European Banking Supervision: A Comprehensive Overview

The European Banking Supervision (EBS) is a unique entity that oversees the banking sector in the European Union. It was established in 2011 as a result of the European financial crisis.

The EBS is responsible for supervising banks across the EU, with the goal of ensuring their stability and soundness. This includes monitoring their risk management practices, capital adequacy, and liquidity.

One key aspect of EBS is its centralized approach to supervision, which allows for more effective coordination and cooperation among national supervisors. This is particularly important given the interconnected nature of the European banking system.

The EBS works closely with the European Central Bank (ECB) to ensure a consistent and effective supervisory framework across the EU.

A fresh viewpoint: Federal Reserve Bank Supervision

The European Banking Supervision has a well-defined organization and structure. The SSM Regulation, Regulation 1024/2013, is the foundation of this structure.

The regulation was made by the Council of the European Union and entered into force on 3 November 2013. It applies to all EU member states, but only eurozone states and those with "close cooperation agreements" are subject to the supervision tasks conferred to the ECB.

Here's a summary of the regulation's key dates:

The European Union's regulatory framework is governed by Regulation 1024/2013, also known as the SSM Regulation.

This regulation was made by the Council of the European Union on October 15, 2013, and entered into force on November 3, 2013.

The regulation applies to all EU member states, but only eurozone states and those with "close cooperation agreements" are subject to the supervision tasks conferred to the European Central Bank.

The SSM Regulation is made under Article 127(6) of the TFEU, and its implementation date is November 4, 2014.

Here is a summary of the regulation's key details:

The ECB has established a division of labor with national competent authorities to oversee banks. This means that banks deemed significant will be supervised directly by the ECB.

A total of 115 banks are currently being supervised by the ECB, while all other banks are monitored by their national authorities. This is a deliberate decision to ensure that significant banks receive close attention.

To determine which banks are significant, the ECB uses specific criteria. A bank is considered significant when its assets exceed €30 billion, or when it meets other conditions such as having large cross-border activities.

Here are the specific criteria used to determine a bank's significance status:

The significance status of a bank can change over time due to events such as mergers and acquisitions. In 2020, two additional banks joined the list of banks supervised by the ECB.

Joint Teams play a crucial role in the organization and structure of banking supervision. They are composed of members of the ECB's staff, national competent supervisors, and experts in the banking field.

These teams are responsible for making the link between the national and supranational levels. They act as supporting bodies, coordinating supervisory missions and evaluating their effectiveness.

A Joint Supervisory Team is formed for each significant banking institution. They are responsible for the coordination, control, and evaluation of supervisory missions.

Felix Hufeld's SSM Board Calendar is a key tool for staying organized. It's a calendar that outlines the key events and deadlines for the Supervisory Board of the German Financial Supervisory Authority (BaFin).

The calendar is used to ensure that all necessary steps are taken in a timely manner. It's a crucial component of the Board's decision-making process.

The calendar is updated regularly to reflect any changes in the Board's schedule or priorities. This helps to keep everyone on the same page and ensures that important decisions are made without unnecessary delays.

The Supervisory Board uses the calendar to plan and prepare for key events, such as board meetings and hearings. This helps to ensure that all necessary information is gathered and that the Board is well-prepared for any discussions or decisions that need to be made.

By using a calendar, the Supervisory Board can stay organized and focused on its key objectives. This helps to ensure that the Board is able to make informed decisions and take effective action.

Worth a look: Key Bank Rating

The European Banking Supervision has a clear geographical scope, which includes all 20 eurozone member states. Croatia, the latest country to join the Eurozone, was added to the scope on January 1, 2023.

Non-Eurozone countries, on the other hand, don't have the right to vote in the ECB's Governing Council and aren't bound by its decisions. This means they can't become full members of the banking union.

However, non-Eurozone EU member states can enter into a "close cooperation agreement" with the ECB, which implies the supervision of banks in these signatory countries. Bulgaria signed such an agreement in 2020, and Croatia had one before joining the eurozone.

On a similar theme: Federal Reserve Bank Supervision Economics

The European Banking Supervision has a clear geographical scope that defines its membership and participation. All 20 eurozone member states automatically participate in European Banking Supervision.

Croatia, which joined the Eurozone on January 1, 2023, was added to the scope of application of European Banking Supervision as a result. Non-Eurozone countries, on the other hand, do not have the right to vote in the ECB's Governing Council and are not bound by its decisions.

