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Erscheinung:17.10.2016 | Topic SSM Two years of the SSM: a lot done, a lot more to do

Since 4 November 2014, banking supervision in the Eurozone has been performed via the Single Supervisory Mechanism (SSM). Since then, the European Central Bank (ECB) has been assigned lead responsibility for ongoing supervision of the approximately 130 largest banking groups in the Eurozone ("significant institutions" or SIs). In practice, the ECB works closely together with the national competent authorities (NCAs). In addition, the NCAs' duty is to continue supervising smaller institutions ("less significant institutions" or LSIs), the majority of which – around 1,600 institutions – are supervised by BaFin in Germany with the support of the Deutsche Bundesbank.

The integration of European banking supervision was, and remains, a project of historic proportions, which presents the ECB and the 19 NCAs involved with major challenges. A good two years after the SSM assumed its duties, the BaFinJournal takes stock once more: How have supervisory practice and standards changed, where have successes been achieved and where is there room for improvement?

Successful beginning to a new supervisory world

To begin, we can say that the SSM has gotten off to a good start and is on the right path. Its introduction was a major feat, one for which not only the ECB and the NCAs, but also the institutions subject to supervision, deserve much respect. The critical first year, during which all processes were new, was successfully mastered. By the second year, some procedures had already been tried and tested both within the ECB as well as between the ECB and the NCAs.

However, it spoils nothing to say that the SSM has still not achieved all its aims: instead, some critical improvements are still required in order to achieve the goal of having a meaningfully harmonised, effective and efficient banking supervision system.

Governance: the aim is more supervision, less coordination

One of the key challenges of the SSM will be to revise its governance, in other words decision-making processes and the distribution of competences. At present, all major decisions within the SSM must be reached by the 25 members of the Supervisory Board who have voting rights. Subsequently, decisions must be approved by the ECB Governing Council as well, since, according to the EU framework treaties, only the Governing Council is authorised to make decisions with external effect.

Just with regard to groups of institutions directly supervised by the ECB, this affects a wide range of issues, ranging from the evaluation of business plans right up to the approval of model changes. In addition, the Supervisory Board decides on all so-called common procedures for the approximately 3,500 credit institutions in the SSM area: it grants and revokes licences and provides authorisation for the purchase of significant holdings (qualifying holding procedure). Obviously, it cannot be expedient and may lead to unnecessary administrative workload if a high-ranking board has to deal with so many issues.

The central decision-making process was also established with the aim of achieving harmonised SSM-wide supervisory practice. This level playing field is ensured in the SSM as well by virtue of the fact that not only the ECB but also the NCAs can view and comment on every single decision proposal. This reduces the possibility of providing exceptional treatment to individual institutions. Striking a balance between the need for (necessary) control and the reality of (limited) capacities, it appears imperative, however, that the Supervisory Board focus its attention on critical or fundamentally important decisions.

An example: before, the fit and proper examination for members of the board of directors of a bank was the responsibility of the respective supervisor at BaFin; the involvement of further hierarchical levels depended on the importance of the institution. Within the SSM, there is now a complex process of coordination between the respective NCA, the ECB's direct supervisors and horizontal functions, ECB senior management and, finally, all members of the Supervisory Board. Against this backdrop, BaFin expressly supports current efforts to redelegate more competencies back to the working level. This is also necessary because of the fact that the number of decision-making procedures continues to increase: whereas in the year 2015 there were a total of almost 980 written procedures with around 2,000 individual decisions, the 1,000th written procedure of this year was already initiated in mid-August.

Joint supervisory teams: trust is everything

Collaboration in daily supervisory practice has improved continuously since the beginning of the SSM. Employees of BaFin, the Bundesbank, the ECB and other NCAs together form joint supervisory teams (JSTs) within the SSM, which supervise individual SIs together. It goes without saying that, owing to factors like geographical distance, multi-dimensional reporting lines and different supervisory cultures, work in the JSTs did not proceed smoothly from day one. At this stage, however, progress has been made in terms of creating an atmosphere of mutual appreciation and trust within the JSTs. BaFin is pleased with the improvements made in this regard.

