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imf paper on risk-weighted assets March 29, 2012

Posted by Bradley in : harmonization , trackback

Vanessa Le LeslĂ© & Sofiya Avramova, Revisiting Risk-Weighted Assets: Why Do RWAs Differ Across Countries and What Can Be Done About It?, IMF Working Paper WP/12/90 (Mar. 2012). Here’s the abstract:

In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.

The Basel Capital Adequacy regime is the most intense set of international standards for financial regulation we have. The paper illustrates that for a number of reasons even this regime does not fully harmonize the treatment of risk-weighted assets, partly because different countries have adopted different stages of Basel, and for other reasons. The authors caution that full harmonization might not in fact be ideal because it might lead to herd behavior but they illustrate that bottom line capital ratios disguise a wide range of behaviors with respect to holdings of assets.

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