ING takes €5.2bn RWA hit from SA-CCR and last of Trim

Regulatory inflation negates RWA decrease from better loan-book quality

Regulator-mandated model fixes and the phase-out of own formulas for counterparty risk heaped €5.2 billion ($6.1 billion) onto ING’s risk-weighted assets (RWAs) in the second quarter – a double whammy that offset gains of €4.4 billion from recovering loan quality.

The bank’s credit and counterparty credit (CCR) RWAs rose €1.2 billion to €266.4 billion in the quarter, as a final wave of adjustments from the European Central Bank’s (ECB) Targeted Review of Internal Models (Trim), coupled with a mandatory shift to the standardised approach for counterparty credit risk (SA-CCR), overwhelmed the cooldown effect of stronger loan-book collateral.

 

 

The credit and CCR increases were offset by drops in market and operational RWAs, of €1.8 billion each, leaving total RWAs down 0.7% at €308.6 billion. This added 10 basis points to ING’s Common Equity Tier 1 ratio – or CET1 capital divided by RWAs – which hit 15.7% at end-June.

What is it?

The Trim was conducted by the ECB between 2016 and 2020 to assess whether the models used by banks to calculate their statutory capital requirements were fit for purpose and aligned with all applicable regulations.

The first stage focused on credit risk models for small and medium-sized enterprises and retail portfolios, counterparty credit risk and market risk models. The second stage concerned models for so-called low-default portfolios.

By the end of the review, ECB supervisors had completed around 200 on-site investigations at 65 banks. The Trim formally closed in Q2 of this year.

The SA-CCR replaces the Basel Committee on Banking Supervision’s previous standardised CCR methodology. It’s designed to be more risk-sensitive than its predecessor and to clearly differentiate between margined and non-margined trades, as well as recognise netting benefits. Its introduction forms part of the final batch of Basel III reforms, also dubbed Basel IV by the industry.

Why it matters

Is it finally over? The Trim hit harder than most banking executives expected when it kicked off five years ago, and the impact for Dutch lenders was particularly heavy.

To be sure, the banks didn’t sit still. At the same time Trim was piling overlays onto their books, they took advantage of other regulatory shifts to shed RWAs. Earlier this year, ING, ABN Amro and Rabobank managed to drastically cut risk weights in their credit portfolios through reshuffling the mix of internally-modelled and standardised RWAs.

The three will do well to take more self-help over the coming months. The Trim gale may be over, but other elements of so-called Basel IV reforms – of which SA-CCR was only a part – will keep the headwinds coming.

What’s more, the Dutch central bank has decided to belatedly introduce a risk-weight floor on Dutch residential mortgages, starting in January 2022. Regulation will keep hounding the country’s banks well beyond this year.

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