© Bloomberg News

European banks are using such different estimates of risk that some are holding between double and four times as much capital as their competitors hold against potential losses from apparently similar loans, analysis by Barclays shows.

Lloyds Banking Group assigns a risk weighting of 28 per cent to its portfolio of A-rated corporate loans, while BNP Paribas gives the same category a 14 per cent risk rating. As a result, BNP is required to hold half as much capital.

The research by Simon Samuels, banks analyst, found even wider disparities for double A rated loans, where the range was 6 per cent to 27 per cent and triple B minus rated loans, which ranged from 29 per cent to 66 per cent.

“The variation between banks is enormous,” Mr Samuels wrote in his research note. “The variation year on year within the same banks is, if anything, more disturbing, with banks often reporting risk weightings going up or down 20 per cent one year to the next within the same credit bucket.”

The findings add fuel to the growing criticism of the current so-called Basel III bank safety rules, which allow banks to use their own models to measure risk. Surveys of investors have found a widespread belief that banks massage their models to cut their capital requirements and critics including Andy Haldane, a Bank of England official, and Tom Hoenig of the US Federal Deposit Insurance Corporation, have called for an ending of the reliance on internal models.

“It has been clear for some time that risk weightings must be made more comparable across banks or the Basel capital framework will lose its credibility,” said Douglas Elliott, a Brookings Institution scholar who studies bank regulation.

The Barclays research focused exclusively on European banks because US banks are still in the process of switching to internal models and they do not yet make as much public about the way they estimate risk for specific groups of loans.

Mr Samuels and other analysts warned that some of the disparities were attributable to genuine differences in loan portfolios. Risk models are heavily dependent on past experience. Lloyds has a backlog of troubled corporate loans that it inherited after taking over HBOS, so it would naturally have higher risk weightings than a bank without that experience. The UK lender has also had a historic reputation for conservatism. BNP has said its models assume a default rate that is twice its actual experience over the past 10 years.

The Basel Committee on Banking Supervision, which sets the global rules, has launched a research project into variation that will probably report back around the end of the year. The regulatory body said last summer that it was trying to determine how much of the bank-by-bank differences are “not reflective of underlying risk”. The group has already raised the possibility of setting minimum risk weightings for trading book assets.

Dropping models would have drawbacks, say some analysts. Simon Gleeson, partner at Clifford Chance, said: “We need to be careful of the argument that because sophisticated modelling produces inaccurate results, it is therefore useless – banks need to be incentivised to do more risk analysis, not less.”

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