SREP
The Supervisory Review of the Risk
Management Process
RAY VELLA
Banking Supervision Unit
MFSA
19th April 2012
Summary of Presentation
- The Capital Requirements Directive (2006/48/EC & 2006/49/EC) as
transposed to local Banking Rules BR/04 and BR/08
- Issue of CEBS document GL03 as transposed to local Banking Rule
BR/12: The Supervisory Review Process
- The Internal Capital Adequacy Assessment Process (ICAAP) –
Appendix 2
- The Supervisory Review and Evaluation Process (SREP) –
Appendix 3
- The Banking Supervision Unit’s approach to SREP
- Concluding Comments
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The Capital Requirements Directive
- Basle II document – International Convergence of
Capital Measurements and Capital Standards
- European Law – 2006/48/EC & 2006/49/EC (Capital
Requirements Directive (CRD))
- Local transposition of 2006/48/EC to BR/04 and
2006/49/EC to BR/08
- CRD based on a 3 Pillar Framework
- Complementary and mutually re-enforcing
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The Capital Requirements Directive
Pillar I
- Minimum Capital Requirements
- BR/04 – for Credit Risk & Operational Risk
- BR/08 – for Market Risk
Pillar II
- The Supervisory Review Process
- Issue of CEBS GL03
Pillar III
- Supervisory Disclosure
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The Capital Requirements Directive
Reasons for Pillar II
- Encourage banks to utilise:
1. better risk management techniques
2. more effective internal governance
- Encourage supervisors to enhance risk based supervision
- Focus on internal not regulatory capital
- Ensure that banks have adequate capital to support all risks
- Accommodate differences between banks
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Issue of CEBS Document GL03
- Issued in January 2006 by the Committee of European Banking Supervisors
- Underlying aim of Pillar 2 process – to enhance link between an institution's risk
profile, risk management and risk mitigation processes
Principles underpinning the Supervisory Review Process
-
Institutions should have a process to assess their capital adequacy in relation to
risks (the ICAAP)
-
Supervisors should review and evaluate institutions’ internal capital assessments
and strategies (the SREP)
-
Supervisors expect institutions to operate above minimum capital level
-
Supervisors should aim to intervene at an early stage to prevent capital depletion
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Issue of CEBS Document GL03
- Transposition to Banking Rule BR/12
- Appendices and Annexes
- Appendix 1 – Internal Governance
- Appendix 2 – ICAAP
- Annex 2A – ICAAP Report –Recommended Structure
- Annex 2B – Technical Criteria on Organisation and
Treatment of Risk
- Annex 2C – List of Definitions
- Annex 2D – Principles of Stress Testing
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Issue of CEBS Document GL03
- Appendices and Annexes (cont.)
- Annex 2E –Principles of Remuneration Policies
- Annex 2F – Principles of Management of IRRBB
- Annex 2G – Principles for the Management of
Concentration Risk
- Annex 2H – Principles of Risk Management
- Annex 2I – Principles for the Management of
Operational Risk in Market-Related
Activities
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Issue of CEBS Document GL03
- Appendices and Annexes (cont.)
- Appendix 3 – SREP
- Annex 3A – SREP/ICAAP Interaction Process
- Annex 3B - Technical Criteria on SREP
- Annex 3C – Prudential Measures
- Appendix 4 – Obligations of the Authority as
Consolidating Supervisor
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ICAAP – Appendix 2
- Codified in Article 123 of CRD
- A process to identify, measure, aggregate and monitor an
institution’s risks
- Hold adequate internal capital in relation to risk profile
- Use sound risk management systems and develop them
further
- ICAAP embedded in institution’s business and
organisational processes
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ICAAP – Appendix 2
10 ICAAP Principles:
1.
A process of assessing capital adequacy relative to risk profile
2.
The ICAAP is the responsibility of the Institution
3.
ICAAP formally documented and responsibility of Board and
Management
ICAAP integral part of management process and decision making
culture
4.
5.
ICAAP should be revised regularly
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ICAAP – Appendix 2
ICAAP Principles (cont.):
6. ICAAP should be risk-based
7. ICAAP should be comprehensive
8. ICAAP should be forward-looking
9. ICAAP should be based o n adequate measurement and assessment
processes
10. ICAAP should produce a reasonable outcome
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SREP – Appendix 3
- SREP codified in Art. 124 and Annex XI of CRD
- Evaluation of ICAAP by the Authority
- Authority’s review of material risks
- Adequacy of own funds and capital
- Assessment of whether additional capital is the correct means of
addressing an institution’s vulnerabilities or other prudential
measures required
- Consistency of assessment
- Application of prudential measures
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SREP – Appendix 3
10 SREP Principles:
1. Integrated part of risk-based approach
2. SREP to apply to all licensed institutions
3. SREP to cover all activities of an institution
4. SREP to cover all material risks and internal governance
5. SREP will assess and review the credit institution’s ICAAP
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SREP – Appendix 3
10 SREP Principles (cont.):
6. Review compliance with capital requirements as per BR/04 and
BR/08
7. SREP should identify existing or potential problems and key
risks
8. SREP to provide info on the possible need to apply prudential
measures
9. Authority to communicate results of SREP and possible
corrective action
10. Authority’s evaluation reviewed annually to ensure it remains
up-to-date
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The BSU’s Approach to SREP
• BSU’s Risk Assessment System (RAS) is based on the
‘Traffic Lights’ approach
• Banks are classified ‘red’, ‘orange’ or ‘green’
• Determination of how each bank’s SREP analysis is to be
conducted
• Either through an on-site visit
• Or through a desk-based analysis
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The BSU’s Approach to SREP
• SREP on-site inspection
– A team of Inspectors undertake review at the bank’s premises
– Assessment of risks inherent in the bank’s operations
– Assessment of internal governance and controls, including
evaluation of risk management, compliance and internal audit
– Assessment of effects of risk mitigation measures
– Evaluation of risk capital allocations and stress tests
– Calculation of available capital
– Evaluation of adequacy of capital, including future projected
requirements
– Issue of SREP Inspection Report
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The BSU’s Approach to SREP
• SREP Desk-Based Analysis
– Receipt of a bank’s ICAAP Document
– A detailed desk-based analysis is undertaken
– Will include evaluation of data contained in the ICAAP and compared to
statutory/regulatory data
– On the basis of the Inspectors’ knowledge of the bank, undertake an
assessment of risks and relative capital allocations
– Evaluate the adequacy of capital allocations on the basis of knowledge of
bank and ICAAP data
– Send letter to the bank requesting that any required corrective measures
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be taken by the bank
Concluding Comments
- BR/12 aims at ensuring that a credit institution is sufficiently
well capitalised in relation to the risks inherent in its
operations
- The importance of robust internal governance process
- The importance of a three pronged internal control
framework – compliance/risk/audit
- BR/12 is a dynamic rule and will continue to be enhanced as
new guidelines and principles are issued by CEBS
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Thank you for your attention.
Ray Vella
Deputy Director – Banking Supervision Unit
rvella@mfsa.com.mt
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