Banks' internal rating models - time for a change? : the "system of floors" as proposed by the Basel Committee : in-depth analysis

We provide an assessment of the BCBS proposal on restricting the IRB approach and introducing RWA floors. If well enforced, risk-sensitive capital regulation results in a more efficient credit allocation compared to the SA. Thus, IRB should be maintained. Further, the use of IRB output floors potentially results in unintended negative side effects. Input floors are likely a valuable tool to achieve RWA comparability. Finally, the proposed measures have a potential detrimental impact for European banks as compared to others.