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Tags: bank | Basel-II | risk | regulator

Global Regulators Probe How Banks Calculate Risks

Monday, 29 October 2012 04:06 PM EDT

Global banking regulators are investigating why banks use such a wide variety of ways to assess risk amid fears the current method for calculating capital safety cushions is not safe and is being gamed.

Totting up risks from assets such as derivatives and government bonds is central to working out how much capital a bank must hold to meet new requirements, known as Basel III.

Some supervisors suspect some banks are trying to scale back how much capital they must find by playing down their level of impaired assets.

U.S. banks have accused European peers in the past of "optimizing" how they add up risks from assets.

Bank of England Deputy Governor Paul Tucker argued this month that continually relying on internal models at banks to add up risks was no longer "safe".

Faced with such concerns, the Basel Committee on Banking Supervision said on Monday it would probe the wide differences in the way banks calculate their risks.

It will report initial findings in early 2013 and recommend any regulatory action.

The Basel Committee said some of the differences can be explained by banks' desire to keep their trading strategies and positions private for competitive reasons.

In the report for finance ministers from the group of top 20 economies (G-20) who meet in Mexico next weekend, it said the differences were making it hard for investors to compare banks.

Some regulators now doubt the effectiveness of Basel III, new bank capital rules written by the Basel Committee and which will be introduced from January.

Basel III, the world's regulatory response to the financial crisis and the bank bailouts which followed it, relies heavily on banks using in-house models to assess risks and capital.

The committee said internal models that have been used for a long time were typically more consistent.

Separately on Monday, a task force set up by the G-20's regulatory arm, the Financial Stability Board, proposed seven recommendations to improve banking risk disclosures.

"Disclosures that describe risks and risk management practices transparently help to build confidence in the firm's management, which is particularly important in attracting debt and equity investors and may in turn support higher equity valuations," the task force said in a separate statement.

The recommendations include listing risks from the bank's business model, outlining sources of funding, how risk-weighted assets are calculated, forebearance of loans and how this affects the reported level of impaired or non-performing loans.

The task force, made up of banks, investors and accounting firms, said many of the recommendations would start to be weaved into annual reports for 2012 or 2013 onwards.

The Basel Committee was hopeful all G-20 countries will have their Basel III rules ready by January to start on time.

So far, key parts of the world, such as the United States and European Union, where many of the world's biggest banks earmarked for particular scrutiny as based, are not ready.

"This means there is now a high probability that just six of the 29 globally systemically important banks will be subject to Basel III regulations from the globally agreed start date," the committee said.

Basel Committee Chairman Stefan Ingves said significant progress has been made in preparation for January.

"We expect that the remaining jurisdictions will be able to finalise their rules swiftly and in a way that is true to the globally agreed minimum requirements," Ingves said.

© 2024 Thomson/Reuters. All rights reserved.

Global banking regulators are investigating why banks use such a wide variety of ways to assess risk amid fears the current method for calculating capital safety cushions is not safe and is being gamed.
Monday, 29 October 2012 04:06 PM
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