How it works
The Supervisory Review and Evaluation Process (SREP) is the structured framework through which prudential supervisors form a holistic view of each bank and decide what additional measures it needs. Supervisors assess four broad areas: the viability and sustainability of the business model; the adequacy of internal governance and risk management; risks to capital, including credit, market and operational risk; and risks to liquidity and funding. Each area is scored, and the assessment feeds an overall SREP score that shapes supervisory intensity for the year ahead.
The SREP is the vehicle that turns this assessment into requirements. Where risks are not adequately covered by the Pillar 1 minimum, the supervisor sets a binding Pillar 2 requirement (P2R). Where forward-looking stress reveals vulnerability, it sets non-binding Pillar 2 guidance (P2G). The SREP can also produce qualitative measures — for example demands to strengthen governance, reduce concentrations or improve internal capital and liquidity assessment processes.
Scope and cadence
For significant institutions, the ECB conducts the SREP directly through Joint Supervisory Teams; for less significant institutions, national competent authorities run it, applying proportionality. The process runs on an annual cycle, though the depth of engagement scales with the bank's size and risk. Its outputs are communicated in an individual SREP decision that the bank must observe.
Legal basis
The SREP is established by CRD Arts. 97–98, which require competent authorities to review the arrangements, strategies, processes and mechanisms of institutions and to evaluate the risks they are or might be exposed to. The supervisory powers exercised on the back of it — including requiring additional own funds — flow from CRD Art. 104, with P2R under Art. 104a and P2G under Art. 104b. The European Banking Authority's SREP guidelines (guidance, not directly binding law) harmonise methodology across the Union.
Relevance for resolution and loss absorption
The SREP is a going-concern supervisory tool, but its outputs reach directly into the resolution framework. The P2R it sets is a building block of the MREL calibration, because loss-absorption and recapitalisation amounts are anchored to the sum of the bank's own funds requirements. A deteriorating SREP score is also an early signal on the path towards failing or likely to fail: persistent weaknesses can prompt early intervention measures and, if capital and viability continue to erode, move a bank towards the point of non-viability. Supervisory and resolution authorities coordinate closely, so the SREP assessment informs not only prudential requirements but also the resolution authority's view of a bank's resolvability and the loss-absorbing capacity it must carry.