Single Supervisory Mechanism for Cross Border Banking

The Single Supervisory Mechanism (SSM) is a crucial aspect of banking supervision in the European Union. It was established in 2014 to ensure uniform supervision of banks across the EU.

The SSM is a centralized system that oversees banks in participating countries, ensuring they meet the same high standards. This is a significant departure from the previous system, where each country was responsible for its own banking supervision.

The SSM is led by the European Central Bank (ECB), which has the authority to supervise banks in participating countries. The ECB works closely with national supervisors to ensure a consistent and effective approach to banking supervision.

The single supervisory mechanism has a clear organization and structure, which is outlined in the SSM Regulation.

This regulation was made by the Council of the European Union on October 15, 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.

The regulation is based on Article 127(6) of the TFEU and was published in the Official Journal of the European Union on October 29, 2013.

Here's a quick rundown of the regulation's key dates:

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

The ECB directly supervises 117 significant banks of participating countries, which hold almost 82% of banking assets in the euro area. These banks meet certain criteria, such as having assets exceeding €30 billion or being among the three most significant banks in their country.

The ECB is assisted by the Supervisory Board, which drafts supervisory decisions and submits them to the Governing Council. The Supervisory Board is composed of national participating supervisors, a chair, vice-chair, and four ECB representatives.

Here are the key roles and responsibilities of the ECB in supervision and oversight:

The ECB Supervision plays a vital role in maintaining financial stability in the EU.

The ECB has the leadership in European banking supervision and is responsible for the effective and consistent functioning of the Single Supervisory Mechanism (SSM).

The ECB has the authority to conduct supervisory reviews, on-site inspections, and investigations, as well as grant or withdraw banking licences.

The ECB's Supervisory Board is composed of all national participating supervisors, a chair, vice-chair, and four ECB representatives, which meet every three weeks to draft supervisory decisions.

A division of labour has been established between the ECB and national supervisors, with banks deemed significant being supervised directly by the ECB, while smaller banks are monitored directly by their national authorities.

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

A total of 115 banks are currently being supervised by the ECB, with the remaining banks supervised by their national supervisors.

Deposit insurance schemes are in place to protect depositors in the event of a bank failure. The European Union has a system of national deposit guarantee schemes (DGS) regulated by Directive 2014/49/EU.

All deposits up to €100 000 are protected through these national DGS across the entire EU. This means that depositors in any EU country are covered up to this amount.

The European Commission proposed a European deposit insurance scheme (EDIS) for bank deposits in the euro area in November 2015. EDIS is the third pillar of the banking union.

This proposal was adopted as part of a broader package of measures to deepen the economic and monetary union, and complete the banking union.

Forbearance is a critical aspect of supervision and oversight, and it's essential to understand how it works in practice. In 2017, the ECB declared Banca Monte dei Paschi di Siena to be solvent based on stress tests performed by the EBA in 2016.

This decision allowed the bank to benefit from a precautionary recapitalisation by the Italian government, but many member states, such as Germany, criticised the ECB's methodology for being vague and non-transparent.

Joint Teams play a crucial role in the single supervisory mechanism, ensuring a smooth coordination between national and supranational levels. They are responsible for the coordination, control, and evaluation of supervisory missions.

Each significant banking institution has a Joint Supervisory Team (JST) composed of members from the ECB's staff, national competent supervisors, and experts in the banking field. These teams act as supporting bodies.

There are JSTs for each of the 115 banks currently being supervised by the ECB, as well as for banks supervised by national authorities. The ECB can take over the direct supervision of any bank, but smaller banks usually continue to be monitored by their national authorities.

The single supervisory mechanism (SSM) has brought significant changes to banking supervision in Europe. The coexistence of micro- and macro-prudential regimes can lead to conflicting policy interventions, especially in bank-based economies with highly concentrated banking sectors.

The SSM has transferred a substantial part of the Bank's responsibilities to the ECB, notably in regard to banks considered significant. This is a critical issue today in the euro area, where policymakers face a short-run trade-off between the resilience of the financial sector and the speed of the recovery.

Supervisors need to agree on a ranking between their policy objectives, internalise the interactions between micro and macroprudential tools, and consider the general equilibrium effects of their interventions on the economy of the area.

Non-Performing Loans are a significant issue for banks, and the European Banking Supervision has been actively involved in addressing this problem. A bank loan is considered non-performing when the borrower fails to make payments for 90 days or more.

The ECB guidance recommends that banks use a multidimensional framework to evaluate non-performing loans, which will be integrated into the comprehensive assessment by the Supervisory Authority. This framework is designed to optimize the disposal of non-performing loans.

A bank loan is considered non-performing when the borrower fails to make payments for 90 days or more, and the bank must protect itself by increasing its equity reserve. This reserve fund is designed to cover losses from future non-performing loans.

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.

The European Banking Union faces significant challenges, particularly in bank-based economies with highly concentrated banking sectors. The coexistence of micro- and macroprudential regimes can lead to conflicting policy interventions.

Supervisors need to agree on a ranking between their policy objectives, which can be a complex task. They must also internalize the interactions between micro and macroprudential tools.

The coexistence of micro- and macroprudential regimes can give place to conflicting policy interventions, which may be further heightened in the contractionary phase of the cycle. This is a critical issue today in the euro area.

The ECB carries out specific tasks in the areas of banking supervision, banknotes, statistics, macroprudential policy, and monetary policy. Its main objective is to maintain price stability as a key component for increasing economic welfare and the growth potential of an economy.

The main decision-making body of the ECB is the Governing Council, which consists of the six members of the Executive Board plus the governors of the central banks of the 19 Euro area countries.

The banking union benefits businesses, investors, and savers in the EU by strengthening the competitiveness of banks and reinforcing the stability of the banking sector as a whole.

A European reinsurance scheme could balance out the varying capacities of the national deposit guarantee schemes. However, risks in national banking sectors must be reduced to ensure that a common deposit insurance scheme indeed serves to strengthen the banking union.

Roughly 120 banks and banking groups have been classified as significant and are under the direct supervision of the ECB.