ECB Regulatory Updates

What Changed

• - Introduced a two‑step ICAAP/ILAAP submission model under the SREP: (1) annual submission of the main “ICAAP & ILAAP package” by 15 March and (2) continuous, year‑round submission of any new or...
• Shortened the standard annual deadline for ICAAP/ILAAP information from 31 March to 15 March, reducing the preparation and governance window by roughly two weeks versus prior practice.
• Confirmed that the clarifications apply from the SREP 2025 cycle onwards, with a general transition approach for 2025 and limited transitional flexibilities for banks whose internal processes cannot...
• Required inclusion of two distinct, concise documents within the annual packages: a “Capital Adequacy Statement” and a “Liquidity Adequacy Statement” reflecting the management body’s formal view on...
• Clarified governance expectations around capital and liquidity planning, including regular updates of governance frameworks to reflect external conditions and the submission of a complete risk...

Suggested Considerations

• Review existing ICAAP and ILAAP submission calendars and internal governance timelines and formally reset them to ensure core packages can be prepared, approved by the management body, and submitted by 15 March each year.
• Design and implement a documented two‑step submission process, including procedures for continuous, year‑round identification, approval and transmission to the ECB of any new or materially updated ICAAP/ILAAP‑relevant documents.
• Develop, approve and embed the new Capital Adequacy Statement and Liquidity Adequacy Statement, ensuring they reflect the management body’s signed‑off view on adequacy and are supported by clear references to ICAAP/ILAAP analyses and results.
• Update ICAAP and ILAAP governance frameworks to reflect ECB expectations, including explicit roles and responsibilities, escalation paths, periodic reviews triggered by external developments, and Board‑level oversight of capital and liquidity planning.
• Compile and maintain a comprehensive risk inventory covering both normative and economic perspectives, and ensure it is aligned with business models, risk appetite frameworks, recovery plans, stress testing programmes and SREP submissions.

Key Dates

References

• [1] bankingsupervision.europa.eu/ecb/pub/pdf/ssm.ICAAP_ILAAP_...
• [2] regulationtomorrow.com/2025/02/ecb-clarification-on-icaap...
• [3] blogs.pwc.de/en/risk/article/247557/ecb-clarification-on-...
• [4] pwcplus.de/de/article/247557/risk-blog-ecb-clarification-...
• [5] linkedin.com/pulse/ecb-clarification-icaaps-ilaaps-respec...
• [6] linkedin.com/posts/la-partners-sarl_ecb-clarification-on-...
• [7] linkedin.com/posts/deloitte_ecb-bankingrisklab-activity-7...
• [8] managementsolutions.com/en/publications-and-events/regula...

What Changed

• - The ECB has reaffirmed that institutions using internal ratings-based (IRB) approaches must apply their approved internal models consistently for expected loss calculation on defaulted retail and...
• The ECB has underscored that the IRB shortfall (difference between expected loss and accounting provisions) must be correctly calculated and deducted from regulatory capital whenever expected loss...
• The ECB has classified intentional failure to apply approved internal models to expected loss calculations as a “severe” breach under its Guide to the method of setting administrative pecuniary...
• The enforcement action confirms the ECB’s readiness to use its sanctioning powers under Article 18 of Council Regulation (EU) No 1024/2013 against internal-model users that misreport capital due to...
• The case highlights that miscalculation of expected loss and IRB shortfall over multiple reporting periods, even without an explicit capital ratio breach of minima, can be sanctioned where capital...

Suggested Considerations

• Review and confirm that all regulatory capital calculations, including expected loss and IRB shortfall for defaulted exposures, consistently use the approved internal models as authorised by the ECB or national competent authority.
• Map and reconcile the internal-model implementation across risk systems, finance, and regulatory reporting to ensure that there are no manual overrides, alternative methods, or parallel calculations that deviate from the approved model specifications.
• Strengthen model risk governance by ensuring that any proposed changes to expected loss methodologies, including for defaulted retail and corporate portfolios, are formally approved by the competent authority before being used in regulatory capital reporting.
• Implement robust controls and periodic testing within Finance, Risk, and Regulatory Reporting functions to detect and prevent misapplication or non-application of approved internal models, with clear escalation procedures for identified discrepancies.
• Ensure that the calculation of IRB shortfall (difference between expected loss and accounting provisions) is independently validated and appropriately deducted from CET1 capital in accordance with CRR and ECB internal models guidance.

Key Dates

References

• [1] zandersgroup.com/en/insights/blog/ecbs-revised-guide-to-i...
• [2] corporatefinanceinstitute.com/resources/career-map/sell-s...
• [3] bankingsupervision.europa.eu/ecb/pub/pdf/ssm.supervisory_...
• [4] finanssivalvonta.fi/globalassets/fi/saantely/maarayskokoe...
• [5] bis.org/basel_framework/chapter/CRE/53.htm?inforce=202201...
• [6] managementsolutions.com/sites/default/files/publicaciones...
• [7] finalyse.com/blog/banking/ecb-revised-guide-to-internal-m...
• [8] bankingsupervision.europa.eu/framework/legal-framework/pu...

