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A comprehensive view on risk reporting: Evidence from supervisory data

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  • Abbassi, Puriya
  • Schmidt, Michael

Abstract

We show that banks’ risk exposure in one asset category affects how they report regulatory risk weights for another asset category. Specifically, banks report lower credit risk weights for their loan portfolio when they face higher risk exposure in their trading book. This relationship is especially strong for banks that have binding regulatory capital constraints. Our results suggest the existence of incentive spillovers across different risk categories. We relate this behavior to the discretion inherent in internal ratings-based models which these banks use to assess risk. These findings imply that supervision should include a comprehensive view of different bank risk dimensions.

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  • Abbassi, Puriya & Schmidt, Michael, 2018. "A comprehensive view on risk reporting: Evidence from supervisory data," Journal of Financial Intermediation, Elsevier, vol. 36(C), pages 74-85.
    • Handle: RePEc:eee:jfinin:v:36:y:2018:i:c:p:74-85
    DOI: 10.1016/j.jfi.2018.03.001
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    Cited by:

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    2. Schlam, Carina & Woyand, Corinna, 2023. "The rollout of internal credit risk models: Implications for the novel partial-use philosophy," Discussion Papers 07/2023, Deutsche Bundesbank.
    3. Ly, Kim Cuong & Shimizu, Katsutoshi, 2021. "Did Basel regulation cause a significant procyclicality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    4. Puriya Abbassi & Rajkamal Iyer & José-Luis Peydró & Paul E. Soto, 2020. "Stressed banks? Evidence from the largest-ever supervisory review," Economics Working Papers 1721, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Goel, Tirupam & Lewrick, Ulf & Tarashev, Nikola, 2020. "Bank capital allocation under multiple constraints," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    6. Falter, Alexander, 2019. "Macro to the rescue? An analysis of macroprudential instruments to regulate housing credit," Discussion Papers 25/2019, Deutsche Bundesbank.
    7. Brunella Bruno & Immacolata Marino & Giacomo Nocera, 2023. "Internal Ratings, Non-Performing Loans, and Bank Opacity: Evidence from Analysts’ Forecasts," BAFFI CAREFIN Working Papers 23195, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. Dal Borgo, Mariela, 2022. "Internal models for deposits: Effects on banks' capital and interest rate risk of assets," Journal of Banking & Finance, Elsevier, vol. 135(C).
    9. Szybisz, Martin Andres, 2019. "Interactions between Credit and Market Risk, Diversification vs Compounding effects," MPRA Paper 93173, University Library of Munich, Germany.
    10. Burkhard Raunig & Michael Sigmund, 2022. "The ECB Single Supervisory Mechanism: Effects on Bank Performance and Capital Requirements (Burkhard Raunig, Michael Sigmund)," Working Papers 244, Oesterreichische Nationalbank (Austrian Central Bank).
    11. B. Bruno & I. Marino & G. Nocera, 2023. "Internal Ratings and Bank Opacity: Evidence from Analysts’ Forecasts," Post-Print hal-04322520, HAL.

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    More about this item

    Keywords

    Internal ratings-based regulation; Credit risk; Market risk; Incentive spillovers; Capital regulation; Comprehensive risk assessment;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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