Comparing Norwegian banks' capital ratios

To improve the basis for comparing banks' financial strength, in this article I employ the same approach to calculate capital ratios in all Norwegian banks. Basel II allows banks to choose between various approaches for calculating their capital ratios. The use of different approaches reduces the comparability of banks' reported capital ratios. The reported Tier 1 capital ratios of banks using the internal ratings-based approach (IRB banks) are lower than those of banks applying the standardised approach. When I use my calculations rather than banks' reported capital ratios, the difference between the average Tier 1 capital ratio of IRB banks and that of banks using the standardised approach more than doubles. Deviations between reported and estimated ratios vary among IRB banks. This may be because banks' risk models generate different capital requirements for comparable assets. In that case, banks' reported capital ratios are an inaccurate measure of their financial strength. However, the deviations between reported and estimated capital ratios may also vary because my calculations did not manage to capture differences in bank risk.