Tighter rules proposed for banks’ credit risk
The biggest lenders to corporates may have to hold even more capital as a result of proposed new rules that would curb how much flexibility banks have to assess the risk of their loan books.
The proposals are the last part of a package of measures designed to make it easier to compare banks’ balance sheets and prevent them from gaming capital ratios that have been made tougher in the wake of the financial crisis.
Thursday’s paper focused on how banks assess credit risk in their banking books. Credit risk accounts for about 70 per cent, on average, of a lender’s risk-weighted assets — the denominator in the all-important fraction that determines a bank’s capital ratios. Banks come up with the RWA number by making a judgment on how risky various loans and other assets are. Other elements of RWAs include operational, market and counterparty risk — all of which BCBS has tightened the rules around.
Banks accuse the group of forcing another round of capital raising by the back door, which they have dubbed “Basel IV”. But policy makers have pushed back hard, arguing that their intention is not to raise overall capital but rather to simplify assessment methods and reduce wide divergences in how banks calculate risk.
Curbing the use of internal models represents a u-turn from earlier iterations of Basel rules, which first permitted banks to use their own models 20 years ago. The presumption is that banks’ internal models are less conservative than standardised ones -- although an industry-funded study earlier this month found that there was “no evidence” lenders manipulated their RWAs.
Mayra Rodriguez Valladares, a regulatory consultant, welcomed the move to curb the modelling of interbank risk. “There is so much interconnection between banks that to allow them to have incredible flexibility on how they measure exposure to each other leaves investors and taxpayers at risk when banks underestimate each other’s risk.”
The regulators are still consulting on how to assess sovereign risk as part of separate proposals -- one of the most politically contentious elements of its work. They plan to launch a study to examine the impact of Thursday’s proposals on banks.