On March 21, the (ECB) published its annual report on supervisory activities for 2018, which sets out the ECB’s key achievements during 2018 under the single supervisory mechanism (SSM). READ MORE
Single Supervisory Mechanism
ECB Speech on Risk Appetite Frameworks
The European Central Bank (“ECB“) published a speech, “Risk appetite frameworks: good progress but still room for improvement“, given by Daniele Nouy, ECB Supervisory Board Chair, at the International Conference on Banks’ Risk Appetite Frameworks on April 10, 2018.
In her speech, Ms. Nouy explains that a bank’s risk appetite framework includes the policies, processes, limits, controls and systems it puts in place to define, communicate and monitor how much risk it is willing to take on. Supervisors expect risk appetite frameworks to be comprehensive, effectively governed, consistently used and fully integrated into strategic decision-making.
Ms. Nouy acknowledges that banks’ risk appetite frameworks are now better structured and subject to clearer governance. Most banks have clarified the role of the relevant stakeholders involved in the risk appetite framework and many banks’ internal auditors have reviewed the effectiveness of risk appetite frameworks.
However, she highlights four areas in which banks need to improve:
- Banks need to improve how they embed risk appetite frameworks in their strategic processes. They need to take a holistic approach to risk culture and risk management and to align risk modifiers and key performance indicators with their risk appetite frameworks. The board must challenge the senior management and ensure that each strategic decision is based on a sound risk analysis.
- Risk appetite frameworks still do not cover enough risks, particularly non-financial risks (such as compliance and reputational risks, IT risks, legal risks and conduct risks).
- The governance of risk appetite frameworks must be improved. Boards and banks’ risk functions need to play a larger role in defining and reviewing risk appetite frameworks
- Risk appetite limits need to be set and used comprehensively. Banks need to break these limits down to business lines, entities and countries and need to work on how they calculate and apply limits.
Ms. Nouy previously stated that banks’ progress had been too slow in relation to risk management frameworks in a speech in March 2018.
The ECB identified risk management as one its supervisory priorities for the single supervisory mechanism (“SSM“) for 2018.
ECB Offers Opinion on Proposed Regulation to Establish a European Deposit Insurance Scheme
On April 20, 2016, the European Central Bank (ECB) published an opinion on a proposal for a regulation amending Regulation (EU) No. 8.6/2014 in order to establish a European Deposit Insurance Scheme (EDIS).
The ECB notes that an EDIS is a necessary third pillar to complete the Banking Union, having established a Single Supervisory Mechanism and the Single Resolution Mechanism and overall welcomes the system proposed. However, the opinion notes risks in terms of scope and governance of the scheme.
The opinion appends a technical working document containing drafting proposals as proposed amendments to the text released by the European Commission.
ECB Publishes Regulation and Guidance on Options and Discretions Available in Union Law
On March 24, 2016, Regulation ((EU) 2016/445) of the European Central Bank (ECB) on the exercise of options and discretions (ODs) was published in the Official Journal of the EU (OJ). The ECB has also published a guide on the ODs available under Union law.
The Regulation details the legal obligations of the significant credit institutions within the scope of the single supervisory mechanism (SSM) regarding the prudential treatment of certain “general” ODs available to competent authorities under EU banking law (that is, the CRD IV Directive (2013/36/EU), the Capital Requirements Regulation (Regulation 575/2013) (CRR) and delegated acts).
The guide sets out the ECB’s approach concerning the exercise of the ODs. It aims to provide coherence, effectiveness and transparency regarding the supervisory policies that will be applied in supervisory processes within the SSM as far as the significant credit institutions are concerned. In particular, it is designed to assist the joint supervisory teams (JSTs) in the performance of their tasks regarding the principles the ECB intends to follow in supervising significant credit institutions.
A related ECB press release advises that, soon, the ECB will launch a consultation on how to harmonise a second, smaller group of identified ODs. Regulation. Guide.
ECB Publishes Its SSM Supervisory Priorities for 2016
On January 6, the European Central Bank (“ECB”) published a paper setting out its supervisory priorities in relation to the banks it supervises under the Single Supervisory Mechanism (“SSM”).
The ECB’s supervisory priorities under the SSM are:
- business model and profitability risk;
- credit risk;
- capital adequacy;
- risk governance and data quality; and
- liquidity.
The priorities are not an exhaustive list but are meant to provide an essential tool to coordinate supervisory actions across banks in an appropriately harmonized, proportionate and efficient way, thereby contributing to a level playing field and a stronger supervisory impact. Paper.