In addition, Basel II permits firms to use their own models to measure counterparty credit risk exposures. This risk arises, for example, in OTC derivatives, which are becoming increasingly complex and more difficult to measure. This approach is closely aligned with industry best practice as well as the underlying economic risks of these activities.
Basel II has also paved the way for improvements in other, less visible ways. One example is Basel II’s greater focus on firms’ risk management infrastructure. For instance, the Framework requires fundamental improvement in the data supporting PD, LGD, and EAD estimates that underpin economic and regulatory capital assessments over an economic cycle.