What Changed

• - The ECB is conducting a comprehensive review of around 130 supervisory publications (guides, reports, letters, methodologies) to assess their relevance, effectiveness and clarity and to align them...
• Approximately 40 supervisory documents have been classified as outdated, superseded or no longer relevant and have been formally discontinued, with the texts remaining accessible but clearly labelled...
• The ECB has updated its classification of supervisory guidance documents to emphasise explicitly that they are non‑binding, do not create new legal obligations and do not replace binding EU or...
• The Guide to the internal capital adequacy assessment process (ICAAP Guide) will be revised to clarify supervisory expectations on the management buffer, explicitly positioning it as the bank’s own...
• The ECB has removed all content on supervisory expectations for the credit conversion factor (CCF) from the Guide to internal models, in anticipation of forthcoming EBA guidelines on CCF, thereby...

Suggested Considerations

• Review the ECB press release and associated lists of discontinued publications to identify any ECB guides, reports, letters or methodologies currently referenced in your internal policies, risk frameworks or model documentation that are now labelled as discontinued.
• Update internal policy inventories, regulatory mapping and compliance registers to reflect the new classification of ECB supervisory guidance as non‑binding and to distinguish clearly between binding EU/national law and non‑binding ECB expectations.
• For banks using the ICAAP Guide, perform a gap analysis of capital planning and management buffer practices against the forthcoming clarified expectations, ensuring internal documentation clearly differentiates management buffers from Pillar 2 requirements and guidance.
• For institutions using internal models for credit risk, remove any reliance on the ECB’s former CCF expectations by re‑mapping modelling policies and documentation to forthcoming EBA guidelines on credit conversion factors and to CRR/CRD provisions, once those guidelines are finalised.
• For risk and finance functions, review the CVA treatment in internal capital and risk methodologies to verify alignment with CRR III and ensure that internal references to ECB guidance (assessment methodology, materiality assessment) are updated to reflect the removed CVA content.

Key Dates

References

• [1] forvismazars.com/group/en/insights/latest-insights/ecb-su...
• [2] managementsolutions.com/en/publications-and-events/regula...
• [3] bankingsupervision.europa.eu/framework/priorities/html/ss...
• [4] bankingsupervision.europa.eu/press/blog/2026/html/ssm.blo...
• [5] bancaditalia.it/media/bce-comunicati/documenti/2026/ecb-g...
• [6] banque-france.fr/system/files/2026-05/ecb.gc260504.en_.pdf
• [7] youtube.com/watch?v=babRYzEG3AY
• [8] linkedin.com/posts/regxplora_europe-european-central-bank...

What Changed

• This enforcement action does not introduce new regulatory requirements but rather clarifies existing obligations:
• Internal Models Scope Limitation: Banks must strictly adhere to supervisory permissions when applying internal models approaches; unauthorized asset classes cannot be included regardless of...
• Risk-Weighted Asset Accuracy: RWA calculations must reflect actual supervisory permissions, not theoretical modeling capabilities
• Capital Ratio Integrity: Misreporting of RWAs directly affects CET1 ratios and capital adequacy disclosures, which are fundamental to regulatory reporting
• Intentionality Standard: The ECB's classification of this breach as "intentional" (rather than negligent) indicates that awareness of supervisory limitations combined with non-compliance triggers...

Suggested Considerations

• *Immediate (for all firms with internal models):
• *Audit Internal Models Scope: Conduct comprehensive review of all asset classes currently included in internal models approaches to confirm supervisory permission exists for each category
• *Verify Sovereign Bond Derivatives Treatment: Specifically validate that all sovereign bond options, forwards, and other derivatives are explicitly covered by supervisory approval documentation
• *Reconcile RWA Calculations: Recalculate historical RWAs (at minimum for the past 3-5 years) to identify any unauthorized inclusions and assess whether prior reporting was accurate
• *Strengthen Internal Controls: Implement automated controls to prevent unauthorized asset classes from being included in model calculations, with documented supervisory permission matrices

Key Dates

References

• [1] bankingsupervision.europa.eu/press/pr/date/2026/html/ssm....
• [2] intellectia.ai/news/stock/ecb-imposes-penalty-on-bofa-sec...
• [3] finanssivalvonta.fi/en/publications-and-press-releases/ne...
• [4] moodys.com/web/en/us/kyc/resources/insights/the-global-sa...
• [5] taylorwessing.com/fr/insights-and-events/insights/2026/01...
• [6] cliffordchance.com/content/dam/cliffordchance/briefings/2...
• [7] bankingsupervision.europa.eu/activities/sanctions/supervi...
• [8] disruptionbanking.com/2026/02/19/ecb-sanctions-j-p-morgan...

