On Monday, the European Bank said that, large euro zone banks have been under-reporting their risky assets by 275 billion euros by using their own models to quantify potential losses. 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, since the 2008 financial crisis.
A 5 year evaluation by the ECB found that the euro zone’s top banks had counted lower than their risk-weighted assets by 275 billion euros, or 12%, for example by underestimating losses in cases where a borrower goes bust.
In a press release, Anna Andrea Enria said, “Banks are following through to correct deficiencies and fully comply with the requirements.” 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.