Fitch: Standardised Bank RWA Disclosure Would Aid Confidence

(The following statement was released by the rating agency)

LONDON, January 29 (Fitch) Universal disclosure of risk-weighted assets (RWAs) 
and capital ratios calculated using Basel’s standardised approach would help aid 
investor confidence in bank capitalisation, Fitch Ratings says. This additional 
metric would be more comparable globally, and with additional disclosure it 
could help analysts understand important differences in risks taken by banks.

The significant dispersion in RWAs calculated using banks’ own models, instead 
of the standardised approach, has undermined investor trust in the internal 
ratings-based (IRB) approach. Regulators are increasing their scrutiny of the 
rigour and consistency of bank risk weights. The European Central Bank has said 
it may adjust risk weights in its asset-quality review this year. 

Several national supervisors have introduced risk-weight floors for mortgages – 
for example Sweden put in a 15% floor in 2013. US rules require banks using 
internal models to also calculate capital ratios under the standardised approach 
– applying the more conservative approach for each sub-category. But there is 
significant variation in how RWAs are being adjusted in different jurisdictions, 
so it is difficult for investors to compare the resulting capital ratios.

 

One way to address investor scepticism and aid comparability would be for banks 
to disclose RWAs calculated using the standardised approach. This is being 
considered by the UK’s Financial Policy Committee as a way to help the 
authorities judge the prudence of lenders’ model-based RWAs, according to its 
November minutes. It would also encourage investors to look at multiple capital 
adequacy ratios, which vary in complexity. 

This is important as no one capital adequacy measure can capture all risks. 
Analysts have little choice but to revert to crude leverage ratios for global 
comparisons as there is insufficient data to adjust RWAs consistently. The 
disclosure of Basel III leverage ratios from 2015 will aid comparability, but it 
is still a blunt measure. Capital ratios using the standardised approach could 
help bridge the gap between this simple and often misleading tool and the 
risk-based, but complex and variable, IRB methodology. 

Where standard approach disclosures reveal material differences from internally 
based RWAs, banks should explain the divergence. This would help reduce 
suspicion about banks’ risk models and build confidence in the IRB approach. 
Enhancing disclosure around RWAs would be better than simply reverting to a 
standardised approach of risk measurement, especially for complex transactions. 
RWA variability can prevent banks acting the same way and reduce systemic risk 
even though it compromises comparability. 

We make allowances for RWA variability in our capital analysis, including 
assessment of leverage as well as risk-weighted metrics. Disclosure of RWAs 
using the standardised approach, for example as part of the ECB’s comprehensive 
assessment, would allow us to make our own RWA adjustments and more accurately 
assess how well capitalised a bank is for its risks.

Contact: 

Bridget Gandy

Managing Director

Financial Institutions 

+44 20 3530 1095

Fitch Ratings Limited

30 North Colonnade

London

E14 5GN

Cynthia Chan 

Senior Director

Fitch Wire

+44 20 3530 1655

Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: 
hannah.huntly@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

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(Repeat for additional subscribers)

Jan 29 (Reuters) - (The following statement was released by the rating agency)

Universal disclosure of risk-weighted assets (RWAs) and capital ratios calculated using Basel'€™s standardised approach would help aid investor confidence in bank capitalisation, Fitch Ratings says. This additional metric would be more comparable globally, and with additional disclosure it could help analysts understand important differences in risks taken by banks.

The significant dispersion in RWAs calculated using banks'€™ own models, instead of the standardised approach, has undermined investor trust in the internal ratings-based (IRB) approach. Regulators are increasing their scrutiny of the rigour and consistency of bank risk weights. The European Central Bank has said it may adjust risk weights in its asset-quality review this year.

Several national supervisors have introduced risk-weight floors for mortgages a€“ for example Sweden put in a 15% floor in 2013. US rules require banks using internal models to also calculate capital ratios under the standardised approach a€“ applying the more conservative approach for each sub-category. But there is significant variation in how RWAs are being adjusted in different jurisdictions, so it is difficult for investors to compare the resulting capital ratios.

One way to address investor scepticism and aid comparability would be for banks to disclose RWAs calculated using the standardised approach. This is being considered by the UK'€™s Financial Policy Committee as a way to help the authorities judge the prudence of lenders' model-based RWAs, according to its November minutes. It would also encourage investors to look at multiple capital adequacy ratios, which vary in complexity.

This is important as no one capital adequacy measure can capture all risks. Analysts have little choice but to revert to crude leverage ratios for global comparisons as there is insufficient data to adjust RWAs consistently. The disclosure of Basel III leverage ratios from 2015 will aid comparability, but it is still a blunt measure. Capital ratios using the standardised approach could help bridge the gap between this simple and often misleading tool and the risk-based, but complex and variable, IRB methodology.

Where standard approach disclosures reveal material differences from internally based RWAs, banks should explain the divergence. This would help reduce suspicion about banks'€™ risk models and build confidence in the IRB approach.

Enhancing disclosure around RWAs would be better than simply reverting to a standardised approach of risk measurement, especially for complex transactions. RWA variability can prevent banks acting the same way and reduce systemic risk even though it compromises comparability.

We make allowances for RWA variability in our capital analysis, including assessment of leverage as well as risk-weighted metrics. Disclosure of RWAs using the standardised approach, for example as part of the ECBa€™s comprehensive assessment, would allow us to make our own RWA adjustments and more accurately assess how well capitalised a bank is for its risks.

((Bangalore Ratings Team, Hotline: +91 80 6677 2513 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))

Keywords: Fitch: Standardised Bank RWA Disclosure Would Aid