Today, the Basel Committee published its first report on the regulatory consistency of risk-weighted assets (RWAs) for credit risk in the banking book. This study is a part of the Basel Committee’s wider Regulatory Consistency Assessment Programme (RCAP), which is intended to ensure consistent implementation of the Basel III framework. The study draws on supervisory data from more than 100 major banks, as well as additional data on sovereign, bank and corporate exposures collected from 32 major international banks as part of a portfolio benchmarking exercise.
According to the report, there is considerable variation across banks in average RWAs for credit risk in the banking book. The report states that most of the variation in RWAs can be explained by broad differences in the composition of banks’ assets. However, some variation is also driven by diversity in bank and supervisory practices.
Through a portfolio benchmarking exercise, the study found a high degree of consistency in banks’ assessment of the relative riskiness of obligors. Differences exist, however, in the levels of estimated risk, as expressed in probability of default (PD) and loss given default (LGD), that banks assign. These differences drive the variation in risk weights attributable to individual bank practices.
Possible Policy Options: The report includes a preliminary discussion of potential policy options that the Basel Committee could pursue in seeking to minimize excessive practice-based RWA variations.
The short-term policy options that the Basel Committee will consider include enhanced disclosure, additional guidance and possible clarifications of the Basel framework. These options could be built on in the ongoing work on enhanced disclosure by the Committee’s Working Group on Disclosure, and the RCAP assessment process. Over the medium term, the Basel Committee will examine the potential to further harmonize national implementation requirements and to put constraints on internal-ratings based approach parameter estimates.
Materials: Basel Committee, Analysis of risk-weighted assets for credit risk in the banking book (Jul. 2013) available here: http://www.bis.org/publ/bcbs256.pdf