LONDON, Aug 5 (Reuters) - Europe’s banks show wide variations in how they calculate risk, and its financial regulators needed a more unified approach to reduce inconsistencies, the region’s banking watchdog said in a study on Monday.
As regulators put in place Basel III, the tougher capital requirements introduced in response to the financial crisis, they want to be sure calculations used by banks to meet the new standards can be relied on by investors.
Among other measures, a bank’s risk-weighted assets are used to determine its capital adequacy.
In the second phase of a study into variations in how risk-weighted assets are assessed, the European Banking Authority looked into low-default portfolios - those involving exposure to central governments, other banks and large corporates, which contain relatively few defaults - at 35 banks from 13 European Union countries during the second half of 2012.
That followed the EBA’s interim probe of risk weightings at 89 banks from 16 EU states in February.
The EBA said on Monday it found “significant variation in the risk weights and expected losses among the banks in the sample”.
It said it remained concerned about the lack of harmony in regulatory approaches and inconsistency in the way banks defined default and other risk measures, which were both identified as a cause of the variation.
It recommended that statistics on banks’ risk-weights based on uniform definitions be published regularly. It also called for additional guidelines on how risk is calculated for low-default portfolios.
The report showed variation stemmed from the roll-out of the Internal Ratings-Based model - international guidelines that allow banks to use their own estimates about how likely certain pools of assets are to default to calculate regulatory capital.
It said benchmarks could be introduced to cut down on inconsistency, for example putting floors under exposure to some asset classes.
That echoes suggestions from the Basel Committee of global banking supervisors, which wrote Basel III and has also published two studies this year showing big variations in how risk-weights are applied.
The Basel Committee faces pressure to simplify its rules which rely heavily on banks adding up risks using in-house models.
Some regulators, including those in Britain and the United States, who say risk-weights are too easily gamed, have moved faster than others to impose a simpler curb on risk known as the leverage ratio as a backstop to mitigate any manipulation.
The Bank of England, which regulates banks in Britain, is considering if banks should calculate risk weights using a standardised model as a cross-check to in-house models. (Reporting by Huw Jones and Clare Hutchison; Editing by John Stonestreet)