On the risk measurement side, we will be taking stock of the current framework, particularly around the internal risk models used by the four largest banks since 2008. Our experience, and that of other regulators, is that it can be very difficult to assess whether these models provide objective measures of the underlying risks banks face.
In theory, internal models allow banks to more accurately manage their risks, and thereby more efficiently align capital with those risks. On the other hand, internal models add complexity to the regulatory framework that may not be warranted in some risk areas, and the banks’ assigned risk weights are often lower than would be prescribed by standardised models.