What you still don't know about Asian banks' risk weighting of assets

There has been increasing scrutiny on RWAs.

According to Barclays, capital ratios reflect a bank’s solvency and resilience, but they depend heavily on the risk weightings of assets.

There has been increasing scrutiny by regulators and investors in the way certain banks calculate their RWAs (particularly the ones using the Basel II advanced IRB approach).

Here's more from Barclays:

RWAs vary from bank to bank where different complex methodologies are used based on each bank’s internal model. A key input that is used to determine risk weightings – Probability of Default (PD) – can be highly subjective and open to interpretation.

The largest mortgage players in Hong Kong and Singapore (HSBC, STAN, BOCHK, Hang Seng Bank, BEA, DBS, OCBC and UOB) which together account for 80%+ market shares, use the IRB approach to determine their mortgage risk weightings.

The IRB approach relies on the banks own assessment of the probability of default (PD) and loss given default (LD) based on their historical experiences.

Given the strong credit quality records in Hong Kong and Singapore, mortgage risk weightings are as low as 5% determined under the IRB approach.

The smaller banks, Wing Hang Bank and Dah Sing, still use the standardised approach in which a 35% risk weight is used on mortgage exposure. 

The HKMA introduced a 15% floor to risk weight on new mortgages on 22 February 2013 as part of its sixth round of property tightening measures. This rule does not apply to the existing mortgage books.

Taking into account the average behavioural duration of mortgages of about seven years, the drag on capital should be gradual over the next seven years.

The MAS does not currently regulate mortgage risk weightings, but we believe this is a potential tool for the MAS to use in future to limit mortgage credit to cool housing prices.