Working Paper: Risk and risk weights

Working Paper - November 2019 - No. 145

Authors Korsgaard, Søren
Subject Credit risk; Stress Tests; Financial regulation
Type Working paper
Year 2019
Published 8 November 2019
The paper studies the relationship between the riskiness of banks' assets and their average risk weight. Risk weights explain about half of the variation in projected credit losses in the 2018 European Banking Authority stress test, and show a clear relationship with estimates of banks' asset volatilities. However, risk weights do a worse job of explaining future credit losses than do asset volatilities, especially for banks using internal models.