In order to consolidate the economic, financial and fiscal process of the European Union, in September 2012, the European Commission presented some legislative proposals to enhance the robustness of the euro area banking system. The Single Supervision Mechanism (SSM) was established by the EU regulation n.1024/2013 and promotes the single rulebook approach to the prudential supervision of credit institutions (see also Banking Union project). As a result, in April 16 2014, the EU Regulation 468/2014 and the Regulation 469/2014 of the European Central Bank (ECB) completed the framework for cooperation between the ECB and the national competent authorities (see also Banking Supervision: ECB guide). The SSMl officially entered into operation in November 2014.
Why a Single Supervision Mechanism?
After the U.S. subprime mortgage crisis in 2007, a radical revision of the bank control systems became manifestly visible in the EU regulatory framework. When the financial crisis spread in 2008, Europe had 27 different regulatory systems for banks in place, largely based on national rules and national rescue measures, although some limited European minimum rules and coordination mechanisms already existed. According to the European legislator, the financial crisis has revealed weaknesses in the European banking supervision and the vulnerability of a regulatory framework that has not been able to respond in uniform way. To remedy these shortcomings, after the economic crisis, the European Commission has tabled around 30 proposals to create, piece-by-piece, a more effective financial sector in order to avoid new recessions in the euro area and to break the connection between financial crises and national public debts. In the idea of the European legislator, the SSM, responsible for the prudential supervision of all credit institutions, is the one of the pillars of this new project and includes the ECB and the national competent authorities (NCAs) of the participating Member States.
Overview: Separation of Powers Between the ECB and National Authorities (NCAs)
The SSM is based on the competence of the ECB in the macroeconomic and financial area and on the knowledge and skills of the NCAs on the supervision of banks in their jurisdictions. To ensure efficient supervision, the respective supervisory roles and responsibilities of the ECB and the NCAs are allocated on the basis of the significance of the supervised entities. The SSM framework regulation contain several criteria according to which credit institutions are classified as either significant or less significant:
- The total value of its assets exceeds € 30 billion or, unless the total value of its assets is below €5 billion, exceeds 20% of national GDP;
- It is one of the three most significant credit institutions established in a Member State;
- It is a recipient of direct assistance from the European Stability Mechanism (ESM);
- The total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%.
The ECB directly supervises all institutions that are classified as significant, around 120 groups representing approximately 1,200 supervised entities, with the assistance of the NCAs while the NCAs continue to conduct the direct supervision of less significant institutions, around 3,700 entities, subject to the oversight of the ECB. The ECB can also take on the direct supervision of less significant institutions if this is necessary. But the creation of SSM requires similar key processes for all credit institutions, both "significant" and "not significant".
The ECB has established four dedicated Directorates General (DGs) to perform the supervisory tasks conferred on the ECB in cooperation with NCAs (as shown in figure 1):
-DGs Micro-Prudential Supervision I and II are responsible for the direct day-to-day supervision of significant institutions;
-DG Micro-Prudential Supervision III is responsible for the oversight of the supervision of less significant institutions performed by NCAs;
-DG Micro-Prudential Supervision IV performshorizontal and specialised tasks in respect of allcredit institutions under the SSM’s supervision and provides specialised expertise on specific aspects of supervision, for example internal models and on-site inspections;
-Additionally, a dedicated Secretariat supports the activities of the Supervisory Board by assisting in meeting preparations and related legal issues.
Fig. 1: SSM Directorates General (DGs)
Decision Making and Structure
The SSM will be composed of the ECB and the national authorities (NCAs) but, according to Art. 6 of Regulation n.1024 / 2013, only the ECB will be responsible for the operation "effective and consistent" of SSM. The execution of supervisory tasks assigned to the ECB will be carried out by the Supervisory Board that will be composed by a chairman and a vice-president, four representatives of the ECB and representative of the national competent authority of each participating Member State. In the organizational structure of the SSM, in addition to the Supervisory Board and the General Districts, there are a Mediation Panel and an Administrative Board of Review.
Decision-making is based on the “non-objection” procedure (as shown in figure 2). The Supervisory Board proposes complete draft decisions to the ECB’s Governing Council. If the Governing Council does not object within a defined period of time, the decision is deemed adopted. In addition, in order to ensure a separation between monetary policy and supervisory tasks, the ECB will create a group of experts in mediation (Mediation Panel) to resolve objections by the Governing Council on a decision of the Supervisory Board. Finally, the Administrative Board of Review carrying out, on request, independent internal administrative reviews of the ECB’s supervisory decisions, ensuring that such decisions are compliant with the rules and procedures.
Fig. 2: Non-objection procedure
About to the measures to be taken, the supervisory authority may impose sanctions. The ECB may impose, at credit institutions, administrative sanctions even twice the amount of the profits gained or losses avoided through the violations.
Finally, the SSM cooperates closely with the other European institutions such as the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), the Single Resolution Mechanism (SRM) and the European Stability Mechanism (ESM).
BANCA CENTRALE EUROPEA (2014) Progress in the operational implementation of the Single Supervisory Mechanism regulation, SSM Quarterly report, 3 maggio (http://www.ecb.europa.eu/pub/pdf/other/ssmqr20142en.pdf)
BANCA CENTRALE EUROPEA (2014) Regolamento UE n.468/2014 (http://www.ecb.europa.eu/ecb/legal/pdf/celex_32014r0468_en_txt.pdf)
BANKING SUPERVISION, website https://www.bankingsupervision.europa.eu/home/html/index.en.html
BCE, “Guida alla Vigilanza Bancaria”, (https://www.ecb.europa.eu/pub/pdf/other/ssmguidebankingsupervision201409it.pdf?fdd36c36a7fd62b4d36e1c8bf1d9bb85)
BCE, Website, https://www.ecb.europa.eu/ssm/html/index.it.html
CONSIGLIO EUROPEO, (2013), Regolamento n.1024/2013 (http://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX:32013R1024)
MANCINI M. (2013) Dalla vigilanza nazionale armonizzata alla Banking Union, Quaderni di ricerca giuridica Banca d’Italia, N. 73, Settembre (http://www.bancaditalia.it/pubblicazioni/quarigi/qeg_73/qrg_73)
Editor: Giovanni AVERSA