Title 4 Business model analysis (BMA)
4.1 General considerations
7056. This title specifies criteria for the assessment of the business model and strategy of the institution. CompetentThe authoritiespurpose shouldof apply this assessment by competent authorities is to anachieve institutiona atcomprehensive theunderstanding same– levelboth asin thecurrent overalland SREPforward-looking assessment,perspectives but– itof canthe alsoinstitution’s beoperations, appliedidentify atsignificant businessexisting or product-linepotential level,vulnerabilities orwhich onare amost thematiclikely basis.
71.to Withouthave undermininga thematerial responsibilityimpact ofon the institution’s, managementand bodyassess forthe runningoverall andsoundness organisingof theits business, ormodel indicatingand preferencesstrategy. forFollowing specificthis business modelsassessment, competent authorities should conduct regular business model analysis (BMA) to assess business and strategic risks and determine:
►a. the viability of the institution’s current business model, onmeasured theby basis of its ability to generate acceptable returns over the followingnext 12 months; and
►b. the sustainability of the institution’s strategy, based on the basis of its ability to generate acceptable returns over a forward-looking period of at least 3three years, basedas onderived from its strategic plans and financial forecastsprojections.
7257. Competent authorities should use the outcome of the BMA to support the assessment of all other elements of the SREP. Competent authorities may assess specific aspects of the BMA, in particular the quantitative assessment of the business model, as part of the assessment of other SREP elements (e.g. understanding the funding structure can be part of the risks to liquidity assessment).
7358. Competent authorities should alsotake useinto theaccount BMAenvironmental, tosocial supportand thegovernance identification(ESG) ofrisks, thegiving institution’spriority keyto vulnerabilitiesenvironmental transition and physical risks, whichwhen areperforming mostthe likelyBMA, with a view to haveassessing athe materialstrategic impactand onprudential implications of these risks for the institution/leadbusiness tomodel itsof failurethe institution in the futureshort, medium and long term.
7459. Competent authorities should also use the BMAbusiness model analysis to assess prudential implications of ML/TF risks known to them, linked to the business model of the institution. In this respect, competent authorities should use the input received from AML/CFT supervisors, in particular their assessments of ML/TF risks and any findings relating to material weaknesses in an institution’s AML/CFT controls, to complement their findings from ongoing supervision, and evaluate whether they give rise to prudential concerns related to ML/TF risk. Where the assessment indicates the business model of the institution gives rise to prudential concerns related to ML/TF risk, competent authorities should share the outcome of the prudential assessment of the business model with the AML/CFT supervisorssupervisor.
7560. Competent authorities should undertake the following steps as part of the BMA:
a. preliminary assessment;
b. identification of the areas of focus;
c. assessment of the business environment;
d. quantitative analysis of the current business model;
e. qualitative analysis of the current business model;
f. analysis of the forward-looking strategy and financial plans (including planned changes to the business model);
g. assessment of business model viability;
h. assessment of sustainability of the strategy;
i. identification of key vulnerabilities to which the institution’s business model and strategy expose it or may expose it; and
j. summarising of the findings and scoring.
76. To conduct the BMA, competent authorities should use at least the following sources of quantitative and qualitative information:
a. institution’s strategic plan(s) with current-year and forward-looking forecasts, and underlying economic assumptions;
b. financial reporting (e.g. profit and loss (- P&L), balance-sheet disclosures);
c. regulatory reporting (common reporting (COREP), financial reporting (FINREP) and credit register, where available);
d. internal reporting (management information, including – where available – contribution to the profitability by business lines, capital planning, liquidity reporting, operational resilience, internal risk reports);
e. recovery andplans;
f. resolution plans, including the resultswork and outcome of resolvability assessment provided by the resolution authority in accordance with Article 14 of Directive 2014/59/EU;
fg. institution’s plan to address ESG risks, to be prepared in accordance with Article 76(2) of Directive 2013/36/EU;
h. third-party reports (e.g. audit reports, reports by equity/credit analysts); and
gi. other relevant macroprudential or financial stabilities studies/surveys (e.g. from the International Monetary Fund (- IMF), macroprudential authorities and institutions, European institutions).
