The European Central Bank (ECB) recently published results of the Supervisory Review and Evaluation Process (SREP) for 2022 as well as imposed an administrative penalty of EUR 6.825 million on Landesbank Hessen-Thüringen Girozentrale (Helaba) for incorrect reporting of calculated risk-weighted assets for market risk. Additionally, the European Commission (EC) adopted the Delegated Regulation 2023/314 that amends the regulatory technical standards laid down in the Delegated Regulation 2016/2251 with regard to the date of application of certain risk management procedures for the exchange of collateral.
The 2022 SREP assessment is based on year-end data for 2021 and the decisions resulting from the 2022 SREP assessment will be applicable in 2023. The SREP results show that banks have improved their profitability due to rising interest rates and maintained solid capital and liquidity positions, with the overall SREP scores broadly unchanged. The weighted average of Pillar 2 requirements for Common Equity Tier 1 (CET1) capital remained unchanged at 1.1% from last year. However, the weighted average of overall capital requirements and guidance in CET1 increased to 10.7%, up from 10.4%, reflecting the impact of macro-prudential policies. Moreover, the Pillar 2 guidance (P2G) remained largely unchanged at an average of 1.3%. While the 2022 SREP painted an overall positive picture, banks are advised to address longer-standing weaknesses and prepare for emerging structural change. The following are the key outcomes of the SREP exercise for 2022:
- The SREP resulted in Pillar 2 requirement (P2R) add-ons for non-performing exposures for 24 banks; these banks fell short of the ECB coverage expectations for non‑performing loans (NPLs) granted before April 26, 2019. The aggregate shortfall in NPL provisions amounted to 7 basis points of risk-weighted asset at the end of the SREP cycle. A capital add-on was also included in the P2R for a few banks with very high exposures to leveraged transactions or highly deficient risk controls in the line of business.
- The risk of excessive leverage was assessed for the first time in the 2022 SREP cycle with a view to identifying banks that may be subject to qualitative measures or Pillar 2 requirements for the leverage ratio. In the 2022 SREP cycle, such assessments were performed for 36 institutions, with 18 resulting in low risk and the remaining 18 in moderate or higher risk. Following the assessments, qualitative measures were issued for four institutions.
- ECB imposed qualitative measures, mostly in the areas of governance and business models, but some also concerning credit, market, and operational risks. Supervisors looked at the broader quality of internal risk control frameworks of banks and the effectiveness of management bodies of banks, in line with the supervisory priorities set for 2022-24. Total number of measures increased by 14%, compared to 2021.
- The supervisors noted that banks need to better identify, assess, manage, and transparently disclose their exposures to climate-related and environmental risks. As a next step, supervisors have asked banks to take concrete actions for compliance by the end of 2024.
- Findings on internal governance highlighted concerns about the effectiveness and composition of management bodies, their collective suitability and their oversight role, whereas the main concerns in the area of risk management relate to banks lacking clarity about their risk appetite and having inadequate practices to assess and manage climate-related and environmental risk. The results show that many banks had insufficient resources across all their control functions (risk management, compliance and internal audit) and many banks had failed to sufficiently improve their capabilities in risk data aggregation and reporting. Thus, the ECB Banking Supervision will continue to assess banks’ progress in improving risk culture through peer benchmarking, sharing good practices and ongoing industry dialog, with appropriate supervisory escalation where key weaknesses are identified. Additionally, as part of the supervisory priorities for 2023-25, a targeted analysis will assess the tone from the top as well as the quality of banks’ nomination processes and will feed into the SREP.
- Given the increased risk of cyberattacks, banks need to tackle deficiencies in their outsourcing arrangements and IT security and cyber resilience frameworks. However, the size of banks’ investments in this area remains limited. To address this, the ECB banking supervision launched several digitalization-related initiatives across the banking sector and this will feed into the supervisory assessment in the next SREP cycle.
- Given the continued uncertainty, the ECB Banking Supervision will continue the thorough supervision of banks’ processes and procedures in two ways: First, it will extend the on-site inspection campaign to additional significant institutions throughout 2023. Second, it will foster awareness of the importance of appropriate profitability steering processes in dialogs with the banks.
The amendments to Delegated Regulation 2016/2251 include replacing contents of point(a) in Article 36(2) and Article 37(3) of the existing regulatory framework. The Commission Delegated Regulation 2016/2251 specifies, among others, the risk-management procedures, including the levels and type of collateral and segregation arrangements—referred to in Article 11(3) of Regulation on over-the-counter (OTC) derivatives, central counterparties, and trade repositories (648/2012)—that financial counterparties are required to have in place for the exchange of collateral, with respect to their OTC derivative contracts not cleared by a central counterparty. The regulation shall enter into force on the day following that of its publication in the Official Journal of the European Union and will be directly applicable in all member states.
Keywords: Europe, EU, Banking, Basel, Regulatory Capital, SREP, Reporting, OTC Derivatives, Central Counterparties, Market Risk, Landesbank Hessen, Pillar 2, EC, ECB
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