This makes it all the more important to utilise capacities in such a way that supervision is performed as effectively as possible. The all-valuable peer reviews and the development of standards must not add to the burden which the JSTs are already under. In addition, communication flows and transparency within the teams are still not always as they should be – a challenge which has to be overcome in spite of the team members working in different locations and speaking different languages.

Common review process: a tool under development

Analogous to the annual preparation of risk profiles, which was already practised by the German supervisors before the existence of the SSM, a common supervisory review and evaluation process (SREP) has been put in place for the SIs. It results in a score, as well as specific supervisory requirements for individual institutions. This may also involve additional Pillar 2 capital requirements, which supplement the fixed Pillar 1 minimum requirement. The advantage of such an approach is obvious: the assessment of all SIs under the same process and based on the same criteria is the foundation for the desired level playing field.

The SREP was carried out in 2016 for the second time. It is remarkable in how many areas the development of joint standards has already been achieved. It is an important but also resource-intensive step towards the creation of a single banking supervisory system, which will improve the quality of supervision as a whole. Here, too, however, there is still some work to do: together with the ECB and other NCAs, BaFin is still working on the clarification of critical methodological and process-related issues.

From BaFin's point of view, two things are important here: firstly, despite harmonisation, of course the outcome should not be the lowest common denominator – instead, the requirements must be high throughout the SSM. The impression must not be created – especially for German institutions – that standards have dropped since the introduction of the SSM. Secondly, the SREP focuses heavily on quantitative aspects, which increases the opportunity for SSM-wide analyses and enhances supervisory practice. At the same time, there is a danger that, through focussing on the quantification of individual risk types, the supervisory view of the whole may suffer. BaFin has gained good experience in considering not only figures (provided by the institutions) but also, for example, in specifically examining decision-making processes within the banks. It is therefore endeavouring to simplify the sometimes mechanistic, template-based approach in the current SREP in order to create more space for an alert, holistic supervision.

Supervision of LSIs: finding the right balance

Thus far, supervisory practice with regard to the less significant institutions has not changed much as a result of the SSM. Direct supervision in Germany continues to be undertaken by BaFin, with ongoing support provided by Deutsche Bundesbank – a system that has been tried and tested over time. The ECB is directly responsible only for the common procedures, which were already discussed above. It also performs indirect supervision, for example by way of reporting obligations, the harmonisation of supervisory processes or horizontal peer group analyses in the entire SSM area. According to Danièle Nouy, Chair of the Supervisory Board, the ECB does not aim to take on the entire task of direct supervision of LSIs; instead, it sees its role as that of providing central oversight and fostering cooperation.

A key project of the SSM is the introduction of a harmonised SREP for the LSIs, too. In order to ensure compliance with the provisions of the relevant guidelines from the European Banking Authority (EBA), BaFin, together with the Bundesbank, introduced its own LSI SREP this year. It is now working with particular intensity on an SSM-wide setting of standards – not least because more than half the LSIs are domiciled in Germany. It advocates for a lean, yet effective, solution, which will burden neither the supervisors nor the institutions excessively. In keeping with the principle of proportionality, the effort expended on unproblematic institutions should be kept as low as possible so that sufficient time and energy remain for supervising the problematic institutions.

From BaFin's point of view, harmonisation with a sense of proportion is important: supervision of LSIs has remained a task for the national authorities for good reason, and this should not be contradicted by SSM provisions which are unnecessarily granular.

Outlook

The SSM is a joint project of the ECB and the NCAs. Setting up such a mechanism in such a short period of time was a task of the utmost complexity. All those involved are justifiably proud of what has been achieved: the SSM is up and running by now, many processes are well implemented, the involved parties know each other and the trust they have in each other is growing day by day. However, the SSM still has some work to do in order to become exactly what it is supposed to be. The integration of very different supervisory cultures, languages and banking systems under one roof remains a challenge, as does the readjustment in important areas like governance and the SREP. BaFin is firmly committed to supporting the SSM project to the best of its ability in the future.

Furthermore, other major challenges are already looming on the horizon. This is because the SSM is only one cornerstone of European Banking Union: currently, implementation of single resolution is beginning, with a European deposit insurance scheme to follow.

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