Basel Report Finds Diverging Bank Views on Risk

LONDON – Regulators are still grappling with how best to rein in banks’ appetite for risk.

On Friday, the Basel Committee on Banking Supervision, a body of central bankers, said it had found significant differences in how some of the world’s large banks continue to assess risks on their balance sheets.

The authorities said that 32 banks, in the United States, Europe and elsewhere, all took different views on the level of capital that they believed was necessary to protect against major losses from potential delinquent corporate, sovereign and consumer debts.

The differences form part of the debate surrounding the rules known as Basel III, which the Federal Reserve approved this week.

The rules include requiring major international banks to hold as much as 9 percent in high-quality capital like stock or retained earnings to guard against potential future financial shocks.

The financial services industry has fought to water down the changes, which will mean they must hold back more capital on their balance sheets and reduce their exposure to risky assets.

In the report published on Friday, the Basel Committee said that banks continued to hold differing views on what constituted risky assets.  These differences allowed some banks to hold less capital in reserve in case the holdings ran into trouble.

“The considerable variation observed warrants further attention,” the chairman of the Basel Committee, Stefan Ingves, said in a statement on Friday. “Information from this study on the relative positions of banks is being used by national supervisors and banks to take action to improve consistency.”

The global regulators added that steps might need to be taken to create an international standard for these so-called risk-weighted assets to create a level playing field for investors.

Risk-weighting allows banks to hold less capital in reserve depending on the perceived risk of the underlying asset. Banks typically carry out these calculations themselves under the guidance of the local regulator.

The potential options to improve the system include forcing banks to disclose greater detail on how they calculate risk or defining how much risk is associated with specific types of assets.

International authorities have been working in response to the financial crisis after many of the world’s largest banks were found to be undercapitalized when many of their assets turned sour.

While both American and European firms have pared back their exposure to risky lending and used retained earnings to bolster their balance sheets, critics contend that the new regulatory changes still do not force banks to hold enough capital on their balance sheets to protect against future major financial shocks.