EU watchdog worried about how banks add up risks
Regulatory action may be needed to end variations in the ways banks add up the risks on their books to determine how big their capital buffers should be, the European Banking Authority said.
As regulators put in place tougher capital requirements, known as Basel III, following the 2007-09 financial crisis they want to be sure calculations used by banks to meet them are sound.
Trust in the figures that banks publish is seen as core to restoring investor and public trust in the financial sector.
The EBA released interim results on Tuesday of its probe into risk-weighted assets on the main banking books of 89 banks, which it did not name, from 16 European Union countries.
It found material differences between banks, with half caused by different regulatory approaches and the structure of a bank's loan portfolio, and the other half because of the way banks calibrated in-house financial models for adding up risks.
Greater disclosure won't be enough to ease concerns raised by investors and market analysts on the reliability of banks' calculations, EBA chairman Andrea Enria said.
Taking the top 20 banks in its study, the EBA said the difference between the maximum and minimum values for risk was 46 percent.
Enria said that was "significant and calls for further investigations and possibly policy solutions".
The EBA said it will complete further studies by the end of this year, looking into areas such as banks' exposure to small and medium-sized enterprises and the home loans market.
Many regulators and bankers have questioned how risk weighted assets are being added up, amid reports some lenders may be gaming the system so as to have to hold less capital.
The global Basel Committee on Banking Supervision published a study last month into how 16 top banks use its rules to add up risks on their trading books and found considerable variations.
Britain's Financial Services Authority is going through risk-weighted asset calculations at domestic banks and will report to the central bank's risk watchdog next month.
(Editing by Dan Lalor)