Jan 29 (Reuters) - (The following statement was released by the rating agency)
Universal disclosure of risk-weighted assets (RWAs) and capital ratios calculated using Basel’€™s standardised approach would help aid investor confidence in bank capitalisation, Fitch Ratings says. This additional metric would be more comparable globally, and with additional disclosure it could help analysts understand important differences in risks taken by banks.
The significant dispersion in RWAs calculated using banks’€™ own models, instead of the standardised approach, has undermined investor trust in the internal ratings-based (IRB) approach. Regulators are increasing their scrutiny of the rigour and consistency of bank risk weights. The European Central Bank has said it may adjust risk weights in its asset-quality review this year.
Several national supervisors have introduced risk-weight floors for mortgages a€“ for example Sweden put in a 15% floor in 2013. US rules require banks using internal models to also calculate capital ratios under the standardised approach a€“ applying the more conservative approach for each sub-category. But there is significant variation in how RWAs are being adjusted in different jurisdictions, so it is difficult for investors to compare the resulting capital ratios.
One way to address investor scepticism and aid comparability would be for banks to disclose RWAs calculated using the standardised approach. This is being considered by the UK’€™s Financial Policy Committee as a way to help the authorities judge the prudence of lenders’ model-based RWAs, according to its November minutes. It would also encourage investors to look at multiple capital adequacy ratios, which vary in complexity.
This is important as no one capital adequacy measure can capture all risks. Analysts have little choice but to revert to crude leverage ratios for global comparisons as there is insufficient data to adjust RWAs consistently. The disclosure of Basel III leverage ratios from 2015 will aid comparability, but it is still a blunt measure. Capital ratios using the standardised approach could help bridge the gap between this simple and often misleading tool and the risk-based, but complex and variable, IRB methodology.
Where standard approach disclosures reveal material differences from internally based RWAs, banks should explain the divergence. This would help reduce suspicion about banks’€™ risk models and build confidence in the IRB approach.
Enhancing disclosure around RWAs would be better than simply reverting to a standardised approach of risk measurement, especially for complex transactions. RWA variability can prevent banks acting the same way and reduce systemic risk even though it compromises comparability.
We make allowances for RWA variability in our capital analysis, including assessment of leverage as well as risk-weighted metrics. Disclosure of RWAs using the standardised approach, for example as part of the ECBa€™s comprehensive assessment, would allow us to make our own RWA adjustments and more accurately assess how well capitalised a bank is for its risks.