The harmonisation of supervision and supervisory priorities for 2016

Introduction

The ECB has published its Annual report on supervisory activities, which describes the activities carried out under the Single Supervisory Mechanism (SSM) in 2015 and the progress made in integrating and harmonising supervisory practices across the Eurozone.

Supervisory priorities

The risks and challenges of the global financial environment served as a point of departure for defining the supervisory priorities of 2016.

1. Business model and profitability risk. This remains a key area as business models continue to be challenged by the prolonged period of low interest rates and the high level of asset impairments.
2. Credit risk. Deterioration in credit quality of loans and in credit underwriting standards, as well as persistently high levels of NPLs are a source of concern in a number of euro area countries. The ECB will also investigate excessive risk concentrations and focus on bank readiness for the implementation of IFRS 9.
3. Capital adequacy. SSM will focus on assessing the consistency and quality of banks’ ICAAP including their internal stress testing capabilities, and the conduct of supervisory stress tests such as the EU-wide stress test coordinated by the EBA.
4. Risk governance and data quality. A thematic review will be carried out to assess compliance with BCBS principles for effective risk data aggregation and risk reporting.
5. Liquidity. This area was added as a new supervisory priority for 2016. The 2015 round of SREP has shown that many banks do not yet fully meet supervisory expectations regarding sound management of liquidity risks. This includes dissecting the robustness of the bank’s LCR and risk appetite expressed through the ILAAP.

Validity for both significant and less significant banks

SSM’s priorities are valid for both significant banks, which are directly supervised by the ECB, and less significant institutions (LSIs), which are directly supervised by the NCAs and indirectly by the ECB.

The level of supervisory oversight and the intensity of supervisory activities will be determined by the classification of LSIs under the prioritisation framework. This framework classifies LSIs into low, medium and high priority based on their intrinsic riskiness and their potential impact on the domestic financial system.

As long as regulation remains fragmented, the convergence of supervisory practices cannot ensure a fully level playing field. In this regard, the SSM is working on the development of a common methodology for the risk assessment systems (RAS) of LSIs in order to foster convergence in conducting the SREP for LSIs. 

How can we help?

Our experienced banking team can support you in addressing the SSM priorities for 2016, many of which fall under the scope of SREP. Our holistic SREP approach ensures that your business model and strategy are viable and sustainable, and that all risks to capital and liquidity driven by your business model are captured in the ICAAP and ILAAP.

In addition, our gap analysis approach will bring your governance policies and procedures in line with EBA guidelines, while our tailored training solutions ensure that board members are up to date with the latest risk and regulatory developments.