An Overview of the Supervisory Review and Evaluation Process (SREP)
The Single Supervisory Mechanism (SSM) is a new banking supervision framework for the European Union (EU) that aims to ensure consistent supervision, increase financial integration and stability, and ensure the safety and soundness of the European banking system. Under the SSM, the European Central Bank (ECB) is responsible for supervision of financial institutions based in the Eurozone. On 19 December 2014 the EBA published final guidelines on common procedures and methodologies for a new Supervisory Review and Evaluation Process (SREP) that is aimed at harmonizing banking supervision which takes effect from 1st January 2016. SREP framework is built around eight core elements required of a National Competent Authority (NCA).
| No | SREP Element | NCA Obligations |
| 1. |
Categorisation Categorisation of the institution and periodic review. |
Categorise institutions into one of four categories based on the institution’s size, structure, internal organisation, and the nature, scope and complexity of its activities.
|
| 2. |
Monitoring Monitoring of key indicators
|
Periodically monitor key financial and non-financial indicators. |
| 3. |
BMA business model analysis
|
Conduct regular BMA in order to assess business and strategic risks, business model viability, and strategy sustainability.
|
| 4. |
Controls Assessment of internal governance and institution-wide controls |
Assess internal governance, corporate and risk culture, management, remuneration policies and practices, risk management framework, internal controls and audit, information systems, business continuity, and recovery planning.
|
| 5. |
Capital Assessment of risks to capital and adequacy of capital to cover these risks
|
Assess credit and counterparty risk, market risk, operational risk, and interest rate risk (non-trading activities) (Risks). |
| 6. |
Liquidity Assessment of risks to liquidity and funding and adequacy of liquidity resources and institution’s own funds to cover these risks
|
Assess inherent liquidity and inherent funding risks; liquidity and funding risk management; assess overall liquidity; determine the need for specific liquidity measures; quantify potential specific liquidity requirements (benchmark calculations); articulate specific liquidity requirements; determine institutional liquidity score (1=No Risk; 2=Low Risk; 3=Medium Risk; 4=High Risk).
|
| 7. |
Assessment Overall SREP assessment |
Assess institutional risks. Determine whether governance, control deficiencies, and/or business model or strategy may exacerbate or mitigate these risks. Determine whether funds and liquidity resources provide sound risk coverage. Assess the potential for positive and negative interaction between elements. Determine overall SREP score (1=No Risk; 2=Low Risk; 3=Medium Risk; 4=High Risk; F=Institution Failing or Likely to Fail).
|
| 8. |
Supervisory Supervisory measures (including intervention measures if required)
|
Assess the need to impose additional own funds requirements by setting the Total SREP capital requirements (TSCR), and also additional capital measures. Assess the need to impose specific liquidity requirements, and also additional liquidity measures. Assess the need to impose other supervisory measures relating to BMA, Controls, Risks, and Liquidity and Funding Risks. Assess the interaction between supervisory and early intervention measures, and between supervisory and macro-prudential measures.
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Ensuring business model integrity, a robust and accurate internal control and governance framework and high quality data quality and management for capital risks, liquidity risks, and funding risks is a crucial priority for EU supervised firms under the new SREP framework.
SREP framework
For more information on the new SREP framework, or our regulatory compliance products and services, please email DataTracks at: enquiry@datatracks.eu.