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Supervisory approach and methodologies

The approach and methodologies used by the ECB in the supervision and oversight of less-significant institutions (LSIs) have to strike a balance between harmonisation and the consideration of local specificities and proportionality.

Supervisory priorities

Every year ECB Banking Supervision, together with the national competent authorities (NCAs), performs a thorough assessment of the main risks and vulnerabilities facing the significant institutions (SIs) under its direct supervision and sets its strategic priorities for the next three years. These priorities are directly applicable to SIs but also set the tone for NCAs when they are considering their priorities for the supervision of LSIs in their jurisdictions, taking into account also local specificities and proportionality.

Proportionality in LSI supervision and oversight

The principle of proportionality ensures that the supervisor’s expectations and requirements correspond to the size, systemic importance and risk profile of the banks under supervision, and that supervisory resources are efficiently allocated.

This essentially translates into adapting the nature and intensity of the supervision to each bank, taking into consideration its risk profile, its business model or its size without compromising its prudential position. The general means and characteristics referred to when considering proportionality are listed in the guidelines published by the European Banking Authority (EBA) on internal governance.

The Single Supervisory Mechanism (SSM) incorporates proportionality into supervision and oversight in several ways.

The classification regime provides a key starting point for applying proportionality. First of all, the differentiation between SIs and LSIs provides a scale for tailoring supervisory intensity. In addition, there has been further clustering among LSIs with the introduction of small and non-complex credit institutions (SNCIs) by Capital Requirements Regulation (CRR) II, and with the classification of high-risk and high-impact LSIs that is based on the methodology set out in the SSM Framework Regulation. The classification regime translates the banks' risk profile, business model or size into more levels of supervisory engagement (in terms of the frequency, scope and depth of supervisory reviews) and duties, for instance when it comes to supervisory reporting. 

In line with the supervisory reporting framework, proportionality is applied by reducing the scope of financial reporting for smaller institutions, which would benefit from more selective data point reporting than full reporting. Refer to the section on reporting for more details.

The Supervisory Review and Evaluation Process (SREP) assessment methodologies are a key element of the supervisory review, as they set different levels of supervisory intensity and place LSIs into different priority categories, mainly in terms of the frequency and granularity of supervisory assessments. Compared with the SREP methodologies applied to SIs, the SREP methodology framework for LSIs encompasses expectations, levels of assessment detail and frequency which are generally less intense.

Lastly, proportionality is also reflected in many other supervisory assessment methodologies, for example in the ECB’s fit and proper assessments.

Speech by Pentti Hakkarainen on proportionality in banking supervision, Basel, 9 May 2019

Methodology used to determine SNCIs

CRR II introduced the concept of an SNCI. To qualify as one, an institution has to meet nine criteria listed in the relevant article of the CRR.


It is not a large institution (i.e. not an other systemically important institution or one of the top three in its country).


It had average total assets of less than €5 billion in the last four years.


It does not prepare a full recovery or resolution plan.


It has a small trading book (i.e. smaller than EUR20 million and smaller than 6% of total assets).


It has derivatives held for trading that are less than 2% of its on and off-balance sheet assets, and its total derivatives are less than 5% of its on and off-balance sheet assets.


It has assets and liabilities with European Economic Area counterparties of more than 75% of total assets and liabilities.


It has no internal models (other than those developed by its group).


It accepts to be an SNCI.


It does not have its NCA reject its SNCI status.

It is primarily up to banks themselves to determine whether they are SNCIs, and in principle they do so on an ongoing basis. LSIs are expected to let their NCAs know when there is a change in their status, i.e. when they start to qualify as an SNCI, or when they no longer meet all the criteria set out in the CRR. This does not preclude NCAs from determining whether banks under their supervision should be considered SNCIs, in accordance with the relevant CRR criteria, and communicating the outcome of those determinations to the banks in question. The SNCI status does have implications, for example for financial reporting on implementing technical standards.

Methodology used to determine high-risk and high-impact LSIs

In relation to ECB oversight of LSI supervision, the SSM Framework Regulation states that “the ECB shall define general criteria, in particular taking into account the risk situation and potential impact on the domestic financial system of the less-significant supervised entity concerned, to determine for which less-significant supervised entities which information shall be notified”.

The ECB differentiates between high-impact and high-risk LSIs.

High-impact LSIs

LSIs are classified as high impact based on criteria such as size, importance for the economy, cross-border activities and business model. In addition, at least three LSIs per country should be classified as high impact to ensure a minimum coverage, though exceptions are possible. An LSI that is considered to be an SNCI as per CRR II cannot be designated as a high-impact LSI unless it is the largest LSI in a jurisdiction where all the LSIs are classified as SNCIs.

High-risk LSIs

LSIs are classified as high risk based on a risk assessment carried out by the relevant NCA and on their compliance with capital and leverage requirements.

The identification exercise for high-impact LSIs is performed annually, and the outcome is then published. By contrast, the high-risk LSI list is updated on a quarterly basis, but the outcome is not made available to the public.

The classification is not only used by the ECB and NCAs in the context of the notification framework, it also has implications for the intensity of the supervision, for instance for the frequency of the SREP assessments.

List of high-impact LSIs

SREP assessments for LSIs

The goal of the SREP is to promote a resilient banking system and a sound provision of financial services to the economy. It involves a comprehensive assessment of banks’ strategies, processes and risks, and adopts a forward-looking stance to determine how much capital each bank needs to cover its risks.

The ECB and NCAs have been working together since 2015 to develop a common SREP methodology for LSIs that is based on the EBA’s SREP guidelines and builds on both the SREP methodology used for SIs and existing national SREP methodologies.

The SREP for LSIs aims to promote supervisory convergence in the LSI sector while supporting a minimum level of harmonisation as well as a continuum in the assessment of SIs and LSIs. As direct supervisors of the LSIs, NCAs continue to be fully responsible for carrying out the assessments and deciding on the appropriate capital, liquidity and qualitative measures to take.

The SREP methodology reflects the principle of proportionality in that it sets out the minimum extent to which supervisors must engage with their LSI(s). The level of supervisory engagement depends on the priority assigned to a particular LSI and the nature of its business – this is what we call a minimum supervisory engagement model. The SREP therefore differs from one LSI to another, 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.

Since 2018, NCAs have had the option to stagger the implementation of the common SREP methodology and apply it as a minimum to high-priority LSIs. It will, however, apply to all LSIs since 2022 at the latest. That said, the methodology does offer NCAs some flexibility, which plays an important role in the SREP when it comes to assessing a bank’s internal capital adequacy assessment process, its internal liquidity adequacy assessment process and the stress tests for LSIs.

The SREP for LSIs is an ongoing process, and its methodology will continue to evolve over time.

LSI SREP methodology

Options and discretions

In April 2017, following a public consultation, the ECB published a guideline and a recommendation that aimed to harmonise how SSM supervisors exercise options and discretions available in EU law.

NCAs were expected to apply the recommendation from the date of its adoption, 4 April 2017, and comply with the guideline as of 1 January 2018. In its oversight function, the ECB monitors the NCAs’ implementation of the agreed options and discretions.

In March 2022 both the guideline and the recommendation were updated to account for the legislative changes that had been adopted since their initial publication, in particular with the introduction of the CRR II/CRD V banking package that contains the revised rules on capital requirements. NCAs are expected to comply with the revised guideline from 1 October 2022, while they were advised to apply the revised recommendation as of the date of its adoption, 25 March 2022.

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