The Credibility of European Banks’ Risk-Weighted Capital: Structural Differences or National Segmentations?

36 Pages Posted: 4 Jun 2015

See all articles by Brunella Bruno

Brunella Bruno

Bocconi University - Department of Finance

Giacomo Nocera

Audencia Business School

Andrea Resti

Bocconi University - Department of Finance

Date Written: June 3, 2015

Abstract

Supranational institutions, academics and market analysts have increasingly questioned the reliability of bank risk-weighted assets (RWAs), a cornerstone of the system of minimum capital ratios designed by the Basel Committee on Banking Supervision. In fact, significant differences can be found in the banks’ average risk weights, both over time and across countries. Such differences can be explained by several factors, some of which may reflect the actual risk content of bank’s assets, while others may conceal distortions due to “RWA tweaking” and supervisory segmentations. We analyze a sample of 50 large European banks between 2008 and 2012 and document several meaningful findings. First, risk weights are affected by the banks’ size, business model and asset mix. Second, the adoption of internal ratings based (IRB) approaches is (as expected) a powerful driver of bank risk-weighted assets. Third, lower risk weights are positively linked to the banks’ capital cushion. Fourth, IRB adoption is more widespread in countries where supervisory capture is potentially stronger, due to a banking industry that is both larger (compared to GDP) and concentrated. Fifth, regulatory risk weights are not disconnected from market-based measures of bank risk.

Keywords: Banks, capital, risk-weighted assets, regulation, Basel accords

JEL Classification: G21, G28

Suggested Citation

Bruno, Brunella and Nocera, Giacomo and Resti, Andrea, The Credibility of European Banks’ Risk-Weighted Capital: Structural Differences or National Segmentations? (June 3, 2015). BAFFI CAREFIN Centre Research Paper No. 2015-9, Available at SSRN: https://ssrn.com/abstract=2613943 or http://dx.doi.org/10.2139/ssrn.2613943

Brunella Bruno (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Giacomo Nocera

Audencia Business School ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Andrea Resti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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