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Emerging market risks rising

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.
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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.

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