On 21 June 2016, the European Central Bank (ECB) published the Single Supervisory Mechanism (SSM) supervisory statement on governance and risk appetite.
This report (PDF 460 KB) conveys some lessons from the thematic review of banks’ management bodies and their Risk Appetite Frameworks (RAF) and describes some good practices observed across the significant institutions (SIs). It also sets out supervisory expectations regarding a bank’s Board and RAF, acknowledging all existing governance structures. The report aims to support and guide institutions towards the implementation of international best practices. One central conclusion reads: “Although major improvements have already been made, most SIs are still far from international best practices.”
Some weaknesses the SSM discovered in the Thematic Review include:
With respect to the Risk Appetite Framework and its implementation, the report concludes that the:
The note states that, for most of the banks, the RAF needs to be integrated and embedded more closely into the other structural processes of the institution, such as strategy, budget process, capital and liquidity planning, recovery plan and remuneration framework.
The SSM itself says that the thematic review is used to identify follow-up supervisory actions for 2016, including planning on-site inspections and will be an input to the SREP process.
In addition, deep-dive investigations will be performed on a sample of SIs on specific governance topics, such as the oversight role of the board on risk and control functions and the RAF implementation. The yearly SREP will assess the implementation of governance requirements and action plans to remedy specific findings.
For banks the report adds a valuable point of information on supervisor’s expectation in terms of Risk Governance. It clearly increases the transparency of the SSM. This transparency should be a prompt to:
The SSM makes clear that the interplay between RAF and other strategic processes such as budget, ICAAP, ILAAP, recovery planning or remuneration planning is important. Given these interlinkages and interplays the central role of Governance in the SSM’s supervisory framework becomes clear. Governance cuts across all of the SSM’s priorities and its assessments of business models, strategy and capital & liquidity planning.