24 trade & finance
What is the reason for these differences in risk-weighted asset calculations ? There are many potential drivers , and not all of them are bad .
A significant part of the variation is due to supervisory choices in the implementation of the regulations . Examples would be : policy decisions to restrict modelling options ( eg . to disallow any diversification benefit between types of risk ) or to apply stricter supervisory multipliers .
Other drivers include the modelling choices of individual banks . Some of these are unavoidable . Models are statistical tools that inevitably rely on samples of data . The estimation noise can be significant and cannot be reduced beyond a certain point ( for instance , by enlarging the sample over which the model is estimated ). In the absence of an objective measure of risk , some difference in opinion between banks is not only legitimate but also welcome : diversity is necessary for two-way markets .
But certain other modelling choices by the banks are more problematic because they reflect strategic behaviour that seeks to minimise regulatory capital requirements . These choices potentially overstate bank solvency , undermine transparency , weaken market discipline and make the playing field uneven . They are unwelcome . The issue is how best to address the bias embedded in banks ’ incentives to ‘ over-optimise ’ regulatory capital . Some solutions may be as simple as standardising the timespan of the data used for modelling .
The Basel Committee is studying these different drivers to get a better understanding of their relative importance and to design an appropriate response . Help from the industry is critical , because it is in everybody ’ s interest to make sure that the framework is implemented consistently .
The solution will necessarily be multifaceted . Some of the options the Basel Committee will be considering include the following :
• Improving public disclosure and regulatory data collection to help understand what risk- weighted assets are and how they are derived . This can build on the work of the Enhanced
Disclosure Task Force , which has come up with many useful ideas .
• Narrowing acceptable modelling choices for banks and developing supplementary measures , such as improved supervisory safeguards and backstops .
• Providing additional supervisory guidance for model approvals .
All these options have costs , and some participants will inevitably be reluctant to move from the status quo . But an uneven playing field , and mistrust in reported bank capital , impose high costs that are best avoided . So we should see these costs as a necessary investment in a regulatory system that is better for all .
Financial markets fragmentation
I have been also asked to say a few words about fragmentation . My starting point here is the premise that consistent , globally applied regulatory standards are not only imperative for global financial stability but they will also help to reduce the pressures that drive the fragmentation of financial markets . Signs of fragmentation have already appeared , particularly in the euro area .
… there are very large differences across banks in the way they riskweight their trading book exposures
Containing fragmentary pressures is important for a number of reasons . First , we should be very careful not to lose the benefits of globalisation and financial integration . Ultimately , these ensure that capital is allocated efficiently at the global level , supporting growth and development . Second , fragmentation can prevent the proper transmission of monetary policy , constrain the supply of credit and in general amplify divergent economic and financial conditions , delaying the necessary normalisation of economic conditions . This is especially the case in a currency union such as the