Report on 2021 sanctioning activities in the SSM shows that governance continues to be banks’ biggest weakness
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The publication of the second annual report (the 2021 Annual Report) shows the ECB’s ongoing commitment to increased transparency. The 2021 Annual Report presents aggregate statistics on the sanctioning activities of the ECB and NCAs within the SSM during the year 2021.
Areas of sanctioning activity
Like in 2020, the focus of sanctioning proceedings was on breaches relating to internal governance and remained at roughly the same level (43% of all proceedings). The ECB foresees that this will continue to be the case and internal governance remains one of its medium-term priorities, as seen in the SSM Supervisory Priorities 2022-24. This is particularly true for smaller banks as less significant institutions (LSIs) again bore the brunt of sanctions in 2021. Other areas of notable sanctioning activities concern reporting, liquidity, large exposures, qualifying holdings and recovery.
Number of proceedings
Overall, there was a significant uptick of almost 50% in the number of proceedings opened by NCAs during 2021 (a total of 249 compared to 169 in 2020) as well as the number of proceedings completed (247 compared to 183 in 2020).
None of these proceedings was opened at the request of the ECB under Article 18(5) of the SSM Regulation, which is the basic regulation on the ECB’s supervisory powers.
However, 14 ECB-initiated proceedings that had been ongoing in 2020 were concluded.
This sharp rise in the number of proceedings is very likely due to the fact that, unlike in 2020, NCAs did not exercise supervisory forbearance due to the Covid-19 pandemic but resumed their activities, including on-site inspections. For this reason, the year 2020 (the first for which a report on sanctioning activity is available) may not be a suitable year for comparisons.
Subjects of sanctioning activities
In terms of number of proceedings conducted in 2021, over 3/4 concerned less significant institutions and/or officials at such institutions. Compared with 2020 there was a notable increase in the number of proceedings concerning individuals (216 in 2021 compared to 156 in 2020).
Significant institutions and their officials made up less than 7% of all proceedings conducted.
Imposition of administrative penalties
A total of 287 proceedings were completed in 2021 (compared to only 183 in 2020). 142 administrative penalties were imposed, of which 75% were pecuniary in nature.
The level of fines imposed on individuals appears to also have increased as the total amount of fines on individuals was more than eight times higher than in 2020, whereas the number of proceedings where a penalty was imposed only tripled. 2021 thus saw a much larger number of penalties for individuals with much higher average amounts. Again, due to Covid-19 related supervisory forbearance during 2020, it is not an ideal benchmark for comparison.
The overall aggregate amount of fines imposed amounted to EUR 31.7m, which is almost three times the amount of penalties imposed in 2020 (EUR12.2m). Over 75% of the overall amount, however, was made of a single large penalty levied on The Governor and Company of the Bank of Ireland, a significant institution, for breaches regarding its IT service continuity framework and related internal controls failings. This penalty was the highest ever imposed in proceedings opened at request of the ECB.
Notably, all 14 proceedings opened at the request of the ECB that closed in 2021 resulted in a penalty being imposed.
Of the 122 proceedings concluded without a penalty, over a quarter still formally acknowledged the wrongdoer’s liability and in most cases resulted in a warning or reprimand. The main reason for completion of the proceeding without penalty was – like in 2020 – the fact that no wrongdoing had been proven.
The data suggest that internal governance weakness, in particular at smaller banks, remains an area of supervisory focus across the SSM. The ECB – in its role as indirect supervisor – has recently completed a thematic review of governance arrangements at over 200 LSIs. In this report, the ECB made clear its intention to foster further harmonisation: “to promote greater alignment with European supervisory expectations and standards for internal governance”, also with a view to a level playing field.
Given the level of sanctioning activity, small banks and their officials should take careful note of ECB and NCA guidance in this area.
An overview of all sanctions imposed by the ECB or by NCAs at the request of the ECB can be found here. Supervisory authorities are required to publish sanctions under EU prudential legislation. Thus, sanctions imposed by NCAs themselves can be found on their website.