* Watchdog to start questioning risk weight variations
* Supervisors, banks will have to justify differences
* EBA to issue new rules in 2014, more may be needed
By Huw Jones
LONDON, Dec 18 The European Union's banking
watchdog is to meet national supervisors, in an attempt to iron
out wide differences in how banks price risk and end any
competitive advantage some may gain from having less rigorous
Announcing plans for the meeting, the European Banking
Authority (EBA) on Wednesday published several reports
highlighting wide variations in how banks across the 28-country
bloc assess the risks on their books, giving it ammunition to
take action in the course of next year.
The findings are also being passed on to the EU's executive,
the European Commission, which has powers to draft new laws.
Some U.S. banks have accused their EU-based rivals of
"gaming" the way they assign a risk-weighting to the
derivatives, bonds and other assets they hold.
The weightings are translated, using in-house computer
models at banks, into how much capital the lender must hold in
case the assets turn sour.
"On the basis of data collected form EU supervisors, the EBA
noticed divergences in terms of how regulatory frameworks are
implemented at the national level," the EBA said in a statement.
"Some aspects were identified that may require additional
work to ensure better harmonisation of supervisory practices
across the EU."
Wide variations are not limited to the EU and the Basel
Committee of banking supervisors on Tuesday published its latest
report confirming differences.
Armed with the data, the EBA will use its powers to ask
national supervisors to justify instances where the risk
weightings they approved differ significantly from more typical
levels across the EU.
This work is expected to start immediately while the EBA
fleshes out new rules in 2014 for supervisors and banks to apply
risk weightings more consistently through the use of
benchmarking, with improvements expected from 2015 onwards.
EU banks may have to use the same template for pricing
risks, for example.
The EBA is so far resisting the more drastic action some
regulators are considering as evidence mounts regarding the huge
difference in pricing of risk.
The Bank of England is studying whether to force big UK
lenders that use in-house computer models to also use a common,
standardised method and report both.
BoE policymakers have also hinted at imposing "floors" to
stop capital levels going below a certain amount, irrespective
of what a bank's in-house model says.
EBA has found it difficult to ascertain whether differences
are due to gaming by banks or a lack of consistency among
Furthermore, most of the different types of risk weightings
are not even covered by binding national or EU rules, although
this will change as the watchdog fleshes out mandates for new
rules next year to plug gaps that have driven the variations.
"However not all the drivers are sufficiently covered by
these mandates, therefore additional work seems necessary on a
limited list of drivers," the EBA said.
The biggest variations were in pricing market risks, with
around 30 percent of the differences observed for individual
portfolios and up to 50 percent for aggregated ones.
These differences could be driven by modelling options that
have been explicitly provided for in the rules banks use, the