Single Supervisory Mechanism

The Single Supervisory Mechanism (SSM) is the legislative and institutional framework that grants the European Central Bank (ECB) sole licensing authority over all banks in participating EU member states (except branches of banks from non-EEA countries) and makes it the prudential supervisor of these banks, directly for the larger ones and indirectly for the smaller. Eurozone countries are required to participate, while participation is voluntary for non-eurozone EU member states. As of late 2018, none of the non-eurozone member states had joined, although the ECB reported that some of them had expressed an interest. The SSM has been the first-established and remains the central component of the European banking union, and works in conjunction to the Single Resolution Mechanism.

Not to be confused with European System of Financial Supervision.
Regulation 1024/2013
European Union regulation
TitleConferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions
ApplicabilityAll EU member states. However, only eurozone states and EU member states with "close cooperation agreements" (collectively referred to as participating SSM members), will become subject to the supervision tasks conferred to ECB.
Made byCouncil of the European Union                  
Made underArticle 127(6) of the TFEU.
Journal referenceOJ L287, 29.10.2013, p.63–89
History
Date made15 October 2013
Came into force3 November 2013
Implementation date4 November 2014.
Current legislation
Initial home of the SSM, the Japan Center in Frankfurt
Current home of the SSM (since March 2016), the Eurotower in Frankfurt

Genesis
Main article: Banking union

The Single Supervisory Mechanism was decided as part of the eurozone shift towards a banking union at the summit of eurozone heads of state and government, in Brussels on 28–29 June 2012. In compliance with the decisions made then, the European Commission developed its proposal for a Council Regulation establishing the SSM in the summer of 2012, and published it on 12 September 2012.[1]

The ECB "welcomed" the proposal,[2] but Chancellor of Germany Angela Merkel questioned "the capacity of ECB to monitor 6,000 banks". The Vice-President of the European Commission, Olli Rehn, responded that the majority of European banks would still be monitored by national supervisory bodies, while the ECB "would assume ultimate responsibility over the supervision, in order to prevent banking crises from escalating".[3]

Some economists remained skeptical, pointing to the composition of the SSM board as an issue.[4] The Commission proposes a board consisting of a total of 23 members, with 17 representatives of bank supervisors of member-states plus one chairman, one vice-chairman, and four other members. Thus, the large majority of the SSM board would consist of national supervisors who "do not appreciate ECB interference in their daily national supervisory activities".[4]

The European Parliament and Council agreed on the specifics of ECB oversight of eurozone banks on 19 March 2013.[5] The Parliament voted in favour of the SSM Regulations on 12 September 2013,[6] and the Council of the European Union gave its approval on 15 October 2013.[7]

The SSM Regulation set 4 November 2014 as the date when the ECB would begin its supervisory role. Within the eurozone, the regulation gives the ECB responsibility for roughly 130 financial institutions with holdings of 85% of the banking assets.[8]

Functioning

The SSM operates as a system of common bank supervision in the EU that involves national supervisors and the European Central Bank. The ECB is endowed with final supervisory authority while national supervisors are in a supporting role.

Division of labour

A division of labour has been established between the ECB and national supervisors. Banks deemed "significant" will be supervised directly by the ECB. Smaller banks will continue to be directly monitored by their national authorities, though the ECB has the authority to take over direct supervision of any bank.[6] A bank is deemed significant if it meets any of the following five conditions:[6]

  1. The value of its assets exceeds €30 billion.
  2. The value of its assets exceeds both €5 billion and 20% of the GDP of the member state in which it is located.
  3. The bank is among the three most significant banks of the country in which it is located.
  4. The bank has large cross-border activities.
  5. The bank receives, or has applied for, assistance from eurozone bailout funds (the European Stability Mechanism or European Financial Stability Facility).

A total of 122 banks are being supervised directly by the ECB, representing approximately 82% of bank assets. All other banks in the SSM (more than 6,000 in the eurozone alone) will be supervised by the national supervisor, although the ECB will keep final supervisory authority over these banks.

Organisational structure in the ECB

A Supervisory Board will draft supervisory decisions. The Supervisory Board will consist of the national supervisors participating in the SSM, in addition to a chair, vice-chair and four ECB representatives.

