Supervisory capital represents the second pillar of the Basel accord and is meant to complement the minimal capital requirements covered under the so call Pillar 1. The composition and determination of the Pillar 2-capital requirements are calibrated and applied differently across jurisdictions and by supervisory authorities. AFME support its members ins navigating different methodologies and communication with supervisors, as well as benchmarking and undertaking structural assessments of the Pillar 2 capital requirements in relation to Pillar 1, macroprudential and resolution requirements.
The Single Supervisory Mechanism (SSM) oversees prudential supervision of significant euro area institutions. Its Supervisory Review and Evaluation Process (SREP) is central to assessing risks and setting capital requirements. Current priorities include implementing SREP reforms to improve effectiveness and transparency, alongside the ECB’s simplification agenda to streamline regulatory, supervisory and reporting frameworks. These initiatives aim to reduce unnecessary complexity without compromising financial stability, responding to industry calls for more efficient and predictable supervision.
AFME works closely with the ECB and SSM, providing industry input on initiatives such as the SREP reforms and the ECB’s supervisory simplification workstream. We advocate for a proportionate, risk-based approach that enhances efficiency and transparency while reducing unnecessary complexity. Our engagement includes structured dialogue with the ECB Banking Supervision and targeted recommendations to ensure that supervisory frameworks remain effective whilst streamlining supervisory processes and reducing unnecessary complexity.
AFME supports the SSM’s efforts to modernise supervisory processes to deliver tangible benefits for supervisors, banks and the wider economy. Key priorities include:
- Simplification Agenda: We welcome the EU’s intention to prioritise the simplification objective, with an effort to streamline regulation and enhance EU competitiveness. It is also essential that this agenda examines ECB banking supervisory processes, as these can contribute to the EU prudential framework’s overall complexity. The ECB’s High-Level Task Force on Simplification should focus on reducing fragmentation and overlapping capital requirements, simplifying supervisory practices, and reducing duplicative and unnecessary reporting.
- SREP Reform: The SSM should deliver on its announced reforms to improve efficiency, planning and transparency of the SREP and Pillar 2 components. We support shorter, multi-year cycles, flexible risk assessments, clearer prioritisation by Joint Supervisory Teams (JSTs), and more transparent methodologies. AFME advocates for a supervisory approach that is risk-based, proportionate and predictable, while reducing intrusiveness and supervisory intensity where possible, particularly in supervisory inspections and on-site activities.
