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Technical preparations have been on-going since September 2012, involving officials from the ECB and the national supervisory authorities. Some of the key issues we are working on are as follows.
First, a full mapping of the euro area banking system, so we can identify which are the significant and less significant banks – that is, those which will and will not be directly supervised by the ECB. Our current estimate is that we will directly supervise around 130 banking groups operating in the euro area which covers approximately 85 per cent of euro area bank assets.
Second, we are developing a common supervisory model, which lays down how the different layers of SSM – national supervisors and the ECB – will work together. The aim is to create, for each banking group we supervise, a joint supervisory team that vertically integrates supervisors in Frankfurt with those in the national competent authorities.
Third, we are preparing to conduct a comprehensive assessment of all banks that will come under direct ECB supervision, which is required by the SSM Regulation. The assessment will involve a Balance Sheet Assessment (BSA), including an Asset Quality Review, to be conducted by the ECB together with the national supervisors and assisted by external expertise. This will then feed into the overall stress test to be conducted by EBA, in cooperation with the ECB.
In my view, the SSM will in fact be very positive for the EBA, for two reasons.
First, the EBA will remain responsible for developing regulatory policy and technical standards that will form the basis of a single rulebook for banks across Europe. The creation of the SSM should help this process, as having a significant number of countries participating in the SSM will reduce the scope for coordination failures, thus making the EBA’s coordination function easier. At the same time, the interests of non-SSM members will be protected by double-majority voting: for a vote to pass, there will have to be a majority by voting weight of all EU members, plus a simple unweighted majority of the eurozone "outs" and the "ins".
Second, the EBA is currently developing a supervisory handbook which reflects best supervisory practices across the EU. The ECB is cooperating closely with the EBA to ensure that its own supervisory manual and the EBA handbook are fully consistent. Here again, the existence of the SSM should help the EBA’s work, as all SSM members will naturally converge in their supervisory practices.
Let me now turn to the other key element of Banking Union, which is a Single Resolution Mechanism operating under a single legal framework for resolution. Dodd-Frank has created a similar resolution framework for larger banks, strengthening market discipline and reducing distorted incentives linked to “too big to fail”. This is what we should be aiming for in Europe: we cannot afford to have a regime that is too weak or too complicated.
Under the Council approach, banks can only be recapitalised with resolution financing arrangements – such as a resolution fund – after a minimum level of bail-in equal to 8 per cent of the total liabilities including own funds, has been imposed on shareholders and creditors. While this of course does not mean that taxpayers will never again be on the line, it should give them more protection, and sharpen incentives to exercise discipline in the financial sector. The second positive is that Council approach on BRRD contains a depositor preference rule which puts some types of deposits at the end of the resolution pecking order and exempts insured deposits from bail-in. Depositor preference is important to give the same reassurance to depositors in all parts of the euro area, especially smaller depositors like ordinary citizens and micro-, small- and medium-sized enterprises, who will be given preference over depositors from large corporations. Moreover, it helps reduce financial fragmentation based on varying credibility of national deposit guarantee schemes. As deposit guarantee schemes will be given highest priority in resolution, they should only have to pay out in extreme cases. This means that the existing arrangements backstopped by individual countries should be sufficient
There is no doubt that the banking system in the euro area is suffering from a confidence problem. Investors remain unsure about the health of banks’ balance sheets; about the rigour of their supervision; and about the capacity of fiscally-constrained countries to resolve banks that are no longer viable. This is why advancing with Banking Union is such an urgent priority for the euro area. It is essential to build trust in the banking sector; to increase transparency over asset quality; and to ensure that banks that need to be wound down, can and will be. From the perspective of the ECB, it is also indispensable to reintegrate financial markets and so to restore the even transmission of our monetary policy across the euro area. The progress made so far has been impressive, by any measure. The SSM is a milestone in European integration. But this is no time to rest on our laurels. We cannot afford a half-baked Banking Union. So I hope that, as of tomorrow, policy-makers will now take up with urgency the task of building a strong SRM.