Prudence comes to risk weights near you November 30, 2012 at 7:23 am

The press release for the most recent UK financial policy committee is interesting:

In today’s Report we draw attention to three reasons that lead us to think that UK banks’ capital ratios – and hence the buffers available to absorb unexpected losses – are currently overstated. First, expected future credit losses may be understated; second, costs arising from past failures of conduct may not be fully recognised; and third, the risk weights used by banks in calculating their capital ratios may be too optimistic… The FPC therefore recommends that the FSA takes action to ensure that the capital of UK banks and building societies reflects a proper valuation of their assets, a realistic assessment of future conduct costs, and prudent calculation of risk weights. Where such action reveals that capital buffers need to be strengthened to absorb losses and sustain credit availability in the event of stress, the FSA should ensure that firms either raise capital or take steps to restructure their business and balance sheets in ways that do not hinder lending to the real economy.

(Emphasis mine.)

Ooops.

Update. You can find more on this from Matt Levine here. The new financial stability review is here: capital junkies will want to see in particular charts 3.18, 3.19 and 3.20.

3 Responses to “Prudence comes to risk weights near you”

  1. David, the link to the Levine article is 404. Don’t want to have folks miss out on that colorful character! Regards

  2. Thanks Jay. I’m not sure what is going on though as it works for me… sorry I can’t fix it as it doesn’t appear to be broken.

  3. Those interested in how banks make money should look at Chart 3.23 and consider what this may means for the future cost of banking services.