In 2017 and 2018, for seven consecutive quarters, Banque et Caisse d’Epargne de l’Etat, Luxembourg reported lower risk-weighted assets than it should have done for exposures to other banks. Due to significant deficiencies in its internal control framework on internal models, during that period the bank was unable to detect an inaccurate calibration of the probability of default model for exposures to other banks.

Risk-weighted assets are a measure of the risks a bank has on its books. They serve as a basis for banks to calculate their capital needs. Underestimating risk-weighted assets means the bank did not calculate its capital needs properly and reported a higher Common Equity Tier 1 (CET1) ratio than it should have done. The CET1 ratio is a key indicator of a bank’s capital strength and its ability to absorb losses.

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. In this case, the ECB classified the breach as severe. More details on sanctions are available on the supervisory sanctions web page.

The bank may challenge the ECB’s decision before the Court of Justice of the European Union.

Notes

• 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 imposing a sanction may be challenged before the Court of Justice of the European Union under the conditions and within the time limits provided for in Article 263 of the Treaty on the Functioning of the European Union.

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