Internal risk rating systems for banks

Proposals in the Basel II Capital Adequacy Accord will require many banks to adopt an internal ratings-based approach to risk management. Pamela Atkins , Shelly Harris and Francis Parisi of Standard & Poor’s look at how banks are preparing for these upcoming changes

For the first time, banks that meet certain minimum criteria will be able to factor their internal assessment of their credit risk into the regulatory capital allocation process. This supports one of the goals of Basel II, which is to increase the risk sensitivity of the regulatory capital allocation process in the banking industry. Regulators want to encourage banks to continue to improve their internal risk management practices as this should help improve the safety of the entire banking