The European Central Bank has allocated up to four years for an in-depth review of major eurozone banks’ risk model, according to a report by the Financial Times.
The ECB was slated to complete its review of the banks within a year or two but has set a deadline of four years due to the complexity of the project. Deutsche Bank, Santander, UniCredit, BNP Paribas and Société Générale are some of the major banks that are supervised by the ECB.
Bank’s internal risk models are very important in measuring capital ratios, which can determine an institution’s financial success. “Risk-weighted assets,” (RWA) are used to identify the risk level of an asset. While banks can measure their RWA using “standardized” risk weights, which are set by international watchdogs, they also have the flexibility to create and measure against their own models. But lately, the ECB has been flexing its muscles by conducting a thorough review of RWAs on all banks that it oversees—a move that has many banks concerned. In other words, if the review uncovers that a bank used a model that reduce their RWA to gain higher capital ratios may be in some hot waters with the regulator.
The ECB said that supervisors and risk models should be on the same page and the thorough review remains a priority for the regulator. In the document obtained by the Financial Times, the ECB said it expects the review of the RWA models to be split among 10 different service providers, who have demonstrated success in areas such as modeling, training, planning, project management, analysis, among others.