4.2 PreliminaryIdentifying assessment
77.the Competentareas authoritiesof shouldfocus analysefor the institution’sBMA
Assessment mainareas
61. activities,In geographiesaccordance andwith marketthe positionengagement tomodel identify,set atout thein highestTitle level2, ofcompetent consolidationauthorities inshould thefocus jurisdiction,their analysis on the institution’s:
a.most majormaterial geographies;
b.assessment majorareas subsidiaries/branches;
c.for majorthe business lines;model and
d.of majorthe product linesinstitution.
78. ForThe thisscope purpose,and competentdepth authoritiesof shouldthe considerBMA amay rangebe ofdifferentiated relevantdepending metricson at the pointnumber and nature of assessmentsupervisory andreviews changesalready overperformed timeon that institution. TheseThis metricsassessment should include:
a.in contributionany case allow competent authorities to overallform revenues/costs;
b.a shareview ofon assets;
c.the shareoverall ofinstitution’s TREA;business and
d.model marketviability positionand sustainability.
7962. Competent authorities should useform thisa preliminaryview assessmenton to:
a.the determine materiality of businessthe areas/lines:changes competentto authoritiesthe shouldinstitution’s determinebusiness whichmodel geographies,compared subsidiaries/branches,to businessprior linessupervisory andreview, productin linesorder areto decide the mostscope materialand baseddepth onof profittheir contributionassessment (e.g.and basedthe onextent P&L),to riskwhich (e.g.the basedprior onsupervisory TREAassessment orcan otherbe measuresused ofas risk)a and/orbaseline organisational/statutoryfor prioritiesthe (enew one.g. specificIn obligationsforming forsuch publica sectorview, bankscompetent toauthorities offershould, specificin products).particular, Competentconsider authoritieswhether shouldthere usehave thisbeen informationrelevant aschanges ain basisthe forfollowing identifyingareas whatof the BMAinstitution:
a. shouldthe focuspreviously oncommunicated (coveredand furtherassessed instrategic Section 4.3)plan;
b. identify the peerstructure group:and competentcomposition authoritiesof should determine the relevantbalance peersheet, groupincluding forchanges thein institution;sources toof conductingprofit aand BMAtheir concentration, theasset competentgrowth, authoritychanges shouldin determine the peerliabilities groupstructure, onor theshift basisin of the rivalrelevant product/businessfinancial linesand targetingrisk theindicators, sameand sourceconsider of profits/customers (e.g. the credit-cardresults businesses of differentthe institutionsindicator targetingmonitoring creditoutlined card users in countryTitle X)3;
c. supportgovernance theand applicationoperations, ofincluding theacquisitions, principlemergers ofor proportionality:divestments competentof authoritiesother mayentities, use the outcomesopening or exit of thebusiness preliminarylines assessmentor togeographic helpmarkets withas thewell allocationchanges to IT infrastructure.
Identification of institutionsmost toimportant proportionalitybusiness categorieslines
63. onCompetent theauthorities basisshould ofcarry theout identifieda complexitymateriality assessment of the institutionsinstitution’s (asbusiness specifiedlines into Sectiondetermine 2.1.1).
