Statement on SSM risk appetite

The ultimate objective of the SSM is a resilient and well-functioning banking sector

The Single Supervisory Mechanism (SSM) contributes to the stability of the financial system by promoting a resilient and well-functioning banking sector which can fulfil its service-providing function to the economy.

The SSM follows a supervisory approach based on best practice for independent, forward-looking, fair and risk-based supervision. While using the ability to compare banks and assess their risk profiles and ultimately their viability, the SSM focuses its resources on those areas where it perceives the greatest risks, at the level of individual banks and for the banking system as a whole. Where the SSM sees severe shortcomings in banks’ capital or liquidity levels or in their risk management and controls, the intensity of supervision is increased in a proportionate manner. The SSM uses the powers granted to it by the legislator, with the ultimate objective of achieving the best impact while minimising the downside risks and unintended consequences.

The SSM does not aim to prevent bank failures, but rather to reduce their risks and impact

In a healthy banking sector, some banks will prosper and some will exit, either through consolidation or, in the extreme scenario, through outright failure. This is an essential feature of a sound marketplace with healthy competition among its participants.

The SSM promotes the sustainability of bank business models that are consistent with sound risk management and controls, backed by sufficient capital and liquidity to be able to withstand adverse economic and financial conditions. Banks that do not meet these threshold conditions must take appropriate measures to strengthen their position or else they may need to exit the market.

Therefore, the objective of the SSM is not to prevent bank failures in themselves. A zero-failure policy is neither feasible nor desirable. Banks can and should exit the market if they are managed in a risky and unsound manner, or if they are structurally incapable of maintaining their competitiveness based on a sound business model. Furthermore, a zero-failure policy would be inconsistent with the principle that the owners and managers of banks are ultimately responsible for the consequences of their decisions and actions. A zero-failure policy would thus foster moral hazard.

After assessing the sustainability of a bank’s business model, its risk profile and plausible recovery measures, the SSM may determine that the bank is no longer viable from a capital or liquidity perspective, and declare it to be failing or likely to fail. The Single Resolution Board (SRB) subsequently takes charge of the decision whether to resolve the bank in question.

Given that the failure of a bank has the potential to destabilise the banking system as a whole, if not managed effectively, our role is also to prepare for the orderly exit of the bank from the market, if necessary. We therefore also promote orderly recovery and resolution planning at banks, working closely with the SRB, which is primarily responsible for resolution strategies.