Risk-Weighted Assets (RWAs)

Basel Committee Issues Revised Framework for Market Risk Capital Requirements

The Basel Committee on Banking Supervision (BCBS) has issued revised standards for minimum capital requirements for market risk. The purpose of the revised market risk framework is to ensure that the standardised and internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions. The revisions focus on three key areas: revised boundary between banking book and trading book, revised internal models approach for market risk and revised standardised approach for market risk. The revised framework also includes a shift from value-at-risk to an expected shortfall measure of risk under stress and incorporation of the risk of market illiquidity.

The revised framework produces market risk risk-weighted assets (RWAs) that account for less than 10% of total RWAs, compared to approximately 6% under the current framework. The revised market risk standard would result in a medium (weighted mean) increase of approximately 22% (40%) in total market risk capital requirements as against the current market risk framework.

The revised market risk framework comes into effect on 1 January 2019. A detailed explanatory note of the new standards is available here.

EBA Publishes RWA Assessment as the Next Step in Improving Consistency of Internal Model Outcomes

The European Banking Authority (EBA) has published two reports on the consistency of Risk-Weighted Assets (RWAs) across large EU institutions for large corporate, sovereign and institutions’ Internal Ratings-Based (IRB) portfolios (collectively referred to as “low default portfolios”, or LDP). The LDP analysis explains how much of the variability in RWAs is led by difference in riskiness (namely, idiosyncratic portfolio features), and tries to identify residual drivers that are linked to banks’ practices. The CCR benchmarking report considers the calculation of counterparty credit risk (CCR) exposures under the Internal Model Method (IMM) and the credit value adjustments (CVA) according to the advanced approach (ACVA).

The reports summarize the findings obtained from two benchmarking exercises aimed at improving the comparability of EU banks’ RWAs. A key finding is that around 75% of the observed difference in global charge (GC) levels across institutions could be explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. As for the CCR and ACVA analyses, the report shows that there is significant variability across banks in the calculation of CCR and ACVA, especially for equity and foreign exchange OTC derivatives.