4.3 Identifying the key areas of focus for the BMA
80 to focus on. CompetentWhen authoritiesperforming shouldthis determineassessment, thecompetent focusauthorities ofshould thetake BMAinto account:
a. Theythe shouldrelevance focusof on the business lines that are most important in terms of viabilitygenerating orprofits/losses, futureincluding sustainabilitythe ofgeographies, currentsubsidiaries/branches businessand model,product and/orlines mostthat likelyare tomost increasematerial thebased institution’son exposuretheir contribution to existingthe oroverall newrevenues/costs vulnerabilities.in Competentthe authoritiesP&L, shouldrisk take(e.g. intobased account:
a.on theTREA materialityor ofother businessmeasures linesof –risk) whetherand/or certainorganisational/statutory businesspriorities lines(e.g. arespecific moreobligations importantfor inpublic termssector ofbanks generatingto profitsoffer (orspecific lossesproducts);
b. previous supervisory findings, –including whetherthose thearising findingsfrom foronsite otherinspections elements– ofwhere thethese SREPfindings can provide indicators on business lines requiring further investigation;
c. –, as well as findings and observations from internal or external audit reports – whether the internal audit function has identified specific issues regarding the sustainability or viability of certain business lines;
dc. importance to strategic plans – whether there are business lines that the institution wishes to grow substantially, or decrease;
e. outcomes of thematic supervisory reviews – whether a sector-wide analysis has revealed common underlying issues that prompt additional institution-specific analysis;
fd. observedimportance changesto instrategic theplans business model – whether there are observed de facto changes in the business modellines that have occurred without the institution declaringwishes anyto plannedgrow changessubstantially or releasing new strategic plansdecrease;
ge. peer comparisons – whether a business line has performed atypically (been an outlier) compared to peers;
h., findingswhere andsuch observationsinformation fromis theavailable preliminary business model assessment including those that point to acompetent potential exposure of the business model to ML/TF risksauthorities.
4.4 Assessing the business environment
81. To formidentify arelevant viewpeers onfor the plausibility of an institution’s strategic assumptionsBMA, competent authorities should undertakeconsider an analysis of the rival product/business environment.lines Thistargeting takes into consideration the currentsame andsource future business conditions in which an institution operates or is likely to operate based on its main or material geographic and business exposures. As part of this assessmentprofits/customers, competent authorities should develop an understanding of the directionregulatory ofregimes macroeconomic and marketgeopolitical trendsrisks and the strategic intentions of thelocation peer group.
82. Competent authorities should use this analysis to develop an understanding of:
a. theoperations keyas macroeconomicwell variablesas withinother whichfactors theappropriate relevant entity, product or segment being assessed operates or will operate based on its main geographies. Examples of key variables include gross domestic product (GDP), unemployment rates, interest rates and house price indices.
b. the competitive landscape and how it is likely to evolve, considering the activitiessector of the peer group. Examples of areas for review include expected target-market growth (e.g. residential mortgage market) and the activities and plans of key competitors in thewhich target market.
c. overall trends in the market that may have an impact on the institution’s performance and profitabilityoperate. This should include, as a minimum, regulatory trends (e.g. changes to retail banking product distribution legislation), technological trends (e.g. moves to electronic platforms for certain types of trading) and societal/demographic trends (e.g. greater demand for Islamic banking facilities).
4.53 AnalysisAssessment of theBMA currentrobustness business model
83. To understand the means and methodsidentification usedof by an institution to operate and generate profits, competent authorities should undertake quantitative and qualitative analyses.vulnerabilities
464.5.1 Quantitative analysis
84. Competent authorities should undertakeperform an analysis of quantitative features of the institution’s current business model to understandassess its financialability performanceto andgenerate acceptable profits in the degreeshort, tomedium whichand thislong isterm, drivengiven bythe itsinstitution’s risk appetite beingand higherits orfunding lowerand thancapital peersstructures.
85. Areas for analysis by competent authorities should include:
a. profitdrivers andof lossprofitability, including trends:, competentby authoritiesassessing should assess the underlying profitabilityelements of the institution’s (e.g.earning capacity, after exception items and one-offs), the breakdown of income streams, the breakdown of costs and costs allocation, impairment provisions and key ratios (e.g. net interest margin, cost/income, loan impairment, and cost of risk). CompetentThis authoritiesassessment shouldmay considerbe howcomplemented by the aboveanalysis itemsof havethe evolvedrelevant inrisk-adjusted recentprofitability yearsmetrics and(e.g. identifyReturn underlyingOn trendsAllocated Capital – ROAC, or the Risk-Adjusted Return on Capital Return - RAROC), where these are available and deemed reliable;
b. the balance sheet, including trends:, competentby authoritiesassessing should assess the asset and liability mix, the funding structure, the change in the TREA and own funds, and key ratios (e.g. return on equity/assets, Core Tier 1, funding gap). Competent authorities should consider how the above items have evolved in recent years and identify underlying trends;
c. concentrations, includingas theirwell trends:as competent authorities should assess concentrations in the P&L and balance sheet related to customers, sectors and geographies. Competent authorities should consider how the above items have evolved in recent years and identify underlying trends; and
dc. risk appetite: competentand authoritiestolerance shouldlevels, assessby assessing the formal limits put in place by the institution by risk type (credit risk, funding risk, etc.) and its adherence to them to understand the risks that the institution is willing to take to drive its financial performance and to ensure operational resilience.
