Supervisory Review and Evaluation Process
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The Supervisory Review and Evaluation Process (SREP) is a regulatory framework used by supervisory authorities to assess and evaluate the risks and capital adequacy of banks and other financial institutions. It is a key component of the prudential supervision of financial institutions and helps ensure their safety and soundness.
The SREP consists of a comprehensive review and evaluation of a financial institution's risk profile, governance, risk management practices, and capital adequacy. It is conducted by the respective national supervisory authorities in accordance with regulatory requirements and guidelines, such as those set by the European Banking Authority for EU member states.
Risk assessment: The SREP begins with an assessment of a financial institution's risk profile. It involves evaluating the institution's exposure to various risks, such as credit risk, market risk, liquidity risk, operational risk, and other specific risks relevant to the institution's activities. This assessment helps supervisors understand the institution's risk appetite and the adequacy of its risk management practices.
Capital adequacy assessment: The SREP includes an evaluation of a financial institution's capital adequacy. This assessment examines the institution's capital levels in relation to its risk profile and the applicable regulatory requirements. It determines whether the institution holds sufficient capital to absorb potential losses and maintain financial stability. Capital adequacy is typically assessed using regulatory capital ratios, such as Common Equity Tier 1.
Governance and risk management assessment: The SREP assesses the effectiveness of a financial institution's governance structure and risk management framework. This evaluation considers factors such as the institution's risk appetite, board oversight, internal control mechanisms, risk culture, and policies and procedures for identifying, measuring, and managing risks. Supervisors examine the institution's ability to identify and address emerging risks and ensure sound risk governance practices.
Determination of capital requirements: Based on the risk assessment and capital adequacy evaluation, the supervisory authorities determine the appropriate level of capital requirements for the institution. This may involve setting additional capital buffers or taking other measures to mitigate identified risks. The determination of capital requirements is designed to ensure that financial institutions hold adequate capital to withstand adverse events and protect depositors and other stakeholders.
Ongoing monitoring and follow-up: The SREP is not a one-time exercise but rather an ongoing process. Supervisory authorities continuously monitor financial institutions to ensure they remain in compliance with capital and risk management requirements. They also follow up on any identified deficiencies or weaknesses and may require the institution to take remedial actions or implement specific measures to address the identified risks.
The SREP is an important tool for supervisory authorities to assess the overall risk profile and capital adequacy of financial institutions. It helps ensure that institutions maintain a robust risk management framework and appropriate capital levels to withstand potential risks and contribute to the stability of the financial system.
The SREP consists of a comprehensive review and evaluation of a financial institution's risk profile, governance, risk management practices, and capital adequacy. It is conducted by the respective national supervisory authorities in accordance with regulatory requirements and guidelines, such as those set by the European Banking Authority for EU member states.
Risk assessment: The SREP begins with an assessment of a financial institution's risk profile. It involves evaluating the institution's exposure to various risks, such as credit risk, market risk, liquidity risk, operational risk, and other specific risks relevant to the institution's activities. This assessment helps supervisors understand the institution's risk appetite and the adequacy of its risk management practices.
Capital adequacy assessment: The SREP includes an evaluation of a financial institution's capital adequacy. This assessment examines the institution's capital levels in relation to its risk profile and the applicable regulatory requirements. It determines whether the institution holds sufficient capital to absorb potential losses and maintain financial stability. Capital adequacy is typically assessed using regulatory capital ratios, such as Common Equity Tier 1.
Governance and risk management assessment: The SREP assesses the effectiveness of a financial institution's governance structure and risk management framework. This evaluation considers factors such as the institution's risk appetite, board oversight, internal control mechanisms, risk culture, and policies and procedures for identifying, measuring, and managing risks. Supervisors examine the institution's ability to identify and address emerging risks and ensure sound risk governance practices.
Determination of capital requirements: Based on the risk assessment and capital adequacy evaluation, the supervisory authorities determine the appropriate level of capital requirements for the institution. This may involve setting additional capital buffers or taking other measures to mitigate identified risks. The determination of capital requirements is designed to ensure that financial institutions hold adequate capital to withstand adverse events and protect depositors and other stakeholders.
Ongoing monitoring and follow-up: The SREP is not a one-time exercise but rather an ongoing process. Supervisory authorities continuously monitor financial institutions to ensure they remain in compliance with capital and risk management requirements. They also follow up on any identified deficiencies or weaknesses and may require the institution to take remedial actions or implement specific measures to address the identified risks.
The SREP is an important tool for supervisory authorities to assess the overall risk profile and capital adequacy of financial institutions. It helps ensure that institutions maintain a robust risk management framework and appropriate capital levels to withstand potential risks and contribute to the stability of the financial system.
