The Supervisory Review and Evaluation Process in 2017
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 SREP for significant banks
2017 SREP methodology booklet
Overall, the amount of Common Equity Tier 1 (CET1) capital that directly supervised banks are expected to hold, as determined by the SREP, will be broadly stable from 2017 to 2018. It remains at an average of around 10% of total risk-weighted assets. However, the amount varies between individual banks, with some needing to hold additional capital and others needing to hold less.
- The SREP 2017 highlighted continued challenges for banks in terms of profitability and capital adequacy. Despite the fact that ratios of non-performing loans declined over the last year, the number of banks with high ratios of NPLs in the euro area remains substantial. In addition, the continued period of low interest rates puts pressure on interest rate margins, which affects banks’ profitability.
- The SREP 2017 also found that many banks still face challenges in terms of risk management, particularly in the areas of risk infrastructure, data aggregation and reporting.
During the SREP, the supervisor not only defines banks’ capital requirements, but may also decide to impose additional measures on banks, including liquidity and qualitative measures.
The SREP for less significant banks
The national competent authorities (NCAs), which are in charge of supervising less significant institutions (LSIs) in the euro area, will implement a harmonised SREP methodology for the LSIs, starting in 2018 and rolling it out to all LSIs by 2020.
2018 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 will 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 will 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 will differ 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.