What Changed

• - 2021 Regulatory Change: Prohibits assigning guaranteed receivables to debtors for large exposure calculations; exposures must be assigned to guarantors instead, ensuring proper risk attribution to...
• Large Exposure Limits (CRR): Exposures exceeding 10% of a bank's capital trigger reporting as "large"; no single exposure or group of connected counterparties may exceed 25% of capital.
• Severity Classification: ECB categorizes breaches as "severe" (from minor to extremely severe), guiding penalty calculations per its *Guide to the method of setting administrative pecuniary...
• Broader Framework: EBA Guidelines on large exposures provide criteria for assessing breaches and timelines for returning to compliance, emphasizing harmonized EU application.

Suggested Considerations

• Review Exposure Calculations: Immediately audit methodologies for guaranteed receivables, ensuring assignment to guarantors per 2021 rules; validate against CRR connected client principles.[ECB Press Release]
• Enhance Internal Controls: Implement robust governance to prevent "serious negligence," including automated checks, independent validation, and training on counterparty identification.[ECB Press Release]
• Conduct Gap Analysis: Test large exposure reporting for the past 4 years; remediate any breaches within EBA timelines (e.g., return to compliance promptly).
• Monitor and Report: Establish real-time monitoring for exposures >10% capital; notify ECB of breaches immediately with remediation plans.[ECB Press Release]
• Penalty Challenge Option: Affected firms may appeal to the Court of Justice of the European Union within standard timelines (typically 2 months).[ECB Press Release]

Key Dates

References

• [1] regulationtomorrow.com/eu/final-standard-for-measuring-an...
• [2] eba.europa.eu/legacy/regulation-and-policy/regulatory-act...
• [3] practiceguides.chambers.com/practice-guides/banking-regul...
• [4] centralbankbahamas.com/viewPDF/documents/2026-01-13-14-51...
• [5] eba.europa.eu/regulation-and-policy/large-exposures
• [6] cliffordchance.com/content/dam/cliffordchance/briefings/2...
• [7] cadwalader.com/resources/clients-friends-memos/ecb-publis...
• [8] managementsolutions.com/sites/default/files/publicaciones...

What Changed

This is an enforcement action, not a new rule change, but it reinforces existing requirements under the Capital Requirements Regulation (CRR) for accurate RWA calculations, including proper classification of corporate exposures for credit risk and inclusion of all relevant transactions in CVA risk (which measures counterparty default risk in derivatives). The ECB applied its Guide to the method of setting administrative pecuniary penalties, categorizing breaches as "severe" (credit risk) and "moderately severe" (CVA risk), based on duration, negligence, and impact on supervisory transparency.

Suggested Considerations

• Conduct immediate RWA process reviews: Audit corporate exposure classifications and CVA calculations for misreporting risks, ensuring compliance with CRR risk weights.
• Strengthen internal controls: Implement robust validation mechanisms to detect errors timely, addressing "serious negligence" gaps highlighted by ECB.
• Enhance reporting accuracy: Recalibrate models and data inputs for quarterly ECB submissions; test for overstatement of capital ratios via underreported RWAs.
• Monitor ECB sanctions page (https://www.bankingsupervision.europa.eu/banking/supervisory-sanctions/html/index.en.html) for updates and self-assess against penalty guide severity categories.
• J.P. Morgan specifically: Pay €12.18 million and consider legal challenge under Article 263 TFEU.

Key Dates

References

• [1] bankingsupervision.europa.eu/press/pr/date/2026/html/ssm....
• [2] grcreport.com/post/ecb-fines-j-p-morgan-eu12-18-million-a...
• [3] english.news.cn/20260220/59d18f550c3d42cd9268ef298f3171a2...
• [4] aa.com.tr/en/economy/ecb-fines-jpmorgan-143m-over-miscalc...
• [5] finnewsnetwork.com.au/archives/finance_news_network403269...
• [6] macaubusiness.com/ecb-fines-jpmorgan-12-2-mln-euros-over-...

What Changed

The ECB's enforcement action reflects several critical regulatory developments: Mandatory Climate Risk Materiality Assessment Banks must now conduct comprehensive materiality assessments of climate-related and environmental risks as a binding supervisory requirement, not a guidance recommendation. The assessment must identify all material C&E risks to which the institution is or might be exposed. Binding Supervisory Decisions with Enforcement Teeth The ECB has transitioned from non-binding guidance (2020) to legally binding decisions with accruing daily penalties for non-compliance.

Suggested Considerations

• *Immediate (Q1 2026):
• related and environmental risks, documenting exposure across the portfolio
• *Near-term (H1 2026):
• related risks into existing credit risk, operational risk, and market risk frameworks
• testing purposes

Key Dates

References

• [1] greencentralbanking.com/2026/02/10/ecbs-green-supervision...
• [2] bankingsupervision.europa.eu/press/pr/date/2026/html/ssm....
• [3] ecb.europa.eu/press/pr/date/2026/html/ecb.pr260212~fe37ff...
• [4] forvismazars.com/group/en/insights/latest-insights/ecb-su...
• [5] connect.cefpro.com/article/view/ecb-enforces-climate-risk...
• [6] banking.vision/en/climate-factor-ecb-2026/
• [7] ecb.europa.eu/press/pr/date/2026/html/ecb.pr260116~4b4a05...
• [8] esgtoday.com/ecb-to-intensify-monitoring-of-physical-clim...