Growing competition in banking has led some EU banks to relax the way they assess and report their investment risk, according to a new study from the European Central Bank.

The survey was prepared by the Banking Supervision Committee of the European System of Central Banks (ESCB), which is comprised of national central banks and banking supervisory authorities within the EU.

While overall exposure to hedge funds among large EU banks remains modest, the survey highlights problems in relation to some banks with large positions in investments of this type.

Unlike mutual funds, hedge funds have fewer obligations to redeem investors' funds on notice.

"Most of the banks extensively dealing with hedge funds had specific guidelines and advanced risk management system for this business or were in the process of improving them further. However, there was also evidence that banks quite often traded with hedge funds in over the counter instruments on variation margin only," the report said.