The Manipulation of Basel Risk-Weights

Ouarda Merrouche () and Mike Mariathasan

No 9494, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we examine the relationship between banks? approval for the internal ratings-based (IRB) approaches of Basel II and the ratio of risk-weighted over total assets. Analysing a panel of 115 banks from 21 OECD countries that were eventually approved for applying the IRB to their credit portfolio, we find that risk-weight density is lower once regulatory approval is granted. The effect persists when we control for different loan categories, and we provide evidence showing that it cannot be explained by flawed modelling, or improved risk-measurement alone. Consistent with theories of risk-weight manipulation, we find the decline in risk-weights to be particularly prevalent among weakly capitalised banks, when the legal framework for supervision is weak, and in countries where supervisors are overseeing many IRB banks. We conclude that part of the decline in reported riskiness under the IRB results from banks? strategic risk-modelling.

Keywords: Basel ii; Internal ratings-based approach; Capital regulation (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2013-05
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 (19)

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Related works:
Journal Article: The manipulation of basel risk-weights (2014)
Working Paper: The Manipulation of Basel Risk-Weights (2014)
Working Paper: The Manipulation of Basel Risk-Weights. Evidence from 2007-10 (2012)
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