In recent years, enormous strides have been made in the art and science of credit risk measurement and management. Much of the energy in this area has resulted from dissatisfaction with traditional approaches to credit risk measurement and with the current Bank for International Settlements (BIS) regulatory model. Specifically, under the current regulatory structure, established by the BIS in 1988 in cooperation with the world’s major central banks, and implemented in January 1993, virtually all private-sector loans are subject to an 8 percent capital requirement with no account being taken of either: (1) credit quality differences among private-sector borrowers or (2) the potential for credit risk reduction via loan.
