(MENAFN- Khaleej Times) Global regulators are weighing steps to ensure that banks take a realistic view of the possible losses on their investments, after uncovering variations in how lenders assess risk.
The Basel Committee on Banking Supervision said that a study of 32 global banks had found "material" differences in how much capital lenders thought was needed to guard against possible losses on assets such as corporate and household debt.
The variations meant that some lenders were backing investments with as much as 20 per cent more capital than other banks, the Basel group said in a report published on its website on Friday.
"The considerable variation observed warrants further attention," Stefan Ingves, chairman of the Basel committee, said in the statement. "Information from this study on the relative positions of banks is being used by national supervisors and banks to take action to improve consistency."
US bankers, including Jamie Dimon, chief executive officer of JPMorgan Chase & Co, have claimed that flexible implementation of previous rounds of Basel rules in the European Union has allowed European lenders to hold less capital against some assets than their US counterparts.
International standards set by the Basel committee require banks to meet minimum capital requirements, measured as a per centage of their assets. The amount of capital that must be held is linked to the riskiness of the assets, with large banks allowed to use their own models to calculate the likelihood of losses. This process is known as risk weighting.
The Basel group's review of risk models is "a step forward and will show us what kind of specific implementation there is of the Basel rules in banks," Bundesbank vice-president Sabine Lautenschlaeger, a member of the Basel group, said in a telephone interview. "Some of the problems that arise from risk weighting can be addressed using these kinds of exercises."
The Basel study, which focused on assets banks intend to hold to maturity, found that North American banks "generally have above-average risk weights." Lenders from other parts of the world "did not show any strong pattern overall, as banks from those regions can be found on both ends of the scale," according to the document. Still, the findings show that European banks generally apply lower risk weights to their holdings of bank-issued debt than lenders based elsewhere.
While most banks' included in the exercise had risk weightings within 10 per cent of each other, there were some outliers, the report said. The Basel group is weighing a range of possible options for ensuring that banks' risk models are realistic, according to the report. These range from rules requiring lenders to disclose more information on how they calculate possible losses to "more explicit constraints," such as the setting of minimum risk levels for some assets.
"The short-term policy options that the committee will consider include enhanced disclosure, additional guidance and possible clarifications of the Basel framework," the group said. "Over the medium term, the committee will examine the potential to further harmonize implementation requirements and to put constraints" on the risk estimates produced by bank models, the group said.
Concerns about banks' ability to reduce their capital requirements by simply changing how they measure the risk of losses on their assets have prompted investigations by regulators and calls from some supervisors for more reliance on simpler, non-risk-sensitive capital rules, known as leverage ratios.
US regulators indicated this week that JPMorgan, Wells Fargo & Co and Goldman Sachs Group Inc. will be among eight US banks to face tougher leverage ratios than required under Basel rules.
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