1.1 The global financial crisis revealed significant shortcomings in the calculation of risk-weighted assets [Throughout this CP, the PRA uses the term 'risk-weighted assets' since it is commonly understood in the industry, as equivalent to 'risk-weighted exposure amounts' which is the term used in the CRR and proposed rules.] (RWAs) and capital ratios, defined as the ratio of capital held by firms to RWAs. The Basel Committee on Banking Supervision (BCBS) identified three factors as key to mitigating the severity of subsequent financial crises:
- raising the quantity of capital in the financial system, per unit of risk;
- increasing the quality of capital held by firms; and
- improving the accuracy of risk measurement by firms.
1.2 In response, the BCBS agreed a series of reforms to its standards (Basel standards). These reforms, collectively known as the 'Basel III standards', were intended to enhance the resilience of banks throughout the economic cycle. The Prudential Regulation
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