Basel 2.5 caused €200 billion jump in risk weighted assets

European banks saw their risk weighted assets leap at the turn of the year, as new trading book rules collided with the European Banking Authority’s call to achieve a 9% capital minimum.

The introduction of Basel 2.5 on December 31 last year saw risk-weighted assets (RWAs) at 10 European banks leap by a combined €200bn, according to disclosures in fourth-quarter and full-year reports – an increase that came just weeks after the European Banking Authority told banks they would need to temporarily achieve a 9% core Tier 1 capital ratio by the end of June this year.

“Banks are being squeezed badly here – the quality requirements for Tier 1 capital are higher than they used to be, the amount of RWAs is going up because of the capital charges in Basel 2.5, and on top of that the capital requirements are moving up as well. This is all happening while banks are trying to recover from the crises of the past few years,” says a risk modelling expert at one European bank.

Building on the long-standing value-at-risk capital charge, Basel 2.5 introduces extra charges to bolster what regulators viewed as an under-capitalised trading book: a stressed value at risk (VAR) calculation that uses a 12-month period of market turmoil to cover risk above the 99% confidence level used for standard VAR, as well as a standardised charge for securitisations and resecuritisations, a comprehensive risk measure (CRM) for correlation trading, a floor for the CRM, and the incremental risk charge that captures default and credit migration risk.

The impact varies from bank to bank. Among the three UK banks with big trading businesses, for example, HSBC racked up the largest increase – $54.7 billion – while Barclays was second, with a £30 billion jump, and Royal Bank of Scotland reported an increase of £21 billion. Banks with smaller trading businesses, like Danske Bank and Standard Chartered, barely felt the impact, with increases of Dkr3.5 billion and $3.5 billion, respectively (see table).


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