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Tighter rules proposed for banks’ credit risk 

March 29, 2016

Caroline Binham, Financial Times

The biggest lenders to corporates may have to hold even more capital as a result of proposed new rules that would curb how much flexibility banks have to assess the risk of their loan books.

The Basel Committee on Banking Supervision proposed on Thursday that banks be barred from using internal models when they calculate how risky certain assets are. Lending to other financial institutions and large companies, and holding equities are the areas most affected.

The proposals are the last part of a package of measures designed to make it easier to compare banks’ balance sheets and prevent them from gaming capital ratios that have been made tougher in the wake of the financial crisis.

Thursday’s paper focused on how banks assess credit risk in their banking books. Credit risk accounts for about 70 per cent, on average, of a lender’s risk-weighted assets — the denominator in the all-important fraction that determines a bank’s capital ratios. Banks come up with the RWA number by making a judgment on how risky various loans and other assets are. Other elements of RWAs include operational, market and counterparty risk — all of which BCBS has tightened the rules around.

“Addressing the issue of excessive variability in risk-weighted assets is fundamental to restoring market confidence in risk-based capital ratios,” said Stefan Ingves, chairman of the Basel committee and governor of the Swedish central bank. Read more

 
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