The start of May marked six months of operation for the Single Supervisory Mechanism (SSM), the new framework for banking supervision in the Eurozone. The largest banks in the SSM have had their first taste of ECB-led supervision. The learning curve for them - and for supervisors at the ECB and national authorities - has been steep. And just as banks grapple with the task of responding to the new regime, the ECB has started tackling its supervisory priorities for 2015.

Regulation and supervision are integral components of banks' strategies and business models, yet for banks in the SSM the task of responding is made more challenging by the complexity created as the supervisory regime evolves. In order to bring clarity to the situation, banks should focus on three areas:

  • Take steps to establish a strong, sustainable relationship with supervisors. In many SSM countries, banks find themselves dealing with both ECB-led supervisory teams and supervisors from their national authority, who continue to carry out supervisory activities on the ground. Through time any overlaps in activity will reduce as the new supervisory approach beds down and as supervisors work together in Joint Supervisory Teams. However, there are risks in the short term of duplication and of added complexity to the interaction between banks and supervisors. Next year, the Single Resolution Mechanism – another part of the Banking Union – will assume its full responsibilities. Without careful planning, banks risk being overwhelmed by supervisory interactions. To deal with this, some banks have strengthened or set up dedicated supervisory relationship teams to establish these links early on. Plans need to account both for the transition and 'target' state. Regardless of the approach taken, it is important to set a strategy for building strong relationships with the new supervisor.
  • Understand the implications of the ECB's drive for consistency. Following last year's health check – involving both a stress test and the asset quality review, the ECB has embarked on addressing identified weaknesses and shortcomings. Looking forward, its supervisory priorities will be shaped by a drive for consistency in the application of regulations and supervisory approach across the Banking Union. The ECB has indicated it won't shy away from seeking changes to EU legislation to achieve this. Its initial focus is on increasing the consistency of the definition of eligible capital and calculation of risk-weighted assets. Banks need to understand the implications of such changes for their capital position, both now and in the future.
  • Ensure the senior management team and board can clearly articulate how the business model is sustainable. Supervisors are becoming increasingly interested in strategies and business models chosen by individual banks, and are gearing up to assess them and take action where they identify cause for concern. The ECB is no exception. In its supervisory approach the ECB will focus on business model analysis, in particular sustainability and viability. Banks need to discuss what steps should be taken to ensure their business models are robust from a supervisory perspective.

These issues are important, but difficult for banks to tackle. Our recent paper, The Single Supervisory Mechanism | Getting to grips with the new regime offers a more in depth analysis on the implications and how to deal with them.

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.