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Summary of EBA Guidelines on Common Procedures and Methodologies for SREP and Supervisory Stress Testing

Core Content

These guidelines, issued by the European Banking Authority (EBA), aim to establish common procedures and methodologies for the Supervisory Review and Evaluation Process (SREP) and supervisory stress testing across the European Union. They are based on Article 107(3) of Directive 2013/36/EU and Article 100(2) of the same directive, with the objective of promoting consistency and convergence in supervisory practices.

The guidelines provide a comprehensive framework for assessing institutions based on their risk profile, business model, internal governance, and capital and liquidity adequacy. They are intended to support competent authorities in conducting effective supervision and in ensuring that supervisory actions are aligned with the prudential requirements set out in EU legislation.

Main Components of the SREP Framework

The SREP framework is structured around the following key components:

• Categorisation of institutions: Institutions are divided into four categories based on their size, complexity, and cross-border activities. This categorisation supports the application of a proportionality principle, where the depth and frequency of assessments vary depending on the category.
• Monitoring of key indicators: Regular monitoring of financial and non-financial indicators is used to detect material changes in the risk profile and to support the SREP process.
• Business model analysis (BMA): This involves assessing the viability of the institution's business model and the sustainability of its strategic plans. It also identifies key vulnerabilities that may not be evident from other SREP elements.
• Assessment of internal governance and institution-wide controls: This ensures that internal governance and risk control systems are adequate for the institution’s risk profile and business model. It includes an evaluation of the internal capital and liquidity adequacy assessment processes (ICAAP and ILAAP), as well as the institution’s ability to implement sound risk strategies.
• Assessment of risks to capital: This includes evaluating credit and counterparty risk, market risk, operational risk, and interest rate risk from non-trading activities. It also covers the determination of additional own funds requirements and the calculation of the Total Capital Requirement (TSCR).
• Assessment of risks to liquidity and funding: This evaluates the adequacy of liquidity resources and the potential need for specific liquidity requirements. It includes an analysis of inherent funding risk and the effectiveness of liquidity and funding risk management.
• Overall SREP assessment and supervisory measures: The overall assessment combines the findings from all SREP elements and leads to a comprehensive supervisory view of the institution. It informs the application of capital and liquidity measures, as well as other supervisory interventions.

Key Methodologies and Scoring

The guidelines introduce a consistent scoring system ranging from 1 to 4 for individual SREP elements and an overall SREP score. The scoring reflects the supervisory view of risk and is based on the assessment of the risk profile, business model, and governance structure of the institution.

• Risk scores: These indicate the likelihood of a significant prudential impact (e.g., potential loss) on the institution from specific risks.
• Viability scores: These reflect the magnitude of risk to the institution's viability from each SREP element.

The scoring framework is supported by detailed tables that outline supervisory considerations for each element. The outcome of the scoring is used to determine the overall supervisory view and to inform the application of institution-specific prudential requirements.

Supervisory Stress Testing

Supervisory stress testing is an essential part of the SREP process. The guidelines outline the key elements of supervisory stress testing, including the use of scenarios to assess the institution’s resilience under adverse conditions. Competent authorities are required to apply a consistent methodology for stress testing and to use the results to inform their supervisory decisions.

The guidelines also address the Pillar 2 Capital Guidance (P2G), which is used to set additional capital requirements in response to stress test outcomes. P2G is not subject to the distribution restrictions in Article 141 of Directive 2013/36/EU, and competent authorities should ensure that institutions meet these requirements at all times.

Proportionality and Supervisory Engagement

The guidelines promote a proportionality principle, which allows for tailored supervisory approaches based on the institution’s category. This includes:

• Categorising institutions according to their systemic importance and cross-border activities.
• Applying a minimum supervisory engagement model, where the frequency, depth, and intensity of assessments vary depending on the category.
• Recognising different types of stress testing, from simple portfolio-level analyses to comprehensive institution-wide scenarios.

Implementation and Repeal

The guidelines were developed following public consultation and the opinion of the EBA Banking Stakeholder Group. They are expected to be applied from 1 January 2016, with transitional arrangements for certain aspects of capital and liquidity measures. These guidelines will replace earlier EBA and CEBS guidelines on SREP and Pillar 2 topics, aiming to harmonise supervisory practices across the EU.

Convergence and Supervisory Quality

The EBA is tasked with monitoring and promoting convergence in supervisory practices, especially in relation to SREP. These guidelines are not meant to impose restrictive or granular technical standards but rather to guide competent authorities in applying a consistent and high-quality supervisory approach. They support regulatory convergence while ensuring that supervisory judgment remains aligned with applicable legislation.

Final Provisions

The guidelines are structured to support a holistic and integrated supervisory approach. They include a range of annexes that provide detailed references and examples for various aspects of the SREP and stress testing processes, such as operational risk, internal governance, and liquidity requirements. The application of these guidelines is intended to enhance the effectiveness and consistency of supervision across the EU.