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The European banking landscape – initial conclusions after four months of joint banking supervision and the main challenges ahead

Speech by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism,
at the SZ Finance Day 2015,
Frankfurt am Main, 17 March 2015


Thank you for having me here today. I am particularly pleased to share this session with my colleague from the European Parliament, Sven Giegold, as the Parliament and Mr Giegold played a major role in establishing the Single Supervisory Mechanism.

As I reflect on the past year, one thing strikes me in particular. We started this journey from the best possible place. The ECB was a perfect and natural home for the creation of the SSM. The ECB’s experience and its credibility were very strong assets.

The existing services at the ECB helped us to pass our first tests, for example recruiting experienced staff from all over Europe and putting in place operational infrastructure such as IT systems. I am convinced that no other institution could have offered better support.

Today I will speak to you about what we achieved over the past year, as well as the challenges that lie ahead.

Let me first emphasise that in establishing an integrated system of banking supervision we are combining the best of two worlds. While taking a European perspective, we can also benefit from the expertise and experience of national supervisors (and the best national practices).

Reflecting on the experience of the SSM to date

The ECB has been responsible for supervising euro area banks for four months now. With the entry of Lithuania in the euro area in January 2015, the ECB directly supervises 123 banking groups comprising around 1,200 institutions and covering close to 85% of total banking assets. Around 3,500 smaller institutions are supervised indirectly by the national competent authorities (NCAs).

Establishing this supervisory system that integrates 19 sub-systems was a major task – one need only think of the diversity of banks’ business models within Europe. However, I am sure that the coming months and years will demonstrate how necessary and relevant banking supervision on a pan-European scale is. Allow me to highlight some of the important milestones that we achieved in the establishment of the SSM.

Following months of preparatory work, the Joint Supervisory Teams (JSTs) have taken over the supervision of significant banks. The JSTs are the key operational tool of the SSM. They are composed of staff members from both the ECB and the national supervisors. The head of each JST, an ECB staff member, is not from the country where the bank is established.

Since assuming our new responsibilities on 4 November last year, we have already taken a first set of important supervisory decisions. In the Supervisory Review and Evaluation Process (SREP) – excuse my jargon here – we assessed how much Pillar 2 capital banks must hold. In other words, in our first set of SREP decisions we told each bank that we directly supervise how much capital it must have in 2015.

Contrary to Pillar 1 regulatory capital, which is based mostly on quantitative calculations, Pillar 2 capital is based more on the supervisors judgment of, say, how a bank manages its risk and how it is governed, along with many other qualitative considerations.

The 2014 decisions (for implementation in 2015) were mostly based on assessments by the NCAs – since we only took over in November – using their own national methodologies. However, the final decisions were taken by the ECB. Looking ahead, the assessments underlying the next round of these SREP decisions, which will be taken toward the end of the year and apply to 2016, will be fully performed under the responsibility of the SSM. And, most importantly, we will be using a common methodology in all 19 countries.

This brings me to another milestone. We finalised a common manual for supervision. Imagine a single song sheet for all 4,000 supervisors (as more than 4,000 ECB and national supervisors, spread across 19 countries, are working for the SSM). And, in line with our aim to be as transparent as possible, we published a shorter version of the manual as the Guide to banking supervision.

Our manual contains detailed information on how we will conduct supervision. This covers the sanctions we can impose, the way we conduct on-site inspections, how we determine whether a bank’s management is capable of running the bank (a process known as “fit and proper testing”).

However, it is important to point out that as supervisors we still need to use considerable judgement and discretion. In fact, things are often less black and white than one might imagine.

Also, with the start of the SSM, the ECB has taken up its role in the supervisory colleges, in which it cooperates with non-euro area authorities in supervising banks whose headquarters are outside of the euro area.

However much we can pride ourselves on these achievements, there is one thing that stands out – the successful conclusion of the comprehensive assessment. This had many unique features: it combined a review of the banks’ assets with a macro-level stress test in which we simulated different economic scenarios. Thousands of experts meticulously went through more than 800 individual portfolios containing the loans of almost 120,000 borrowers. As a result we found 25 banks short of capital. All of these elements, together with the good and intensive cooperation with national supervisors, made the comprehensive assessment a successful exercise.

It was also a precondition for the SSM to get off to a good start. It enhanced transparency and gave the ECB access to a vast array of data, which it used to build up knowledge about the banks it now supervises. The comprehensive assessment also resulted in a significant strengthening of banks’ balance sheets and allowed the SSM to start establishing its reputation and credibility as the largest global supervisor. I still think fondly back to the way in which we delivered solid figures, on time, and in close cooperation with the NCAs and the European Banking Authority.

Of course, identifying and covering the capital shortfalls was only one aspect of the exercise. And we are now making sure that all other findings of the exercise are also implemented.

The main challenges ahead of us

I used to think that the build-up phase and the comprehensive assessment would be the most challenging periods we would have to face. But, when I look at our work programme for 2015, I am not so sure about this anymore. While we expected to reach some kind of “steady state” in November 2014, we find ourselves continuing to build and set up structures.

To take an image from aviation, we have built a very powerful plane and we have recruited and trained the pilots and crew. These are considerable achievements. At the same time, expectations run very high and the environment we are operating in is turbulent to say the least. So now the challenge is to make that plane fly steadily over a long distance.

