Inside the labyrinth of Basel risk-weighted assets: how not to get lost
Many studies have questioned the reliability of banksï¿½ 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 banksï¿½ risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banksï¿½ riskiness under a risk-sensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assets ï¿½ which is widely used for peer analyses ï¿½ 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.
|Date of creation:||Sep 2012|
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- Rafael Repullo & Javier Suarez, 2012.
"The Procyclical Effects Of Bank Capital Regulation,"
- Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
- Repullo, Rafael & Suarez, Javier, 2012. "The Procyclical Effects of Bank Capital Regulation," CEPR Discussion Papers 8897, C.E.P.R. Discussion Papers.
- 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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