Risk Sensitivity and the New Basel Accord - speech by David Clementi

In a speech to be delivered today at an FSA Conference, David Clementi, Deputy Governor, discusses the implications of the New Basel Accord not only for banks but for the financial system more generally and the possible impact on financial stability.
Published on 10 April 2001

Mr Clementi welcomes the New Accord and the introduction of more risk-sensitive capital requirements. However he highlights areas where there may be too little risk sensitivity in the proposals. For example, the treatment of unrated credits in the revised standard approach may act as a disincentive for banks to move to the more sophisticated internal ratings approach developed in the New Accord. This may over time result in the worst-quality credits gravitating to those banks least able to assess, price or monitor them. It is important that the new Accord provides the right degree of capital incentives for banks to progress to using internal ratings. Supervisors will also need to recognise that the risk weights in the standard approach represent a floor and in Pillar 1 require more capital for unrated credits if that is needed. Under Pillar 2 of the Accord, supervisors must ensure that banks have a level of capital requirements appropriate to their risks.

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