ECB Wants Beefed-Up SRM

On 12 February 2014, the European Central Bank (ECB) published a speech by Mario Draghi, ECB President, on financial integration and EU banking union.

Mr Draghi conceded that there were improvements that could be made to elements of the Council’s proposal on the Single Resolution Mechanism Continue reading

Banking Union Details to be Discussed in Emergency Meeting

Yesterday’s meeting of finance ministers in Brussels failed to establish crucial details over bail-in according to the Financial Times. The negotiations did produce a draft compromise broadly based on Germany’s revised position (see this blog post for more details).  The financing details will be left to an emergency meeting on the eve of the next EU summit in Brussels on 19 December 2013.  In the event Brussels rejects the board proposal, the plans would need the approval of the European Commission or a majority vote of banking union member states.

SSM MoU with ECB Approved and Inter-institutional Agreement Published in Official Journal

On 2 December 2013, the Council of the European Union published a press release announcing that it has approved the Memorandum of Understanding (MoU) (15963/13) between the Council and the European Central Bank (ECB) relating to the single supervisory mechanism (SSM).  A few days earlier on 30 November 2013, the Inter-institutional Agreement (IIA) between the ECB and the European Parliament on the implementation of procedures related to the SSM was published in the Official Journal of the EU (OJ).

 

ECB speech on SSM and entrance into MoU with EU Council

On 20 November 2013, the European Central Bank (ECB) published a speech given by the ECB executive board member, Yves Mersch, on the ECB’s perspective on the future of the European banking union.  Continue reading

ECB thumbs up for the SRM

The ECB has published its legal opinion on the Single Resolution Mechanism (SRM), a short summary follows:

  • The SRM should include all EU credit institutions
  • Resolution should only be triggered by a supervisory assessment of “failing or likely to fail”
  • The SRM should not require new legislation, Article 114 of the Treaty should suffice as a legal basis
  • The ECB supports early implementation of the bail-in tool (currently 2018)
  • Resolution financing must be provided by the Single Bank Resolution Fund. The ECB proposes a “temporary, fiscally neutral backstop” to the SBRF in the form of a credit line supplied by Member States, but recoupable from the financial industry
  • The ECB seeks representation as an observer in all plenary and executive meetings of the Single Resolution Board

The opinion voices its full support for the SRM which it views as a necessary complement to the Single Supervisory Mechanism, although it considers it crucial that the responsibilities of supervisory and resolution authorities are kept distinct.  The ECB regards a fully-functioning single supervisory mechanism as a vital precondition for the establishment of the SRM, it therefore strongly supports adoption of the SSM legislation during the Parliament’s current term.  This being the case, the ECB voices its support for the SRM to become effective as of 1st January 2015.

The 32 page opinion contains little that is unexpected; it is notable though, for its bullish tone on scope and timing of implementation. Perhaps it may be unwise to rely on delay.

SSM Regs Published in Official Journal

On 29 October 2013, the following were published in the Official Journal of the EU (OJ):

The SSM Regulation bestows supervisory powers over “significant” Eurozone banks on the European Central Bank (ECB).  The assessment of whether or not a bank is “significant” will be based on:

  • Size – the presumption being that any bank which fulfils any of the following criteria will be regarded as significant:
    • the total value of its assets exceeds EUR 30 billion; or
    • its total assets represent over 20% of the GDP of the relevant participating Member State (unless the value of those assets is below EUR 5 billion); or
    • both the bank’s national competent authority (NCA) and the ECB confirm that the bank is to be regarded as “significant”;
  • Importance for the economy of the EU or any Member State participating in the SSM; and
  • Significance of cross-border activities.

Any bank which has received public financial assistance shall be regarded as “significant” as are the three most significant banks in each of the participating Member States.  The assessment as to whether or not a bank is “significant” should not be conducted more often than annually.

Pursuant to the SSM Regulation, the ECB will have power over the authorisation (and withdrawal of authorisation) of banks, as well as authority in relation to early intervention and recovery planning (but not resolution).  In addition, it can, inter alia:

  • require banks to hold own funds in excess of capital requirements;
  • restrict, limit or require the divestment of activities of a bank;
  • impose limits on variable remuneration;
  • prohibit distributions;
  • impose additional reporting and liquidity requirements; or
  • remove members of the management body.

The ECB is due to publish a framework for the SSM by 4 May 2014, prior to assuming its supervisory role on 4 November 2014.  In advance of this, it is empowered to require NCAs to provide it with relevant information from 3 November 2013, the same day on which the SSM Regulation enters into force.

ECB Launches Bank Assessment Exercise

On 23 October 2013, the European Central Bank (ECB) published a note, accompanying press release and transcript of a question and answer session regarding the comprehensive assessment of banks’ balance sheets and risk profiles it will carry out in advance of assuming full responsibility for supervision as part of the single supervisory mechanism (SSM) in November 2014.

The exercise will commence in November 2013 and take approximately 12 months to complete. It will involve approximately 130 “significant”[1] credit institutions established in 18 EU Member States (listed in the annex to the note), covering approximately 85% of euro area bank assets which will be directly supervised by the ECB. It has three main goals:

  • Transparency – enhancing the quality of information available concerning the condition of banks;
  • Repair – identifying and implementing necessary corrective actions; and
  • Confidence building – assuring all stakeholders that banks are fundamentally sound and trustworthy.

The assessment will be carried out in collaboration with national competent authorities and will consist of:

  • A supervisory risk assessment – addressing key risks in banks’ balance sheets, including liquidity, leverage and funding;
  • An asset quality review – examining the asset side of bank balance sheets as at 31 December 2013; and
  • A stress test, building on and complementing the asset quality review by providing a forward-looking view of banks’ shock-absorption capacity under stress.

The outcome of the assessment may lead to a range of remedial action, including changes in a bank’s provisions and capital.

[1] A bank is “significant if:

  • the total value of their assets exceeds €30 billion;
  • the ratio of total assets to GDP of the participating Member State of establishment exceeds 20 per cent, unless the total value of their assets is below EUR 5 billion;
  • the institution is among the three largest credit institutions in a participating Member State.

European Parliament Votes to Adopt SSM

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.

The SSM legislation consists of a proposed regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposed regulation amending Regulation 1093/2010 (see this blog post for more details).  The European Parliament has also published a document containing the provisional texts adopted which can be found on pages 105 and 50 respectively.

The Regulations will come into force following approval by the EU Council and publication in the Official Journal of the EU.  The ECB will assume its supervisory role 12 months later.

EU Council publishes final compromise SSM text

On 25 April 2013, the Council of the EU published the final compromise texts of a regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and the proposed regulation amending Regulation 1093/2010 (which established the European Banking Authority).  Together these texts establish the EU single supervisory mechanism (SSM).

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:

  • size;
  • 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).