The impact of the IRB approach on the risk weights of European banks

The Rollout of Internal Credit Risk Models: Implications for the Novel Partial-Use Philosophy

“…Thus, beyond previous findings, we provide initial evidence that banks seem to have an incentive to not fully roll out the IRBA since they achieve the highest possible RWA reduction at lower rollout levels. Although this explanation is in line with previous studies pointing to overall reduced RWA densities and underreporting of RWA under the IRBA (e.g., Mariathasan and Merrouche, 2014;Montes et al, 2018;Behn et al, 2022), we cannot entirely rule out other explanations for deferred IRBA rollouts. For instance, banks may decide to remain at low levels of partial use because the remaining portfolios under the SA are less suited for modelling or supervisors do not approve the models required for the completion of the rollout.…”

“…Beltratti and Paladino (2016) show that the cost of equity is a significant factor in explaining RWA reductions, suggesting that banks optimize their capital ratios particularly when equity capital is costly. Montes et al (2018) provide more recent evidence for a negative relationship between the IRBA use and RWA densities after controlling for portfolio and bank characteristics.…”

Climate sentiments, transition risk, and financial stability in a stock-flow consistent model

“…The Basel III framework, that was formulated after the Great Financial Crisis of 2007-08, puts specific emphasis on the banking sector's liquidity, risk exposure and capital buffers within the objective of preserving banking sector's financial stability (BIS, 2011). By adopting Basel III's regulatory framework, the banking sector has to fulfill capital requirements and loan-loss provisioning, depending on quality and level of banking sector's assets (Pérez Montes et al, 2016) and to comply with a minimum Capital Adequacy Ratio (CAR). 8 The CAR is defined as bank equity over risk-weighted loans and indicates the liquidity of the banking sector with respect to loans that are considered as safe.…”

Climate Transition Risk, Climate Sentiments, and Financial Stability in a Stock-Flow Consistent Approach

“…The Basel III framework, that was formulated after the great financial crisis of 2007-08, puts specific emphasis on bank's liquidity, risk exposure and capital buffers within the objective of preserving banks' financial stability (BIS, 2011). By adopting Basel III's regulatory framework, the banking sector has to fulfill capital requirements and loan-loss provisioning, depending on quality and level of bank's assets (Pérez Montes et al, 2016) and to comply with a minimum Capital Adequacy Ratio (CAR t ). The CAR t is defined as bank equity over risk-weighted loans and indicates the liquidity of banks with respect to loans that are considered as safe.…”