Marking the inauguration of the ECB’s new supervisory responsibilities

Keynote speech by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism,
at the inauguration of the European Central Bank’s new supervisory responsibilities,
Frankfurt am Main, 20 November 2014

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Summary

Speaking at the Inauguration of the European Central Bank’s new supervisory responsibilities, Danièle Nouy, Chair of the Supervisory Board of the ECB, reflected on the origins of the Single Supervisory Mechanism, which she traced back to the hard lessons learned from the global financial crisis. She also commented on the unprecedented undertaking of setting up a new supervisory system in less than a year, while simultaneously conducting the comprehensive assessment. Ms Nouy stated that “the ECB was a perfect and natural home. No other institution could have offered better support for the creation of the SSM”.

Describing the SSM as the first supervisor “with a truly European mandate, which will impact the way we supervise the banking sector”, Ms Nouy argued that its set-up would allow for more benchmarking and peer comparisons. Ms Nouy then highlighted the need to address macro-prudential risks from a system-wide perspective. She noted that all of the moves to converge supervisory practices, such as the new Joint Supervisory Teams (JSTs) who base their supervisory decisions on the single European rulebook, would make little sense if the regulatory environment remained fragmented.

Looking ahead, the Chair of the European banking supervisory system called for reducing national discrepancies and pointed to the now famous report by Jacques de Larosière from 2009 in which he called for aligning financial regulation. “Our priority will be to tackle the most controversial national options, for instance regarding the definition of capital”, Ms Nouy added, before concluding that it was now time to focus on making this new system operate effectively to deliver supervision that is “tough and thorough”.

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Welcome address and introduction

Ladies and Gentlemen, I am very pleased to speak to you today at an event to mark the successful establishment of the Single Supervisory Mechanism (SSM).

The SSM – one of the key components of the banking union – was established to ensure that strong supervisory standards are applied in a consistent manner across the euro area.

The origins of the SSM lie in the hard lessons learned from the recent global financial crisis. The establishment of the SSM is a milestone in the reinforcement of the institutional framework of the euro area, which was deeply inspired by the report by the High-Level Group on Supervision chaired by Jacques de Larosière.

We need the SSM to promote certainty in the banking sector and boost the confidence of European citizens and markets in the resilience of supervised banks. We need to ensure that European taxpayers will no longer foot the bill for ailing banks.

The euro area needs healthy banks, which enjoy the confidence of the people and the markets. Only these institutions will be able to finance the real economy and support job creation. The SSM will provide a far-reaching and thorough supervisory framework for better early detection of the risks developing within a financial institution.

The reform of the European banking supervisory system clearly offers both opportunities and challenges. Since 4 November 2014, the ECB has risen to the task and has successfully assumed responsibility for supervision of the euro area banking sector.

Today, besides talking about the establishment of the SSM, I would also – and more importantly – like to present my vision of the European banking supervisory system of the future.

Moving to the SSM and banking union

Set-up

The ECB now directly supervises 120 banking groups in the euro area, covering more than 85% of total banking assets. Around 3,400 smaller institutions are supervised indirectly through national supervisory authorities. Through this system of direct and indirect supervision, the SSM combines the strengths of national supervisory authorities and of the ECB.

Establishing this integrated system of banking supervision was a major task. The scale of the undertaking was unprecedented. It required harmonised, comprehensive and clearly defined supervisory standards and processes; practical infrastructures such as functional and tested IT-systems; and appropriate governance structures for swift and effective decision-making.

Staffing was one of the most important and earliest practical tests for the SSM. I am pleased to report that the recruitment process attracted huge interest across Europe, permitting us to be selective and to hire only the very best and most experienced candidates. Most of the almost 900 people hired during the recruitment campaigns are now already working at the ECB, including staff at the core of the SSM in the Joint Supervisory Teams.

Experience of the comprehensive assessment

Let me say some words on an exercise of unprecedented magnitude recently completed by the ECB: the comprehensive assessment.

