Risk managers defend IRB against Tarullo criticism
The internal ratings-based (IRB) approach has been in intensive care for the past year. Now, one of the world’s most senior supervisors wants to pull the plug, but bank risk managers argue that – with some therapy – it can still lead a full and useful life. Fiona Maxwell reports
The models banks use to calculate capital for their loan books are complex and opaque; they can be gamed, offer little insight into bank balance sheets, do little for market discipline, and are both pro-cyclical and blind to tail risk – or so says Daniel Tarullo, one of seven Federal Reserve Board governors.
In a speech on May 6, Tarullo argued the 13-year old internal ratings-based (IRB) approach fails on pretty much every level, and said the industry would be better served by a combination of
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