Supervisory Review and Evaluation Process (SREP)
The Supervisory Review and Evaluation Process (SREP) is designed to ensure that supervised entities have adequate own funds to support material risks and that supervised entities have in place processes of internal governance, internal control and risk management to guarantee stability of operations.
The FIN-FSA undertakes the risk assessment in relation to the risk-bearing capacity of the supervised entity. For purposes of the assessment work organisation, the Risk Assessment System (RAS) of the FIN-FSA classifies the risks into six broad risk areas: credit risk, market risk, operational risk, risks related to changes in the operating environment, risks related to the strategic choices made by the supervised entity or business risks and risks related to corporate governance and control. Within each risk area, the risks or risk-bearing capacity are examined from many angles. The constituents of risk bearing capacity are capital base, profitability, and qualitative factors, including internal governance, internal capital adequacy assessment and appropriate internal control and risk management.
Key to the Supervisory Review and Evaluation Process is evaluation of the Internal Capital Adequacy Assessment Process (ICAAP): its adequacy and reliability and the rationale for the outcome. Attention is also paid to the connection between the ICAAP and business planning and other internal governance and control by management (such as price setting and measurement of risks by stress tests) as well as target-orientation and proactivity of capital planning.
Supervisory evaluation is based on Basel II and its three-pillar structure. The minimum capital requirements under pillar 1 are always binding on supervised entities. However, sound risk-based capital adequacy assessment cannot be based solely on compliance with the minimum capital requirements under pillar 1. In addition to the minimum capital requirements, attention should be paid to the risks defined under pillar 2, including credit concentration risk, interest rate risk in the banking book, financial risk and risks related to changes in the external operating environment. The ICAAP also includes mandatory disclosure of capital adequacy information. The FIN-FSA evaluates information disclosure on the basis of the regulations under pillar 3.
The FIN-FSA undertakes an evaluation of the supervised entities' ICAAP and the adequacy of the risk-bearing capacity on an annual basis, at the least. The scope and frequency of the FIN-FSA's evaluation depends on the nature and scope of the supervised entity's operations and its importance for financial stability. The supervisor evaluates an individual supervised entity as an independent whole but also in relation to other entities of the same type. Peer group analysis is applied to promote the adoption of best practices and harmonised regulatory application.
The evaluation is based on the ICAAP information submitted to the FIN-FSA as well as on other reported information and information obtained during inspections. The dialogue between the FIN-FSA and the supervised entity is key to the evaluation of the ICAAP and its outcome.
13 May 2009