Are even the largest banks ready to take advantage of the IRB approach?
The fact that both banks and supervisors need to make much more progress explains the relatively long (three-year) transition period proposed before the new accord would be implemented. As bankers, you should ask yourselves whether you are truly ready. The quick answer, “we’re there,” is probably wrong. Based on our examinations of U.S. banks’ internal risk-rating processes, I suspect that few banks would or should get a clean sign-off from their supervisor today. Despite the importance of evaluating a borrower’s probability of default, banks have been surprisingly slow, it seems, to distinguish among acceptable credit risk levels in their pricing and in their own assessments of capital adequacy. In recent years, some leading institutions have clearly expanded their risk gradations, with some using twenty categories or more and paralleling the practices of large external rating firms. Typically, though, banks have used half a dozen “pass” grades or less. Moreover, the distribution of c
