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Basel Moves to Limit Banks’ Use of Risk Models 

March 30, 2016

Katie Kuehner-Hebert, CFO

In another step toward shoring up the financial system, global banking regulators have proposed limits on banks’ use of internal risk models to calculate how much risk they can take.

The proposed changes, the Basel Committee on Banking Supervision said, are intended to standardize risk assessment, rather than continue with the current hodgepodge of individual models.

“Addressing the issue of excessive variability in risk-weighted assets is fundamental to restoring market confidence in risk-based capital ratios,” committee chairman Stefan Ingves said in a news release.

The regulators stopped short of the complete ban on models some Basel members had wanted, choosing to scrap them only for loans to other banks and financial institutions, for equities holdings, and for loans to companies with total assets of more than 50 billion euros, a threshold that would capture about 200 companies.

Models would also not be allowed for credit valuation adjustment (CVA) risks from counterparties to banks’ derivatives trades. Read more


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