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Comparability of Basel risk weights in the EU banking sector

Author(s): Zsofia Döme and Stefan Kerbl

Date published: Feb 2018

SUERF Policy Note, Issue No 26
Zsofia Döme and Stefan Kerbl, Oesterreichische Nationalbank

JEL-codes: G21, G28, E61, G38
Keywords: bank capital, regulation, risk weights, Basel regulatory capital frameworks

We quantify the variability of risk weights (RW) across banks. Risk weights define banks minimum capital requirements and – together with their capital level – their capital ratios, e.g. CET1 ratios or other solvency ratios. In line with the Basel regulatory capital framework, RW should adequately mirror the risk of the obligations. One meaningful indicator of the underlying risk is the share of nonperforming loans (NPLs) in a given portfolio and our dataset provides the NPL ratio on portfolio level. Using a granular and public EU-wide dataset, we show that a good portion of RW variability can be explained by portfolio- and destination-specific risk indicators as intended by regulation. Contrary to the intention of banking regulation, we find statistically significant and economically important differences with regard to the country where a bank is headquartered and marginally statistically significant effects that banks with low common equity tier 1 employ low RW after controlling for risk. The paper sets forth evidence that implementation standards differ from jurisdiction to jurisdiction.

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SUERF Policy Note, Issue 26SUERF Policy Note, Issue 26

Comparability of Basel risk weights in the EU banking sectorWeb version: Comparability of Basel risk weights in the EU banking sector

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