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Report finds ‘no evidence’ of banks manipulating risk models 

March 17, 2016

Laura Noonan, The Financial Times

There is “no evidence” to support regulators’ suspicions that under-pressure banks exploited a controversial risk measure to make themselves appear healthier, a new industry-funded report from the consultancy Europe Economics has found.

The report — which was researched independently but funded by finance industry group AFME — looked at how European banks changed the models they used to calculate their most important capital ratios from 2013 and 2014.

Global banking regulators have long suspected that these models were being manipulated to flatter troubled banks, and new rules are already being drafted that give banks less flexibility to do so in the future.

But the research into actual model changes at 40 European banks found no proof of links between model changes and banks’ capital levels, profitability or cost of capital.

“There was no evidence of a biased movement,” said Ross Dawkins, principal at Europe Economics and one of the report’s authors, adding that AFME had no influence on the report’s conclusion.

The European Central Bank — which has made reviewing banks’ internal risk models a key supervisory priority — declined to comment on the research, as did the Bank of England, which has previously voiced concerns about the potential for the models to be manipulated. Read more

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