European Central Bank continues crackdown on financial risk mistakes
As part of a crackdown on banks that miscalculate financial risks, the European Central Bank (ECB) has imposed an administrative penalty of €4.47 million on de Volksbank N.V. after the bank miscalculated its risk weighted assets for exposures to regional governments outside the European Union.
It was discovered that from 2014 to 2021, the bank calculated lower risk weighted assets for these exposures than it should have done for 29 consecutive quarters.
The bank used a lower risk weight than banking rules prescribe with deficiencies in internal controls preventing the bank from detecting this mistake. The bank reported wrongly calculated figures preventing the ECB from having a comprehensive view of its risk profile.
Risk-weighted assets are a measure of the risks a bank has on its books and enables the calculation of the bank’s capital needs. By underestimating risk-weighted assets Volksbank N.V. did not calculate its capital needs properly and reported higher capital ratios than it should have done. A bank’s capital strength and its ability to absorb losses relies on these key indicators.
The ECB is responsible for monetary policy of the European Union (EU) member countries that have adopted the euro currency and has its headquarters in Frankfurt. When deciding on the amount of a penalty to sanction a bank, the ECB applies its Guide to the method of setting administrative pecuniary penalties. Out of the severity categories “minor”, “moderately severe”, “severe”, “very severe” and “extremely severe”, the ECB classified the Volksbank N.V. breach as “severe”.
In 2022, the ECB imposed an administrative penalty of €3.755 million on Banque et Caisse d’Epargne de l’Etat, Luxembourg after the bank miscalculated and misreported, its risk-weighted assets for exposures to banks.
The ECB’s power to impose sanctions stems from Article 18(1) of Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. The Decision to impose a sanction can be challenged before the Court of Justice of the European Union, although there are time limits to any action.
The ECB is increasingly showing it is prepared to instigate significant penalties in a bid to ensure compliance across its region having imposed an administrative penalty of €3.145 million on ABANCA Corporación Bancaria, S.A. (ABANCA) in December last year after it “knowingly failed to report a significant cyber incident to the ECB within the prescribed two-hour deadline.”
Situations like this can result in shareholders being disgruntled and bringing action against Directors or Officers alleging they failed to comply by committing wrongful acts. The personal exposure held by directors and officers comes with an unlimited liability. This can be protected through carefully arranged Management Liability Insurance. W Denis Europe arranges insurance for Financial Institutions, including Directors & Officers Liability, as well as other Civil Liability. For more information, or a quotation, please contact W Denis Europe:
Western Europe &/or elsewhere worldwide