Commission proposes a package for banking supervision in the Eurozone – frequently asked questions
European Commission - MEMO/12/662 12/09/2012
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Brussels/Strasbourg, 12 September 2012
Commission proposes a package for banking supervision in the Eurozone – frequently asked questions
What is being proposed today?
The Commission adopted today a package of proposals to set up a single supervisory mechanism (SSM) that contains:
Why is this proposal necessary?
There are currently vulnerabilities in the banking sector which have a negative impact on the sovereign debt crisis. The negative feedback loops between individual Member State budgets and some of their banks are a threat to financial stability in the EU. This problem poses specific risks within the euro area where the single currency increases the likelihood of negative spill-over effects across borders. Furthermore, the trend of financial institutions to increasingly focus on their national home markets significantly undermines the single market for financial services which constitutes an important basis for economic growth. It also impairs the transmission of monetary policy impulses by the ECB into actual lending to the real economy.
Therefore, in May 2012, as part of a longer term vision for economic and fiscal integration, the Commission called for a banking union to restore confidence in banks and the euro.1 In tandem, the on-going reforms of the EU regulatory framework for the financial sector need to be completed to ensure the integrity of the single market. Both a deeper single market for the entire Union and a stronger Economic and Monetary Union (EMU) for Member States in the euro area are necessary. Decisive and rapid steps to achieve both are required. It is in this context that the June 2012 European Council decided that the countries of the euro area would create a single supervisory mechanism for banks. Such an integrated supervision is necessary to make sure that all euro-countries can have full confidence in the quality and impartiality of banking supervision, opening the way for the European Stability Mechanism (ESM) to directly recapitalize banks that fail to raise capital on the markets.
Will all banks be covered or only big banks from the euro area?
The single supervisory mechanism will cover all (approximately 6,000) banks in the euro area. Although large banks of systemic importance are at the heart of the European supervisory framework, recent experience shows that relatively smaller banks can also pose a threat to financial stability. It is therefore essential that the supervisory tasks conferred on the ECB can be exercised over all those banks.
The degree of direct European supervision by the ECB on a daily basis and the role played by national supervisors may vary according to the size of banks. But the ECB will be responsible for ensuring appropriate monitoring of all those banks' performance of their supervisory tasks.
Why do you want to cover all banks from the euro zone? Will the ECB be able to supervise several thousand banks?
While the safety and soundness of large banks is essential to ensure financial stability, recent experience has shown that smaller banks can also pose a threat to it. Therefore it is important that the new regime applies to all banks. This is also consistent with the approach agreed by Member States that any bank can potentially benefit from ESM interventions.
A two-tier system, where a subset of banks would be subject to ECB supervision while others would remain under full national responsibility would introduce significant asymmetries within the same country and is inherently unstable: depositors and banks could easily move to the segment that is perceived to be safer. This would increase volatility risks and make parts of the banking sector less, rather than more stable.
While the SSM would cover all banks in the euro zone, national supervisors would continue to carry out day-to-day verifications and prepare and implement the ECB's acts in their capacity to assist the ECB, since they are best placed for such activities.
Why will the ECB only supervise European systemically important banks as a first step?
It is proposed to have the SSM in place as of 1 January 2013. In order to allow for a smooth transition to the new mechanism, a phasing-in period is envisaged which would allow the ECB and national supervisors sufficient time to prepare. As a first step, as of 1 January 2013, the ECB may decide, at its discretion, to assume full supervisory responsibility over any credit institution, particularly those which have received, or requested public funding.
As of 1 July 2013 all banks of major systemic importance will be put under the supervision of the ECB. The phasing-in process should be completed within one year from the entry into force of this Regulation at the latest, that is on 1 January 2014, when the new SSM will cover all banks.
Why should the ECB be the institution in charge of supervising the euro area banking system?
Recent developments have demonstrated that the single monetary policy needs to be complemented by a single supervisory function. There are several reasons why the ECB is best placed for carrying out banking supervision:
What exactly would the powers of the ECB be? What would it do in practice?
The ECB would be exclusively responsible for key tasks concerning the prudential supervision of credit institutions. In particular, it would:
National authorities would assist the ECB. They would prepare and implement the ECB acts under the oversight of the ECB, including day-to-day supervision activities.
Moreover national supervisory authorities would remain responsible for carrying out tasks not conferred on the ECB, including, for example, on issues of consumer protection, receiving notifications from credit institutions in relation to the right of establishment and the free provision of services, supervising credit institutions from third countries establishing a branch or providing cross-border services in the EU, supervising payments services, carrying out day-to-day verifications of credit institutions, preventing the use of the financial system for the purpose of money laundering and terrorist financing.
Which powers would the ECB have to carry out its tasks?
In order to execute its tasks, the ECB would have the necessary supervisory and investigatory powers once this legislative package enters into force.
The ECB's supervisory powers will be the same as the powers which competent authorities shall be granted under applicable Union law. Under the Capital Requirements Directive (CRD IV) package (IP/11/915), competent authorities are equipped with a broad range of supervisory powers - for example they can request banks to strengthen their governance or improve their capital situation. The ECB will be considered a competent authority and will have all powers available to competent authorities under the Capital Requirements Directive (CRD IV) package.
The ECB's investigatory powers are provided for in the proposed Regulation itself. These include for example the power to request all necessary information, to conduct all necessary investigations of credit institutions and the persons involved in the activities of the respective institutions as well as to carry out on-site inspections. The ECB may also impose pecuniary sanctions where European Union law confers such powers on supervisory authorities.
What would the role of national supervisory authorities be in the new context?
