The variability in RWA density. New perspectives on the approach to risk measuring

This research focuses on the denominator of the SR – RWA. Density Ratio – expressed by the ratio between risk-weighted assets and total balance sheet assets. Analysis of the average weightings of banks has highlighted the excessive variability of the RWA ratios over time and space profile, leading to the conclusion that banks tend to “manipulate” the measurement of risk, in order to obtain capital savings. This has called into question the ability of RWAs to adequately reflect the levels of banking and financial risks, thus undermining the pursuit of financial stability and a level international playing field. With the aim of reducing the variability of weighted assets and consequently improving the comparability of the capital requirements of different banks, in 2017 the Basel Committee published the reforms to be made to the current regulatory framework, known as Basel IV. Basel IV capital agreement, which came into force on 1 January 2023, but which in its entirety will become fully operational in2028, introducing a mechanism to limit the discretionality of the results of the estimates of internal models, to the introduction of the standardized output floor and of additional requirements for systemic banks, will inevitably lead to an expansion of RWAs and therefore of capital requirements.