Page 35 - EBA 2015.1815 Annual report 2014 web 2

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Standards and guidelines to strengthen
supervisory convergence
Promoting supervisory convergence is an es-
sential part of the EBA’s mandate and during
2014 the EBA developed a number of stand-
ards and guidelines to achieve convergence
in supervisory methodologies and college
functioning. The Single Rulebook addressing
supervisory convergence focused on estab-
lishing a common framework for the Super-
visory Review and Evaluation process (SREP)
across the EU and a common approach to as-
sessing funding plans across the EU. A new
set of technical standards laid the foundations
for the functioning of colleges necessary for
cross border supervision, and for reaching a
joint decision for approving internal models
used by institutions across Member States.
These products represent major progress in
establishing consistent supervisory practices
across the single market and in strengthen-
ing the basis and functioning of cross border
supervision in colleges.
The common SREP framework is built around
the assessment of four major building blocks
leading to the overall SREP assessment, which
represents the up-to-date supervisory view of
an institution’s risks and viability (see Figure 4).
The overall SREP assessment serves as a
basis for the decision on the application of
supervisory measures, including additional
capital and/or liquidity requirements, and may
also lead to the decision on the application of
early intervention measures. If the outcomes
of the SREP assessment suggest there is a di-
rect threat to the viability of an institution, the
supervisor should then consider whether con-
ditions for the resolution are met and whether
resolution proceedings should be initiated
following the procedures and requirements
stipulated in the BRRD.
What do the new guidelines cover?
The new guidelines comprehensively cover all
aspects of SREP and provide a common and
consistent process. This means all EU banks
will undergo an evaluation of their business
model and an assessment of their risks to capi-
tal e.g. interest rate risk in the banking book.
The guidelines also provide clarity on the scor-
ing methodology, set the framework for how to
determine and articulate additional capital and
liquidity requirements, and explain the role of
stress testing and CRD capital buffers. Finally,
they allow for the frequency and intensity of the
assessment to depend on the size, complexity
and systemic impact of an institution, deter-
mined by a category to which it is assigned.
Box 3 — The new SREP framework
The SREP framework allows supervisors within the EU to assess risk profiles
of institutions, their risk management, control and governance arrangements,
business models, capital and liquidity adequacies; in sum the overall viability of
an institution. The outcomes of this assessment can lead to the application of su-
pervisory measures or early intervention measures to address any shortcomings.
The guidelines on common procedures and methodologies for SREP developed
by the EBA in 2014 introduce a common SREP framework to be implemented
across the EU by 2016 and aim to increase consistency of supervisory practices
and outcomes across the EU. They also provide a solid foundation for the work of
supervisory colleges in their annual joint risk assessments and in reaching the
joint decision on institution-specific prudential requirements.
Until now, the EBA observed inconsistencies in how supervisors across vari-
ous Member States undertook their reviews and applied supervisory measures.
This has led to a dispersion of supervisory conclusions on risks and different
outcomes when identifying which measures (additional capital requirements
or otherwise, as listed in Articles 104 and 105 should be used to remediate the
outcomes of the SREP).