Reuters reports that the European Central Bank said that large euro zone banks have been underreporting their risky assets by using their own models to quantify potential losses.

A five-year review by the ECB found that the euro zone's top banks had undercounted their risk-weighted assets by 275 billion euros, or 12%, for example by underestimating losses in cases where a borrower goes bust.

This lowered the ratio between those banks' capital and their risky assets, a key gauge of a lender's solidity, by 70 basis points on average between 2018 and 2021.

The ECB said "further improvement" was needed in some areas, for example to ensure that the probability of default that banks assume is in line with long-run averages and sufficiently conservative.

The way borrowers are rated also needed "to be amended or adapted", the euro zone's top banking supervisor added.