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EBA Workshop Summary: Proportionality in Institutional and Regulatory Reforms

Core Content

The workshop focuses on the application of the proportionality principle within the Single Supervisory Mechanism (SSM) as outlined in CRD IV and EBA guidelines. The principle ensures that supervisory efforts are aligned with the systemic importance and risk profile of credit institutions, allowing for an efficient use of resources and tailored supervision.

Main Views

1. Regulatory Proportionality Framework

• The proportionality principle is a key component of CRD IV (Article 97.4) and EBA guidelines on SREP.
• It dictates that the frequency and intensity of supervisory review and evaluation should be proportional to the size, systemic importance, nature, scale, and complexity of the institution.
• The SSM Guide emphasizes Principle 7 – Proportionality, stating that supervisory practices should match the systemic importance and risk profile of credit institutions.

2. Limits to the Proportionality Principle

• EBA SREP guidelines set a floor for the application of the proportionality principle, ensuring that minimum standards are maintained.
• Individual assessment of SREP elements is required, including:
  • Business model
  • Internal governance and controls
  • Risks to capital
  • Risks to liquidity
• A 4-grade scale is used to score individual SREP elements.
• The frequency of assessment is determined by:
  • Quarterly monitoring of key risk indicators
  • Annual summary of the overall SREP assessment
  • Biennial review of all individual SREP elements
• Individual SREP legal decisions are made based on the assessment outcomes.

Key Information

3. Intensity of Engagement

• Significant Institutions (SIs) are subject to consolidated supervision, with on-going supervision and on-site inspections based on their risk profile.
• The intensity of engagement is directly linked to the risk profile of the institution, with a stronger focus on larger and more complex systemic groups.
• Less Significant Institutions (LSIs) are monitored in a proportionate manner, based on their priority rank within the banking group.

4. SSM SREP (Supervisory Review and Evaluation Process)

• The SSM SREP is a holistic approach that combines quantitative and qualitative assessments.
• It includes:
  • Quantitative capital measures
  • Quantitative liquidity measures
  • Other supervisory measures
• The SREP considers:
  • The potential impact of the institution on the financial system
  • Its intrinsic riskiness
• The outcome of the SREP includes a score and a rationale or main conclusions.
• The principle of proportionality is applied to both SIs and LSIs, ensuring that supervisory standards are consistent and appropriate.

Conclusion

The proportionality principle is a central element in the SSM's supervisory framework, enabling a risk-based and resource-efficient approach. It ensures that supervisory engagement is differentiated based on the size, complexity, and systemic importance of institutions. The SSM SREP provides a structured and comprehensive method for evaluating institutions, with clear guidelines on how to apply proportionality in both quantitative and qualitative assessments. This approach supports the stability and resilience of the European banking system while maintaining supervisory consistency across all institutions.