IRB Models, the Standardised Approach for Credit Risk, and Capital Floors 2017

Counting the cost of the risk and capital floors implemented by the Basel Committee, alongside the increased capital requirements demanded by the expected loss accounting approach mandated by the IFRS9, has left some banks questioning the ability of internal models to significantly impact their bottom line given the cost involved in building, maintaining and validating these complex models. While these models deliver exceptional risk sensitivity to localised markets compared with the Standardised Approach, their efficacy in terms of reducing the capital requirements of lending structures has come under increased pressure. Under the new regulations, the goal is not only to fine tune current models, ensuring that they continue to grant the best reduction in capital requirements, but also to understand where and how these models can be best utilised to deliver results that justify their expense.