A Federal Reserve System task force reported Friday that banks' internal credit risk models could eventually be used to set formal capital requirements for certain assets.
"Credit risk models are progressing so rapidly it is conceivable they could become the foundation for a new approach to setting formal regulatory capital requirements," the report concluded.
For now, however, the Fed task force is only suggesting that internal models may be a substitute for capital requirements on assets that are not accurately measured by the current risk-based capital standards.
Credit enhancements supporting securitization programs are one example, the report said, because these assets did not exist when risk-based capital was created in 1988.
"The application of internal credit risk models ... could provide the first practical means of assigning economically reasonable capital requirements against such instruments," the report said.
Refining risk-based capital has been a priority at the Fed for some time, but the effort has picked up momentum this year.
In February the central bank, along with supervisors in England and Japan, hosted a two-day conference devoted to creating the next generation of capital standards. At that meeting, Fed Chairman Alan Greenspan threw his weight behind efforts to refine risk-based capital and argued that regulators need to find a way to incorporate the work being done by large banks.
These banks are using cutting-edge technology to assess their capital …