On April 1, the Basel Committee on Banking Supervision (“BCBS”) issued its second report: an analysis of risk-weighted assets (“RWA”) for credit risk in the banking book.
The report’s first objective is to identify the main drivers of RWA variation and evaluate their effects. The report distinguishes between risk-based drivers (i.e. those drive by underlying differences in risk) and practice-based drivers (i.e. those that reflect differences in bank practices and regulatory environments). The second objective of the report is to highlight where there is potential to modify current standards either to reduce practice-based RWA variation or to simplify the capital framework of internal ratings-based models and increase its comparability.
The report also contains sound practices relating to institutions’ intendent model validation functions, which the BCBS observed during the study. Report.