UK: Eurozone Banks Wake Up To A New Supervisor. What’s Next?

Last Updated: 7 November 2014
Article by Simon Brennan and Dea Markova

Most Read Contributor in UK, August 2017

The Single Supervisory Mechanism (SSM) formally opens for business today.  For months, supervisors and banks have been preparing for the transfer of supervisory responsibilities to the European Central Bank (ECB).  Yet the 4 November milestone is just the start of a much longer, possibly testing journey for all involved.

Over time, the SSM will change the terms of engagement between supervisors and banks. It will introduce higher supervisory standards than some banks have been used to in the past; greater standardisation of approach, and a change in perspective (so that different issues might come to the fore of the supervisory relationship).

Related insight: 

Meeting the challenge of the SSM | How banks should get ready for the new regime.

Banks need to seize the initiative, recognise the raised expectations and take the opportunity to make a fresh start in the supervisory sphere. The first 12 months of the SSM will be key for establishing the priorities and approach of the SSM. Through a careful analysis of the SSM supervisory objectives, the experience of banks during the comprehensive assessment, and of other supervisory regimes, banks can cut through uncertainty around what these priorities and approach will be.

Four characteristics stand out as drivers for change in day-to-day supervision. Each of these could affect the supervisory expectations placed on banks substantially, although the effect will be felt more and more rapidly by directly supervised 'significant' banks:

  • The SSM will harmonise how risk-based, forward looking supervision is conducted in the Eurozone.
  • The SSM will integrate qualitative and quantitative analysis, but may have a stronger quantitative approach to supervision than most NCAs currently have, at least initially.
  • Seeking supervisory consistency will be a key driver for how banks are supervised.
  • Peer group analysis will be a key new supervisory tool, in part to deliver consistency between countries.

Under the risk-based approach, supervisory interactions will increasingly move towards focusing on areas of concern. The intensity of supervision will be affected by the efficiency of banks' risk and risk appetite management, and how effective is the link between risk management and strategy when calibrating the intensity of its supervision. While this is not a novel approach, the ECB will have an opportunity to apply it more rigorously and consistently. The ability of banks to coordinate internally, between Eurozone entities as well as between regulatory projects such as their capital, liquidity, and recovery and resolution projects.

The supervisory emphasis on quantitative analysis and data (evident through the comprehensive assessment) will result in heightened expectations of data availability, quality and governance. Data governance, risk data aggregation and automisation of processes such as stress testing and AQR will be a key investment. At the same time, quantitative analysis will highlight disparities between banks quickly. Banks need to ensure that disparities are not driven by poor data quality, and be prepared to explain such disparities where they are driven by bank interpretation and policy or local market idiosyncrasies.

The ECB will have discretion over a number of important decisions which previously sat with NCAs, for example the application of exemptions or waivers. As the ECB looks to improve supervisory consistency, banks will find some of these key decisions reversed or amended.

Peer-group analysis will be a key tool in the delivery of consistent supervision, and it may be the case that some of the peer groups created are less than obvious and could end up resulting in some novel and challenging comparisons. One possible outcome is to encourage a wider spread of 'best' practice across banks.

Making a success of the SSM

The impact of supervision on banks – both in terms of the financial cost and the call on senior management time – can be affected by how actively banks manage the regulatory relationship. Thus, it is important for banks establish trust and understanding of their business with supervisors. In the past this has been an interactive process over many years; in contrast the new relationship with the SSM needs to be established immediately. In our experience, the impact of supervision on banks – both the financial cost and the call on senior management time – depends on how actively banks manage the regulatory relationship.

To be successful under the new regime, banks should be proactive – in addressing the outcomes of the CA, and beyond, in assessing which aspects of their business could cause supervisory concern, and in managing the supervisory dialogue around such issues. Any resultant changes should not be implemented in a vacuum – instead, banks should take a strategic view of how the adaptation to the new supervisory regime links to on-going and forthcoming regulatory change projects, and what synergies can be drawn. All in all, this is a new start not just for the supervisor, but for many aspects of a bank's work.

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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