On-site banking supervision

On-site supervision is an essential and irreplaceable element of banking supervision that complements off-site supervision. On-site missions involve more in-depth reviews of specific aspects and are complementary to ongoing off-site supervision. They include inspections and internal model investigations.

Inspections provide for in-depth analysis of the risks that may affect banks, while internal model investigations involve review and, where appropriate, authorisation of the internal models used to calculate the capital requirements for credit, counterparty and market risks.

In on-site supervision, a team appointed by the European Central Bank (ECB) – in the case of significant institutions (SIs) – or by the Banco de España – in the case of less significant institutions (LSIs) – carries out an in-depth review of a specific issue, led by a Head of Mission. Part of the inspection activity is usually conducted at the premises of the bank concerned. These reviews identify shortcomings (referred to as “findings”), classified by importance (or severity), and determine the corresponding supervisory actions.

Banks must remedy these findings in accordance with the indications received, as appropriate, from the ECB or the Banco de España. For this purpose, they must submit the corresponding corrective action plan. The teams responsible for off-site supervision (joint supervisory teams (JSTs) in the case of SIs or monitoring groups in the case of LSIs) are responsible for monitoring and evaluating the process of remediating these findings.

Among other aspects, inspections assess banks’ risk management, their internal control systems and governance and their business models. The conclusions drawn help to determine the supervisory risk profile assigned to each bank.

Internal model investigations seek to assess whether the internal models used to calculate capital requirements comply with regulatory requirements. These investigations may be conducted at a bank’s request (in the case of initial approval or material changes) or at the supervisor’s initiative. Draft decisions on the use of internal models are prepared once the investigation is complete. Before they can become final, the decisions must be endorsed by the ECB (in the case of SIs) or by the Banco de España (in the case of LSIs).

Every year the ECB establishes an on-site supervisory plan for each significant institution. The Banco de España plays an active role in implementing the inspection plans for Spanish SIs. In the case of LSIs, the Banco de España itself approves the annual supervisory programme, which includes the on-site activities planned for the following year.