On 12 September 2013, the European Parliament published a press release announcing the adoption of a package of legislative acts to set up a Single Supervisory Mechanism (SSM) for the Eurozone. The SSM legislation was adopted with very large majorities and will bring the EU’s largest banks under the direct oversight of the European Central Bank (ECB) from September 2014.
Broadly, under the new regime, the European Central Bank (ECB) will assume responsibility for the supervision of “significant” credit institutions, with “less significant” credit institutions to remain subject to regulation by national supervisors. “Significance” is to be based on the following criteria:
importance for the economy of the EU or any participating Member State; and
significance of cross-border activities.
In addition, any credit institution will be regarded as “significant” if:
it has total assets of EUR 30 billion or more; or
the ratio of its total assets to the GDP of the participating Member State of establishment exceeds 20% (unless the total value of its assets is below EUR 5 billion); or
the ECB considers it to be of significant relevance; or
it has requested or received public assistance directly from the European Financial Stability Facility or the European Stability Mechanism;
it ranks amongst the three most significant credit institutions in a participating Member State.
The ECB will assume responsibility for, inter alia:
authorisations and withdrawal of authorisations;
the administration of certain activities currently carried out by home state regulators, such as the establishment of branches in non-participating Member States;
the assessment of applications for the acquisition and disposal of “qualifying holdings” (i.e. involving 10% or more of capital or voting rights);
the regulation of own funds requirements, securitisations, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on those matters;
the enforcement of governance arrangements, risk management processes, internal control mechanisms, remuneration policies and internal capital adequacy assessment processes;
conducting supervisory reviews and stress testing;
consolidated supervision where parent companies are established in participating Member States; and
supervisory tasks in relation to recovery plans, early intervention and structural changes required to prevent financial stress or failure (but excluding any resolution powers).
This is a link to an article in today’s Financial Times regarding a European Commission draft proposal which will force euro zone countries to share the cost burden of future bailouts in return for aid from the zone’s €500bn rescue fund.
The plan, circulated among euro zone finance minister officials late last year, calls for struggling countries to either invest in the rescue fund, European Stability Mechanism (ESM), or guarantee the fund against any losses. The proposal calls into question EU leaders’ commitment to “break the vicious circle” between failed banks and their sovereign leaders.
In June, the ESM agreed to directly recapitalise banks in countries such as Ireland and Spain in order to move large amounts of debt resulting from bank bailouts on to the ESM. However, the plan states that the ESM will only pay out once countries that could afford it place their own funds into failing banks first. A country facing insolvency after a bank bailout would also need to guarantee that the ESM would get its money back. Finance ministers have until June to make a final decision while in the interim period, the draft is likely to change