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Proposal to reshape banking supervision in the euro area

In a fast changing banking regulatory landscape, banks in the euro area might think that at least they know their watchdog (ie their national supervisory body) and take some comfort from the fact that it is this body tasked with implementing the massive amount of new regulation currently being put forward.

This now looks likely to change. We expect however that this change is not going to take place without much debate.


This proposal is all about vulnerabilities of the banking sector in the context of sovereign debt crisis. There is a lot at stake: the intention is to break “the vicious circle between banks and sovereigns”.1 The euro area summit in June promised that “when an effective supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly.” 2

For the European Commission, the reshaping of the supervision mechanism is part of the plan to set up a genuine banking union, which encompasses a series of existing and forthcoming initiatives.

The 12 September 2012 proposal

On 12 September 2012, the European Commission released a package of proposals to set up a single supervisory mechanism. As far as bank supervision is concerned, the Commission has presented a draft regulation establishing an ambitious single supervision mechanism. The proposed timetable is short: the Commission hopes that these proposals will be adopted by the end of the year, and that the new system will enter into force early in 2013. What is being proposed includes the following:

The ECB will become a bank supervisor

The single supervisory mechanism which the Commission proposed is based on the transfer to the European level of specific, key supervisory tasks for banks established in the euro area Member States. While retaining ultimate responsibility, the ECB would carry out its tasks within the single supervisory mechanism composed of the ECB and national supervisory authorities.

Fast timetable

As from 1 January 2013 the ECB would be empowered to take over the supervision of any bank in the euro area if it so decides, in particular if the bank is receiving public support. For all other banks, ECB supervision would be phased in automatically: on 1 July 2013 for the most significant European systemically important banks, and on 1 January 2014 for all other banks. In other words, by 1 January 2014 all banks in the euro area would come under European supervision.


The ECB would become the competent authority for authorising credit institutions, assessing qualifying holdings, ensuring compliance with the minimum capital requirements, ensuring the adequacy of internal capital in relation to the risk profile of a credit institution, conducting supervision on a consolidated basis and supervisory tasks in relation to financial conglomerates. The ECB would also ensure compliance with provisions on leverage and liquidity, apply capital buffers and carry out, in coordination with resolution authorities, early intervention measures when a bank is in breach of, or is about to breach, regulatory capital requirements.


The ECB would be vested with the necessary investigatory and supervisory powers to perform its tasks. All tasks not explicitly assigned to the ECB would remain with national supervisors, which include, among others, consumer protection, money laundering regulation and the supervision of third country credit institutions establishing branches or providing cross-border services within a Member State.


The ECB must be able to carry out its new supervisory functions in full independence whilst being fully accountable for its actions. The Commission proposal contains accountability safeguards, notably vis-à-vis the European Parliament and the Council, to ensure democratic legitimacy. The proposal lays down a number of organisational principles to ensure clear separation between monetary policy and supervision.

The future

No doubt this proposal will raise a number of questions and objections. Not only is the ultimate aim ambitious but the timetable is aggressive. It is not certain how fast this will in fact progress but those in charge of the relationships with their regulator within banks ought to keep an eye on flight times for Frankfurt.


1. Euro Area Summit Statement, 29 June 2012, http://consilium. pressdata/en/ec/131359.pdf
2. The ESM will have a lending capacity of EUR 500 billion. For euro area Member States not subject to a programme, the ESM will have the possibility of providing a loan for the specific purpose of re-capitalising financial institutions

Legal and Regulatory Risk Note