The European Central Bank (the “ECB”) published its 2020 supervisory priorities at the beginning of October 2019, which set out the ECB Banking Supervision focus areas for the forthcoming year.
Both directly and indirectly supervised banks should consider these as, in addition to informing where supervisors will concentrate resources, insights are given on the schedule of on-site inspections and thematic reviews that are likely to occur.
The supervisory priority areas are largely a continuation from the previous year, albeit with a realigning of these to high-level priority areas set out below. One notable addition is the reference to Business model sustainability, with this reflecting the gradual shift in supervisory focus to banks’ future resilience. A spotlight has also been placed on Governance, and more specifically banks’ Governance frameworks, due to 2019 findings that further improvements are still required in this area. Following the conclusion of the ECB sensitivity analysis of liquidity risk and publication of findings on in early October 2019, explicit reference to liquidity stress tests has been removed. The three key priority areas are set out as follows:
Continuing Balance Sheet Repair
- NPLs – despite further reductions made in NPL inventory, the current aggregate level of NPLs remains elevated compared to international standards. The main purpose is to continue engagement on bank-specific supervisory expectations while reducing legacy risks and achieving consistent coverage of the stock and flow of NPLs over the medium-term
- Internal Ratings-Based Models – following up on the TRIM findings will be the primary focus, in addition to further work by banks on the EBA’s IRB repair programme
- Trading Risk and Asset Valuations – concentration will be on-site inspections on trading and market risk aspects, particularly banks exposed to complex instruments at fair value
Strengthening Future Resilience
- Credit Underwriting Criteria and Exposure Quality – continuation of the assessment of the quality of banks’ underwriting criteria, with focus on gaining a deeper understanding of loan origination processed and practices. Real estate exposures and leveraged finance have been flagged as on-site inspection topics
- Capital and Liquidity Management – improvement of ICAAPs and ILAAPs, in addition to further integration into SREP, with ICAAPs being the focus of on-site work
- Business Model Sustainability – continued assessment of bank’s business models and profitability within SREP, with a particular focus on digitalisation
- IT and Cyber Risk - continuation of the assessment of the IT and cyber risks facing banks through on-site inspections and monitoring risks as part of SREP. In addition, the SSM cyber incident reporting process will be utilised by significant banks to report any significant cyber incidents to the ECB
- Stress Test Exercises – EBA EU-wide stress test and ECB stress test, with results feeding into the SREP. A review and/or enhancement of banks’ own stress testing is encouraged
- Governance – assessment of adherence to governance expectations in specific areas linked with strengthening future resilience
Brexit follow-ups fall under ‘Other Priorities’ however, monitoring of the implementation of contingency measures in the event of a no-deal Brexit continues to be of prominence.
Why Grant Thornton
Grant Thornton’s teams of dedicated experts are experienced in supporting banks with these regulatory challenges outlined in the 2020 supervisory priorities:
- Our industry-leading Prudential Risk team understands that regulation continues to drive the strategic agenda for banks. They specialise in assisting clients across the financial services sector in navigating through the maze of regulation and supporting clients to identify regulatory obligations and work towards full compliance
- Our highly qualified Quantitative Risk team provides support to financial institutions across the full spectrum of risk measurement and modelling strategies, including the development, deployment and validation of key models and risk measurement methodologies in regulatory capital, stress testing and IRB, IFRS 9 and bank risk modelling
- Our Financial Services Consulting team integrates with our wider Financial Services Advisory practice to deliver leading, multi-disciplinary assignments. Our people hold internationally recognised project management qualifications, and have gained considerable experiences in assisting clients to deliver significant change programmes arising from the regulatory agenda
- Our NPL Advisory team specializes in assisting clients tackle their NPL challenges. We work closely with clients to establish fit for purpose, efficient operating models to service NPL debt. The team also specializes in assisting clients through the various stages of their NPL Deleveraging journey , including loan sale management, loan sale enablement and due diligence, Loan dale data tape build, stratification and pricing; migrations to purchasers and NPL servicing solutions. We also acquire distressed portfolios on behalf of our clients, including, pricing, Q&A, bid and migration services