UK bank market RWAs ebbed in 2019

HSBC shed $5.9 billion of market RWAs in 2019

Market risk-weighted assets fell across all but one of the big five UK banks in 2019, with HSBC reporting the largest drop year-on-year, of -16%.

RWAs, which are used to set regulatory capital requirements, dropped $5.9 billion to $29.9 billion at HSBC. The bank’s average value-at-risk, a key input to its market RWA calculation, also fell -18% to $149 million in 2019.

At Lloyds, market RWAs declined -14% to £1.8 billion, though its average VAR climbed +27% to £7 million. RBS saw RWAs shrink -12% to £13 billion and average VAR -26% to £46 million. Barclays’ RWAs edged down the least, by less than 1% to £30.8 billion. Average VAR stepped down -3% to £84 million.


On the flipside, Standard Chartered swelled market RWAs by +9% to $20.8 billion over the year. Its VAR measure increased +19% to £38 million.

The average share of market RWAs calculated using the internal models approach across the five banks was 71% in 2019, compared to 73% in 2018. Over the year, HSBC saw the RWA share attributable to the IMA fell most of the set, by 10 percentage points to 74%.

What is it?

Value-at-risk measures the potential loss due to adverse market movements over a defined time horizon to a specified confidence level.

Banks using internal models to calculate some or all of their market risk exposure use VAR as one input. The EU’s Capital Requirements Regulation stipulates that the regulatory VAR must be calculated daily, at a 99% confidence interval assuming a 10-day holding period. At least a year’s worth of historical data is needed to estimate the exposure amount.

Why it matters

Calmer markets in 2019, free from the volatility spasms that characterised the year before, would explain some of the reduction in market RWAs disclosed by the UK banks. But factors unique to each bank were also at play.

HSBC disclosed it had brought a clutch of trading desks into the internal models approach after winning regulatory approval, which enhanced its ability to offset risks across different portfolios. The diversification benefits gained helped it to shrink its VAR, and in turn its modelled RWAs. Such efficiencies should assist the bank in pursuit of its targeted $100 billion RWA reduction going forward.

Because offsets are banned between standardised and internally modelled portfolios, it makes sense for firms to get as much of their market RWAs as feasible calculated under one or the other approach.

At StanChart, the bump up in RWAs was related to non-trading book risks captured by the market risk charge. The bank said its bond inventory swelled in 2019 through its treasury markets business.

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