Hearing at the Committee on Economic and Monetary Affairs of the European Parliament
Introductory statement by Danièle Nouy, chair of the Supervisory Board, Single Supervisory Mechanism, ECB,
Brussels, 18 March 2014
This is my first regular public hearing in ECON, in line with the Interinstitutional Agreement between the ECB and the European Parliament.
I am committed to apply the Interinstitutional Agreement in both letter and spirit so that the assignment of supervisory prerogatives to the ECB is matched with appropriate democratic accountability at the European level. This is essential to ensuring an efficient, effective and accountable European supervision to the benefit of European citizens.
At the same time, this is also the last regular public hearing on the SSM in this legislature. So let me thank you, Sharon, and the ECON Committee, for the decisive role you have played in the adoption of the SSM regulation and in the legislative process towards a fully-fledged banking union. I know that all throughout, there have been fruitful exchanges between you and the ECB. I am very much looking forward to continuing this trustful relationship with the next ECON Committee.
I would like to cover today the SSM preparations for taking on supervisory task, the comprehensive assessment and the challenges lying ahead for banking union.
SSM preparations are making good progress
Turning first to the SSM preparations – we are well on track.
Most of the senior managers have been appointed and progress is underway in recruiting about 800 supervisors. They are being provided adequate training on the processes and procedures. Moreover, the composition of the Joint Supervisory Teams or so-called JSTs, which are the cornerstone of the system, responsible for the operational supervision of significant credit institutions, is taking shape. It has been already specified how many ECB and national competent authorities resources will be allocated to each of them.
In parallel, the ECB is designing information management solutions to support the supervisory processes, in particular the work of the joint supervisory teams. Good progress is being made to ensure strong and resilient connectivity with the seven national competent authorities which are not central banks.
The ECB will publish the Framework Regulation by 4 May 2014, following a public consultation that was recently closed. The consultation resulted in around 40 contributions, mostly from banking and market associations, financial institutions but also supervisory authorities, ministries of finance and non-euro area central banks. We are now reviewing the comments received and will prepare a feedback report that will be published at the same time as the Framework Regulation.
By now, we have largely developed the supervisory model of the SSM, which is reflected in the draft Supervisory Manual of the SSM. This manual covers the general principles, processes and procedures as well as the methodology for the supervision of significant and less significant institutions. It describes the procedures for cooperation within the SSM and with authorities outside the SSM. While the Supervisory Manual is an “internal SSM staff document”, we intend to prepare also a comprehensive public version.
The preparation of the SSM fee framework is also well on track. The public consultation is foreseen still in the first half of 2014, with the SSM Regulation on fees to enter into force before 4 November 2014.
The Supervisory Board is currently working on the Rules of Procedure and Codes of Conduct. The Rules of Procedure will, in particular, include the arrangements for Supervisory Board meetings. Codes of Conduct will address matters of conflict of interest. Although the SSM Regulation does not explicitly request a Code of Conduct for the members of the Supervisory Board, it refers to some ethical rules that will specifically apply to them, such as those concerning conflict of interests resulting from subsequent employment. In addition to the Code of Conduct for the members of the Governing Council and the Supplementary Code of Ethics Criteria for the members of the Executive Board, a separate Code of Conduct was adopted for the Supervisory Board to implement these requirements and to reflect the distinct nature of the Supervisory Board within the organisational framework of the ECB. The requirements for the Code of Conduct as regards ECB staff and management involved in banking supervision are also being examined. A proposal will be submitted in due course to the Supervisory Board and the ECB’s decision-making bodies, after a consultation of the Staff Representatives. Before adoption, the ECB will inform the ECON Committee on the main elements of the envisaged Code of Conduct in accordance with the Interinstitutional Agreement.
Work is also progressing on the implementation of the separation principle between the monetary policy and supervisory functions, as part of a general reflection involving all the relevant business areas within the ECB. This should help in the drafting of internal rules regarding professional secrecy and information exchanges between the two functional areas.
The Supervisory Board has discussed the format of the Record of Proceedings, which has been finalised a few days ago (on 13 March), after approval by the Governing Council.
The transmission of the Records of Proceedings of the Supervisory Board to the ECON Committee of the European Parliament is a key element in building up the accountability framework, as foreseen in the Inter-institutional Agreement. The ECB aims at achieving the best possible balance between its transparency and accountability obligations, on the one hand, and the supervisory confidentiality constraints on the other.
After considering different options, the Supervisory Board decided that it would submit the records of proceedings on a quarterly basis to the European Parliament, together with the Quarterly Reports. It means that the proceedings relating to the meetings from January to March would be transmitted by the end of April.
