To illustrate this problem we can cite certain analyses published in 2012 which concluded that around half of all investors did not believe banks’ RWA figures, while 80% considered that the risk measurement framework should be simplified in order to be more credible. The Basel Committee conducted various studies attempting to cast light on this matter. Work on the credit and market risk areas was carried out. While this type of study should be viewed with all due caution, it is worth recalling some of the conclusions reached. 4/7  For instance, according to a study by the Committee published in July 2013, when different banks applied their own internal models to a single portfolio selected for the purposes of the study, there was seen to be high variation among the resulting RWAs. Only a portion of this variation was due to genuine factors, i.e. to risk factors, and to methodological differences permitted by the supervisors (and which were, therefore, in principle, acceptable or relevant differences). What was most interesting, or worrying, depending on one’s standpoint, was the fact that 25% of the variation could not be explained by either of the factors I have just mentioned. Market criticism and doubts, combined with the findings of the studies, led the Basel Committee to launch a far-reaching internal debate. At the risk of excessive simplification, at one extreme are those who have lost confidence in banks’ capacity to properly use their own models, and also in supervisors’ ability to validate and oversee increasingly complex models.

In the process of finalisation of Basel III, the Committee has also stated its intention to improve the standardised approaches for credit and operational risk. Broadly speaking, the aim is also to make them more risk-sensitive. The standardised approaches are important per se, since they are used by a great number of banks worldwide; but as restrictions on the use of internal models are introduced they will become even more important. Thus, discontinuing the use of internal models to measure operational risk would mean that all institutions, irrespective of size, business model or type of business, would have to use the same standardised approach to measure operational risk. Measuring such a heterogeneous risk using a standardised approach clearly presents considerable difficulties. 6/7  The proposal published for public consultation by the Basel Committee has a series of limitations that must be remedied before it is approved. Regarding the use of the standardised approach to measure credit risk, the Committee is striving to make it more risk-sensitive and, at the same time, to reduce its excessively automatic reliance on external credit ratings. This is no easy task either, and the final outcome may possibly be less ambitious than was initially intended. It is important, however, that the approach be robust and correctly calibrated. The impact assessments being performed by the Basel Committee will provide more information in this respect. In accordance with the guidelines we all subscribe to, as I mentioned earlier, this package of reforms should not produce a significant widespread increase in capital requirements.