Basel Committee Chairman Stefan Ingves has delivered a speech discussing the Basel Committee’s policy agenda over the next year, noting that “there is still a lot on the Committee’s plate – at last count, a total of around 50 projects.” Among other topics, Chairman Ingves discussed the variation of risk-weighted assets (RWAs) among banks and potential policy responses.
The Basel Committee has published three studies on the variation of RWAs among banks – two for the trading book (our earlier blog post on this topic is available here) and one for the banking book (our earlier blog post on this topic is available here). According to Chairman Ingves, taken together, the three reports suggest that underlying differences in actual risk drive the lion’s share of variations in RWAs and capital requirements, just as they ought to do. However, some variations arise from supervisory and practice-based idiosyncrasies and these can result in material discrepancies. Chairman Ingves stated that while it is difficult to be precise on how much scatter is “too much,” the observed range of practice-based variations is “too wide.”
According to Chairman Ingves, although further analysis to obtain a comprehensive view of RWAs may not be completed until 2015, this does not prevent the Basel Committee from taking action in the meantime. Chairman Ingves went on to describe the following set of potential policy and supervisory changes:
Most immediately, there will be supervisory action. Our studies have provided supervisors with a clearer picture of how their banks stack up against their international peers, and supervisory action is already being taken against a number of the outlier banks that are on the low side.
Similarly, the Committee’s [Regulatory Consistency Assessment Programme] work is helping to reduce variability due to undesirable differences in national regulations, thereby improving the consistency of outcomes. The Committee is also looking at the issue of national discretions and Pillar 2, and it is investigating whether more can be done to reduce variability from these sources.
Since a lack of transparency in bank modelling practices lies at the heart of the problem, the Committee will propose enhancements to Pillar 3 in the first half of this year.
At the heart of this problem is a question of whether, for regulatory purposes, banks have too much freedom in their modelling choices, so we are looking at whether, and how far, greater constraints on the modelling practices of banks are needed.
To make a more direct impact, we are also examining the role of floors and benchmarks within the regulatory framework, and considering whether they should have a greater role to play.
Finally, we now have the leverage ratio as a backstop to the risk-based regime. And the case for a leverage ratio will only grow stronger if risk-weight variability is not adequately dealt with.
Stefan Ingves, Chairman of the Basel Committee, Finishing the job: next steps for the Basel Committee (Jan. 31, 2014) available here: http://www.bis.org/speeches/sp140131.pdf.