The 10 U.S. banks that will be required to adopt the second Basel Capital Adequacy Accord need to focus more energy in developing their internal credit ratings systems. Zahra El-Mekkawy, v.p. at the Federal Reserve Bank of New York, said some key areas of firms' internal ratings systems need more work, despite the strong progress already made.
In terms of their ratings systems design, firms need to define their ratings categories more clearly and objectively in order to provide a meaningful differentiation of credit risk, she said. Another key area to be developed is in the collection of robust loss data. Firms will need to invest in developing a data warehouse that enables them to collect, store and draw upon statistics in an efficient manner.
Corporate governance and internal controls are also key areas to be addressed. Boards of directors and senior management teams need to gain a deeper understanding of their internal ratings systems in order that they think more actively about the systems' conceptual underpinnings and can incorporate this into their risk strategies, she concluded.