The Informational Content of Bank Risk Weights and the Role of Internal Ratings

Brunella Bruno, Francesco Corielli, Immacolata Marino, Giacomo Nocera

No 26281, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We examine when a regulatory measure of bank asset risk, the ratio of risk-weighted assets to total assets (RWATA), aligns with a market-based measure of risk, namely the volatility of bank assets estimated using option-pricing techniques. We argue that the informational content of RWATA is conditional on the framework used to generate risk weights. Using a unique hand-collected dataset on the adoption and scope of internal ratings-based (IRB) models, we show that RWATA is unrelated to market-based asset risk on average, but becomes significantly associated with asset volatility among banks that use internal models. The relationship strengthens with the intensity of IRB adoption, particularly when advanced internal models are applied to corporate exposures, and persists among relatively weakly capitalized banks and during periods of financial stress.

Keywords: Asset volatility; Capital regulation; Internal ratings. (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 G32 (search for similar items in EconPapers)
Pages: 42
Date: 2026
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