ECB published a letter by Andrea Enria, Chair of the Supervisory Board of ECB, to Piernicola Pedicini, a member of the European Parliament. The letter sets out some considerations to help better understand the supervisory role and policies of ECB. In response to the question on approach to prudent valuation, Andrea Enria advised the members to refer to ECB Banking Supervision’s general approach to dealing with the valuation of trading book assets. The supervisory objective is to ensure that balance sheet positions are valued, managed, and controlled appropriately. From its inception, ECB Banking Supervision has promoted awareness of valuation risks and the application of prudent valuation and risk management approaches.
As with the approach to prudent valuation, processes and methodologies have been developed to ensure a level playing field for banks with a broad range of risk profiles. ECB Banking Supervision has developed methodologies and processes to adequately identify and assess the different types of risks that banks under its supervision are exposed to. In line with the 2019 supervisory priority to focus on trading risk and asset valuations, ECB Banking Supervision employs on-site inspections at banks that have major trading operations and exposures to instruments measured at fair value. These inspections allow ECB to evaluate how well banks have implemented the valuation framework and the controls of the pricing models that are used to produce fair values.
As described in more detail in the Supervisory Manual, the key supervisory tool supporting ongoing assessments is the Supervisory Review and Evaluation Process (SREP). Its aim is to capture the best possible overall picture of the risk profile of an institution, taking into account risks, risk severity, and mitigating factors. ECB Banking Supervision applies the common Single Supervisory Mechanism (SSM) SREP methodology to all significant institutions, facilitating peer comparisons and large-scale transversal analyses. The methodology thus ensures a level playing field for supervised institutions, while taking into account their specific features.
In the letter, Andrea Enria mentioned that ECB Banking Supervision fully respects the unity and integrity of the internal market. By carrying out intrusive and effective banking supervision, without any unjustified discrimination among the banks under its supervision, ECB contributes to the smooth functioning of the single market for financial services. As also noted by EC in its review of the application of the SSM Regulation, the establishment of integrated supervision of credit institutions at the European level has brought clear benefits in terms of a level playing field, along with the confidence and financial stability, which form the basis of increased public confidence in the European banking sector.
Keywords: Europe, EU, Banking, SREP, Banking Supervision, SSM, Supervisory Manual, Financial Stability, Trading Book, European Parliament, ECB
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