August 24, 2015

How do you audit risk-weighted capital ratios? What would an auditor say about a zero risk weight?

Sir, ICAEW’s Iain Coke writes that since “Bank’s risk weighted asset calculations and capital ratios are currently unaudited”, “Bank capital ratios need to be audited” Monday 24.

What a great idea! I would love to see bankers and regulators explaining the risk-weights to the auditors…

Mr. Stefan Ingves, you as the current chair of the Basel Committee, how do you explain the zero risk weight for some of your favored sovereigns? And how do you explain that for purpose of setting the capital requirements that are to cover for expected losses you think those perceived as risky in terms of expected losses, can generate more unexpected losses than those perceived safe?

I can’t wait for an ICAEW endorsed audit of a bank’s capital ratio.

Coke writes “People needs to have confidence in bank’s capital formation”. Absolutely, that would be a good thing, but such an audit would certainly also shatter the confidence in bank regulators… and that would also be good, or at least a much needed thing.