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Inside the labyrinth of Basel risk-weighted assets: how not to get lost

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  • Francesco cannata

    ()
    (Bank of Italy)

  • Simone Casellina

    ()
    (Bank of Italy)

  • Gregorio Guidi

    ()
    (Bank of Italy)

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    Abstract

    Many studies have questioned the reliability of banks’ 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 banks’ risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banks’ riskiness under a risk-sensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assets – which is widely used for peer analyses – 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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    File URL: http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef132/QEF_132.pdf
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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 132.

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    Date of creation: Sep 2012
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    Handle: RePEc:bdi:opques:qef_132_12

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    Web page: http://www.bancaditalia.it
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    Related research

    Keywords: Basel Accord; risk-weighted assets; banking supervision; credit risk;

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    References

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    1. Repullo, R. & Suarez, J., 2010. "The Procyclical Effects of Bank Capital Regulation," Discussion Paper 2010-29S, Tilburg University, Center for Economic Research.
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    Cited by:
    1. Elisabetta Montanaro, 2013. "Regole di Basilea e modelli di vigilanza: quale convergenza? (Basel rules and supervisory models: What convergence?)," Moneta e Credito, Economia civile, vol. 66(264), pages 415-442.
    2. 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.
    3. 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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