Non-Eurozone EU member states can, however, enter into a "close cooperation agreement" with the ECB. This agreement implies the supervision of banks in these signatory countries by the ECB. Bulgaria signed a close cooperation agreement with the ECB in 2020, and Croatia had a similar agreement before joining the eurozone.

The European Central Bank (ECB) plays a crucial role in European banking supervision. The ECB has the leadership in this area, with a strict administrative separation between its monetary and supervisory tasks.

The ECB's Governing Council is the main decision-making entity, comprising members of the Executive Board and governors of national central banks. It takes formal decisions on supervisory matters based on an opinion drafted by the Supervisory Board.

The Supervisory Board is composed of national participating supervisors, a chair, vice-chair, and four ECB representatives. They meet every three weeks to draft supervisory decisions, which are then submitted to the Governing Council.

A Steering Committee assists the Supervisory Board in preparing its meetings, consisting of the Chair and Vice-Chair, an ECB representative, and five deputies of national supervisors.

A total of 115 banks are currently supervised directly by the ECB, while smaller banks are monitored by their national authorities. The ECB has the authority to take over the direct supervision of any bank, but this is not always the case.

A bank is considered significant when it meets any of the following criteria:

In 2020, two additional banks (LP Group B.V. in the Netherlands and Agri Europe Cyprus in Slovenia) joined the list of banks supervised by the ECB.

The European Banking Supervision has a robust regulatory framework in place to ensure the stability and soundness of the financial system. This framework is governed by the European Banking Authority (EBA) which is responsible for creating and enforcing rules for banks across the EU.

The EBA's regulatory framework is based on the Capital Requirements Directive (CRD), which sets out the minimum capital requirements for banks. The CRD requires banks to hold a minimum amount of capital against their risk-weighted assets.

The CRD also sets out rules for banks' liquidity and funding, requiring them to maintain a stable liquidity position and to have adequate funding in place. This helps to prevent bank runs and ensures that banks can meet their obligations.

The EBA's framework also includes rules for banks' risk management, requiring them to have effective systems in place to identify and manage their risks. This includes rules for credit risk, market risk, and operational risk.

The EBA's framework is designed to be flexible and adaptive, allowing it to respond quickly to changes in the financial system. This includes regular reviews and updates to the framework to ensure it remains effective in maintaining financial stability.

Broaden your view: Equivalence in Financial Services

The Single Supervisory Mechanism (SSM) is a key part of European banking supervision, placing significant banks in participating countries under the direct supervision of the European Central Bank (ECB).

The SSM is made up of the ECB and the national supervisory authorities of the euro countries, with non-euro area member states able to participate on a voluntary basis.

The SSM's main goal is to ensure the financial stability of the banking system, prevent money laundering and terrorist financing, and protect consumers.

Banka Slovenije is part of the SSM, working alongside the ECB and national supervisors to achieve these objectives.

The SSM's rulebook is outlined in the Banking Union framework, established in 2014 as a key component of the EU's economic and monetary union.

Here are the key objectives of Banka Slovenije's banking supervision:

The Single Supervisory Mechanism (SSM) is a crucial part of European banking supervision.

The SSM places significant banks in participating countries under the direct supervision of the European Central Bank (ECB).

In the SSM, the ECB and the national supervisory authorities of the euro countries work together to ensure effective supervision.

Non-euro area member states may participate in the SSM on a voluntary basis, giving them the option to join the mechanism if they choose to do so.

The ECB has the leadership in European banking supervision, overseeing the SSM and making key decisions.

The Governing Council, which includes the members of the Executive Board of the ECB and the governors of all national central banks of the Eurozone's member states, makes final decisions on both monetary and supervisory matters.

The Supervisory Board, composed of national participating supervisors, an ECB representative, and a chair, vice-chair, and four ECB representatives, drafts supervisory decisions for the Governing Council.

The Supervisory Board meets every three weeks to discuss and finalize supervisory decisions, which are then submitted to the Governing Council for approval.

The Steering Committee assists the Supervisory Board in preparing for its meetings, providing additional support and guidance as needed.

If this caught your attention, see: Single Euro Payments Area

The Single Rulebook is a crucial component of harmonizing European banking supervision law. It's a comprehensive framework that binds all financial institutions together.

The Single Rulebook comprises various legal acts, which are binding for all financial institutions. This ensures that everyone is following the same set of rules.

One of the key objectives of the Single Rulebook is to provide a unified framework for banking supervision. This helps to eliminate confusion and inconsistencies.

