EU Bank Calculations of Capital Vary Widely, EBA Says

The European Union’s top banking regulator found “material differences” in the way lenders calculate how much capital to hold on their balance sheets against potential losses in asset value.

The agency must conduct an in-depth investigation to ensure lenders’ calculations of so-called risk-weighted assets, or RWAs, are reliable, consistent across banks and reflect their true risk profile, the European Banking Authority, set up in 2011 to harmonize banking rules across the 27-member bloc, said in a report published on its website today.

“Thanks to this preliminary analysis, we identified some explanatory drivers of RWA differences across banks,” Andrea Enria, chairman of the EBA, said in a statement. “Greater disclosure could, therefore, go some way to appease the concerns raised by investors and market analysts on the reliability of banks’ RWAs.”

U.S. bankers, including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have said that flexible implementation of previous rounds of Basel capital rules in the European Union has allowed European lenders to hold less capital against some assets than their U.S. counterparts. The U.K.’s Financial Services Authority is reviewing banks’ so-called risk weighted assets for a report to be published as soon as March.

The EBA surveyed 89 banks from 16 countries and used information from as recently as the end of 2011.

Public information is “insufficient to allow investors and other interested parties to assess how much of the variation reflects differing levels of actual risk,” the Basel Committee on Banking Supervision said in a report last month.

Regulators could respond with tougher disclosure rules or “limitations in the modeling choices for banks,” Stefan Ingves, chairman of the Basel committee that brings together regulators from 27 nations to set capital rules for banks, said last month in a speech.

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net;

To contact the editor responsible for this story: Christopher Scinta in London at cscinta@bloomberg.net

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