4.5.2 QualitativeThis analysisshould also cover the impact tolerance for ICT disruptions.
8665. Competent authorities should undertakeperform an analysis of qualitative features of the institution’s current business model to understand its success drivers and key dependencies.
87. Areas for analysis by competent authorities should include:
a. keythe externalbusiness dependencies:environment, competentby authoritiesassessing should determine the mainforward-looking exogenousenvironment factorsin thatwhich influence the successinstitution ofoperates thebased businesson model;its thesemain mayor includematerial third-partygeographic providers, intermediaries and specificbusiness regulatory drivers;
bexposures. keyAs internalpart dependencies:of this assessment, competent authorities should determinedevelop thean mainunderstanding endogenousof factorsthe thatkey influencemacroeconomic thevariables, successmarket oftrends, the businesscompetitive model;landscape theseand mayother includerelevant thedevelopments quality(such ofas ITregulatory platforms and operationallegal and resource capacitychanges);
cb. franchise:key competentinternal authoritiesand shouldexternal determinedependencies, theby strengthassessing ofmain relationshipsexogenous with customers, suppliers and partners;endogenous thisfactors that may includeinfluence the institution’ssuccess relianceof upon its reputation, the effectivenessbusiness of branchesmodel, theconsidering loyaltyassociated ofgovernance customers and theinternal effectivenesscontrol of partnershipsarrangements; and
dc. franchise and areas of competitive advantage:, competentby authoritiesassessing should determine the areasreputation inof which the institution hasand athe competitivestrength advantageof overrelationships itswith peers;customers, thesesuppliers mayand include any of the abovepartners, such as thewell qualityas ofwhether thethere institution’sare ITareas platforms,in orwhich other factors, such as the institution’s globalhas network,a thecompetitive scaleadvantage ofover its business or its product proposition.peers;
ed. InICT the analysissupport, competentby authoritiesassessing should consider any indications that the businesslevel model and activitiesadequacy give rise to increased ML/TF risks, including deposit-taking or establishment or use of legalalignment entitiesbetween inthe high-riskICT thirdand countries,the asbusiness identified in accordanceterms with Article 9 of Directive (EU) 2015/849. Where presentstrategy, these indications should be complemented by quantitative analysisobjectives, as appropriateactivities, focusingresources inand particularfunctions, on the materiality of the revenues and theby incomeconsidering fromwhether operationsany run in such highICT-riskrelated thirdconcerns countries,could theimpact concentrations of exposures to customers for which the institution’s applybusiness enhancedstrategy customerand due diligence as set out in Chapter II, Section 3 of Directive 2015/849objectives.
66. Competent authorities should exchangecomplement information with the AML/CFTanalysis supervisorby oncarrying these indications as laid out ina paragraphforward-looking 74.
4.6analysis Analysis(both of the strategy and financial plans
88. Competent authorities should undertake a quantitative and qualitative) forward-looking analysis of the institution’s financial projections and strategic plan to understand the underlying assumptions and dependencies, plausibility and riskiness of its business strategy.
