On 4 November 2014, the European Central Bank (ECB) assumed responsibility for supervising the largest and most significant banks in the euro area, numbering around 120. Six months have passed since then, and in the view of Bundesbank Executive Board member Andreas Dombret, the benefits of European banking supervision have so far prevailed. Building on a single statistical dataset and the experience of national supervisors, European banking supervision is well on the way to establishing a harmonised supervisory framework, he remarked at a conference in Frankfurt am Main. This offered the potential for all banks in the euro area to be supervised according to the same high standards.

Harmonise supervisory rules for small banks as well

But if the SSM is to meet these requirements and be a lasting success story, Dombret believes that European supervisors still need to overcome a number of hurdles. One of these was, notably, harmonising application of the regulatory requirements in all countries. Dombret pointed out that there are still more than 150 options to choose from in European supervisory legislation. These options had so far been exercised in very different ways at the national level. This is why the ECB and the national supervisors had to pay close attention to retaining those interpretations of the rules that reflect specific national market features and types of bank. "Those that do not, we should phase out," said Dombret. The ECB and the national supervisors are currently evaluating the various options and agreeing on joint standards, he added.

These standards will also apply to the banks classified as "less significant" by the ECB; unlike the approximately 120 large banks, these are only indirectly supervised by the ECB. The respective national supervisors retain responsibility for monitoring these institutions. Germany’s supervisors are the Bundesbank and the Federal Financial Supervisory Authority (BaFin). In Dombret's view, having national supervisors continue to supervise "less significant" banks is the most efficient and effective solution, and one which is also consistent with the principle of subsidiarity. In Germany, as many as roughly 1,700 institutions are subject to purely national supervision by the Bundesbank and BaFin. These constitute around half of all the euro-area institutions classified as "less significant" by the ECB.

Another challenge that Dombret mentioned was the appropriate deployment of banking supervisory teams. Past experience had shown that supervisors' workloads are disproportionately high, especially in smaller joint supervisory teams (JSTs). He argued that care must be taken to ensure that the JSTs are always of a sufficient size to perform their duties in an effective manner. JSTs comprise ECB staff and national supervisors, who jointly supervise the banks that come under the ECB's direct supervision. Considering the complexity of the banking supervision project, day-to-day operations were already running very smoothly in the eyes of the Bundesbank Executive Board member. Many supervisors had only worked in their own countries for years and had to adjust very quickly to an international working environment with the launch of the SSM. "This is exciting and challenging at the same time," Dombret said.

Identify financial crises earlier

Besides establishing the greatest possible harmonisation in supervision, another aim of the SSM is to improve the scope for managing problems experienced by cross-border banks. This should enable the risk of new financial crises to be averted at an early stage. "The failure of the Franco-Belgian bank Dexia in 2011 is a classic case in which banking supervision with a cross-border focus could have improved crisis management. Another example is Germany’s Hypo Real Estate, which folded in 2009," Dombret commented. After all, large banks in particular mostly operated in more than one country. Half a year on from the launch of the SSM, supervisors now have a much more international workload, he noted. "One positive outcome of the financial crisis is that supervisors from all countries are now communicating with each other much more," said Dombret. At the same time, he continued, the multinational make-up of the JSTs ensures that supervisors do not act in the national interest by giving preferential treatment to their own country's banks.