Date published: Feb 2018
SUERF Policy Note, Issue No 26
by Zsofia Döme and Stefan Kerbl, Oesterreichische Nationalbank
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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