January 13, 2014

Banks’ RoRWAs is like allowing kids to grade themselves. Shareholders could, at their own risk do so. Regulators should not!

Sir, The Lex Column makes several statements about banks’ RoRWA, the return on risk-weighted bank assets, January 13.

In essence RoRWA is like allowing kids to grade themselves, and their parents, as their shareholders, believing it. And though it does not sound very wise, that is ok since parents, at their own risk, are absolutely free to do so.

But, when teachers, or bank regulators, start using the kids’ own grading system, or the banks’ own risk-weights, then something is bound to go wrong. More sooner than later the whole system will overdoses on the kids and bankers biased perceptions, as these all have a lot of vested interest in having good grades or good RoRWA.