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EU watchdog worries about how banks add up risks

A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe, January 9, 2013. R
A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe, January 9, 2013. R

By Huw Jones

LONDON (Reuters) - Regulatory action may be needed to end variations in the ways banks add up the risks on their books to determine how big their capital buffers should be, the European Banking Authority said.

As regulators put in place tougher capital requirements, known as Basel III, following the 2007-09 financial crisis, they want to be sure calculations used by banks to meet them are sound.

Faith in figures that banks publish is seen as core to restoring investor and public trust in the financial sector.

The EBA released interim results on Tuesday of its probe into risk-weighted assets on the main banking books of 89 banks, which it did not name, from 16 European Union countries.

It found material differences between banks, with half caused by different regulatory approaches and the structure of a bank's loan portfolio, and the other half because of the way banks calibrated in-house financial models for adding up risks.

Greater disclosure will not be enough to ease concerns raised by investors and market analysts on the reliability of banks' calculations, EBA chairman Andrea Enria said.

Taking the top 20 banks in its study, the EBA said the difference between the maximum and minimum values for risk was 46 percent.

Enria said that was "significant and calls for further investigations and possibly policy solutions".

The EBA said it will complete further studies by the end of this year, looking into areas such as banks' exposure to small and medium-sized enterprises and the home loans market.

BASEL BASHING

Some regulators and bankers have questioned how risk weighted assets are being added up, amid reports some lenders may be gaming the system so as to have to hold less capital.

The global Basel Committee on Banking Supervision published a study last month into how 16 top banks use its rules to add up risks on their trading books and found considerable variations, mainly due to the use of in-house models at banks.

The Committee is now studying risk weightings on banking books and its secretary general, Wayne Byres, said on Tuesday in a speech in Korea it was reasonable for investors to complain that current risk disclosures are opaque.

Remedies could include a combination of better disclosures, stricter supervision and forcing banks to show risk calculations based on their own and a standardized model.

Byres said this would come at a cost but the "costs of a lack of confidence in bank capital ratios are likely to be substantial, so cost should not be a reason to immediately dismiss any ideas out of hand".

Bank of England director of financial stability Andrew Haldane and others says Basel III, written by the Basel Committee, should be simplified to stop over-reliance on the use of banks' own in-house models for totting up risks.

Byres said Basel's review of risk weights "does not mean, as some have suggested, that we should stop what we are doing to implement Basel III and go back to the drawing board."

Britain's Financial Services Authority is going through risk-weighted asset calculations at domestic banks and will report to the central bank's risk watchdog next month.

(Additional reporting by Steve Slater, Editing by Dan Lalor and David Cowell)

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