The Quest to Save Risk-Weighted Assets

Christopher Finger

Since the 1980s, global banking supervisors, working through the Basel Committee on Banking Supervision, have agreed to a succession of standards for regulation of internationally active banks. At the core of these standards is the risk-based framework for setting minimum capital requirements. Although the effectiveness of these standards has been tested over the years by local events, the global financial crisis of 2007–9 exposed significant weaknesses in the framework. Supervisors globally have worked since the crisis to reform the standards, with the goal of ensuring banks’ safety, addressing systemic financial risks and re-establishing the credibility of the risk-weighted assets (RWA) framework with the public.

We begin with a short history of the successive global capital frameworks, and the primary motivations for each reform. Then we discuss the weaknesses of the prevailing framework that were exposed by the financial crisis. The most recent reforms to the capital framework are then introduced, with a discussion of how these reforms are intended to address the problems of the prior regime. Finally, we lay out a series of approaches by which supervisors could evaluate