89. Areas for analysis by competent authorities should include:
a. overall strategy: competentand authoritiessuccess shoulddrivers, considerby assessing the main quantitative and qualitative management objectives;
b. projectedand financial performance: competent authorities should consider projected financial performance, covering the samegap orbetween similar metrics as those covered in the quantitativeenvisaged analysis of the current business model;
c. success– driverspost of the strategy execution
and financial plan: competent authorities should determine the key changes proposed to the current business model to meet the objectives;
db. assumptions:projected competentfinancial authoritiesperformance, shouldby determineassessing the plausibility and consistency of the assumptions made by the institution that drive its strategy and forecasts;
c. theseexecution maycapabilities, includeby assumptionsassessing inmanagement’s areastrack suchrecord ason macroeconomicdelivering metrics,previous marketstrategies dynamicsand forecasts, volumeas andwell marginas growththe inoverall keyability products,of segmentsthe andinstitution geographies,to etc.;make and
e.use executionof capabilities:competitive competentadvantages authoritiesand shouldsuccess determinedrivers thein institution’scarrying executionout capabilitiesits basedbusiness onand theto management’sgenerate trackreturns record in adheringan toeffective previousway. strategiesAs andpart forecastsof this assessment, andcompetent theauthorities complexityshould andconsider:
i. ambitionthe adequacy of the strategycost setallocation comparedframework - in terms of adequacy to reflect the currentprofitability of business modellines/units;
ii. Inthe assessingfund thetransfer executionpricing capabilities,framework competent– authoritiesin shouldterms alsoof takeadequate intodetermination accountof the capabilitiesnet toincome executecomponent thefor strategyeach frombusiness aline/unit, riskproduct managementand perspective.customer;
90iii. Competentthe authoritiesloan maypricing conductframework parts– ofin thisterms analysisof concurrentlyadequate withgovernance the quantitative and qualitative analysis of the currentloan businesspricing modelprocess, particularlypricing themethodology, analysisappropriate consideration of all the projectedloan financialpricing performancecomponents, and ofex thepost successprofitability driversmonitoring and reporting of theproduct strategy.pricing decisions;
4iv.7 Assessingthe businessrevenue modelsharing viability
91.framework Havingbetween conductedinstitutions established in the analysesUnion coveredthat inare Sectionspart 4.4of third-country groups and 4.5,other competententities authoritiesof shouldthat form,group orestablished update,outside theirthe viewUnion onand thenot viabilityconsolidated ofby the institution’sEU currentparent businessundertaking model– onin theterms basis of itsfair abilitysharing toof generateP&L acceptablebetween returnsentities overor thebusiness followinglines 12taking months,part givenin itsthe quantitativelife performance,cycle keyof successtransactions, drivers and dependenciesof andthe businessadequate environmentgovernance.
9267. CompetentIn the analysis, competent authorities should assessconsider theany acceptabilityindications ofthat returnsthe againstbusiness themodel followingand criteria:
a.activities returngive onrise equityto (ROE)increased againstML/TF costrisks, ofincluding equitycrypto-asset (COE)activities or equivalentdeposit-taking measure:or competentestablishment authoritiesor shoulduse considerof whetherlegal theentities businessin modelhigh-risk generatesthird acountries, returnas aboveidentified costin (excludingaccordance one-offs)with onArticle the9 basis of ROEDirective against(EU) COE;2015/849. otherWhere metricspresent, suchthese asindications returnshould onbe assetscomplemented orby risk-adjustedquantitative return on capitalanalysis, as wellappropriate, asfocusing consideringin changesparticular inon thesethe measuresmateriality throughof the cycle,revenues mayand alsothe supportincome thisfrom assessment;
b.operations fundingrun structure:in competentsuch authoritieshigh-risk shouldthird considercountries, whether the fundingconcentrations mixof isexposures appropriate to thecustomers businessfor modelwhich andthe toinstitution theapply strategy;enhanced volatilitycustomer ordue mismatchesdiligence inas theset fundingout mixin mayChapter meanII, thatSection a3 businessof modelDirective or2015/849. strategy,Competent evenauthorities oneshould thatexchange generatesinformation returnswith abovethe costs,AML/CFT maysupervisor noton bethese viableindications oras sustainablelaid givenout thein currentparagraph or5963.
