UK: Shaping Up For The SSM - How Banks Can Prepare For The New Supervisory Regime

Last Updated: 16 May 2014
Article by Simon Brennan and Dea Markova

Most Read Contributor in UK, August 2017

In six months' time, the Single Supervisory Mechanism (SSM) will take effect, with the European Central Bank (ECB) taking charge of prudential supervision in the Eurozone. The project to establish the SSM has been ambitious, especially against a tight time schedule, but the ECB confirmed in its latest SSM Quarterly Report on the operational implementation of the SSM that progress was on track and the SSM would start on schedule, on 4 November. Banks now need to turn in earnest to preparing for the new supervisory regime, under which they will no longer be able to deal only with a local supervisor.

For banks designated as 'significant', the Asset Quality Review (AQR) and the European Banking Authority's (EBA) stress test are naturally currently in focus. As we note however in our recent publication on preparing for the SSM, SSM | Banking on the Banking Union, attention needs to turn to the future. The scope of the upcoming changes and the speed with which they are being implemented means banks cannot safely wait for the end of the comprehensive assessment exercise before they take action.

On the supervisory regime, there are two questions in particular for banks to consider:

  • How will supervisory relationships change?
  • How will changes to the supervisory approach affect banks?

The Quarterly Report and the recently finalised SSM Framework Regulation provide some insights to help with this. Banks are also gaining direct experience operating with the proto SSM supervisory teams through the comprehensive assessment exercise. That said, there is still much about the new regime to be decided. The priority now for banks is to get off to a good start.

The new supervisory structure

According to the Quarterly Report, the SSM governance structure is now in place. Appointments to the SSM's decision making bodies, the Supervisory Board and its Steering Committee, have been finalised; the structure of its four directorates has been fully established and Heads of Divisions are to take up their roles in May. Significant progress has also been made on recruiting mid-level supervisors and technical experts, although the ECB acknowledged that the process was proving operationally challenging. It aims for a "critical mass" of its final target of 700 new employees to be in place for the start of the SSM.

The framework for how the ECB will cooperate with national authorities is set out in the SSM Framework Regulation. The final version did not deviate significantly from the draft published earlier this year. Some points have been clarified, such as the sharing of information between the ECB and national authorities. The threshold above which a supervised group may be considered significant on the basis of its cross-border activities has been increased (from 10% to 20% ratio of cross-border assets or liabilities to total assets or liabilities).

How will supervisory relationships and approach change?

It is clear that the role of national supervisory authorities will reduce in prominence, although the shift will be gradual and they will certainly remain important to the process. From November, the main supervisory structure will be Joint Supervisory Teams (JSTs). JST coordinators, a natural starting point for banks to engage with supervisors, are expected to be appointed by the end of June.

Looking beyond the operational arrangements it is essential for banks to understand what the priorities of the new supervisor will be, and how it will work to address them. In speeches, members of the ECB executive have promised to deliver "ambitious and innovative" supervision, safeguarding stability and furthering banking sector integration in the Eurozone by holding all banks to one high standard. The ECB is taking steps to ensure its supervisors capture issues identified in the comprehensive assessment exercise as a starting point for future work plans.

In reality, it will take time for the ECB to form a distinctive approach and in the short term the new supervisor will likely rely on the knowledge and established practices of national authorities. Thus the its approach may not feel very different at first. It may in fact feel more cumbersome as the ECB and national supervisory authorities begin to work together and exchange knowledge. Banks can also start getting ready for the new supervisor by remedying any areas of existing concern, or deficiencies of which they are aware.

The SSM Quarterly Report provides an update on development of the SSM Supervisory Manual, which will cover the methodology, processes and procedures for supervision. The manual will detail, for example, how the new supervisor will conduct the Supervisory Review and Evaluation Process (SREP), and on-site inspections. Details of the supervisory approach will be made public in a guide to supervisory practices, to be published before end-October. The guide will include information on the key tasks in different areas of supervision, and their objectives, frequencies and desired outcomes; and procedures to ensure consistency in approach.

As expected, the new supervisory approach will emphasise the use of data. The ECB noted in its report the SREP will be "largely dependent on the availability and quality of reported supervisory data", to which end "considerable efforts" are being made to improve data coverage and quality. Pilot data exercises have revealed substantial deficiencies in data comparability and quality. A testing phase for supervisory data submission will start this summer and the ECB has developed a Supervisory Reporting Manual to outline the data and reporting framework of the SSM.

How banks can prepare for the new supervisory regime

Banks, particularly those classified as 'significant', will be paying close attention the SSM-related appointments as they consider how to build their new supervisory relationships. They have to take a view on how and when their relationships with local supervisors may change. Banks need to address the shift of resources, supervisory know-how and decision-making power to Frankfurt in a planned and coordinated way, and decide what degree of centralisation of functions such as compliance or risk and regulatory affairs is most suitable for operating under the SSM. The change will also give banks the opportunity to refocus their approach to supervisory engagement more broadly and consider which of their current practices have proved effective and which can be improved. Banks should be able to form a view on what being a good 'supervisee' looks like under the SSM.

Banks should also consider the impact of the SSM on conduct of business supervision, which will remain the responsibility of national supervisory authorities. Experience from the UK, for example, shows that that reallocation of prudential responsibilities can result in a revision of objectives and priorities for conduct of business regulation.

The bigger picture

Beyond changes in supervision, banks also need to consider the effect of Banking Union reforms introducing the new resolution regime and revised deposit guarantee regime. With the Bank Recovery and Resolution Directive (RRD), and in particular the introduction of bail-in, resolution planning becomes clearer, but potentially more onerous and complex for banks. Resolvability assessments for all significant and cross-border Eurozone banks will be conducted by a new authority, the SRM, which will likely result in new demands on banks.

Our recent publication examines these important issues in more detail. For this and other publications on the Banking Union, please visit our dedicated page.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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