European Banking Supervision, formally known as the Single Supervisory Mechanism (SSM), is the policy framework for the prudential supervision of banks in the euro area. It is centered on the European Central Bank (ECB), whose supervisory arm is referred to as ECB Banking Supervision. EU member states outside of the euro area can also participate on a voluntary basis. European Banking Supervision was established by Regulation 1024/2013 of the Council, also known as the SSM Regulation, which also created its central (albeit not ultimate) decision-making body, the ECB Supervisory Board.
Under European Banking Supervision, the ECB directly supervises the larger banks that are designated as Significant Institutions. The other banks, known as Less Significant Institutions, are supervised by national banking supervisors ("national competent authorities") under supervisory oversight by the ECB. As of late 2022, the ECB directly supervised 113 Significant Institutions in the 21 countries within its geographical scope of authority, representing around 85% of the banking system's total assets (excluding financial infrastructures that are designated as LSIs such as Euroclear Bank in Belgium, Banque Centrale de Compensation in France, or Clearstream Banking AG and Clearstream Banking SA in Germany and Luxembourg).
European Banking Supervision represents the initial and so far most complete component of the broader banking union, a project initiated in 2012 to integrate banking sector policy in the euro area. The unfinished piece of the banking union agenda is about crisis management and resolution, for which the so-called Single Resolution Mechanism coexists with national arrangements for deposit insurance and other aspects of the bank crisis management framework. The policy agenda on the completion of the banking union, stalled since June 2022, also includes options for the regulatory treatment of sovereign exposures.
History
Background and genesis The question of supervising the European banking system arose long before the 2008 financial crisis. Shortly after the creation of the monetary union in 1999, a number of observers and policy-makers warned that the new monetary architecture would be incomplete, and therefore fragile, without at least some coordination of supervisory policies among euro members.
The first supervisory measure put in place at the EU level was the creation of the Lamfalussy Process in March 2001. It involved the creation of a number of committees in charge of overseeing regulations in the financial sector. The primary goal of these committees was to accelerate the integration of the EU securities market.
This approach was not binding for the European banking sector and had therefore little influence on the supervision of European banks. This can be explained by the fact that the European treaties did not allow the EU, at the time, to have real decision-making power on these matters. The idea of having to modify the treaties and of engaging in a vast debate on the Member States’ loss of sovereignty cooled down the ambitions of the Lamfalussy process. The financial and economic crisis of 2008 and its consequences in the European Union incentivized European leaders to adopt a supranational mechanism of banking supervision.
The main objective of the new supervisory mechanism was to restore confidence in financial markets. The idea was also to avoid having to bail out banks with public money in case of future economic crises.
To implement this new system of supervision, the President of the European Commission in 2008, José Manuel Barroso, asked a group of experts to look at how the EU could best regulate the European banking market. This group was led by Jacques de Larosière, a French senior officer who held, until 1978, the position of Director General of the Treasury in France. He was also President of the International Monetary Fund from 1978 to 1987, President of the "Banque de France" from 1987 to 1993 and President of the European Bank for Reconstruction and Development from 1993. On a more controversial stance, Jacques de Larosière has also been a close advisor of BNP Paribas.
This group led by de Larosière delivered a report highlighting the major failure of European banking supervision pre-2008. Based on this report, the European institutions have set up in 2011 "The European System of Financial Supervision" (ESFS). Its primary objective was: "to ensure that the rules applicable to the financial sector are adequately implemented, to preserve financial stability and ensure confidence in the financial system as a whole". The ESFS brought together, in an unconventional manner, the European and the national supervisory authorities.
Despite the creation of this new mechanism, the European Commission considered that, having a single currency, the EU needed to go further in the integration of its banking supervision practices. The idea was that the mere collaboration of national and European supervisory authorities was not enough and that the EU needed a single supervisory authority. The European Commission therefore suggested the creation of the Single Supervisory Mechanism.
This proposal was debated at the Eurozone summit that took place in Brussels on 28 and 29 June 2012. Herman Van Rompuy, who was president of the European Council at the time, had worked upstream with the president of the commission, the president of the Central Bank and of the Eurogroup on a preliminary report used as a basis for discussions at the summit. In compliance with the decisions made then, the European Commission published a proposal for a council regulation establishing European banking supervision in September 2012.
The European Central Bank welcomed the proposal."ECB welcomes Commission's proposal for a single supervisory mechanism", ECB press release, 12 September 2012 Chancellor of Germany Angela Merkel questioned "the capacity of the ECB to monitor 6,000 banks". The Vice-President of the European Commission at the time, Olli Rehn, responded to that concern that the majority of European banks would still be monitored by national supervisory bodies, while the ECB "would assume ultimate responsibility for the supervision, in order to prevent banking crises from escalating"."Rehn: Schedule for Single Supervisory Mechanism Feasible", Helsinki Times, 13 September 2012
The European Parliament voted in favour of the legislative proposal on the 12th of September 2013. The Council of the European Union gave its own approval on the 15th of October 2013. The SSM Regulation entered into force on the 4th of November 2014.
