Market risk SREP methodology : market risk in SREP.
Date: 2023-12-31
Institutions: European Central Bank
Subjects: banking supervision, financial institution, financial risk, financial supervision

Market risk SREP methodology 

Market risk in the SREP 

The following sections provide a more detailed description of the methodology 
for assessing the market risk of significant institutions (SIs), as part of the 
Supervisory Review and Evaluation Process (SREP). The ECB uses a standardised 
risk-based methodology to assess market risk. 

1 

Introduction 

The SREP market risk methodology: 

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is consistent with the European Banking Authority (EBA) guidelines on the 
SREP and assesses whether banks are complying with the ECB’s supervisory 
expectations; 

is applied proportionately to SIs, taking into account the nature, scale and 
complexity of their activities; 

supports Joint Supervisory Teams (JSTs) in performing risk-based supervision 
while providing sufficient flexibility to cater for bank-specific elements, which 
means that the frequency, scope and depth of assessments vary in line with 
European banking supervision and bank-specific priorities; 

is comprehensive and includes backward and forward-looking perspectives that 
consider all relevant risk components and their possible mitigants; 

draws on best practices and is periodically updated to ensure alignment with 
the EBA guidelines on the SREP and any relevant changes to regulations. 

The factors that the ECB considers relevant when assessing the market risk of 
an institution include: 

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2 

the size and materiality of market exposures/activities; 

risk factors underlying the instruments held: interest rate risk1 (excluding 
positions in the banking book), equity risk, credit spread risk (excluding 
positions in the banking book2), foreign exchange (FX) risk (including the gold 
position), commodity risk (including the precious metal position), and default 
and migration risks in the trading book; 

Including inflation risk. 

From 2024 credit spread risk in the banking book (CSRBB) will no longer be assessed as part of 
market risk in the SREP but will instead be assessed together with interest rate risk in the banking book 
(IRRBB), in line with the recent EBA guidelines on the management of IRRBB and CSRBB 
(EBA/GL/2022/14) applicable from 31 December 2023 for provisions related to CSRBB. 

Market risk SREP methodology 

 
 
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features of the positions taken: complexity, model risk, non-linear risk and 
gap risk; 

uncertainty regarding the fair value/exit price of a position: risks related to 
market liquidity, market price uncertainty, bid-ask spreads and close-out costs; 

relationships with the counterparties of transactions: credit valuation 
adjustment (CVA) risk and risks related to other fair value adjustments 
(whereby, despite being hybrid in nature, between credit and market risk-like 
drivers, counterparty credit risk is assessed under credit risk, in line with the 
EBA guidelines); 

the risk management practices of the institution: hedging strategies, basis 
risk, concentration risk and correlation risk. 

External factors – such as the economic environment, climate-related and 
environmental aspects, and geopolitical developments – are also considered. 

Market risk is gauged as part of the assessment of risks to capital (Element 3) of the 
SREP (Figure 1). 

Figure 1 
Overview of the SREP methodology 

SREP methodology at a glance: four key elements

Quantitative capital 
measures

SREP decision

Quantitative liquidity measures

Other supervisory 
measures

Overall SREP assessment – holistic approach
 Score + rationale/main conclusions

1. Business model 
assessment

2. Governance and 
risk management 
assessment

3. Assessment of 
risks to capital

4. Assessment of 
risks to liquidity 
and funding

Credit and 
counterparty 
risk

Market risk

Interest rate 
risk in the 
banking book

Operational 
risk

The market risk assessment is based on (i) a quantitative assessment that 
considers the inherent risk (risk level) and (ii) a qualitative assessment that 
considers the management and control framework (risk control) (Figure 2). In 
the risk level assessment, JSTs assess risks or vulnerabilities that could have an 
impact on prudential elements of the institution if they were to materialise. During the 
risk control assessment, JSTs assess whether credit institutions have adequate 

Market risk SREP methodology 

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processes and systems in place to identify, measure, evaluate, monitor, report and 
mitigate the level of market risk. 

The risk level assessment is performed by JSTs in three phases: 

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• 

• 

Phase 1: supervisors gather data and assess the materiality of the risks; 

Phase 2: an automated anchoring score is generated based on common key 
risk indicators; 

Phase 3: supervisors carry out a more in-depth market risk assessment, taking 
into account supervisory judgement regarding the specificities of the bank and 
applying constrained judgement. 

