Today the ECB / SSM (Single Supervisory Mechanism) published the 2018 results of the SREP (Supervisory Review Evaluation Process) and concluded that bank governance and risk management have worsened compared to the 2018 results. Supervisors at the ECB and in 19 countries jointly prepared the SREP decisions for the SSM significant institutions.
For Governance and Risk Management, one of the 4 SREP elements, the results are worrying. This is highlighted by the following findings:
On a scale from 1-4, no bank achieved the best score of 1, neither in 2017 nor in 2018;
However, in 2018, only 27% scoring 2, 65% scored 3 and 8% scored 4;
This should be compared to 2017 – where 33% scored 2, 57% scored 3 and 10% scored 4
In essence, barely a quarter of the significant institutions passed 2018 with a satisfactory score for Internal Governance and Risk Management.
We strongly urge all Risk, Treasury and ALM practitioners to study the results booklet. The booklet includes a very illustrative example of key questions assessed, related to Internal Governance and Risk Management - Are there mechanisms in place to ensure that senior management can act in a timely manner to effectively manage, and where necessary mitigate, material adverse risk exposures, in particular those that are close to or exceed the approved risk appetite statement or risk limits?
Banks are failing to measure, manage and mitigate material exposures, be that risks to capital or liquidity in an effective and timely manner. The “culprit” is largely related to Risk Infrastructure, Data and Reporting.
The evolution of Internal Governance and Risk Management standards require banks today to have the ability to measure and manage risk in the banking book, almost in real-time. As part of the Risk Appetite Framework, limits must be defined and set for all material exposures, including a significant number of sub-limits on different levels such as currency or legal entity.
How do we then ensure that all these exposures and limits are governed adequately and, in a manner, consistent with supervisory expectations?
Real-time calculation and reporting that supports real-time dash-boards and monitors is one part of the solution. Equally important is the ability to calculate the exposure on any sub-level and the ability to set limits with Early Warning Levels for Liquidity and Interest Rate in the Banking Book (IRRBB) related risks. Early Warnings or Limit breaches automatically need to trigger alerts and reports. Finally, the whole process needs to be maintained in an Audit log.
Would you like to know more about how MORS Software could help you to improve your Internal Governance and Risk Management framework?
The writer is a Partner with MORS Software a provider of real-time Integrated Risk and ALM solutions.