ECB publication of 2019 SREP Results

On 28th January the ECB published the outcomes of the 2019 Supervisory Review and Evaluation Process (SREP) including comparison with the 2018 SREP outcomes where relevant. By way of context, the 2019 SREP is generally based on year-end data for 2018 and the 2019 SREP decisions are applicable for banks in 2020.

Key Messages from the ECB Publication

Key messages arising from the ECB publication are set out below:

  • Overall SREP requirements and guidance for Common Equity Tier 1 (CET1) capital remained stable at 10.6% in 2019, the same level as in 2018.
  • The average Pillar 2 requirement (P2R) for banks is 2.1% in line with the P2R average for 2018. The P2R is still viewed as stable and risk sensitive by the ECB.
  • The average Pillar 2 guidance (P2G) [non-binding] for banks is 1.5% in line with the P2G average for 2018.
  • 91 banks received "other" SREP qualitative measures (as compared with 83 in 2018), with internal governance a key area of supervisory focus. Also notable is that 40 banks received qualitative liquidity-related measures (a decrease of 5 versus 2018).
  • Aggregate data by business model and bank-by-bank P2R information has been published in an effort to improve transparency. 108 banks agreed to this disclosure or have already published P2R themselves.
  • The volume of non-performing loans (NPLs) held by significant institutions had been reduced to €543 billion (3.4% NPL ratio) as at September 2019, a significant reduction against €1 trillion in NPLs (c. 8% NPL ratio) when the ECB/SSM came into force.
  • The ECB have highlighted some areas of deterioration year-on-year:
    • Business models: earnings remain below banks’ cost of capital which compromises the organic generation of capital and the capacity to issue new equity.
    • Internal governance: management bodies were identified as being not effective in some banks and weaknesses in internal controls were also identified. Data aggregation and outsourcing deficiencies were also highlighted by the ECB.
    • Conduct risk: some banks reported material operational losses related to conduct risk events.
    • IT/cyber risks continue to be a key source of operational risk for banks.
    • ICAAP and ILAAP remain a source of supervisory concern and areas which require further enhancement.

Conclusion and Consequences for Banks

The 2019 SREP provide an interesting insight into the business and risk profiles of Significant Institutions and a roadmap for potential areas of supervisory focus in 2020 and beyond.

In terms of consequences for 2020, we can expect:

  • Continued and targeted scrutiny of business models, with the ECB very much focussed on sustainability and future resilience;
  • Ongoing review of Board effectiveness and senior management capabilities;
  • Continued focus on risk management and internal controls (including ICAAP and ILAAP). From an ICAAP/ILAAP perspective internal governance, risk data quality and IT frameworks will remain key target areas;
  • An emphasis on transparency, noting progress in 2019 from a SREP perspective and continued debate around the benefits of transparency from a Resolution Planning perspective.

Deloitte Perspectives

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