After the banking crisis it became clear that banks had been too smart for their regulators and it seems this is still the case, if the findings of a survey by Europe's top banking regulator is anything to go by.
The European Banking Authority has found discrepancies in the ways banks measure the riskiness of their assets. This could reduce the amount of capital they need to hold.
The EBA, which oversees regulation of banks across the European Union, concluded there were "material differences" in the way risks are measured across 89 banks in 16 countries. Andrea Enria, chairman of the EBA, said some of the differences could be accounted for by more explanation about the methodology being used. "But this is not enough. The remaining dispersion is significant and calls for further investigations and possibly policy solutions," he added.
Quite. The Financial Services Authority is already on the case: in November the Bank of England's financial policy committee told banks to make a more "honest" assessment of potential losses they face and to report to the regulator by March. One of the concerns centred on the so-called risk weighted assets, known as RWAs, that the EBA has also been analysing. More work is under way across Europe. It sounds dry and technical but it is absolutely crucial. Unless regulators can be confident about the riskiness of the assets banks hold they cannot have any confidence that banks have enough capital.
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