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

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.


About Author

Monica C. Meinert

Monica C. Meinert is deputy editor of the ABA Banking Journal and editorial director at the American Bankers Association, where she oversees ABA Daily Newsbytes.