ECB Fines Luxembourg State Bank €1.685 Billion for Concealing Significant Real Risks

The European Central Bank (ECB) has imposed a fine of €1.685 billion on Luxembourg's Banque et Caisse d'Épargne de l'État this Friday for failing to adequately report its risk-weighted assets, which are crucial for determining its actual market exposure and credit risks. This financial institution is owned by the State of Luxembourg itself.

Between 2018 and 2022, this Central European firm undervalued its risk-weighted assets related to foreign exchange exposures for 17 consecutive quarters, as it did not accurately reflect its US dollar-denominated positions on equity in accordance with macroprudential requirements.

Furthermore, between 2021 and 2023, the bank also failed to correctly assess its risk-weighted assets for eight quarters by not accounting for an indirect capital position when calculating the exposure amount of qualifying holdings outside the financial sector. Consequently, the Luxembourg entity did not deduct the relevant exposure amount from its own funds nor applied the correct risk weighting as prescribed by the applicable framework, reports Europa Press.

The undervaluation of risk-weighted assets implies that an entity has not properly calculated its capital requirements and has reported higher capital ratios than it should have. "This prevents the ECB from obtaining a complete view of the risk profile. Capital ratios are key indicators of a bank's capital strength and its ability to absorb losses," states the ECB in its resolution.

The substantial financial penalty imposed on Luxembourg's Banque et Caisse d'Épargne de l'État is one of the largest sanctions ever imposed by the eurozone's supervisory body, now led by Frenchwoman Christine Lagarde.