The problem of heterogeneity within risk weights

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Binder , C & Lehner , O 2020 , ' The problem of heterogeneity within risk weights : Does basel IV contain the solution? ' , ACRN Journal of Finance and Risk Perspectives , vol. 8 , no. 1 , pp. 183-205 .

Title: The problem of heterogeneity within risk weights;
Does basel IV contain the solution?
Author: Binder, Christina; Lehner, Othmar
Contributor: Hanken School of Economics, Hanken School of Economics
Belongs to series: ACRN Journal of Finance and Risk Perspectives
ISSN: 2305-7394
Abstract: 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).
Date: 2020-01-07
Subject: 512 Business and Management
Bank regulation
Basel IV
Credit risk
Internal ratings based approach
Risk weighted assets
Risk weights
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1- Minst en av författarna har en utländsk affiliation
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