For each type and each category, capital requirements calculated by an institution’s own models is typically a lot more in line with historically observed risk. And this, in turn, has positive consequences. For example, it incentivises risk-adequate behaviour in financial institutions in general.
From a supervisory point of view, we are especially interested in the additional incentives it offers to banks to develop and maintain a thorough risk assessment approach – which also supports and strengthens the internal risk management. 4.