Show all ex-libris

First Major Banking Union Milestone Completed (September 18, 2013)

The European Central Bank (ECB) will soon take over direct supervision responsibilities of approximately 130 of the most significant credit institutions established in Member States whose currency is the Euro (Euro Area).

On 12 September 2013, the European Parliament (EP) adopted the European Commission’s (EC) proposals to set up a single supervisory mechanism (SSM). This means that supervisory regulatory powers will be transferred from national authorities to the ECB for the most significant credit institutions in the Euro Area.  85% of the total banking assets in the Euro Area will be directly supervised by the ECB, which will be responsible for overall oversight of prudential supervision of credit institutions in the Euro Area.

At least three of the most significant credit institutions in each participating country are expected to be under the direct supervision of the ECB, irrespective of their total size.  Non-Euro Area Member States can also choose to opt in.

A credit institution’s significance depends on:

  • the size and value of its assets;
  • its importance to the economy of the country in which it resides or the EU as a whole;
  • the importance of its cross-border activities; and
  • whether it asked for or received money from the European Stability Mechanism or the European Financial Stability Facility.

The remainder of the approximately 6,000 Euro Area credit institutions will continue to be supervised by national authorities.  However, the ECB will have the right to take over the responsibility for any of these credit institutions at any time.

The SSM regulation will enter into force following approval by the EU Council and publication in the Official Journal of the EU.  Once the regulation is in force, the ECB will have twelve months to take over all applicable supervisory responsibilities from the Euro Area national authorities.  In the short term, the ECB will need to establish an SSM Supervisory Board and conduct asset quality reviews of the credit institutions falling under its supervision.

The SSM is the first step in creating a united banking union in Europe that is intended to safeguard financial stability and minimize costs of bank failures. The second milestone – the single resolution mechanism (SRM) proposed by the EC in early July 2013 – is next in the line. The SRM is intended to create a centralized supervisory and resolution system to efficiently manage bank failures with minimal costs to tax payers and the economy. The banking union is one of the four blocks needed to establish an Economic and Monetary Union.

Stay tuned, as we will continue to follow developments regarding the implementation of the SSM and adoption of the SRM.