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ECB publishes annual report on banking supervisory activities in 2021

On 31 March 2022, the ECB published its 2021 annual report on banking supervision (Annual Report). The Annual Report reflects on the supervisory priorities for 2021 which related to credit risk, business model sustainability and governance. These themes will continue to be important in 2022, with a particular focus on digitalisation and climate change.

Primary supervisory priorities 2021

In 2021, the ECB focused its supervision primarily on four areas materially affected by the pandemic:

  • Credit risk: Initiatives undertaken by the ECB included dedicated on-site activities, and follow-up with banks that were deviating considerably from supervisory expectations. Credit risk also accounted for the majority of supervisory findings despite making up less than a tenth of overall activities. 
  • Capital strength: The EU-wide stress tests allowed for an in-depth assessment of banks’ capital positions. The ECB decided not to extend its recommendation to limit dividends and will phase out capital relief measures in 2022. 
  • Business model sustainability: The ECB continued to assess banks’ business strategies to meet the challenges of the current economic environment, with a particular focus on digitalisation strategies. 
  • Governance: The ECB was active in three main areas: (a) scrutinising banks’ crisis management procedures; (b) follow-up on the thematic review of risk data aggregation: and (c) prudential work continued on AML/CFT risks, which included updating the methodologies for the SREP and on-site investigations to reflect these risks.

Supervisory priorities going forward

For 2022-2024, the ECB has stated its three key priorities that it identified when assessing the key vulnerabilities during 2021:

  • Banks emerge from the pandemic healthily;
  • Banks address structural weaknesses via effective digitalisation strategies and enhanced governance; and
  • Emerging risks, including climate and environmental, IT and cyber risks are addressed. 

For more detail, see our dedicated blog post on the supervisory priorities 2022-24.

Supervisory decisions

Further key themes

Follow-up on Brexit

2021 marked the first year of a post-Brexit world in banking supervision during which the ECB monitored the implementation of the post-Brexit target operating models to ensure they progressed in line with the time frames previously agreed on. In 2022, ECB Banking Supervision will continue to monitor banks’ alignment with its post-Brexit expectations and, if needed, further refine its stance towards the adequacy of banks’ structures and governance.

Fintech and digitalisation

In 2021 the ECB continued its work on fintech and digitalisation-related topics. This included a workshop on the strategic, governance and risk management aspects of digital transformation, as well as the revision of the SREP methodology on business models with a view to better reflecting digital transformation aspects in upcoming supervisory cycles.

Given the role technology can play in reducing costs and meeting the expectations of increasingly digitally oriented banking customers, it is crucial that banks continue to innovate and pursue digital transformation to remain competitive both now and in the future. Banks’ digitalisation strategies, as well as their corresponding cyber resilience, also form a key part of the ECB’s 2022-24 priorities

C&E risks

Especially since publishing its Guide on climate-related and environmental (C&E) risks in November 2020, the ECB has been encouraging banks to improve their management of C&E risks. Following self-assessments of banks regarding their preparedness to deal with these risks the ECB published a report on C&E risk management in the banking sector which set out some of the best practices. The ECB has however emphasised that no institution fully meets its supervisory expectations.

In respect of disclosures of C&E risks the ECB has recently stated that it expects banks to quickly improve the quality of their disclosures and meet supervisory expectations.

In the first half of 2022 the ECB will continue its work on C&E risks by conducting a dedicated thematic review within the SREP as well as a supervisory climate stress test. These will serve as learning exercises both for the ECB and for the banks, and will lay the groundwork for including C&E risks in ECB’s SREP methodology in a more structural manner which will eventually influence Pillar 2 capital requirements. In its Opinion on the proposal to amend the Capital Requirements Directive, the ECB makes a strong call for evidence-based joint methodologies for assessing C&E risks.

SREP assessment and supervisory findings

In 2021, ECB Banking Supervision returned to a full SREP assessment. Consistent with previous SREP cycles and the 2021 supervisory priorities, the majority of measures addressed deficiencies in credit risk and internal governance. Banks’ risk control frameworks were assessed against the supervisory expectations communicated to banks via a ‘Dear CEO letter’ from 4 December 2020.

The assessment led to an increased number of findings, which mostly reflected concerns about the quality of banks’ processes. In general, the number of supervisory findings has increased in 2021, largely due to the resumption of on-site inspections (OSIs) which followed a hybrid approach in 2021.

Remarkably, more than half of the findings in 2021 were reported in the area of credit risk despite credit risk making up less than 10% of supervisory activities in that year. This indicates just how significant the weaknesses in banks’ credit risk management were found to be. Inspections highlighted deficiencies in how banks carry out and monitor key credit risk processes in the pandemic environment, including underestimation of expected credit losses and weak monitoring processes.

