BIG BANKS could face tighter controls on their in-house calculations of the riskiness of their loans and the size of their capital buffers, the Bank of England warned yesterday.
Currently, big banks can use historic data to calculate the risk weights applicable to their assets. By contrast, smaller banks must use a formula set out by the regulator.
As a result risk weights vary for the same asset between banks.
The same prime mortgage could be given a 35 per cent weight at a challenger, but seven per cent at a big bank – so smaller banks have to hold five-times as much capital for the same loan, driving up costs.
The regulator said this makes “it harder for market participants to compare capital positions.”
As a result, ex-prudential regulation authority deputy head Paul Sharma expects regulators to tighten up on big banks, and move their risk weightings closer to those faced by challengers.
“We can expect to see the PRA push for more homogenisation,” said Sharma, a managing director with Alvarez and Marsal. “I suspect the PRA will take the opportunity to narrow the gap between the models and standardised approach, to partially address challenger banks’ complaints.”
Meanwhile the big banks could still be told to hike capital levels to cover parts of the areas not studied in the stress tests. This may include pension fund deficits, and worries that banks are too concentrated in one region or product area.