The European Central Bank redefines the supervisory priorities for banks (EKT) as announced this morning.

The objective of the ECB is to strengthen the resilience of banks in immediate macroeconomic and geopolitical crises.

In this context, the ECB will require banks to address deficiencies in asset and liability and credit frameworks and counterparty credit risk management. Banks must also accelerate effective remediation of identified deficiencies in internal governance and climate and environmental risk management. In addition, they need to make further progress in digital transformation and building strong business resilience frameworks.

As the ECB’s Supervisory Arm announced today as part of the publication of the results of its Supervisory Review and Evaluation Process (SREP) for 2023 and its supervisory priorities for the years 2024-26, European banks have a strong capital base and liquidity as well as increased profitability. Nevertheless, it was decided to increase the minimum capital adequacy ratio from 10.7% to 11.1% due to the effects of micro prudential policies.

It is clarified that the specific evaluation process – known by the acronym SREP – is the annual exercise in which supervisory authorities examine banks’ risks and produce capital requirements, then determining individually for each bank separately the percentage of the minimum capital (CΕΤ1) that it should have.

The SREP assesses four main areas: the viability and sustainability of business models, adequacy of internal governance and risk management, risks to capital and risks to liquidity and funding. Each item is given a score ranging from 1 to 4 (with 1 being the best and 4 being the worst). These scores are then combined to produce an overall score (which also ranges from 1 to 4).

However, the ECB stepped up efforts to ensure that banks took the required measures imposed on them to address any weaknesses arising from the exercise.

The ECB called for qualitative measures, which are a key component of its supervisory toolkit, mainly to address deficiencies related to internal governance, credit risk management and capital design.

Banks should continue to pay close attention to internal governance, as three out of four have taken steps to address deficiencies in this area.

There was also a significant increase in the number of measures imposed by the ECB to address liquidity risk and interest rate risk in the banking book, caused by the changing macroeconomic landscape.