After the draft decision, the formal decision is to be made by the ECB's ultimate decision-making body, the Governing Council, which consists of the national central banks of the eurozone and the ECB's Executive Board.

A strict administrative separation is foreseen between the ECB's monetary and supervisory tasks. Final decision-making on both matters, however, takes place in the same body (the Governing Council).

Membership

The 19 eurozone member states participate automatically in the SSM.[9] The last country to join was Lithuania, when it joined the eurozone on 1 January 2015.[10]

Since the EU treaties only give the ECB jurisdiction over eurozone states, legally it cannot enforce measures in non-eurozone states. This would prevent the ECB from effectively carrying out its supervisory role in these states. Under the European Treaties, non-eurozone countries do not have the right to vote in the ECB's Governing Council and in return are not bound by the ECB's decisions. Non-eurozone countries cannot become full members of the SSM in the sense of having the same rights and obligations as eurozone SSM members.

However, non-eurozone EU member states can enter into a "close cooperation agreement" with the ECB. The banks in that country are then supervised by the ECB and the country gains a seat in the ECB's Supervisory Board. It would allow banks in that country to be supervised by the ECB provided that they have mechanisms in place to make ECB measures binding upon national authorities. A "close cooperation" agreement can be ended by the ECB or by the participating non-eurozone member state.[6] Participating non-eurozone states will also gain a seat on the ECB's Supervisory Board.[7]

The procedure for non-eurozone states to join SSM through "close cooperation", regulating the timing and content of applications and how the ECB shall assess such applications and the practicalities of admitting new members, was outlined by Decision ECB/2014/510. The decision entered into force on 27 February 2014.[11] The ECB governing council decided on 24 June 2020 to establish a close cooperation agreement with the Bulgarian and Croatian central banks. The close cooperation agreements enter into force on 1 October 2020, at which point they will participate in the SSM.[12][13]

Mechanisms

The ECB's monitoring regime includes conducting stress tests on financial institutions.[6] If problems are found, the ECB will have the ability to conduct early intervention in the bank to rectify the situation, such as by setting capital or risk limits or by requiring changes in management.

However, if a bank is found to be in danger of failing, the responsibility for resolving it will rest with the Single Resolution Mechanism.[6]

Limits to supervision

A first limit to the SSM's scope is geographical because it only covers a part of the EU member states. It will hence contribute to what is known as multi-speed Europe. A second limit is the fact that the SSM only deals with bank supervision. Supervision of the rest of the financial sector (for example insurance firms) remains a national competence. In addition, some aspects of bank supervision (for example consumer protection or anti-money laundering monitoring[14]) remain a task for national supervisors.[15]

Leadership

Chair:

Vice Chair:

ECB appointees:

2014 Comprehensive Assessment

ECB published its first comprehensive supervision review on 26 October 2014, covering the 130 most significant credit institutions in the 19 eurozone states (representing assets worth €22 trillion - equal to 82% of total banking assets in the eurozone), of which the 3 credit institutions from Lithuania were included only for informational purpose as they will first join SSM on 1 January 2015. The selection of the significant credit institutions being subject for the supervision and stress test, is not identical to each states selection of its domestic Systemically Important Financial Institutions.

The supervision report included:

  1. The results of an Asset Quality Review (AQR) - assessing capital shortfalls of each significant credit institution on 31 December 2013.
  2. Assessment of potential capital shortfalls when subject to a stress test based on the baseline scenario - being the latest economic forecast published by the Commission for the eurozone in 2014-16.
  3. Assessment of potential capital shortfalls when subject to a stress test based on an adverse scenario - which was developed by the European Systemic Risk Board in cooperation with the National Competent Authorities, the EBA and the ECB.

