Risk weightings on assets have increased for many emerging-market regions, but the very low level of risk-weighted assets in Europe looks disconnected from the deteriorating asset quality in the region.

A rise in the share of risk-weighted assets (RWAs) to total assets could indicate either or both of two trends. The first is deteriorating asset quality, or an expectation of it among bankers or their regulators, which obliges banks to increase the risk weights on existing assets. The second is a rise in risk appetite, as banks move further down the quality curve in search of better returns, taking on new assets with higher risk weights. Either way, emerging markets appear to be growing in terms of their risks. Africa, Asia-Pacific and Central and South America all saw significant increases in RWAs as a proportion of total assets.

Deteriorating asset quality may be part of the story in Latin America and Asia-Pacific, where total impairment charges increased significantly. But impairments have moved little in Africa, suggesting this region is gradually taking on riskier assets. Africa also has the highest proportion of market risk for any region. This could indicate holdings of government bonds that are marked to market, or simply reflect the limited liquidity in many African financial markets, so that risk weights will need to take account of much higher market volatility.

By contrast, western Europe’s deleveraging efforts are apparent, with the region recording the largest drop in RWAs as a proportion of total assets. Total RWAs for western Europe fell by almost 6%, even though assets were largely unchanged. The region’s ability to compress RWAs must continue to provoke some scepticism, because asset quality has deteriorated considerably. Total impairment charges for western Europe increased by almost a fifth in the 2013 ranking, which does not indicate falling risks. Despite exhibiting worse asset quality than any other region, western Europe still has by far the lowest proportion of RWAs to total assets. This disconnect between asset quality and risk-weighting, which has been criticised by bankers and regulators outside Europe, continues the trend seen in last year’s ranking.

At the other end of the scale, central and eastern Europe remains by far the most conservative region. RWAs are much the highest share of total assets, even though asset quality, as measured by the ratio of impairment charges to total income, is better than in western Europe or Latin America.

While most regions have maintained a relatively steady balance between the three components of risk – credit, market and operational – Latin America has sharply increased its proportion of market RWAs. These rose from 2.41% of total RWAs last year to 7.62% this year. This could show greater investment in securities or simply an expectation of higher volatility in its financial markets.

Given the security and infrastructure risks of operating in Africa, it is no surprise to find high operational RWAs for African banks. But North America exceeds this ratio. That could be a sign of the value of real estate or the damage that would be caused by IT failures. But it also seems likely that the high risk of litigation and regulatory fines in the US is a contributing factor. Despite some high-profile regulatory enforcement against UK banks, operational risks have fallen as a share of total RWAs in western Europe in this year’s ranking.

Composition of disclosed risk-weighted assets

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