(e.g. Mexico and Panama) PCRs collect, for each credit, date of origination, contractual maturity and amortizing profile, and register the occurrence of early amortizations. With this information the effective maturity for different credit lines can be estimated. Also, it is quite simple to track and analyze the behavior of borrowers’ balances prior to the event of default, and hence estimate the exposure at default of credit lines at different banks.

Bank deviation from the IRB underlying assumptions should also be of concern for bank supervisors, and some of them can be addressed with PCR data. The IRB approach relies on the assumption that banks portfolios are perfectly granular and have therefore diversified away all the idiosyncratic risk. Therefore, it is important that supervisors inspect that loan portfolios are sufficiently fine grained (for example, computing a Herfindahl index). Consideration should be given to adopting corrective measures, for example with granularity add-ons that adjust capital requirements for undiversified idiosyncratic risk (Gordy, 2002). However, Tarashev and Zhu (2008) show that a violation to perfect granularity has a more limited impact on IRB measures of risk than a deficient calibration of the IRB model, resulting for example from wrong asset correlations.

The possibility to perform these exercises on an off-site fashion without using bank internal data facilitates the supervisory assessment of their internal rating systems.

- **Auxiliary rating systems** . Whether to level the playing field in the banking sector or to facilitate banks gradual adoption of more advanced risk management tools, supervisors can use PCR data to build risk rating systems themselves. These can be provided to those banks that are unable or unwilling to develop their own systems (for example because they lack sufficient historical data, resources or experience). They can also be used by the supervisors to benchmark banks’ internal rating systems; for example, flagging those borrowers who are rated abnormally well.

# _The macroprudential revolution in Basel III_

The traditional approach to banking sector regulation and supervision has been predominantly microeconomic, mainly concerned with stand-alone bank solvency, implicitly assuming that the stability of the financial sector was a by-product obtained by “aggregation.” This philosophy was rooted in Basel II.

In the last years, though, regulations and supervisory policies have been incorporating elements of a complementary, macroprudential approach, principally concerned with overall macroeconomic stability. This approach is characterized as having two perspectives:<sup>31</sup> i) a time dimension, that tries to mitigate the natural procyclicality of banking systems due to feedback/second round effects between the financial and the real sectors of the economy and ii) a cross sectional dimension, which addresses systemically important institutions and their inter-linkages and spillovers that are key drivers of domino problems in banks. Basel III reflects a policy shift towards this pronged approach; focused not only on bank solvency but also on macroeconomic stability.

> 31 For an analysis on the distinction between the macro and microprudential perspectives, see Borio (2003).

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