Banks using the advanced approach would have more freedom, but their methodologies would first be closely reviewed and approved by the supervisor. This multilayered structure offers a flexible approach that could apply to a wider group of banks, not just to large, internationally active banks.
The key question for U.S. community banks and their regulators is whether any of the options in the new Basel proposal--especially the standardized approach--is a good match for community banks. Another question is whether competitive pressures would provide incentives--perhaps overwhelming incentives--for community banks to pursue an IRB approach. Would such an allocation of resources by community banks and supervisors be desirable and efficient?