The EBA designed the utilized stress test methodology, where banks were required to maintain a minimum CET1 ratio of 8% under the baseline scenario (equal to the requirement for the AQR), and a minimum CET1 ratio of 5.5% under the adverse scenario. The review found, that despite identification of a need for asset value adjustments equal to €62 billion, a total of 105 out of the 130 assessed banks still met each of the 3 calculated minimum capital requirements on 31 December 2013. So only a total of 25 banks were found to suffer from capital shortfalls on 31 December 2013, of which 12 had already managed to cover these capital shortfalls through raising extra CET1-capital from the markets during 2014.[16] The remaining 13 banks still suffering from a capital shortfall, were granted 2 weeks to submit a plan for how they plan to cover it, with a final deadline for raising additional CET1-capital no later than: 30 April 2015 (if the shortfall stemmed from the AQR assessment or the baseline scenario stress test) or 31 July 2015 (if the shortfall stemmed from the adverse scenario stress test).[17]

The table below summarizes the review results for all of the 25 banks, that were found to suffer from a capital shortfall on 31 December 2013.[18] Those 12 with a green background already raised sufficient amount of additional CET1-capital in 2014, while those 5 with a yellow background were found to have bridged their shortfall through other measures than raising additional capital (internal restructuring ensuring dynamic budget sheet gains, governmental guarantees, or retained earnings), and only the remaining 8 with a red background were required to raise additional CET1-capital.

SSM participating banks with a CET1 capital shortfall, as of the status of its assets on 31 December 2013
Bank Name State CET1 ratio
starting
point		 CET1 ratio
post
AQR		 CET1 ratio
baseline
scenario		 CET1 ratio
adverse
scenario		 Capital shortfall
on 31 Dec 2013
(€ billion)		 Net eligible
capital raised
during 2014
(€ billion)		 Capital shortfall
post net
capital raised
(€ billion)
Eurobank¹Greece10.6%7.8%2.0%-6.4%4.632.861.76
Banca Monte dei Paschi di SienaItaly10.2%7.0%6.0%-0.1%4.252.142.11
National Bank of Greece¹Greece10.7%7.5%5.7%-0.4%3.432.500.93
Banca CarigeItaly5.2%3.9%2.3%-2.4%1.831.020.81
Cooperative Central Bank LtdCyprus-3.7%-3.7%-3.2%-8.0%1.171.500.00
Portuguese Commercial BankPortugal12.2%10.3%8.8%3.0%1.14-0.011.15
Bank of CyprusCyprus10.4%7.3%7.7%1.5%0.921.000.00
Oesterreichischer Volksbanken-VerbundAustria11.5%10.3%7.2%2.1%0.860.000.86
Permanent tsbIreland13.1%12.8%8.8%1.0%0.850.000.85
Veneto BancaItaly7.3%5.7%5.8%2.7%0.710.740.00
Banco PopolareItaly10.1%7.9%6.7%4.7%0.691.760.00
Banca Popolare di MilanoItaly7.3%6.9%6.5%4.0%0.680.520.17
Banca Popolare di VicenzaItaly9.4%7.6%7.5%3.2%0.680.460.22
Piraeus BankGreece13.7%10.0%9.0%4.4%0.661.000.00
Credito ValtellineseItaly8.8%7.5%6.9%3.5%0.380.420.00
Dexia²Belgium16.4%15.8%10.8%5.0%0.340.000.34
Banca Popolare di SondrioItaly8.2%7.4%7.2%4.2%0.320.340.00
Hellenic BankCyprus7.6%5.2%6.2%-0.5%0.280.100.18
Münchener HypothekenbankGermany6.9%6.9%5.8%2.9%0.230.410.00
AXA Bank EuropeBelgium15.2%14.7%12.7%3.4%0.200.200.00
C.R.H. - Caisse de Refinancement de l’HabitatFrance5.7%5.7%5.7%5.5%0.130.250.00
Banca Popolare dell'Emilia RomagnaItaly9.2%8.4%8.3%5.2%0.130.760.00
Nova Ljubljanska banka3Slovenia16.1%14.6%12.8%5.0%0.030.000.03
LiberbankSpain8.7%7.8%8.5%5.6%0.030.640.00
Nova Kreditna Banka Maribor3Slovenia19.6%15.7%12.8%4.4%0.030.000.03
Total-10.0%8.4%7.2%2.1%24.6218.599.47
Notes:

00000¹ These banks have a shortfall on a static balance sheet projection, but will have dynamic balance sheet projections taken into account in determining their final capital requirements.
000000Under the dynamic balance sheet assumption, these banks have no or practically no shortfall taking into account net capital already raised.
00000² Taking into account the orderly resolution plan of this institution, which benefits from a State guarantee, there is no need to proceed with additional capital raising.
000003 The impact on 2014 of the restructuring measures already taken to improve structural profitability and the maintenance of retained earnings in banks will cover the shortfalls identified.

