ECB updated the booklet on the Supervisory Review and Evaluation Process (SREP) methodology for less significant institutions. This common SREP methodology for less significant institutions is based on the EBA SREP Guidelines and builds on the methodology for significant institutions and existing national SREP methodologies. The national competent authorities are implementing the harmonized SREP methodology for less significant institutions and aiming for full implementation by 2020.
The SREP booklet highlights that, in 2019, 15 national competent authorities implemented this SREP methodology for non-high-priority less significant institutions, in addition to the high-priority less significant institutions that were covered last year as a minimum. Some authorities had already done so in 2018. These authorities are expected to continue the roll-out of the methodology to non-high-priority less significant institutions to ensure that, by the end of 2020, all less significant institutions will have been assessed on the basis of the SREP methodology for less significant institutions. For 2020, the SREP methodology has been enhanced in the areas of interest rate risk in the banking book and IT risk assessment, in line with the EBA guidelines and the supervisory priorities of the Single Supervisory Mechanism. Additionally, the national competent authorities are expected to implement the Pillar 2 Guidance by 2021, in line with the revised EBA guidelines on SREP.
As per the methodology, national competent authorities continue to retain full responsibility, as direct supervisors of less significant institutions, for carrying out the assessments and deciding on capital, liquidity, and qualitative measures. The methodology reflects the principle of proportionality, as it sets out the minimum extent to which supervisors must engage with a less significant institution, according to the priority assigned to the less significant institution and the nature of its business (minimum supervisory engagement model). As a result, the SREP differs between less significant institutions, for example, in terms of how intense the assessment is, what information the less significant institutions needs to submit to the supervisors, and what the supervisors expect from the less significant institutions. The methodology also offers some flexibility to the national competent authorities. Flexibility in the SREP plays an important role when it comes to assessing the Internal Capital Adequacy Assessment Process (ICAAP), the Internal Liquidity Adequacy Assessment Process (ILAAP), and the stress tests for less significant institutions. The SREP for less significant institutions is an ongoing process and the methodology will continue to evolve in the future.
Keywords: Europe, EU, Banking, Less Significant Institutions, SREP Supervisory Approach, Proportionality, SSM, Stress Testing, ECB
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