Inside the labyrinth of Basel risk-weighted assets: how not to get lost
AbstractMany studies have questioned the reliability of banksÂ’ calculations of risk-weighted assets (RWA) for prudential purposes. The significant divergences found at international level are taken as indicating excessive subjectivity in the current rules governing banksÂ’ risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banksÂ’ riskiness under a risk-sensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assets Â– which is widely used for peer analyses Â– is a valuable starting point, but when analysis becomes more detailed it needs to be supplemented by other indicators. Focusing on credit risk, we propose an analytical methodology to disentangle the major factors in RWA differences and, using data from Italian banks (given the inadequate degree of detail of Pillar 3 reports), we show that a large part of the interbank dispersion is explained by the business mix of individual institutions as well as the use of different prudential approaches (standardised and IRB). In conclusion we propose a simple data template that international banks could use to apply the framework suggested.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 132.
Date of creation: Sep 2012
Date of revision:
Basel Accord; risk-weighted assets; banking supervision; credit risk;
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-24 (All new papers)
- NEP-BAN-2012-11-24 (Banking)
- NEP-CBA-2012-11-24 (Central Banking)
- NEP-RMG-2012-11-24 (Risk Management)
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- Alessandro Ronaglia, 2012. "Note bibliografiche: Gallino L. (a cura di): La lotta di classe dopo la lotta di classe," Moneta e Credito, Economia civile, vol. 65(260), pages 335-339.
- Alessandro Roncaglia, 2012. "Keynesian uncertainty and the shaky foundations of statistical risk assessment models," PSL Quarterly Review, Economia civile, vol. 65(263), pages 437-454.
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