Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment

28 May 2024

By Claudia Buch, Chair of the Supervisory Board of the ECB

Supervision is all about risks: identifying risks that are relevant for banks, ensuring that banks manage risks well and that they are sufficiently resilient against them. Supervision is not an end in itself – it is needed to ensure that banks remain sound and at the service of citizens at all times.

The risk environment in which banks operate has evolved substantially in recent years. Structural shifts and external shocks have made risk assessments more complex. Changes in the macro-financial environment, geopolitical shocks, climate change and nature degradation as well as digitalisation affect the risks banks are facing. And the overall level of uncertainty is high.

As risks evolve, supervision must evolve too. Supervisors need to understand risks, they need to be forward-looking, they need to communicate clearly with banks, and they need to be intrusive in their actions to ensure that banks remediate their deficiencies. All this takes time and resources, and it requires a reprioritisation of tasks to ensure that new risks are adequately addressed.

This is why the ECB’s Supervisory Board has embarked on a journey to make supervision in Europe more efficient and effective. It has taken a critical look at its strategy and processes, and it asked a distinguished panel of independent experts to holistically assess its supervision. Their report was published in April 2023.

On this basis, the Supervisory Board has decided on a reform of its Supervisory Review and Evaluation Process (SREP). This is an important milestone for European banking supervision. The SREP will be adapted to increase efficiency and effectiveness, building on and going beyond changes that have been implemented in recent years, such as a new risk tolerance framework. The new SREP will remain fully compliant with the relevant European Banking Authority guidelines. Changes will be implemented gradually, starting in the second half of 2024, and will be finalised for the 2026 SREP cycle.

The new SREP builds on a successful first decade of European banking supervision. Banks’ resilience has been strengthened, legacy risks have been reduced, and prudent governance and risk management have been promoted. Supervisory standards have largely been harmonised. European banking supervision has achieved these goals by building on best practices, designing a comprehensive supervisory methodology and benchmarking across banks.

The Supervisory Board has six goals for the new SREP:

1. Focusing risk assessments: to assess bank-specific risk profiles, supervisors need common tools, methodologies and procedures. But this does not mean that every supervisory team has to address every risk with the same intensity every year. The new SREP will thus build on and strengthen the multi-year approach introduced in 2023, which allows supervisors to focus on specific topics each year while spreading their assessments throughout the year. If assessments show no material changes in the risk profile of an institution, SREP decisions can be updated every two years, under some conditions. This possibility – so far limited to a small number of banks – will now be extended.

2. Better integrating supervisory activities: supervision needs to deliver a structured, comprehensive and consistent view of banks’ risks, based on different supervisory activities. On-site inspections, targeted deep-dive analyses by Joint Supervisory Teams and horizontal thematic reviews are needed to provide an integrated assessment of the evolving risk environment in which banks operate. In the new SREP, integrated planning of the different supervisory activities will be improved to maximise synergies. This will also provide banks with a clearer overview of supervisory plans. ECB Banking Supervision has, for example, already taken steps to better integrate fit and proper assessments into the overall SREP governance assessments, and this will continue.

3. Using the full supervisory toolkit: supervision is not only about identifying risks but also about mitigating them. The reformed SREP will make supervision more effective and intrusive by using the full range of supervisory tools that the law makes available.^[1] When remediation of identified weaknesses is insufficient, ECB Banking Supervision will expeditiously increase the severity of supervisory tools and swiftly move up the escalation ladder. This also includes making wider use of legally binding qualitative requirements as well as enforcement measures such as the imposition of periodic penalty payments.

4. Enhancing communication: supervisory communication to banks needs to be clear and concise. But SREP decisions can be long documents. In 2021, ECB Banking Supervision introduced executive letters to facilitate a better dialogue about key priorities with banks. In the future, SREP decisions will be more focused, clearly outline supervisory expectations and include strong measures when needed.

5. Making methodologies more stable: good supervision is based on consistent methodologies like those developed during the first decade of European banking supervision. It is now time to make existing methodologies more stable and, where possible, simpler and more transparent. With this goal in mind, ECB Banking Supervision is working on a revised methodology for setting Pillar 2 capital requirements, which will be published by the end of 2024 and fully applied in the 2026 SREP cycle. More stable methodologies will enable supervisors to focus conceptual work on new issues and emerging risks.

6. Making better use of IT systems and analytics: ECB Banking Supervision has prioritised its digital agenda. Its IT strategy for the years 2024-28 foresees continued investment in supervisory technology applications to improve efficiency, access to data, risk analysis, consistency of decision-making and collaboration. We will explore how generative artificial intelligence and large language models can support supervisors in taking on routine tasks, leaving more room for their supervisory judgement.

These changes will improve European banking supervision. They will make supervisory processes more targeted, efficient, predictable and transparent. The SREP will become shorter and move closer to real-time supervision. To fully reap the benefits of these and other measures, ECB Banking Supervision will foster a supervisory culture that focuses on key risks and encourages strong and timely actions.

The new SREP will not mean less supervision or a “light touch” approach. Rather, it will enable ECB Banking Supervision to continue delivering on its mandate to keep banks safe and sound. This key purpose of supervision will not change – but supervision will become more effective. This is more relevant than ever considering the fast-evolving risk environment that we live in, with geopolitical, macroeconomic, cyber, and climate and environmental risks on the rise, and as economies are undergoing structural changes. We will continue to evolve our supervision to ensure that European banks remain at the service of European citizens in the future.

The Q&A on the SREP is available.

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