Rewards for failure: the ECB’s topsy-turvy market risk relief

Eurozone banks with better models are least able to offset Covid-driven rise in backtesting multiplier

As the economic lockdown adopted by governments around the world to combat the spread of coronavirus threatened a whole series of unforeseen hits on bank capital, regulators scrambled to provide relief. But rewarding banks for poor model risk management probably wasn’t quite what they had in mind.

And yet, that’s the possible perverse result of a measure adopted by the European Central Bank to help banks avoid a spike in market risk capital. A letter written by ECB president Christine Lagarde