4  BIS Review 15/2003  While there is much work still to be done at many institutions, those banks that have obtained senior management buy-in to embark on this approach have been able to move ahead fairly rapidly. In addition, these institutions have found significant value in the process of rolling out such a framework. The benefits include greater risk transparency within the firm, greater cost efficiency, and ultimately, less exposure to large losses, both in terms of dollars and additional reputational knock-on effects. Challenges for supervisors I've focused on the challenges banks will confront in implementing the new Accord. Let me now spend a few moments discussing how our supervisory approach is also likely to evolve over time. Naturally, allowing banks to rely on internal models in determining their capital requirements has led, and will continue to lead, to changes in our supervisory process. Fortunately, we do have some experience on which to draw. In 1996, under the "market risk amendment" to the original Basel Accord, qualifying banks with large market risk positions were first permitted to incorporate internal estimates of the associated risk in their regulatory capital requirements. When determining whether a bank may rely on its market risk model for capital purposes, our examiners have had to evaluate the technical underpinnings of the model, as well as the risk management and control processes surrounding its implementation and use.
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.