Nevertheless, and you can see this on the right-hand side more clearly, the secured overnight financing rate surged markedly towards the end of September, well above the Federal Reserve’s policy rates. Even the effective federal funds rate briefly exceeded its target range. Such volatility is clearly undesirable from a monetary policy perspective.
Banks using the advanced approach will have more freedom, but their methodologies for deriving loss given default statistics and effective exposures will be closely reviewed. In all cases, supervisors will require a rigorous analysis supporting their estimates, whether they are based on internal or vendor data.