As November passes, the SSM celebrates its first anniversary. It is remarkable the speed with which the new supervisory framework has been established. Building on the groundwork done by the Asset Quality Review (AQR) and the stress test exercise, arguably, a new rigor has been brought to supervision of European banks.
One year of the Single Supervisory Mechanism (SSM) is not enough time to feel comfortable and familiar with the new supervisory approach of the European Central Bank (ECB). Nevertheless, the outline of their approach: data focused supervision; forward looking challenges of business strategy; critical assessment of the overall governance framework; a preference for onsite supervision as well as the desire to deliver a harmonized Supervisory Review and Evaluation Process (SREP) process across Europe; are clear.
As the intensity of supervision rises, banks need to spend more resources to ensure that the engagement with SSM supervisors is of the highest quality, as the intensity of supervision rises. Many have appointed a dedicated SSM Manager to ensure focus on the overall regulatory relationship. Not only do additional resources need to be devoted to regulatory reporting and compliance, but institutions must be able to clearly demonstrate the importance of high quality regulatory engagement shared by all areas of the bank. The ECB expects to have a multi-stranded relationship with individuals across all areas of a bank, engaging with multiple stakeholders throughout the business, with the expectation that they should understand the underlying issues and the ECB policies. In addition, banks must show that regulation is a core part of the business strategy and crucially that the Board is engaged in these discussions – in areas ranging from business model decisions, strategic business initiatives to legal entity structure and IT strategy.
The main changes KPMG member firms have observed in the first year for banks stem from two sources: first, development of new supervisory methodologies and the associated data demands; and second, changes in the supervisory approach itself and how supervisors are deployed.
The prime example of a methodological change is the new SREP process. Here, the ECB have introduced a more formal SREP process that is explicitly linked to a formal data gathering exercise known as the Short Term Exercise, targeting a harmonized process for all SSM banks. Ultimately, scores for the four SREP pillars are calculated and combined to give a SREP score that influences the overall minimum capital holding required. A by-product of this approach has been extensive ECB reporting requirements on all aspects of the banks' business. This focus from the ECB challenges the IT and Data architecture of many banks.
A prime example of the second source of change is the increased deployment of supervisors onsite. Banks have seen longer and more intrusive onsite supervision. There has also been more extensive use of interviews with senior levels within the banks and more challenge of a bank’s business model and strategy. Selected thematic reviews across the Eurozone have also been undertaken including topics such as leveraged finance, cyber security and governance. The output of these reviews will set the supervisory agenda for next year.
KPMG’s Financial Services Regulatory Centers of Excellence can provide insights into the implications of the raft of regulatory change.
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