Single Supervisory Mechanism

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Temporary home of the SSM, the Japan Center in Frankfurt
Future home of the SSM, the Eurotower in Frankfurt

The Single Supervisory Mechanism (SSM) is the name for the mechanism which has granted the European Central Bank (ECB) a supervisory role to monitor the financial stability of banks based in participating states, starting from 4 November 2014. Eurozone states are obliged to participate, while Member state of the European Union outside the eurozone can voluntarily participate. The SSM is the first established part of the EU banking union, and will function in conjunction to the Single Resolution Mechanism.

Proposal and reactions[edit]

Proposal[edit]

On 12 September 2012, the European Commission revealed their proposal, on the basis of article 127(6) of the Treaty of Lisbon,[1] that would assign the European Central Bank a supervision role for the eurozone area's banks. The Commission called on the Council and the European Parliament to adopt the proposal "by the end of 2012," together with other components of what is intended to be "an integrated banking union." An important part of this integration would be the adoption of a "single rulebook in the form of capital requirements,...harmonized deposit protection schemes...and a single European recovery and resolution framework."[2]

President of the European Commission José Manuel Barroso stated that the proposed mechanism "will restore confidence in the supervision of all banks in the euro area," emphasizing that the European Union intends to "break the vicious link between sovereigns and their banks." "In the future," Barroso added, "bankers' losses should no longer become the people's debt, putting into doubt the financial stability of whole countries."[2] The EU's Internal Market Commissioner Michel Barnier stated that the "ultimate aim is to stop using taxpayers' money to bail out banks," adding "We...made sure that the ECB will be accountable to the European Parliament for supervisory decisions".[2]

On the occasion of the Commission's SSM proposal, Commission President José Manuel Barroso, addressing the EU parliament in Strasbourg, called for the EU to evolve into a "federation of nation-states".[3] Barroso said he was not calling for a "superstate", but rather "a democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty," acknowledging that such a federation "will ultimately require a new treaty."[3]

Reactions[edit]

ECB "welcomed" the proposal, [4] but Chancellor of Germany Angela Merkel questioned "the capacity of ECB to monitor 6,000 banks."[5] 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 "ECB would assume ultimate responsibility over the supervision, in order to prevent banking crises from escalating."[5]

The European Banking Federation (EBF), representing the interests of over five thousand European banks in 32 countries, with its members combining assets of over 30,000 billion Euro and around 2.4 million employees, stated that it welcomes the European Commission's proposals and supports "the clear commitment towards a single rule book". Guido Ravoet, EBF Chief Executive stated that the federation remains "keenly aware" that further steps will be required to create "a common resolution mechanism and a harmonised deposit guarantee framework," which EBF considers as "necessary to complete an effective single supervisory mechanism."[6]

According to BBC reports, Britain does not want to take part in the SSM, but will support the idea of a single supervisor for the eurozone, "as long as it does not affect the integrity of the wider EU single market."[3]

Some economists remained skeptical, pointing to the composition of the SSM board as an issue. [1] 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."[1]

Agreement[edit]

The European Commission revealed their proposal on 12 September 2012.[1] The European Parliament and Council agreed on the specifics of ECB oversight of eurozone banks on 19 March 2013.[7] The Parliament voted in favour of the SSM Regulations on 12 September 2013,[8] and the Council of the European Union gave their approval on 15 October 2013.[9]

The SSM was enacted through two regulations which are titled:[9]

  • Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions[10]
  • Regulation (EU) No 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) No 1024/2013[11]

The regulation sets 4 November 2014 as the date when the ECB will begin its supervisory role.[10] Within the eurozone, the regulation gives the ECB responsibility for roughly 130 financial institutions with holdings of 85% of the banking assets.[12]

Functioning[edit]

General system[edit]

The SSM will put in place 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[edit]

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.[8] A bank is deemed significant when it meets one of the following 5 conditions:[8]

  1. The value of its assets exceeds € 30 billion.
  2. The value of its assets exceeds both € 5 billion and 20% of the Gross Domestic Product 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 a eurozone bailout funds (the European Stability Mechanism or European Financial Stability Facility).

Around 150 banks will be supervised directly by the ECB, representing approximately 80% 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 ECB[edit]

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 4 ECB representatives.

After the draft decision, the formal decision is to be made by the ECB's ultimate decision-making body: the Governing Council. The Governing Council 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[edit]

Not all EU member states will participate in the SSM. Participation is automatic for eurozone states.

Since the EU treaties only give the ECB jurisdiction over eurozone states, legally it cannot enforce measures in non-eurozone state. 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.[8] Participating non-eurozone states will also gain a seat on the ECB's Supervisory Board.[9]

Mechanisms[edit]

The ECB's monitoring regime will including conducting stress tests on financial institutions.[8] 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.[8]

Limits to supervision[edit]

A first limit to the scope of the SSM is geographical: the SSM will only cover 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) remain a task for national supervisors. [13]

See also[edit]

References[edit]

  1. ^ a b c d "First the Governance, Then the Guarantees", by Ivo Arnold, EconoMonitor, 19 September 2012
  2. ^ a b c "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. 
  3. ^ a b c "EU Commission chief Barroso calls for 'federation'", BBC News, 12 September 2012
  4. ^ "ECB welcomes Commission's proposal for a single supervisory mechanism", ECB press release, 12 September 2012
  5. ^ a b "Rehn: Schedule for single supervisory mechanism feasible", Helsinki Times, 13 September 2012
  6. ^ "EBF welcomes steps towards Single Supervisor" (Press release). European Banking Federation. 12 September 2012. Retrieved 22 July 2013. 
  7. ^ "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. 
  8. ^ a b c d e f "Legislative package for banking supervision in the Eurozone – frequently asked questions". European Commission. 2013-09-12. Retrieved 2014-05-29. 
  9. ^ a b c "Council approves single supervisory mechanism for banking". Council of the European Union. 2013-10-15. Retrieved 2014-05-29. 
  10. ^ a b "COUNCIL REGULATION (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions". Official Journal of the European Union (European Union) L (287): 63–89. 2013-10-29. 
  11. ^ "REGULATION (EU) No 1022/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 22 October 2013 amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) No 1024/2013". Official Journal of the European Union (European Union) L (287): 5–14. 2013-10-29. 
  12. ^ "EU regulatory outlook". http://www.pwc.com/us/en/financial-services/regulatory-services/publications/eu-bonus-cap-crd-iv-emir-aifmd.jhtml, January, 2014. 
  13. ^ Verhelst, Stijn. "Assessing the Single Supervisory Mechanism: Passing the point of no return for Europe's Banking Union". Egmont – Royal Institute for International Relations. Retrieved 12 June 2013. 

External links[edit]