European Central Bank

ECB Publishes Its SSM Supervisory Priorities for 2016

On January 6, the European Central Bank (“ECB”) published a paper setting out its supervisory priorities in relation to the banks it supervises under the Single Supervisory Mechanism (“SSM”).

The ECB’s supervisory priorities under the SSM are:

  • business model and profitability risk;
  • credit risk;
  • capital adequacy;
  • risk governance and data quality; and
  • liquidity.

The priorities are not an exhaustive list but are meant to provide an essential tool to coordinate supervisory actions across banks in an appropriately harmonized, proportionate and efficient way, thereby contributing to a level playing field and a stronger supervisory impact. Paper.

The ECB Published a Recommendation on Dividend Distribution Policies

On January 28, the European Central Bank (“ECB”) published a recommendation to establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements.

The ECB has published recommendations with regard to Category 1, Category 2 and Category 3 credit institutions. Category 1 credit institutions should only distribute their net profits in dividends in a conservative manner to enable them to continue to fulfil all the Pillar 1 requirements. Category 2 credit institutions should not only distribute their net profits in dividends in a conservative manner but should also only pay out dividends to the extent which is consistent, at a minimum, with a linear path towards the fully loaded ratios required by the Common Equity Tier 1 capital ratio. Category 3 credit institutions which under the 2014 comprehensive assessment have a capital shortfall should, in principle, not distribute any dividend.  Recommendation.

European Parliament and ECB Inter-Institutional Agreement on SSM in Force

On November 7, the European Central Bank (ECB) updated its webpage on building a banking union to reflect the coming into force of the inter-institutional agreement (IIA).  The ECB has agreed with the European Parliament on cooperation on procedures related to the single supervisory mechanism (SSM).  The ECB also published a copy of the IIA, which will also be published in the Official Journal of the EU.

The UK Prime Minister has stated that the UK will not participate in the SSM.  ECB  webpage.  IIA.

SSM Legislation Adopted by European Parliament at First Reading

In a plenary session held on September 12, the European Parliament adopted legislation establishing the single supervisory mechanism (SSM), as announced in a press release.

The new EU bank supervision system will bring approximately 150 of the EU’s largest banks under the European Central Bank’s direct oversight in a year’s time.  The system will be compulsory for Eurozone members and will be open to other EU countries.  Press Release.

ECB Publishes May 2013 Financial Stability Review

On May 29, the European Central Bank (ECB) published its financial stability review with an accompanying press release. The ECB believes the financial stability conditions in the Euro area remain fragile, and that there is still vulnerability in the interaction between sovereigns, banks and the macroeconomy.  The ECB highlighted the following four key risks to the Euro area in the review:  (i) Further decline in bank profitability.  This is linked to credit losses and a weak macroeconomic environment.  (ii) Renewed tensions in sovereign debt markets due to low growth and slow reform implementation.  Continued momentum is needed towards completing a genuine Economic and Monetary Union (EMU), including a full banking union.  (iii) Bank funding challenges in stressed countries.  Continued steps at both national and EU levels are needed to tackle the remaining fragmentation in bank funding.  (iv) Reassessment of risk premia in global markets. Stable and predictable policies are key to the prevention of such a risk reversal.

The ECB stated that it published the review to promote awareness in the financial industry, and among the public, of issues that are relevant for safeguarding the stability of the Euro area financial system.   Financial Stability ReviewPress Release.

European Agreement on Creation of a Single Supervisory Mechanism

An agreement has been reached on the way the European Central Bank (ECB) will be responsible for the supervision of banks within the framework of the single supervisory mechanism.

The agreement, made between the Council of the EU, the European Commission and the European Parliament (EP), was announced in a press release.  Billed as being the first step towards a European banking union, the press release summarizes areas where the EP pushed through changes to improve democratic accountability, including a stronger role for national parliaments, a strict division of the ECB between monetary policy and supervision and stronger accountability of the supervisor by the EP.

The next step in the process towards the single supervisory mechanism will be the formal ratification of the agreement by the EP.

Legislative Proposals for an EU Banking Union

On September 12, the European Commission published its legislative proposals to establish a single supervisory mechanism (SSM) for eurozone banks. An accompanying communication sets out the ‘roadmap’ for achieving the banking union.

There are two legislative proposals, both of which the Commission has called on the Council of the EU and the European Parliament to adopt by the end of the year:

  • regulation to create the SSM, which tasks the European Central Bank with prudential regulation policy and provides for non-euro countries to join voluntarily; and
  • a regulation to adapt the existing European Banking Authority Regulation (1093/2010) to ensure the preservation of the integrity of the single market and balanced decision making by the European Banking Authority.

Central Banks Increase Liquidity Support to Global Financial System

On November 30, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Fed and the Swiss National Bank announced coordinated actions to increase their capacity to provide liquidity support to the global financial system. Pricing on existing temporary U.S. dollar liquidity swap arrangements will be lowered by 50 basis points to a rate of the U.S. dollar overnight index swap rate plus 50 basis points, and the central banks will establish temporary bilateral liquidity swap arrangements to offer liquidity in non-domestic currencies other than the U.S. dollar. Fed Release.