Sources of Inconsistencies in Risk Weighted Asset Determinations

Michel Araten
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Michel Araten: JPMorgan Chase

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: Differences in Risk Weighted Assets (RWA) and capital ratios have been noted across firms, both within a particular supervisory jurisdiction, as well as across jurisdictions. Since these differences have created concerns regarding a level playing field, regulatory authorities are in the process of establishing benchmark portfolios to examine these issues in more detail. While some of these differences may be due to different credit profiles and even due to the relative rigor of examination processes, more fundamental differences in methodology and risk management processes must first be understood in the context of quantitative surveys of RWA using benchmark portfolios. This paper explores these differences that may arise in estimates of Probability of Default, Exposure at Default, and Loss Given Default that are required for the Advanced Internal Rating-Based (AIRB) approach. In some instances, improved supervisory guidance in the form of best practices could be issued which could reduce the RWA differences.

Date: 2012-05
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