Bloomberg reports that regulators need to monitor the use of internal risk models in determining the capital lenders hold against losses and complement them with gauges that don’t use risk weightings, the BIS said in its annual report released Sunday.
The BIS, based in Basel, Switzerland and owned by 60 central banks, hosts the Basel Committee on Banking Supervision, a group of regulators and central bankers that sets global capital standards.
'Market commentary has suggested that much of this trend reflects banks’ optimization of risk-weighted assets - the redesign of transactions in order to lower capital requirements - rather than a genuine increase in loss absorption capacity', the BIS said. 'Such window-dressing raises questions about the use of internal risk assessments for the determination of regulatory capital requirements'.
The BIS adds to a chorus of international regulators that are increasingly looking at leverage, in addition to capital measures based on risk weightings assigned to different assets, to gauge banks’ financial strength. Their focus intensified as some banks improved capital ratios following the financial crisis by altering internal models or cutting risk-weighted assets without correspondingly shrinking their balance sheets.
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