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Pillar 2: The supervisory review process (SRP)

The second pillar, which is an integral part of the new capital accord and ranks equally alongside the minimum capital requirements and the call for market transparency, specifically emphasises the need for a qualitative approach to supervising banks.

The main aims of the supervisory review process can be summarised as follows. Banks are to be encouraged to continuously improve their internal procedures for assessing their institute-specific risk situation and the adequacy of their capital. The same applies to the ongoing adjustment and further development of new methods of risk management and internal control.

The supervisory review process is aimed at covering external factors such as the influence of cyclical developments as well as risk areas that are not taken into account or are not fully taken into account when computing the minimum capital requirements (eg interest rate risks in the banking book and uncertainties in measuring operational risks).

Supervisors are to be enabled, based on an overall assessment of the bank, to take measures which, if necessary, go beyond the minimum capital requirements.

The supervisory review process represents a great challenge for banking supervisors in Germany. In the international context it is crucial to achieve greater harmonisation not only of maj or rules, such as the capital requirements imposed on banks, but also of prudential practices to ensure a level playing field for banks in different countries.