The problem of heterogeneity within risk weights: Does basel IV contain the solution?

Christina Binder*, Othmar Lehner

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

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).

Original languageEnglish
Peer-reviewed scientific journalACRN Journal of Finance and Risk Perspectives
Volume8
Issue number1
Pages (from-to)183-205
Number of pages23
ISSN2305-7394
DOIs
Publication statusPublished - 07.01.2020
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • Bank regulation
  • Basel IV
  • Credit risk
  • Internal ratings based approach
  • Risk weighted assets
  • Risk weights

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