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Banks single supervisory mechanism

In the October 2012 Risk Note we reported on the European Commission’s initiative to implement a European Banking Union. The Commission’s initial target was to have the system in place by January 2013. We expressed doubts about the feasibility of this aggressive timetable. Unsurprisingly, the timetable has now slipped. It is now proposed that the European Central Bank (ECB) will assume its supervisory tasks within the single supervisory mechanism (SSM) on 1 March 2014 (or 12 months after the entry into force of legislation, whichever is later). From this date, the ECB will also be entitled to exercise its supervisory functions, in relation to any credit institution which the European Stability Mechanism (ESM) considers requires recapitalisation.

In early December 2012, the Council of the European Union made significant progress towards the plan to create a European Banking Union. Its decision of 13 December 20122 (the Council Proposal) reflects the political agreement reached by the Member States concerned. Although this Council Proposal will need to follow the European legislative process, we now have a relatively precise idea of the shape of the future EU banking supervision system.

It may not be entirely a coincidence that this decision was taken almost simultaneously with the release of the Financial Stability Board’s (FSB) report on strengthening the oversight and regulation of “shadow banking entities”.3 This is another initiative which emerged in the wake of the financial crisis. It is obvious that the more mainstream banking business is subjected to demanding regulation, the more the question of how, and to what extent, banking activities can be exercised outside that framework becomes relevant.

Further steps towards a European Banking Union

The Council Proposal contains two proposals aimed at establishing a SSM for the oversight of credit institutions. The proposals involve two regulations; the most noticeable one confers supervisory tasks on the ECB. The Council Proposal aims to reduce the systemic risk posed by certain European credit institutions. Arguably, even more fundamental is the objective of decorrelation between banks and sovereign risks. The concern is that only a properly regulated financial institution in crisis should receive financial assistance from the ESM.
Which credit institutions will be covered?
The SSM will apply to all 17 Euro Area Member States and also any other EU Member Sates wishing to participate and who enter into a close participation agreement (some have already indicated that they are not interested in participating, including Sweden, the Czech Republic and the UK).

After much discussion it was agreed in Council that not all credit institutions within those participating Member States would be directly covered, but only those representing a degree of systemic risk. It is estimated this means approximately 150 to 200 banks overall will fall within scope. This point was of particular concern to German negotiators who wanted to exclude smaller, regional German banks from SSM supervision. The criteria for banks to be affected includes the size of the balance sheet (total assets exceed EUR 30 billion or 20% of a relevant Member State’s GDP) or the fact that a bank has already benefited from a European financial support plan. In addition, the ECB will automatically and directly supervise the three most important credit institutions of each participating Member State and, upon demand of any participating Member State, a particular credit institution.

The future shape of the SSM

The SSM will be composed of the ECB and national competent authorities. The ECB will be responsible for the overall functioning of the SSM and, in this respect, the Council Proposal remains in line with the proposal from the Commission of September 2012.4

National supervisors will remain in charge of tasks not conferred on the ECB, for instance in relation to consumer protection, money laundering, payment services, and branches of third country banks. The European Banking Authority (EBA) will retain its competence for further developing the single rulebook and ensuring convergence and consistency in supervisory practice.

It is intended that the ECB’s monetary tasks will be separated from supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision. To this end, a supervisory board responsible for the preparation of supervisory tasks will be set up within the ECB. As a result of concerns expressed by non-Euro Area Member States about the governance of the SSM, non-Euro Area countries participating in the SSM will have full and equal voting rights on the supervisory board.

Legal and Regulatory Risk Note