Europe needs swagger

Time to review the risk weights of assets: ECB Official

Global assessment of the banking sector could have been on the wrong track, a member of the European Central Bank's (ECB) governing council has told CNBC.

Speaking to CNBC in Lima where the International Monetary Fund and World Bank was holding its annual meeting, Erkki Liikanen, who is also governor of the Bank of Finland, said that asset quality reviews of banks' books last year could have weighted the risks of those assets incorrectly.

"When we assessed the capital requirements (of banks) on the basis of risk-weighted assets, (we saw that) housing has very low risk-weights but small and SMEs have very high risk weights."

"But if we look at our experience of the crisis, housing has been the biggest source of problems -- so perhaps there is something wrong there. You should be able to diversify risks if you have many SMEs that you finance, but with housing you have to be careful, because bubbles are very heavy because they have a deep impact on a whole population," he said.

"If there are evident complexities (in the reviewing process) which don't serve the main purpose then of course you need to look at it."

Erkki Liikanen, governor of the Bank of Finland
Bloomberg | Getty Images

The review, Liikanen said, could have inadvertently made it harder for small and medium-sized enterprises – often seen as the backbone of the European economy -- to access funding.

"It wasn't our purpose to make funding of the SMEs more complicated and perhaps create a bubble in the housing market, it should be perhaps more balanced. I just feel that if there is a problem, as this has been identified, we must be able to look at it."

Read MoreECB gets tough on risky bank assets

With financial stability in the region a priority following the 2008 global financial crisis, one of the key areas in focus for European policymakers like Liikanen is the banking sector.

European banks such as Credit Suisse, Deutsche Bank and Barclays have gone through a period of spending cuts, deleveraging and reforms in order to reduce risks and meet new banking regulations in Europe, such as higher capital ratios, designed to prevent further financial crises.

One of the largest initiatives created in Europe in a response to the 2008 financial crisis was the creation of a banking union in the euro zone and moves to establish a single supervisory mechanism to oversee the financial sector to ensure it abides by a European banking rulebook.

While such initiatives were a step in the right direction, Liikanen said, more needed to be done to ensure banks could lend and help European economies grow further.

Read MoreHow many banks will fail ECB stress tests?

"I would say that we have gone a long way but not all the way. What we've done is to create a banking union and single supervisory mechanism which means that the same rulebook and practices apply to all."

"But there is still a problem that the amount of non-performing loans is still too high. Before banks are really on solid ground to contribute to the growth of the economy you must be able to cut these down," he said.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld

Clarification: This story has been updated since publication to clarify Mr Liikanen's comments on risk weights.