EBA Proposes SREP Framework and Endorses Equivalence Decision of EC
As part of the recent regulatory announcements, the European Banking Authority (EBA) acknowledged the decision of European Commission to consider the supervisory and regulatory framework applicable to credit institutions in Bosnia and Herzegovina and North Macedonia as equivalent to that applied in the European Union (EU). According to the Capital Requirements Regulation (CRR), this would imply that credit institutions in EU can apply preferential risk-weights to relevant exposures to entities located in these countries. Additionally, EBA and the European Securities and Markets Authority (ESMA) launched a consultation on their guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP). As part of SREP, EBA is also consulting on the regulatory technical standards on the additional own funds requirements that could be determined by competent authorities for investment firms. Both regulatory proposals are based on the Investment Firms Directive (IFD) and are being consulted on till February 18, 2022.
Proposed Guidelines on SREP. The draft guidelines from EBA and ESMA set out the process and criteria for assessment of the main SREP elements such as business model, governance arrangements, and firm-wide controls, risks to capital and capital adequacy, and liquidity risk and liquidity adequacy. As part of this assessment, a scoring system is planned to be introduced to facilitate comparability across firms. In addition, the proposed joint guidelines provide clarifications on the monitoring of key indicators, the application of SREP in the cross-border context, and the use of supervisory measures. The guidelines also link the ongoing supervision and the gone-concern concept, by determining whether the investment firm is "failing or likely to fail." The link is made to resolution processes under the Bank Recovery and Resolution Directive (BRRD) for the investment firms that are subject to it, while, in other cases, investment firms assessed as "failing or likely to fail" are expected to undergo an orderly wind-down.
Proposed Regulatory Standards on Own Funds Requirements. For the determination of additional own funds requirements for risks not covered or not sufficiently covered by Pillar 1 requirements, the joint SREP guidelines refer to the draft technical standards. The draft standards propose a number of indicative qualitative metrics to support competent authorities in the identification, assessment, and quantification of material risks and elements of risks not covered or not sufficiently covered by own funds requirements set out in Article 11 of the Investment Firms Regulation (IFR). The proposed metrics reflect size, complexity of activities, and business models of various investment firms across EU. The draft regulatory standards clarify how competent authorities should measure risks or elements of risks that investment firms face or pose to others and that are not covered or not sufficiently covered by the own funds requirements set out in Part Three or Four of IFR. These technical standards are relevant for class 2 and class 3 investment firms and aim to ensure a consistent and proportionate application of supervisory practices across EU, providing granular guidance embedding different sizes, business models, and risk profiles of the investment firms, while maintaining risk-sensitivity of the calculation of capital requirements under Pillar 2. Given that the application of additional own funds requirements results from a comprehensive SREP, these draft standards should be read together with the SREP guidelines. The finalization of the draft technical standards and communication to the European Commission is planned by June 30, 2022.
Related Links
- Press Release on Equivalence
- Press Release on SREP
- Draft Guidelines on SREP (PDF)
- Draft Standards on Own Funds (PDF)
Comment Due Date: February 18, 2022
Keywords: Europe, EU, Banking, Securities, Investment Firms, IFR, IFD, SREP, Regulatory Technical Standards, Own Funds Requirement, Regulatory Capital, CRR, Basel, Pillar 2, ESMA, EBA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
ESRB Recommends Reciprocation of Macro-Prudential Measures in EURelated Articles
APRA Penalizes Heritage Bank for Incorrect Reporting of Capital
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
OSFI Releases Annual Report 2021-2022
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
APRA Finalizes Guidance on Management of Climate Change Risks
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
EBA Publishes Single Rulebook Q&A Updates in November 2021
The European Banking Authority (EBA) Single Rulebook Question and Answer (Q&A) tool updates for this month include answers to 10 questions.
EC Proposes New Measures Under Capital Markets Union Package
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
European Council Adopts Position on Digital Finance Package Proposals
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
PRA Proposes Rulebook Changes; BoE Extends BEEDS Testing Window
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.
FED Outlines Lending Conditions and Supervisory Activities in H1 2021
The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.
EBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR
The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).
APRA Expects Boards to Strengthen Ability to Oversee Cyber Resilience
The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.
