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02 June 2015

Reuters: Global regulators concerned over banks' own capital risk models


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Banks should not depend on internal models for assessing the size of their capital buffers. "Supervisors should be cautious against over-reliance on internal models for credit risk management and regulatory capital," the Joint Forum said in a statement.


"Where appropriate simple measures could be evaluated in conjunction with sophisticated modelling to provide a more complete picture," the Joint Forum added.

The forum comprises the Basel Committee, the International Organization of Securities Commissions and the International Association of Insurance Supervisors.

The 2007-09 financial crisis revealed that banks were undercapitalised and many had to be shored up by taxpayers and regulators suspect that banks have still been understating risks after finding huge variations in calculations of their capital adequacy ratios.

Some regulators like the Bank of England are mulling additional safeguards, such as requiring big banks to also calculate their capital requirements using the so-called "standardised approach" used by most lenders and publish both sets of results for investors to compare.

Regulators in Britain, Switzerland and the United States have already forced lenders to have a higher so-called "leverage ratio" than the current global norm.

This simpler yardstick is a measure of core equity capital as a percentage of a bank's total assets, not just risk-weighted assets.

The forum said that supervisors should also scrutinize risk-taking at banks more closely as lenders may be tempted to take on too much risk in their "search for yield" at a time of low interest rates.

It said they should also ensure that banks use high-quality collateral such as high-quality government debt to back their off-exchange derivatives trades and are accurately assessing risks from their exposures to clearing houses that handle trillions of dollars in securities.

Full article



© Reuters


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