The Committee of European Banking Supervisors (CEBS) starts a formal consultation on the validation and assessment of the risk management and risk measurement systems used by credit institutions and investment firms for the calculation of their capital requirements. The consultation starts today and runs until 30 October 2005.

The proposed EU legislation will allow institutions to use more risk-sensitive approaches with regard to credit risk and operational risk. Under these approaches the institutions estimate their own risk parameters or at least parts of them. The accuracy of the resulting capital requirements depends on the accuracy of the estimated risk parameters.

Institutions that want to use these approaches for regulatory purposes can only do so with prior approval from their supervisory authority. Before granting this approval supervisors have to assess institutions' validation procedures and the control environment. The use of the more risk-sensitive approaches requires institutions to meet higher risk management standards than are required under the less risk-sensitive approaches.

This consultation paper reflects a common understanding of what supervisors should take into account when dealing with an application from an institution to use Advanced Measurement (AMA) or Internal Ratings Based (IRB) approaches for regulatory purposes. One of the aims is to streamline the approval process, especially for cross-border groups, and contribute to a level-playing field for institutions using the more advanced risk measurement approaches. The guidelines should also further enhance the use of advanced risk management systems by institutions.

The proposals set out in this consultation may have to be revisited after the final text of the Capital Requirements Directive (CRD) has been approved. Furthermore, CEBS will continue to work on further guidance on more specific issues of the AMA and IRB approaches, which have not been covered in the current guidelines.

CEBS' proposed guidelines provide a detailed framework for convergence of practices, developed from the minimum harmonisation framework set out in the CRD. However, they do not establish a maximum harmonization framework, since the common understanding achieved in the guidelines might need to be further developed and adapted, where local business practices or market features require it.