Supervisory Review Process
The general criteria and methodologies for the supervisory review process (SRP) within pillar 2 are disclosed this section of the website. The FMA hereby fulfils its obligations pursuant to Article 143 (1) (c) of Directive 2013/36/EU in conjunction with Article 3 of Commission Implementing Regulation (EU) No. 650/2014.
The Supervisory Review and Evaluation Process (SREP) forms part of the comprehensive Supervisory Review Process (SRP) in addition to the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP).
The Austrian credit institutions, for which this Supervisory Review Process applies, are described in the section on “Banking Union”.
Internal Capital and Liquidity Adequacy Assessment Process (ICAAP, ILAAP)
The credit institution itself is responsible for conducting the ICAAP/ILAAP. Pursuant to Article 39a BWG, the ICAAP encompasses all plans and procedures of the credit institutions,
“to determine on a regular basis the amount, the composition and the distribution of capital available for the quantitative and qualitative coverage of all material risks from banking transactions and banking operations and to hold capital in the amount necessary.” (Article 39a para. 1 BWG).
In accordance with the provisions relating to the ILAAP, credit institutions are also required to ensure that they
“have in place suitable strategies, policies, processes and systems for the identification, measurement, management, monitoring and limitation of liquidity risk over an appropriate set of time horizons, including intra-day, so as to ensure that they maintain adequate levels of liquidity buffers. These strategies, policies, processes and systems shall be tailored to business lines, currencies, branches and legal entities.” (Article 39 para. 2 BWG in conjunction with Article 12 para. 1 KI-RMV).
The selected approaches have to be proportional to the type, scale and complexity of the banking transactions conducted (Proportionality Principle).
Supervisory Review and Evaluation Process (SREP)
The SREP is conducted by the competent supervisory authorities. It forms the supervisory authority’s comprehensive process for the supervision and evaluation of the business model, of the credit institution’s risk management and the adequacy of its ICAAP and ILAAP as well as its internal governance. Furthermore, it also checks the compliance with all relevant regulations, identifies the existence of conditions that amount to transgressions and permits the imposing of supervisory measures (see Article 69 BWG).
The guidelines issued by EBA in connection with the SREP and Pillar 2 can be consulted by following the link to the EBA Guidelines. Further information about the SREP and Pillar 2 can be found on the EBA website. In this context in particular, the EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) (EBA/GL/2014/13), act as a reference. According to these Guidelines the SREP consists of four principle components:
- Business model analysis
- Evaluation of internal governance and the institution-wide controls
- Evaluation of the capital risks, and
- Evaluation of the risks to liquidity and funding.
The evaluation is based on a common scoring. These Guidelines have been applicable since 01.01.2016.
Furthermore, in the future, the currently unpublished EBA Guidelines on ICAAP and ILAAP Information will also act as a reference (EBA/CP/2015/26).
The legal basis for the risk review is defined in Article 69 para. 2 BWG, Article 39 paras. 1 and 2 BWG in conjunction with the KI-RMV and Article 39a BWG. Based on this, the competent authority shall check the adequacy of institution’s capital and liquidity taking into consideration the principle of proportionality in credit institutions and groups of credit institutions.
In accordance with Article 69 para. 2 BWG, the Financial Market Authority is required, in consideration of the nature, scope and complexity of the banking transactions conducted by credit institutions and groups (principle of proportionality) to supervise the adequacy of the capital that is available for the quantitative and qualitative coverage of all material risks from banking transactions and banking operations, as well as the adequacy of procedures pursuant to Article 39 paras. 1 and 2 BWG (General Due Diligence Obligations) in conjunction with Article 12 KI-RMV as well as Article 39a BWG (ICAAP).
In particular, it pays attention to the following risks listed in Article 39 para. 2b BWG:
- the credit risk and counterparty credit risk;
- the concentration risk;
- the market risk;
- the risk of excessive over-indebtedness;
- the operational risk;
- the securitisation risk;
- the liquidity risk;
- the interest rate risk arising from any transactions not already covered;
- the residual risk from credit risk mitigation techniques;
- the risks arising from the macroeconomic environment;
- the risk of money laundering and terrorist financing;
- the risk arising from the institution’s business model when taking into account the effects of diversification strategies;
- the results of stress tests in the case of institutions that apply internal approaches; and
- the systemic risk emanating from an institution.
Article 69 BWG defines the duties and obligations of the Financial Market Authority in its supervisory activities; Article 70 BWG details its supervisory powers in relation to banking supervision:
In the event of there being a danger of a credit institution not being able to fulfil its obligations towards its creditors, the Financial Market Authority can order temporary measures pursuant to Article 70 Para. 2 BWG by means of an administrative decision (full/partial prohibition of withdrawals of capital and earnings as well as distributions, the appointment of expert supervisors, prohibition of transactions that increase the risk for the creditors, to fully/partially prohibit directors from managing the credit institution, full/partial prohibition of the continuation of business operations).
In the event of violations against banking supervision laws, the Financial Market Authority shall issue an instruction for restoring legal compliance within an appropriate timeframe pursuant to Article 70 para. 4 BWG, in the case of a repeated or continued violation will completely or partially prohibit the directors from managing the credit institution, or if other measures are not able to ensure the credit institution’s ability to function, to revoke the credit institution’s licence.
If a violation of the terms of the BWG or the CRR lead to an inappropriate limitation of risks arising from banking transactions and banking operations of the credit institution and the group of credit institutions, then the Financial Market Authority may prescribe, regardless of other measures pursuant to Art. 70 paras. 4 and 4a BWG, a higher minimum capital requirement for the credit institution or the group of credit institutions over and above the capital requirement prescribed pursuant to Article 92 of Regulation (EU) No. 575/2013 (“CRR”), or particular liquidity requirements (see Article 70 para. 4d BWG – e.g. A higher LCR or NSFR ratio).