Basel Committee considers reining in banks' risk-modelling practices

The Basel Committee on Banking Supervision will make changes to its Pillar 3 (capital adequacy and risk disclosures) regime this year, with the aim of improving the transparency of the banks' risk-weighted asset modelling practices, and reducing inconsistencies in risk-weighted asset calculations.

Speaking at a conference in South Africa last week, the chairman of the Basel Committee on Banking Supervision, Stefan Ingves, spelled out the committee's priorities for the next two years.

Ingves said that dealing with the inconsistencies the committee has found in risk-weighted asset calculations was a high priority.

"Much is at stake here - in fact, nothing less than the credibility of the banks' model-based capital ratios and hence the confidence of external parties that such ratios can be meaningfully compared," he said.

The committee has found that underlying differences in actual risk drive the lion's share of variations in risk weights and capital requirements, and this is appropriate.

However, some variations arise from both supervisory and practice-based idiosyncrasies, and these can result in material discrepancies. The committee's view is that the observed range of practice-based variations is too wide.

Ingves said: "A problem exists and needs corrective measures. At the heart of this problem is a question of whether, for regulatory purposes, banks have too much freedom in their modelling choices.

"So, we are looking at whether, and how far, greater constraints on their modelling practices are needed."

He said the committee would also be looking for undesirable differences in national regulations.

The BCBS's other priorities for the next couple of years include bringing the post-crisis reform agenda to a "satisfactory conclusion".

Ingves said: "We have the details in place for most of the remaining major projects. These include the leverage ratio, the net stable funding ratio, the trading book, and securitisation. We should be able to finish them in the next 12 months."

Implementation will take on increasing importance. "The committee's work to help build a resilient banking system will be in vain if the agreed standards are not implemented in a full and consistent manner at a national level," Ingves said.

"Once the committee has done its part the reforms will only have concluded the design stage. They will still need to be adopted and implemented by individual countries. It is a priority, therefore, to monitor and evaluate the implementation of [these] reforms.  

Another of the committee's priorities is to be on the alert for any unintended prudential consequences.

And, by the end of 2015, detailed peer reviews of the capital regulations of all 27 committee members' jurisdictions will have been completed.