The European Central Bank (ECB) today published the results of its Supervisory Review and Evaluation Process (SREP) for 2024 and its supervisory priorities for 2025-27. The euro area banking sector remained resilient in 2024. On average, banks maintained solid capital and liquidity positions, well above regulatory requirements. The aggregate Common Equity Tier 1 (CET1) ratio stood at 15.8% in mid-2024, which is a slight improvement compared with the previous year. The leverage ratio increased slightly to 5.8%. Higher interest rates continued to sustain banks’
profitability.
Looking ahead, however, the weakening macroeconomic outlook and structural changes in the economy call for heightened vigilance. Geopolitical risks are often not priced in financial markets until they materialise, potentially leading to abrupt risk repricing which could increase risks to liquidity and lead to additional losses. Concerns around banks’ governance, risk management – including climate and nature-related risks – and operational resilience persist and require swift remediation due to the uncertain risk environment.
Against this background, the current SREP cycle has not resulted in major changes to banks’ scores or overall Pillar 2 requirements. The average SREP score remained broadly stable at 2.6 (in a range of 1 to 4), with 74% of banks scoring the same as in 2023, 11% scoring worse and 15% scoring better. Banks’ scores were adversely affected by the market impact of lower valuations of commercial real estate and unexpected increases in interest rates, leading to higher interest rate risks in the banking book. By contrast, increased profitability had a positive effect on scores.
CET1 capital requirements increased slightly, from 1.1% to around 1.2% of risk-weighted assets, with small adjustments to the Pillar 2 requirements attributable to changes in the risk profile of selected banks. The bank-specific Pillar 2 requirements resulting from the 2024 SREP decisions will be applicable from 2025.
Overall CET1 capital requirements and guidance – which consist of the Pillar 2 requirement, the combined buffer requirements and the non-binding Pillar 2 guidance – increased slightly from 11.2% to 11.3%. A similar increase, from 15.5% to 15.6% of risk-weighted assets, was required in relation to total capital — the sum of CET1, Tier 1 and Tier 2 capital.
The ECB required certain banks to apply dedicated Pillar 2 requirement add-ons, with 18 banks being subject to an add-on for insufficiently provisioned non-performing exposures – decreasing from 20 banks last year. In addition, nine banks were subject to an add-on for risky leveraged loans – increasing from eight banks last year. These add-ons reflect either high exposures to leveraged loans or inadequate risk management practices for these loans.
Furthermore, the ECB more than doubled the number of banks subject to increased capital on account of the risk of excessive leverage. There are now 13 banks with a leverage ratio Pillar 2 requirement. Bank-specific mandatory requirements under the leverage ratio Pillar 2 requirement ranged between 10 and 40 basis points. These were applied in addition to the minimum 3% leverage ratio that is a binding requirement for all banks.
The ECB applied leverage ratio Pillar 2 guidance to seven banks and imposed quantitative liquidity measures on four banks, requiring them to hold additional liquidity to comply with minimum survival periods and currency-specific liquidity buffers.
The ECB imposed qualitative measures, a key component of its supervisory toolkit. These primarily address deficiencies relating to credit risk management, internal governance and capital planning so that banks take overdue action to remediate long-standing findings. In some cases, measures were imposed to address compliance with risk data aggregation and risk reporting expectations.