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Heterogeneity of Bank Risk Weights in the EU: Evidence by Asset Class and Country of Counterparty Exposure

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  • Ms. Rima A Turk

Abstract

Concerns about excessive variability in bank risk weights have prompted their review by regulators. This paper provides prima facie evidence on the extent of risk weight heterogeneity across broad asset classes and by country of counterparty for major banks in the European Union using internal models. It also finds that corporate risk weights are sensitive to the riskiness of an average representative firm, but not to a market indicator of a firm’s probablity of default. Under plausible yet severe hypothetical scenarios for harmonized risk weights, counterfactual capital ratios would decline significantly for some banks, but they would not experience a shortfall relative to Basel III’s minimum requirements. This, however, does not preclude falling short of meeting additional national supervisory capital requirements.

Suggested Citation

  • Ms. Rima A Turk, 2017. "Heterogeneity of Bank Risk Weights in the EU: Evidence by Asset Class and Country of Counterparty Exposure," IMF Working Papers 2017/137, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2017/137
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    Citations

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    Cited by:

    1. Malovaná, Simona & Kolcunová, Dominika & Brož, Václav, 2019. "Does monetary policy influence banks’ risk weights under the internal ratings-based approach?," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    2. Bruno, Brunella & Marino, Immacolata & Nocera, Giacomo, 2023. "Internal ratings and bank opacity: Evidence from analysts’ forecasts," Journal of Financial Intermediation, Elsevier, vol. 56(C).
    3. Paul-Olivier Klein & Rima Turk-Ariss, 2022. "Bank capital and economic activity," Post-Print hal-03955630, HAL.
    4. Tomáš Konečný & Lukáš Pfeifer, 2020. "Macroprudential ring-fencing," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 29(2), pages 125-142, August.
    5. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    6. Sophia Döme & Stefan Kerbl, 2017. "Comparability of Basel risk weights in the EU banking sector," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 34, pages 68-89.
    7. Edson Bastos e Santos & Neil Esho & Marc Farag & Christopher Zuin, 2020. "Variability in risk-weighted assets: what does the market think?," BIS Working Papers 844, Bank for International Settlements.
    8. Haselmann, Rainer & Krahnen, Jan Pieter & Wahrenburg, Mark, 2019. "Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise: Zusammenfassung der wichtigsten Ergebnisse," SAFE Policy Reports 2, Leibniz Institute for Financial Research SAFE.
    9. Salvatore Cardillo & Jacopo Raponi, 2023. "EU banks' dividend policies: main determinants and the role of capital ratios," Temi di discussione (Economic working papers) 1403, Bank of Italy, Economic Research and International Relations Area.
    10. B. Bruno & I. Marino & G. Nocera, 2023. "Internal Ratings and Bank Opacity: Evidence from Analysts’ Forecasts," Post-Print hal-04322520, HAL.

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