The risk control assessment has two phases: 

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• 

Phase 1: supervisors gather information; 

Phase 3:3 supervisors carry out a more in-depth market risk assessment, taking 
into account supervisory judgement regarding the bank specificities and 
applying constrained judgement. 

The assessment of market risk covers both the risk level and risk control 
components, which are combined to form an overall market risk assessment. 
The supervisory judgement is summarised in an overall market risk score of between 
1 and 4 (with qualifiers) and a rationale for that score. 

3   Following the revision of the risk control methodology to be applied from SREP 2024, the risk control 
assessment for market risk no longer includes a Phase 2 during which the formal compliance check 
would have been performed. Instead, compliance with the relevant areas of regulation formerly covered 
in Phase 2 will be checked as part of the main assessment (Phase 3). 

Market risk SREP methodology 

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Figure 2 
Overview of the SREP market risk assessment 

Risk level

Phase 1
Data gathering and 
materiality 
assessment

Phase 2
Automated score

Phase 3
Risk level 
assessment

In-depth analysis

Preliminary 
automated anchoring 
score based on 
common key risk 
indicators

Identification of material modules

Risk control

Phase 1
Information gathering

Gathering of 
information on the 
control set-up for 
market risk

Phase 3
Risk control 
assessment

In-depth analysis

Combined 
assessment

The SREP methodology is rooted in the EBA guidelines on the SREP and in 
documents in which the ECB communicates its supervisory expectations as an 
integral part of the SREP framework. 

2 

Market risk level methodology 

2.1 

Phase 1 

The primary objective of Phase 1 is to conduct a materiality assessment of market 
risk – gaining an overview of potential pockets of vulnerability, evaluating the market 
risk framework and gathering the data that are required to perform the main 
assessment in Phase 3. 

The Phase 1 methodology has three main modules, which cover (i) regulatory 
market risks, (ii) non-regulatory market risks and (iii) pricing-related risks. 
These three modules are further divided into sub-modules. This enables JSTs to 
focus on the most pertinent risks (Table 1). 

• 

In the regulatory market risk module, JSTs assess any vulnerability to market 
risk stemming from exposures in the trading book (looking at all asset classes), 
as well as foreign exchange and commodity positions in the banking book4 as 
defined in the EU’s Capital Requirements Regulation (CRR). 

4  Excluding structural FX risk, which is instead included in the non-regulatory market risk module (see 

Table 1 and footnote 5). 

Market risk SREP methodology 

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In the non-regulatory market risk module, JSTs assess the risk of losses in 
banking book activities arising from adverse movements in market prices or risk 
factors, covering banking book equity instruments measured at fair value and 
structural FX risk. 

In the pricing-related risks module, JSTs assess the risk of losses in fair 
value positions arising from adverse movements in market prices or risk factors 
which have an impact on the fair value adjustments used for accounting 
purposes – notably, CVAs and other valuation adjustments (xVAs) – or arising 
from inaccurate determination of their fair value (valuation risk). 

In addition, JSTs can assess any other aspect which is materially important to the 
market risk profile of an institution. The modular structure introduced in Phase 1 
therefore facilitates a more proportionate assessment, while the supervisory efforts 
in Phase 3 focus on the material risk drivers for each institution. 

Table 1 
Modular structure of the risk level assessment 

Modules 

Sub-modules 

Regulatory market risk 

Non-regulatory market risk 

Pricing-related risk 

Interest rate risk in the trading book 

Credit spread risk and default risk in the trading book 

Equity risk in the trading book 

FX position risk 

Commodity risk 

Model risk from regulatory models and residual risk 

Equity risk in the banking book 

Structural FX risk 5 

CVA risk 

xVA risk 

Valuation risk 

The market risk assessment is based on a wide range of information, including 
supervisory reporting and other relevant sources. 

First, the materiality of the different modules is calculated automatically on the 
basis of the available data sources, which include: 

• 

• 

implementing technical standards on supervisory reporting, such as financial 
reporting (FINREP) and common reporting (COREP), in addition to fundamental 
review of the trading book reports; 

additional information derived from the Short-Term Exercise (STE), e.g. from 
the STE on market risk. 

5  Note that structural FX risk is capitalised as part of the market risk framework in accordance with the 

CRR and could have been included in the regulatory market risk module; nevertheless, it has been 
included in the non-regulatory market risk module on account of differences in its nature. 