Beside of the 25 banks found to suffer from capital shortfalls on 31 December 2013, it was expected Portugal's second-biggest bank, Banco Espírito Santo, would also have shown a capital shortfall if being analyzed. However, ECB decided to postpone the AQR and stress test for this bank, after it went into an orderly resolution and ceased to exist in August 2014 - with all its assets transferred to the Portuguese resolution fund. The resolution plan now being implemented by the resolution fund, will cause a split of the bank into a "bad bank" (holding all bad assets, to be liquidated as soon as possible) and a new continuing recapitalized bank Novo Banco (only holding the healthy assets).[19] At the time of the published stress test, the work of splitting up the assets between the two entities had not yet been completed, and for this reason ECB decided to postpone its stress test of the continuing Novo Banco.[20] One month later, it was announced Novo Banco had a sufficient CET1-ratio of 9.2% as of 4 August 2014 (after secretion of the toxic assets into the "bad bank"), and the resolution fund expected it would be sold as a viable bank to a new private owner during the second quarter of 2015.[21]

In addition to ECB's AQR and stress test for the 130 most significant banks in the eurozone member states, an identical AQR and stress test was conducted and published simultaneously by the EBA, covering the 123 most significant banks across the entire European Union.[22] National supervision authorities might also choose to publish additional stress tests. For example, the Bank of England regularly publishes its own stress tests, covering all of its 8 selected domestic SIFIs.[23]

See also

References
  1. "Commission proposes new ECB powers for banking supervision as part of a banking union" (Press release). Communication department of the European Commission. 12 September 2012. Retrieved 22 July 2013.
  2. "ECB welcomes Commission's proposal for a single supervisory mechanism", ECB press release, 12 September 2012
  3. "Rehn: Schedule for Single Supervisory Mechanism Feasible", Helsinki Times, 13 September 2012
  4. Ivo Arnold, "First the Governance, Then the Guarantees",EconoMonitor, 19 September 2012
  5. "An important step towards a real banking union in Europe: Statement by Commissioner Michel Barnier following the trilogue agreement on the creation of the Single Supervisory Mechanism for the eurozone". European Commission. 2013-03-19. Retrieved 2014-05-29.
  6. "Legislative package for banking supervision in the Eurozone – frequently asked questions". European Commission. 2013-09-12. Retrieved 2014-05-29.
  7. "Council approves single supervisory mechanism for banking". Council of the European Union. 2013-10-15. Retrieved 2014-05-29.
  8. "EU regulatory outlook" (PDF). PwC. Retrieved February 19, 2014.
  9. "Euro area 1999 – 2015". European Central Bank. Retrieved 3 December 2015.
  10. "Lithuania to join euro area and single supervisory mechanism (SSM) on 1 January 2015". European Central Bank. 23 July 2014.
  11. "Decision of the European Central Bank of 31 January 2014: On the close cooperation with the national competent authorities of participating Member States whose currency is not the euro (ECB/2014/5)" (PDF). European Central Bank. 31 January 2014.
  14. Jones, Claire. "ECB lacks power to uncover money laundering — Nouy". Financial Times. Retrieved 5 July 2018.
  15. Verhelst, Stijn. "Assessing the Single Supervisory Mechanism: Passing the point of no return for Europe's Banking Union" (PDF). Egmont – Royal Institute for International Relations. Retrieved 12 June 2013.
  16. "ECB's in-depth review shows banks need to take further action". European Central Bank. 26 October 2014.
  17. "Banking Supervision > Comprehensive assessment: What happens after the disclosure of the results?". European Central Bank. 26 October 2014.
  18. "Aggregate report on the comprehensive assessment, October 2014" (PDF). European Central Bank. 26 October 2014.
  19. "Portugal in 4.9 billion euro rescue of Banco Espirito Santo". Reuters. Retrieved 3 August 2014.
  20. "2014 EU-wide stress test: Frequently Asked Questions". European Banking Authority. 26 October 2014.
  21. "Novo Banco Says Common Equity Ratio Exceeded ECB Minimum". Bloomberg. 4 December 2014.
  22. "2014 EU-wide stress test results". European Banking Authority. 26 October 2014.
  23. "Bank of England stress test home". Bank of England. 15 December 2017.
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