Compliance with prudential requirements imposed on credit institutions is a key factor in ensuring their safety and soundness and the stability of the financial system in the European Union.
If a significant bank does not comply with prudential requirements, or there are problems with the bank’s management or its ability to cover risks, the ECB can adopt measures under the Single Supervisory Mechanism (SSM) to remedy the situation. It can also impose enforcement measures and sanctions.
Supervisory measures aim to ensure that supervised banks take the necessary action at an early stage to address problems related to the prudential requirements set out by relevant Union law.
For example, the ECB can require banks to:
- hold additional own funds
- submit a plan to restore compliance with supervisory requirements
- reinforce their arrangements, processes and strategies
- apply a specific provisioning policy or treatment of assets in terms of own funds requirements
- limit variable remuneration
- use their net profits to strengthen own funds
- adhere to ECB restrictions on, or prohibitions of, distributions to shareholders or holders of AT1 instruments
For a more detailed account of these points, please consult the Capital Requirements Directive (CRD).