Comment: Rethinking credit risks and weights tests a decade of reform
The fine-tuning or even unwinding of some of the banking regulatory changes introduced in the aftermath of the financial crisis may be finding fans, if a communiqué on the work of the Financial Stability Board's Regional Consultative Group for Asia in Kuala Lumpur is any guide.The FSB's periodic Asian talkfest was hosted by Bank Negara Malaysia. Among the policy priorities outlined in the communiqué appears to be a provision for unwinding one pillar of post GFC reform, via a push to remove regulatory references to credit ratings and to introduce alternative methods of measuring credit risk.However, implementation of this policy initiative has led to a lack of comparability of risks between banks, both within and between jurisdictions. This is of particular concern when the risk weightings of ostensibly similar assets differ.In December, the Basel Committee on Banking Supervision published its second consultative document on Revisions to the Standardised Approach for Credit Risk. It recognises that removing all references to external credit ratings and assigning risk weights based on a limited number of alternative risk drivers is unnecessary and undesirable.The second document reflects the BCBS's decision to reintroduce the use of credit ratings for exposures to banks and corporates but allow alternative approaches to be used in jurisdictions that do not permit the use of credit ratings for regulatory purposes.This looks very much like trying to shut the barn door after the horse has bolted and seems unlikely to do much for inter-jurisdictional comparisons of bank risk assets.Nevertheless, the BCBS latest proposal was considered at the meeting of the FSB Regional Consultative Group for Asia. Nothing was revealed about the outcome of this consideration. Interestingly, a corresponding communiqué for the FSB's Regional Consultative Group for the Americas held in Montreal at the same time did not consider matters of credit risk.But with central banks now grappling with the vagaries of the internal-ratings based models used by the largest banks to determine risk weightings, it is likely that the policy makers would prefer the standardised approach to be just that.