White Paper No. 43

Banks' Internal Rating Models - Time for a Change? The System of Floors as Proposed by the Basel Committee

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.

This paper was provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned and drafted under the responsibility of the Economic Governance Support Unit (EGOV) of the European Parliament. It was originally published on the European Parliament’s webpage: