Taking a pragmatic approach to SREP
Frankfurt am Main, 13 May 2020
The coronavirus (COVID-19) pandemic and its economic fallout have prompted many companies, banks and organisations to review their processes and activities at a time when human and other resources are constrained. ECB Banking Supervision has done the same and, in addition to putting in place a series of measures to help banks cope with the situation, it has taken a pragmatic approach to implementing its annual core activity – the Supervisory Review and Evaluation Process (SREP).
The approach is aimed at ensuring an efficient yet structured assessment of the significant banks directly supervised by the ECB, while reducing resource intensity compared with normal SREP cycles. This year the process will focus on the banks’ ability to respond to current challenges and the most material risks and vulnerabilities related to the crisis.
More concretely, this means that supervisors will assess the four elements of the SREP – business model and profitability; internal governance and risk management; risks to capital; and risks to liquidity and funding – with a focus on banks’ capacity to handle this crisis and manage its impact in the coming months. In the course of their assessment, supervisors will take into account the latest available data.
As recently communicated to banks, the internal capital adequacy assessment process (ICAAP) and the internal liquidity adequacy assessment process (ILAAP) are key sources of information for understanding how banks are managing capital and liquidity in this challenging time. While the submission deadlines for the packages have remained unchanged (April 2020), a pragmatic approach to the collection of information on the ICAAP and ILAAP has been taken. Supervisors will focus in particular on collecting and assessing evidence on the banks’ current processes for managing capital and liquidity, including their internal decision-making, their ability to update capital/liquidity and funding plans in a timely manner, and their stress-testing scenarios.
The outcome of this more pragmatic SREP assessment will be shared and discussed with banks as part of the supervisory dialogue. This will focus on the findings and on recommendations that should help banks better withstand current headwinds. As has started to become practice, ECB Banking Supervision will also communicate the SREP outcome to the public to explain the banks’ situation in the crisis. The approach envisages keeping Pillar 2 requirements and Pillar 2 guidance stable for the most part, which should help reinforce the positive impact of the capital relief measures announced by ECB Banking Supervision in March.
Supervisors in national competent authorities are also encouraged to take a similarly pragmatic approach when assessing the less significant institutions, i.e. the smaller banks that they supervise on a day-to-day basis. Depending on the individual situation of each bank, supervisors will focus their assessment on the areas considered most relevant in the current context.
With this sharpened focus on the risks and challenges related to COVID-19, the SREP this year aims to continue delivering on what it was set up to do: provide a sound supervisory view of where a bank stands in terms of capital and liquidity requirements, as well as internal governance and risk controls. Especially in times of crisis, when the focus shifts and uncertainty may prevail for some time, supervisory processes and expectations need to remain predictable, clear and transparent.