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

49 Pages Posted: 9 Aug 2017

See all articles by Rima Turk-Ariss

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: June 2017

Abstract

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

Keywords: Bank Capital; Regulation; Risk Weights; Basel III, Bank Capital, Regulation, Risk Weights, Basel III

Suggested Citation

Turk-Ariss, Rima, Heterogeneity of Bank Risk Weights in the EU: Evidence by Asset Class and Country of Counterparty Exposure (June 2017). IMF Working Paper No. 17/137. Available at SSRN: https://ssrn.com/abstract=3014048

Rima Turk-Ariss (Contact Author)

International Monetary Fund ( email )

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Washington, DC 20431
United States

Economic Research Forum ( email )

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(P.O. Box: 12311)
Dokki, Cairo
Egypt

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