Banks' latitude in assessing their biggest source of risk is set to be curtailed as global regulators try to prevent the financial industry from gaming capital requirements.
The Basel Committee on Banking Supervision proposed on Thursday to remove the option for lenders to use their own models to determine how much capital they need to fund exposures to financial firms, equities, and large corporations, forcing them to use a standardized method set by the regulator. The plan also envisions a floor to limit how far risk assessments using the models still allowed for assets such as mortgages and small-business loans can diverge from those obtained with the standardized approach.
The Basel group, whose members include the U.S. Federal Reserve and the European Central Bank, is adjusting its rules for gauging banks' credit, market, and operational risks to simplify the process and reduce the variation in results. A 2013 Basel study found variations of as much as 20 percent in the risk weights banks attach to similar assets in the banking book, undermining confidence that the capital ratios lenders report reflect the real risks they take on.
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