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 Commission proposes Single Resolution Mechanism

On 10 July 2013, the EU Commission proposed a Single Resolution Mechanism (SRM), a complement to the Single Supervisory Mechanism (SSM) and one of the building blocks of EU Banking Union.  The SRM is designed to ensure that the resolution of a failing bank can be managed efficiently with minimal costs to taxpayers and the real economy.

The proposed SRM would apply the substantive rules of the Recovery and Resolution Directive (RRD). The EU’s Council of Finance Ministers reached agreement on a general approach to the RRD on 27 June and the EU Parliament’s Committee on Economic and Monetary Affairs adopted its report on 20 May. Negotiations between the Council and the European Parliament are due to start soon with the aim of reaching final agreement on the RRD in autumn 2013.  At its recent meeting, the EU Council of Ministers set themselves the target of reaching agreement on the SRM by the end of 2013 so that it can be adopted before the end of the current European Parliament term in 2014. This would enable it to apply from January 2015, together with the RRD.

Under the SRM:

  • the European Central Bank (ECB) would signal when a bank in the euro area or established in a Member State participating in the Banking Union was in severe financial difficulties and needed to be resolved;
  • a Single Resolution Board, consisting of representatives from the ECB, the EU Commission and the relevant national authorities, would prepare the resolution of a bank;
  • a Single Bank Resolution Fund, funded by contributions from the banking sector and replacing national resolution funds, would be set up under the control of the Single Resolution Board;
  • on the basis of the Single Resolution Board’s recommendation, or on its own initiative, the EU Commission would decide whether and when to place a bank into resolution and would set out a framework for the use of resolution tools and the Single Bank Resolution Fund; and
  • under the supervision of the Single Resolution Board, national resolution authorities would be in charge of the execution of a resolution plan.

EU Banking Union in the Balance?

If it were needed, proof positive once again that politics and economics don’t always mix is this link to an article published today in the FT.  It discusses the split developing within the EU between Brussels, Paris and the European Central Bank (ECB) on one hand, and Germany on the other.  The subject of the split is the future direction of EU banking union, specifically the design of the Single Resolution Authority, which together with the Single Supervisory Mechanism and the Common Deposit Guarantee Scheme, represents the three pillars of EU banking union.

The article describes the “German vision” for banking union – one of gradual integration where Member States remain largely responsible for supervision (albeit with coordination between national authorities) and wholly liable for costs (so as to protect the German taxpayer).  This contrasts with the EU vision for banking union which demands the creation of a centralised “heavyweight bank executioner” and implies a surrender of sovereignty with which Germany is uncomfortable.

If one considers that a single EU authority is a necessary step in relation to the supervision of credit institutions from birth and throughout life, it seems logical to conclude that a single authority should also govern them in their death.  Despite this, apparently logic has no place in this discussion and no compromise is in sight.  Add to this the fact that reformers are up against the deadlines of looming elections in Germany and at an EU level as well as a change of commission and EU banking union seems to be as far away as ever.

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).

EU Council and Parliament Reach Agreement Over SSM

On 18 April 2013, the EU Council published a press release confirming that agreement had been reached with the EU Parliament on the establishment of the single supervisory mechanism (SSM) with respect to EU credit institutions.

The European Central Bank (ECB) will be responsible for administration of the SSM, but national supervisors will retain responsibility for takes not conferred on the ECB, such as consumer protection, money laundering, payment services and branches of third country banks.  The ECB will assume its supervisory role with respect to the SSM either on 1 March 2013 or 12 months after entry into force of the legislation, whichever is later to occur.

ECB Publishes Letter on Scope of SSM

On 4 April the European Central Bank (ECB) published a letter from Mario Draghi, President of the ECB, to Nuno Melo, MEP regarding the scope of supervisory responsibilities under the Single Supervisory Mechanism (SSM).

In the letter, the ECB makes clear that the scope of the SSM is designed to include all credit institutions in the euro area and in non-euro area Member States wishing to participate within the SSM.  Furthermore, the current draft legislation regarding the SSM distinguishes between “significant” and “less significant” banks according to:

  • size;
  • importance to the economy;
  • cross-border activity; and
  • whether or not they benefit from direct EU financial assistance.

The ECB will have full supervisory powers over significant banks, with the assistance of national supervisory authorities.  However, in order to ensure that it can effectively supervise all credit institutions within participating Member States, the ECB will also have certain powers with respect to less significant banks, namely:

  • national supervisory authorities will need to abide by ECB regulations, guidelines and instructions; and
  • the ECB may, at any time, decide to exercise direct supervision over less significant banks, based on the supervisory data on such institutions to which it will have access.

The Single Supervisory Mechanism: “Singleness” a Question of Degree Only?

On 29 January 2013, Vítor Constâncio, Vice-President of the European Central Bank (ECB), gave a speech in Frankfurt to the Banker’s Association for Finance and Trade – International Financial Services Association Europe Bank-to-Bank Forum entitled “Establishing the Single Supervisory Mechanism”.

Broadly, the legislative framework establishing the Single Supervisory Mechanism (SSM) provides that, of Europe’s 6,000 banks, the ECB will have direct responsibility only for:

  • systemically important European banks; and
  • banks which have received or requested public financial assistance.

In fulfilling its duties, the ECB will be assisted by national competent authorities, acting in accordance with ECB instructions.  In practice, the ECB will assume direct responsibility for over 80% of the euro area banking system in terms of assets.  However, the actual number of banks coming under direct ECB supervision may be as low as 150, with the remaining banks continuing to be supervised by their national competent authorities.

This has raised concerns about the creation of an uneven playing field and the possible effects on the completion of the single market.  It is felt that this is driven in the main by a desire that the politically influential German Landesbanks escape direct ECB supervision.  Nonetheless, Sr Constâncio believes that the difference between the two systems of regulation “will concern only the degree of centralisation of supervisory responsibilities within the single supervisory mechanism composed by the ECB and the national supervisory authorities”.  The “singleness of the SSM” would be ensured by virtue of the fact that:

  • national supervisory authorities will have to comply with ECB regulations;
  • the ECB will have access to data concerning all credit institutions;
  • the ECB may decide at any time to exercise direct supervisory power over a bank; and
  • the ECB would in any event wield powers affecting banks “from their birth (i.e. the authorisation to operate) to their death”.

Subject to operational arrangements being in place, the ECB is due to assume its new supervisory role on 1 March 2014 or 12 months after entry into force of the legislation, which occurs later.  Currently, the SSM legislation is the subject of trialogue negotiations between the EU Council, EU Commission and EU Parliament.  This process is due to end soon, but unfortunately, it may be some time before we truly know the degree to which this is merely about ‘degrees of centralisation’ rather than a political compromises which threatens to give rise to a two-tier banking system within Europe.