28 January 2020

ECB keeps capital requirements and guidance for banks stable and increases transparency

The ECB published the outcomes of its 2019 Supervisory Review and Evaluation Process (SREP). The overall SREP requirements and guidance for Common Equity Tier 1 (CET1) capital remained stable at 10.6% in 2019, the same level as in 2018. The average Pillar 2 requirement, set by the supervisor for each bank, stood at 2.1% and the non-binding Pillar 2 guidance at 1.5%, both unchanged from the previous year.

The SREP is an annual exercise in which the supervisor examines banks’ risks and subsequently determines individual capital requirements and guidance for each bank, in addition to legally required minimum capital.

For the first time the ECB is also publishing aggregate data by business model and bank-by-bank information on Pillar 2 requirements in an effort to improve transparency. For this SREP cycle, 108 banks agreed to this disclosure or have already published the Pillar 2 requirements on their own websites.

The SREP assesses four main elements:

• the viability and sustainability of business models,
• the adequacy of internal governance and risk management,
• the risks to capital (with its sub-components of credit risk, market risk, interest rate risk in the banking book and operational risk) and
• the risks to liquidity and funding.

The assessment of each element leads to an element-specific score from 1 to 4 (1 being the best score, 4 the worst) for every bank which is then combined into an overall score from 1 to 4, in line with the European Banking Authority guidelines on SREP.

The share of banks receiving an overall score of 3 increased to 43% in 2019 from 38% in 2018. Meanwhile the share of banks classified as worst performers, scoring 4, decreased to 8% from 10%. At the same time the percentage of banks that scored 2 decreased to 49%, from 52%. No significant bank scored 1.

There are three areas of notable deterioration in the SREP scores:

• An assessment of business models showed that most significant institutions’ earnings are below their cost of capital. This hampers their capacity to organically generate capital and to issue new equity. Concerned by low profitability, supervisors are increasingly focusing on banks’ future resilience and the sustainability of their business models.
• Internal governance is proving to be an area for supervisory concern: governance scores have worsened overall over recent years. Three out of four banks (76%, up from 67% in 2018) scored 3. Only 18% of banks achieved a score of 2, down from 25% in 2018. Findings show that in a significant number of instances management bodies are not effective and internal controls are weak.
• Furthermore, some banks reported material losses which were mostly due to conduct risk events. This is reflected in the growing number of banks that scored 3 for operational risk: 77%, up from 63% in 2018. IT/cyber risks have also been a key source of operational risk.

In response to the deterioration in scores, supervisors will intensify assessments of the sustainability of business models and will continue to require banks to enhance the effectiveness of their management bodies and to strengthen internal controls and risk management.

Full press release on ECB

Aggregate SREP_outcome on ECB

Full SREP_information on ECB

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