Assessment of the Internal Governance as an Element of the Supervisory Review and Evaluation Process (SREP)

Abstract

In recent years, the internal governance issues in the banking sector have received increased attention on the international level. One of the global financial crisis causes was banks’ weak and superficial internal governance practices. Before the financial crisis, banks have not effectively implemented the internal control mechanisms and risk management, because the goal of profit maximization prevailed and conditioned the banks managers to take the decisions with a high degree of risk. The European Banking Authority (EBA) is constantly concerned with issuing the best policies for an efficient banking supervision in the European countries. In this context, EBA included the internal governance assessment as a component of the Supervisory Review and Evaluation Process (SREP). The difference between the previous researches on the internal governance topic and the present article is the fact that it analyzes the peculiarities of the internal governance assessment during the SREP process, performed by the supervisory authority. The supervisory authority task is to assess whether or not a bank’s internal governance arrangements are adequate for and correspond to the institution’s risk profile, business model, size and complexity. The score assigned following the internal governance assessment expresses the supervisory authority view on the adequacy of the institution’s internal governance arrangements and institution wide controls.