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The impact of the IRB approach on the risk weights of European banks

Carlos Pérez Montes, Carlos Trucharte Artigas, María Elizabeth Cristófoli and Nadia Lavín San Segundo

Journal of Financial Stability, 2018, vol. 39, issue C, 147-166

Abstract: We use European Banking Authority (EBA) 2014 stress test data to study the use of the internal ratings based approach (IRB) and the risk weights of European banks. A simple inspection of data at country level reveals significant differences in the use of the IRB approach by banks and in risk weighted asset (RWA) densities. Empirical analysis of these differences is conducted at both the level of bank group and country of exposure. A clearly negative relation is found between use of the IRB approach and RWA densities, even after controlling for portfolio and bank characteristics. The jurisdiction in which a credit exposure is located affects both the use of IRB and risk density. Portfolio variables (default rate, weight of corporate exposures), and bank characteristics (book equity ratio, liquidity measures) are also significantly related to risk weights. The analysis of the dataset also provides some evidence of a relation between RWA density and IRB utilization, and portfolio composition, bank size, and market risk measures (stock return volatility, CDS spreads).

Keywords: Risk weights; Credit risk; IRB; Portfolio management; Banking regulation (search for similar items in EconPapers)
JEL-codes: G21 G32 G38 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:finsta:v:39:y:2018:i:c:p:147-166