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Can consumers of financial products view the SSM as an adequate response to the fallout from the 2008 financial crisis?
Consumers of banking services can indeed view the SSM as part of an adequate response to the effects of the crisis. The SSM aims to strengthen the banking sector and to make sure that in the future banks do not take excessive risks. An important step in preparing the SSM is the comprehensive assessment, which is a financial health check of 131 banks in the euro area. Its purpose is to restore confidence in the European banking sector by fostering transparency in banks’ balance sheets and by ensuring that they are repaired where needed by identifying and implementing necessary corrective measures. To a large extent this balance sheet repair has been taking place already, as many European banks have taken proactive steps to make their balance sheets more robust. Since mid-2013 in particular, European banks have implemented write-offs and increased provisions and capital. According to data collated by the national competent authorities (NCAs), since July 2013 SSM banks have strengthened their balance sheets by almost €200 billion. The European Banking Authority’s end-of-2013 estimate of the average Common Equity Tier 1 ratio of Europe’s largest banks is 11.6%, which is broadly equivalent to that of their American counterparts. This is already an important step towards a stronger banking system.
Does the SSM have the necessary clout and teeth to nip a banking crisis in the bud to avoid the painful meltdown witnessed in the aftermath of 2008?
Supervision will be intrusive, tough and fair. That’s my commitment. The SSM will provide a thorough, comprehensive and tough supervisory framework to better detect at an early stage the risks developing within a financial institution. It will allow the supervisory authorities to impose the necessary mitigants and corrective measures. Also, our intention is to make the use of public support more difficult so that the taxpayer does not have to bail out banks in the future. But having said this, I must also make clear that the ECB cannot once and for all eliminate the risk of another financial crisis. It would be absurd to make such a promise. However, we strongly believe that there has never in the past been a European institution better equipped to minimise such a risk.
Given that there are thousands of banks that operate in the EU, how will supervision be conducted? Does the ECB have the capacity to supervise all the banks?
To ensure efficient supervision, banks are categorised as “significant” or “less significant”. The ECB will directly supervise the significant banks, which account for approximately 85% of the assets of the euro area banking sector. The day-to-day supervision of the significant banks will be conducted by the Joint Supervisory Teams, which comprise staff from both the ECB and the NCAs of the countries in which the credit institutions, their banking subsidiaries or their significant cross-border branches are established. The NCAs will be in charge of the supervision of the approximately 3,400 less significant banks, but we are a single supervisory system: all the banks (significant and less significant) will be supervised according to the same supervisory manual, and the ECB can if necessary assume direct supervision of any credit institution to ensure application of the highest supervisory standards. The new structure of banking supervision will enable the efficient and rigorous supervision of all the banks in the SSM area through close cooperation between the ECB and the NCAs.
Full article on European Central Bank's site