4.4 futureBusiness businessmodel environment;viability and sustainability
c68. riskCompetent appetite: competent authorities should considerassess whetherthe resilience of the institution’s business model orto strategyexternal reliesshocks onand aits riskadaptability appetite,to forstructural individualchanges risksin (e.g.terms credit,of market)its orcapacity moreto generally,absorb thatthem isand consideredadapt highto orexogenous isfactors anthat outliercould amongstthreaten thebusiness peerand groupstrategic to generate sufficient returnsobjectives.
4.8 AssessingAreas thefor sustainabilityanalysis ofby thecompetent institution’sauthorities strategyshould include:
93a. Havingclimate-related conductedand theother analysesenvironmental coveredrisks, inby Sectionsassessing 4.4their toimpact 4.6,on competentthe authoritiesinstitution’s shouldcurrent form,and orfuture update,business theirenvironment viewand onbusiness thestrategy, sustainability of the institution’s strategyexposure onto thematerial basistransition ofand itsphysical abilityrisks, toas generatewell acceptableas returns,the asdevelopment definedand above,implementation overof a forward-lookingplan periodto ofmonitor atand leastaddress 3the yearsfinancial basedrisks onstemming itsfrom strategicESG plansfactors and- financialincluding forecaststhose andarising givenfrom the supervisoryprocess assessment of thetransition businesstowards environment.
94.regulatory Inobjectives, in particular, competentclimate-related authoritiesobjectives shouldapplicable assessin the sustainabilityjurisdiction(s) ofwhere the institution’s strategy based on:operates;
ab. digitalisation, by assessing the plausibilityuse and adoption level of new technologies and impact on the institution’s assumptionsbusiness strategy and projectedbusiness financialplan, performanceexecution comparedcapabilities toand thecost supervisorycontrol, viewas ofwell theas currentrevenue and future business environmentgeneration;
bc. theoperational impactresilience, onby reviewing the projectedinstitution’s financialoperational performanceresilience ofapproach theand supervisoryits viewconsideration ofto the business environmentstrategy (whereby this differs from the institution’smanagement assumptions)body; and
cd. thegeopolitical riskrisks, levelby ofassessing the strategysource (i.e.of thegeopolitical complexityuncertainties and ambitionits ofinclusion thein strategy compared to the current business model)strategy, andas thewell consequentas likelihoodtheir offinancial successimpact based on the institution’s likelycurrent executionand capabilitiesfuture (measuredprofitability, bywhile also taking into account the institution’s successcapacity into executingwithstand previoussuch strategiesuncertainties, offor ainstance similarby scalemeans orof theits performancegeographical againstand thebusiness strategicprofile plandiversification;
e. socrypto-asset faractivities, andif takingapplicable, intoby accountassessing the capabilitiesinstitution’s toprovision executeof thecrypto-asset strategyservices fromand aany riskother managementactivities perspective).
4.9related Identificationto of key vulnerabilitiescrypto-assets.
9569. HavingBased conductedon the BMAperformed analysis, competent authorities should assessform, or update, their view on the following elements:
a. key vulnerabilities to which the institution’s business model and strategy expose it or may expose it, consideringsuch anyas ofexcessive theconcentrations following:
a.or risk-taking, poor expectedstrategic financialsteering performance;
b.of relianceprofitability onand anexecution unrealistic strategycapabilities;
cb. excessiveviability concentrationsof orthe volatilityinstitution’s (e.g.current ofbusiness revenuesmodel, earnings,as customersdefined subjectin toparagraph enhanced56, customergiven dueits diligencequantitative setperformance, outrisk inappetite, Chapterfunding IIstructure, Sectionkey 3success ofdrivers Directiveand 2015/849,dependencies high-riskand thirdbusiness countriesenvironment;
c. insustainability accordanceof withthe Articleinstitution’s 9strategy, ofas thatdefined Directive,in depositsparagraph and56, assetsbased underon custody/managementthe relatedplausibility toof suchits high-riskstrategic thirdplan countries;
d.and excessivefinancial risk-taking;
e.forecasts, fundingand structuregiven concerns;
f.the significantsupervisory externalassessment issuesof (e.g.the regulatoryprojected threatsfinancial performance, suchoverall asstrategy, mandatinglevel of ‘ring-fencing’operational ofresilience businessand units);the and
gexecution capabilities. ESGCompetent risksauthorities andshould theiralso impactconsider on the viabilityinstitution’s andcapacity sustainabilityto ofensure theits businessmedium- modelto and long-term resilience ofto theenvironmental institution.
