Salz Review - Wall Street Journal

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Salz Review
An Independent Review of Barclays’ Business Practices
Appendix J – Variability in Risk Weighted Assets Calculations
Differences in RWA calculations can be explained either by differences in intrinsic
portfolio risk and asset quality or by differences in banks’ internal models. To distinguish
between those two factors, the FSA conducted over time multiple exercises in which banks
applied their internal models to three hypothetical portfolios (respectively sovereigns,
banks and corporates). The latest of these exercises was undertaken in 2011 and shows a
high-level of variability in banks’ estimates for overall risk weights, probability of default
and loss given default. For instance, for the same portfolio, estimated capital requirements
for the most ‘prudent’ banks were more than three times higher than the most ‘aggressive’
banks. Consequently, the difference in risk weights translates into differences in capital
ratio computations.
FSA 2011 hypothetical portfolio exercise – Variability of overall risk weights,
probability of default and loss given default estimates
Index value given a sample mean of 100
250
Risk weights Probability of default Loss given default
200
150
100
Index value of
sample mean
(100)
50
0
Sovereigns Banks Corporates
Notes: Sample mean is set to 100
Source: Financial Stability Report, Bank of England, November 2012