The issues include the suitability of internal and external data sources, the appropriate historical period to use in producing estimates, and the manner in which historical data and loss estimates should be linked to the bank s current exposures. These and other issues will be challenging and will rightly occupy much of our attention over the coming months and years. In this context, the industry and supervisors must work together to develop and use reasonable standards for IRB quantification. Neither we nor banks can afford a race to the bottom in this critical area. The expertise of the RMA will be particularly sought and appreciated.
Supervisors obviously have a lot of work to do.
We are at the very beginning of efforts to train our staff to understand all of the issues raised by Basel II and to make sound judgments about banks adherence to the standards. I hope you will be patient with our examiners as they come up to speed, just as we intend to be patient with you. And you should not interpret my earlier remarks as a signal that we intend to be very inflexible. We recognize that many systems, methods, and organizational forms can satisfy the spirit of the IRB standard, and that what is appropriate for one bank may not be appropriate for another. We expect and welcome variety, in part because that is necessary to support further innovation.