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Regulators may ask EU banks to find more capital next year

Watchdogs to scrutinise how banks in EU calculate capital buffers.

LONDON – Regulators may ask banks in the European Union to find more capital next year when they run an exercise to crack down on wide variations in how lenders calculate their capital requirements.

The European Banking Authority (EBA), the bloc’s banking watchdog, said on Monday that the first EU-wide benchmarking exercise under its new rules will be run based on banking data for the fourth quarter of this year.

“Institutions shall report the information by 11 April 2016,” EBA said in a statement.

“This work is part of the EBA’s efforts to address possible inconsistencies in the calculation of risk weighted assets across the EU single market and to ultimately restore confidence in EU banks’ capital and internal models,” EBA said.

The EBA and the global Basel Committee of banking supervisors have published studies showing big variations in how much capital banks hold against the same type of assets.

Big banks use their own computer models to assign a level of risk to each asset on their books, which in turn determines how much capital should be held to safeguard against the loans or other assets turning sour.

Some regulators suspect banks may be underplaying risks to cut down on the amount of capital required. Such suspicions have led Britain, the United States and Switzerland to put a greater emphasis on blunt capital tools that do not take an asset’s riskiness into account.

The Basel Committee is considering a “floor” of capital for banks, irrespective of the amount their models say is needed.

Last year, Europe’s main banks had their balance sheets scrutinised to make sure they were valuing assets properly and not trying to avoid making provisions for worsening loans.

The EBA benchmarking exercise will now look at how banks tot up risks from their assets to determine their capital levels.

The exercise will allow an assessment of differences in risk weighted assets across EU banks and the identification of potential underestimation of capital requirements, the EBA said.

In the euro zone, the exercise will be led by the European Central Bank, supervisor of the single currency area’s top lenders.

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