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Top 1000 World Banks – Market risk declining globally

Market risk-weighted assets decline as a proportion of total assets in this year's ranking, as banks reduce their trading desk activities to meet higher capital requirements.
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The global proportion of market risk-weighted assets (RWAs) has dropped significantly in this year’s ranking, to 4.39% of total RWAs from 5.86% in last year’s Top 1000. Deleveraging in western Europe has played a major role in this change, as banks shrank the size of their trading desks in a bid to meet higher capital requirements imposed by regulators. Market RWAs have fallen to 5.87% of the total in western Europe from 6.76%. As the region has the second largest total of RWAs after Asia-Pacific, this change has a significant impact on the global proportions.

Philip Alexander reports on the full results of The Banker’s Top 1000 World Banks ranking 2014, in the story Top 1000 World Banks 2014: Back on track?

However, the sharpest decline in market risk is in Central and South America, which previously had one of the highest shares of market RWAs in the world. This is now 3.72% of the total, lower than all other regions except Asia-Pacific and the Middle East.

Operational risk has also declined by a few basis points worldwide, slipping slightly in most regions. Even in western Europe and North America, where banks are facing increased costs from regulatory and criminal enforcement actions, operational RWAs are slightly lower than in last year’s ranking. The exception in this instance is Asia-Pacific, where operational RWAs have risen sharply, to 7.54% of the total compared with 5.82% last year.

Top 1000 World Banks Ranking 2014 – Risk-weighted assets

In theory, the proportion of RWAs to total assets should indicate the riskiness of the assets held by each bank. However, as we have long noted, this proportion rarely correlates well to actual impairments. Although western Europe has increased the ratio of RWAs to total assets by almost two percentage points, the proportion remains lower than for any other region, at 35.4%. And yet, western Europe has the highest impairments of any region, at 23.6% of total operating income.

The region with the highest proportion of RWAs to total assets – central and eastern Europe – is perhaps more realistic in calculating risk weights. It has the second highest level of impairments at 19.7% of total operating income, so the correlation with RWAs is healthier. This region also sees the sharpest decline in RWAs as a proportion of total assets this year, suggesting that banks in central and eastern Europe believe credit risk is peaking. However, impairments are rising in Russia, the region’s largest banking sector, so the decline in RWAs to total assets may actually be contradicted by a rise in regional impairment levels.

The region with the lowest level of impairments, North America, looks to be relatively conservative on risk weighting, with impairments of just 4.4% of operating income, but RWAs at 57.7% of total assets. However, US total asset sizes are not comparable with those for most other jurisdictions, because American accounting standards allow netting of derivative positions. This is not the case for western Europe or other regions that use the International Financial Reporting Standards.

North America and Asia-Pacific have seen the greatest rise in RWAs as a proportion of total assets, but this can be interpreted in several different ways. It could signal greater risks, and certainly there is an expectation that asset quality in China will deteriorate. But asset quality in the US continues to improve as the country recovers from the financial crisis. The other two obvious explanations are that banks are increasing their risk appetite and moving into riskier assets or that regulators are toughening their scrutiny of banks’ risk models.

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