Speech by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism, at the ECB Forum on Banking Supervision,
Frankfurt, 4 November 2015
Ladies and gentlemen,
I am very pleased and quite proud to speak here today on the occasion of the Single Supervisory Mechanism’s 1st anniversary, less than four years after the publication of the so-called “Four Presidents’ Report”, which paved the way for the decision to establish a banking union in the euro area.
Precisely one year ago, on 4 November 2014, the big SSM adventure was just starting: we had just finalised the comprehensive assessment; we were striving to finish the recruitment campaigns; and we were 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 and I believe we have taken a giant leap towards ensuring consistent supervision in the euro area. But we still have a lot to achieve. This is what I wish to address in these introductory remarks.
1. Main achievements of the first year
Our first year of operational existence 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. The ECB was the natural home for meeting all of the challenges involved in establishing the SSM. I would argue that no other institution could have offered a sounder basis for the creation of the SSM and no other institution could have absorbed these new functions and so many new staff as efficiently as the ECB. For a new European supervisory authority starting its work, the ECB’s long-established services and its credibility as an institution were invaluable assets. Our supervision also benefits from a link with the central bank: in the SSM we ensure that microprudential supervision is complemented by a macroprudential perspective. Our mandate includes both micro- and macroprudential competences and this was an important lesson from the crisis. Being “under one roof” ensures that no relevant macro-level information gets lost between the supervisory authority and the monetary policymaker. At the same time, the division of competences and the separate responsibility of the ECB Banking Supervision are firmly anchored in European law. To underline this, the ECB Banking Supervision is held accountable in its own right and this is what has been happening since the first day: the Supervisory Board submits an account of its meetings to the European Parliament, we regularly report to the relevant European parliamentary committee – separately from monetary policy activities – as well as to the Eurogroup, and we publish a separate annual report on supervisory activities, which is presented to the European Parliament and the Eurogroup.
In the ten-month preparatory period, we also did the “sonogram” – the first health check of the banks that were likely to fall under our direct supervision – through the comprehensive assessment. We conducted a rigorous balance sheet review in combination with a macro-level stress test, and this was done on an unprecedented scale with the close involvement of the national supervisory authorities, the European Banking Authority and the private sector.
The successful conclusion of this exercise was a precondition for a good start of the SSM. But equally important was our follow-up to this exercise. Shortfall banks had to produce capital plans and the asset quality review (AQR) findings had to be implemented. The comprehensive assessment 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. A number of the problems identified have been the subject of the on-site inspections and thematic reviews we conducted in 2015. IT risks are a good example of risks that pose a broad problem to banks, as identified during the comprehensive assessment. But we also discovered specific risks at individual banks, for example in relation to non-performing exposures. The findings of the AQR have been fully exploited by a dedicated task force set up to develop consistent approaches on this issue. By taking up all these lessons, we ensured a broad and full follow-up of the comprehensive assessment. Overall, this exercise was certainly one of the key building blocks in renewing market confidence in the euro area banking sector. It also gave the SSM the opportunity to start supervision on a credible footing.
Since 4 November last year, the SSM has been fully operational.
Completing the establishment and staffing of the ECB Banking Supervision was of course a priority. For this purpose, we have managed to attract a diverse range of excellent people. Many of our supervisors come from the NCAs. They have brought knowledge about supervisory methods and practices in the nineteen member countries to the SSM. Other supervisors were previously employed by the banks. They bring first-hand experience of the business of banks. Lastly, some of our staff were already working at the ECB, but on the central banking side. They bring very valuable institutional knowledge about the ECB, as well as a macroprudential perspective to our supervision. These diverse teams of supervisors work closely with supervisors of the NCAs in the so-called Joint Supervisory Teams or – an acronym which has become very well known by now – the “JSTs”.
The concept of JSTs, which directly supervise the significant institutions, is both a cornerstone and a symbol of the SSM. We have a JST in place for each banking group; JSTs are composed of ECB and NCA staff and are managed by a coordinator located at the ECB in Frankfurt. The JSTs form the link between the ECB and the NCAs. They are essential in achieving the SSM’s aim of maintaining proximity and close contact with the banks. They operate 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. Our other business areas also work closely with the NCAs. The Directorate General in charge of the indirect supervision of the “less significant institutions” (or LSIs) maintains oversight over the NCAs’ work on LSIs, to ensure consistency of supervisory standards and to intervene whenever the situation requires. Our “horizontal” DG which plays a key role in promoting harmonised practices and a state-of-the-art supervisory approach draws on networks pooling together ECB and NCA staff, mirroring to some extent the concept of the JSTs.
Overall, in addition to around 800 supervisors in Frankfurt, we draw on another 2,000 supervisory staff in the 19 euro area countries. On top of being involved in the JSTs, national supervisors directly supervise the remaining 3,500 euro area banks and implement the supervisory guidance and best practices that we agree upon at the European level. While we benefit from the national experience and expertise of the local supervisors, the fact that supervisory policy decisions are made at the European level guarantees the absence of political influence and national capture. We have combined all these strengths to create a unique form of integrated cooperation, which could inspire other current and future European bodies.
One of the major assets of the SSM is the capacity to compare banks’ situations across countries through benchmarking, peer reviews and horizontal functions. We are devoted to tough supervision and we strive to be fair and even-handed in our actions, while avoiding a one-size-fits-all supervisory approach. By balancing uniform supervisory anchor points with constrained supervisory judgement, we ensure both consistency across institutions and supervision tailored to banks’ specific circumstances. With this approach, we also accommodate banking diversity, which I consider very desirable from a financial stability perspective.
As we say, “experience is the best teacher”. In this respect our first year has been particularly intense. Allow me to highlight some 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.
One of the main challenges this year has been to adequately play our role in the Greek crisis. We are of course not the only institution that is involved here. As a banking supervisor, it is up to us to make sure that Greek banks are stable and healthy, because only a healthy Greek banking sector can play a positive role in getting the Greek economy back on track. Throughout the summer, we have been very closely monitoring the situation and preparing for supervisory action in case of need. We have also conducted a comprehensive assessment of the Greek significant institutions, which contributed to the determination of the recapitalisation needs. The SSM will play its part in ensuring that this recapitalisation is completed on time.
While entering into the day-to-day practice of European supervision, 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 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 today 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, I believe: progressing towards more consistency, more comparability and, eventually, more trust in the European banking system. In a lot of cases we can from now on speak of options and discretions, and leave out the word “national”.
2. The road ahead
Of course, 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 across the SSM will naturally take more efforts and time. Further important steps on regulatory harmonisation are 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 – in close cooperation with the Single Resolution Board – a transition that is as smooth as possible to these new standards and also to the ones still to come in the next years.
Looking at the priorities for the year ahead, 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.
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.
We will also keep playing our part in the rest of the banking union. The Single Resolution Board (SRB) has recently been established and will also soon be fully operational. It is of the essence for the functioning and the coherence of the banking union that we cooperate actively and efficiently with the SRB.
What I have given you now is just a quick overview of the developments that I consider prominent in 2015 and that should be particularly relevant in 2016. It is far from exhaustive, but it is already quite a list.
Given the many achievements already reached in the first year of the SSM, I am confident that we will continue to rise to the many challenges ahead. I am also optimistic that we will continue to meet the high expectations that the public legitimately places on us, thanks to the hard and good work of our dedicated teams.
Thank you very much for your kind attention.