European Central Bank Banking Supervision fines Banque Internationale à Luxembourg EUR 3.255 million for internal models breach that overstated capital for three quarters

The European Central Bank has imposed an administrative penalty of EUR 3.255 million on Banque Internationale à Luxembourg for intentionally failing to apply its approved internal models when calculating expected loss for retail and corporate exposures in default. Because the bank did not calculate expected losses as approved, it could not accurately determine the internal ratings-based shortfall that should have been deducted from capital. This led it to report higher capital and higher capital ratios than it should have for three consecutive quarters, from the fourth quarter of 2023 to the second quarter of 2024. Under the internal models framework, when expected loss exceeds provisions, the difference must be subtracted from capital so that capital adequately reflects risk exposure. The ECB classified the breach as severe under its guide to setting administrative pecuniary penalties. The bank has the right to challenge the ECB's decision before the Court of Justice of the European Union.