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Since the introduction of the Single Supervisory Mechanism (SSM) in 2014, systemically important banks in the euro area are directly supervised by the ECB. From a static and dynamic perspective, we examine how this fundamental shift towards unified supervision under the SSM affects the competitive position of SSM banks. A clear pattern emerges. In euro area countries that were heavily affected by the sovereign debt crisis, competition for SSM banks decreased. In the other countries, the SSM either had no impact on the competitive position of SSM banks or competition increased. Our results also suggest that the effects of the SSM on competition are unlikely to be permanent.
The European Union introduced the Single Supervisory Mechanism (SSM) in 2014 in response to the financial crisis of 2007 – 2009 and the sovereign debt crisis of 2010 – 2012. The objectives of the SSM are to establish a common approach to day-to-day supervision, harmonized supervisory actions and corrective measures, and to ensure the consistent application of regulations and supervisory policies.
Before the SSM, all banks in the euro area were supervised by their national authorities. In the SSM, about 110 “significant banks”, which we call SSM banks for simplicity, are now directly supervised by the ECB. These banks collectively hold about 82% of all banking assets in the euro area, which corresponded to a value of around 21,000 billion euros in 2015. For comparison, in 2015 the nominal GDP of the USA was 16,310 billion euros, and the nominal GDP of the euro area was 11,150 billion euros.
In the supervision of SSM banks the ECB cooperates with national authorities. However, within the SSM, national supervisors operate independently of their national board of directors. Decisions concerning SSM banks are made by the ECB’s Supervisory Board and approved by the Governing Council. Consequently, supervision under the SSM is likely to be more rigorous and consistent than supervision by national authorities. Moreover, the shift from national supervision to direct supervision by the ECB is the only fundamental regulatory change that applies exclusively to SSM banks.
In Raunig and Sigmund (2023), we empirically investigate how the shift to direct and uniform supervision under the SSM affects the competitive position of SSM banks.
From a theoretical perspective, the SSM could have an impact on the competitive position of SSM banks because tougher and more rigorous supervision could potentially increase costs. However, stricter supervision might also reduce costs by mitigating information asymmetries between the banks and the market. In addition, stricter supervision under the SSM could boost confidence in SSM banks, potentially increasing demand for their services. Increased confidence may also help weaker SSM banks staying in the market by preventing deposit outflows and enabling participation in the interbank market. Therefore, it is essential to empirically assess the net impact of the SSM on the competitive position of banks operating under the SSM.
Examining the impact of the SSM on competition is also important from a policy perspective because the financing conditions for millions of consumers and firms in the euro area might be affected. Finally, from a financial stability perspective, it is important to know whether the SSM increases or decreases competition for SSM banks, as tensions exist between bank competition and financial stability.
We investigate the impact of the SSM on the competitive position of SSM banks using annual balance sheet data of euro area banks for the period 2004—2019. Our data comes from the SNL Financial’s database and include banks from Austria (AT), Belgium (BE), Cyprus (CY), Germany (DE), Spain (ES), Finland (FI), France (FR), Greece (GR), Ireland (IE), Italy (IT), Luxembourg (LU), Malta (MT), Netherlands (NE), Portugal (PT), Slovenia (SI), and Slovakia (SK). In total, our sample contains more than 2,600 banks at the unconsolidated level. Of these, 116 are SSM banks.
We examine the impact of the SSM on the competitive position of SSM banks from both a static and a dynamic perspective. In the static analysis, we examine whether the SSM affects the market power of SSM banks. In the dynamic analysis, we investigate impact of the SSM on the intensity of competition and potential long-run effects of the SSM on profitability....
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