On 12 September 2012, the European Commission proposed a single supervisory mechanism (SSM) for Eurozone banks led by the European Central Bank (ECB) in order to strengthen the Economic and Monetary Union.
This set of proposals is highlighted by the Commission as a first step towards an integrated 'banking union', which includes further components such as a common rulebook, common deposit protection and a single bank resolution mechanism. The proposals cover:
- A single supervisory mechanism - a Council Regulation giving powers to the ECB for the prudential supervision of all banks in the Euro Area, with the option for non-Euro countries to opt-in.
- European Banking Authority (EBA) powers - an EU Regulation with limited and specific changes to the Regulation that set up the EBA, to ensure a balance in its decision-making structures between participating and non-participating countries.
The Commission proposes that the ECB be in a position to take over responsibility for direct supervision from January 2013, with a phased-in transition to full coverage by January 2014. Initially only firms with public funding and systemically important banks will be supervised, with all banks covered by the end of the transition.
Also released was a ‘Banking Union roadmap’, outlining future key proposals - including a single deposit guarantee scheme and single bank resolution mechanism.
In its roadmap communication, the Commission calls for progress to be made on its existing proposals for a deposit guarantee scheme and bank resolution by the end of 2012.
Implications for banks
Tougher supervision - the ECB may be expected to take a tougher supervisory approach than some national supervisors are perceived to have taken. This could have a direct and significant impact on banks in participating countries. There may also be a tendency for the ECB to adopt a 'one size fits all' approach that is less sensitive to national specificities than national supervision.
Higher supervisory costs - the proposals suggest that levies imposed on banks by national supervisory authorities may fall as tasks are transferred to the ECB. However, with the ECB able to levy charges to fund supervision, the overall cost of banking supervision is likely to increase, and this will have to be paid for by the banks.
Continued regulatory uncertainty - the other key elements of a banking union remain to be clarified, including, in particular, a single deposit guarantee scheme and a single resolution fund. Banks will be particularly interested in the contributions they will have to make in advance to such funds and the basis for cost sharing should payouts be triggered.
Limits to national discretion - the proposals give a specific mandate to the ECB to coordinate and express a common position of participating country representatives at the EBA. This may also permeate other bodies, both within and outside the EU, such as the Basel Committee. If effective, such co-ordination will:
- reduce the influence of non-participating countries;
- possibly reduce the ability of participating countries to reflect 'national specificities' in rules.
While bringing benefits from a single rulebook perspective, there may be disadvantages for banks where the banking system has specific local characteristics, for example, legal structure, types of business, customer base, mutual assistance schemes, etc.
New supervisory relationships - banks located within participating countries will be subject to potentially confusing sets of responsibilities across their supervisors, with the ECB taking the lead on prudential rules and regulations contained within EU Regulations and Directives and ESA binding technical standards; and national supervisors taking the lead on additional national prudential rules and all conduct issues (wholesale and retail, including market abuse and money-laundering).
Supervisory uncertainty - even within the list of ECB supervisory responsibilities, it remains unclear what the ECB will undertake directly and what will be left for national supervisors to (continue to) undertake on behalf of the ECB. This may also give rise to some difficult practical issues.
Home / host supervision - for banks that are headquartered in a non-participating EU country and with operations in participating countries, the ECB is likely to take a more structured and coordinated view of the operations of such banks across all the participating countries - including both subsidiaries and branches. This could result in the ECB taking a more intrusive approach.
Non-EU banks - the ECB’s approach to supervision could affect the decisions of non-EU banks on their investment and business operations within the EU.
Wider implications
Enhanced co-operation and co-ordination - the most significant impact of the transfer of supervisory responsibilities to the ECB may be seen in the workings of supervisory (and resolution) colleges. A single supervisor across countries should be able to achieve enhanced levels of co-operation and co-ordination. This may also have a significant impact on non-participating EU countries, where the ECB is mandated to achieve closer co-operation in the group-wide supervision of banks with operations in both participating and non-participating countries.
