The Single Supervisory Mechanism assumes responsibility of bank supervision within the euro zone area

The European Central Bank (ECB) assumed responsibility for the supervision of euro zone banks on 4 November 2014 as the Single Supervisory Mechanism (SSM) came into effect, bringing Europe closer to the realization of a banking union.

Considered one of the pillars of the banking union, the SSM is a new regime of banking supervision comprising the ECB and the national competent authorities of participating countries, including Finland. The SSM’s main aims are ensuring the safety and soundness of the European banking system, increasing financial integration and stability, and providing uniform supervision of euro zone banks.

The SSM provides for joint supervision of euro zone banks by the ECB and national supervisory authorities under the ECB’s lead. If a bank is deemed “significant,” it is supervised directly by the ECB. A bank is “significant’” if it is among the three most significant banks of the country in which it is located; it has large cross border activities; it receives or has applied for certain Eurozone assistance funds; the value of its assets exceed EUR 30 billion; or the value of its assets exceeds EUR 5 billion and 20% of the GDP of the country in which it is located. Smaller banks not deemed significant under these criteria are supervised by national supervisory authorities. If necessary, however, the ECB may take over direction supervision.

The SSM is not a separate European supervisory entity but is instead organized under the auspices of the ECB. Commentators have noted that this arrangement is largely a product of the need to establish a supervisory authority quickly to address the 2012 euro zone crisis. In its June 2012 meeting, the European Council proposed the creation of the SSM as a solution to weaknesses in the European financial system made apparent by the crisis. In October 2013, the SSM Regulation was adopted. In April 2014, the ECB published rules specifying how the SSM would function in the SSM Framework Regulation (ECB/2014/17). The SSM also undertook a comprehensive assessment of the 130 largest euro zone banks over the past year. The comprehensive assessment compared European banks according to harmonized criteria and consisted of both an asset quality review and a forward-looking stress test. Results of the comprehensive assessment were published on 26 October 2014, and Finnish banks received high marks according to both measures.

The final step in implementing the SSM is the creation of harmonized reporting templates, which are aimed at unifying reporting standards across European countries. The ECB recently opened public consultation on it draft regulation on reporting of supervisory financial information (FINREP). The draft regulation stipulates what supervisory financial information must be submitted to national supervisory authorities and to the ECB by supervised banks. Under the draft regulation, balance sheet items such as information about financial assets, non-performing exposures and financial liabilities as well as income and expenses information must be submitted. The public consultation will remain open until 4 December 2014.

The comprehensive assessment has had an immediate positive effect on the Finnish banking sector. Anneli Tuominen, the Director General of Finland’s Financial Supervisory Authority (FSA), remarked that the results would strengthen consumer confidence in Finland’s banking sector. While the FSA has taken the position that the SSM is an improvement on the prior nationally based supervisory system, concerns remain about the SSM’s impact on banks in the Nordic region which do not clearly fall within or outside of the SSM. Of the three Finnish banks considered in the comprehensive assessment, two are subsidiaries of banking groups located in countries not participating in the SSM: Sweden and Denmark. Director General Tuominen has called for the SSM to apply a uniform supervisory and regulatory regime across the Nordic region, to reduce the reporting costs for banks headquartered outside of the SSM that operate within the SSM through subsidiaries and to prevent such banks from taking advantage of the their ambiguous position through regulatory arbitrage.

Further information about the consultation is available at the ECB website and at the FSA website.