The EBA has released new guidelines meant to harmonise the Supervisory Review and Evaluation Process (SREP) by introducing comprehensive requirements concerning business models, governance/control, capital, and liquidity risks. Fundamental changes from what financial institutions are currently used to are expected.
Finalisation of SREP guidelines and their implementation (ECB timeline)
The EBA’s “Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP)” is meant to ensure a harmonised and structured approach pursuant to Article 107(3) of Directive 2013/36/EU (CRD IV). The guidelines are addressed to competent authorities and cover all aspects of SREP (Article 97 et. seq. of Directive 2013/36/EU).
The new SREP framework is based on the proportionality principle and is built around four main elements—business model, governance/control, capital, and liquidity risk—which are individually assessed (quantitative and qualitative), scored, and summed up to produce a final overall SREP score. This final overall score reflects the institution’s viability and has four positive grades (1-4) and one negative grade (F) indicating that an institution is “failing” or “likely to fail” according to Article 32 of Directive 2014/59/EU. The overall assessment is the basis for subsequent supervisory measures (Pillar 2 requirements) such as additional capital and/or liquidity requirements, further prudential measures, or an early intervention (application of BRRD).
The quantitative assessment of ICAAP and ILAAP through stress tests is a novelty of unknown impact but which will most likely lead to higher capital and liquidity requirements. Similarly, the analysis of the business model may lead to supervisory measures concerning the business structure and risk strategy. We therefore recommend banks to prepare for these upcoming changes, even though some of the methodical changes are only broadly defined as of yet.
All institutions covered by CRD IV: credit institutions, financial
holding companies, mixed financial holding companies, and branches of credit
institutions established in non-participating Member States.