Fitch: It is still too difficult to compare banks
Investors cannot fairly compare banks’ capital buffers and financial soundness because the rules allow them too much flexibility in how they report their numbers, analysts at credit ratings agency Fitch warned yesterday.
The biggest banks calculate their risk-weighted assets (RWAs) based on internal models of risk, which are then approved by regulators.
But the models can produce wildly differing interpretations of risk from institution to institution, meaning even under the apparently harmonised international regime, it can be difficult to accurately compare banks to other banks.
“The Basel Committee on Banking Supervision’s Regulatory Consistency Assessment Programme (RCAP) initiative is making slow progress in reducing RWA variability and there is limited transparency on which banks’ ratios might be overstated,” said the analysts.
“For example, in April 2015, the Committee announced it had agreed to remove just six of around 30 national discretions from Basel II’s capital framework.”
“The Committee’s reluctance or inability to name the banks whose capital ratios are overstated undermines confidence in the internal ratings-based models generally.”
The analysts hope the rules will be tweaked following a consultation.