So-called 'risk weightings' are applied to banks' assets, which should reflect how risky the asset is and determine how much capital must be held against it.

Many regulators, and some banks, are concerned variations across countries and companies lead to big capital differences between major banks holding similar assets.

The chairman of the Basel Committee of banking supervisors said in March variations in how banks add up risks were "uncomfortably wide" and needed fixing. (http://uk.reuters.com/article/2014/03/04/us-basel-banks-ingves-idUKBREA231IE20140304)

"We think most of the variance that exist can be explained by definition. We've given to officials a set of 90 proposals and suggestions that go a long way to narrowing those variances," Tim Adams, chief executive of the Institution of International Finance (IIF), told Reuters on Thursday at an IIF meeting in Frankfurt.

Banks can calculate their risk weighting using standardised levels set by international regulators, or they can use internal models based on their own past loan experience. Global and national regulators are assessing and trying to harmonise both.

All assets are affected, from government bonds to small business loans to securitised loans, and reforming the system is likely to take years.

"There's a sense of wanting to review all of those (assets) against a backdrop of wanting to understand internal models and how we can narrow the variances in some of the models' behaviour," Adams said.

An example of how definitions differ is when a bank considers a loan is in default, which varies across countries.

The risk-weighting approach means a low-risk residential mortgage may have a weighting of 20 percent, whereas a riskier investment banking product has a 200 percent weighting, meaning the bank needs to hold 10 times more capital for the latter.

Regulators are expected to also introduce more benchmarking to compare models and require banks to be more transparent about what weightings they apply.

"Hopefully the outcome will be a more consistent and more level playing field for the banking system irrespective of whether banks are using internal models or a standardised approach," said Adam Farkas, executive director at the European Banking Authority, a pan-European regulatory body.

Bankers at the IIF event had mixed views on the best outcome, however

Wolfgang Kirsch, CEO of Germany's DZ Bank, said he would like "a standardised approach, but with many asset classes so that you do not compare apples with oranges".

(Reporting by Steve Slater; Editing by Mark Potter)

By Steve Slater