Average risk weights for corporate exposures: what can 30 years of loss data for the Norwegian banking sector tell us?
- Henrik Andersen and Hanna Winje
- Staff Memo
The cost to society of a banking crisis is high. Higher capital ratios improve banks' loss-absorbing capacity and reduce the risk of crises. Since the financial crisis erupted in 2008, banks have increased their capital ratios considerably in pace with stricter regulatory requirements. Nevertheless, the level of capital held by banks to support their assets is not appreciably higher than after the banking crisis of the 1990s. Banks calculate capital ratios by risk-weighting their exposures to reflect the risk of unexpected losses. Large Norwegian banks' risk weights have decreased over the past decade. In this paper, we examine historical loss data and corporate data back to the 1980s to estimate average risk weights for corporate exposures in the Norwegian banking sector. We cross-check the estimates using calculations that are based on a stress test and other points of reference. Even when we take a number of elements of uncertainty into account, historical loss data indicate higher average corporate risk weights than the current level in the Norwegian banking sector.
Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.
ISSN 1504-2596 (online)