Coping with inconsistencies in bank risk weighted assets
Abstract
Industry participants, regulators and investors have raised concerns with the consistency of Basel risk-weighted asset (RWA) assessments across banks that are critical to the determination of capital ratios. These issues have created misgivings as to whether capital adequacy measures constructed by advanced internal rating based (AIRB) banks create level-playing field problems and whether they can be relied upon. Solutions to narrow the differences among banks have been proposed, ranging from imposing floors on certain parameters and calculations all the way to reverting to non-risk differentiated measures, such as leverage ratios. In this paper the evidence associated with RWA consistency will be examined. Some of the underlying reasons and sources of inconsistency will be evaluated along with the solutions proposed. The risks of moving away from risk-sensitive regulatory capital will be described and recommendations for coping with these inconsistencies will be made.
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Author's Biography
Michel Araten is managing director at JPMorgan Chase (JPM) with special focus on regulatory issues and the firm’s strategic risk grading task force. Since 1998 he has developed credit risk capital models for global retail, wholesale and capital markets, and completed a number of historical studies supporting these models. His previous assignments over the last 40 years (since the 1970s) at JPM include manager, management science, group executive in real estate finance responsible for high profile workout problems, secretary of the Credit Policy Committee, director of Insurance Income Products, and managing director, Mezzanine Finance. He has published widely in journals, authored chapters in books and is a frequent speaker at conferences and seminars. He is chairman of the Data and Models Committee of the IACPM and on the editorial board of the Journal of the RMA. Previously, he worked at Lever Brothers and Celanese Chemical. He has been an adjunct lecturer at Columbia University, Fordham Graduate School of Business and at the Polytechnic Institute and holds a PhD in Operations Research from Columbia University.
Citation
Araten, Michel (2013, July 1). Coping with inconsistencies in bank risk weighted assets. In the Journal of Risk Management in Financial Institutions, Volume 6, Issue 3. https://doi.org/10.69554/IYZL3394.
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