Advanced approaches continue to bind Citi in Q2

Modelled RWAs fall slower than standardised over the three months to end-June

Citi’s core risk-based capital requirement was again determined by its own internal models in Q2, as the bank’s own view of its riskiness exceeded estimates set by the regulator-set standardised approach for the second consecutive quarter. 

The New York-based bank posted risk-weighted assets (RWAs) as calculated using the advanced approaches, which use the firm’s own data inputs and modelling techniques, of $1.21 trillion at end-June. The RWA value assigned using the standardised approach was almost 2% lower, at $1.19 trillion.

US rules require top lenders to set risk-based capital requirements using the higher of standardised and advanced RWAs under the Collins amendment to the Dodd-Frank Act, meaning as of end-June Citi’s binding Common Equity Tier 1 (CET1) capital ratio was 11.5%. The ratio calculated using standardised RWAs was around 11.7%.

 

The binding ratio was up from 11.2% at end-March.

Advanced approaches RWAs fell 1.1% quarter-on-quarter, and standardised RWAs 2.2%. CET1 capital amounted to $139.6 billion at end-June, up 2% on three months prior.

What is it?

The standardised approach for calculating RWAs relies on rules and formulas set by regulators – based on methodologies cooked up by the Basel Committee on Banking Supervision – whereas the advanced approaches use banks’ internal models, inputs and assumptions derived from their own data. The standardised approach, given its broader scope, generally results in higher RWA outputs.

Under the Collins amendment to the Dodd-Frank Act, US banks must report their regulatory capital ratios under both modelled and standardised approaches. If standardised credit and market RWAs exceed total modelled RWAs, then a bank must calculate its regulatory capital requirements in reference to the former.

Standardised RWAs, therefore, form a so-called ‘Collins floor’, below which banks cannot reap any further regulatory capital efficiency from reducing their modelled RWAs by improving their models or bringing more business activities into scope.

Why it matters

With the advanced approaches on the ascendant at Citi, the bank may find certain assets and business lines are more capital intensive now than when it was bound by the standardised approach. Non-cleared derivatives are one example. Under the advanced approaches, these attract credit valuation adjustment charges that are not included in the standardised calculation. 

However, as the firm’s capital requirement is now set using its own models, Citi has the scope to optimise RWAs by improving the data and parameters used as inputs for these. Asked on an analysts’ call today (July 14) what options the bank was pursuing in this area, chief financial officer Mark Mason said “we're constantly looking to manage it [RWAs] effectively”.

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