The Supervisory Review and Evaluation Process in 2015

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. We know from previous crises that sustainable growth is hampered by an undercapitalised banking system. The long-term benefits of a properly capitalised banking system by far outweigh any short-term costs for the banks involved, or for government finances in cases of public support provided to weak banks.

Common methodology

In 2015 the SREP was for the first time carried out according to a common methodology for the 120 largest banking groups in the euro area. Previous national processes were rather diverse. Capital and liquidity levels of banks directly supervised by the ECB have been set according to their risk profiles. Additional supervisory measures have been applied where deemed necessary.

The SSM methodology is in line with EU legislation and European Banking Authority (EBA) guidelines and draws on leading practices within the Single Supervisory Mechanism (SSM) and as recommended by international bodies. A holistic assessment of institutions’ viability, taking a forward-looking perspective and applying proportionality, was achieved. Quantitative and qualitative elements were combined through a constrained expert judgement approach. This ensures consistency while taking into account institutions’ specificities. Extensive peer comparisons and transversal analyses were possible on a wide scale for the first time, allowing all institutions to be assessed in a consistent manner and thus promoting a more integrated single banking market.

Capital requirements

Altogether, capital requirements will gradually increase by 50 basis points from 2015 to 2016, including the effect of the phase-in of the combined buffer requirements.

• Given the euro area’s position in the economic cycle, the capital in the banking system needs to be maintained and, in some cases, strengthened. Many banks are still recovering from the 2012 financial crisis, and they continue to face risks and headwinds. In this context, compared to 2015, the average Pillar 2 requirements increased by 30 basis points.
• Another key lesson of the crisis, reflected in the SSM’s capital framework and calibration in line with EU legislation, is the need to contain any adverse system-wide effects that global systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs) may pose to the financial system and the euro area’s economies. To this end, in accordance with the EBA Guideline, the systemic buffers (whether for G-SIBs or D-SIBs, or the systemic risk buffer) are added to the Pillar 2 requirements, thus reducing the probability and severity of problems at these institutions spreading through the system. Those systemic buffers which start phasing-in explain the second part of the increase of the capital requirements (20 basis points) for euro area banks in 2016 versus 2015 and will continue to phase-in as expected until 2019.

We carefully checked the level of capital demand for euro area banks, especially taking into account fully loaded Common Equity Tier 1 (CET1) and total capital requirements. In the case of G-SIBs, the calibration of the phase-in and fully loaded capital requirements reflects a number of considerations, including the need to promote a consistent framework across 120 institutions, the systemic impact of G-SIBs and D-SIBs, and a broad comparison with G-SIBs of other jurisdictions.

Maximum Distributable Amount

For the application of maximum distributable amounts (MDAs), the SSM approach refers to the opinion published by the EBA on 18 December 2015.

This approach might nonetheless be revisited, in relation to future regulatory developments or to the application of the EBA guidelines, in order to ensure consistency and harmonisation in the Single Market.

More certainty in capital planning

Through our direct communication to banks, we are providing them with the clarity and supervisory certainty they need to perform their capital planning. All things being equal, the Pillar 2 requirements set out in the 2015 SREP decisions provide an indication for the future, especially as we already took full account of the fully loaded capital conservation buffer requirements. Banks can also plan the phase-in of the CRR/CRD package, i.e. the deductions from CET1 capital and the phase-in of the systemic risk buffers. Whilst the final developments on Basel III are not entirely known, it has already been acknowledged that their objective is not to significantly raise capital in the system, but to improve the simplicity, comparability and transparency of capital across banks.