ECB Releases Results of Supervisory Review and Evaluation Process for 2023

The European Central Bank (ECB) recently released the results of its Supervisory Review and Evaluation Process (SREP) for 2023. This process provides an overall assessment of the challenges facing significant institutions and the capital requirements and other supervisory measures that banks are expected to comply with for the year ahead. The SREP was conducted amid deteriorating economic conditions and financial market dynamics following Russia’s invasion of Ukraine. Despite the outlook worsening throughout the year, rising interest rates led to improved profitability and capital generation. On average, banks maintained solid capital and liquidity positions, with the vast majority holding more capital than the levels dictated by capital requirements and guidance stemming from the previous SREP cycle.

CET1 Weighted Average of Pillar 2 Requirements

The weighted average of Pillar 2 requirements (P2R) set by the ECB for total capital remained in line with the requirements set out in previous years, at 2.0% of risk-weighted assets (RWA) after 1.9% in 2022. The P2R for CET1 also remained broadly unchanged for 2023, at 1.1%. Given that no SSM-wide capital stress test was performed in 2022, Pillar 2 guidance (P2G) remained largely unchanged at an average of 1.3%. The 2022 SREP resulted in P2R add-ons for…

Supervisory Action

Credit risk and internal governance remain key areas for supervisory action. The ECB introduced several initiatives in 2022 to foster banks’ response to medium-term structural transformations, such as the digitalization of the financial system and the transition to a green economy. These initiatives were designed to incorporate the thematic review on climate-related and environmental risk and climate stress test results in the SREP. The ECB also launched a knowledge-gathering project across the banking sector to monitor the adoption of digital transformation and the adaptation of business models.

Related Facts

• The weighted average of overall capital requirements and guidance in CET1 rose to 10.7%, up from 10.4%, reflecting the impact of macroprudential policies.
• Banks maintained solid capital and liquidity positions, with the vast majority holding more capital than the levels dictated by capital requirements and guidance stemming from the previous SREP cycle.
• The ECB introduced several initiatives in 2022 to foster banks’ response to medium-term structural transformations.

Key Takeaway

Despite the economic outlook worsening throughout the year, banks have done well in withstanding the impact of the Russian invasion of Ukraine, thanks to their strong capital and liquidity positions, increased profitability and continued improvement in asset quality. However, challenges will remain as long as the war drags on, and banks need to address persistent weaknesses, particularly in their risk control and governance frameworks, and prudently assess future developments.

Conclusion

The ECB’s SREP for 2023 provides an overall assessment of the challenges facing significant institutions and the capital requirements and other supervisory measures that banks are expected to comply with for the year ahead. Despite the economic outlook worsening throughout the year, banks have done well in withstanding the impact of the Russian invasion of Ukraine. The ECB has introduced several initiatives to foster banks’ response to medium-term structural transformations. Banks must address persistent weaknesses, particularly in their risk control and governance frameworks, and to assess future developments prudently.