The ECB makes banks ugly about the “poor quality” of the documentation used in internal risk models

The European Central Bank (ECB) gives a slap on the wrist to the entities of the Old Continent on the processes of internal risk models to calculate their capital needs. “The efficiency of the evaluation process is sometimes significantly hampered by the poor quality of the applications submitted and the documentation provided by the institutions,” says the agency in its latest supervision bulletin, published this Wednesday. The study is carried out on an aggregate basis, not by country. That is, without pointing to specific entities or those of a certain territory.

In this way, the institution chaired by Christine Lagarde calls on banks to make an extra effort to improve the implementation of these models. The investigation carried out during 2021 and 2022 reveals that more than 80% of the requests related to internal models focused on credit risk, “of which almost two thirds were triggered by the need to comply with the new requirements of the Banking Authority Union (EBA)”. Financial groups are obliged to carry out these processes by the new European regulation.

In the document, the ECB also explains that investigations have revealed that banks “need to improve the way in which they implemented and used internal models.” To this must be added, according to the organization, the relocation of businesses of some entities after Brexit, for which they needed the approval of the Eurobank “to continue using internal models that had initially been approved outside the scope of European banking supervision” .

Among the concerns that the institution headed by Lagarde maintains is the poor quality of the information provided. “The quality of the data that enters the models continues to be a concern and improvements are needed,” the text collects. To which he adds: “Similarly, deficiencies were identified in the preparation of banks to implement changes.” Despite this, he concludes in the document that the entities have generally improved after the review.

Looking ahead, the ECB encourages banks to further simplify their models and use a sufficient number of exposures to meet regulatory requirements, as well as demonstrate the accuracy and robustness of the estimates. Despite the rebuke, the agency says there has not been “a systematic increase in risk-weighted assets as a result of these investigations,” although some decisions did have an impact on banks’ capital requirements.

Finally, the Eurobank asks for help from the addresses of financial institutions. “The ECB expects banks, and in particular their governing bodies and senior management, to commit to ensuring a high quality of applications and to meeting agreed deadlines.” And he adds: “The internal control functions of banks should play an important role in this regard, and their role, independence and commitment should be further strengthened.”

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