Rating system design  The first area concerns the design of a risk rating system, which is, of course, central to ensuring the effectiveness of the IRB approach. The Basel Committee believes that banks’ internal rating systems should accurately and consistently differentiate between degrees of risk. The minimum IRB standards in this area build on the strongest risk management practices observed in the industry. To illustrate the point, many organizations either already have, or are in the process of developing a ratings system that captures both the risk of borrower default, as well as transaction-specific factors that shed light on the amount of loss that would arise if default occurs. In other words, these banks’ systems are now oriented to capturing the several essential components in estimating credit risk under the IRB approach. Credit risk rating systems are clearly improving in various dimensions, including how finely they seek to distinguish differing degrees of borrower risk. To do so, banks typically look to expand the number of ratings categories into which they slot their exposures. However, just establishing more rating categories is not enough. The challenge is for banks to define clearly and objectively the criteria for these ratings categories in order to provide more meaningful assessments of both individual credit exposures and, ultimately, their overall risk profile. The clarity and transparency of the ratings criteria will be critical to ensuring that ratings are assigned in a disciplined and reliable manner. b.
In order to become a smart consumer he must try to understand the nature of different kinds of banking products and to avoid those products that go beyond his risk appetite or personal financial capability. This relates to the “smart” part. On the “responsible” part, it is important that when a person takes out a loan from his bank, whether to shop or buy a flat, he should fully assess his repayment capability in relation to his income and expenses. There is not much point in blaming the bank in granting you easy and cheap credit when you have overstretched yourself in exuberant spending or in taking excessive risks in properties or stocks. In the context of buying investment products from a bank, the customer must realise that he is bound by his signature on the agreement, and that he cannot imply obligations which are contrary to the express terms of an agreement. Put it simply, a customer may not succeed in civil litigation for investment losses on the ground that he did not fully understand the terms of the investment contracts. Recent court cases in Hong Kong have clearly demonstrated that the existence of mis-selling by the bank would be a relevant factor in determining the culpability of the bank, but the customer must not harbour the expectation that mis-selling, regardless of its nature and severity, would necessarily lead to full compensation for investment losses.