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Incentives for good risk management

Incentives for good risk management

The combination of parameter constraints on the remaining permitted IRB approaches and the output floor reduces the incentives for banks to use IRB approaches for credit and market risk. This could have an adverse unintended consequence on the quality of risk management in some banks.


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Incentives for good risk management

Similarly, banks may become less inclined to model operational risks. Although the introduction of an internal loss component in the standardised approach to operational risk will provide some regulatory incentive for firms to reduce their operational risk losses, this element of risk-sensitivity is limited to past losses, and does not include other key elements of the currently available advanced measurement approach (AMA), including the use of external data, forward-looking scenario analysis information, and business environment and internal control factors data.

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