Coping with inconsistencies in bank risk weighted assets

Michel Araten
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Michel Araten: JPMorgan Chase, USA

Journal of Risk Management in Financial Institutions, 2013, vol. 6, issue 3, 219-228

Abstract: Industry participants, regulators and investors have raised concerns with the consistency of Basel risk-weighted asset (RWA) assessments across banks that are critical to the determination of capital ratios. These issues have created misgivings as to whether capital adequacy measures constructed by advanced internal rating based (AIRB) banks create level-playing field problems and whether they can be relied upon. Solutions to narrow the differences among banks have been proposed, ranging from imposing floors on certain parameters and calculations all the way to reverting to non-risk differentiated measures, such as leverage ratios. In this paper the evidence associated with RWA consistency will be examined. Some of the underlying reasons and sources of inconsistency will be evaluated along with the solutions proposed. The risks of moving away from risk-sensitive regulatory capital will be described and recommendations for coping with these inconsistencies will be made.

Keywords: RWAs; Basel II; credit risk; advanced internal ratings (AIRB); regulatory capital; probabilities of default (PD); loss given default (LGD) (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2013:v:6:i:3:p:219-228

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