Successful first year of European banking supervision

Bundesbank Executive Board member Andreas Dombret has given the common system of European banking supervision a glowing reference. One year on from the launch of the Single Supervisory Mechanism (SSM), he said there is good reason to be very satisfied with its achievements so far. "But there are still some aspects we can improve upon," he conceded. The SSM, which is based at the European Central Bank (ECB), became operational on 4 November 2014. Since then, the largest, most significant banks across all 19 euro-area countries have been supervised directly by Joint Supervisory Teams (JSTs) staffed by personnel from the ECB and each country's national competent authorities – in Germany, BaFin and the Bundesbank. Mr Dombret, the Bundesbank Executive Board member responsible for banking supervision, stressed that the cooperation among the national supervisors and the ECB is running very smoothly: "We are seeing a convergence of the diverse supervisory cultures."

Banks becoming accustomed to new structures

The supervised banks have also accepted the new system, Mr Dombret said, even though plenty of things have changed for them, too, over the past year. In the pre-SSM era, banks were overseen by supervisors from their domestic authorities. Since the launch of the SSM a year ago, the euro area's largest, most significant banking groups – roughly 120 in number – have been supervised by mixed JSTs composed of supervisors from different euro-area countries. This transition sparked a number of changes and transformed the way banks and supervisors communicate with one another, with day-to-day supervisory practices now mainly being conducted in English. The ongoing supervision of the less significant credit institutions, meanwhile, continues to fall within the remit of the national competent authorities.

This is not the only change the banks have been forced to deal with. "The supervisory approach has taken on a more quantitative slant," Mr Dombret said, with the new set-up now addressing the very vulnerabilities that the financial crisis had exposed – before the SSM was launched, national supervisors often trained their sights primarily on the institutions based in their own jurisdiction, meaning that risk that spilled over to other banks, sovereigns and continents sometimes went undetected until it was too late. "Greater emphasis is being placed on peer comparisons," Mr Dombret noted, stressing that these cross-border comparisons highlight that the SSM is indeed seeking to take a European perspective.

Supervisory structures discourage national favouritism

Another factor that fuelled the financial crisis was the varying degrees of strictness in national supervisory regimes. The new SSM structures tackle this issue head-on. "That starts with the JSTs, all of which are headed by a coordinator who is not from the country in which the supervised bank is located," Mr Dombret explained. And, he added, it continues all the way up to the decision-making bodies, the Supervisory Board and the ECB's Governing Council – in which representatives from 19 countries pass joint decisions.

One year on from the launch of the SSM, Mr Dombret also hailed the ECB's ongoing endeavours to harmonise prudential standards across the participating countries. The existence of various national options under European supervisory law means that supervisors are still able to exercise their discretion when interpreting prudential rules at the national level. "The ECB is currently working on closing off the national options in the banking regulation," said Mr Dombret. This, he added, is another initiative which will help to promote supervisory consistency across the individual countries and diminish the influence of national interests. However, Mr Dombret warned that a measured approach should be taken to harmonising standards and called for the proportionality principle to feature more prominently in practical banking supervision. "A small bank running a low-risk business model doesn't need to be supervised as intensively as a large one engaged in riskier transactions."

Mr Dombret identified the SSM's decision-making structures and processes as issues that can still be improved upon. As a case in point, the highest tiers of management – the ECB's Governing Council and Supervisory Board – are being swamped by what are known as "fit and proper" assessments of future members of the supervised banks' management bodies with executive and supervisory functions. In 2015 alone, the Supervisory Board, followed by the Governing Council, has made more than 1,200 such fit and proper decisions, he explained. The Supervisory Board, of which Mr Dombret is a member, prepares these decisions, but the final decision is down to the ECB's Governing Council, a body composed of all the governors of the national central banks as well as the members of the ECB's Executive Board.