The IIF is fully supportive of the goal to reduce RWA variance and to strengthen the regulatory capital framework. Through the IIF RWA Task Force, we have made considerable effort in exploring the sources of RWA variance, and in compiling a suite of 78 recommendations of practices and assumptions that could be harmonized within banks' models in order to reduce variance. We see it very much as a shared need for the industry and regulators alike to improve models, in order to restore their credibility and ensure the preservation of sufficient risk-sensitivity at the center of the capital framework.
We also recognize that there are some sectors where it is difficult to model because there haven't been many loan defaults or losses in those areas - but it is important to differentiate risk to the greatest degree possible amongst different borrowers. Where low default portfolios are characterized by a lack of historical losses, this reflects the fact that (by their very definition) those assets are relatively low risk. We are concerned that where the treatments set out in the Consultative Document would create anomalies, those anomalies will generally be concentrated against the better-quality borrowers.
Consequently, our primary concern with the Committee's proposals is less about models, and more about the bluntness of the approach that the Committee proposes to replace these with. Heeding the Committee's concerns but seeking remedies that preserve a greater degree of risk-sensitivity, the IIF put forward some constructive alternate solutions. These include:
We also note that the changes proposed by the Basel Committee in this Consultative Document come alongside the developments in the Fundamental Review of the Trading Book in market risk, operational risk, the Standardized Approach for credit risk and the Leverage Ratio. While these each cover distinct risk disciplines, it is essential to examine these (and their cumulative impacts) collectively and holistically, rather than in their respective risk silos.
The IIF is highly conscious of the Basel Committee's accelerated timeline to finalize changes to the capital framework by the end of this year, and we hope that this expedited response will give members of the regulatory community further opportunity to explore and consider alternate solutions.