A significant drawback of regulatory capital measures is the lack of comparability between institutions that employ internal ratings-based (IRB) capital models and those that use less sensitive, but generally more conservative, standardised capital models. Furthermore, the measurement and implementation of risk weighted assets (RWA) may differ between countries due to national discretion as part of current regulations.
For this reason, in addition to regulatory capital ratios, NCR considers adjusted capital ratios. For example, we adjust for differences in regulatory capital floors and risk weights to increase the comparability of individual banks. By only removing the Basel I floor and converting the Swedish mortgage risk weight floor into Pillar 1, the average adjusted capital ratios of eight large Norwegian banks is higher than the average of the major Swedish banks despite significant advantages for the Swedish banks' official regulatory measures.
“We find that by making a few adjustments to improve RWA comparability, the average CET1 ratio for the Norwegian IRB banks increases from 16.4% to 18.2%, while the average CET 1 ratio for the largest Swedish banks is reduced from 21.2% to 17.3% as of end-2017” says Geir Kristiansen, Credit rating analyst for financial institutions at NCR.
NCR expects these differences to decline over time. The new Basel III floor will be phased in from 1 Jan. 2022, which means that IRB banks' RWA will be at least 72.5% of the amount using the new standard method. We also note that on 14 Aug. 2018, the European Commission decided not to reject the Swedish financial supervisor's proposal to move the 25% mortgage floor into Pillar 1 calculations, thus affecting each bank's regulatory capital ratios. While not particularly risk sensitive, the change would better align Swedish banks' capital requirements for mortgage loans with those of their domestic and Norwegian peers, which have floors built into their Pillar 1 IRB models.
If you have any questions, please contact:
Geir Kristiansen, Analyst, +47 90 78 45 93, firstname.lastname@example.org
Sean Cotten, Lead analyst, +46 732 32 43 78, email@example.com