Bank Risk Models to Face Further Basel Probe on Capital Concerns

Banks face further scrutiny from global regulators into their risk models amid concerns lenders are underestimating the amount of capital they need to cope with losses.

Initial studies of how lenders measure risk on assets they intend to trade as well as those they intend to hold to maturity found “substantial” differences in the amount of capital different banks hold against identical securities, the Basel Committee on Banking Supervision said in a report to finance ministers from the Group of 20 nations and central bank chiefs.

Banks’ modeling choices are a “key source of variation,” the group said. “Further analysis is therefore under way, and areas where Basel committee standards might be modified to reduce excessive variation are becoming apparent.” The committee is considering tightening its rules to narrow banks’ freedom to design models and said it’s also weighing the need for tougher scrutiny by supervisors and stronger disclosure requirements.

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

The Basel committee is reviewing banks’ risk models as part of its oversight of how well nations are implementing an overhaul of capital rules agreed on in response to the 2008 collapse of Lehman Brothers Holdings Inc.

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.

The group said that 11 of its 27 member nations have begun to apply Basel III, while another three have completed work on the necessary legislation.

The European Parliament is set to vote next week on the EU’s implementing measures, which will be reviewed by the Basel committee once the final text is published.