The State of the Union

On Wednesday 12 September, the European Commission proposed a Regulation for a single supervisory mechanism in the Euro area, conferring specific prudential supervision tasks on the European Central Bank (ECB). The proposal is accompanied by the Commission’s Roadmap towards a Banking Union and a proposal for changes to the Regulation setting up the European Banking Authority (EBA).

Overview of the proposed changes

The proposals for a single supervisory mechanism (SSM) the Commission put forward today are a key element of the proposed banking union ("the Union"). The core of the SSM will be the transfer of all responsibilities and powers for the authorisation and prudential supervision of credit institutions (i.e. banks) in the Euro area to the ECB.

The ECB’s objectives will be to promote the safety and soundness of credit institutions and the stability of the financial system. National competent authorities (NCAs), i.e. banking supervisors in the Euro area, will continue to have a significant role in carrying out a wide variety of operational prudential supervisory activities, and will remain responsible for conduct of business supervision. However, the ECB will be firmly in charge and will ultimately be able to instruct NCAs. Precisely how activities and tasks will be divided between the ECB and NCAs will have to be determined, although the documents published today contain some useful examples of the types of activity that may fall to NCAs. It will remain open to other non-Euro area Member States to "opt in" to the SSM, provided they undertake to comply with ECB acts and instructions.

The responsibilities of the EBA will remain essentially unchanged. It will be responsible for the single rulebook which will apply across the EU as a whole. In addition, it has now also been tasked by the Commission to prepare a single supervisory handbook – a "how to do it" manual for supervision across the EU. The ECB will co-ordinate the input of the SSM countries into the EBA which we assume means that the SSM will speak and vote as one. The EBA's governance arrangements will be changed to reflect this new reality and provide safeguards for both the Union and non-participating Member States.
There are no new proposals on Deposit Guarantee Schemes or resolution in today's announcement. However, in its roadmap document the Commission has signalled its intention to bring forward a proposal for a single resolution mechanism for the Union which would resolve credit institutions and co-ordinate the application of resolution tools within the Union.

Initial assessment

As expected these are far-reaching proposals which will fundamentally change the balance of responsibility for banking supervision within the Euro area. Inevitably the initial focus will be on the political debate and negotiation that will follow – very quickly if the Commission's ambition of having the proposed Regulation agreed by the end of the year is to be realised. In this note we focus instead on providing a summary of the proposals and on the main practical issues and challenges, of which we have identified six:

1. Giving the ECB responsibility for prudential supervision of all credit institutions in the Union is a necessary step in creating the SSM. But it is not in itself sufficient if the SSM is to correct the “supervisory failings” that have eroded confidence in the EU banking system. A single supervisor requires a common and consistent supervisory culture, approach and risk assessment framework to be in place across the SSM, encompassing both the ECB and the NCAs. This process of convergence of supervisory practice to produce real consistency will take years rather than months. The full benefits that the SSM is intended to deliver to policymakers, taxpayers and the industry will emerge gradually as this process completes.
2. The division of tasks and activities between the ECB and the NCAs needs to be developed. This is hardly surprising at this early stage, but the helpful practical examples given in the papers need to be clarified as soon as possible and it would be a very positive first step if the ECB and NCAs engaged the industry in this debate. To add to an already complex picture, NCAs will remain responsible for conduct of business and anti-money laundering supervision. As we know, there is no bright line between prudential and conduct of business in certain areas, such as governance, and there will almost certainly be some overlap. Agreeing clear and practical co-ordination arrangements will therefore be essential.
3. The EBA will have a vital role in producing the single rulebook for the EU as a whole and for ensuring consistency of its interpretation and implementation inside and outside the Union. Changes will be made to its governance and voting arrangements to assist the EBA in this regard. Notwithstanding these safeguards, the ECB/SSM will come to exercise a very powerful, possibly dominant, role in EBA policy-making.
4. The Commission proposes giving the ECB the power to impose significant financial penalties on credit institutions for rule breaches. It is silent on procedural safeguards, including rights of representation and appeal. These will need to be put in place in due course.
5. The proposals have little new to say on resolution, although the Commission has indicated that it will bring forward proposals for a single resolution mechanism to co-ordinate resolution activities.  The role and nature of this mechanism will be critical to ensuring effective crisis management and resolution proceedings. The details, when they emerge, need to answer decisively the question of which body is ultimately in charge in a crisis.
6. The ECB will fund its supervisory activities by a levy on credit institutions. It is possible that some of these additional costs may be offset by reduced fees levied by NCAs. However, it seems unlikely that a new layer of supervision can be added without some net increase in costs to the industry. More positively, the ECB will be required to publish a separate budget and accounts for its supervisory function, which will introduce useful transparency.

Today’s proposals provide all credit institutions in the EU with ample food for thought. The ambitious implementation timetable, the expected raft of documents on how the new regime will work in practice and the upcoming proposal on the ‘missing link’ (i.e. single resolution mechanism) will further add to firms’ ‘to-do’ list. It is thus essential that all those affected start assessing the potential impact of these proposals on their operations and their supervisory relationships as soon as possible.

Read our briefing note including our summary of the proposed changes >

Contacts

Göran Engquist

National Financial Services Industry Leader, Deloitte Sweden
gengquist@deloitte.com

Jonas Vedung

Consulting Financial Services Industry Leader, Deloitte Sweden
jvedung@deloitte.com

David Strachan

Co-Head, EMEA Centre for Regulatory Strategy
dastrachan@deloitte.co.uk

Clifford Smout

Co-Head, EMEA Centre for Regulatory Strategy
csmout@deloitte.co.uk