Model review adds €13bn to ING’s RWAs

Trim effects projected to raise CET1 requirement by at least €600m

Changes to risk models following a supervisory review caused Dutch lender ING’s risk-weighted assets to bloat +2% in the final quarter of 2019, even as balance sheet assets contracted –3%.

RWAs increased by a net €6.7 billion ($7.4 billion) in Q4 2019. A €13.2 billion RWA add-on, equivalent to 4% of ING’s total, was applied in the final quarter, more than offsetting RWA decreases caused by improvements to the credit quality of its portfolio and positive foreign exchange effects. 

The add-on was absorbed by ING to frontload the expected RWA inflation that will follow the European Central Bank’s (ECB) verdict on its internal risk models for calculating capital requirements. The regulator’s targeted review of internal models (Trim) at ING is scheduled to conclude in the first quarter of this year.

 

The RWA add-on effectively raised ING’s minimum Common Equity Tier 1 (CET1) capital requirement by €600 million. As of end-2016, the bank’s ratio of CET1 to RWAs stood at 14.6%, flat on Q3 but up on the 14.5% disclosed at end-2018. Without the add-on, it would have been 15.2%. 

Who said what

“It’s based on our own scenario analysis, as well as extrapolating earlier feedback on Trim model reviews… for which we still need to receive final closing letters. As we expect to receive these final letters in the coming quarters, we will then have more clarity on the total impact of risk-weighted assets from banking regulation and model reviews. And, as mentioned last quarter, this could bring earlier impacts on the CET1 ratio, though the magnitude of the remaining risk-weighted asset inflation for now is still uncertain. Overall, we remain well positioned to achieve the CET1 ratio ambition of around 13.5%” – Ralph Hamers, chief executive officer at ING.

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 enterprise and retail portfolios, counterparty credit risk and market risk models. The second stage, currently under way, concerns models for so-called low-default portfolios.  

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

Why it matters

The ECB’s internal model detectives have unearthed questionable capital calculation practices at a host of banks, including top lenders ABN Amro, Commerzbank and Santander.

Firms are penalised under Trim for modelled capital outputs that do not adhere to European Union regulations. The RWA add-ons, therefore, can be understood as making up for banks’ lowballing of their risks.

ING did not specify what shortcomings ECB investigators dug up. But Trim findings in general have shown some banks do not have a policy for approving model changes, fail to backtest their models annually, or lack separate teams for developing and validating models. Some banks have also been found to use the standardised approach for certain portfolios without the say-so of their national regulators.

ING’s hope is that by anticipating the Trim impact, its overall RWA inflation will be marginal this year. The bank still expects some uplift because of regulatory changes and macroprudential add-ons. However, by getting the bulk of the Trim effects out of the way in Q4, it’s betting the growth will be slighter and smoother than otherwise.

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