Banks must accept risk weights need fixing: Basel's Ingves
Changes to how banks add up risks on their books to determine capital levels are inevitable and lenders must acknowledge there is a problem to be fixed, a global banking supervisor said on Tuesday.
Stefan Ingves, chairman of the Basel Committee of banking supervisors from nearly 30 countries, said variations in how banks add up risks were "uncomfortably wide" but not all lenders accept there is a problem in the first place.
"The message I would like to leave you with today is that there is one (a problem), and we plan to do something about it," Ingves said in speech to a financial conference in New York.
"Question marks remain about the reliability and comparability of risk-weighted asset calculations and, until these are resolved, confidence in capital ratios cannot be fully restored," said Ingves, who is also governor of Sweden's central bank.
After pressure from British and U.S. regulators who say the current rules are too complex and easily circumvented, it is the clearest response yet from Ingves that major changes are in the pipeline to restore public trust in lenders.
Many regulators are concerned about how the variations in adding up risks leads to big capital differences between major banks holding similar assets, making it harder for them to know if they are holding enough capital.
Ingves said the committee will develop a set of "simplifications and safeguards" to limit variability, perhaps by putting curbs on the in-house models big banks use to add up risks.
There could also be capital "floors" below which a bank could not go, regardless of what their model tells them. Floors could also be used to underpin capital levels to cover exposures to specific products and markets.
The ability of national supervisors to exercise discretion over risk weights could also be curbed, Ingves said.
There will be a public consultation over the summer on proposed improvements from the Basel Committee to how banks give information about their risk profiles and risk-weighted asset differences to improve "market discipline", Ingves added.
Britain and the United States, due to their skepticism over banks' internal models, have put greater emphasis on forcing lenders to comply with a leverage ratio which sets a minimum amount of capital regardless of an asset's riskiness.
Ingves alluded to this by saying that the case for a stronger leverage ratio will only grow if banks fail to deal with risk-weight variations adequately.
The committee is currently split over whether its preliminary minimum global leverage ratio of 3 percent should be fixed at a higher rate.
(Reporting by Huw Jones, editing by Steve Slater and Louise Heavens)