The third area in which more work is needed concerns information and advance planning. In recent years the Bank has been forcefully arguing the importance of information gathering to  BIS Review 157/2009  5  the government and FSA. In my experience resolution work is like icebergs – I don’t mean that in the sense that banks are about to hit them. It is like icebergs in the sense that a vast amount of the work done is beneath the surface, hidden from view. Because resolution is an invasive form of surgery, it requires a very large amount of information to be carried out safely. Moreover, the planning work has to be done quietly, out of sight in order to avoid fuelling the failure of the bank, and it needs to start well in advance of the actual resolution weekend. As the authority responsible for resolution operations, the Bank of England faces a tension. In the ideal world, we want to work closely with the management of the bank to plan a resolution, at a time when it remains a contingency option that management naturally wish to avoid. But we also have to avoid the sense that a bank is receiving the attention of the undertakers. A very important development here will be the production and maintenance of resolution plans, as part of the overall recovery and resolution plans, or living wills.
And at the other extreme are those who consider that the evidence available is not sufficiently conclusive as to do away with internal models, since, from their standpoint, the differences in RWAs would essentially be in response to the different levels of risk assumed under different business models. In our view at the Banco de España, risk sensitivity should continue to be at the heart of the capital framework: if a bank assumes more risk, more regulatory capital should be required of it. If this nexus were to disappear, there would then be a disconnect between the bank’s internal risk management and regulatory requirements; and perverse incentives might arise, potentially leading banks to take on greater risks than they could properly manage. That said, internal risk management models undoubtedly pose problems that need to be analysed and resolved. First, their growing complexity means there is a risk they may ultimately become black boxes accessible to only a handful of experts. Second, the elements integrated into models (such as probability of default or loss given default) are difficult to estimate, especially in certain cases characterised, for example, by the absence of sufficient data. And finally, given that the higher the risk calculated by the model, the greater the capital required, banks might be tempted to underestimate the risks in order to save on capital. To sum up, we believe it is necessary to continue to use the internal models, insofar as they provide for credible and consistent risk measurement.