Credit Risk Models at Major U.S. Banking Institutions: Current state of the art and implications for assessments of capital adequacy
by the Task Force on Internal Credit Risk Models of the Federal Reserve System
Introduction: Nearly a decade has passed since the 1988 Basle Capital Accord established the basic architecture for setting minimum risk-based capital (RBC) requirements for banking organizations ("banks"). The Accord's overriding objectives, achieved relatively quickly, were both to provide cross-border consistency in capital standards and to increase the capital cushions of the world's largest banks. Along with this early success has come heightened reliance on capital-based regulatory and supervisory policies. Within the United States, for example, Prompt Corrective Action and other provisions of the FDIC Improvement Act of 1991 now link supervisory and regulatory policies explicitly to banks' regulatory capital ratios. But, even as the formal RBC ratios have assumed great prominence, ongoing technological and financial innovations have exposed shortcomings in the Basle framework that, if not redressed, could undermine the future role of bank capital standards.