April 2 (Bloomberg) -- Euro-area banks face tougher scrutiny of how they measure the risk of losses on their assets, the European Union’s financial-services chief said.
Michel Barnier said that once the European Central Bank takes on oversight of euro-area lenders in November, its tasks will include tackling potential inconsistencies in the so-called risk-weight models banks use to measure the capital they need to withstand crises.
“The single supervisor will need to work on the great diversity of approaches in terms of bank risk-weight models that exist at the moment,” Barnier said in an interview yesterday in Athens, Greece. While banks across the EU can’t ever be expected to all have the same risk profile, “we can at least try to harmonize the thermometer” for measuring possible losses, he said.
Banks face mounting oversight over how they measure their risks, amid concern that their ability to adapt internal models could undermine moves to boost capital requirements after the crisis that toppled Lehman Brothers Holdings Inc. and left banks from the U.S. to Ireland close to collapse.
Bankers including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have said that flexible implementation of previous rounds of Basel rules has allowed European lenders to hold less capital against some assets compared with their U.S. counterparts.
Stefan Ingves, chairman of the international Basel Committee on Banking Supervision, said last month that the group is weighing a range of options to rein in bank practices when using internal models.
Regulators “need to examine whether there is a case for the greater use of floors” to limit how low assessments of perceived risk can fall, Ingves said.
Under global agreements, bigger lenders can use internal models to calculate their capital requirements, which are set as a percentage of the bank’s assets, with the value of the assets weighted in terms of their riskiness.
Regulatory capital encompasses retained earnings, as well as ordinary shares and some other securities issued by the bank that can take losses.
The ECB is currently conducting a review of bank assets at 128 lenders across the euro area. While the ECB has said it won’t do a full examination of risk-weighting in this process, it could still discover practices that need to be corrected and result in a restatement of their capital ratios.
Officials are “keenly aware of the challenges” that potential differences in banks’ calculations of risk weights imply for banking regulation and supervision, ECB Supervisory Board Chair Daniele Nouy said in an article published for a conference in Athens on March 31. “Tackling those with a view to improving supervision and enhancing the level playing field across banks constitutes a priority” for the ECB once it takes over supervision of the region’s lenders.
If the ECB’s asset-quality review and stress tests reveal “that there are certain needs in terms of restructuring and recapitalization, then it will be up to each bank to take its own responsibilities, working with the supervisor, in the way that they have done in the last few years,” Barnier said.
“It’s already happened in the past, in response to stress tests etc., that banks have taken preemptive actions to strengthen their capital positions and that is a sensible approach,” he said,
“At the end of the day what matters is that the banks are solid,” Barnier said. “And that they get rid of any remaining toxic assets that they may still have.”