No. 1537 - Banks' internal models and RWA variability: strategic modelling portfolio reallocation?
Internal ratings-based (IRB) models may encourage banks' opportunistic behaviour to reduce the capital requirement associated with risk-weighted assets (RWAs). This paper uses supervisory data to assess whether the validation of IRB models within the Single Supervisory Mechanism (SSM) has affected the dynamics of RWAs, investment strategies and capital management at euro-area significant banks.
The analysis finds no evidence that, within the SSM framework, less capitalized or more fragile banks reduced the risk weights applied to their assets following the adoption of IRB models. This finding is consistent with the hypothesis that harmonized supervision has constrained opportunistic reductions in RWAs. Furthermore, the adoption of IRB models appears to be associated with a reallocation of lending toward more profitable assets, particularly those to large non-financial corporations.
Instagram
YouTube
X - Banca d'Italia
Linkedin
RSS
E-mail Alert
