ECB published a letter by Andrea Enria, Chair of the Supervisory Board of ECB, to members of the European Parliament. The letter sets out certain considerations to better understand the role of ECB in the sphere of prudential banking supervision. As a general principle, banks are responsible for determining their internal capital targets, provided they adhere to a range of minimum regulatory and supervisory thresholds. ECB Banking Supervision continually assesses the situation of supervised banks to ascertain whether they are in a position to comply with all prudential requirements in the foreseeable future. Heightened scrutiny is applied in periods when the business model of a bank undergoes changes that impact its risk profile and, thus, its capital and liquidity planning.
The letter specifies that ECB Banking Supervision engages in detailed discussions with these banks on their strategic and financial planning to gain assurance that they are maintaining adequate levels of capital and liquidity, commensurate with their risk profile, and the buffers needed to manage the risks inherent in their strategic plans. As described in more detail in the Supervisory Manual, the key supervisory tool supporting ongoing supervisory 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. The 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 across supervised institutions, while taking into account their specific features.
In the letter, Andrea Enria stressed that the ECB Banking Supervision carries out all its supervisory tasks to promote the safety and soundness of the banking sector and the stability of the wider financial system. The ECB Banking Supervision is tasked with maintaining a level playing field, not enforcing competition (which is the responsibility of EU and national competition authorities). By ensuring even and consistent supervisory practices across euro area, the ECB Banking Supervision may indeed contribute to competitiveness in the banking sector. With respect to dealing with less liquid and illiquid securities, the supervisory objective is to ensure that balance sheet positions are valued, managed, and controlled in an appropriate manner. From its inception, the ECB Banking Supervision has promoted awareness of valuation risks and the application of prudent valuation and risk management approaches.
Keywords: Europe, EU, Banking, SREP, Banking Supervision, SSM, Supervisory Manual, European Parliament, ECB
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