
Risk-weighted Capital: Whose Model is it anyway? - akg_67
http://www.economist.com/news/finance-and-economics/21665039-regulators-are-taking-firmer-stand-how-banks-gauge-risk-whose-model-it
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sfrechtling
This article basically just outlines regulatory capital and (I think) avoids
economic capital. In very very shorthand - regulatory capital is the capital
needed to comply with local regulations (with guidance from BASEL and BIS),
while economic capital is the more nuanced calculation used to calculate the
risk of capital using the bank's own deduction and modelling. A great metaphor
for the actual difference is "Regulatory Capital is to Economic Capital as
Road Test Is to Driving" ([http://www.americanbanker.com/bankthink/regulatory-
capital-r...](http://www.americanbanker.com/bankthink/regulatory-capital-road-
test-as-economic-capital-actual-driving-1061908-1.html)). Good banks use both,
alongside other metrics to evaluate deals.

Economic capital takes into account the particulars of individual companies,
while regulatory capital takes a broad brush approach. In reality, using reg
capital leads to set ratings without taking into account the actual risk of
the asset to the company. I would argue that the best approach would be
economic capital as the main capital calculation with review and monitoring by
regulators of the model and its assumptions.

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conistonwater
I wish the article made a clearer distinction between the capital ratio and
the equity ratio. In places it makes it sound as if only shareholder equity
counts towards capital requirements.

~~~
cm2187
But today that's essentially true. The other tiers of capital are much thiner
and easier to manage. To get more equity the only way is more profits, or a
right issue.

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cm2187
In the enthusiasm to raise the capital requirements there is a fundamental
schizophrenia. We can't ask banks to lend more, in particular to borrowers
with lower credit quality, and at the same time force banks to deleverage. We
can't ask banks to hoard capital to strengthen their capital ratios and at the
same time nationalise all their profits by imposing gigantic fines that are
scaled more to be headline grabbing that to the actual scale of the
misbehaviour.

~~~
crdoconnor
>In the enthusiasm to raise the capital requirements there is a fundamental
schizophrenia. We can't ask banks to lend more

There is no schizophrenia. We don't want more lending. The economy is already
over leveraged as it is.

The banks want more lending, of course.

~~~
bboreham
Some governments want more lending:

[https://www.gov.uk/government/news/new-40-million-
investment...](https://www.gov.uk/government/news/new-40-million-investment-
by-british-business-bank-to-support-450-million-of-lending-to-smaller-
businesses)

[http://www.washingtonpost.com/business/economy/obama-
adminis...](http://www.washingtonpost.com/business/economy/obama-
administration-pushes-banks-to-make-home-loans-to-people-with-weaker-
credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story.html)

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osullivj
“The idea, in Europe and beyond, is to limit how far banks can adapt their
spreadsheets to make their assets look less risky.”

They should be required to publish live spreadsheets on their websites showing
their RWAs with daily marks. SpreadServe [1] would be perfect for this job.

[1] [http://spreadserve.com](http://spreadserve.com)

~~~
tekp2
The group aggregated RWA calcs for a global tier 1 bank run substantially in
arrears - perhaps as much as 2 months, and IIRC are submitted to the
regulators quarterly.

The author is also using the word "spreadsheet" as shorthand to mean "the
entire modelling infrastructure". For the trading book, this can be non-
trivial.