96.risks Followingby thetaking aboveinto assessment,account competentlong-term authoritieshorizons shouldof format aleast viewten onyears, theincluding viabilityby ofreviewing the institution’senvironmental business model andresilience theanalyses sustainabilityconducted ofby itsthe strategy,institution andin anycompliance necessarywith measuresthe toEBA addressGuidelines problemson andenvironmental concerns.scenario analysis;
4.105 Summary of findings, scoring and scoringsupervisory measures
9770. Based on the assessment of the viability and sustainability, and of theany businesspotential modelrisks and vulnerabilities to the institution, competent authorities should form ana overall view on the business model viability and strategy sustainability, and any potential risks to the viability of an institution’s stemmingbusiness from this assessmentmodel. This view should be reflected in a summary of findings, accompanied by a viability score based on the considerations specified in Tabletable 2.
Table 2. Supervisory considerations for assigning a business model and strategy score
Supervisory view ConsiderationsConside rations
The business model and strategy pose a low level of risk to the viability of the institution. • The institution has a strong competitive position in its chosen markets and a strategy likely to reinforce this. • The institution generates strong and stable returns which are acceptablecommensurate to the risk it takes on, given its risk appetite and funding structure and that are not driven by excessive risk-taking, or reliance on an unrealistic strategy.
Score
1
Supervisory view ConsiderationsConside rations
• There are no material asset concentrations or unsustainable concentrated sources of income. • The institution has afinancial strongforecasts competitivedrawn positionup inbased itson chosenplausible marketsassumptions andabout athe strategyfuture likelybusiness to reinforce thisenvironment. • The institution hasaddresses financialstrategic forecastsimplications drawnof upmaterial onESG therisks, basisin ofparticular plausibleenvironmental assumptionstransition aboutand thephysical futurerisks, for its business environmentmodel in the short, medium and long term through a robust transition planning process. • Strategic plans are appropriate given the current business model and management execution capabilities.
The business model and strategy pose a medium-low level of risk to the viability of the institution. • The institution faces competitive pressure on its products/services in one or more key markets. There is some doubt about its strategy to address the situation. • The institution generates average returns compared to peers and/or historic performance which are broadly acceptablecommensurate to the risk it takes on, given its risk appetite and funding structure. • There are some asset concentrations or concentrated sources of income. • The institution faceshas competitivefinancial pressureforecasts ondrawn itsup products/servicesbased inon oneoptimistic orassumptions moreabout keythe marketsfuture business environment. Some• doubtThe aboutinstitution itsbroadly strategyaddresses tostrategic addressimplications theof situation.material •ESG Therisks, institutionin hasparticular financialenvironmental forecaststransition drawnand upphysical onrisks, thefor basisits ofbusiness optimisticmodel assumptionsthrough aboutan theoverall futurereasonable businessyet environmentnot fully robust transition planning process. • Strategic plans are reasonable given the current business model and management execution capabilities, but not without risk.
The business model and strategy pose a medium-high level of risk to the viability of the institution. • The institution has a weak competitive position for its products/services in its chosen markets and may have few business lines with good prospects. The institution’s market share may be declining significantly. There are doubts about its strategy to address the situation. • The institution generates returns that are often weak or unstable or not stable,commensurate orto reliesthe onrisk ait takes given its risk appetite or funding structure toand generate appropriate returns that raise supervisory concerns. • There are significantmaterial asset concentrations or concentrated sources of income. • The institution has afinancial weakforecasts competitivedrawn positionup forbased itson products/servicesoverly optimistic assumptions about the future business environment. • The institution addresses strategic implications of material ESG risks, in itsparticular chosenenvironmental marketstransition and physical risks, for its business model only partially. Its transition planning process shows some weaknesses and/or deficiencies. • Strategic plans may havenot fewbe plausible given the current business linesmodel withand goodmanagement prospectsexecution capabilities.
