Inspecting risks and operations on-site
On-site inspections are the most intrusive supervisory tool available to banking supervisors and are a powerful complement to off-site supervisory activity. They are undertaken at the behest of the joint supervisory teams (JSTs), but carried out independently of the ongoing, day-to–day supervision performed by the JSTs. For each on-site mission, the head of mission receives a precise mandate and has a focused objective that is approved in advance by the Supervisory Board of the ECB. The purpose of on-site missions is to provide an in-depth analysis of the situation of banks, in particular regarding risks, internal control systems, business models and governance. On-site inspections are conducted at the premises of the bank and, depending on the complexity of the inspection, the on-site fieldwork can last from six to 16 weeks.
In 2017, more than 150 on-site inspections were undertaken in ECB-supervised banks, covering all aspects of the inspected banks’ risk profiles. About 40% of these missions focused on credit risk. There was also a strong but lower demand for missions on operational risks including IT risks, and on general governance topics and capital. On-site activities are not limited to the 19 countries of the euro area. As inspected entities’ business is in many cases performed worldwide through branches or subsidiaries, inspections can also take place in bank premises based in non-euro area countries.
Each inspection or mission team is composed of experienced inspectors drawn from the ECB and national competent authorities (NCAs) and is led by a Head of Mission who acts independently of but in cooperation with the JST coordinator (JSTC). In 2017, 90% of missions were led by mission heads from NCAs, with most taking place in institutions based in the country of the respective NCA. The remaining 10% of the inspections were led by staff from the ECB. External experts working under the same confidentiality rules that apply to ECB staff may also support the on-site teams as team members. ECB Banking Supervision is keen for inspection teams from the different participating member states to benefit from each other’s experience and perspectives and in 2017 launched a dedicated initiative to increase the number of cross-border and mixed-team missions.
Depending on the scope and objectives of the inspection, the teams apply a mix of techniques during their work on the premises of the bank. These encompass not only targeted interviews but also in-depth analyses of the banks’ information, data verification, observations, walk-throughs and case-by-case examinations, for example, the analysis of a sample of credit files or business transactions. To support these activities inspectors can ask for read-only access to the inspected entities’ IT systems.
Inspectors’ draft reports are subject to a quality assurance process before they are sent to the inspected entities, well in advance of the exit meeting. This is the last meeting between the on-site team and the persons effectively directing the business of the bank. The aim of the exit meeting is to discuss the draft report, with the comments of the inspected entities being added to the final report. This process allows full transparency and ensures that the JST can take the bank’s position into consideration when preparing the follow-up to the mission. The final inspection report, which is signed by the Head of Mission, and hence is his/her sole responsibility, is sent to the JSTC and the bank. The JST uses the inspection report to develop recommendations or draft decisions; it will then follow up on the appropriate remedial actions undertaken by the bank, including by taking supervisory measures to address any remaining shortcomings.