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A number of key risk indicators are calculated in order to check the materiality of the 
three modules and their respective sub-modules. These indicators fall into three 
different categories, seeking to capture three complementary time perspectives: 
backward-looking indicators (e.g. indicators that measure the historical volatility of 
market impacts over several quarters); point-in-time indicators (e.g. indicators that 
capture the size of positions exposed to market risk relative to the overall size of the 
balance sheet); and forward-looking indicators (e.g. indicators that measure the 
potential impact of market movements on current positions in prudential terms). 
These indicators signal riskiness and are considered when deciding which modules 
to include in the in-depth assessment in Phase 3. 

Second, JSTs make a final decision on the material modules, also taking into 
account additional information such as: 

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internal management data available in banks’ internal reports, such as internal 
capital adequacy assessment process (ICAAP) reports and internal audit (IA) 
reports; 

qualitative information, such as market risk budgets and strategies, risk appetite 
frameworks for market risk, market risk policies and procedures, accounting 
policies and procedures for the trading and banking books, and details of banks’ 
assets and liabilities committees and board risk committees; 

supervisory information, such as findings from on-site inspections, deep dives, 
previous risk assessment system reports and other routine reporting templates; 

non-harmonised reporting forwarded by national competent authorities. 

JSTs will flag modules as either “material” or “immaterial”. In making their final 
decision on the materiality assessment, JSTs always consider the results of the 
automatic assessment and the specificity and complexity of the institution in 
question. 

2.2 

Phase 2 

The purpose of Phase 2 is to produce an automatic anchoring score for the 
institution’s market risk level. The Phase 2 score is risk-based and the 
methodology is applied consistently across all SIs. It serves as a starting point for 
JSTs to consider more detailed bank-specific circumstances and thus apply expert 
judgement. The Phase 2 methodology captures different dimensions to ensure that 
the preliminary assessment of an institution’s market risk profile is sufficient and 
comprehensive. 

The automatic score for the overall market risk level is based on key risk 
indicators for the three time perspectives considered in Phase 1 and covers all 
aspects of market risk (i.e. all three modules). 

Figure 3 summarises the approach followed in Phase 2. The scores for the 
quantitative risk indicators used in Phase 2 are calculated by comparing the 

Market risk SREP methodology 

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supervised institution’s values with predefined thresholds based on the risk appetite 
of the Single Supervisory Mechanism (SSM). 

Figure 3 
Approach for determining the Phase 2 score 

Backward-looking view

Historical volatility of market impacts

Point-in-time view

Relative size of positions exposed to market 
risk

Phase 2 score

Forward-looking view

Potential prudential impact on capital 
positions as a result of market risk

The Phase 2 framework is purely quantitative in nature, which ensures that it is 
based on harmonised and consistent indicators and thresholds. The objective of 
the Phase 2 score is neither to capture all idiosyncratic elements linked to a 
bank’s market risk profile nor to assess specific features, such as its business 
model (e.g. a diversified lender, global systemically important bank or 
universal bank). These aspects are considered during the in-depth assessment 
performed by the JSTs in Phase 3. 

2.3 

Phase 3 

In Phase 3, JSTs conduct a comprehensive bank-specific assessment. This 
results in a final risk level score which reflects the institution’s specific market 
risk level. While the Phase 2 market risk score serves as an anchoring score, Phase 
3 gives JSTs the flexibility to consider institution-specific aspects of the various risk 
drivers. Phase 3 follows a consistent risk-based framework and can lead to an 
adjustment of the Phase 2 score. 

JSTs consider information from various sources, including peer comparisons. 
During the Phase 3 assessment, JSTs take into account insights gained from on-site 
inspections, deep dives and horizontal analyses (such as targeted or thematic 
reviews) when available. Peer comparison is also embedded in this assessment and 
supported by internally available tools. 

The adequacy of processes and procedures is essentially a risk control topic 
and feeds into the risk control assessment. However, there may be 
consequences for the reliability of quantitative information analysed in the risk 
level assessment. The quality and reliability of quantitative metrics reported by the 
supervised entity are considered, in order to prevent metrics from being biased. 
Such bias (which could, for example, stem from a lack of prudence or deficiencies in 

Market risk SREP methodology 

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the area of risk control) could result in an overly positive assessment of the 
supervised entity’s risk position. 

