The banking union, one year on

Introductory remarks by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism, at the Center for European Reform,
London, 21 October 2015

Ladies and gentlemen,

I am very pleased and honoured to speak at this distinguished event.

Precisely one year ago, on 21 October 2014, we were under quite some pressure at the ECB: rushing to finalise the comprehensive assessment results, due a few days later; striving to finish the recruitment campaigns; and organising the transfer of responsibilities from the national competent authorities (NCAs) to the ECB. One year on, where do we stand? The amount of progress made in such a short period of time is definitely impressive. But we still have a lot to achieve. This is what I wish to address in these short introductory remarks.

1. Main achievements of the first year

Conceptually, the banking union is the latest demonstration of the famous theory by Jean Monnet according to which: “Europe will be forged in crises”. After the financial crisis, and even more after the sovereign debt crisis in the euro area, there was an acute awareness of the incompleteness of the European Economic and Monetary Union. All of a sudden, European integration received a boost, this time with the step towards banking union. The work on the single rulebook started as early as 2009 and by end-2013 we had the CRR, CRD IV and our “founding act”, the SSM Regulation, in place.

Concretely, our first year was actually preceded by a ten-month “gestation” period from January until November 2014, during which we achieved two main objectives. First, we shaped the Single Supervisory Mechanism (SSM) as a new European institution which was part of the ECB and I would argue that no other institution could have absorbed the functions and so many new staff as efficiently as the ECB did.

Second, we did the “sonogram”, the first health check so to speak, through the comprehensive assessment. We conducted a rigorous balance sheet review in combination with a macro-level stress test.

The comprehensive assessment has been an effective tool to prompt the actions required to increase the levels of Common Equity Tier 1 capital of banks with shortfalls, and to remedy qualitative findings as identified for a broader sample of participating banks. Measures undertaken by the banks included divestments, capital raising measures and restructuring activities as well as improvements in risk management and prudential accounting procedures.

On top of the strengthening of balance sheets, this exercise improved transparency and gave us access to a vast array of data, which we used to build up knowledge about the banks we are now supervising. More generally, it gave the SSM the opportunity to start its supervision on a credible footing.

Since 4 November last year, the SSM has been fully operational. The Joint Supervisory Teams – we have one so-called “JST” per banking group, with two-thirds of the team’s staff from the NCAs and one-third from the ECB, which is coordinated at the ECB level by a JST coordinator from a different country than that of the banking group – have started supervising their institutions, following the priorities that were established last year and according to the principles that we have agreed upon: we aim at being a tough and fair supervisor, dedicated to ensuring a level playing field among SSM banks, while recognising the need for a certain degree of proportionality. One of our Directorates General is responsible for the indirect supervision of the “less significant institutions” (or LSIs). Its goal is to maintain oversight over the NCAs’ work on LSIs, to ensure consistency of supervisory standards and to intervene whenever the situation requires. Last but not least, our “horizontal” DG plays a key role in promoting harmonised practices and a state-of-the-art supervisory approach by providing in-depth risk analyses and peer reviews covering the 19 member countries.

As we say, “experience is the best teacher”, and in this respect our first year has been particularly intense. Allow me to highlight two concrete examples where the leap forwards in terms of efficiency and consistency of European banking supervision has been particularly impressive.

The first example is our full round of annual supervisory assessments of the banks – the so-called “Supervisory Review and Evaluation Process” or SREP. Because we were only about two months into operations, the first assessment round performed by the ECB in 2014 was still mostly based on the methodology formerly applied by the national supervisors. But I am proud to say that the 2015 round has been done – and is actually being finalised right now – under a common methodology that was developed by us at the ECB in close cooperation with the 19 national supervisors and with the European Banking Authority. This exercise is clearly showing the positive impact of a more harmonised approach: consistency has been improved with regard to the assessment of risks and, in the end, with regard to the level of capital requirements.

This leads me to my second point: we quickly found out that harmonisation of supervisory practices in the SSM could not happen without a harmonisation of the rules. We have counted over 150 provisions where some discretion remains for supervisors or national governments to decide on the concrete implementation of the CRD IV/CRR package, the so-called “options and national discretions” (ONDs). Some of these ONDs are there for good reasons, to cater for specific national features. But many of them are the mere reflection of unquestioned traditions, pure national interest and regulatory capture. They have material effects on the level of prudence of the framework and on the comparability of capital ratios. They also add an additional layer of complexity as well as a source of regulatory arbitrage.

In its first year of action, the SSM has already been a game changer in this very important field. We have done a tremendous amount of work to be able to propose solutions to those national options that fall under the discretion of the national supervisors. And I am pleased to say tonight that we have agreed on a single implementation of these national options for the whole euro area, aligning it with global standards or, when there is no such standard, adopting the most conservative approach. In a few cases harmonisation was not possible with the level of rigour that I would have liked to see, unfortunately, so the dialogue with legislators is ongoing. Nevertheless, this is a unique and necessary achievement, which could not have been reached in any other European forum.

This is what the SSM is about: progressing towards more consistency, more comparability and, eventually, more trust in the European banking system.

2. What’s next?

After this first very productive year, what’s next? What are our main priorities?

I mentioned the tremendous and very rapid progress already achieved on the road towards a truly single banking supervision in the euro area. But Rome was not built in a day, and the SSM will not be built in one year. We are very conscious of the important steps that are still ahead of us and that in terms of harmonisation, we are still far from being where we eventually want to be. The development of a single supervisory culture within the JSTs and throughout the SSM will naturally take more efforts and time. Further important steps on regulatory harmonisation are also needed, which will now require the determined cooperation of the national and European legislators. A number of important regulatory measures will shortly come into force and will have a significant impact on the banks we supervise, like the total loss-absorbing capacity (or TLAC) or the full implementation of the Bank Recovery and Resolution Directive (BRRD). It is also our job to ensure an as smooth as possible transition to these new standards and also, in a more forward-looking way, to the ones still to come in the next years.

Looking at the priorities for the year ahead of us, I think it is safe to say that the economic environment in which banks operate will remain challenging. In particular, the economic climate in the euro area poses challenges to banks’ profitability and many of them will have to review their business models in order to tackle this challenge. Business models in terms of their viability and profit drivers will remain a priority for us in 2016. Governance has a huge impact on risk profiles and we will complete our thematic review on “Risk governance and appetite” with follow-up measures for all significant institutions.

We know that some of the banks within the euro area still face significant credit risk; this is therefore likely to remain a key priority as well, with a focus on non-performing exposures and concentrations of exposures in areas like real estate.

In addition, we will engage in supervisory activities together with other European and international authorities. In the first semester of 2016, we will participate in the EU-wide stress test that will be coordinated by the European Banking Authority. At the global level, the strategic review of the Basel capital framework will continue. I think it is important that the ECB contributes to this review, which should achieve an adequate balancing of the simplicity, comparability and risk sensitivity of the Basel framework.

What I have given you now is just a quick overview of the developments that I consider will be relevant in 2016. It is far from exhaustive, but it is already quite a list. In the coming months, we will make the final selection of our supervisory priorities, which will be published and will help us to focus our supervisory work throughout the coming year.

Thank you very much for your kind attention.