The European Central Bank (ECB) has set out its supervisory priorities for 2023-2025 for the Banking Supervision. The work program builds on a thorough assessment of the main risks and vulnerabilities for supervised banks, considers the progress made on the priorities endorsed last year, and draws on the outcome of the 2022 Supervisory Review and Evaluation Process (SREP).
The planned work for the next three years has been categorized into three supervisory priorities set by the regulator:
- Strengthen resilience to immediate macro-financial and geopolitical shocks. The 2023 EU-wide stress test exercise, coordinated by the European Banking Authority (EBA), will support the ECB intention ensure that directly supervised banks strengthen their resilience to immediate macro-financial and geopolitical shocks. The key vulnerabilities to be addressed include shortcomings in credit risk management, including exposures to vulnerable sectors, and lack of diversification of funding sources and deficiencies in funding. The work program includes targeted reviews of IFRS 9 and of loan origination and monitoring, on-site inspection campaigns on IFRS 9, targeted joint on-site/internal model investigations, follow-ups by supervisory teams to assess internal ratings-based, or IRB, model changes related to new regulatory requirements, and targeted review of TLTRO III exit strategies for banks with material reliance on this funding source.
- Address digitalization challenges and strengthen management bodies’ steering capabilities. This priority involves focus on deficiencies in digital transformation strategies, operational resilience frameworks, functioning of management bodies, and risk data aggregation and reporting. The work program includes targeted reviews of banks’ digital transformation strategies, their use of innovative technologies, assessment of their business models, and targeted reviews and on-site inspections of outsourcing arrangements, cyber-security management. With respect to risk data and aggregation, the work program includes refinement and communication to banks of supervisory expectations related to the implementation of risk data aggregation and risk reporting principles, targeted engagement and horizontal analysis across supervisory teams and/or on-site inspections for banks with persistent shortcomings, and an on-site inspection campaign on risk data aggregation and reporting (extension from 2022).
- Step-up efforts in addressing climate change. Supervisors will follow up on the deficiencies identified during the 2022 climate risk stress test and thematic review, monitor progress, and take enforcement action if necessary. For this, supervisors have set institution-specific remediation timelines for achieving full alignment with expectations by the end of 2024. The work plan includes targeted deep dives to follow up on shortcomings identified in the context of the 2022 climate risk stress test and thematic review, review of banks’ compliance with new reporting and Pillar 3 disclosure requirements related to climate risk, benchmarking of bank practices against supervisory expectations, and deep dives on reputational and litigation risk associated with climate-related and environmental strategies and risk profiles for selected banks. Additional work activities will focus on preparatory work for reviews of banks’ transition planning capabilities and readiness for environmental, social and governance (ESG) related mandates expected in the sixth Capital Requirements Directive (CRD VI) and targeted on-site inspections on climate-related aspects, either on a stand-alone basis or within reviews of individual risks (for example, credit risk, governance, business model).
Keywords: Europe, EU, Banking, Basel, ESG, Climate Change Risk, Stress Testing, Scenario Analysis, Credit Risk, IFRS 9, Regtech, Outsourcing Risk, Cyber Risk, Operational Resilience, CRD, ECB
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