Our File: P2835-2

TO: Banks

Federally Regulated Trust and Loan Companies

Subject: Basle Committee Report on Credit Risk Models

Today the Basle Committee is releasing for public comment a report entitled Credit Risk Modelling: current practices and applications. This report provides a description of current practices in credit-risk modelling and assesses the potential uses of credit-risk models for supervisory purposes. Copies of this report can be obtained directly from the BIS web site (http://www.bis.org) or through the hot links to the BIS provided at OSFI's web site (http://www.osfi-bsif.gc.ca).

The report underscores a number of challenges and limitations to current modelling practices including:

Data limitations: the lack of data on historical performance of loans and other variables severely constrain the ability of models to take into account the default process and changes in credit quality.

Model validation: the longer time horizons involved in assessing credit risk make credit-risk models more difficult to validate than market-risk models. To gain further confidence in credit-risk modelling, both banks and regulators will need a commonly accepted framework for periodically verifying the accuracy of credit risk models.

Deposit-taking institutions and other interested parties are invited to provide their comments to OSFI by September 1, 1999. Comments or questions about the content of the report should be directed to Mr. Richard Gresser, Manager, Capital Management at 613-990-7336 (fax 613-998-8466).

Sincerely,

Robert Hanna

Director, Capital Division