Swiss Regulator Says Banks Need Simpler Financial Risk Models

(Bloomberg) -- Banks have pushed the limits of how they assess the riskiness of their investments and will have to take a simpler approach to reduce their investment risk, according to the Swiss financial markets regulator.

“We have reached the limits of the model approach to financial risk,” Swiss Financial Market Supervisory Authority Chief Executive Officer Mark Branson said in a statement released Tuesday ahead of the regulator’s press conference in Bern. “I do not think we need more models with more complexity, what we need in fact is fewer and simpler models.”

Since the 2008 financial crisis forced government bail-outs of numerous large banks, lenders have been under pressure to increase their capital ratios -- a measure of their financial strength -- and improve how they measure risks. The Basel Committee on Banking Supervision is pushing to decide next year on measures restricting the leeway banks have to interpret risk and calculate their capital requirements, as studies have found wide variations in how they assess possible losses on similar assets.

Basel standards require banks to meet minimum capital requirements, measured as a percentage of their risk-weighted assets. The risk-weighting means that the amount of capital they must have is linked to the likelihood of losses on the investments. Banks can either measure their capital requirements using so-called standardized approaches prepared by Basel or their own risk models validated by supervisors.

Finma said in the statement it has taken steps to tighten rules on capitalization including requiring banks to disclose how their internal model calculations differ from more standard models. The measures together taken by Finma and the Basel Committee “will help build trust in the capital regime,” Branson said.

 

--With assistance from Jim Brunsden in Brussels and Jeffrey Vögeli in Zurich.

 

To contact the reporter on this story: Hugo Miller in Geneva at hugomiller@bloomberg.net To contact the editors responsible for this story: Heather Smith at hsmith26@bloomberg.net Jan Schwalbe

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