Basel III May Change the Way Banks Calculate Risk

The Basel Committee on Banking Supervision (Basel III) has discovered “material variation” in the methods banks have for calculating risk. As a result, regulators may begin to impose new standards of risk calculation across banks.

“The preliminary work suggests we may not have the balance right in the current set up,” said Basel Committee Chairman Stefan Ingves, speaking in Cape Town this week.

“Certain modelling choices seem to be major drivers of the variation in risk weights,” Ingves said.

Critics of Basel III

Some critics of Basel III, however, believe the regulatory committee is making financial compliance overly complex. Nevertheless, if Ingves’ earlier remarks are any indication, the Basel Committee is unlikely to step back, especially after the forthcoming publication of the Committee’s findings on risk models:

Apart from assessing the regulatory consistency and materiality of the gaps, the Basel III implementation process has drilled down to the level of individual bank portfolios, and I expect the work will help us to identify the key drivers of variations in risk-weighted assets across banks, across jurisdictions and across time. As other Basel standards and policies are completed – such as those relating to liquidity, G-SIBs and large exposures – the focus on implementation is expected to rise.

The Basel committee brings together regulators from 27 nations, including the U.K., U.S. and China, to set capital rules for banks. The requirements it sets are measured as a percentage of lenders’ risk-weighted assets. The latest round, known as Basel III, states that banks should have core reserves equivalent to 7 percent of their RWAs.

Read more.

About The Author

Elan Mendel

Elan Mendel is an associate with Shipkevich PLLC, and has done registration, compliance, and enforcement defense work for commodities, futures and forex firms registered with the CFTC and NFA as FCMs, RFEDs, and others. Elan also specializes in domestic and cross-border insolvency issues.