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Top 1000 World Banks – US banks’ move to Basel III drives rise in regional RWAs

Risk-weighted assets have jumped in North America as a result of the move among its banks to Basel III. Elsewhere, western Europe also saw an RWA-to-total assets ratio percentage rise.
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North America has seen a jump in risk weightings in the 2016 Top 1000 World Banks rankings – an increase of 351 basis points (bps) compared with a 57.4bps rise in the 2015 rankings. 

This increase can be attributed to the remaining US banks’ move to Basel III, with its stricter Tier 1 capital requirements. More than 99% of North American banks in the Top 1000 are now compliant with Basel III reporting requirements. 

The rise in risk weighted assets (RWAs) as a proportion of total assets, or RWA density, was much sharper in North America than in western Europe, the only other region that saw a year-on-year percentage rise. Western Europe saw a slightly greater increase in the 2016 rankings compared with the 2015 results – 52.9bps versus 40.1bps, respectively. 

A region’s RWA density is influenced by its banks’ business models, i.e. balance sheet size, asset mix or strategy, such as deleveraging; dominant activity type, i.e. retail or investment; and RWA calculation methodologies, standard or internal risk-based approaches. It is also influenced by external factors, such as the accounting treatment of on- and off-balance sheet assets, or macroeconomic factors, including economic turmoil and rising loan impairments. 

As The Banker has explained in previous years, RWAs are used to calculate the capital ratios that are a key measure of banks’ financial strength. While they are considered to be an indication of the risk appetite in a market, the proportion rarely compares well to actual impairments.  

North America’s risk modelling seems more reserved than in western Europe, with RWAs coming in at 61.8% of total assets for the former versus 36.1% for the latter, which is the lowest RWA ratio across all regions. Nine out of the top 10 banks for the lowest risk weights are from western Europe. 

However, this may change in the near future as the internal risk-based models favoured by European banks are currently under scrutiny. In March 2016, the Basel Committee on Banking Supervision proposed that for loans to financial institutions and large corporates – those with assets more than Ä50bn – banks should move to a standardised way of calculating risk. 

Central and eastern Europe (CEE) has the highest RWA-to-total assets ratio, 81.9%, which can be attributed to the poor performance across the region in the 2016 rankings. Russia, the largest banking sector in the region, has endured a number of hardships throughout 2015: the rouble plummeted by more than 22%, while the country’s gross domestic product (GDP) fell by 3.7%. In addition, sanctions continued to bite and oil prices plummeted by 47%. It is ranked fourth in the top 10 countries for total impairment charges. Additionally other CEE countries, such as Ukraine, Bulgaria and Slovenia, also exhibit high impaired loan percentages. 

However, despite increasing risk in the region, CEE’s RWA ratio fell 361.3bps year on year. This implies that CEE banks consider the risks on their books to be falling and enables them to potentially hold less capital. Time will tell whether this assessment is correct. 

In a similar vein, Latin America and the Caribbean has seen the biggest drop in RWA-to-total assets ratio – 516.7bps. Yet troubles have rumbled in Brazil, the region’s biggest market, throughout 2015, including a sharply devalued Brazilian real, rising interest rates, runaway inflation and the fall out from the Petrobras corruption scandal. 

Other important South American markets – Argentina and Venezuela – have also experienced particularly difficult times. Venezuela continues to face sky-high inflation, rising unemployment and political uncertainty. Argentina experienced double-digit inflation and flat economic growth.  

The Middle East’s RWA ratio fell 427.4bps in the 2016 rankings to 69.6%, in spite of the dramatic plunge in oil prices in 2015. However, the region continues to have the second highest ratio of RWAs to total assets after CEE. This may be a result of its banking sector’s expansion into riskier markets outside the Gulf states to fuel growth, such as Egypt, Kenya and Turkey.

RWAs

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Joy Macknight is the editor of The Banker. She joined the publication in 2015 as transaction banking and technology editor. Previously, she was features editor at Profit & Loss, editorial director at Treasury Today and editor at gtnews. She also worked as a staff writer on Banking Technology and IBM Computer Today, as well as a freelancer on Computer Weekly. She has a BSc from the University of Victoria, Canada.
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