SSM Proposals Being Watered Down?

Introduction

On 8 October 2012, the EU Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report proposing amendments to the European Commission’s draft regulation establishing a single supervisory mechanism (SSM).

The most significant amendment proposed by the EU Parliament would restrict the number of banks coming under direct ECB supervision.  Whilst subject to safeguards (and admittedly still in draft form) these proposals nonetheless have the potential to undermine the effectiveness of the SSM as a mechanism for ensuring a coordinated cross-border response to bank resolution within the EU.  As such, it will be important to monitor the way in which these proposals develop.  More detail on the contents of the draft report is provided below.

Scope of the SSM Regulation

As drafted by the EU Commission, the ECB would have been given supervisory responsibility for “all banks of participating Member States”.  In contrast, the EU Parliament amendment proposes that the ECB’s powers be limited to exercising “specific and clearly defined supervisory tasks” in relation to:

• systemically important European banks (measured by reference to size of exposures, systemic risk for the relevant domestic economy and scale of cross-border activity); and
• banks which have received or requested public financial assistance.

Under the EU Parliament’s proposed amendments, national competent authorities would continue to supervise all banks falling outside the scope of direct ECB supervision.  However, the ECB would establish a supervisory framework under which national supervision would take place and would be responsible for monitoring national authorities’ compliance with this framework.  The framework would be supported by a requirement on national authorities to report to the ECB on a quarterly basis, and provide notification “without delay” where:

• serious concerns exist about the safety and/or soundness of a credit institution falling outside the scope of direct ECB supervision;
• the stability of the financial system is or is likely to be endangered by a credit institution falling outside direct ECB supervision; or
• a credit institution for which they are competent ceases to fall outside the scope of direct ECB supervision.

The ECB would commence supervision from 1 July 2013 but may, by way of notification, exercise its powers before this date in relation to any credit institution which has received or requested public financial assistance.  In addition, the ECB would also retain the right to exercise supervisory power of any Member State credit institution if:

• national authorities failed to perform their obligations under the SSM regulation;
• there was evidence that a credit institution posed, was likely to pose, or would exacerbate  a threat to the single market or financial stability; or
• a credit institution falls under the scope of direct ECB supervision.