21 June 2016

SSM supervisory statement on governance and risk appetite

This report conveys some lessons from the thematic review and describes some good practices observed across the significant institutions (SIs). It also sets out supervisory expectations regarding a bank’s board and risk appetite framework (RAF), acknowledging all existing governance structures.

This report does not aim to give exhaustive guidance on effective governance and RAFs. Instead, it aims to support and guide institutions towards the implementation of international best practices. Although major improvements have already been made, most SIs are still far from international best practices.

The SSM has high and specific expectations regarding banks’ boards. Boards should challenge, approve and oversee the management’s implementation of the bank’s strategic objectives, governance and corporate culture. In this respect, the SSM expects the board to demonstrate its capacity for independent challenging and oversight of senior management. This implies that an institution’s board should have an adequate composition and effective organisation in order to ensure that it has the capacity to challenge senior management. The board should include a risk perspective on strategic discussions and demonstrate effective oversight of risk and control functions. In particular, the board should be strongly involved in the validation process and monitoring of the RAF.

The SSM also expects banks to develop and establish a comprehensive RAF, which should help them to strengthen risk awareness and promote an adequate risk culture. As a prerequisite for sound risk management, the RAF should define the level of risk tolerance that the institution is willing to take in relation to both financial and non-financial risks. Risk metrics and limits should be deployed consistently within entities and business lines, and should be monitored and reported to the board regularly. The RAF should also remain aligned with the business plan, strategy development, capital and liquidity planning, and remuneration schemes of financial institutions.

The thematic review on risk governance and appetite is a starting point in our engagement with the boards. The SSM will continue to foster dialogue and interaction with management bodies in order to promote adequate and sound governance arrangements.

Conclusions and next steps

The thematic review identified that most SIs still need to improve their governance and risk appetite frameworks to be in line with international best practices.

Ensuring sound governance is the institutions’ responsibility. In this respect, institutions have already started defining actions to address the areas of concerns.

The thematic review confirmed that effective governance is feasible in any corporate structure across the different SSM jurisdictions. The effectiveness of the board and the quality of the RAF do not depend on the size and complexity of an institution, but on the robustness and soundness of the governance arrangements in place.

The performance of the thematic review has allowed the SSM to identify follow-up supervisory actions for 2016, as well as areas for forthcoming on-site inspections and aspects to focus on as part of the SREP process. As part of their ongoing supervision, JSTs will follow up on the implementation of the actions included in the individual follow-up letters sent to banks.

Deep-dive investigations will be performed on a sample of SIs on specific governance areas, such as the oversight role of the board on risk and control functions and the RAF implementation. The yearly SREP will assess the implementation of all the measures and action plans that institutions have communicated in order to remedy all the relevant findings.

The SSM will continue fostering the dialogue with the boards through regular meetings and using a string of different tools to assess governance, including on-site inspections, documentation analysis, meetings, ongoing “fit and proper” tests, etc. In addition, SSM supervisors may attend parts of board meetings as observers from time to time to see how the board functions and to convey some specific messages.

Governance will remain at the top of the SSM priorities in order to continue to foster the highest standards in all institutions and consistency among them. While this report reflects the lessons from the thematic review conducted across the SIs, which are directly supervised by the ECB, many of the lessons are also valid for the less significant institutions, which are directly supervised by the NCAs. A consistent approach is ensured across the whole of the SSM in close coordination with the NCAs and in accordance with the principle of proportionality. In the follow-up of the thematic review, the SSM will also continue to build on its policy recommendations and stances and work on the promotion of good practices. The SSM will also continue to play an active role at EU and international levels in the definition of international standards.

Full statement

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