In order to concentrate on critical errors and take harsh measures against those who fall behind, the European Central Bank is simplifying its examinations of the banks in the euro zone.
Claudia Buch, the head of the central bank’s supervisory division, stated that although the redesign would ease the annual examinations, it would also employ more authority to penalize and compel improvements.
About a hundred of the largest lenders in the EU are subject to ECB financial health assessments. Despite this, the ECB has long lamented that banks are taking too long to implement necessary improvements, such as improving risk management or technology.
In response, banks have argued that the ECB’s so-called Supervisory Review and Evaluation Process (SREP) was onerous and more concerned with checking boxes than it was with staying abreast of significant shifts in the economy or geopolitical shocks like war.
In response to the criticisms and a 2023 report from an expert panel, the European Central Bank (ECB) announced that it would begin energizing the process and tightening up sanctions on bankers who took too long.
The European Central Bank (ECB) will communicate changes and deadlines more clearly in order to maintain bank satisfaction.
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The move, according to think tank Bruegel’s Nicolas Veron, demonstrated how the supervisor was reorganizing processes and forging ahead ten years after it was established in the wake of the global financial crisis.
The ECB already had the authority to punish banks, but its influence was diminished by the protracted back and forth with irresponsible lenders.
“The new SREP will not mean less supervision or a light touch,” Buch stated. “Supervision will become more effective.”
Beginning in the second half of this year, changes will be finalized in time for the 2026 SREP cycle. Additionally, a new method for determining the so-called Pillar 2 capital requirements—specific emergency buffers that banks must construct—will be included in the changes.
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This year, according to Buch, a new framework will be issued and implemented starting with the 2026 checks.
Buch noted that banks might anticipate less invasive regulation if they perform as anticipated and if their risk profile does not dramatically change.
An exception that has only been offered to a small number of lenders could be expanded to include updates to SREP judgments on capital needs once every two years if the ECB’s assessment indicates no changes in a bank’s riskiness.