But the Supervisory Board also decided that the record of proceedings would be provided to the European Parliament earlier, should the European Parliament ask for such transmission.
I am ready to use this possibility if you consider that a quarterly delivery is not adequate.
The Comprehensive Assessment is advancing at full steam
Turning to the Comprehensive Assessment. Before I give you the latest state of play, let me briefly recall its objectives and components. The goal of this exercise is threefold. First, foster transparency of banks’ balance sheet. Second, repair balance sheets where needed by identifying and implementing necessary corrective measures. Third – as a result of the first two –, foster confidence in the banks among all stakeholders, which will contribute to the most needed revival of credit to the euro area economy.
Let me clearly stress that the Comprehensive Assessment will be rigorous. The AQR threshold is 8% Common Equity Tier 1 (CET1). For the stress test, in the baseline scenario the capital threshold is also 8% CET1, whilst in the adverse scenario the capital threshold is 5.5% CET1. These thresholds are higher than in the previous exercises and importantly, require a higher quality of capital than in the past. For past exercises the Core Tier 1 definition of capital was used, which is a less stringent capital definition than Common Equity Tier 1 (CET1). Please note furthermore that the stress test for the banks subject to the comprehensive assessment will incorporate capital requirements that may result from the AQR. As a consequence of all this, the end result will be more demanding than in previous exercises.
The preparation and implementation of the Comprehensive Assessment are well on track. The selection of asset portfolios to be reviewed for the asset quality review has been completed. We are now proceeding to phase 2 of the AQR, which is the actual execution of the AQR. The AQR Phase 2 manual was published on 11 March, providing full details on the different building blocks of the AQR. This transparency further increases the credibility of the exercise and demonstrates its rigour and comprehensiveness.
To illustrate the scope and the comprehensiveness of the AQR, let me provide you with some figures. A total of around 760 banking book portfolios have been selected from the 128 banks in scope for a detailed examination. This examination will involve the review of approximately 135,000 credit files. We estimate that over 1000 auditing staff and independent specialist appraisers will be engaged, complementing the NCAs efforts. For all 128 banks, the banking book RWAs selected for the execution of the AQR amount to 3.72 trillion euros, representing 58% of the total credit RWA of all banks in scope.
The preparations for the EU-wide stress test exercise are near finalisation. A consultation has been launched as regards the stress test methodology and templates. The stress test methodology and the scenarios will be finalised and published in April 2014, thereafter the stress test exercise will be launched amongst all 128 banks.
The Comprehensive Assessment will help increase confidence and resilience of the EU banking sector. In turn, this will help the recovery of credit flow in the real economy. It cannot do this alone, however.
To further underpin the credibility of the exercise, we need solid and well-defined public backstops at the national and, as a last resort, at the European level. I call on Member States to honour the strong commitments they made and to have the necessary arrangements in place at the national level, including resolution mechanisms and public backstops, enabling them to respond promptly if needed to any vulnerability identified by the Comprehensive Assessment.
The road ahead for Banking Union
Let me now briefly discuss the road ahead for Banking Union. The SSM is a cornerstone of a larger project.
Looking at what has already been achieved, progress on banking union has been fast by historical standards and the European Parliament has largely contributed to this momentum. Beyond the SSM, progress has been made in ensuring that investors, not taxpayers, will assume the consequences of a bank failing or risking to fail. In particular, the Bank Recovery and Resolution Directive is a very important contribution in this direction.
But we need to keep this momentum: the joint efforts and commitment of all relevant actors are needed to ensure that banking union is completed. At the national level, this will imply the swift and thorough transposition of agreed directives into national law. At the European level, it now requires completion of the legislative process on the SRM in this legislature to ensure that it is operational as soon as possible after the ECB assumes full supervisory responsibilities. To this end, all parties involved need to show a willingness to compromise with a view to establish by the end of the legislature a truly single resolution mechanism, with an effective governance, a single resolution fund and adequate common backstop arrangements. To put it in simple terms: when a house is on fire, the fire brigade should not have to wait until the city council has agreed on whether and how to intervene. It should be able to go out immediately when the fire has broken out. And just like an effective fire brigade needs access to water and reliable water hoses, the SRM needs ready access to a resolution fund to be able to conduct a resolution over one weekend.
Finally, let me emphasise that Banking Union has the potential to significantly contribute to the re-integration of financial and banking markets in Europe. While banking union is a key element of the Economic and Monetary Union, it is thus fully consistent with the objectives of the Single Market and is also important for non-euro area Member States. In this context, a shared system of supervision and resolution increases our capacity to address cross border linkages and strengthens our safety nets against banking crises.
Thank you for your attention. I am now looking forward to your questions.