Featured Product

    BIS Paper Examines Variability in Risk-Weighted Assets of Banks

    February 25, 2020

    BIS published a working paper that presents a new approach to measuring variability in the risk-weighted assets (RWAs) of banks. The approach presented in the paper compares a market-implied estimate of a bank's risk profile with the bank's own estimate. This variability ratio provides an external benchmark to assess the degree of difference in modeled capital requirements across banks and over time. It also provides a quantitative measure to assess the extent to which this difference has narrowed as a result of the Basel III reforms.

    The global financial crisis highlighted a number of weaknesses in the regulatory framework, including concerns about excessive variability in bank RWAs stemming from their use of internal models. The Basel III reforms that were finalized in 2017 by BCBS seek to reduce this excessive RWA variability. This paper develops a novel approach to measuring RWA variability—the variability ratio—by comparing a market-implied measure of RWAs with reported regulatory RWAs of banks. Using a panel data set comprising a large sample of internationally active banks during 2001-2016, the study found that there was a wide degree of RWA variability among banks and that the market-implied RWA estimates were persistently higher than regulatory RWAs. Regulatory RWAs are roughly half the level of the market-implied RWAs. 

    Regarding determinants of this variability, the authors have found a strong and statistically significant association between the measure of RWA variability and the share of opaque assets held by banks (example derivatives); the degree to which a bank is capital constrained; and the jurisdiction-specific factors. The results suggest that market participants may be applying an opaqueness premium for banks that hold highly complex instruments and that the incentive for banks to game their internal models is particularly acute for capital constrained banks. The results also point to jurisdiction-specific factors which could also explain RWA variability. The results point out that RWA variability directly affects banks’ own profitability through higher funding costs. Finally, it was found that the 2017 Basel III reforms, and in particular the output floor, help reduce RWA variability, with greater reductions in variability observed for higher calibrations of the floor.  

     

    Related Link: Working Paper

    Keywords: International, Banking, Basel III, Capital Requirements, Risk-Weighted Assets, Variability Ratio, Output Floor, Research, BIS

    Featured Experts
    Related Articles
    News

    EU Amends CRD4 and CRD5 as Part of Capital Markets Recovery Package

    EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.

    February 26, 2021 WebPage Regulatory News
    News

    EU Committee Recommends Systemic Risk Buffer of 4.5% in Norway

    The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.

    February 25, 2021 WebPage Regulatory News
    News

    PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks

    In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.

    February 25, 2021 WebPage Regulatory News
    News

    FSB Sets Out Work Priorities for 2021

    In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.

    February 25, 2021 WebPage Regulatory News
    News

    EU Publishes Corrigendum to Revised Capital Requirements Regulation

    EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).

    February 25, 2021 WebPage Regulatory News
    News

    ESAs Issue Statement on Application of Sustainability Disclosures Rule

    ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).

    February 25, 2021 WebPage Regulatory News
    News

    EC Consults on Crisis Management and Deposit Insurance Frameworks

    EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.

    February 25, 2021 WebPage Regulatory News
    News

    HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs

    HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.

    February 24, 2021 WebPage Regulatory News
    News

    EBA Proposes Standards for Supervisory Cooperation Under IFD

    EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.

    February 24, 2021 WebPage Regulatory News
    News

    BoE Addresses Banks in Scope of First Resolvability Assessment

    BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.

    February 24, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6629