We are looking forward to creating fully integrated European banking supervision as quickly as possible. Since “experience is the best teacher” we are very lucky to benefit from the many years of experience of high-level supervisors from all over Europe.

Let me now highlight some areas which we must tackle in the coming months and years.

Challenge 1: Harmonising supervision and regulation

One of the most important assets of European banking supervision is its capacity to compare banks’ situations across countries. We can do this by benchmarking, through peer reviews and with the support of our horizontal functions. For example, and we already did this in the comprehensive assessment, we can compare the default rates of credit portfolios of a similar nature. This allows us to detect delicate situations much earlier. In a nutshell, we combine a bank-specific approach with a cross-sector view and have a better knowledge of how banks are linked to the rest of the financial system.

This is one of the reasons why European-level supervision is an improvement.

Moreover, the SSM contributes to the harmonised Implementation of the EBA single rulebook, which was a first major step towards harmonisation. But – and now we come to one of the biggest challenges we must tackle – insufficiently harmonised regulation stands in our way. To deliver consistent supervision and a level playing field, we need fully harmonised regulation.

Granted, there has been much progress on the regulatory front. However, there is some room for improvement. In the CRD IV, one of the most important pieces of regulation, we have identified more than 150 national options and discretions. Such options range from the speed at which the fully phased-in Basel III capital definitions need to be implemented, to the amount of deferred tax assets that can be counted toward the highest quality capital, known as CET1. There is also the issue of goodwill and how much can still be counted as capital, as well as the debate on how to treat the insurance equity holdings of banks with large insurance subsidiaries. I will end my list here, although I could go on for quite some time.

The ECB strongly supports all initiatives aimed at addressing national discrepancies and reducing the complexity of the existing rules. The more different rules we have, the more we encourage regulatory arbitrage, thus hampering the creation of a level playing field. We are committed to playing our part in promoting convergence in a rigorous fashion and we have already started to work hard in this field.

By doing so, we will also better align the SSM regulatory framework to international standards, in particular the rules of the Basel Committee, thereby promoting the banking union’s objectives of financial stability and financial integration.

The SSM is not alone in this. The European Banking Authority is developing the single rulebook and single supervisory handbook by identifying and pushing for the best supervisory practices. Take the definition of non-performing loans which was developed by EBA and which we used for our asset quality review. Here the EBA decided that a loan that has not been serviced for 90 days has to be declared non-performing. This is a clear rule that was also welcomed by investors who can compare banks more easily across borders.

Moreover, we will actively contribute to such harmonisation efforts by conducting and participating in peer reviews, surveys and impact studies. They are key to understanding the impact various options and discretions have on banks.

Challenge 2: Developing a European “supervision culture”

The work of the SSM involves a large number of stakeholders: 25 NCAs and NCBs, around 1,200 directly supervised banks within 123 significant banking groups and more than 4,000 supervisors in total (with one in five located at the ECB and the other four at the NCAs). And to these stake holders I could add other European and international financial institutions, market authorities, the press, etc.

In order for banking supervision to function well at the European level, all of these stakeholders must interact efficiently. This is a real challenge. Not only for technical reasons such as the issues surrounding supervisory and regulatory harmonisation, but also for more “psychological” reasons, if I may say so.

We have to create a European “supervision culture”. Of course, we are not starting from scratch: we have years and even decades of cooperation behind us. But the SSM is in an unprecedented position and has an unprecedented responsibility to help foster such financial integration.

One example of putting in place such a shared culture of European supervision is the Joint Supervisory Teams. As I mentioned earlier, they combine staff from different countries who bring in-depth knowledge of the NCAs’ methods and help to identify and promote the best practices from all over Europe as well as to develop a shared “culture” of European supervision.

And so do the networks for horizontal functions which we have also established. They serve the same purpose of developing a common “supervision culture” and sharing information and experiences.

Challenge 3: Setting strong priorities

The setting of priorities is another important element of our work. Given the scale of our undertaking, it is vital to prioritise our objectives and be realistic about them. Let me give you a concrete example. We plan to review banks’ internal models. While banks are allowed to use internal models to calculate their risk-weighted assets and capital needs, those models must be solid, credible and consistent.

As there are close to 7,000 such internal models, reviewing them is an extensive project. To give you an idea and put things into context, reviewing all the internal models of directly supervised banks would require as many resources as the comprehensive assessment did. In addition, this would also be for a longer period of time, as the exercise would take two to three years, hence the prioritisation.

On top of following up on the comprehensive assessment, working towards eliminating national discrepancies and reviewing internal models, we are focusing on some important qualitative issues. For example, we look at how effective and robust a bank’s credit risk management is and we challenge the sustainability of banks’ business models, with a focus on their main profitability drivers.


I will conclude now by saying that the SSM approach to supervision is hands-on and diligent, or tough and fair, as mentioned in our mission statement.

I have very much enjoyed the past year, although I must also admit that I would not like to establish a new pan-European supervisory body every year. Now not a single day goes by when I do not feel very privileged to work with a team of highly dedicated people from all over Europe, a team that is committed to making Europe’s banks safer and sounder.

I cannot promise that the ECB will eliminate once and for all the risk of another financial crisis. However, I am fully convinced that integrated banking supervision will make a big difference.


European Central Bank

Directorate General Communications

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