The ECB’s initiative to develop a SREP methodology for Less Significant Institutions (LSIs)

Is this the next step towards a more proportional approach to supervising LSIs across the Euro area?

Banking alert | 11 September 2017


The SSM in conjunction with the National Competent Authorities (NCAs), are in the process of devising a common methodology for the Supervisory Review and Evaluation Process (SREP) of LSIs.

SREP for large banks vs LSIs currently

SREP is the main toolkit which NCAs use to annually assess and measure risks for banks, as well as adopt and determine supervisory measures, including capital and liquidity measures.

NCAs across Europe currently adopt the EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) in the conduct of SREP for the largest banks. NCAs have been using their own methodologies in conjunction with these guidelines to supervise LSIs, which has at times, led to inconsistent approaches, as well as situations where the same methodology applied to larger banks is also applied to smaller banks.

SREP from 2018 onwards

The ECB in conjunction with the local NCAs are in the process of devising a common framework for the supervision of LSIs based on the principles and methods used in the supervision of the largest banks, but also adapted, simplified and tailored to the specific needs of LSIs.

NCAs will start using and implementing this methodology from the 2018 supervisory cycle onwards, possibly with a staggered approach. However, by 2020, all LSIs should be assessed using the SREP methodology for LSIs.

What this means for Maltese banks

This revised methodology will allow local supervisors to modify the intensity of assessments according to the individual characteristics of each institution, in particular according to their size and riskiness. This will limit the burden for the smaller, less risky banks, for example in the area of data reporting requirements.

Furthermore, the revised methodology will provide local supervisors with the opportunity to approach ICAAP and ILAAP reviews in a manner that is specifically tailored to the risk profile and business model of the bank under review. This means that a more flexible methodology, specifically in the risk-by-risk assessment of how a bank quantifies its capital and liquidity needs, including in stress tests, can be adopted locally.

How we can help

Deloitte’s Banking Risk Advisory team specialises in industry-specific risk, regulatory and strategic consulting.

We have worked with banks to assess their status quo, determine the required change, and set out their transformation plan, including assessment of resource requirements and level complexity. Our SREP Transformation

solution includes the following elements:

  • Business Model Analysis. Assistance in the preparation of a ‘business model analysis model and report,’ to help you defend and demonstrate the viability and sustainability of your business model and strategy to the regulator.
  • Internal governance. Gap analysis aimed at bringing your governance policies and procedures in line with EBA guidelines; also tailored training solutions to ensure that board members are up to date with the latest risk and regulatory developments.
  • ICAAP and ILAAP. Diagnostic on existing ICAAP and ILAAP processes, as well as model validation and enhancement of your stress testing framework.

In addition to this, we can assist you in taking stock of regulatory developments, including assessing the implications of the tailored LSI SREP methodology.

Did you find this useful?