The Single Rulebook is made up of multiple legal acts, all of which are equally binding. This means that financial institutions must comply with all of these acts in order to operate within the European banking system.

Here are some of the key components of the Single Rulebook:

Willingness to act is a crucial aspect of good supervision. It's the willingness to take action when needed, especially during economic and financial turmoil.

The International Monetary Fund staff published a document in 2010 stating that this willingness is a key ingredient for effective banking supervision. The European Central Bank echoed this idea in 2022, asking experts to review the SREP and concluding that using the full range of supervisory tools available is an international best practice.

Supervisory authorities act in line with the principle of proportionality, using supervisory tools as appropriate, as necessary, and decisively. They give banks a chance to address their weaknesses within a defined time frame, with interim deadlines to comply with established parameters.

The available supervisory tools include binding measures such as quantitative supervision, qualitative supervision, sanctions, and periodic penalty payments. The most common supervisory measure is the Pillar 2 capital add-on, but it's not the only one.

Here are the types of supervisory tools used by authorities:

European Banking Supervision has faced criticism regarding its methodology and scope over time. This institutional scheme has also suffered from some controversies.

The European Banking Supervision has been criticized for its approach to supervising banks, particularly when it comes to evaluating complex risks such as climate and environmental crises. The Basel Committee has recognized that climate-related risks can transform into traditional risks like credit, liquidity, market, operational, and litigation risk.

The European Banking Supervision has made progress in leading to stronger banks and harmonized supervision, but it still faces new challenges, including mitigating climate and environmental risks. The SSM priorities for 2024-26 include ensuring a banking sector resilient to immediate macro-financial and geopolitical shocks.

Some of the key challenges ahead include promoting a better supervisory culture, reviewing SREP scores and capital requirements, and increasing qualitative measures. This will require continuous investments in security technologies, staff training, and incident response skills, as well as IT competences at both a managerial and operational level.

Qualitative requirements are a crucial tool for addressing weaknesses in banks, and they're often the root cause of problems that lead to risks.

Article 16 of the SSM Regulation allows the ECB to impose these requirements based on a bank's specific circumstances.

Periodic penalty payments are an enforcement measure that can be used to compel banks to comply with requirements by a specific date.

Sanctions are intended to punish banks for misconduct and deter future infringements.

The failure of Silicon Valley Bank in 2023 is a prime example of how qualitative requirements can be overlooked, leading to catastrophic consequences.

Despite repeatedly breaching internal risk limits, the bank's management didn't adequately address the issues, and supervisors didn't escalate their concerns until it was too late.

The European Banking Supervision has been criticized for its methodology and scope. It's surprising that such a crucial institution has faced so many controversies.

This institutional scheme has suffered from some controversies, which is a testament to the complexity of the issue.

Critics have pointed out the flaws in European Banking Supervision's approach, which has led to its share of problems.

Forbearance is a complex issue in the European banking system. The ECB's decision to declare Banca Monte dei Paschi di Siena solvent in 2017, despite multiple unsuccessful recapitalisations, is a prime example of forbearance.

The bank was subject to a national insolvency procedure, but the ECB declared it solvent based on stress tests performed by the EBA in 2016. This decision was met with criticism from many member states, including Germany, which considered the ECB's methodology vague and non-transparent.

The ECB's reliance on private companies like BlackRock to advise on prudential risk matters has also raised concerns about potential conflicts of interest. In 2019, the European Commission contracted BlackRock to advise on implementing sustainability in banking regulation.

As we explore the challenges and controversy surrounding Raimund Röseler's role as SSM Board Alternate, let's take a closer look at his calendar of activities.

Röseler's calendar is a public document that outlines his responsibilities and commitments as SSM Board Alternate.

One notable entry on his calendar is the European Central Bank's Code of Conduct for high-level officials.

This code of conduct is an important guideline for Röseler and other high-level officials at the ECB.

It's worth noting that Röseler's calendar is a public document, providing transparency into his activities and responsibilities.

The future of banking in Europe is looking at a major shift, driven by the need to address climate and environmental risks. The Basel Committee has identified that climate-related risks can transform into traditional types of risks, such as credit, liquidity, market, operational, and litigation risk.

Banks will have to adapt to a more complex and dynamic environment, where extreme climate events are on the rise. Floods, fires, drought, and other extreme weather events are becoming more frequent and severe.

