In this case, one of the many additional possibilities currently under discussion to reduce the potential undesirable effects of Basel II is to scale the capital requirements obtained through the IRB function by using a countercyclical multiplier. In order to make this multiplier countercyclical, it would be built as a function of a reliable economic activity variable (for instance GDP growth rate). As it happens with other alternatives, its main pros and cons should be carefully assessed. The multiplier is easy to obtain, transparent (as depends on a reliable macro variable), it has a low implementation cost and, finally, it would be of a uniform and wide applicability. Among its drawbacks we found that, first, it implies undertaking an external modification on the capital requirement figure and, second, that the multiplier is built using a domestic variable, which may make international comparison very difficult. No matter what the result of the previous debate is, either the use of counter-cyclical risk estimations or the use of a capital multiplier, we should explore the use of complementary measures to attain our final goal of financial stability and to minimise the social costs of procyclicality; for example, dynamic provisions. As most of you already know, this type of provision uses historical information on credit losses to estimate a general provision for homogenous loan portfolios. It reflects a collective assessment of credit losses at the balance sheet date (i.e. it covers incurred losses not yet identified in specific individual loans).
One of the most notable advances in risk management across all three financial services sectors is the growing emphasis on developing a firm-wide assessment of risk. This constitutes the first trend in the Joint Forum’s report. Improvements in technology and telecommunications have made it easier for firms to gather, collect, and analyse large amounts of data on their exposures and business activities efficiently and increasingly in near “real time.” To make the best use of firm-wide data, some organisations have established a dedicated risk management function to foster more highly integrated and systematic approaches to risk measurement and management. The risk management function typically promotes the use of common risk measures across business lines. It can then report the firm-wide risk data to senior management. Reports may range from daily updates on “value-at-risk” trading positions to regular, if less frequent, compilations of the results of stress testing. The broader use of shared definitions to guide the comprehensive reporting of risk across the firm enables the integrated risk management function to identify concentrations of risk. Concentrations matter particularly when various business lines within the firm have different kinds of exposures to the same counterparty. Comprehensive and consistent reporting helps, moreover, to ensure that the firm is aware of the wide range of risks to which it is exposed; that it understands the relative importance of various risks and how they may interact; and that the firm is less likely to ignore material sources of risk.