Institutional investors no longer trust banks to accurately measure riskiness of their assets

According to an article in the Financial Times, institutional investors no longer trust bank to accurately assess and report the riskiness of their assets.

Regular readers know that the solution is to require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this data, the market participants can independently assess the riskiness of each bank.

Institutional investors no longer trust banks to measure the riskiness of their assets and want regulators to take a much more prescriptive approach to setting capital requirements, a new report by analysts at Barclays has found. 

Global rules put forward by the Basel Committee on Banking Supervision require banks to hold top quality capital equal to 7 per cent of their risk-weighted assets. However, banks have the option of developing their own models to measure their RWAs, a method known as internal ratings based (IRB). 

In recent years regulators and investors have raised questions about the reliability of the models and some bankers have accused their rivals of “fudging” their models to make their holdings appear less risky and reduce their need for capital....

By making all banks provide ultra transparency, the bankers could independently assess their competitors and identify who is fudging their models.

Now Barclays has surveyed 130 institutional investors representing about $6tn in equities under management and found that 63 per cent have less faith in bank models than they did a year ago and 83 per cent want to get rid of “model discretion”. 

“The range of risk weights has been so disparate that confidence in the entire regime has been undermined,” said Simon Samuels, author of the Barclays analysis.

As Jamie Dimon would say 'I want to see the positions'.

With ultra transparency, the institutional investors could determine the riskiness of the banks for themselves or hire expert third parties, like the banks, to analyze the riskiness of the banks for them.