The Phase 3 assessment allows JSTs to focus on the material modules and 
sub-modules as identified in Phase 1. This main assessment phase takes 
account of the five key perspectives described in the EBA guidelines to 
provide comprehensive analysis of a given area of market risk (e.g. for a 
module or sub-module): 

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Strategy: this refers to the choices that the institution makes regarding the level 
of market exposure and market risk it is willing to accept, particularly when it 
comes to choices concerning its business model, business lines and products, 
as well as the limits set by the institution for implementing its risk appetite. It 
also encompasses decisions about risk mitigation (hedging strategies, 
collateralisation, etc.). The assessment of a bank’s strategy should also cover 
recent and/or planned changes. 

Nature and composition of market risk activities: this assessment reflects 
the realisation of institutions’ strategies (including hedging). It aims to produce 
an overview of exposure to market risk by business line and product (based on 
the complexity and liquidity of the products), as well as concentrations of risk 
and correlations between risk factors in the portfolios, related risk drivers and 
relevant risk measures (sensitivity, value at risk, expected shortfalls, etc.). 

Profitability: this refers to the actual realisation of market activities in the 
institution’s profit and loss and other comprehensive income as a result of its 
strategy, the nature and composition of its portfolios, market movements and its 
ability to efficiently manage its exposure to market risk. The assessment of 
profitability encompasses analysis of its evolution over time (i.e. trends and 
volatility), as well as related sources (trading revenue, commissions, etc.), 
broken down by business line/desk and product. In addition, profitability is 
assessed against the risk profile of the institution. 

•  Market view: this is a holistic assessment of major trends and movements in 

the financial markets, as well as changes and developments that could have an 
impact on the level of risk borne by the institution. Special emphasis is placed 
on the markets (both domestic and international) and macro/micro risk factors 
that are identified as being particularly relevant to the institution in question. 

• 

Prudential view: this covers the impact that market risk could potentially have 
on the institution’s prudential position, as well as current and future capital 
requirements in terms of market risk, CVA risk and valuation risk. It also covers 
any other potential prudential impacts (e.g. the impact of market risk in the 
banking book). It uses the results of stress tests, as well as relevant ICAAP 
information, to identify possible additional sources of market risk (e.g. tail risk 
events). 

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3 

Market risk control methodology 

The regular analysis of banks’ internal market risk control functions complements the 
market risk level assessment performed under the risk level part of the SREP. It is of 
the utmost importance that banks manage their risks well to better withstand adverse 
circumstances, and that their risk appetite is subject to closer scrutiny and control at 
all levels of the organisation. A lack of responsiveness to supervisory measures 
(as well as to IA recommendations) signals serious deficiencies in banks’ risk 
control frameworks, as well as a lack of capacity to improve their control 
systems to ensure the risk is properly managed. 

3.1 

Phase 1 

The primary objective of Phase 1 is to obtain information about the risk control 
structures for market risk. To assess risk control in Phase 3, JSTs gather 
information on the control set-up for market risk for both the governance structure 
and the control framework in place. 

Phase 1, like Phase 3, has three common modules for all risks to capital which 
include topics that are closely related to organisational and strategic aspects of the 
management of a given risk, in this case market risk, and two risk-specific 
modules that capture the unique nature of the market risk assessment (Figure 
4). 

Figure 4 
Modular structure of the market risk control assessment 

Modular structure of market risk control 

Modules

Common modules

Risk strategy & risk appetite

Governance and organisational framework

Risk-specific modules

Internal controls

Framework for internal capital allocation

Risk identification, measurement, monitoring and reporting

3.2 

Phase 3 

The primary objective of Phase 3 is to assess the soundness and efficiency of 
the market risk control framework from different perspectives and in the light 
of the scale and complexity (business model, organisational structure, etc.) of 
the institution. The assessment performed in Phase 3 should be proportionate to 
the institution’s level of market risk and should be risk focused. 

For this reason, the current methodology invites JSTs to adapt the scope and depth 
of their assessment to the risk characteristics of the supervised institution. 

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JSTs include in their assessment the outcomes of any supervisory activity to 
gauge the degree to which the institution verifies compliance with, and the 
effective implementation of, relevant Level 1 regulation6 to ensure that any 
potential deficiency in this regard is duly reflected in the assessment and in the 
scores obtained. If severe weaknesses or non-compliance are identified, JSTs will 
design appropriate measures to restore compliance. 

