Model reviews imposed capital charges on top EU banks in Q4

Large banks in the European Union continued to absorb capital add-ons in response to scrutiny of their internal risk models in the last quarter of 2020. A number expect to take further such charges this year, too.

Dozens of top lenders were subject to on-site assessments under the European Central Bank’s (ECB) Targeted Review of Internal Models (Trim) from 2016 through 2020. Some supervisees were saddled with capital add-ons following these to address the “unwarranted variability” of their model outputs compared with benchmarks.

In Q4 2020, Crédit Agricole SA, Societe Generale, Commerzbank, ING and ABN Amro all explicitly reported capital add-ons imposed through the Trim. Societe Generale absorbed the largest charge, which took 36 basis points off its Common Equity Tier 1 (CET1) ratio – effectively cancelling out all gains achieved that quarter through earnings.


Crédit Agricole SA followed with a -20bp deduction, and ABN Amro with an -18bp charge.

Several other banks telegraphed that they’d incur additional charges over the course of 2021. Deutsche Bank said Trim effects would add €4 billion ($4.8 billion) to its risk-weighted assets (RWAs) over Q1, equal to a Pillar 1 CET1 capital charge of €180 million. Crédit Agricole SA expects an €8 billion uplift over 2021 and 2022.

Spanish lender BBVA estimates its CET1 ratio will take a -30bp hit over 2021 because of Trim, and UniCredit a 140bp depletion, though this includes some non-Trim related charges. French bank Natixis expects -20bp of capital depletion through Trim and other capital changes in 2021.

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- to 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.

Why it matters

Trim charges have built up among a small group of banks since early 2019, with Dutch and French lenders taking the most punishment to date among those assessed by Risk Quantum. ABN Amro, for instance, has endured €21 billion of RWA inflation to get its models up to scratch since 2019.

The timing of the charges does not adhere to a fixed schedule, but instead depends on when the ECB finalises its results for each bank. This has injected an element of volatility to some firms’ capital ratios in recent years. Heading into 2021, it may lead some banks to hold back the size of planned capital distributions to compensate.

For some, though, there may be a silver lining to all these add-ons. Most EU banks expect their RWAs to inflate anyway over the next few years as Basel III rules are implemented. The Trim add-ons help shrink the gap between current and projected Basel III RWAs, effectively frontloading some of the capital impact of the new rules. The pain endured through Trim today, then, may mean less hassle for these banks once the new rules come into effect.

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