For example, from 1993 to 2008 the total assets of a sample of what we call global systemically important banks saw a twelve-fold increase (increasing from $ trillion to just over $ trillion). But the capital funding these assets only increased seven-fold, (from $ billion to $ billion). Put differently, the average risk weight declined from 70% to below 40%. The problem was that this reduction did not represent a genuine reduction in risk in the banking system. To take an even more concrete example from my own country: during the past twenty years or so, the risk weights for retail mortgages in the major Swedish banks have decreased from 50% to 35% with the adoption of Basel II (from Basel I) and further, to about 6% when banks themselves were allowed to model risk weights. In equity terms, this means that instead of SEK 17,000 of their own equity to fund a mortgage of 1 million, banks’ models implied that SEK 1,200 was enough.1 In retrospect, it is clear that the decrease in risk weights did not reflect actual risks and banks therefore needed more capital. Furthermore, although it is a historical fact that banks’ problems often start in the form of liquidity constraints, there were no global liquidity regulations for banks prior to the crisis. This meant that banks could rely heavily on very short-term market funding to finance highly illiquid and long-term assets.
After an assessment has been thoroughly debated in the Committee, the final assessment becomes public.7 The assessments, and the publication of the results, have proved to be a powerful tool. To date, more than 200 adjustments have been made by member jurisdictions in response to findings raised by the assessment teams. In addition, the process has also generated a positive feedback loop, meaning that the lessons learnt from assessments are used to improve and clarify the standards. So far, the assessments have concentrated on the capital framework, but from 2015 onwards the scope of this work will widen further to include the implementation of the liquidity coverage ratio and the SIB-requirements. However, for the new, stricter requirements to bring the benefits we are aiming for, it is important that they be properly reflected, not only in national legislation, but also at the level of individual banks. To use an analogy of car safety, if we are now providing banks with air bags, in the form of higher capital requirements, it is important that those air bags are actually activated in case of an accident. For this to happen, the sensors need to be functioning and well-calibrated. For banks, this means that risk weights need to signal appropriately the risks that individual banks actually face. This aspect is captured in the Committee’s thematic assessments. To put it simply, in these assessments we examined whether the banks’ risk-weighted assets could be trusted.