BDO has closely accompanied the developments associated with the regulatory fireworks as an auditor and consultant to financial services companies of all sizes and to the national and European regulatory authorities. We were involved in the preparations for the single supervisory mechanism in Germany and Europe and have supported, e.g., supervisory authorities in Germany within the scope of an asset quality review 4 major credit institutions. Since then we have taken into account in our audit and advisory practice the methods and procedures developed by the regulators within the framework of asset quality reviews.

After completing the asset quality reviews, the regulatory authority began implementing the European Banking Authority (EBA) guidelines for the Supervisory Review And Evaluation Process (SREP). This involves fixing a level of equity capital deemed adequate by the regulatory authority.

The introduction of this new supervisory review and evaluation process in banking has led to uncertainty in the market and raised issues relating to its content design and the options to prepare for this process.

According to the EBA stipulations, SREP consists of the following components:

• Categorisation of institutions
• Monitoring of key indicators
• Business model analysis
• Evaluation of governance and the institute-wide controls
• Appraisal of the capital risks
• Appraisal of the liquidity and financing risks
• SREP overall evaluation
• Supervisory measures
• Early intervention measures

The content of some of these components is based on known or modified rules. For example, the information from the statutory reporting system has traditionally always been available to the regulatory authorities to help them carry out their supervisory duties (monitoring of key indicators). And the minimum risk management requirements (MaRisk) in Germany use a recognised framework to structure governance and institution-wide controls; similarly, the equity capital requirements (capital risk assessment) already form basis for fixing the required equity capital. However, categorisation of institutions, business model analysis and evaluation of liquidity and financing risks are new. In addition, it will be necessary to deal with how the regulators derive an overall assessment from the acquired information, and which measures, such as the establishment of an additional capital buffer, are be expected. As an auditor and consultant to financial services companies, we are very familiar with statutory reporting, MaRisk, and risk-weighted determination of capital requirements. The same is true for the business model analysis and the evaluation of the liquidity and financing risks, we have previously also had to critically consider in the framework of advisory and valuation projects.

We use this experience to make the SREP process as transparent as possible for our clients, and to provide support in preparing for the supervisory review and evaluation process.

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