Assigning risk weights to assets to calculate capital ratios is the central plank of the Basel capital accords. The trouble is, investors and regulators alike seem to think the plank is rotten. The European Central Bank has said it may use its stress-test exercise to challenge the risk weightings assigned by banks. Stefan Ingves, chair of the Basel Committee on Banking Supervision (BCBS), has delivered what amounts to a series of warnings indicating that a higher crude leverage ratio - capital adequacy calculated without risk weights -could be used as a stick to beat banks if there is no sign of a reduction in the sharp variability in risk-weighted assets (RWAs).
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