ECB finds top euro zone banks underreport risk

FILE PHOTO: Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt
FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski//File Photo

April 19, 2021

FRANKFURT (Reuters) – Large euro zone banks have been underreporting their risky assets by 275 billion euros by using their own models to quantify potential losses, the European Central Bank said on Monday.

Since the 2008 financial crisis, regulators around the world have been picking apart the internal models that large banks use to calculate how much risk is on their balance sheet and, in turn, how much capital they need.

A five-year review by the ECB found that the euro zone’s top banks had undercounted their risk-weighted assets by 275 billion euros, or 12%, for example by underestimating losses in cases where a borrower goes bust.

This lowered the ratio between those banks’ capital and their risky assets, a key gauge of a lender’s solidity, by 70 basis points on average between 2018 and 2021.

“Banks are following through to correct deficiencies and fully comply with the requirements,” Andrea Enria, chair of the ECB’s supervisory board, said in a press release.

The ECB said “further improvement” was needed in some areas, for example to ensure that the probability of default that banks assume is in line with long-run averages and sufficiently conservative.

The way borrowers are rated also needed “to be amended or adapted”, the euro zone’s top banking supervisor added.

The ECB’s Targeted Review of Internal Models (TRIM) included 65 large banks across the euro zone. Germany was the most represented country with 14 lenders.

(Reporting By Francesco Canepa; Editing by Toby Chopra)