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Over seven months, you reviewed the effectiveness and efficiency of the ECB’s Supervisory Review and Evaluation Process (SREP) and how it relates to other supervisory processes. What is your view of European banking supervision?
The exercise confirmed that the Single Supervisory Mechanism (SSM) is fulfilling its mandate. In record time, the ECB and participating competent authorities managed to put in place a fully effective supervisory regime for all significant banks in the euro area. Moreover – and this was a big challenge from the very beginning – our review confirmed that a well-defined and articulated supervisory methodology has been established, which is consistently applied to all banks thanks to the ECB’s internal controls, including a strong and rather unique second line of defence. Finally, a common supervisory culture is certainly being progressively developed by taking the most positive elements of national supervisors’ varied practices.
But, of course, the success achieved so far does not guarantee future success. As it is often said: “what got you here is not necessarily going to get you there”. ECB supervision needs to continually evolve to continue being effective. For that purpose, the ECB could leverage the maturity of the common supervisory procedures reached to date and, in particular, the strong commitment to ensuring a level playing field across institutions. The credibility gained so far allows the ECB to take ambitious steps to further improve. That could be accomplished by increasing the risk sensitivity of supervisory actions, streamlining processes, better establishing priorities, applying more judgement to complement the information provided by quantitative methodologies for risk assessment and strengthening the role of qualitative measures aimed at promoting adequate risk management.
You flagged the need to streamline the supervisory processes. How could the SREP become leaner? After all, it is a process spanning 21 countries, more than 100 banks and thousands of staff members.
Indeed, by definition the SREP needs to provide on an annual basis an overview of the risk profile of the institutions and the measures required to preserve their safety and soundness. This entails, and will always entail, a fair amount of complexity. That said, there is clear dissatisfaction on the part of all relevant stakeholders regarding the length and operational costs of current procedures. The expert review group believes that there are ways to make the process leaner and shorter. Our main recommendation in that regard is to reduce and simplify SREP-specific analysis and to rely much more on ongoing supervisory actions. Moreover, supervisory decisions taken outside the SREP could well feed into SREP decisions and, possibly, be escalated if so warranted.
We also believe that by separating the risk assessment component of the SREP from the decision on capital add-ons (Pillar 2 requirements (P2R)), running some of the process in parallel and reducing the touch points with the Supervisory Board, the length of the SREP process could be significantly shortened, possibly by up to three months.
Another interesting recommendation was to score a bank’s ability to act, instead of scoring the viability risk for banks. To what extent would this improve the SREP?
The current scoring system aims to provide an overall assessment of a bank’s viability risk and does a good job in that regard. Yet, by definition, that risk does not vary much over time, nor do the scores. That stickiness over time may dampen the ability of the current scoring system to reflect banks’ improvements and the system may therefore fail to provide incentives for banks to address their weaknesses.
Following the example of other important jurisdictions, we believe that rather than reflecting banks’ absolute viability risks, scores could be redefined to reflect supervisors’ assessment of banks’ ability to address their most important weaknesses. As progress made by banks to meet supervisory expectations varies in both directions over time, so will the scores they receive. Importantly, that redefinition would clarify the rationale behind score assignments and strengthen banks’ incentives to implement the actions requested by the supervisor.
This links back to your recommendation to make more use of qualitative measures to move away from the ECB’s capital-centric approach. What is the added value, bearing in mind that more qualitative measures would not result in lower capital requirements?...
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