The European Central Bank (ECB) published the outcome of its 2020 Supervisory Review and Evaluation Process (SREP) and announced its supervisory priorities for 2021. Due to the COVID-19 pandemic, the ECB settled on a pragmatic approach, keeping Pillar-2 requirements (P2R) and Pillar-2 guidance (P2G) stable at around 14% on average (incl. buffers) and not updating SREP scores unless justified for exceptional circumstances affecting an individual bank. The P2R also remained stable, at an average of around 2.1% for the SREP 2020, with a few exceptions. The common equity Tier-1 (CET1) component of the P2R decreased to 1.2% from 2.1% due to the frontloading by the ECB of the revised Capital Requirements Directive (CRD V) rules. As a result, the CET1 component of the SREP capital requirements and guidance (excluding systemic buffers and the countercyclical capital buffer) decreased to 9.6%. The P2G also remained stable at around 1.4%.

Risks associated with low profitability, business models, and the danger of increasing non-performing loans were highlighted. The ECB identified some problems regarding credit-risk management within the internal control functions and sustained structural weaknesses around risk-data aggregation and reporting. Ongoing digitalisation of internal processes faces delays in one in four banks, but the supervisors approve of strategic overhauls or restructuring plans as well as domestic consolidation operations that they noted. Based on the SREP analysis and the situation triggered by the pandemic, ECB Banking Supervision set the following supervisory priorities for 2021: credit risk, capital strength, business-model sustainability, and governance.

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