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

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    News

    EC Mandates ESAs to Propose Amendments to SFDR Technical Standards

    The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.

    May 11, 2022 WebPage Regulatory News
    News

    EBA Examines Supervisory Practices, Issues Deposits Reporting Template

    The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),

    May 11, 2022 WebPage Regulatory News
    News

    US Agency Publications Address Basel, Reporting, and CECL Developments

    The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances

    May 09, 2022 WebPage Regulatory News
    News

    SEC Extends Comment Period on Climate Risk Disclosures

    The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.

    May 09, 2022 WebPage Regulatory News
    News

    APRA Reduces Committed Liquidity Facility, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.

    May 09, 2022 WebPage Regulatory News
    News

    CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks

    The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.

    May 06, 2022 WebPage Regulatory News
    News

    PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down

    The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.

    May 06, 2022 WebPage Regulatory News
    News

    EBA Updates Standards for 2023 Benchmarking of Internal Approaches

    The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.

    May 06, 2022 WebPage Regulatory News
    News

    EIOPA Responds to Stakeholder Views on Blockchain in Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.

    May 06, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8179