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Governance within smaller banks - key takeaways from the ECB thematic review

Author
Henri Wagner

Partner

Luxembourg

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Aubry Baptiste
Baptiste Aubry

Counsel

Luxembourg

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Costica Andrei
Andrei Costica

Senior Associate

Luxembourg

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Schmidt Carole
Carole Schmidt

PSL-Counsel

Luxembourg

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Image of Angeliki Kontodimos
Angeliki Kontodimos

Junior Associate

Luxembourg

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01 June 2022

In the context of its 2022-2024 Supervisory Priorities, the ECB carried out a thematic review of the governance arrangements of more than 200 smaller banks under its indirect supervision. The review identified some areas requiring improvement and highlighted the need for greater alignment among European supervisors in addressing the identified weaknesses. 

While the ECB is not responsible for the direct supervision of smaller banks or “less significant institutions”, it is responsible for their indirect supervision and has an oversight role over their activities. In this context and in cooperation with the national supervisory authorities (NCAs) of the countries participating in European banking supervision, the ECB carried out a thematic review of the governance arrangements of smaller banks (based on a sample of more than 200 smaller banks across the 21 participating countries).

Bank governance being a key point of attention for both ECB and NCAs, this review evidenced several supervisory concerns related to the governance of smaller banks that require improvement to enhance bank management bodies’ effectiveness: 

  • Weaknesses in the functioning and the oversight role of bank management bodies in their supervisory functions: For instance, it was found that (i) internal control functions had partially insufficient direct access to the boards and (ii) risk committee structures or alternative arrangements (such as sufficient discussions on risks within the management body where no risk committee exits) were not always in place.
  • Issues concerning the boards’ composition: In particular, these arise around the formal independence, experience and diversity of board members. Some of these identified areas of attention also concern larger banks, but they are even more pronounced in smaller banks.

While smaller banks can rely on the proportionality principle, the ECB makes it clear that this shall not justify the identified weaknesses and an adequate level of oversight of the bank shall be guaranteed at all times. Therefore, the ECB, in cooperation with the NCAs, will be following up on the identified deficiencies in order to raise the bar on governance. Needless to say that smaller banks can expect that the above points will be carefully scrutinised by NCAs when auditing governance arrangements of less significant banks.

Read more on the 2022-2024 supervisory priorities in our dedicated blog post