Some banks may be forced to hold even more capital after a study found that there was “considerable variation” in the way banks estimate their exposure to risk.
The study, undertaken by the Basel Committee on Banking Supervision on 100 unnamed banks, found that, while banks ranked the relative riskiness of a portfolio of individual borrowers in very similar ways, their estimates for risk – as expressed as the probability a borrower will default and the losses they would sustain if a default were to occur – were very different.
In some cases, the gap between a bank's reported capital ratio and a ten per cent risk-based capital ratio benchmark was as high as two per cent in either direction – although most fell within a narrower range. Banks must currently hold seven per cent capital as a protective buffer; these findings show that different risk models may allow them to inflate this benchmark by a considerable margin.
The findings could lead to the Committee introducing new policies to harmonise the way banks calculate their credit risk, invariably leading to further capital requirements for the outlying banks.
The Committee put forward a number of potential policy options to minimise excessive variations. In the short-term, policy options that will be considered include enhanced disclosure, additional guidance and possible clarification of the Basel rules. In the medium term, it will be looking at harmonising implementation requirements and putting restraints on banks’ estimates for risk parameters.
Commenting on the report, chairman of the Basel Committee and governor of Sveriges Riksbank Stefan Ingves said:
While some variation in risk weightings should be expected with internal model-based approaches, the considerable variation observed warrants further attention. In the near term, information from this study on the relative positions of banks is being used by national supervisors and banks to take action to improve consistency. In addition, the Committee is using the results as part of its ongoing work to improve the comparability of the regulatory capital ratios and to enhance bank disclosures. The Committee will be considering similar exercises to monitor consistency in capital outcomes and assess improvement over time.