MORS Comment: “ECB releases 2020 SREP results”

Yesterday, the ECB / SSM (Single Supervisory Mechanism) released the annual SREP results for 2020 – 2020 SREP aggregate results (

The results release was accompanied by a live stream, with a Q&A session – ECB Banking Supervision Press Conference – 28 January 2021 – YouTube

In terms of take-aways from the 2020 results, there are a few things we wish to highlight. What did the ‘Pragmatic SREP 2020’, as the results release is titled actually contain? Primarily, the ‘pragmatic’ aspect of the title reflects some of the particular measures in 2020, mainly that both Pillar 2 requirements and guidance were essentially kept stable, and there were no updates of SREP scores, unless justified by exceptional circumstances. Supervisory concerns were mainly addressed through qualitative recommendations. With this in mind, relative to the pandemic response, we must look slightly deeper into the results.

Bank profitability in the region and the fact that a majority of banks fail to cover their cost of capital by return on equity is a major concern.

Looking at qualitative measures in 2019 versus qualitative recommendations in 2020, 3 interlinked elements stand out and are worthy of further comment:

1. Internal Governance is still a major concern. During the pandemic the JSTs have noted inadequate reporting to the management body. This inadequacy is related to timing and data quality issues. Specifically, the ability of banks to assess scenarios and outcomes and to respond adequately has been severely impeded by sustained problems related to data aggregation and reporting limitations.

From an integrated planning and stress testing perspective, banks are struggling with data quality and re-conciliation problems. Legacy infrastructure often means that risk data is siloed. Credit, Earnings & EVE, and Liquidity risk data is based on different, and in many cases, pre-aggregated source data with no ability to perform ad-hoc stress tests and what-if scenarios at will.

2. Credit risk recommendations, partly related to IFRS 9 classification and provisioning. We wish to draw attention to this, as we believe this is not just a concern for the Supervisor, but also has wider ramifications for Debt & Equity analysts, investors, rating agencies, etc. It has just become a lot more difficult to compare banks. This may be partially due to ECB guidance on applying transitional provisions and most importantly avoiding excessively procyclical assumptions in IFRS 9 models. IFRS 9, is inherently procyclical and naturally has an impact during a pandemic, in which banks might incorporate different assumptions leading to large differences. This has different ramifications from a Financial Planning and Stress Testing perspective, leading to:

3. Capital Planning – the ability of banks to produce reliable forecasts, whilst facing the profitability headwinds affecting organic capital generation is a concern. We wish to highlight the obvious link to Governance above, there are data aggregation and reporting related issues. Put differently, banks and senior management in particular lack the tools and capability to understand the consequences of their actions or in-actions alike.

There is a need to articulate and visualise risk differently, to facilitate agile online decision-making at all banks.

MORS Software is an award-winning ALM and Balance Sheet Management solution provider – MORS wins best Balance Sheet System in 2020 bobsguide Awards – MORS Software

MORS offers a unique data management process at the core of the solution. Hence all risk data can effortlessly be based on unique transactional source data, without compromising frequency and performance for data-intensive calculations and forecasts, such as NII projections.

Thus, MORS users have an agile and responsive instrument at their disposal, always helping them to navigate treacherous waters, particularly at times of stress.

Would you like to know more about how MORS Software could help you to improve your Internal Governance and Risk Management framework?