Unsurprisingly, credit risk related to the pandemic features prominently in the 2022-2024 priorities.

Authorisations, enforcement and sanctions procedures

Authorisation procedures

In 2021 the number of notifications of common procedures for licensing, qualifying holdings and withdrawals submitted to the ECB remained similar to the previous year. The vast majority of licensing procedures in 2021 were associated with the establishment of smaller banks.
Following the entry into force of the new regime for investment firms in June 2021, a number of investment firms must apply for authorisation as a credit institution. A grandfathering regime applies in 2021 and 2022 but about 20 firms are expected to be in scope of the new licence requirements. The ECB states that it has been notified of 11 applications, but as of today, no licence has been issued. 

Fit & proper procedures

In 2021, the ECB was notified of a total of 2,627 fit and proper applications, largely for members of the management body but also supervisory board members, key function holders and third country branch managers. This is a decrease of 7% in the number of applications from the previous year. 

The overall processing time for fit and proper procedures to complete was 3.7 months, just short of the maximum of 4 months prescribed in the Joint ESMA and EBA Guidelines. Individual national competent authorities (NCAs) may however well exceed this time period.

The ECB works with the relevant NCAs and banks in its assessment process and raises doubts and concerns on a candidate’s suitability as part of this supervisory dialogue. To pre-empt a negative decision, a fit and proper application is often withdrawn. 2021 saw the trend of rising withdrawals continue with 52 applications being withdrawn in this manner compared to just 22 in 2020 and 12 in 2019.

These numbers are indicative of the ECB’s stricter approach to the fit and proper assessment that culminated in the publication of its revised Guide to fit and proper assessments (FAP Guide). The ECB also welcomes the stricter fit and proper requirements proposed by the Commission in its 2021 Banking Package, notably the emphasis on ex ante assessment of suitability.


The ECB handled eight sanctioning proceedings in 2021, five of which were finalised by the end of the year, resulting in pecuniary penalties of up to EUR 24.7 million. Of the eight proceedings, seven were related to suspected breaches of directly applicable EU law committed by seven significant institutions (SIs).

The remaining proceeding related to suspected breaches of national law implementing an EU directive committed by a less significant institution and was finalised with an ECB request addressed to the relevant NCA to open proceedings. In line with applicable provisions of the Single Rulebook, penalties imposed by the ECB, as well as the penalties imposed by an NCA at the request of the ECB, are published on the ECB’s banking supervision website.

Cross-border cooperation

In 2021 there were three significant developments as regards cross-border cooperation of the ECB with other supervisors:

  • Publication of supervisory MoUs: Following its 2020 decision on publishing existing and future MoUs entered by the ECB with other supervisors, the ECB published on its website 18 MoUs concluded since 2014, including the MoU agreed with the Bank of England/PRA in the context of Brexit.
  • ECB-SEC MoU: The ECB signed an MoU with the SEC in the US regarding the registration of SIs as security-based swap dealers or major security-based swap participants in the US. Under this MoU, the ECB and the SEC will communicate and exchange information on the security-based swap activities that ECB-supervised entities conduct in the US. This is to enable compliance with US requirements that permit such entities to meet certain US rules by complying with comparable EU or national requirements.
  • Close cooperation with Bulgaria and Croatia: Having joined the banking union in 2020, the NCAs of Bulgaria and Croatia were integrated into the SSM in 2021. 

Supervision under Securitisation Regulation

In May 2021 the ECB announced it would start supervising the compliance of SIs with the risk retention, transparency and re-securitisation requirements under Articles 6, 7 and 8 of the Securitisation Regulation. To this end, an SSM-Hub was established that will be coordinated by a “coordinating NCA” that will vary over time and be staffed from one of the volunteering NCAs (from Austria, France, Germany, Italy, the Netherlands and Spain).

The SSM-Hub will assist the ECB in discharging its supervisory duties. As part of this project the ECB consulted on and published a non-binding Guide on the notification of securitisation transactions. It clarifies the information that the ECB expects banks acting as originators or sponsors to provide.


Following on from the trend set in previous years, the ECB expects trends from previous years on digitalisation and C&E risks to continue and exacerbate in 2022. Digital transformation has accelerated due to the pandemic and is changing the competitive landscape, consequently requiring banks to adapt accordingly. With awareness of the urgent risks posed by climate change growing in 2021, this will be an area of increased scrutiny.

Meanwhile, the effect of the new FAP Guide still needs to be felt and it remains to be seen how active the ECB will be in its new role under the Securitisation Regulation.

Further reading

Read the full Annual Report here.

Read our blog post on the 2022-24 supervisory priorities here.