By Huw Jones
LONDON, Dec 17 (Reuters) - Global banking regulators havereinforced their campaign to impose more consistent ways forbanks to assess risks on their trading books with a secondfinding of wide variations between systems in use in the sector.
The Basel Committee said on Tuesday a review of how lendersassign risk weightings to more complex trading positions showedbig differences, reflecting the in-house models that banks usefor their calculations.
The Committee has already published one report on the issue,which is an important element of attempts to regulate the sectorand avoid a repeat of the financial crisis of 2007-2009.
Regulators have told banks to hold more capital against therisk of default, but this is still contingent on an assessmentof the scale of risk being taken.
And watchdogs therefore want to tighten up on riskassessments to stop lenders being able to "game" the system byusing models that understate their risks and allow them to holdless capital, potentially giving them a trading advantage.
"Consistent with the findings in the first report, theresults show significant variation in the outputs of market riskinternal models used to calculate regulatory capital," the BaselCommittee said in a statement.
"In addition, the results show that variability typicallyincreases for more complex trading positions."
Such a finding is not surprising given the different systemswhich the banks use, but is part of the Committee's efforts topush through reforms of the sector.
IMPLIED CAPITAL REQUIREMENTS
The review looked at 17 major banks in nine jurisdictions,including the likes of HSBC Holdings Plc, Deutsche BankAG and JP Morgan Chase & Co, and founddifferences in implied capital requirements of between 24 and 30percent for the two most diversified portfolios looked at.
The Committee is made up of banking supervisors from nearly30 countries and wrote the Basel III accord, the world's coreresponse to improving bank capital levels after the financialcrisis showed some lenders were undercapitalised and had to beshored up by taxpayers.
Yet some critics in Britain and the United States have saidBasel III is too complicated and allows banks to use in-housemodels to hold less capital than they should against riskyassets.
The Bank of England is looking at whether to force big banksto calculate their risk weightings and capital requirements onthe basis of a common standardised approach, as well as on thebasis of their own models.
And the Basel Committee is also reviewing how it can curbthe ability of in-house models to come up with such differences.
Following the first report on the issue earlier this year,the Committee has already recommended improving publicdisclosure by banks and narrowing the range of modelling choicesfor banks.
The regulators are also undertaking a fundamental review ofbanks' trading books which is also considering ways to narrowvariability in risk weightings.
Changes could include "floors" or minimum capital levelsirrespective of what models come up with, but Basel said this"may not necessarily lead to less variability across banks ifthe floors are themselves based on modelled inputs".