Since the introduction of the Single Supervisory Mechanism (SSM), on-site inspections of banks have increased in scrutiny and forced banks to increase their efforts to remain compliant while also tackling growing levels of regulation. Current focus areas of on-site inspections are the structural complexities of banks and the resulting challenges for governance frameworks and profitability, the use of risk modelling and the accompanying governance implications, the growing reliance on technology and automation (ICT risk) and the use of outsourcing.

That is the overall message that emerges from KPMG's first Europe-wide survey of supervisory on-site activities. The survey covers 15 Eurozone significant institutions of different sizes, ranging from specialised lenders to universal banks. Its goal was to compare the experiences of banks, to identify trends in supervisory activities and to help banking clients better prepare for potential forthcoming on-site inspections.

Looking back over 2018, the survey confirmed that the `extra-curricular' off-site activities of joint supervisory teams (JSTs), such as thematic reviews and deep dives, were often closely aligned with the ECB's stated priorities for the year. These included business model and profitability analysis, NPLs, IFRS 9, stress testing and improvements to ICAAP and ILAAP approaches (see figure below).

From past learnings we also know that these activities and identified deficiencies are often followed-up on in consecutive on-site examinations.

The survey supports our hypothesis that the below topics are established as new and continued on-site focus areas:

• Governance (general decision making processes, effectiveness of group steering, but also specific processes such as lending practices and NPL management);
• Technology (IT risks, models); and
• Their combined fields (risk data and reporting, BCBS 239, model governance)

We have found that up-front investments can make a big difference to the supervisory perception of topics (i.e. number and severity of findings). We consider it more important than ever for banks to understand the trends and shifting focus of supervisory activities in order to prepare for on-site inspections. To do this, banks can start with a sound understanding of the recently published process paper on On-Site Inspections and Internal Model Investigations (PDF 516 KB) and solid oversight over trending topics such as NPLs, IT risks, models and BCBS.

Preparation for individual on-site examinations should be largely driven by a combination of the individual supervisory history of the institution and a thorough understanding of the assessment methodology of the ECB. In addition to this, banks should consider periodically completing the below actions and self-checks:

• Perform critical `health checks' of each business model, and across the organisation as a whole.
• Ensure that governance arrangements are reviewed and updated regularly, and in response to significant events.
• Identify where supervisors see the greatest `expectation gaps', prioritise their responses, and take the right steps to achieve lasting improvements.
• Prepare to provide both a top-down view of how systems fit together, and a bottom-up view of technical specifications. The ability to demonstrate evidence of `effective review and challenge' is especially important for TRIM on-site inspections.

The structural complexity of banks is of great importance, as it becomes apparent that the growing demands of supervisory activities are also encouraging European banks to review their operational models. To that extent, some banks are contemplating reorganising their structures in response to supervisory expectations - a topic we plan to explore further in future. For now, banks can use the lessons learnt from past on-site inspections with the current trends shared by their peers to better prepare themselves for future inspections.