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The Informational Content of Bank Risk Weights and the Role of Internal Ratings

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Abstract

We examine when a regulatory measure of bank asset risk, the ratio of risk-weighted assets to total assets (RWATA), aligns with a market-based measure of risk, namely the volatility of bank assets estimated using option-pricing techniques. We argue that the informational content of RWATA is conditional on the framework used to generate risk weights. Using a unique hand-collected dataset on the adoption and scope of internal ratings-based (IRB) models, we show that RWATA is unrelated to market-based asset risk on average, but becomes significantly associated with asset volatility among banks that use internal models. The relationship strengthens with the intensity of IRB adoption, particularly when advanced internal models are applied to corporate exposures, and persists among relatively weakly capitalized banks and during periods of financial stress.

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  • Brunella Bruno & Francesco Corielli & Imma Marino & Giacomo Nocera, 2026. "The Informational Content of Bank Risk Weights and the Role of Internal Ratings," CSEF Working Papers 791, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:791
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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