The European Central Bank published a working paper finding that a small number of very high-severity deficiencies in banks’ internal ratings-based models account for most of the additional risk-weighted assets imposed through supervisory limitations. The total number of deficiencies was not statistically significant in determining the size of these add-ons, indicating that severity matters more than quantity. The analysis covers 267 internal model inspections that resulted in limitations at banks supervised under the Single Supervisory Mechanism between 2014 and 2020. The associated additional Common Equity Tier 1 capital amounted to a double-digit billion euro figure. High-severity findings were concentrated in breaches of Capital Requirements Regulation provisions governing data handling, linking weak data governance to poor model performance and risk underestimation. The paper suggests supervisors could use resources more efficiently by focusing inspections and remediation follow-up on material data governance deficiencies. It also identifies scope to improve risk sensitivity when calibrating supervisory limitations.
European Central Bank2026-08-04
European Central Bank working paper finds severe data governance deficiencies drive supervisory capital add-ons
A European Central Bank working paper finds that a small number of severe deficiencies, rather than the overall number of issues, drive supervisory capital add-ons for internal ratings-based models. Data governance breaches are a key source of high-severity findings, supporting a more targeted and risk-sensitive supervisory approach.