New Basel study confirms variations in how banks tot up risks
By Huw Jones
LONDON (Reuters) - Global banking regulators have reinforced their campaign to impose more consistent ways for banks to assess risks on their trading books with a second finding of wide variations between systems in use in the sector.
The Basel Committee said on Tuesday a review of how lenders assign risk weightings to more complex trading positions showed big differences, reflecting the in-house models that banks use for their calculations.
The Committee has already published one report on the issue, which is an important element of attempts to regulate the sector and avoid a repeat of the financial crisis of 2007-2009.
Regulators have told banks to hold more capital against the risk of default, but this is still contingent on an assessment of the scale of risk being taken.
And watchdogs therefore want to tighten up on risk assessments to stop lenders being able to "game" the system by using models that understate their risks and allow them to hold less capital, potentially giving them a trading advantage.
"Consistent with the findings in the first report, the results show significant variation in the outputs of market risk internal models used to calculate regulatory capital," the Basel Committee said in a statement.
"In addition, the results show that variability typically increases for more complex trading positions."
Such a finding is not surprising given the different systems which the banks use, but is part of the Committee's efforts to push through reforms of the sector. Continued...