To mention just a few: credit data are sparse, correlations cannot be easily observed, credit returns are skewed and, due to the statistical problems, back testing in order to assess a model’s output may not be feasible. Clearly, there are model risks here. Secondly, if models were to be used for regulatory capital purposes, competitive equality within the banking industry could be compromised.
On the first issue of the separation of monetary and supervisory functions, we are not entering uncharted territory. Many central banks around the world – including a large majority of the national central banks in the Eurosystem – combine monetary and supervisory functions. Proper arrangements to prevent monetary policy being inappropriately affected by the supervisory role have been devised in several countries.