ECB objectives - although the proposals stress the need to separate formally the banking supervision responsibilities of the ECB from its other responsibilities, it is likely that there will be some 'cross-over', and that the ECB will reflect in its supervisory approach some wider-ranging objectives relating to monetary union and to reversing the post-financial crisis fragmentation and localisation of banking across Europe.
In the detail
Scope and definitions
The scope of proposals is much wider than many had been arguing for. It covers all Member States (applying at least to Eurozone, with non-Eurozone member states able to sign up), and all credit institutions, financial holding companies, mixed financial holding companies and financial conglomerates.
Co-operation and tasks
The ECB proposed tasks are wide-ranging including:
- the authorisation of new firms (but not approved persons);
- withdrawal of authorisation;
- compliance with EU rules (this only covers rules from Directives, Regulations and ESA binding standards, not purely national standards);
- capital buffers from the CRR/CRD 4; setting Pillar 2 requirements for capital and liquidity;
- conducting stress tests;
- governance and risk management;
- on-site inspections;
- early intervention to initiate recovery planning;
- resolution; and
- sanctioning.
This leaves a considerable amount of co-ordination to be achieved with national supervisors, who remain responsible for any purely national prudential requirements, all conduct of business, financial crime etc. It is by no means clear how this will operate – this has proved difficult enough within single countries with multiple supervisors.
Supervisory and investigatory powers
The proposals give the ECB a lot of information gathering powers, including from non-regulated firms, without being very specific about whether these are incorporated only within the ‘euro plus’ area. As planned, the ECB can request any information it requires to perform its role from firms, persons and third parties including outsourced functions.
The ECB will have rights to conduct general investigations through submissions, examination of records, written and oral explanations and interviews. Further, if required, the ECB will have the power to carry out on-site inspections without prior consent. While the ‘powers’ element of the proposals suggests that most will pass to the ECB, in practice there remains plenty of scope for national supervisors to continue under the auspices of the ECB. For example, all authorisation requests to set up a credit institution will initially go through national supervisors to meet any local requirements, with the ECB granting authorisation taking into account the views of the national supervisor. Withdrawal of authorisation, however, will be the responsibility of the ECB.
Despite the protections offered in the separate proposals for the EBA, the proposals describe the ECB coordinating “a common position amongst representatives of the participating member states in relation to matters that are within its competence” at the EBA.
Finally, the ECB will be able to apply sanctions for failure to comply with those requirements under its authority...
Organisational principles
There is a commitment that the ECB’s supervisory role will not interfere with its tasks relating to monetary policy.
The ECB will appoint its own supervisory board including representatives from participating national authorities.
The ECB will be granted powers to levy credit institutions to meet at least part of its supervisory costs. A fee will be levied proportionate to the importance and risk profile of firms.
EBA powers
The EBA will be able to apply its mediation powers to the ECB and to take action where necessary - where there are disagreements between the ECB and other supervisors regarding supervision.
There will be changes to the voting structure in mediation cases, to prevent the ECB from using member states’ (who are part of the ECB supervisor arrangements) votes to protect the ECB from the EBA.
Steps are outlined to ensure non-participating member states will be properly represented on the Management Board of the EBA.
This is all based on the votes at the EBA continuing to be exercised by individual member states – they do not simply pass to the ECB.
Banking Union roadmap
Despite the details provided within the Commission communication, it remains largely unclear exactly what will happen (and when) on a European deposit insurance scheme and a common European resolution system.
The Commission calls for progress on key inter-related legislative proposals essential to the functioning of a banking union, including CRD 4, Deposit Guarantee Schemes and bank recovery and resolution.
While calling for urgent progress before the end of 2012, no specifics are given as to how progress on these proposals might be achieved within a changed environment under a banking union, for example, exemptions negotiated under CRR/CRD 4 to allow for country-specific policies.
The Commission has flagged this as an important priority in restoring confidence in EU banking supervision. It is clear that there will be some significant debate on the scope, governance and day-today responsibilities between the ECB and national authorities. It is also likely that various national regulators across Europe will have differing views on what this means in practice.