Basel RWA review said to show banks ‘many multiples’ apart

Regulators are bracing for fresh criticism of bank capital modelling, say industry sources

Regulators are said to be expecting a backlash as they prepare to release the first half of a year-long comparison of capital modelling at different banks, which industry sources believe will reveal huge disparities in the risk-weighted asset (RWAs) numbers against which capital is held. Instead of dampening scepticism about the regulatory capital regime – which had been the industry’s hope – the Basel Committee on Banking Supervision study could now add weight to calls for a fundamental rethink.

“It’s a game-changer. The Basel Committee is really worried about this – it’s a complete failure of supervision,” says one industry source. He says regulators plan to publish their work on January 31.

The study focuses on trading businesses at 15 banks and falls into two parts – a questionnaire on modelling methodology and a benchmarking exercise in which each bank was given the same set of test portfolios and asked to calculate the appropriate RWAs. Those numbers are “many multiples” apart in some cases, according to the source. A risk manager at one large international bank says he has heard the same estimate of the size of the RWA differences.

The results of the study are said to have been discussed on a call between regulators and one banking industry association in the middle of this month. They have since leaked out to other associations and their member firms. A second study, of banking book RWAs, was also completed last year but is not thought to be ready for publication.

The chairman of the committee, Stefan Ingves, acknowledged the review had uncovered “material variations” in a speech in Cape Town yesterday, and briefly discussed some of the policy options regulators could take. The Basel Committee declined to comment further.

So far, analysis of bank capital numbers at different institutions has focused on comparisons of the ratio of assets to RWAs – a rough measure of the riskiness of a bank. Two banks with similar-sized asset bases but very different RWA numbers would – in theory – be taking very different amounts of risk. But analysts have had a hard time making sense of the numbers. As of the end of 2011, for example, Deutsche Bank’s RWAs represented 17.6% of total assets, while the proportion at Commerzbank was 35.7%.

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