16 August 2015

Financial Times: ECB doubles the time needed to review banks’ risk models

Having originally hoped to complete the review of banks’ risk models within a year or two, the ECB has set a deadline of four years for work on the project, according to a tender document seen by the Financial Times.

Some experts whose firms are pitching for contracts said the review could take even longer, because the project is so comprehensive and demands a huge amount of manpower.

Banks’ internal risk models are crucial because they can produce the risk weighted assets (RWA) used to calculate the capital ratios that are a key measure of banks’ financial strength. Lower RWAs mean better capital ratios.

The internal models must be approved by supervisors, but various studies have found widespread differences in banks’ RWA models, spurring the ECB’s vow to eliminate anomalies among the 123 banks it began supervising last November.

One expert said there was “no way” the work could be completed in four years as the task was so great and much of it has to be carried out by highly specialised staff. The 123 banks together have more than 7,000 internal models.

[...]

The ECB said that harmonising supervisors’ approaches — including to risk models — was a priority for the single eurozone regulator. [...]

Not all of the banks’ supervised by the ECB use internal models to calculate capital, but the biggest names including Deutsche Bank, Santander, UniCredit, BNP Paribas and Société Générale all do.

The banks most affected by the ECB review are likely to be those that have aggressively used models to reduce their RWAs and flatter capital ratios.

[...]

The RWA review has been identified as one of the key priorities of the single supervisory mechanism, and its chairman Danièle Nouy speaks of it frequently.

“I guess there is some setting of priorities among the 7,000 models,” said Nicolas Véron, senior fellow at Bruegel, a Brussels-based think-tank. [...]

In its tender document, the ECB said it expects the work on the RWA models to be split among 10 different service providers. Successful firms must have expertise in a variety of tasks including modelling, training, planning, project management, quality assurance and analysis. They must also have already done at least 20 assignments for banks in similar fields between 2012 and 2015.

© Financial Times