EBA notes EU-wide consistent implementation of 2023 priorities in supervisory work programmes but highlights need for further consistency in the identification and treatment of risks covered by Pillar 2 requirements

The European Banking Authority (EBA) today published its annual Report on convergence of supervisory practices for 2023. The EBA confirms that the key topics identified for supervisory attention in 2023 were adequately included by most competent authorities, but there is still disparity in the implementation of risk areas like ESG and data aggregation capabilities in the supervisory processes. Regarding the convergence of supervisory practices in the context of Pillar 2 and liquidity measures, the analysis shows that there is still room for further consistency in the identification and treatment of risks covered by Pillar 2 requirements across the EU. Lastly, the EBA’s monitoring of supervisory colleges has confirmed that the annual college cycle is functioning well.

The four key topics identified for supervisory attention in the 2023 European Supervisory Examination Programme (ESEP), namely 1) macroeconomic and geopolitical risks, 2) operational and financial resilience, 3) transition risks and 4) money laundering/terrorism financing (ML/TF) risks in the Supervisory Review and Evaluation Process (SREP) and internal controls and governance, were adequately included by most competent authorities in their supervisory priorities for 2023.

Macroeconomic and geopolitical risks were a key area for competent authorities’ attention, in the context of the continuing Russian aggression in Ukraine, the rise in interest rate and persistent high inflation in most Member States in 2023.

The resilience of institutions on an operational and financial level was assessed in its multiple elements by competent authorities in the context of the SREP. Although the risks analysed were on average deemed stable, there were concerns related to information security management and the implementation of the IFRS 9 standard by institutions. On data aggregation capabilities, a few competent authorities are still in the process of incorporating this element into their supervisory work.

Transitions related to digitalisation and ESG were given supervisory attention by most competent authorities, who have stepped up their attention in the past year, although a small minority are still working on including ESG risk in their supervisory approach.

The final key topic, the assessment of ML/TF risks in the SREP and related internal governance, was assessed in the context of the sanctions against Russia and Belarus. Most of the authorities have included the ML/TF risks in the SREP assessment and noted that institutions have strengthened internal controls and governance to implement and monitor the sanctions.   

While a certain dispersion of supervisory decision-making is consistent with the need to take into account local market specificities and idiosyncratic situations, the EBA’s analysis shows that there is still room for further consistency in the identification and treatment of risks covered by Pillar 2 requirements across the EU. The Pillar 2 Guidance framework has notably improved since the last survey of EBA in 2021, with nearly all authorities having a methodology in place, often in line with the updated SREP Guidelines.

Authorities have been increasing the frequency of the monitoring of liquidity and funding risk in recent years. While the current framework is generally satisfactory, there are targeted areas where it could be improved, particularly in reporting frequency and deposit origination.

The implementation of EU Banking Package (Capital Requirements Regulation and Capital Requirements Directive - CRR III / CRD VI) and the subsequent review of the SREP Guidelines are expected to increase the convergence in the implementation of the framework, helping authorities to achieve greater consistency in the supervisory outcome in the context of setting Pillar 2 requirements.

The EBA’s monitoring of supervisory colleges has confirmed that the annual college cycle is functioning well. While the consolidating supervisors prepare and facilitate the college meetings well, information sharing could still be enhanced, in particular information on early warning signs, potential risks and vulnerabilities. Joint supervisory activities are sometimes limited to the organisation of the annual college meeting, failing to explore further opportunities of joint work, especially in light of uncertain times where collective approaches enhance robustness.

The EBA peer reviews and benchmarking exercises provided further support for supervisory convergence and for addressing deficiencies identified as raising prudential concerns. Targeted policy developments support and promote further convergence in prudential supervision.

Note to the editors and next steps

According to Article 1(5)(g) and 29 of its founding Regulation, the EBA shall contribute to enhancing supervisory convergence across the European Union and it shall play an active role in building a common supervisory culture and ensuring the consistent application of the Single Rulebook.

Particularly in the context of the SREP, the EBA shall annually report to the European Parliament and the Council on the degree of convergence of the application of the SREP and supervisory measures as mandated by Article 107 of the Capital Requirements Directive (CRD).