The ECB has published the SSM’s European supervisory priorities for 2017

Business model analysis, credit risk, and ICAAP and ILAAP are high on the list of priorities

Banking alert | 05 January 2017


The Single Supervisory Mechanism (SSM) has identified three priority areas for Joint Supervisory Teams (JSTs) supervision, in an attempt to address risks considered as material threats to the European banking sector. Significant risk drivers for banks include the ultra-low/negative interest rate environment, high levels of non-performing loans (NPLs), EU geopolitical uncertainty, lackluster EU growth, cybercrime and IT disruptions, as well as the impact of increased regulation on smaller banks in particular.

The priority areas also apply to Less Significant Institutions (LSIs). Firstly, because the supervisory focus of National Competent Authorities (NCAs) would likely be modelled on the supervisory priorities of the SSM. Secondly, the SSM has the power to directly carry out onsite inspections for LSIs.

Priority areas for banking supervision

Business model and profitability drivers

Business model and profitability risk will be the top supervisory priority for 2017, and JSTs will continue to assess banks’ business models and profitability drivers. Assessments will consider the impact that potential risks may have on the viability of individual banks and on the sector as a whole.

Credit risk, with a focus on NPLs and concentrations

Deterioration in the credit quality of loans and credit underwriting standards continues to be a source of concern for euro area countries, as both contribute to persistently high levels of NPLs. In 2016 the ECB issued guidance on best practice solutions to reduce levels of NPLs across the euro area. Locally this was followed by proposed changes to Banking Rule 09, the objective being to reduce NPLs domestically.

Throughout 2017 the SSM will also address excessive risk concentrations, and intensify its focus on bank readiness for the implementation of IFRS 9.

Risk Management, governance, and capital and liquidity adequacy

Risk governance, capital adequacy and liquidity continue to be key priorities throughout 2017. Additionally, the following areas will be under focus:

  • Compliance with the Basel Committee’s principles for effective risk data aggregation and risk reporting – High quality data is fundamental for accurate risk reporting and sound risk management procedures. European banking supervision will therefore focus on the principles for effective risk data aggregation and risk reporting (BCBS 239).
  • ICAAP and ILAAP – JSTs will assess the ICAAP and ILAAP processes of banks with the expectations that they are integrated holistically with business models, and that they are implemented as management tools.
  • Targeted review of internal models – Onsite inspections will be carried out to assess adequacy and appropriateness of Pillar 1 internal models.
  • Outsourcing – European banking supervision will also focus on how risks associated with outsourcing (e.g. IT risks) are being managed by Banks.

How can we help?

SREP Transformation

  • 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.

Credit risk management

  • NPL reduction. Assistance in the preparation of NPL reduction plans in line with Banking Rule 09 and ECB guidance on NPLs.
  • IFRS 9. Implementation of Finevare - a comprehensive IT solution developed by Deloitte to support banks in their transition to IFRS 9; Gap analysis on accounting policies to ensure that they are in line with IFRS 9.
  • OSI credit risk readiness. Assistance in achieving readiness to undergo either a full-scope or a targeted AQR-type assessment in line with the ECB AQR methodology.

Data quality

  • BCBS 239. Detailed diagnostic to ensure compliance with Basel principles on risk data aggregation and risk reporting.
Did you find this useful?