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An external assessment of the Supervisory Review and Evaluation Process (SREP) was published by the ECB

On 17 April 2023, the ECB published a report on the results of an external assessment of the Supervisory Review and Evaluation Process (SREP). The SREP is a comprehensive review conducted annually by the ECB to assess banks’ capital adequacy, risk management, and governance and to identify potential weaknesses and risks in their business models. The report was drafted by a group of independent experts appointed in September 2022 who had access to the documentation of the ECB for seven months and consulted with numerous stakeholders. The system is now considered mature enough to make processes even more efficient by making it more integrated and risk sensitive. 

This can be achieved by considering some adjustments to current procedures, mainly:  

  • Further enhancing risk-based supervision and empowering supervisory judgement, thus emphasizing enhanced risk-based prioritization. 
  • Promoting the better integration of the outcome of other supervisory assessments into the SREP. 
  • Streamlining SREP processes and shortening their timeline in order to allow the SREP to evolve towards a simpler and leaner process. 
  • Rebalancing capital and qualitative measures: While the European banking supervision has made significant progress in ensuring an adequate level of capitalization, this approach appears to be too capital centric. Instead, the report recommends that ECB strengthens the link between SREP scores and qualitative measures encouraging banks to address inadequate business models and governance practices, as capital alone cannot address all risks.  
  • Reforming the process for determining Pillar 2 capital requirements as ECB’s current process combines a holistic approach with some elements of a risk-by-risk approach, thus making the process operationally complex.

European banking supervision has already been focusing on the need to target specific risk areas during the SREP and prioritize follow-up actions. This will enable the implementation of specific recommendations of the report as early as the 2023 cycle. For example, supervisors will introduce a new risk tolerance framework to help banks focus on critical vulnerabilities and strategic priorities with increased flexibility in planning activities based on a multi-year SREP. The report and its input will also be taken into account as a part of the review of supervisory processes planned for 2024. 

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RBI Regulatory Advisory

Raiffeisen Bank International AG | Member of RBI Group | Am Stadtpark 9, 1030 Vienna, Austria  | Tel: +43 1 71707 - 5923