Watchdog fears chaotic bank risk modelling

Tim Wallace
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BANKS set aside such different amounts of capital against the same assets that investors cannot be certain how safe the institutions are and the authorities may have to step in to set standards, a top group of regulators warned yesterday.

The Basel Committee tested 15 major international banks, giving them each a hypothetical portfolio of assets and running their internal risk weighting models against it.

The ratio of market risk weighted assets to total trading assets came in at 80 per cent for UniCredit and 10 per cent for BNP Paribas, an enormous variation.

Part of the difference came from internal modelling differences, though some of the variation was made up of different national guidelines as well as specific rules given to different institutions by their local regulators.

“There are considerable differences between banks in terms of reporting details regarding market risk, making comparisons difficult,” the report noted.

The Committee suggested more regular reporting would help investors understand the banks’ positions, as would a more standardised and detailed breakdown of the models used.