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SREP capital ratios and due process
The introduction of the Single Supervisory Mechanism (SSM) and the resulting transfer of prudential bank supervisory competences to the European Central Bank (ECB) has led to material changes in the European financial supervisory landscape. One of the ECB’s key supervisory tools is the supervisory review and evaluation process (SREP). On the basis of the outcome of this process, the ECB requires significant credit institutions to hold additional own funds. This article describes and analyses the ECB’s handling of this significant regulatory tool and identifies weaknesses in applicable due process requirements.
Contents
- I. SREP Framework
- II. SREP Overview
- 1. Categorization of institutions
- 2. Monitoring of the key performance indicators
- 3. Core SREP elements
- 3.1 Business model analysis (BMA)
- 3.2 Assessment of internal governance and controls
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- 3.3 Assessment of risks to capital
- 3.4 Assessment of risks to liquidity and funding
- 4. Overall SREP assessment and supervisory measures
- 4.1 Overall SREP assessment
- 4.2 Supervisory measures
- III. SREP capital requirements
- 1. Calculation of the SREP capital add-on according to the SREP Guidelines
- 2. Determining the amount of capital add-on: due process and procedural rights
- 2.1 Statement of reasons requirement
- 2.2 Do the ECB’s SREP decisions meet the statement of reasons requirement?
- 2.2.1 Interpretation of ECB’s SREP decisions
- 2.2.2 Examples for deficiencies determined in the ECB’s SREP decisions
- 2.2.3 Issues
- 3. Quality of the capital required as SREP capital add-on
- 3.1 Pillar 1 capital requirements
- 3.2 Own funds to be regarded for large exposure definition and limit
- 3.3 Capital buffer requirements
- 3.4 ICAAP under Art. 73 CRD IV
- 3.5 SREP capital add-on
- 3.6 Conclusion
- 4. Amount of SREP capital add-on in 2015
- 4.1 SREP CET1 requirements between 8 % – 14 %
- 4.2 4,5 % CET1 under Pillar 1 vs. 4 % – 9,5 % CET1 under Pillar 2
- 5. SREP capital add-on and capital buffers
- 6. Impact of the SREP capital add-on on capital distributions
- 7. Disclosure of the SREP capital add-on
- IV. Conclusion
- *
- *)Dr. iur., partner at Freshfields Bruckhaus Deringer LLP, Frankfurt/M.
- **
- **)Associate lawyer at Freshfields Bruckhaus Deringer LLP, Frankfurt/M.
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