Global bank regulators report that they have found excessive variation in how banks and regulators calculate banks’ market risks.
The Basel Committee on Banking Supervision published a report Thursday that examines the regulatory consistency of risk-weighted assets in the trading book, based on both publicly-available bank data for a selection of large banks, and a hypothetical test portfolio.
The report finds “considerable variation” in risk-weighted assets for market risk (mRWAs) based on publicly-available bank data. The Basel Committee says that, while there was some indication from the public data that differences in the composition and size of trading positions are correlated with banks’ average mRWAs, “the quality of disclosures was found to be insufficient” to allow investors and others to assess how much of the variation reflects differing levels of actual risk and how much is a result of other factors.
The hypothetical test portfolio exercise indicated that there can be a substantial difference between the bank reporting the lowest mRWAs and the bank reporting the highest. It says that a sizable portion of the variation is due to supervisory decisions by regulators; and, modelling choices made by banks is also another major source of variation.
“While some variation in risk weightings should be expected, excessive variation arising from bank modelling choices is undesirable when it does not reflect actual risk-taking,” said Stefan Ingves, chairman of the Basel Committee and governor of Sveriges Riksbank.
“These preliminary findings will feed into the policy work already initiated by the Basel Committee, in particular regarding the enhancement of bank disclosures and the fundamental review of the trading book,” he added. “Also, the analysis used to compile this report provides national supervisors with a much clearer understanding of how the risk models of their banks compare with those of international peers. This will allow national supervisors to take action where needed.”
The Basel Committee notes that the hypothetical portfolio exercise focused on a series of simple long and short positions, designed to reveal the impact of model design features. “To shed more light on the effect of different sources of variation on more realistic portfolios,” it plans to conduct a further hypothetical test portfolio exercise later this year that will examine more complex, hypothetical test portfolios, in order to help the committee deepen its analysis of the variation in risk measurement of trading books across banks.
The review released Thursday is part of a wider effort to examine regulatory consistency, which aims to ensure consistent implementation of the Basel capital adequacy framework; and, the Basel Committee notes that a similar analysis is currently under way for the banking book.