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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308916301632
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:39:y:2018:i:c:p:147-166

DOI: 10.1016/j.jfs.2016.11.004

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().