Risk-weighted assets raise concerns

UK and European regulatory bodies reveal that banks could undercut global efforts to create a safer financial system by the way they measure asset risk.

UK and European regulatory bodies warn that banks could undercut global efforts to create a safer financial system by the way they measure asset risk.

There is growing concern that some banks may be adjusting the way they measure the riskiness of their assets in order to increase their perceived safety.

The Financial Policy Committee (FPC), the UK’s new stability regulator, announced on Tuesday this week that the models that banks use to calculate their risk-weighted assets are “opaque to investors and regulators … [and] could have dented market confidence.”

‘Leverage ratios’ are an alternative measure of bank safety that rely on total assets without risk adjustment and the FPC stated that UK banks should start making these figures public in 2013.
The head of the European Banking Authority (EBA), Andrea Enria, raised even stronger concerns about risk-weighted assets declaring that national and institutional differences undermine efforts to strengthen the European Union’s banks. Furthermore, the chief executives of JPMorgan Chase and Santander have expressed similar concerns.

The FPC also offered the strongest indication yet that UK regulators would force London banks to curb their pay-outs to employees this year as well as urging consideration of the risks associated with raising additional capital in a ‘stressed market environment’.

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