Flawed floors

24 March 2016 By George Hay Follow @gfhay

The Basel Committee is keen to prevent banks understating the riskiness of their assets via their own generous models. Good idea, but new proposals to introduce risk floors could wind up too lenient. If so, investors will continue to take bank capital with a pinch of salt.

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The Basel Committee on Banking Supervision said on March 24 it was proposing to limit banks’ use of their own internal models to calculate their capital positions.

Basel said that loans to other banks and financial institutions, for equities holdings, and for loans to companies with total assets of more than 50 billion euros, a threshold that would capture about 200 companies, will have to be calculated using a more conservative standard approach set by regulators.

Basel is also proposing a floor, meaning banks using their own models cannot hold less than 60 percent to 90 percent of the capital the standard approach recommends for credit risk.

The committee aims to finalise the rules by the end of this year.

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