Challenges lie ahead for the Single Supervisory Mechanism

The banking union, which has seen banking supervisory powers shift to the European level, was a "major step" towards improving the monitoring of risk and coping with distress in the banking sector more efficiently, and it was now a question of completing the SSM by implementing further reforms, Bundesbank Deputy President Claudia Buch said at the 32nd SUERF Colloquium on the Single Supervisory Mechanism (SSM).

This conference, entitled "SSM at 1", brought together representatives from banks, central banks and academia to assess the structural set-up and effectiveness of European banking supervision one year on from its launch. The SSM became operational on 4 November 2014. Since then, the largest, most significant banks across all 19 euro-area countries have been jointly supervised by the ECB and each country's national competent authorities – in Germany, these are the Federal Financial Supervisory Authority (BaFin) and the Bundesbank. Responsibility for supervising less significant institutions that are not systemically important, meanwhile, continues to lie with the national competent authorities, even if the ECB could take over this task in certain cases.

The Deputy President of the Bundesbank cautioned that work on the structural framework underpinning the SSM was far from over. "We've still got plenty of items on the agenda," she stressed, pointing in particular to the creation of additional macroprudential instruments in Germany that will give supervisors more effective tools to combat systemic risk in the mortgage lending market, say. The Financial Stability Committee submitted a recommendation outlining these instruments to the Federal Government in June. "We need to be prepared and capable of taking action, should risk become a pressing issue in the housing market," the Deputy President noted. Ms Buch told the conference that putting an end to the privileged regulatory treatment afforded to sovereign debt was another item on the agenda. Sovereign bonds count as risk-free assets under the current regulatory regime, meaning that they are exempted from the capital adequacy requirements for banks. Nor is there any limit on the volume of government bonds that banks are allowed to hold. The Deputy President explained how this arrangement might be a particular incentive for institutions to hold sovereign exposures – something which might impair financial stability and reduce the supply of credit to the private sector.

Potential conflicts of interests

Ms Buch also called for a clearer line to be drawn between SSM activities and monetary policy, since both sets of tasks are housed at the European Central Bank, with the ECB Governing Council as the supreme decision-making body. This set-up, she pointed out, was a potential source of conflicts of interest which only an amendment of the EU Treaties could resolve.

Echoing Ms Buch's concerns, Professor Isabell Schnabel from the University of Bonn issued a strong warning that the conflict of interests was still a pressing issue. "We may well have created a too-powerful institution," said Ms Schnabel, who is also a member of the German Council of Economic Experts. In her opinion, the decision to base banking supervision at the ECB was less than ideal. "The priority back then was to get the SSM off the ground quickly," Ms Schnabel observed.

Bundesbank Executive Board member Andreas Dombret joined the other speakers in highlighting some of the weaknesses in the SSM set-up. He explained how the existence of various national options under European supervisory law meant that supervisors were still able to exercise their discretion when interpreting prudential rules at the national level. "That can sometimes be seen as an obstacle to creating a level regulatory playing field," Mr Dombret said.

Complete the banking union

Both Ms Buch and Mr Dombret warned of the risks involved in prematurely introducing a common European deposit insurance scheme as a further step towards making the European banking union a reality. They explained that the necessary preconditions for doing so had not been met, citing the need to first sever the financial sovereign-bank nexus with the aid of regulatory reforms. Only when mechanisms that allowed the take-up of risk to be monitored had been transferred to the European level, would it also be possible to install mechanisms that permitted risk to be shared further among the euro-area countries. "National policy decisions still have a huge bearing on the stability of Europe's credit institutions," Mr Dombret remarked, noting that national insolvency legislation was still far too different from one EU member state to the next. A common deposit protection scheme could not be created without first harmonising these provisions across Europe, he concluded.

A common deposit insurance scheme would represent the third pillar of the European banking union. The second pillar is the Single Resolution Mechanism (SRM), which has been operational since 1 January 2015. The SRM establishes a single set of rules for the orderly resolution or recovery of distressed European banks.