Preparing for the New Accord Let me get into more detail now on what both banks and supervisors will need to do to prepare for the Accord, by describing what we are doing in the United States. I am sure our experience will have parallels in the UK and elsewhere. Challenges for banks To begin with, we have looked to get our arms around where the major firms actually stand in preparing for Basel II, and to pinpoint the major challenges that lie ahead for them as they look towards implementing the advanced approaches to credit and operational risk. Importantly, our dialogue with the banks has focused on where they stand in meeting the minimum standards for entry to, and on-going use of, the IRB approach. Our strong sense is that banks have both the desire and the commitment to continue to develop their internal ratings systems in a manner consistent with the requirements of the IRB framework. The discussions with the industry have, however, highlighted various areas where banks may need to expand their efforts in preparing for implementation. I will offer comments on four areas where more work is needed: a.  the design and structure of rating systems;  b.  the necessary controls to ensure that ratings are accurate and up to date;  2  BIS Review 15/2003  c.  the availability and quality of credit data; and, finally  d.  the overall corporate governance approach  a.
The primary criteria of the AMA could be summarized as falling into three broad areas: first, the development of strong corporate operational risk governance and management structures - structures that include business line integration into a firm-wide process; second, the incorporation of qualitative factors such as control self-assessments into the overall capital measurement process; and finally, loss data quantification, which includes scenario analysis. Our review of those major U.S. banks that intend to adopt the AMA indicates they are clearly in various stages of preparation. However, most of these institutions already have in place, or are well along towards establishing, a corporate level operational risk management function, with firm-wide policies for managing and assessing this risk. Moreover, many firms already have in place good, and improving, firm-wide control self-assessment methodologies. Finally, an increasing number of banks are now turning their attention to collecting internal loss data in a consistent manner across the firm. Some have already been collecting such data for a year or two and some have been particularly effective at mining their existing historical loss experience for certain risk types. A few leading institutions have made real progress in pulling all this together - by piloting operational risk quantification methodologies that combine the quantitative and qualitative elements of the AMA into an overall economic capital assessment for operational risk.