In two articles published in its latest Supervision Newsletter, the European Central Bank (ECB) outlined some of the key changes under its comprehensive reform of the Supervisory Review and Evaluation Process (SREP).
The reform, which follows an external review of the SREP in 2023, aims to enhance the effectiveness and efficiency of the SREP and make it more risk-based, without compromising quality. The ECB had signposted, in May 2024, that it was planning the enhancements to the SREP to start gradually in H2 2024 and be finalised for the 2026 SREP cycle.
The Supervision Newsletter confirms certain enhancements have already been implemented and that others will be implemented later in 2025. Enhancements include changes to decisions issued under the SREP, the ECB’s approach to supervisory findings and its assessment of internal capital adequacy assessment process (ICAAP) for credit institutions. We have provided below an overview of the main changes set out by the ECB.
Changes to the format and content of SREP decisions
ECB decisions resulting from a SREP will be clearer and more strategic, with content focusing on key risks to facilitate engagement between credit institutions and supervisors. Decisions will also be presented in a more streamlined format and structure.
The changes aim to enhance transparency and help credit institutions more easily understand SREP outcomes. However, the changes are not intended to result in a change in ECB supervisory focus or a reduction in supervisory attention.
In summary, the main changes to SREP decisions are:
- Decisions will focus on strategic risk drivers and key supervisory concerns, rather than providing a comprehensive list of findings. Key supervisory concerns and related requirements will be detailed in dedicated sections of the decision.
- Each ECB decision will focus on ‘severe findings’ from the assessment and on measures from other supervisory processes which require escalation in line with ECB Banking Supervision’s escalation framework. In this regard, the SREP decisions will mainly show findings and weaknesses with material impact on scores and/or requirements and will not repeat those already addressed through other supervisory acts.
- The sections of the SREP decision dedicated to subsidiaries and parent financial holding companies will be shortened and mainly focus on risk drivers, requirements and the relevant entity’s risk contribution to the group.
- Qualitative requirements and recommendations will be presented in annexes to enable credit institutions to quickly identify the key actions they have been asked to undertake.
- The ‘executive letters’ which previously accompanied SREP decisions will no longer be issued.
- Supervisory dialogue meetings will continue, complementing the communication on draft SREP outcomes, but the meetings will now start in June and finish by mid-July this year. The ECB encourages credit institutions to discuss these engagements with their boards.
New approach to supervisory findings
Much of the ECB’s supervisory work consists of identifying credit institutions’ shortcomings (or “findings”) in a timely manner and requesting remedial action (or “measures”).
Previously, credit institutions have had to document the step-by-step resolution of shortcomings and remedial action and provide this detailed information to the Joint Supervisory Team (JST). The JST then had to verify each element before approving the closure of the related finding and measure, irrespective of the materiality of the issue.
Although the ECB believes that while this process has helped improve credit institutions’ resilience over the years, it has become resource-intensive for both credit institutions and supervisors. This is why, from July 2025, the SREP will provide for a new streamlined and “tiered approach” for following up on findings and measures, focusing on the most material risks and issues.
Under the new tiered approach:
- JSTs will focus their follow-up activity (e.g. review of documented evidence submitted by credit institutions and follow-up meetings and engagement) on the most severe shortcomings (F3 and F4 findings or an aggregation of F2 findings).
- For these higher-severity findings, the follow-up activity and engagement between the JST and the credit institution will remain as it is now, including the submission of action plans and evidence within agreed timeframes. The JST will consider the progress made by the credit institution in the context of its on-going supervision and the SREP. The JST will still need to determine when the findings can be closed based on credit institution remedial action.
- The follow-up activity and engagement for lower-severity findings (F1 and F2 findings) will change. The process will rely on credit institutions directly and autonomously closing the findings once all necessary actions have been taken.
- When a credit institution receives a follow-up letter, any F1 and F2 findings will be accompanied by a new type of measure which is considered a “reminder to comply”. The “reminder to comply” will be standardised and include a default deadline of 12 months, unless otherwise agreed with the JST. Credit institutions will not need to deliver evidence to the JST that low-severity findings have been addressed. Instead, each credit institution will be responsible for ascertaining this themselves with an appropriate internal governance process. JSTs will not actively scrutinise how credit institutions have addressed lower-severity findings, but supervisors may perform sample checks from time to time. Credit institutions will, however, need to retain evidence demonstrating how issues identified in F1 and F2 findings were properly addressed for five years.
- Towards the end of this year, JSTs will communicate to credit institutions how open findings and measures created under the old approach will be migrated to the new system.
Assessment of credit institutions’ ICAAP
During 2025, the ECB has taken steps to enhance its approach to assessing the soundness of credit institutions’ ICAAPs (and will continue to do so), emphasising its important role in the SREP. The enhancements will enable JSTs to focus on the areas that are most relevant and incorporate the ICAAP assessments fully into the SREP.
For example:
- The ICAAP assessment has become more flexible. JSTs now employ a multi-year assessment strategy, which allows them to conduct an in-depth review of all relevant ICAAP areas over several years, in line with the ECB’s risk tolerance framework. However, an exception is made for capital plans – baseline and adverse scenarios are assessed annually to reflect the significant role capital planning plays in credit institutions’ ability to navigate long-term economic developments and manage the multiple sources of future stress events, including geopolitical risks.
- JSTs now also receive updated or new internal ICAAP documentation throughout the year. Credit institutions can, therefore, focus their submission on updated ICAAP documents and avoid re-submitting comprehensive and sizeable packages of ICAAP documents each year. This allows JSTs to assess credit institutions’ ICAAPs throughout the year and supports them in identifying and addressing any issues early on.
- With regard to content, the ICAAP assessment continues to cover all the relevant aspects outlined in the ECB Guide to the ICAAP (November 2018).
- Finally, the ICAAP will no longer be used as a starting point for calibrating Pillar 2 requirements on the basis of individual risks. However, the assessment of the ICAAP’s soundness can have a material impact on setting the level of capital requirements which are defined through the SREP.
Conclusion
The ECB’s reforms should make the SREP more targeted, efficient, predictable and transparent, and it is likely to move closer to real-time supervision. However, given the focus on material risks and shortcomings, the ECB is likely to expect strong and timely actions by credit institutions to supervisory findings. Indeed, the ECB has made clear that the enhanced SREP will not mean less supervision or a “light touch” approach.
For information on how ALG can assist your institution, please contact Patrick Brandt, Partner, Dario Dagostino, Partner, Mark Devane, Partner, Ciara Brady, Senior Associate, Louise Hogan, Senior Associate, Sarah Lee, Senior Knowledge Lawyer or any member of ALG's Financial Regulation Advisory team.
Date published: 9 June 2025