This demanding exercise built a basis for the SSM, by covering more than 85% of the euro area banks’ balance sheets. We established strong processes at an early stage to ensure reliable results and the consistent implementation of the outcomes. The exercise brought together in cooperation the European Banking Authority, the European Commission, the European Systemic Risk Board and the European Securities and Markets Authority.

One of our major priorities was to prevent surprises in the outcome for any credit institution. At the SSM level, every effort was made to involve all relevant stakeholders. A formal supervisory dialogue process was conducted to provide preliminary and partial results to the banks and there was constant interaction between the banks and the coordinators of the Joint Supervisory Teams.

Banks at which capital shortfalls were identified were given two weeks to develop sound and credible capital plans to be implemented over the coming months. The Joint Supervisory Teams are currently assessing and reviewing these plans, which, along with the results of the comprehensive assessment, will be taken into account for the annual Supervisory Review and Evaluation Process.

In conducting this stress test in combination with a rigorous balance sheet check, we substantially enriched our knowledge of the banks we supervise and gained valuable insights into cross-border trends within the entire European banking system.

We also enhanced transparency regarding the condition of our banks. I am sure that, at the end of this whole process, when the appropriate measures to repair the impaired balance sheets have been taken, stakeholders will be reassured that our banks are fundamentally sound and trustworthy.

In the future we will see that the comprehensive assessment served as an excellent basis and was one of the key building blocks in renewing confidence and stability in the euro area banking sector.

For meeting all of the challenges in establishing the SSM, the ECB was a perfect and natural home. No other institution could have offered better support for the creation of the SSM. For a new European supervisory authority starting its work, the ECB’s long-established services and its credibility as an institution were tremendous assets.

I am fully convinced that the integration of micro- and macro-prudential tasks in one institution, the ECB, paves the way for enhancing the safety and stability of the European banking system in the euro area.

Future of banking supervision in Europe

SSM Philosophy

I would now like to say a few words about the ethos of the SSM as I believe it is essential to clearly define and articulate our philosophy from the start.

Everyone, from those working at the institutions we supervise to our own front line supervisory staff, must understand that the SSM will not shy away from intrusive and hands-on supervision. The SSM will diligently and assertively implement the single rulebook. We will ask the hard questions and challenge the responses where necessary.

Our supervisors are prepared to be assertive with the banks we supervise and if, after an appropriate period of dialogue, we remain unconvinced that a risk has been properly mitigated, we will take action.

We will be a tough supervisor and will at all times strive to be fair and even-handed in our actions. Crucially, our supervisory approach is backed up by strong administrative penalties and a robust enforcement and sanctioning team.

The SSM will also make every effort to be transparent in all its workings; in September this year we published a guide to our supervisory practices and methodologies, which provides practical assistance to our stakeholders and lays down a transparent common methodology for our work.

European level insights

Let me also remind you that, for the first time in the history of the European Union, we have a banking supervisor with a truly European mandate. Of course, this will impact on the way we supervise the banking sector.

One important objective of the SSM is to improve the quality and consistency of banking supervision within the euro area. The SSM will deliver enhanced opportunities for benchmarking and peer comparison among institutions across the euro area.

With due regard to the diversity of banks’ business models within Europe – which I believe is a clear strength – the SSM will allow us to improve the tools of supervisory risk assessment.

The SSM will certainly be better placed to assess, monitor and address the risks in the banking sector on a European scale. The SSM’s micro-prudential view will be further supported by the ECB’s macro-prudential tasks with respect to monitoring and addressing risks from a system-wide perspective.

The powers given to the ECB to directly apply macro-prudential instruments, as well as to play a coordinating role among all Member States, is an important innovation of the SSM Regulation.

I am convinced that it will improve financial stability in the euro area.

In addition, the SSM will give us a stronger consolidated perspective, and enhance efficiencies in the allocation and transfer of intra-group capital and liquidity.

This will help to reduce market fragmentation, fostering financial integration and ultimately allowing us to reap the benefits of the single market.

In a nutshell, we will take full advantage of the new European level overview provided by the SSM.

Decision-making in the Supervisory Board

This truly European view is also translated into decision-making in the SSM and has a tangible impact on our day-to-day supervisory work.

