Inside the labyrinth of Basel risk-weighted assets: how not to get lost

Francesco Cannata (), Simone Casellina () and Gregorio Guidi ()
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Francesco Cannata: Bank of Italy
Simone Casellina: Bank of Italy
Gregorio Guidi: Bank of Italy

No 132, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Many studies have questioned the reliability of banks� calculations of risk-weighted assets (RWA) for prudential purposes. The significant divergences found at international level are taken as indicating excessive subjectivity in the current rules governing banks� risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banks� riskiness under a risk-sensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assets � which is widely used for peer analyses � is a valuable starting point, but when analysis becomes more detailed it needs to be supplemented by other indicators. Focusing on credit risk, we propose an analytical methodology to disentangle the major factors in RWA differences and, using data from Italian banks (given the inadequate degree of detail of Pillar 3 reports), we show that a large part of the interbank dispersion is explained by the business mix of individual institutions as well as the use of different prudential approaches (standardised and IRB). In conclusion we propose a simple data template that international banks could use to apply the framework suggested.

Keywords: Basel Accord; risk-weighted assets; banking supervision; credit risk (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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