Ongoing off-site supervision

The purpose of ongoing off-site supervision is to verify compliance with prudential regulations and to maintain an up-to-date view of banks and their supervisory risk profile, in order to implement supervisory measures to improve that profile where appropriate.

The supervisory risk profile reflects the likelihood that a credit institution may experience solvency, profitability or liquidity problems in the future or, more generally, may generate unwanted turbulence in the financial system.

Ongoing supervision includes recurring and regular supervisory activities and other one-off or ad hoc actions. The former most notably include the Supervisory Review and Evaluation Process (SREP), but also periodic monitoring of banks’ financial and economic performance, review of their recovery plans and regular meetings with management.

The one-off or ad hoc activities include deep dives on specific issues (to examine areas of particular supervisory concern or to gain further insight into bank-specific issues) and horizontal or cross-institutional reviews (to uniformly examine supervisory priorities or areas of particular interest at several or all banks).

The SREP is one of the core recurring tasks involved in ongoing off-site supervision and is conducted pursuant to European Banking Authority (EBA) guidelines (EBA/GL/2022/03). The European Central Bank (ECB) applies a common SREP methodology to all significant institutions (SIs), thus facilitating peer comparisons and cross-institutional analysis. Meanwhile, for less significant institutions (LSIs), the Banco de España applies the methodology approved by the ECB.

The SREP conclusions encompass all of the information compiled in the supervisory tasks and determine or update each bank’s risk profile. In short, they provide an overall picture of the bank’s risks and assess the suitability of its governance and risk management and control framework, and the adequacy of its capital and liquidity levels.

This process also helps to determine the level of supervisory intensity for each bank and concludes with the capital and liquidity decisions. Key elements of these decisions are the bank-specific capital requirement (P2R) and capital guidance (P2G), which remain in force until the next capital and liquidity decision is adopted.

Also as a result of the SREP, qualitative requirements and recommendations on any areas for improvement may be issued to banks.  

The P2R is a specific requirement intended to cover risks that are underestimated or not covered by the minimum capital requirement (Pillar 1). The P2R is binding and, therefore, any breaches can have legal consequences.

The P2G is bank-specific guidance which indicates the level of capital that the supervisor expects the bank to maintain. It is not legally binding and acts as an additional buffer to ensure that banks can withstand stressed situations. It is set using a methodology based on the Capital Requirements Directive and EBA guidance, drawing on the results of the regular stress tests that examine the impact of an economic shock on banks’ capital.

A key element of ongoing supervision is the dialogue between the supervised institution and the supervisor, particularly during the SREP. This supervisory dialogue is essential for communicating the weaknesses identified, the supervisory assessment and the supervisory priorities and expectations, as well as to foster an exchange of views and dialogue on the main areas of supervisory focus.

In the case of significant institutions (SIs), joint supervisory teams (JSTs) are responsible for their ongoing supervision. These teams are made up of supervisors from the ECB and the national authorities. The Banco de España is a key participant in the JSTs for Spanish SIs, and also in JSTs for significant banking groups from other Single Supervisory Mechanism (SSM) countries that have a material presence in Spain.

As for Spanish less significant institutions (LSIs), the Banco de España, as the national competent authority, is responsible for their direct supervision. The ECB conducts indirect supervision to ensure that the supervisory activities meet high standards and yield consistent results across the different SSM countries. The Banco de España’s Executive Commission approves an annual supervisory plan for Spanish LSIs, which sets out the on-site and off-site supervisory activities planned for the following year.