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New bank safety plans criticised for encouraging risky loans 

June 7, 2016

Laura Noonan, Financial Times

Banks will be encouraged to lend more to their weakest borrowers and take on excessive risks if global regulators push ahead with a rule change aimed at making it harder to cheat on safety measures, a leading industry group has warned.

The Institute of International Finance (IIF) has denounced regulators’ proposals to give banks less freedom to use their own models to decide how much capital they need to support their loan books.

Regulators want a simpler and more consistent approach to risk treatments after several reviews found that individual banks’ models produced vastly different risk assessments of identical types of loans.

But the IIF wrote in a strongly worded letter to the Basel Committee on Banking Supervision (BCBS) that the proposed solution was overly simplistic and dangerous.

“Our primary concern with the committee’s proposals is less about models, and more about the bluntness of the approach that the committee proposes to replace these with,” wrote the IIF’s regulatory affairs chief Andres Portilla.

Banks use so-called internal models to determine their risk-weighted assets, which in turn are a key input into capital ratios, the main measure of financial strength. Read more

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