The fact that European Banking Supervision is formulated as a regulation and not a directive is important. Indeed, a regulation is legally binding and Member States do not have the choice, unlike for directives, of how to transpose it under national law.
Entry into force
The ECB published its first comprehensive assessment on 26 October 2014. This financial health check covered the 130 most significant credit institutions in the 19 Eurozone states representing assets worth €22 trillion (equal to 82% of total banking assets of the eurozone).
The supervision report included: The results of an Asset Quality Review (AQR) - assessing capital shortfalls (i.e., a failure to meet the minimum capital requirement) of each significant credit institution on 31 December 2013. Assessment of potential capital shortfalls when subject to a stress test based on the baseline scenario - being the latest economic forecast published by the Commission for the eurozone in 2014–16. Assessment of potential capital shortfalls when subject to a stress test based on an adverse scenario - which was developed by the European Systemic Risk Board in cooperation with the National Competent Authorities, the EBA and the ECB.
Based on these three criteria, the review found that a total of 105 out of the 130 assessed banks met all minimum capital requirements on 31 December 2013. A total of 25 banks were found to suffer from capital shortfalls on 31 December 2013, of which 12 managed to cover these capital shortfalls through raising extra capital in 2014. The remaining 13 banks were asked to submit a recapitalization plan for 2015.
SSM participating banks with a CET1 capital shortfall, as of the status of its assets on 31 December 2013 Bank NameStateCET1 ratiostartingpointCET1 ratiopostAQRCET1 ratiobaselinescenarioCET1 ratioadversescenarioCapital shortfallon 31 Dec 2013(€ billion)Net eligiblecapital raisedduring 2014(€ billion)Capital shortfallpost netcapital raised(€ billion)Eurobank¹ Greece 10.6% 7.8% 2.0% -6.4% 4.63 2.86 1.76Banca Monte dei Paschi di Siena Italy 10.2% 7.0% 6.0% -0.1% 4.25 2.14 2.11National Bank of Greece¹ Greece 10.7% 7.5% 5.7% -0.4% 3.43 2.50 0.93Banca Carige Italy 5.2% 3.9% 2.3% -2.4% 1.83 1.02 0.81Cooperative Central Bank Ltd Cyprus -3.7% -3.7% -3.2% -8.0% 1.17 1.50 0.00Banco Comercial Português Portugal 12.2% 10.3% 8.8% 3.0% 1.14 -0.01 1.15Bank of Cyprus Cyprus 10.4% 7.3% 7.7% 1.5% 0.92 1.00 0.00Volksbank Group Austria 11.5% 10.3% 7.2% 2.1% 0.86 0.00 0.86Permanent tsb Ireland 13.1% 12.8% 8.8% 1.0% 0.85 0.00 0.85Veneto Banca Italy 7.3% 5.7% 5.8% 2.7% 0.71 0.74 0.00Banco Popolare Italy 10.1% 7.9% 6.7% 4.7% 0.69 1.76 0.00Banca Popolare di Milano Italy 7.3% 6.9% 6.5% 4.0% 0.68 0.52 0.17Banca Popolare di Vicenza Italy 9.4% 7.6% 7.5% 3.2% 0.68 0.46 0.22Piraeus Bank Greece 13.7% 10.0% 9.0% 4.4% 0.66 1.00 0.00Credito Valtellinese Italy 8.8% 7.5% 6.9% 3.5% 0.38 0.42 0.00Dexia² Belgium 16.4% 15.8% 10.8% 5.0% 0.34 0.00 0.34Banca Popolare di Sondrio Italy 8.2% 7.4% 7.2% 4.2% 0.32 0.34 0.00Hellenic Bank Cyprus 7.6% 5.2% 6.2% -0.5% 0.28 0.10 0.18Münchener Hypothekenbank Germany 6.9% 6.9% 5.8% 2.9% 0.23 0.41 0.00AXA Bank Europe Belgium 15.2% 14.7% 12.7% 3.4% 0.20 0.20 0.00C.R.H. - Caisse de Refinancement de l'Habitat France 5.7% 5.7% 5.7% 5.5% 0.13 0.25 0.00Banca Popolare dell'Emilia Romagna Italy 9.2% 8.4% 8.3% 5.2% 0.13 0.76 0.00Nova Ljubljanska banka3 Slovenia 16.1% 14.6% 12.8% 5.0% 0.03 0.00 0.03Liberbank Spain 8.7% 7.8% 8.5% 5.6% 0.03 0.64 0.00Nova Kreditna Banka Maribor3 Slovenia 19.6% 15.7% 12.8% 4.4% 0.03 0.00 0.03Total - 10.0% 8.4% 7.2% 2.1% 24.62 18.59 9.47
This is the only time where a comprehensive assessment has been done for the 130 banks supervised by the ECB. Since 2014, only a few numbers of banks have been comprehensively assessed by the ECB: 13 in 2015, 4 in 2016 and 7 in 2019. These comprehensive assessments are conducted either when a bank is recognized as significant or when deemed necessary (i.e., in case of exceptional circumstances or when a non-Eurozone country joins the mechanism). Comprehensive assessments require too much resources for them to be conducted annually.