Markets discover bank “risk-weight inflation”

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Yeees, at the AFR:

Analysts examining NAB’s result, which included a 64 per cent cut to the interim dividend and $3.5 billion capital raising, say the entire amount of the $3 billion institutional placement could be chewed up by the higher risk weightings assigned to its loans as the economy weakens.

This occurs because as unemployment rises and property prices fall, banks are forced to increase both the “probability of default” and “loss given default” in their risk models. The latter calculation reflects the amount actually lost by a bank when a loan is not repaid, which rises when the value of the security backing the loan falls.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.