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Carney Calls for Bank Risk-Model Clampdown to Repair Trust

BOE Governor Mark Carney
Bank of England Governor Mark Carney also said nations must make further efforts to finish drawing up and fully implement international standards targeted at preventing another financial crisis. Photographer: Nigel Roddis/Bloomberg

Sept. 6 (Bloomberg) -- Regulators must restrict lenders’ ability to escape tougher capital rules by changing how they measure risk, Financial Stability Board Chairman Mark Carney said, as he urged nations to finish an overhaul of bank rules.

“The risk models that banks use to calculate their capital needs show worryingly large differences,” Carney, governor of the Bank of England, said in a letter yesterday to leaders from the Group of 20 nations meeting in St. Petersburg, Russia. “This must be addressed for depositors, investors, clients and authorities to have full confidence in the strength of bank balance sheets and their resilience during a downturn.”

Bankers, including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have claimed that flexible implementation of previous rounds of international capital rules in the European Union has allowed the bloc’s lenders to hold less capital against some assets than their U.S. counterparts.

The Basel Committee on Banking Supervision, an international regulators group, said in July that some lenders were backing investments with as much as 20 percent more capital than other banks. European banks generally apply lower risk weights to their holdings of bank-issued debt than lenders based elsewhere, the Basel group said.

“Given large banks risk-weight based on internal models approved by supervisors and populated with their own historic data, it is not surprising that there is substantial inconsistency,” Bob Penn, financial regulation partner at law firm Allen & Overy LLP in London, said in an e-mail.

Embedded Inconsistency

“Consistency is arguably a good thing here: but for so long as the Basel rules explicitly embed inconsistency it is hard to see how Mr. Carney’s call will be heard,” he said.

International standards set by the Basel committee require banks to meet minimum capital requirements, measured as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the assets, with large banks allowed to use their own models to calculate the likelihood of losses. This process is known as risk weighting.

Carney also said nations must make further efforts to finish drawing up and fully implement international standards targeted at preventing another financial crisis.

Policy areas where work is lagging behind include rules to protect taxpayers from bailing out failing banks, and efforts to bolster the resources and independence of supervisors, according to an FSB report published alongside Carney’s letter.

“It is crucial that the G-20 stay the course in implementing reforms in a consistent manner,” Carney said in the letter, submitted to the summit of G-20 leaders that began yesterday.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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