Ingves: internal modelling may create too much complexity

Internal modelling introduces complexity and creates a number of unappealing side-effects, Basel Committee on Banking Supervision chairman Stefan Ingves said on December 2.

Delivering a keynote address in Santiago, Chile, where the Basel Committee had just met, Ingves said the post-crisis regulatory framework "continues to be quite complex". Calculating regulatory capital requirements typically requires several thousand parameters, he said.

"Complex rules can result in a number of undesirable outcomes," Ingves told listeners at the banking conference. They can undermine risk oversight, restrict the ability of a broader range of stakeholders to contribute to policy development and may even undermine banks' own ability to implement capital requirements.

"Research has shown that simple rules can often produce more prudent and robust outcomes," Ingves said. He cited a recent study that found some banks using internally modelled approaches were charging higher rates for loans while simultaneously applying lower risk weights.

"This striking disconnect between banks' internal risk management and their approach to prudential regulation merits further research," he said.