To address these challenges, the SSM priorities for 2024-26 focus on creating a banking sector resilient to immediate macro-financial and geopolitical shocks. This includes promoting a better supervisory culture, reviewing SREP scores and capital requirements, and increasing qualitative measures linked to SREP scores.

The banking sector will also have to invest in operation risk prevention, with a more rigorous regulatory control and a more meticulous check of IT and cyber security practices. This will require continuous investments in security technologies, staff training, and incident response skills.

Here are some key measures that supervisors should focus on to comply with the SSM priorities:

Increased risks and complexity are a major challenge in European banking supervision.

The international tension, FinTech and Big Tech companies, digital transformation, and climate change all contribute to this complexity.

According to Frank Elderson, the complexity of supervisory tasks has increased, and the European banking supervision needs to adapt to this new risk environment.

Capital Requirements are crucial for banks to absorb potential losses and secure people's deposits. Banks are required to hold capital that's proportional to the risks they take.

The European Central Bank (ECB) closely monitors bank capital requirements, and since 2016, it may impose additional requirements if the bank's risk assessment doesn't reflect proper coverage. The ECB's requirements are based on the Basel agreement.

The Basel agreement sets a minimum capital requirement of 8% of banks' risk-weighted assets. This is known as the Pillar 1 requirement.

Pillar 2 requirements are divided into two categories: P2R and P2G. P2R requires banks to maintain risk sensitivity and flexibility at all times, while P2G identifies the levels of capital banks should maintain in the long run.

Basel III provides additional capital buffers to cover more specific risks.

Here's an interesting read: Basel Committee on Banking Supervision

Non-performing loans are a significant concern in the banking sector. A bank loan is considered non-performing when the borrower fails to pay the due amount or agreed interest for 90 days or more.

European Banking Supervision has been actively involved in addressing this issue. The SSM, along with the European Banking Authority, introduced a new definition of Non-Performing Loans to optimize their disposal.

A bank must increase its equity reserve if a loan becomes non-performing to protect itself from potential losses. This is done to increase the bank's resilience to shocks by sharing the risk with the private sector.

The new provisions put in place a "prudential backstop", or minimum common loss guarantee, for the reserve funds that banks set up to deal with losses from future non-performing loans. If a bank fails to meet this agreed minimum level, deductions are made directly from its capital.

Stress tests, a crucial tool for assessing bank risk, have their own set of limitations. Methodological flaws have been identified and corrected over the years, but some issues persist.

The 2014 stress tests used the Basel III approach, which focuses solely on Common Equity Tier 1 as the capital buffer. This approach has been criticized for not providing accurate estimates of a bank's solvency.

Stress tests have been shown to favor investment banks over commercial banks. They don't take into account potential externalities and spillovers, which can have significant impacts during a crisis.

You might enjoy: 2010 European Union Bank Stress Test

International tension, the spread of FinTech and Big Tech companies, and digital transformation have increased the complexity of supervisory tasks.

The ECB's Executive Board member, Frank Elderson, emphasizes the need for more risk-focused, efficient, and effective European banking supervision.

Rising climate change is also affecting banks, making their tasks more complex.

The Supervisory Review and Evaluation Process (SREP) has been revised to be more targeted and risk-focused in a new risk environment.

The revised SREP puts greater emphasis on impact and effectiveness, aiming for safe and sound banks.

The European Banking Supervision has a robust implementation and oversight process in place to ensure the stability of European banks. The Supervisory Review and Evaluation Process (SREP) is an annual assessment of banks' risks, undertaken by supervisors from the ECB and Joint Supervisory Teams.

This process is based on four key areas: Business Model, Internal Governance, Risks to Capital, and Risks to Liquidity. Supervisors examine the bank's strategy, organizational structure, and management, as well as its credit, market, interest rate, and operational risks.

Each year, the European Central Bank conducts at least one stress test on all supervised banks. This test evaluates the banks' capacity to cope with potential financial and economic shocks. The results of the SREP cycle are used to write a report on the vulnerability of European banks, with a score ranging from 1 (low risk) to 4 (high risks).

Supervisors also list concrete measures for banks to take, which can be quantitative or qualitative. These measures must be fulfilled by the following year. If a bank fails to comply, the ECB can charge a fine up to double the profits or losses caused by the breach, or up to 10% of the bank's annual turnover.

Here's a breakdown of the SREP cycle:

The ECB can also request national authorities to open proceedings against non-compliant banks. In extreme cases, the Single Resolution Mechanism may be triggered, leading to the bank's resolution.