Banks' internal rating models - time for a change? The system of floors as proposed by the Basel Committee

Publication: White Paper No. 43
Topic Area: Financial Institutions
Authors: Rainer Haselmann,
Mark Wahrenburg
Date: Nov 2016
Keywords: Internal rating models, floors, banking regulation, BCBS

We provide an assessment of the Basel Committee on Banking Supervision (BCBS) proposal to restrict the internal ratings-based approach on bank risk and to introduce risk-weighted asset floors. If well enforced, risk-sensitive capital regulation results in a more efficient credit allocation compared to the standard approach. Thus, the internal ratings-based approach should be maintained. Further, the use of internal ratings-based output floors potentially results in unintended negative side effects. Input floors are likely a valuable tool to achieve risk-weighted assets comparability. Finally, the proposed measures have a potential detrimental impact for European banks as compared to others.

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