Basel rules let equity vary widely among banks

JP Morgan CEO Jamie Dimon claims European banks are calculating their risk more leniently than U.S. banks do. This makes U.S. banks have to run their operations with more equity than do European banks, and that eats into profits.

Now two analysts at Barclays Capital agree with him, according to efinancial news.

From efinancial news:

Simon Samuels and Mike Harrison, analysts at the UK banks, said they set out to examine his claim, and were surprised by what they found.

Posing the question ‘Is Jamie Right?’ they said: “We had expected to produce a qualified ‘no’ but it seems the inputs into the RWA calculations under Basel II … do leave considerable scope for subjectivity.”

Samuels and Harrison found different European banks were using a wide range of risk weightings for similar loan portfolios, and there was even divergence over time within the same bank. They said that this was possible as a RWA calculation under Basel II is immensely complicated and open to interpretation. …

As an example of the gap, they note that JP Morgans’ $2.1 trillion balance sheet will have an average risk weighting of 77% under Basel III, compared to 41% at BNP Paribas. A higher weighting means riskier balance sheets.

Across the board, average risk weightings in the US are double the European level. It is not clear exactly why this is the case.

 If Basel gives banks so much leeway to set their own capital requirements, this gives RepoWatch one more reason to question whether requiring more capital will really help financial markets withstand the next crisis.


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