Ensuring that everyone understands the nature and level of risks facing a bank will depend on the timely delivery of the right information. We expect many banks will need to make greater investments in their reporting systems with the aim of facilitating the flow of information about a bank’s ratings practices to senior management and directors. (c)  Challenges for supervisors  I've focused on the challenges banks may 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. The New Accord will present supervisors with an opportunity to re-evaluate and further develop their current approaches to looking at banks. Going forward, supervisors, like banks, will have to take a more dynamic view of risk management. Change will occur in response to the new Basel framework. I must add that change would also occur as part of the natural evolution of banking supervision. Basel II’s emphasis on risk management strongly supports our current effort to make evaluations of banks’ internal processes the heart of a more forward-looking supervisory approach. 4  BIS Review 7/2003  In terms of credit risk, we will focus less on point-in-time assessments of financial condition, and much more on internal processes and control structures that are intended to help safeguard the health of banks.
For example, 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 that could be collected if things were to go poorly. In other words, these banks’ systems are generally oriented to capturing the essential components in estimating credit risk. As the methods for measuring credit risk improve, we expect that banks will incorporate these new insights in their ratings practices. For example, banks may look to expand the number of ratings categories to more finely distinguish between exposures of different credit quality. However, the challenge is for banks to clearly and objectively define 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. It is also important to note that it is not enough to have a well-designed internal risk rating system - it must also be an integral part of a bank's day-to-day credit risk management processes. The expectation is for banks to rely on their internal risk rating systems not just when making decisions about whether to extend credit. We also encourage banks to incorporate ratings information into other key processes, such as pricing and reserving determinations and when allocating economic capital internally.