How does the SREP aggregate risk and assign a supervisory score?

Question

AcadiFi · Accepted Answer

The Supervisory Review and Evaluation Process (SREP) is an annual holistic assessment by the supervisor (ECB under the SSM for significant institutions; national supervisors for less significant ones) resulting in a score and capital/liquidity decisions.

Four assessment blocks:
1. **Business model viability** — profitability, strategy, vulnerability to stress; scored 1 (low risk) to 4 (high risk).
2. **Internal governance and risk management** — board effectiveness, three-lines-of-defense, data quality, risk culture.
3. **Capital risks** — credit, market, operational, IRRBB, sovereign, other; quantitative and qualitative combined.
4. **Liquidity and funding risks** — LCR trajectory, funding concentration, CFP quality.

Each block is scored, combined into an overall SREP score (1-4), and translated into decisions: P2R for capital, P2G for capital guidance, liquidity add-ons, qualitative measures (governance remediation, dividend restrictions, business-model actions).

```mermaid
flowchart TD
  A[Business Model] --> E[Overall SREP Score]
  B[Governance] --> E
  C[Capital Risks] --> E
  D[Liquidity] --> E
  E --> F[P2R Capital]
  E --> G[P2G Guidance]
  E --> H[Qualitative Measures]
```

Example: Falkenborg Bank scores 3 overall in 2025 SREP — driven by weak NIM trajectory (business model) and elevated CRE concentration (capital). Supervisor imposes P2R = 2.10% CET1, P2G = 1.25%, and qualitative requirements: reduce CRE exposure 15% within 24 months, improve ALCO governance.

SREP decisions are binding (for P2R) and published in summary form. Persistent weak scores can escalate to early intervention measures under BRRD.

How does the SREP aggregate risk and assign a supervisory score?

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