As we predicted in the last edition of 2017, the rapid evolution of banking technology seems certain to be a recurring theme. Several of the articles in this edition touch on the increasingly important connections between technology, management and supervision.
Like it or not, political uncertainty is also likely to makes itself felt during 2018. On a more positive note, we can also expect to see the ECB, EBA and other institutions continuing to push for greater harmonization and stability across the SSM. Again, several of our articles reflect on these themes.
In this edition, you can read about:
Banks themselves will make use of their own crystal balls in 2018 planning, for example through stress tests and the ICAAP and ILAAP. These are key tools for banks and the ECB is keen to set a high standard for their implementation and use. To this end the ECB published at the beginning of March its expectations on ICAAP and ILAAP for public consultation, following up on the principles published in 2017. While the new Guides are not a dramatic step change to previous versions and they remain rather general in nature, they include more examples and explanations as well as additional expectations for documentation and data quality. The final Guides are expected to appear later this year and take effect for the 2019 SREP.
As usual, we hope this update will help you stay on top of developments in Europe’s supervisory landscape, and to plan responses to forthcoming changes.
Supervisors increasingly view the composition of banks' managing bodies as a key driver of future stability. This is part of the reason why some banks are reviewing the skills and expertise of board members as well as board compositions. We believe banks should take an active, self-critical approach to building the board of the future.
What are the supervisory expectations of the SSM on Brexit, and what further pronouncements have been made since July 2016? The SSM has taken a more proactive stance, with steady progress in defining its expectations with respect to passporting and business planning, thereby giving banks a better understanding of what exactly the ECB expects when it comes to their preparations for Brexit. But what’s next for banks?
The EBA's recommendations on cloud outsourcing have been finalised and will enter into force in July. They place new responsibilities on banks and service providers alike, and it is clear that supervisors will soon begin to scrutinise compliance. Banks need to ensure they are fully aware of the new requirements, and should begin implementing them immediately - if they are not already doing so.
Models are increasingly being used in different areas of banks. The scope of modelling and linked processes (such as algorithms and Artificial Intelligence) is fast expanding and should also be considered. This increasing reliance on models requires a sound model governance and model risk management framework for business reasons as well as to comply with supervisory requirements such as the ECB TRIM Guide.
As EU authorities continue their focus on reducing Europe's overhang of non-performing loans (NPLs), banks face growing scrutiny on the quality and quantity of their NPL data. Requirements from regulators to improve data are evolving fast, raising concerns from banks on where to start to respond to this 'moving target'.
IFRS 9 promises to have a marked effect on banks' financial results and it is becoming clear that it will have an equally significant impact on supervision. In particular, the quality of IFRS 9 implementation will affect several important elements of the Supervisory Review and Evaluation Process (SREP).