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Home Compliance and Risk

ABA Op-Ed: Regulators Must Clarify Role of Risk-Sensitive Models

March 29, 2016
Reading Time: 1 min read

Regulators must better clarify their expectations for risk-sensitive models used to determine regulatory capital levels for the largest banks, ABA VP Hugh Carney wrote in an American Banker op-ed today. Recently, he wrote, regulators have begun to place greater emphasis on simpler, across-the-board capital standards — regardless of asset risk — rather than the risk-based models outlined under Basel II’s advanced approaches. This shift in thinking has led many banks to question the relevancy of their risk-based models and created uncertainties about how much money and resources should be devoted to them.

“Policymakers are emphasizing simplicity without clarifying for banks the extent to which their risk-sensitive models — which they have spent tremendous resources to construct — still matter,” Carney wrote. “A clearer understanding of risk management expectations is vitally important if regulators shift away from a risk-sensitive capital framework.”

Under Basel’s advanced approaches, banks are allowed to align capital levels with their specific level of risk, a model that is “extremely useful in terms of risk management.” However, since the financial crisis, calls have increased for more standardized, risk-blind leverage ratios, leaving bankers confused over how to best balance regulatory expectations. Should regulators ultimately decide to move to a standard approach, Carney pointed out that it could lead to a repurposing of resources and key personnel, as well as the abandonment of models and programs that cost millions to develop.

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Tags: Regulatory burdenRegulatory capitalRisk management
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Monica C. Meinert

Monica C. Meinert

Monica C. Meinert is a senior editor at the ABA Banking Journal and VP for executive communications at the American Bankers Association.

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