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Case Studies

Case Study

Transition to direct supervision by the European Central Bank

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Summary

Avantage Reply was requested by a well-known Private Bank in Europe, a less significant institution (LSI) part of a global systemically important group, to evaluate what impact a transition of the bank to direct supervision by the ECB would have on their organisation.

The ECB banking supervision is based on the same rules as local supervision (single rulebook), public information on the differences between both is not commonly available. While there are differences, these are on a practical level and only known to experts with insights on both locally and directly supervised banks. Avantage Reply prepared a review of these differences and the gaps of the client to these the previous year. The client wanted to have an update on these recommendations based on the progress that was made during the year, also with regard to the updated timeline to ECB supervision. To address these topics, Avantage Reply organised workshops with its subject matter experts and the client and reviewed the relevant documents provided by the client.

Avantage Reply delivered an updated report summarising all remaining and new gaps of the bank should they transit to direct ECB supervision, as well as updated recommendations to address them.

CUSTOMER GOALS

Our client’s main goal was to have an updated estimate of the implications that a transition of the bank from supervision under the local regulator to direct supervision under the ECB would have. The recommendations would include:

  • A presentation of the progress made on all areas where improvements would be needed under direct supervision,
  • A recommendation on remaining weaknesses, highlighting ECB expectations and both short- and long-term actions that would be needed to meet them, and
  • An impact analysis, estimating the impact on the headcount, data & systems, governance and change management, and affected departments as well as a timeline for implementation.

CHALLENGES

The key challenge for the project was to get insights of all areas that would be impacted by ECB supervision, not only under direct supervision but also during the transition phase. As the ECB supervision is part of the Single Supervisory Mechanism (SSM) and the single rulebook, differences between direct and indirect supervision are not explicitly stated, but can be observed in practice. The whole bank and all areas were to be assessed, and any differences had to be based on the experience of the subject matter experts who had insights into both locally supervised and ECB supervised banks.

SOLUTION

In order to review all areas affected by a transition to direct supervision, Avantage Reply organized and conducted workshops with all relevant stakeholders with the respective subject area experts. The workshops were organized around multiple topics, namely ICAAP, ILAAP, risk governance, credit risk management, internal audit, human resources, Board of Directors, Asset Quality Review (AQR), conduct risk, recovery planning, stress testing, outsourcing and regulatory reporting. Depending on the topic, the representatives from the finance & treasury departments, risk departments, internal audit, HR and operations were invited to meet with Avantage Reply expert(s) who would assess the client’s readiness for ECB supervision.

Apart from the workshops, Avantage Reply reviewed any supporting documentation such as the ICAAP, ILAAP, minutes of committees including Board minutes, recovery plan, regulatory reporting, etc.

The final deliverable was a presentation that included a brief description of the SSM and the transition to ECB supervision as well as all findings and recommendations regrouped by the following topics:

  • Business model analysis,
  • Governance,
  • Risks to capital and capital management,
  • Treasury management and liquidity risk management,
  • Systems, data and reporting,
  • Outsourcing,
  • Comprehensive assessment, and
  • Supervisory coordination.
    • Additionally, the impact of new and upcoming regulations such as the COVID-19 reporting, ESG and CRRII/CRD V were assessed in the analysis.

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