Let me remind you that all national competent authorities of euro area countries are represented on the Supervisory Board and that all votes carry equal weight. Equal treatment, in accordance with the single rulebook and without national bias, is at the core of the SSM.

In return for participating in a pan-European supervisory system, national supervisors gain influence in the supervision of banks in other countries. Most importantly, all supervisors gain insights into the developments and trends which may arise in other countries’ banks before arriving in their home market. At the ECB in Frankfurt we have teams dedicated solely to analysing such horizontal data, enabling us to have an early warning system.

How we will implement the rules

Another key aspect of the SSM approach to banking supervision, and maybe even the most important, is the concept of the Joint Supervisory Teams, or “JSTs” (a new acronym to learn, sorry about that!), comprising supervisors from both the ECB and the NCAs and managed by a coordinator working for the ECB.

The JSTs will be essential in realising the SSM’s aim of maintaining proximity and close contact with the banks during the ongoing supervisory activities.

We know that we have a wealth of experience to draw from, and the new structure of JSTs as well as that of on-site inspection teams unites the deep specific knowledge of national supervisors with the broad-ranging experience of the ECB. The JSTs are totally pan-European, combining staff from different countries and enriching a European overview with detailed knowledge of national specificities.

As part of ongoing supervision, the JSTs will regularly meet with the senior management and relevant staff of the supervised banks and will organise on-site visits on specific topics.

To obtain a complete overview of the banking system, the JSTs will also work in close cooperation with the professionals dealing with the supervision of less significant banks. All supervisors will be supported by horizontal divisions at the ECB providing specialised expertise.

The JSTs’ pan-European approach will be strengthened by the deep integration between the ECB and the national supervisors. Of course, we will conduct a continuous dialogue about the ongoing supervision of our banks. This will be the basis of our work. But the exchanges of information and views on the supervised entity and on banking supervision in general will also become a key element in the SSM’s operation as a system.

While the ECB will build upon the experience acquired by the national supervisors, the SSM approach to banking supervision will also be forward-looking. Our purpose is to address potential issues in a timely manner. We will promote multiple perspectives on risk and will aim to develop a deep understanding of the risk factors, risk appetite and business model of each entity. We will combine this individual approach with a cross-sector view and look at the linkages between banks and the rest of the financial system.

In order for the SSM to work efficiently, we will also actively encourage further harmonisation of the banking regulatory environment. This is another important aspect of our work.

Use of discretions and options

Already five years ago, the de Larosière report stated that “there is no point in converging supervisory practices, if the basic financial regulations remain fragmented’”. I fully share that view.

The current banking regulatory framework is an undeniable improvement on the previous regime. However, there is still room for progress to ensure consistency and comparability of capital ratios.

The Capital Requirements Directive (CRD IV) contains too many national options and discretions, including on the speed of its implementation into the fully phased-in Basel III definition. To deliver consistent supervision, we need fully harmonised European regulation.

The ECB strongly supports all the initiatives likely to help reduce national discrepancies that add complexity to the existing rules and encourage regulatory arbitrage, thus hampering the creation of a level playing field.

Of course, the ECB will play its part in promoting convergence. Our priority will be to tackle the most controversial national options, for instance regarding the definition of capital. The SSM will also support the European Banking Authority in the promotion of the single rulebook and the single supervisory handbook through the identification and diffusion of best supervisory practices. It will also actively contribute to harmonisation by conducting and participating in peer reviews, surveys and impact studies, which are key to understanding the significance of the various options and discretions.

The SSM looks forward to the development of a more harmonised international framework, and will do its part by championing convergence in the design of future standards at both European and international level. The singleness of the SSM will be a real asset in this regard.

Conclusion

Finally, I would like to say that I believe the establishment of the SSM is a landmark achievement in strengthening the institutional framework of the euro area.

The creation of the SSM has been a major undertaking both for the ECB and the entire EU. Now we must focus on its effective operation and on creating a thorough, comprehensive and tough supervisory framework for Europe.

I can assure you that we are well prepared and ready to deliver on this task.

Thank you for your attention.

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