EBA published a report on convergence of supervisory practices in 2019. The report provides an update on the policy developments and activities supporting supervisory convergence, along with the supervisory convergence plan for 2020. Overall, in 2019, EBA saw considerable achievements in supervisory convergence and good level of engagement in supervisory colleges across EU. The report finds that the key topics for supervisory attention identified in the 2019 convergence plan have been largely implemented in supervisory work across EU. The key topics that have been identified in the supervisory convergence plan for 2020 include information and communication technology (ICT) risk and operational resilience, loan origination standards, profitability, and capital and liability management.
The report finds that the four key focus areas identified in the convergence plan for 2019—internal governance, ICT risk and operational resilience, non-performing exposures, and benchmarking of internal models—have been largely implemented in supervisory work across EU, although to different degrees. With respect to the Supervisory Review and Evaluation Process (SREP) practices and the associated EBA recommendations, the assessment found improvements and increasing consistency in the application of Pillar 2 requirements. The requirement for the establishment of a nonperforming exposure (NPE) strategy and related operational plan was well-implemented, particularly for institutions with relatively high NPE/non-performing loan levels. Refinement is expected, mainly in the quality of reduction plans, particularly for smaller and less complex institutions. Additional areas that will require further attention include the ongoing assessment of the individual and collective suitability of the members of the management bodies and the formalization of the ICT risk appetite and how it cascades down the organization ICT risk governance and controls.
This report is part of the work of EBA to actively foster and promote supervisory convergence across EU to bring about strong supervisory standards and a common supervisory culture. One of the core elements covered in this report is the practical application of the Single Rulebook by competent authorities in their supervisory activities. For the first time, the report incorporates information on convergence in supervisory colleges that used to be included in a separate report in the past. Supervisory colleges made considerable efforts in 2019 to conduct thorough group risk assessments and the areas that received the most supervisory attention correspond to the key topics that EBA put forward in its 2019 convergence plan. Further convergence is required in the assessment of interest rate risk in the banking book (IRRBB) in some colleges and in channeling the findings of the group recovery plan assessment and the money laundering/terrorist financing risk assessment into the SREP. In addition, colleges should make sure that a stand-alone group liquidity risk assessment report is prepared and shared, a lack of which hampers a thorough assessment of the main components of liquidity risk and is not in line with the legal requirements.
The report also incorporates the supervisory convergence plan for 2020. The plan has identified five key topics for supervisory attention for 2020: ICT risk and operational resilience, loan origination standards, profitability, capital and liability management, and money laundering and terrorism financing (ML/TF) risk and other conduct risk for prudential supervisors. These topics for supervisory attention for 2020 have become even more relevant in the context of the COVID-19 crisis. The plan makes reference to the significant supervisory efforts and resources that will be dedicated to monitoring the crisis preparedness of institutions in 2020 and further implications of COVID-19 on credit institutions` operations and financial soundness. In addition, and based on the observations of this report, EBA intends to further investigate the use of supervisory measures under Pillar 2 and provide additional clarification in the update of the SREP guidelines.
Keywords: Europe, EU, Banking, Credit Risk, NPLs, Loan Origination, Guidelines, Mortgage Credit Directive, ESG, Governance, AML, Fintech, Artificial Intelligence, Big Data, COVID-19, EBA
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