Banks’ Financial Strength Isn’t What It Seems

(Bloomberg Opinion)


Twelve years on from the financial crisis, depositors and investors really shouldn’t be doubting whether they can trust the way banks measure their financial strength. But the reasons for skepticism keep coming.

The Bank of England last week signaled some lenders may be underestimating the riskiness of their home loans. Banks that use their own models to make these calculations — typically the bigger, more sophisticated lenders — assign an average risk weight of 10% on their mortgages. The measure is low compared with historic levels, and it’s a fraction of the 35% risk weight that lenders assign to real-estate borrowings when they use a standard model rather than a bespoke approach. That’s a troubling discrepancy.

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