single supervisory mechanism (SSM)

ECB Publishes Letter on Development of SSM Guides on ICAAP and ILAAP for Significant Institutions

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On February 20, 2017, the European Central Bank (“ECB“) published a letter from Ms. Daniele Nouy, Chair of the Supervisory Board of the ECB, to the management of significant institutions under the Single Supervisory Mechanism (“SSM“) on the development of comprehensive SSM guides on the Internal Capital Adequacy Assessment Process (“ICAAP“) and the Internal Liquidity Adequacy Assessment Process (“ILAAP“).

In January 2016, the ECB published a letter setting out its expectations as to the ICAAP and ILAAP information that institutions are expected to submit. Ms. Nouy explains that it has since become clear that there are still several areas in which improvements are needed across banks. To help move banks towards an adequate level of information provision, the ECB has started a multi-year project to develop comprehensive SSM guides on the ICAAP and ILAAP. The first step in this regard is to receive feedback from recipients of the letter on the two draft guides that are attached to the letter. The draft guides set out more detailed ICAAP and ILAAP principles, which provide a road map that the ECB intends to follow.

The ECB seeks comments on the guides by May 31, 2017. It will then review the guides in the light of the comments received and will publish the guides for consultation at the start of 2018.

In the meantime, institutions are expected to comply with the 2016 expectations and to submit corresponding documentation in accordance with the EBA guidelines on ICAAP and ILAAP information collected for the purposes of the supervisory review and evaluation process by April 30, 2017.

The full text of the letter can be found here.

European Parliament Adopts Resolution on Finalization of Basel III

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On November 23, 2016, the European Parliament published a provisional version of the text of the resolution it has adopted on finalization of Basel III.

Among other things, in the resolution, the Parliament:

  • Underlines the importance of sound global standards and principles for the prudential regulation of banks and welcomes the post-crisis work of the Basel Committee on Banking Supervision (“BCBS“) in this area. The Parliament notes the BCBS’ ongoing work to finalize the Basel III framework and underlines the need for greater transparency and accountability to enhance the legitimacy and ownership of the BCBS’ deliberations.
  • Stresses that the current revision should respect the principle of not significantly increasing overall capital requirements, while at the same time strengthening the overall financial position of EU banks. The Parliament also underlines the equally important principle to be respected of promoting the level playing field at the global level, by mitigating rather than exacerbating the differences between jurisdictions and banking models, and by not unduly penalizing the EU banking model.
  • Is concerned that early analysis of recent BCBS drafts indicates that the reform package at its current stage might not comply with the principles mentioned above. As a result, the Parliament calls on the BCBS to revise its proposals accordingly, and calls on the European Central Bank (“ECB“) and the Single Supervisory Mechanism (SSM) to ensure respect of the principles in finalizing and monitoring the new standard. The Parliament underlines that this approach would be instrumental in ensuring consistent implementation of the new standard by the Parliament as co-legislator.
  • Calls for dialogue and an exchange of best practices among regulators concerning the application of the principle of proportionality to be established at EU and international levels.
  • Calls on the European Commission to prioritize work on a “small banking box” for the least risky banking models. The Parliament also calls on the Commission to extend this work to an assessment of the feasibility of a future regulatory framework consisting of less complex and more appropriate and proportional prudential rules specifically adapted to different types of banking models.
  • Stresses the importance of the role of the Commission, the ECB and the EBA in engaging in the BCBS’ work, and in providing transparent and comprehensive updates on developments in the BCBS’ discussions. The Parliament calls for this role to be given stronger visibility during meetings of the European Economic and Financial Affairs Council (ECOFIN), and for enhanced accountability to its Economic and Monetary Affairs Committee (ECON).

The Parliament has instructed its President to forward the resolution to the Commission.

European Court of Auditors Special Report on Single Supervisory Mechanism

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On November 18, 2016, the European Court of Auditors published a report on the Single Supervisory Mechanism (“SSM“) (No 29/2016). The SSM was set up by the European Central Bank (“ECB“) to ensure the consistent application of prudential rules across the euro-zone countries. The report examines the setup and workings of the SSM and concludes that the complexity of the new system is a challenge, especially because it relies too heavily on the resources of national supervisors. This means that despite the ECB’s overall responsibility, the ECB has insufficient control over some important aspects of banking supervision.

The full report can be found here, but, in brief, specific concerns identified in the report relate to:

  • Under resourcing of internal audit for its work on the SSM, which is given less attention than other audit tasks.
  • Efforts to ensure transparency and accountability for the SSM towards the European Parliament and the general public are potentially weakened by the lack of a proper process for assessing and then reporting on supervisory effectiveness.
  • The independence of the ECB’s work relating to monetary policy and supervision functions.
  • Insufficient staffing levels and overdependence on staff appointed by national authorities leading to the ECB having insufficient control over the composition and skills of supervision and inspection teams.
  • Insufficient allocation of resources to joint off-site supervisory teams.
  • Inspection teams for on-site supervision include insufficient ECB staff. There are also concerns over missing guidance on prioritization for inspection requests, IT shortcomings and the qualifications of national competent authority on-site inspectors.

The report sets out a number of recommendations on how the SSM could be improved in relation to issues outlined above and explains that the ECB was not willing to share a number of documents needed for the audit to be completed. As a result, the report only reflects a partial assessment of whether the ECB is managing the SSM efficiently in the areas of governance, off-site supervision and on‑site inspections.

Legislative Proposals for an EU Banking Union

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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:

  • a 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.