Material differences in the way banks define their risky assets is blinding investors' ability to make informed choices about where to put their money, a top regulator said on Thursday.
Stefan Ingves, chairman of the Basel Committee, said a report to be published shortly will confirm suspicions among key policymakers and top bankers that the methods used - generally in-house - across the world for measuring risky assets is not working well enough.
If risks are not measured correctly a bank would not be holding enough capital to cover losses, leaving taxpayers on the hook.
The committee, made up of regulators from nearly 30 countries, looked at trading books using data from 15 top banks and found risks were not being properly reflected.
"The preliminary work suggests we may not have the balance right in the current set up," Ingves said in speech in Cape Town.
Ingves said meaningful and comparable bank capital figures give shareholders, bank depositors, counterparties and supervisors confidence in a lender.
Jamie Dimon, Chief Executive of JPMorgan has complained that some rivals -- widely seen as referring to lenders in Europe -- were gaming the system by attaching "aggressively" low risk weights to their assets.
The risk weightings are added up using models to determine the overall amount of capital needed to meet regulatory requirements.
Ingves said the Basel Committee has found "material variation" in risk weights for assets held on trading books, after adjusting for accounting and portfolio differences.
"Certain modelling choices seem to be major drivers of the variation in risk weights," Ingves said.
This "generally insufficient" public disclosure by banks left investors in the dark, added Ingves, who is also governor of Sweden's central bank.
On Thursday, credit ratings agency Moody's said banks in Spain, Italy, Ireland and Britain may need to set aside much more money to cover potentially bad loans.
The Bank of England's Financial Policy Committee is unhappy about relying on in-house models used by the biggest banks.
The bank's director of financial stability, Andrew Haldane, said on Monday regulators were instead slapping extra capital charges on some types of assets held by banks, such as riskier commercial real estate.
There could also be "floors" set for capital levels irrespective of what the models show as the right amount.
Fitch rating agency, meanwhile, backed Haldane's view on Thursday, when it said British banks could be underestimating the riskiness of their property loans and may need more capital to correct this.
Haldane and others say Basel's rules are too complicated and want a simpler system for determining capital requirements that does not rely on a bank's own arithmetic.
The Basel Committee is looking at possible solutions such as improving public disclosure, curbing a bank's choice of model and more consistent supervision by regulators.
Ingves said more work will be done on how risk weights are used in a bank's trading and banking books.
The committee will publish a paper looking at the trade-offs that need to be made if the risk weighting system is simplified but Ingves said it was "naive" to believe that big banks can be supervised using simple rules, even with penal settings.
The committee is already looking at so-called effectively requiring the use of standardized models for adding up risk weights, raising fears among big banks that the days of their bespoke versions are numbered.
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