These three elements - independence of the ratings process, internal review of those ratings, and transparency - all contribute toward stronger controls over the ratings process. Such controls over the risk ratings process must be complemented by the collection of good data on which to base those ratings, which is the third area of focus for banks. c.  Data requirements and validation  Clearly, a system is only as good as the inputs that go into it. Accordingly, banks using the IRB approach will need to be able to measure the key statistical drivers of credit risk. I would emphasize that the Basel Committee clearly recognizes that there is more than one way to accomplish this purpose. The minimum Basel standards provide banks with the flexibility to rely on data derived from experience, or from external sources, as long as the bank can demonstrate the relevance of the external data to its own exposures. Regardless of source, high quality data are critical for formulating meaningful internal risk assessments. From a broader risk management perspective, access to such  BIS Review 15/2003  3  data will enable a bank to evaluate the performance of its internal rating and risk estimation systems in a consistent and meaningful manner. The Basel standards outline the data history banks will need in order to use the IRB approach. The Committee recognizes that banks may not currently have all of the required information on hand.
For this reason we have continued to engage market participants in a dialogue on this issue. As implementation of the New Accord approaches, we encourage banks to consider their data needs very seriously and to comprehend fully the techniques they will need to use to derive appropriate estimates of loss based on those data. In practical terms, banks will be expected to have in place - or be actively developing - a data "warehouse". By data warehouse, I mean a process that enables a bank to collect, to store, and to draw upon loss statistics in an efficient manner over time. d.  Corporate governance  The design, controls, and data that figure into a risk rating system must all be developed within the framework of good overall corporate governance, which is the fourth area of focus for banks that I’ll mention today. The involvement of senior management and directors will be critical to the successful implementation of the New Accord. This will be particularly true for those banks seeking to adopt the more advanced approaches to calculating regulatory capital. As a bank’s capital requirements draw increasingly on firm-specific performance and systems, there will be a need for its board of directors and senior management to gain a deeper understanding of the conceptual underpinnings, and even operational mechanics, of a bank’s internal rating systems and the measures of risk derived from them.