Banks May Face Limits on Risk Calculations, Basel Chief Says

Global regulators may impose restrictions on the way lenders model risk and assign capital after a review of banks’ trading practices found wide differences in their number crunching.

A probe of banks’ calculation of the riskiness of their assets found “material variation” across the industry, Stefan Ingves, chairman of the Basel Committee on Banking Supervision, said in a speech in Cape Town.

Regulators could respond with tougher disclosure rules or “limitations in the modelling choices for banks,” Ingves said in the prepared remarks today. “The committee’s work on how banks calculate risk weighted assets also feeds into a broader concern that, in pursuit of risk sensitivity, the Basel III framework has grown too complex.”

U.S. bankers, including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have said that flexible implementation of previous rounds of Basel capital rules in the European Union has allowed European lenders to hold less capital against some assets than their U.S. counterparts. The U.K.’s Financial Services Authority is reviewing banks’ so-called risk weighted assets for a report to be published as early as March.

The Basel committee brings together regulators from 27 nations, including the U.K., U.S. and China, to set capital rules for banks. The requirements it sets are measured as a percentage of lenders’ risk-weighted assets. The latest round, known as Basel III, states that banks should have core reserves equivalent to 7 percent of their RWAs.

Basel Delays

Delays in implementing Basel III capital rules aren’t “critical” at this stage, Ingves said.

The EU and the U.S. missed the January deadline to start implementing the new measures, amid calls from some officials for the so-called Basel III rules to be scrapped in favor of a simplified form of bank regulation. The 2013 start date was supposed to be the start of a phase-in process for Basel III that runs until 2019.

The “lengthy phase-in period” means “that in 2013 the new requirements should not be particularly burdensome for banks,” he said. “None of the new deductions from capital are applied this year.”

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