Model flaws continue to dog ABN Amro

Trim added €10 billion of risk-weighted assets in 2019

Penalties imposed as part of the European Central Bank’s (ECB) targeted review of internal models (Trim) inflated ABN Amro’s credit risk-weighted assets (RWAs) by €5.3 billion ($5.8 billion) in Q4, capping a year full of regulatory add-ons.

The Dutch lender ended 2019 with credit RWAs of €89.1 billion, up +4% on end-September and +5% year on year. The Trim-related uplift was offset slightly by business changes and tweaks to the risk-weighting of equity holdings.

Since Q4 2018, ABN Amro has swallowed RWA increases mandated through the Trim of €10 billion. This translates to an increase to its minimum regulatory capital requirement of €800 million.

 

The bank’s ratio of Common Equity Tier 1 (CET1) capital to RWAs was 18.1% at end-2019, down from 18.2% in Q3 and 18.4% a year ago.

What is it?

Trim was launched by the ECB in 2016 to assess whether the models used by banks to calculate their statutory capital requirements are fit for purpose and align with all applicable regulations.   

The review is being conducted in two phases. The first stage focused on credit risk models for small- to medium-sized enterprises and retail portfolios, counterparty credit risk and market risk models. The second stage concerns models for so-called low-default portfolios.  

By the end of the review, ECB supervisors will have completed around 200 on-site investigations at 65 banks.

Why it matters

The grim Trim news keeps coming for ABN Amro, as the bank said it expects “substantial further impact” from ECB model scrutiny this year.

But there is a silver lining. The add-ons and model tweaks have frontloaded some of the expected RWA inflation from the migration to the Basel III regulatory framework. This means there could be less of a cliff-edge effect on its CET1 capital ratio from the switch to the new regime.

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