On Air Now

Listen

Listen Live Now » 94.7 FM Central Wisconsin 102.9 FM Wausau, WI

Weather

Current Conditions(Wausau,WI 54403)

More Weather »
73° Feels Like: 73°
Wind: SSW 9 mph Past 24 hrs - Precip: 0”
Current Radar for Zip

Tonight

Partly Cloudy 52°

Tomorrow

Mostly Sunny 76°

Thurs Night

Showers Late 59°

Alerts

New Basel study confirms variations in how banks tot up risks

A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file pho
A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file pho

By Huw Jones

LONDON (Reuters) - 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 undercapitalized 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 assets.

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 standardized 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 modeling choices for banks.

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 modeled inputs".

(Editing by David Holmes)

Comments