EU Banks Must Prepare for More Effective Supervision

EU Banks Must Prepare for More Effective Supervision

On May 28, 2024, the Chair of the Supervisory Board of the European Central Bank ("ECB"), Claudia Buch, announced the decision to reform the current process of annual review of credit institutions under direct ECB supervision ("SREP").

Beyond general remarks such as "as risks evolve, supervision must evolve too," the Supervisory Board made some more practical statements that will impact the interactions of the authority with banks, not only in the review itself but also in the controls to be conducted:

  • Implementing a multi-year approach where supervision intensity varies on the risks to be assessed;
  • Applying supervisory tools comprehensively, from on-site-inspections, to thematical horizontal reviews to better coordinate review over supervised institutions;
  • Using more frequently expeditive enforcement measures, such as binding requirements or by imposing periodic penalty payments;
  • Revising the Pillar 2 capital requirements methodology to make it simpler and more transparent;
  • Exploring the use of generative artificial intelligence in routine tasks; and
  • Increasing the principle of proportionality, in particular towards smaller banks.

With this reform of the SREP, the Supervisory Board shows its willingness to follow a more risk-driven supervision, with some flexibility to be brought in the process, but potentially less predictability for the institutions to anticipate the precise expectations from the supervisor.

This should be balanced by the supervisory priorities to be set each year by the Supervisory Board, which are currently set for a three-year period.

The Supervisory Board is determined to perform its duties in a more efficient way, in light of the risk environment. This will notably translate into taking more frequently expeditious enforcement measures, and we can expect a more pragmatic approach, taking into account the size of banks and simplified tools, with executive letters and clearer messages embedded in SREP decisions.

These new measures will take effect in phases across the 2025 and 2026 cycles, depending on the implementation constraints and impacts.

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