MFSA announces 2021 banking supervision priorities

Strong focus on credit risk management and business model viability to manage the medium-term impacts of the COVID-19 pandemic

Preparing for the post-COVID economy

The MFSA announced its supervision priorities for 2021 on 17 December, building on several of the founding themes outlined in its three-year strategic plan for 2019-2021, but also adding direct supervisory focus on monitoring the impact of COVID-19 on the financial services sector.

In essence, this means that while several key themes such as corporate governance, financial crime compliance and ICT risk and cybersecurity will continue to dominate the supervisory agenda, banks should also expect deeper assessments of their analysis, quantification and management of credit risk, as well as the viability of their business model in the post-COVID economy.  

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Banking supervision priorities for 2021

The MFSA’s supervision priorities are divided into cross-sectoral and sector-specific priorities. Five targeted priorities have been identified for the banking sector:

  1. Corporate governance will remain high on the agenda, with the MFSA seeking to add fresh impetus to suitability and board effectiveness assessments, particularly within LSIs, strengthen its communication and training with boards, especially non-executive directors, and reviewing remuneration and succession planning arrangements.
  2. Following up on SREP onsite inspections and associated mitigation actions which, for the first time, will have allowed the MFSA to provide all banks with a SREP score (some reports have not yet been issued). The MFSA will follow up on remediation and take enforcement action if necessary.
  3. Post-COVID business model viability is a key cross-sectoral theme which also features as a sector-specific priority. The MFSA has stressed the importance of costing increasing compliance costs within business plans and will also lay the foundations for assessing the impact of climate change on business models.
  4. Also linked to the fallout of COVID-19 is the growing focus on the analysis and quantification of credit risk, including the assessment of asset quality and banks’ preparedness for managing balance sheet and operational challenges arising from higher credit risk. The MFSA has already approached several banks to conduct a thematic review on credit risk.
  5. Following its efforts on product oversight and governance, the MFSA’s Conduct Supervision Function will shift its attention to the robustness of banks’ creditworthiness assessments when providing facilities, as well as launching new Conduct of Business Rules for the banking sector.

These five sector-specific priorities build on several of the key themes outlined in the cross-sectoral priorities. Two other cross-sectoral priorities which remain very relevant to banks are the MFSA’s objective to continue strengthening its monitoring of AML/CFT compliance, as well as its intention to undertake thematic desk-based reviews on ICT Risk and cybersecurity matters, including outsourcing to cloud service providers. The latter has added significance considering the publication of the MFSA Guidance on Technology Arrangements, ICT and Security Risk Management and Outsourcing Arrangements earlier this month.  

Spotlight on risk and compliance functions

Over the coming year, the MFSA will undoubtedly seek to reap the fruit of its efforts to enhance its supervisory capacity, as evidenced in the development of several functions around financial crime, conduct, ICT and cybersecurity, and due diligence, as well as the strengthening of the banking supervision function. This has led to a significant increase in supervisory inspections, with a fresh thematic review on credit risk management announced just last week.

The simultaneous broadening and deepening of supervision priorities and themes will undoubtedly continue to place strain on banks’ risk and compliance functions. The MFSA’s expectation is that banks will significantly strengthen investment in risk and compliance infrastructures and resources to manage the growing suite of material risks they face, as well as the increase in supervision reporting expectations.  

How can we help?

SREP remediation plans

Support in SREP process self-assessments, reviewing and understanding the MFSA’s SREP conclusions, and designing action plans for remediation of SREP findings.

Board effectiveness and suitability

Assistance in completing a self-assessment of the individual and collective suitability of the Board of Directors, and/or completion of reviews of the effectiveness and efficiency of the Board and its respective committees.

Credit risk management support

Provision of a full scope credit risk support, including reviews of the credit process and internal controls and governance, formalisation of policies and procedures, and execution of credit monitoring and reporting mechanisms.

AML/CFT readiness assessment

Completion of a current state assessment and formulation of an action plan for achieving full compliance with the revised FIAU Implementing Procedures.

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