On 15 October 2013, Europe's Finance Ministers agreed the two Regulations which will put in place a Single Supervisory Mechanism (SSM) for banks in the Eurozone and EU member states which choose to opt-in to the SSM.

The ECOFIN vote is the last step in the EU legislative process for the SSM. The European Parliament has already voted in favour of the Regulations and their text can no longer be changed. Publication in the Official Journal (OJ) of the European Union, the legal pre-condition for entry into force, will shortly follow. Following OJ publication, the European Central Bank (ECB) – the body entrusted with new prudential supervisory responsibilities, including the direct supervision of around 130 of Europe's most 'significant' banks – can officially begin preparations for SSM.

However, the overall legislative framework for the Banking Union project is far from complete – difficult negotiations remain underway on the Single Resolution Mechanism and EU Recovery and Resolution Directive, while progress on the Deposit Guarantees Schemes Directive seems to have stalled.

Backstage preparations

In reality, the ECB has already started preparatory work across five technical workstreams. These cover i) initial mapping of the Eurozone banking system; ii) legal issues; iii) development of a supervisory model; iv) coordination of the comprehensive assessment of banks; and v) preparation of a future supervisory reporting template.

While progress on all workstreams is being made, one of the ECB's first priorities will be workstream iv which will include a risk assessment, a balance sheet assessment, including an Asset Quality Review (AQR) and a stress test, which the European Banking Authority (EBA) will perform in close cooperation with the ECB.

The ECB needs to put in place the basic structure of the SSM organisation and recruit its Supervisory Board before it can begin the AQR. This step requires that the SSM Regulation has entered into force – hence the significance of today's vote.

How will the SSM work?

Recent speeches by members of the Executive Board of the ECB have provided useful insights into the organisation and structure of the SSM. In particular, we now know that the SSM will be comprised of four Directorates General (DGs) and a Secretariat Division:

  • DGs Micro-Prudential Supervision I and II will conduct the direct and day-to-day supervision of significant banks. The division of responsibility for supervision between these two departments will follow a risk-based approach, allowing them to specialise by risk exposure, complexity and business model of the banks. This will likely result in a small number of the largest banks being supervised by DG I and a much larger number being supervised by DG II;
  • DG Micro-Prudential Supervision III will be in charge of the conduct of indirect supervision of 'less significant' banking groups. Direct supervision of these banks will still be carried out by the relevant national competent authorities (NCAs) on a day-to-day basis, but with regular reporting to the ECB;
  • DG Micro-Prudential Supervision IV will perform horizontal supervision and provide specialised expertise, such as supervisory quality assurance, methodology and standards development, enforcement and sanctions, crisis management, capital market risk analysis and model validation.

Putting the SSM into practice: challenges ahead

Deloitte's EMEA Centre for Regulatory Strategy recently produced a paper outlining the background to the SSM project, the next steps and deadlines for the ECB and the challenges we see in making it work, both for the ECB and for firms. These are:

  • ECB Challenge #1: Supervisory approach -  There are multiple elements the ECB needs to address when it sets its supervisory approach. Clear communication and access to the right experience mix is crucial for implementation. Achieving the right culture should happen in parallel to process and approach changes. The industry needs to be engaged;
  • ECB Challenge #2: Data and analytics -  Careful and intelligent analysis of the data that banks report will be core to SSM supervision. A key issue in any framework is how to balance the supervisory thirst for data against the burden placed on firms and the practicalities of managing and analysing data;
  • ECB Challenge #3: Talent -  The SSM is looking to employ between 800 and 1,000 new staff members. Initial recruitment will be a challenge. The ECB will also need to train all of its direct and indirect staff, in NCAs, in the technical aspects of supervision, and also establish a common culture;
  • Challenges for banks: Managing the unknown -  Banks need to start preparing for AQR. Significant and less significant banks will be affected in different ways. How will firms manage the new regulatory relationship? In the absence of a stable timeframe, can firms undertake SSM readiness 'health checks'?

Find our full paper here. 

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