Another speech on the Single Supervisory Mechanism (SSM) from the European Central Bank (ECB) this time by ECB President, Mario Draghi, titled “The future of Europe” was presented in Frankfurt on 22 November 2013.
Mr Draghi reiterated that the objective of the ECB’s comprehensive assessment of the major banks in the SSM is to increase confidence in banks, by increasing transparency. He added that the assessment will be comprehensive and consistent in its approach, covering 128 banks and about 85% of the assets of countries participating in the SSM, and centrally led using a rigorous common methodology.
The ECB recently met with bank top management and their national supervisors to emphasise the need for high-quality information to make the exercise a success. The first data request (the “portfolio selection”) has just been issued and the key parameters of the stress test exercise are expected by the end of January 2014.
Mr Draghi also offered his views on how the SSM can help foster financial integration. First, the SSM can supervise in the European interest as it has no incentives related to national champions and its mandate is fully aligned with its European financial stability objective. Second, under the SSM, all supervisors will be subject to the same rules, standards and decision-making procedures thereby increasing confidence among supervisors. A supervisory assessment from the SSM that a bank is healthy can therefore act as a “seal of quality”. Lastly, the SSM can foster trust between banks to allow them to lend to one another cross-border.
The speech concluded with a discussion on the Single Resolution Mechanism (SRM) which complements the SSM. Mr Draghi believes that the SRM needs to be pursued immediately and made two points in relation to where he thinks more certainty is needed. First, he supports implementing the bail-in tool well ahead of 2018 as it would be better to have the new EU resolution framework available right from the start of the SRM. In addition, investors need to see a clear pecking order in resolution financing in order to price risk properly but need clear public backstops at the national and European levels.