Supervisors assess the risks banks face and check that banks are equipped to manage those risks properly. This activity is called the Supervisory Review and Evaluation Process, or SREP, and its purpose is to allow banks’ risk profiles to be assessed consistently and decisions about necessary supervisory measures to be taken.
Supervisors use a single methodology and a set of harmonised tools to assess banks consistently. They focus on the following areas:
Supervisors analyse a bank’s business model to better understand its main activities and business areas, the environment in which it operates and its key vulnerabilities.
Supervisors look closely at how a bank is run, examining its key people, functions, management bodies and committees.
Supervisors assess four categories of risk: credit risk, market risk, interest rate risk in the banking book and operational risk.
Supervisors assess a bank’s ability to cover ad hoc cash needs, such as in times of economic uncertainty when depositors may withdraw much more money than usual.