TY - JOUR
T1 - The problem of heterogeneity within risk weights
T2 - Does basel IV contain the solution?
AU - Binder, Christina
AU - Lehner, Othmar
PY - 2020/1/7
Y1 - 2020/1/7
N2 - The article uses a bank’s credit data to study the impact of the Basel IV regulations on risk weight density (RWD). The analysis of the simulated data shows mixed results, as the improvement of risk weight heterogeneity is restricted to optimistically valued portfolios. Conservatively valued portfolios are likely to be confronted with an RWD decrease. However, within these portfolios, risk weight heterogeneity usually does not play an important role. Out of all the analysed Basel IV rules, the output floor clearly has the biggest influence on risk weight density, while the effect of the input floors is very limited within optimistically valued portfolios and is even eliminated by the removal of the scaling factor within conservatively valued portfolios. The change in RWD will also lead to a concurrent change in risk-weighted assets and therefore also in the level of eligible capital. The findings within the retail portfolio confirm those of the EBA study, which already suggested that Basel IV and especially the output floor will lead to a significant increase of risk capital (European Banking Authority, 2018).
AB - The article uses a bank’s credit data to study the impact of the Basel IV regulations on risk weight density (RWD). The analysis of the simulated data shows mixed results, as the improvement of risk weight heterogeneity is restricted to optimistically valued portfolios. Conservatively valued portfolios are likely to be confronted with an RWD decrease. However, within these portfolios, risk weight heterogeneity usually does not play an important role. Out of all the analysed Basel IV rules, the output floor clearly has the biggest influence on risk weight density, while the effect of the input floors is very limited within optimistically valued portfolios and is even eliminated by the removal of the scaling factor within conservatively valued portfolios. The change in RWD will also lead to a concurrent change in risk-weighted assets and therefore also in the level of eligible capital. The findings within the retail portfolio confirm those of the EBA study, which already suggested that Basel IV and especially the output floor will lead to a significant increase of risk capital (European Banking Authority, 2018).
KW - Bank regulation
KW - Basel IV
KW - Credit risk
KW - Internal ratings based approach
KW - Risk weighted assets
KW - Risk weights
UR - http://www.scopus.com/inward/record.url?scp=85079666639&partnerID=8YFLogxK
U2 - 10.35944/jofrp.2019.8.1.012
DO - 10.35944/jofrp.2019.8.1.012
M3 - Review article
AN - SCOPUS:85079666639
SN - 2305-7394
VL - 8
SP - 183
EP - 205
JO - ACRN Journal of Finance and Risk Perspectives
JF - ACRN Journal of Finance and Risk Perspectives
IS - 1
ER -