The business model and strategy pose a high level of risk to the viability of the institution • The institution’s markethas sharea mayvery bepoor decliningcompetitive significantly.position Therefor areits doubtsproducts/services aboutin its strategychosen markets and participates in business lines with very weak prospects. Strategic plans are very unlikely to address the situation. • The institution hasgenerates financialvery forecastsweak drawnand uphighly unstable returns or relies on thean basisunacceptable ofrisk overlyappetite optimisticor funding structure to generate appropriate returns.
Score
2
3
Supervisory view Considerations
assumptions about the future business environment. • Strategic plans may not be plausible given the current business model and management execution capabilities.
The business model and strategy pose a high level of risk to the viability of the institution. • The institution generates very weak and highly unstable returns, or relies on an unacceptable risk appetite or funding structure to generate appropriate returns. • The institution has extreme asset concentrations or unsustainable concentrated sources of income. • The institution has a very poor competitive position for its products/services in its chosen markets and participates in business lines with very weak prospects. Strategic plans are very unlikely to address the situation. • The institution has financial forecasts drawn up on the basis of very unrealistic assumptions about the future business environment. • Strategic plans are not plausible given the current business model and management execution capabilities.
Score
4
Supervisory view Conside rations
• The institution has extreme asset concentrations or unsustainable concentrated sources of income. • The institution has financial forecasts drawn up based on very unrealistic assumptions about the future business environment. • The institution is exposed to material ESG risks, in particular environmental transition and physical risks, and does not address strategic implications for its business model. Its transition planning process is inconsistent with the broader business strategy. Its transition planning process shows severe weaknesses and/or deficiencies. • Strategic plans are not plausible given the current business model and management execution capabilities.
Score
71. The table below presents a non-exhaustive list of supervisory measures that competent authorities may take in case of identified deficiencies in the institution’s business model. Competent authorities should decide on the type of the supervisory measure based on its effectiveness to the specific identified deficiency.
72. Competent authorities may apply additional supervisory measures (including quantitative measures in accordance with Article 104(1)(a) of the Directive 2013/36/EU) or a combination of them if these are deemed more appropriate to address the identified deficiencies.
Table 3. Potential and non-exhaustive list of supervisory measures stemming from the BMA
Potential supervisory measures for competent authorities in accordance with Article 104(1)(b), (d), (e), (f), (m), (n) of Directive 2013/36/EU – Competent authorities may require the institution to: A. adjust the financial plan assumed in the strategy, if it is not supported by internal capital planning or credible assumptions; B. make changes to organisational structures, reinforcement of risk management and control functions and arrangements to support the implementation of the business model or strategy; C. make changes to and reinforcement of IT systems to support the implementation of the business model or strategy; D. make changes to the business model or strategy; E. reduce the risk inherent in the products they originate/distribute, including requiring changes to the risks inherent in certain product offerings; and/or requiring improvements to the governance and control arrangements for product development and maintenance; D. reduce the risk inherent in its systems, including requiring improvements to the systems, or increasing the level of investment or speeding-up the implementation of new systems; and/or requiring improvements to the governance and control arrangements for system development and maintenance; G. reduce the risk inherent in their activities, including outsourced activities and requiring changes to or reduction of certain activities with a view to reducing their inherent risk; and/or requiring improvements to governance and control arrangements and oversight of outsourced activities; H. reduce ESG risks, in particular environmental risks, through adjustments to its business strategy, for which a reinforcement of the targets, measures, and actions included in the institution’s plan to be prepared in accordance with Article 76(2) of Directive 2013/36/EU could be requested.