Supervisory measures

Compliance with the prudential requirements imposed on credit institutions is key in ensuring their safety and soundness and the stability of the EU’s financial system. The ECB therefore takes timely and appropriate action as soon as it has reason to suspect that a supervised entity is not complying with the prudential requirements or obligations imposed on it by laws, regulations or supervisory decisions, or that it is (or is likely to be) engaged in unsafe or unsound practices that may jeopardise the supervised entity itself or the banking system.

The timely identification of shortcomings (referred to as “findings”) and the related requests for remedial actions are the backbone of banking supervision. This means supervisors identify their concerns and address them to banks at a sufficiently early stage to ensure prompt and effective remediation. Supervisors are also ready to escalate issues when the remediation process does not proceed at the expected pace or if the severity of the findings necessitates taking such a step. It is essential that the supervisory process and its corrective function be effective. It is also in the banks’ own interest to engage with the ECB in this endeavour.

For this purpose, the ECB has at its disposal a broad set of tools which allow it to adopt supervisory and enforcement measures and/or impose effective, proportionate and dissuasive sanctions. This ensures compliance with the prudential requirements by the bank concerned and deters misconduct by others.

Supervisory measures are aimed at ensuring banks take the necessary actions at an early stage. The goal is to ensure sound management and coverage of their risks and that any lack of compliance or risk of non-compliance with prudential requirements is addressed. If a bank does not (or in the following 12 months is unlikely to) comply with applicable prudential requirements, or there are problems with its management of or ability to cover risks, the ECB can issue non-binding recommendations, set expectations or require banks (among other measures) to:

• submit an action plan to restore compliance with supervisory requirements;
• provide additional or more frequent reporting;
• reinforce their arrangements, processes and strategies;
• limit variable remuneration payments;
• use their net profits to strengthen own funds;
• reduce the risk inherent in certain activities, products and systems;
• adhere to ECB restrictions on, or prohibitions of, distributions to shareholders or holders of Additional Tier 1 instruments;
• hold additional own funds;
• restrict or limit their business, operations or network, or request divestment of activities that pose excessive risk to their soundness;
• reassess the fitness and propriety of management body members. 

For a more detailed account of some of these measures, please consult the Capital Requirements Directive (CRD), as transposed into binding national laws, and Article 16 of the SSM Regulation.

All these tools vary in intensity and choosing the right one for each situation relies on supervisory judgement and depends on the specific circumstances. As a rule, the ECB seeks to deliver on its mandate through supervisory dialogue, cooperating with banks to identify and address shortcomings before their safety and soundness are threatened. However, in some cases the findings’ severity obliges the ECB to resort to intrusive supervisory actions from the outset. In other cases, banks might not respond properly to the initial measures taken, leading the ECB to increase the level of intrusiveness by taking further measures the longer an issue remains unresolved. 

The available measures (which are not mutually exclusive) may be used in parallel or one after the other but without following any automatic sequence, which means that one or more of the escalation framework steps can be skipped if the severity of the findings or (unsatisfactory) progress of the remediation process so requires. Usually, as the escalation proceeds the set of available tools narrows down. For example, whereas the ECB may first use a recommendation to invite a bank to prepare an action plan to address a certain set of shortcomings, certain aspects of that plan or other specific measures may be made enforceable through the imposition of binding requirements if previous engagements have been unsuccessful. As the use of the escalation framework relies on supervisory judgement and depends on the specific circumstances, the request for an action plan may be imposed as a binding requirement from the outset, with or without necessarily specifying its content. On other occasions the severity of the findings or the behaviour of the bank may justify immediately adopting enforcement measures or imposing sanctions, in parallel with the use of supervisory measures.

When moving through the escalation framework, supervisors also bear in mind a set of principles which ensure the effective identification, issuance and remediation of their findings and measures (as explained in this speech by the Vice-Chair). Specifically, when issues are detected in a bank:

• supervisors start by identifying the underlying root causes of those issues, which allows them to aggregate their findings around those causes, rather than simply tackling their consequences;

• supervisors use the principle of proportionality to prioritise their focus and adjust the level of supervisory intensity to the severity of the issues and the circumstances surrounding them;
• supervisors formulate their supervisory actions with clear intended outcomes and communicate their expectations to banks, ensuring that banks know what is expected and by when;
• once measures have been communicated, supervisors monitor their implementation and verify the extent to which banks are committed to following up and remediating them properly within the allocated time – in this part of the process, regular interactions with banks are common and tend to be more frequent for the higher-severity issues;
• when banks do not address issues at the expected pace, thereby not fully meeting supervisory expectations, supervisors stand ready to escalate and take stricter action to ensure prompt and effective remediation;
• depending on the complexity of the findings, supervisors plan out potential escalation strategies from the outset, preparing for further action(s) when needed and ensuring there is clear communication with banks on the potential consequences of not complying with supervisory measures.