The ECB’s identification of peer groups

The ECB’s identification of peer groups

How will the ECB allocate banks to clusters?

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The European Central Bank (ECB) has been quite clear that peer analysis is a key part of their supervisory approach. We know that initially banks were allocated to clusters primarily based on size. However, more recently the ECB has spoken of using business model types to create peer groups. The cluster is a classification based primarily on the size and other attributes. The objective is to ensure proportionality, i.e. to compare large international banks with relevant peers across Europe and not a large international bank with a small private bank which happen to be based in the same country. The second element of peer analysis has the objective of identifying relevant peers for the purpose of comparing business models. It is likely that a bank’s peer group will consist of banks in its cluster and banks within that group identified as having similar business models.

To develop these peer groups, it is our understanding that the ECB uses a universe of business model types with a certain constellation of attributes that shall result in banks being allocated to one of the following business model types:

  • G-SIB (Global Systemically Important Bank) 
  • Specialized lender
  • Diversified lender
  • Custodian   
  • Retail lender
  • Universal Bank
  • Small Universal bank

The typical characteristics used by the ECB to assess business models include size of balance sheet, legal complexity, composition of loan book, market orientation, range of activities, ownership type, funding profile etc. For example, a universal bank is expected to be medium or large size, medium legal complexity, diversified activities and funding alongside a substantial cross border presence.

The allocation of certain banks to a single business model is challenging as the institution will often meet several of the characteristics of different business models. KPMG’s ECB Office has recently piloted a study whereby DG1 banks were allocated to the above business model types. As expected, universal bank and retail lender models predominate as the most common type. DG2 banks should generate a wider range of results. For further details, please contact the KPMG ECB Office.

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