It is six months since the EU’s Single Supervisory Mechanism (SSM) became operational. It was, of course, a big step towards a European banking union (EBU), but when will we be able to say that we have effectively created an integrated financial framework to safeguard financial stability and minimise the costs of potential future institutional failures?
To have both the SSM working like a well-oiled machine, and also sleep soundly in full conviction that all possibilities of future bank failures are now eliminated... well, these objectives will however still take a lot of time. Seeking to protect customers’ deposits, as well as going about resolving the problems of credit institutions, are tasks that the bodies involved in two of the pillars of the European banking union, i.e. the SSM and the Single Resolution Mechanism (SRM), have to carry out in a context which some might, with some reason, also describe as very political.
We are here faced with the largest transfer of sovereignty from states to the EU since the creation of the euro, and with it the interpretation and application of the new prudential rules designed to increase confidence in supervision.
Even the ECB was subject to significant change. It created its own new supervisory committee and prior to that it performed solvency tests on some 130 groups of eurozone banks (plus in Lithuania), examining the quality of those assets and conducting stress tests.
All of this effectively means that the ECB has taken on supervision duties required for all the eurozone and practically also all the other non-eurozone EU member states, 3,600 banks in 18 countries, who all have accepted to cooperate closely with this SSM structure.
The creation of the SSM meant that the ECB itself had to change its organisational structure, in the process creating four micro-prudential general directorships, and one secretariat of the board.
The SSM now has to cooperate and work closely with structures like the SRM, the European Systemic Risk Board, the European Stability Mechanism, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority, in the sense of close cooperation, sharing information where necessary, and generally being proactive to maintain stability in the market and, hopefully, avoid crises and institutional failures in all member states.
Even the ECB was subject to significant change
Supervision under these EU structures is obligatory for all institutions holding more than €30 billion in assets, and this covers some 120 important banking groups, who between them hold around 80 per cent of all banking assets in the eurozone.
As the Irish, Spanish, Greek – and to a lesser extent even Italian – experiences have shown us, these institutions are of great importance to the economies of their country, and the EU as a whole simply cannot ignore them even in their day-to-day operations and status, often also due to the scale of their cross-border activities. Apart from this, some institutions have in recent years managed to obtain financial assistance from the ESM or the European Financial Stability Facility through the ECB.
The ECB supervises 14 banking groups in Spain, 21 in Germany, 10 in France, and 14 in Italy. But the numbers supervised in each country mean little if one does not consider the volumes of bank assets and indeed also economic characteristics or developments in each country.
Smaller banking groups in both these and other countries remain outside the ECB’s supervision and are supervised by the national authorities, while small banking groups with assets of less than €30 billion in small countries will also be obliged to fall under ECB supervision. Again there are some other countries (e.g. Austria with the case of Sberbank a bank with strong Russian origin connections, and Belgium with its Banque Degroof) where the economic significance of cross-border assets is large. In general, the overall status of any institution in any EU state has a big bearing over whether it is EU or local authority supervised.
Far too often situations are posited by observers who, in their own quiet way, look very far ahead and start asking questions which get overlooked, involved as we are in the fire-fighting of the present.
Let me posit just one such example. If, in say four or five years’ time, there are more former USSR countries seeking to snub Putin and join the EU, to what extent would we be able to say that the present target level of €55 billion as the level of the EU’s Single Resolution Fund is actually a functional and realistic one? As the old Renzo Arbore was fond of saying, “meditate gente, meditate” (meditate people, meditate).
John Consiglio lectures at the University of Malta’s Faculty of Economics, Management & Accountancy, and is a governor on the Board of the Malta Financial Services Authority.