Global Regulators Revamp Approach To Bank Risk And Capital Reserves, Seek Simpler, Standardized Assessment Tools

U.S. and European regulators are shifting their focus away from the riskiest assets held by banks to their overall capital cushions, in an effort to simplify overly complex banking regulations, the Wall Street Journal said.

Current rules rely on subjective assessments of the risk attached to a specific asset, like a mortgage debt. These risk calculations can vary between banks, countries and regulators, so developing a clear and standardized view of global banking risk is difficult.

International standards vary widely, and banks themselves have wide discretion in how they interpret the riskiness of their own assets, the Journal said Thursday.

Instead, a broad approach backed by some regulators now simply focuses on absolute thresholds for capital buffers and leverage ratios, which measure the reserve capital a bank holds against its total assets.

The approach is more effective against technical loopholes banks could exploit, and could facilitate country-to-country comparisons of bank risk.

Complexity is now “an issue as far as consistent application and transparency of capital requirements, both for market players and supervisors,” Federal Deposit Insurance Corporation (FDIC) chair Martin Gruenberg told the Journal.

“Some parts of the capital framework have become unduly complex…The marginal benefits from incremental complexity can be small or even negative,” added a July paper from the Basel Committee of global bank regulators.

Former FDIC chair Sheila Bair has also called capital to risk assessment rules “hideously complex.”

American Bankers Association head Wayne Abernathy has also said a simplified approach could be beneficial. “You can be too simplistic … but you reach a point where how do you explain it to your regulators, your investors,” said Abernathy.

Still, piecing together an effective global consensus among regulators will be an uphill battle, because regulators often seek to protect their domestic banks, and have differing opinions about ideal approaches to oversight.

U.S. regulators have been more concerned, too, recently, with banks considered systemically important to the economy. Last month they proposed much higher leverage ratios for banks considered too big to fail.