European Central Bank
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Interview with Diena

Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM),
conducted by Ruta Kesnere
29 August 2014

1. The SSM will assume its supervisory duties on 4 November. You will directly supervise significant credit institutions. What does “significant credit institutions” mean? What percentage of European credit institutions will be supervised?

The ECB will indeed directly supervise significant banks as of 4 November. The criteria for a bank to be deemed significant relate to its size in absolute terms – and what I mean here is that its total assets must exceed €30 billion – but also to its relative size or the nature of its activities. I am talking for instance about the importance of a credit institution for the economy of the EU or of a Member State, its cross border activities or whether it has requested or received assistance from the European Stability Mechanism. The ECB will directly supervise approximately 120 banks. Their assets amount to approximately €25 trillion, equivalent to around 85% of total bank assets in the SSM countries. As you can imagine, this is an enormous undertaking, but we are very satisfied with our progress so far.

2. What will be the main difference between your supervision and the supervision exercised by national competent authorities (NCAs) until now?

The SSM is composed of the ECB and the NCAs of 18 countries (19 in 2015) and therefore combines the strengths, experience and expertise of all of these institutions. The ECB is responsible for the effective and consistent functioning of the SSM and exercises oversight over the functioning of the system. The main difference that the SSM will make is that, for the first time, we will have a banking supervisor in Europe with a truly European mandate. This will support the effective application of the single rulebook developed by the European Banking Authority (EBA) and therefore a harmonisation of supervisory standards in Europe. In turn, this will reduce regulatory arbitrage and remove national biases. As a result, we will enhance confidence in banking supervision and in the whole financial system in the SSM countries.

3. What will the NCAs’ role be as of 4 November?

To ensure efficient supervision, credit institutions are categorized into “significant” and “less significant” institutions, with the ECB directly supervising the significant banks while the NCAs are in charge of the supervision of less significant banks. The day-to-day supervision of the significant institutions will be conducted by the Joint Supervisory Teams (JSTs), 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. A JST is established for each significant institution. So there is much work for the NCAs to do and we are looking forward to a fruitful cooperation with them.

4. What will the SSM and the banking union mean for banks’ clients: depositors and borrowers?

They will mean a lot for them. The banking union is based on three pillars: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and a common system of deposit protection, which will be ready at a later stage. Once a full banking union has been achieved, and by that I mean a situation where confidence in deposits is independent of the jurisdiction in which banks are established, we will have a truly single banking system in Europe. However, the SSM is already moving full steam ahead and will be operational on 4 November. The preparatory work of the SSM includes a comprehensive assessment of the banks, which is aimed at restoring confidence in the banking sector by providing transparency with respect to the banks’ balance sheets. As a result, banks will have much better access to markets for equity and funding, which will permit them to better support economic activity.

5. Does the new supervisory mechanism require stricter rules for banks? And how could it affect their credit policy, which is essential for economic growth?

The SSM will ensure that the strong supervisory standards introduced by the Capital Requirements Regulation and Directive (CRD IV) will be applied in a homogeneous way across the whole euro area, hence providing a level playing field. This will help to reduce market fragmentation, fostering financial integration and further reaping the benefits of the Single Market. By reducing financial fragmentation, the SSM will also facilitate the smooth transmission of monetary policy throughout Monetary Union. Money markets will work more efficiently across national borders. For instance, in crisis times, we will no longer see national supervisors requiring banks to match national assets against national liabilities.

6. Is the introduction of the SSM related to the fight against money laundering through banks?

Anti-money laundering does not fall within the mandate of the SSM. These are supervisory duties that will remain a national responsibility.

7. The Latvian government has invested tens of millions lats of taxpayers money in Parex bank to save it from bankruptcy. Will there be fewer such cases thanks to your work in the future?

The 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. We have new regulations coming in, such as Basel III and CRD IV. State aid rules implemented since last summer state very clearly that the use of public money will require burden sharing, with the bail-in of junior debt and hybrid capital instruments. This is changing the landscape. The bail-in of senior debt from 2016 on is another powerful new element. When a problem is detected, if, for instance, the comprehensive assessment reveals capital shortfalls, the recapitalisation must be covered by private sources. Only if all private means have been exhausted, and a bank is still in need of capital, may public support be considered, provided a number of conditions are met.

8. NCAs often say that it is impossible to prevent fraudulent bankruptcies that are planned by the owners. What is your opinion about such cases?

The SSM will provide a thorough, comprehensive and tough supervisory framework to better detect at an early stage the possible risks developing within a financial institution, thus allowing the supervisory authorities to impose the necessary corrective measures.

9. In Latvia we have banks that work with the deposits of non-residents. Will there be a stronger supervision and how it would affect the raising of non-residents’ money?

I understand that non-resident services are important for some Latvian banks and that much progress has been made in monitoring non-resident banking activity. The Latvian Financial Capital Market Commission has put in place the appropriate regulatory requirements, such as higher individual capital and liquidity requirements in line with the banks’ business models.

10. The two biggest banks by assets in Latvia, Swedbank and SEB Bank, are the subsidiaries of Swedish banks. As we know, Sweden is not part of the banking union. How will supervision take place in the case of Latvia?

The SSM and the country (e.g. Sweden) in which the parent institution has its headquarters will cooperate, in particular within supervisory colleges, in the supervising of such banks. We will be the “host supervisor” for banks owned by non-SSM area banks, while the “home supervisor” (or consolidating supervisor) will be in a non-participating Member State. The SSM will not create new or artificial borderlines within one banking group as regards supervision, as we consider it crucial to have a holistic understanding of how a group operates and how its individual entities are linked, also from a risk perspective. Therefore it would not make sense to look at the entities within SSM countries in complete isolation and, for this reason, the role of the supervisory colleges is essential. The Joint Supervisory Teams (JSTs), which are the vehicle through which we will directly supervise banks on the ground and which will be supervising the largest Latvian banks, will of course take part in the supervisory colleges for these groups. They will be represented by the JST coordinator and will be fully committed to strong cooperation. The EBA has done important work in building and improving the framework for cooperation within colleges and the SSM is committed to playing a very constructive role. Bilateral cooperation between the SSM and supervisory authorities from non-participating Member States is based on arrangements that set out in detail how supervision is to be conducted in such cases.

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