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Banks' internal models and RWA variability: strategic modelling portfolio reallocation?

Author

Listed:
  • Maria Alessia Aiello

    (Bank of Italy)

  • Salvatore Cardillo

    (Bank of Italy)

  • Caterina Ciancaglioni

    (Bank of Italy)

Abstract

We analyse the effects of internal ratings-based (IRB) models on risk-weighted asset (RWA) variability, investment strategies and capital management among significant banks in the euro area, using a unique supervisory dataset. Our findings indicate a decline in RWA density (i.e. the ratio of risk-weighted assets to total exposure at default) following the adoption of internal models. The magnitude of this reduction varies across banks and is influenced by balance sheet characteristics. We find no evidence that, in the post-2015 SSM setting, weakly capitalized or fragile banks reduced RWA density more than other banks after the adoption of IRB models along the margins examined in the paper. This is consistent with the view that harmonized supervision may have limited the scope for opportunistic post-adoption reductions in RWAs. Finally, we provide evidence that IRB models encourage banks to reallocate credit towards more profitable assets - particularly those to large non-financial corporations - while reducing sovereign and central bank exposures.

Suggested Citation

  • Maria Alessia Aiello & Salvatore Cardillo & Caterina Ciancaglioni, 2026. "Banks' internal models and RWA variability: strategic modelling portfolio reallocation?," Temi di discussione (Economic working papers) 1537, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1537_26
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2026/2026-1537/en_tema_1537.pdf
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • 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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