Making European supervision more efficient, effective and risk-focused
Stable banks are the foundation of a strong economy. Since European banking supervision was established, banks in the euro area have become more stable and better capitalised, with lower levels of non-performing loans. The current supervisory and regulatory framework has helped the banking sector remain resilient, enabling it to continue providing services to households and firms, including in times of stress.
The achievements since the global financial crisis are a strong foundation. But the environment in which banks are operating is changing fast. As technology changes rapidly and the risk landscape evolves, supervision must be responsive and adapt to new challenges to remain as efficient and effective as possible. Banks and supervisors need to have the analytical capacities to address emerging risks. Against this background, we are working on a comprehensive reform agenda to tackle undue complexity in supervision, refocusing our resources without compromising banks’ resilience.
The reform agenda of European banking supervision
We are making European banking supervision even more efficient, effective and risk-focused through four dedicated initiatives.
Reforming the SREP – banks’ regular health checks
In September 2022 European banking supervision launched an independent expert review of its regular health check for banks – the Supervisory Review and Evaluation Process (SREP). Based on the recommendations from that review, we are making the SREP more efficient and effective, with a greater focus on risk-based supervision. More information on the changes is provided in our FAQ on the SREP of tomorrow.
The SREP reform builds on earlier decisions and is being implemented over a three-year period (2024-26). Its benefits will therefore evolve over time, and we will monitor and document progress via indicators such as the duration of the SREP cycle, the length and clarity of SREP decisions and information on open findings.
More information on the SREP reform:
Next-level supervision: reforming other supervisory activities
Our aim to become more efficient and effective, while remaining fully risk-focused, goes beyond the SREP. Using experiences from supervisors and feedback from external stakeholders, we have created six workstreams that further streamline supervisory processes and procedures.
In line with the risk-based approach, the overall objective of each workstream is to focus on relevant risks and ensuring resilience of banks while reducing time spent on standard requests and tasks. This will enable us to focus resources on addressing emerging risks and areas of higher concern and complexity.
- Improving decision-making and harnessing digitalisation:
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We are speeding up our supervisory decisions with the help of digital tools and a fast-track decision-making procedure. For instance, the average duration of fit and proper assessments, which make up by far the largest number of ECB decisions, fell to 97 days in 2024 (well below the 120-day target set by the European Banking Authority and the European Securities and Markets Authority). We are also piloting a fast-track process for the assessment of significant risk transfers in securitisations, which we developed in dialogue with the European Banking Federation. This reduces the time needed to assess sufficiently simple and standardised securitisations – without compromising resilience – from three months to ten working days. For complex and innovative securitisations, the ECB will continue to carry out a detailed assessment and scrutinise whether a significant transfer of risk has been achieved.
- Internal models:
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Internal models that are used to calculate risk-weighted assets help determine how much capital a bank needs to have and therefore affect its resilience. Improving the model landscape has thus been a priority of the SSM from its beginning. Supervisors need to approve the use of such models in advance and continue to monitor how they are used, including in the event of (material) changes. We are exploring ways to streamline supervisory processes related to internal models. The European Banking Authority is reviewing its regulatory technical standards on the classification of model changes, which is a good opportunity to reduce the number of material model changes that require supervisory approval.
- Stress testing:
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Supervisory stress tests are used to assess how well banks are able to cope with financial and economic shocks. The results help to identify vulnerabilities and address them at an early stage in the supervisory dialogue with banks. We want to improve stress tests – in close coordination with the European Banking Authority where necessary – by removing unnecessarily complex and resource-intensive processes. This will improve our ability to respond to emerging risks more quickly, while reducing stress test-related reporting requirements and compliance costs for banks.
- Capital-related decisions:
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Adequate capitalisation is key to safety and soundness. Banks take on risks and may suffer losses if risks materialise. They need to be able to absorb such losses to continue servicing their clients also in bad times. Because of this important role, certain capital-related decisions require supervisory approval. We will make our internal procedures for capital-related decisions, such as the approval of share buy-backs, more risk-based and quicker, including by using digital tools. For banks, this will mean clearer supervisory guidance, more standardised templates and faster turnaround times.
- Reporting:
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To be able to monitor risks and enforce regulation, supervisors need relevant information that is usually collected via standardised reporting. Banks’ reporting framework has evolved over time, reflecting needs of different policy areas at the national and European level. Faced with a complex reporting framework, we are mapping the prudential reporting and disclosure landscape for significant and less significant banks, taking national and European mandates into account. This will help us identify overlaps, outdated requirements and areas where reporting can be streamlined.
- On-site inspections:
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Inspections are a critical tool for banking supervision. They involve an in-depth analysis of different risks, internal control systems, business models or governance arrangements. Inspections provide detailed information on the situation of a given bank, including a forward-looking analysis. We are enhancing the efficiency of on-site inspections, including at the planning, execution and follow-up stages. We will take a more risk-based approach when defining the scope and intensity of on-site inspections.
Assessing the effectiveness of supervision
Assessing the effectiveness of supervision is a key element of our reform agenda. But we need more than financial indicators to understand the effectiveness of supervision. For instance, a bank’s financial ratios can improve for several reasons, including better macroeconomic conditions. To disentangle these factors, we are improving our analytical tools to better assess supervisory effectiveness.
Regular assessment
We have integrated a regular assessment of supervisory effectiveness into our annual planning process. This places a strong focus on measurable outcomes and makes sure that our efforts remain results-oriented and impactful. And a new tiered approach for following up on findings and measures allows us to deal with the most critical issues more effectively.
Fostering a risk-focused supervisory culture
The ECB and national supervisors work together to deliver European banking supervision. Joint Supervisory Teams bring together staff from the ECB and national authorities to supervise significant banks, while the national authorities supervise less significant banks under the ECB’s oversight.
To deliver on our reform agenda, we are fostering a risk-based supervisory culture across the entire system, empowering teams to exercise judgement and decide where best to direct supervisory attention.
With a view to enhancing consistency across European banking supervision, we have launched a dedicated initiative to drive cultural change. The focus is on developing a supervisory culture that is better integrated, efficient and effective, and risk-based. A unified supervisory culture will strengthen our supervision and lead to smoother processes for banks.