For example, as regards operational risk and the so-called hybrid approach which sets out how the capital requirement for operational risk calculated as an aggregate using advanced models (AMA) can be distributed or assigned within a banking group - we as supervisors find ourselves in a situation where it would be advisable for us to take steps to clarify some aspects of this approach, but where we need the industry to make clearer progress in developing concrete assignment models. There are other eminently practical topics that are being discussed by the AIG. Without wishing to provide an exhaustive list, I would just like to mention that it is examining the material effect, in terms of capital, of the differences that continue to exist in some jurisdictions on subjects such as the definition of default. The Group is also engaged in an exchange of views on how to interpret “user testing” and so-called “LGDs in stress situations”. The AIG is attempting to establish the circumstances in which all these differences may be acceptable, when they affect different entities within the same banking group, and under what circumstances it would be appropriate to standardise the treatment of some of them. Another practical aspect of implementation relates to the growing use by a number of institutions of external models and databases, known as “vendor products”.
The work has been, and continues to be, intensive and I believe that it is necessary to keep moving forward pragmatically. Many of the issues raised by the banks cannot be regarded as arising directly out of Basel II implementation; rather, they have always existed in connection with the supervision of internationally active groups, although obviously these are genuine problems. Cooperation between supervisors is a complex process which takes time and cannot be resolved by decree; I think that the way to move this process forward is by focusing on real topics and real cases, and that the time for discussing hypothetical or theoretically possible situations with no practical relevance has passed. However, we should recognise that Basel II implementation in international banking groups poses new challenges and requires a greater degree of coordination between the actions of home and host supervisors, especially as regards the adoption of advanced approaches. Having accepted the need to keep moving forward on coordination, I would like to voice some concern that these difficulties might be used to justify the tendency, on the part of international banking groups that are moving over to the advanced approaches, to use less sophisticated approaches in host countries, including in those that allow advanced approaches. Indeed, some observers are reporting, without justification in my opinion, that the low level of implementation of advanced approaches in subsidiaries may stem from the lack of coordination among supervisors.