The goal of the Supervisory Review and Evaluation Process (SREP) is to promote a resilient banking system as a prerequisite for a sustainable and sound financing of the economy.
The SREP involves a comprehensive assessment of banks’ strategies, processes and risks, and takes a forward-looking view to determine how much capital each bank needs to cover its risks.
The national competent authorities (NCAs), which are in charge of supervising less significant institutions (LSIs) in the euro area, have been implementing a harmonised SREP methodology for the LSIs, starting in 2018 and rolling it out to all LSIs by 2020.
2020 LSI SREP methodology booklet
Since 2015, the ECB and the national competent authorities have been working together to develop a common SREP methodology for less significant institutions, based on the EBA SREP Guidelines and building on the methodology for significant institutions and existing national SREP methodologies. The national competent authorities have the option to stagger the implementation of the common SREP methodology, applying it as a minimum to the high-priority LSIs in 2018. It will be applied to all LSIs by 2020.
The SREP for LSIs aims to promote supervisory convergence in the LSI sector while supporting a minimum level of harmonisation and a continuum in the assessment of significant and less significant institutions. NCAs 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 in that 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 (what we call a “minimum supervisory engagement model”). As a result, the supervisory review and evaluation process 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 NCAs. Flexibility in the SREP plays an important role when it comes to assessing a bank’s internal capital adequacy assessment process (ICAAP), its 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.