Featured Product

    ECB Releases Results of Supervisory Review and Evaluation for 2019

    January 28, 2020

    ECB published a report on the outcomes of the Supervisory Review and Evaluation Process (SREP) for 2019. Overall, as a result of the assessment, SREP requirements and guidance for Common Equity Tier 1 (CET1) capital in 2019 remained unchanged from 2018, at 10.6%. However, the review shows areas of notable deterioration in SREP scores, due to which supervisors will intensify assessments of the sustainability of business models and will continue to require banks to enhance the effectiveness of their management bodies and to strengthen internal controls and risk management.

    The average Pillar 2 requirement, set by the supervisor for each bank, stood at 2.1% and the non-binding Pillar 2 guidance at 1.5%, both unchanged from the previous year. Most significant institutions have CET1 levels above the overall capital requirements and guidance. However, six out of the 109 banks that participated in the 2019 SREP cycle showed CET1 levels below the Pillar 2 guidance. For the banks that have not taken satisfactory measures in the last quarter of 2019, remedial actions have been requested within a precise timeline. Additionally, Internal Capital Adequacy and Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP), which are the two key risk management processes for capital and liquidity, showed significant need for improvements.

    The share of banks receiving an overall score of 3 increased to 43% in 2019 from 38% in 2018. Meanwhile, the share of banks classified as worst performers, scoring 4, decreased to 8% from 10%. The percentage of banks that scored 2 decreased to 49%, from 52%. No significant bank scored 1. The following are the three areas of notable deterioration in the SREP scores:

    • An assessment of business models showed that the earnings of most significant institutions are below their cost of capital. This hampers their capacity to organically generate capital and to issue new equity. Concerned by low profitability, supervisors are increasingly focusing on banks’ future resilience and the sustainability of their business models.
    • Internal governance is proving to be an area for supervisory concern, as governance scores have worsened overall over recent years. Three out of four banks (76%, up from 67% in 2018) scored 3. Only 18% of banks achieved a score of 2, down from 25% in 2018. Findings show that in a significant number of instances management bodies are not effective and internal controls are weak.
    • Furthermore, some banks reported material losses, which were mostly due to conduct risk events. This is reflected in the growing number of banks that scored 3 for operational risk: 77%, up from 63% in 2018. IT/cyber risks have also been a key source of operational risk.

    The SREP is an annual exercise in which the supervisor examines bank risks and subsequently determines individual capital requirements and guidance for each bank, in addition to the legally required minimum capital. For the first time, ECB also published aggregate data by business model and bank-by-bank information on Pillar 2 requirements in an effort to improve transparency. For this SREP cycle, 108 banks agreed to this disclosure. The SREP assesses four main elements: the viability and sustainability of business models, the adequacy of internal governance and risk management, the risks to capital (with its sub-components of credit risk, market risk, interest rate risk in the banking book, and operational risk) and the risks to liquidity and funding. The assessment of each element leads to an element-specific score from 1 to 4 (with 1 being the best score and 4 being the worst score) for every bank; these specific scores are then combined into an overall score from 1 to 4, in line with the EBA guidelines on SREP.

     

    Related Links

    Keywords: Europe, EU, Banking, SREP, Basel III, SSM, Regulatory Capital, Credit Risk, Operational Risk, Pillar 2, Liquidity Risk, Internal Governance, ECB

    Featured Experts
    Related Articles
    News

    UK Government to Set Out Rules on Wind-down of Critical Benchmarks

    HM Treasury notified that, after considering all responses, the government intends to bring forward further legislation, when the Parliamentary time allows, to address issues identified in the consultation on supporting the wind-down of critical benchmarks.

    May 07, 2021 WebPage Regulatory News
    News

    EIOPA Launches Stress Test for Insurance Sector in EU

    EIOPA launched the 2021 stress test for the insurance sector in EU.

    May 07, 2021 WebPage Regulatory News
    News

    UK Authorities Publish Third Edition of Regulatory Initiatives Grid

    UK authorities jointly published the third edition of Regulatory Initiatives Grid setting out the planned regulatory initiatives for the next 24 months.

    May 07, 2021 WebPage Regulatory News
    News

    EC Consults on Regulation on Non-Financial Sustainability Disclosures

    EC is requesting feedback on the proposed Commission Delegated Regulation on the content, methodology, and presentation of information that large financial and non-financial undertakings should disclose about their environmentally sustainable economic activities under the Taxonomy Regulation.

    May 07, 2021 WebPage Regulatory News
    News

    OSFI Outlines Prudential Policy Priorities for Coming Months

    OSFI has set out the near-term priorities for federally regulated financial institutions and federally regulated private pension plans for the coming months until March 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BIS Announces TechSprint on Innovative Green Finance Solutions

    Under the Italian G20 Presidency, BIS Innovation Hub and the Italian central bank BDI launched the second edition of the G20 TechSprint on the lookout for innovative solutions to resolve operational problems in green and sustainable finance.

    May 06, 2021 WebPage Regulatory News
    News

    ACPR Publishes Version 1.0.0 of RUBA Taxonomy

    ACPR published Version 1.0.0 of the RUBA taxonomy, which will come into force from the decree of January 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    EBA Proposed Regulatory Standards for Central Database on AML/CFT

    EBA proposed the regulatory technical standards on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ECB Responds to EC Consultation on Crisis Management Framework

    ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU.

    May 06, 2021 WebPage Regulatory News
    News

    BCBS, CPMI, and IOSCO to Survey Market Participants on Margin Calls

    BCBS, CPMI, and IOSCO (the Committees) are inviting entities that participate in market infrastructures and securities markets through an intermediary as well as non-bank intermediaries to complete voluntary surveys on the use of margin calls.

    May 05, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6942