ING’s capital charge for operational risk jumped 8% over Q3, wiping out three quarters’ worth of savings. 

Op risk-weighted assets (RWAs) hit €39.9 billion at end-September, translating to a capital charge of €3.2 billion. This reversed a series of quarter-on-quarter declines starting back in Q3 2019.

The bank said the Q3 increase was due to technical updates to its models. ING uses internal models allowed under the Basel Committee’s advanced measurement approach (AMA) to calculate its op risk capital requirement. 

The spike in operational RWAs was offset by quarterly savings across all other risk categories. Credit RWAs dropped by €10.5 billion, thanks to favourable foreign exchange movements and a culling of risky exposures. Market RWAs fell by €2.3 billion.

ING’s total RWAs fell 3% over the quarter, to €312.3 billion.

What is it?

A bank’s minimum capital requirement equals 8% of its total risk-weighted assets (RWAs) for credit, market and operational risks.

Existing Basel Committee rules allow op RWAs to be calculated under the AMA using banks’ own internal models, which use the frequency and severity of past op risk losses to determine how much capital should be put aside to absorb potential future losses.  

At end-2017, the committee scrapped the AMA and replaced it with a standardised measurement approach (SMA), under which firms will have to calculate their op risk using the standard-setter’s own formulae. The SMA will be phased in from January 2022.

Why it matters

ING has run into trouble with financial regulators in recent years, mainly over failings concerning its anti-money laundering (AML) practices.

Last quarter, some of these failings, and their accompanying fines, likely rolled into the calculation window used by its AMA model, pumping up op RWAs.

Further increases could be on their way. In its Q3 report, the Dutch bank said “[we have] experienced heightened scrutiny by authorities in various countries,” which may lead to new investigations and more fines.

ING may end up being grateful it took the higher op risk charge in Q3, when RWA tailwinds to credit and market exposures helped to offset them. Still, the higher charges are likely to stay for some time considering the bank’s recent loss history, putting pressure on its core capital ratio.

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