These banks need to be induced to create and use internal risk classifications in their banking book for establishing their minimum capital requirements. To ensure that minimum standards are used, the supervisor should be required to validate the conceptual and empirical basis of each bank's risk-classification and risk-management system.
One of those tests could be the use of the system by the bank in making internal management decisions--pricing, reserving, and controls, for example. We should not try to establish separate regulatory and management systems, but one unified system in which supervisors and the managers are looking at the same thing. A weak or misused classification system would destroy any such process.