JSTs integrate into their assessment of risk controls the insights gained from on-site 
supervisory activities, deep dives and horizontal analyses (such as targeted or 
thematic reviews), and findings of the institution’s internal and external auditors. 

Finally, nothing prevents JSTs from broadening the scope of the risk assessment to 
include relevant aspects that have not been addressed in the methodology. 

Modularity of the Phase 3 assessment 

The risk control assessment is not preceded by a materiality check, in contrast to the 
risk level assessment. All modules are assumed a priori to be material. The risk 
control modules for market risk are summarised below. 

3.2.1 

Modules common to all Element 3 blocks (risks to capital) 

Governance and organisational framework: the JSTs’ assessments include, but 
are not limited to, the extent to which the institutions: 

• 

• 

have an appropriate organisational framework for market risk management, 
measurement, monitoring and control functions, with sufficient qualitative and 
quantitative human and technical resources; 

have a proper governance framework, with clear and adequate involvement of 
the management body, senior management and relevant committees in the 
decision-making processes for topics related to market risk. 

Risk strategy and appetite: the JSTs assessments include, but are not limited to, 
the extent to which the institutions: 

• 

• 

have a sound, clearly formulated and well-documented market risk strategy, 
approved by the management body, which is effectively implemented, 
monitored and controlled; 

have a sound, clearly formulated and well-documented risk appetite 
framework, which is approved by the management body, consistent with the 
market risk strategy, which is effectively implemented, monitored and controlled. 

Framework for internal capital allocation in market risk: the JSTs assess 
whether the institutions have an adequate framework for quantifying capital needs 

6   The compliance check that was included in the previous Phase 2 has been integrated into Phase 3 with 

effect from SREP 2024.  

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related to market risk, focusing on comprehensiveness, conservativeness and the 
risk sensitivity of the methodologies used (notably in the ICAAP). 

3.2.2 

Modules specific to market risk 

Risk identification, measurement, monitoring and reporting: the JSTs’ 
assessments include, but are not limited to, the extent to which the institutions: 

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have an appropriate and well-documented framework (including policies and 
procedures) for identifying and measuring market risk; 

have conservative and reliable mark-to-model pricing processes in place, which 
should be based on appropriate assumptions and periodically reviewed; 

perform adequate and independent price verification processes in addition to 
daily mark-to-model; 

comply with the requirements for prudent valuation (in accordance with Article 
105 CRR and the related regulatory technical standards7) and have established 
and maintained procedures for calculating adjustments to the current valuation 
of less liquid positions, concentrated positions and/or positions for which the 
originally intended holding period has been exceeded; 

have adequate well-documented, regularly validated and back-tested internal 
models to calculate own funds requirements for market risk (for those 
institutions authorised to use internal models); 

have management information systems that allow the accurate and timely 
identification, aggregation, monitoring and reporting of market risk exposures; 

have adequate and regularly performed stress testing frameworks to 
complement the market risk measurement; 

have an adequate monitoring and reporting framework for market risk in place, 
which includes the effect of climate-related and environmental factors on their 
current market risk positions and future investments,8 ensuring prompt action at 
the appropriate level of the institution’s senior management or management 
body where necessary. 

Internal controls: the JSTs’ assessments include, but are not limited to, the extent 
to which the institutions: 

• 

have a clearly defined and adequate framework for limiting and controlling 
market risk, which is aligned with their strategy and risk appetite; 

7  Commission delegated regulation (EU) 2016/101 with regard to regulatory technical standards for prudent 

valuation. 

8  See Section 6.4 of the ECB Guide on climate-related and environmental risks. 

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• 

• 

have an internal validation function which adequately and effectively covers 
market risk in all relevant dimensions, which is adequately staffed, in terms of 
both numbers and skills, and acts in a timely manner; 

have an IA function which adequately and effectively covers market risk, which 
is adequately staffed, in terms of both numbers and skills, and acts in a timely 
manner. 

© European Central Bank, 2023 

Postal address 
Telephone 
Website 

60640 Frankfurt am Main, Germany 
+49 69 1344 0 
www.bankingsupervision.europa.eu 

All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. 

For specific terminology please refer to the SSM glossary (available in English only). 

PDF 

ISBN 978-92-899-6313-8 

doi:10.2866/2686  QB-05-23-422-EN-N 

Market risk SREP methodology 

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