The EBA follows a holistic approach to SREP as it is built around the assessment of key indicators, business model, governance, the capital adequacy and liquidity risks. A new key feature in this context is for the individual supervisor to draw its own quantitative picture of the capital and liquidity risk profile of an institution. It is also worth noting, that the EBA guideline is very specific; e.g. the indicators and sources supervisors should use to identify material deteriorations in the risk profile and supporting SREP framework are specified in detail. The elements of the SREP framework are individually assessed and scored and summed to a final overall SREP score. This final overall score is not the simple arithmetic mean of the individual scores, rather the supervisor has the option to deviate and reflect its findings from the previous 18 months here.
The implementation of this guideline is severely dependent on the behaviour of the ECB. It already appears certain that the ECB will develop its own SREP approach which will not only be binding for all directly supervised banks, but also for all indirectly supervised banks in accordance with the principle of proportionality. As the EBA and the ECB are both institutions with a European background – and are closely collaborating on the development of such regulatory texts – we assume that the EBA draft SREP guideline gives a good indication of the ECB SREP.
We are expecting significant fundamental changes in the SREP from what financial institutions are currently used to, so even though such methodical changes are only broadly defined yet, we especially recommend to banks directly supervised by ECB to prepare for these upcoming changes.
Implications for your Institution
The EBA draft guideline indicates fundamental changes to the SREP and to the methods banks need to employ for quantification of their economic capital adequacy as well as their liquidity risks. As the future methods are yet to be defined in more detail during national implementation, we would currently not propose to perform premature changes to internal methods and approaches. Nonetheless, we strongly advise banks, especially those to be in the future directly supervised by the ECB, to start preparing for the imminent change process. At least the following steps should be addressed:
- Establish a ‘Single Point of Contact’ for the SREP process, in a timely manner, to manage the process both from both a process and content perspective in order to prevent frictions, inefficiencies and inconsistencies.
- Analyse readiness for the new SREP process: the future SREP process comprises new and also quantitative analyses by the regulators. We expect that the ECB will employ the new process at least partially in 2015.
- Impact analysis on capital needs: some of the emerging methodological changes directly impact the economic capital adequacy. We recommend firms start to perform recurring impact analyses on the resulting changes in capital needs in order to identify potential gaps in the capitalization as soon as possible.
- Identify requirements to enhance internal management processes: the future SREP process will lead to fundamental changes both in the analysis of the capital adequacy as well as in liquidity risk management. We recommend firms analyse the current portfolio of business plans and projects with regard to compatibility with the future SREP process in order to prevent misguided investments.
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