Consultation response
Finance Watch urges the European Banking Authority to strengthen SREP supervision with a more risk-focused and precautionary approach, especially for emerging ESG and geopolitical risks. It also calls for clearer capital rules and better integration of ESG risks to protect financial stability.
Finance Watch has responded to the European Banking Authority consultation on revised Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing. These guidelines promote common procedures and methodologies for supervisors to assess bank risk management practices. This update is also an opportunity for the EBA to include the latest updates concerning the management of ESG risks.
Finance Watch supports a comprehensive and prudent approach to risk management supervision. New risks such as climate, geopolitical and technological have emerged and require banks to strengthen their ability to manage them effectively. Supervisors play a crucial role in this process, adopting a proactive and precautionary stance to ensure institutions allocate sufficient capital to cover these risks and eliminate vulnerabilities that could compromise their stability.
Key points:
- Support for risk-focused approach: Finance Watch endorses the EBA’s risk-focused approach to the SREP, highlighting that supervisors should prioritise the materiality of the risk, rather than the size or complexity of institutions, when determining their adequate response to risk mismanagement.
- Precautionary approach: Following the first point, supervisors should apply the precautionary principle when uncertainty remains regarding the robustness of the institution’s risk management approach, especially for emergent risks such as ESG risks and geopolitical risks. Finance Watch proposes targeted capital add-ons when an institution’s capacity to address environmental risk is still insufficient.
- ESG integration: While environmental risk is prioritised, social and governance risks must not be deprioritised. Finance Watch advocates for a comprehensive integration of ESG risks across all SREP elements, with a focus on developing supervisory benchmarks and ensuring robust data and transition plans.
- Output floor: The interaction between the output floor and Pillar 2 requirements (P2R) must be closely monitored. The output floor specifically addresses variability in risk-weighted asset computation when using internal models rather than a standardised approach. As such, only the portion of P2R related to deficiencies in internal models should be considered during this monitoring process, keeping other components of P2R unchanged.
- Interaction between Pillar 2 requirement and macroprudential buffers: Finance Watch argues that P2R and P2G don’t fit the same objective as capital buffers (CCB, CCyB, G-SIB, SyRB). P2R and P2G are tailored to individual institutions and designed to address idiosyncratic risks faced by banks, whereas macroprudential buffers aim to bolster financial stability through the mitigation of systemic risks.
