The European Central Bank is looking at the trading books of Deutsche Bank AG, BNP Paribas SA and Société Générale SA as it inspects how the three groups use the leeway they have to price so-called Level 3 instruments, people briefed on the matter told Bloomberg News.
The unnamed sources said the lenders were asked several months ago for information on how they price bonds, stocks and derivatives on their trading books, according to the June 13 report. The so-called Level 3 instruments, the fair value of which cannot be determined easily, pose potential risks to financial stability, the newswire noted.
Deutsche Bank CFO James von Moltke had reportedly said that German lender's Level 3 assets had dropped to an unadjusted €22 billion, while that of BNP Paribas and SocGen were at €11.7 billion and €6.6 billion, respectively, at 2017-end.
The ECB is about to conclude the review, the sources said. If the risks from the instruments were deemed underpriced, the central bank may ask the lender to revalue their Level 3 assets through either writing down their book value or assigning them high risk weightings, both of which will still negatively impact their regulatory capital ratios, the report said.
ECB Chair Daniele Nouy reportedly said the regulator had put major trading banks under "a combination of enhanced monitoring, 'deep dives' and on-site inspections" on Level 3 instruments, but did not specify which firms the ECB had targeted.