The Basel Committee’s two recently published studies on RWA variability have compared banks’ estimates of risk-weighted assets on hypothetical portfolios of financial instruments (for the trading book) and credit counterparties (for the banking book). To give you an idea of the size of the task, in the case of the banking book, for example, the Committee collected banks’ probability of default (PD) and loss-given-default (LGD) estimates for 46 sovereigns, 77 banks, and more than 1,200 large corporates. Both reports suggest that the underlying differences in risk remain the core driver of differences in risk weights and capital requirements, as intended. However, there are also supervisory and practice-based variations, and they are material. While it is difficult to be precise on how much variation is “too much”, the observed range of practice-based variations analysed by the two studies appears too wide. To give you a flavour of that: just taking the banking book results alone, two banks with exactly the same assets could report capital ratios that differ by 4 percentage points – the most conservative bank would report a regulatory capital ratio of 8% when the least conservative one would report 12%. Of course, this simply compares the extremes in the sample – many banks were much closer to the average. But if outsiders have no way of identifying who is “average” and who is an “outlier”, this variance is clearly too wide to underpin confidence in the measurement of bank capital. So what are we doing about it?

Chart 17 Impact of TLTRO III on bank lending volumes to enterprises  https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200519~e5203d3520.en.html  12/14  5/19/2020  Pandemic central banking: the monetary stance, market stabilisation and liquidity  (net percentage of banks, over the past and next six months)  Source: ECB bank lending survey (BLS). Note: Net percentages are defined as the difference between the sum of the percentages for “contributed considerably to an increase” and “contributed somewhat to an increase” and the sum of the percentages for “contributed somewhat to a decrease” and “contributed considerably to a decrease”. Conclusions We continue to monitor market developments closely. In the context of the current extraordinary and severe macro-financial environment, we must ensure our monetary stance provides sufficient accommodation and guards against the escalation of tail risks associated with procyclical financial amplification mechanisms. We continuously examine each of our measures (individually and as a package) to assess whether these are still adequately calibrated and appropriately sized to provide the necessary degree of accommodation in this uncertain economic environment. Accordingly, we are fully prepared to further adjust our instruments if warranted. This includes increasing the size of the PEPP and adjusting its composition, by as much as necessary and for as long as needed. Reproduction is permitted provided that the source is acknowledged.   [1] I am grateful to Danielle Kedan and Julian Schumacher for their contributions to these remarks. [2] See my blog post entitled “The monetary policy response to the pandemic emergency”, 1 May 2020.