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Reducing excessive variability in banks’ regulatory capital ratios

A BCBS report sets out measures to improve consistency and comparability in bank capital ratios, including policy proposals to revise the standardised approaches for calculating regulatory capital ratios, and reducing the modelling choices in the capital framework when determining internal-model based estimates of credit, market and operational risk-weighted assets.

Report on regulatory capital ratios
12 November 2014
Bank for International Settlements

The Basel Committee on Banking Supervision published a report on measures to reduce excessive variability in banks’ regulatory capital ratios prepared for the G20 Leaders’ Summit in Brisbane November 2014.¬†Studies conducted by the Basel Committee on banks’ risk-weighting of assets confirmed that there are material variances in banks’ regulatory capital ratios that arise from factors other than differences in the riskiness of banks’ portfolios. These variances undermine confidence in capital ratios. In response, the Committee initiated a number of policy and supervisory actions to address excessive variability in risk-weighted assets that are based on a bank’s internal models.

One such measure is to revise the Basel capital framework’s standardised measurement approaches (ie the non-internal model-based approaches). Once finalised, the revised standardised approaches will form the basis for a capital floor, which will ensure that internal model-based capital requirements do not fall below prudent levels. …

Drawing from its risk-weighted asset studies, the Committee is also developing specific policy proposals to reduce excessive variability arising from banks’ risk modelling practices. The modifications under consideration will narrow the modelling choices available to banks, particularly in areas which by their nature are not amenable to modelling, and will serve to increase consistency and reduce complexity.