Watchdog: aggressive banks will have to raise capital buffer

Global regulators have warned that there are “significant differences” in how banks evaluate the riskiness of their assets, raising the prospect that some may ultimately have to increase their capital buffers by more than expected.

The Basel Committee on Banking Supervision said yesterday that its study of 32 large international lenders had uncovered a large degree of variation between institutions in their judgement of how much capital they needed to hold against their corporate and household loans.

“While some variation in risk weightings should be expected with internal model-based approaches, the considerable variation observed warrants further attention,” said the Basel chairman, Stefan Ingves.

Under existing Basel rules, banks have to hold 7 per cent of capital against “risk-weighted assets”. But banks have considerable discretion in deciding what these weights should be, meaning that there could be a difference as much as 2 percentage points between the reported capital ratios of banks holding a similar portfolio of assets.

The Basel report said that there should be enhanced disclosure by institutions and extra guidance from supervisors. But it also mooted restraints on the discretion of banks to judge the riskiness of their assets – a move that could result in institutions being required to raise more capital.

European banks are widely believed to be particularly aggressive in their risk-weighting approach.

Risky ratios

Regulators at the Bank of England have preferred to target a simpler leverage ratio, rather than a capital ratio, of late. This requires banks to have a minimum equity buffer of 3 per cent of total assets. The mutual Nationwide and Barclays bank have been told that their equity buffers have fallen below this level and that they need to hit the target by the end of the year.

Nationwide has complained that it is in effect being penalised for having a large lending book made up of low-risk mortgages. Barclays feels hard done by because the special debt it has been issuing, which would convert to equity in a crisis, is not considered equity by the regulator.