LONDON Dec 17 Global banking regulators have
reinforced their campaign to impose more consistent ways for
banks to assess risks on their trading books with a second
finding of wide variations between systems in use in the sector.
The Basel Committee said on Tuesday a review of how lenders
assign risk weightings to more complex trading positions showed
big differences, reflecting the in-house models that banks use
for their calculations.
The Committee has already published one report on the issue,
which is an important element of attempts to regulate the sector
and avoid a repeat of the financial crisis of 2007-2009.
Regulators have told banks to hold more capital against the
risk of default, but this is still contingent on an assessment
of the scale of risk being taken.
And watchdogs therefore want to tighten up on risk
assessments to stop lenders being able to "game" the system by
using models that understate their risks and allow them to hold
less capital, potentially giving them a trading advantage.
"Consistent with the findings in the first report, the
results show significant variation in the outputs of market risk
internal models used to calculate regulatory capital," the Basel
Committee said in a statement.
"In addition, the results show that variability typically
increases for more complex trading positions."
Such a finding is not surprising given the different systems
which the banks use, but is part of the Committee's efforts to
push through reforms of the sector.
IMPLIED CAPITAL REQUIREMENTS
The review looked at 17 major banks in nine jurisdictions,
including the likes of HSBC Holdings Plc, Deutsche Bank
AG and JP Morgan Chase & Co, and found
differences in implied capital requirements of between 24 and 30
percent for the two most diversified portfolios looked at.
The Committee is made up of banking supervisors from nearly
30 countries and wrote the Basel III accord, the world's core
response to improving bank capital levels after the financial
crisis showed some lenders were undercapitalised and had to be
shored up by taxpayers.
Yet some critics in Britain and the United States have said
Basel III is too complicated and allows banks to use in-house
models to hold less capital than they should against risky
The Bank of England is looking at whether to force big banks
to calculate their risk weightings and capital requirements on
the basis of a common standardised approach, as well as on the
basis of their own models.
And the Basel Committee is also reviewing how it can curb
the ability of in-house models to come up with such differences.
Following the first report on the issue earlier this year,
the Committee has already recommended improving public
disclosure by banks and narrowing the range of modelling choices
The regulators are also undertaking a fundamental review of
banks' trading books which is also considering ways to narrow
variability in risk weightings.
Changes could include "floors" or minimum capital levels
irrespective of what models come up with, but Basel said this
"may not necessarily lead to less variability across banks if
the floors are themselves based on modelled inputs".