May 24, 2019

ECB published a booklet on the Supervisory Review and Evaluation Process (SREP) methodology for less significant institutions (LSIs). This methodology has been developed by ECB and the national competent authorities. This common methodology, applicable to the supervision of smaller banks in the euro area, is based on principles and methods used in the supervision of significant institutions but is adapted, simplified, and tailored to the specificities of LSIs. It aims to foster a consistent supervisory approach in the euro area and to support national competent authorities in their day-to-day supervisory responsibilities. The national competent authorities are implementing the harmonized SREP methodology for LSIs and aiming for full implementation by 2020.

The booklet highlights that, from 2019, the parallel run of the liquidity assessment methodology will no longer take place, as the SREP methodology will be applied more consistently. Additionally, national competent authorities are expected to implement the Pillar 2 Guidance, in line with the revised EBA Guidelines on SREP. In the coming years, supervisors will also gradually put more focus on IT risk in their SREP assessments, consistent with the applicable international supervisory standards and in line with Single Supervisory Mechanism (SSM) supervisory priorities. ECB and national competent authorities will continue to develop and maintain a full-fledged training program for supervisors in the SSM.

As per the methodology, national competent authorities continue to retain full responsibility, as direct supervisors of LSIs, 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 an LSI, according to the priority assigned to the LSI and the nature of its business (minimum supervisory engagement model). As a result, the SREP differs between LSIs, for example, in terms of how intense the assessment is, what information the LSI needs to submit to the supervisors, and what the supervisors expect from the LSI. 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 LSIs. The SREP for LSIs is an ongoing process and the methodology will continue to evolve in the future.

 

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Keywords: Europe, EU, Banking, SREP, SSM, Less Significant Institutions, SREP Methodology, Supervisory Approach, Proportionality, Stress Testing, ECB

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