National supervisors have an important and long-established expertise in the supervision of credit institutions within their territories and have established a large body of dedicated and highly qualified staff for these purposes.
National supervisors would therefore continue to play a pivotal role in banking supervision in the Member States under the SSM.
First, in accordance with Treaty rules the ECB can only be assigned specific tasks, not overall responsibility for supervision. As a consequence, certain key supervisory tasks necessary for the supervision of credit institutions, notably all key tasks related to financial stability, are conferred on the ECB while all tasks not spelt out in the regulation would remain the competence of national supervisory authorities.
These include – amongst others - the powers to supervise credit institutions from third countries establishing a branch or providing cross-border services in the EU, to supervise payments services, to impose pecuniary sanctions on credit institutions for breaches of EU legal acts except where the breach concerns an ECB act or to carry out day-to-day verifications of credit institutions.
Second, even for the tasks conferred on the ECB, most day-to-day verifications and other supervisory activities necessary to prepare and implement the ECB's acts could be exercised by national supervisors operating as an integral part of the SSM. An SSM covering all banks in the participating Member States can only work based on a model which integrates a strong role for national level supervisory expertise. The proposal recognises that within the SSM, national supervisors are in many cases best placed to carry out such activities, due to their knowledge of national, regional and local banking markets, their significant existing resources and to locational and language considerations, and therefore enables the ECB to rely on national authorities to a significant extent. Preparatory and implementing activities which national authorities could deliver within the SSM for example include the following:
How would democratic accountability of the ECB be ensured?
The ECB will be independent when carrying out banking supervision and will be subject to strong accountability provisions to ensure that it uses its supervisory powers in the most effective and proportionate way, within the boundaries set by the Treaty in parallel to the arrangements provided for the European Supervisory Authorities.
The ECB shall therefore be accountable for its tasks to the European Parliament (EP) and to the Council/the Eurogroup. The ECB will be subject to regular reporting requirements and will respond to questions. The chair of the supervisory board will present an annual report on the ECB's supervisory activities to the EP and the Eurogroup and may be heard by the competent committees of the EP on other occasions. The ECB will also be obliged to respond to any questions asked by the EP and its members on its supervisory activities. Moreover, under the Treaty, the President and the Vice-President of the Governing Council as the body with final responsibility for the ECB's action, as well as the other members of the Executive Board, are appointed by the European Council after consultation of the European Parliament. As the Chair of the supervisory board will be selected from the Members of the Executive Board, this also ensures a significant role for the EP in the selection of the Chair. As regards the budget, in accordance with 314(1) TFEU the ECB's budget is not part of the Union budget.
Nevertheless, with a view to ensuring accountability within this framework, the ECB will be required to develop a separate budget line for supervisory tasks from its general budget. Expenditures relating to the ECB's supervisory tasks will be financed by charging fees from supervised institutions.
How would the ECB be able to deal with the proposed new tasks: would they get more staff and budget?
National supervisory authorities would carry out most of the preparation and implementation of the ECB's supervisory decisions. The ECB will have to build up the necessary resources to ensure decision-making and overall coordination of the Single Supervisory Mechanism. Those resources should be obtained in a way that ensures the ECB's independence from undue influences by national competent authorities and market participants, and separation between monetary policy and supervisory tasks.
The costs of supervision should be borne by the banks which are subject to it. The expenditure relating to the performance of the supervisory tasks will therefore be financed primarily by fees levied by the ECB on the credit institutions subject to its supervision, and will be based on the size and the risks posed by these institutions.
Why should the ECB's supervisory tasks be carried out in operational separation from its monetary policy tasks?
Within the ECB an operational separation between monetary policy tasks and supervisory tasks is necessary to eliminate potential conflicts of interest between these two tasks. Conflicts of interest could for instance emerge in a situation where in order to meet the monetary policy objective of price stability, interest rates need to be raised, while this might at the same time have adverse effects on the solvency and profitability of the banking sector.
Therefore, the proposal lays down a number of organisational principles to ensure a clear separation between monetary policy and supervision while at the same time allowing the ECB to take full advantage of the synergies between monetary policy and supervision.
To implement the necessary separation between both tasks and ensure appropriate attention to supervisory tasks, the ECB will ensure that all preparatory and executing activities within the ECB will be carried out by bodies and administrative divisions separated from those responsible for monetary policy. To this end a supervisory board will be set up that will prepare decisions on supervisory matters. The Governing Council will be ultimately responsible for taking decisions but may decide to delegate certain tasks or decision-making power to the supervisory board. The supervisory board will be led by a Chair and a Vice-Chair elected by the ECB Governing Council and composed in, addition to them, of four representatives of the ECB and of one representative of each national central bank or other national competent authority.
What will the impact of the SSM on the relationship between home and host supervisors of banks active in several Euro area Member States?
Today, day-to-day supervision of cross-border banks is carried out by national supervisors. Under EU law the home supervisor and the host supervisors of other Member States where the bank establishes branches or subsidiaries or provides cross-border services have to coordinate their action. One important forum for coordination is the colleges of supervisors bringing together all supervisors responsible for subsidiaries in a banking group.
With the creation of the SSM, many supervisory tasks in the euro area Member States will be carried out by the ECB for all Member States concerned.
Nevertheless, existing home/host supervisor coordination procedures and colleges of supervisors will continue to exist as they do today, as far as coordination with supervisors in non-euro area Member States is concerned. Non-euro area Member States will retain all their existing powers and prerogatives. However, to the extent that the ECB has taken over supervisory tasks, it will carry out the functions of the home supervisor for euro area banks and the host supervisor for other banks active within the euro area. The obligations to cooperate in consolidated supervision and between home and host supervisors, to exchange information and to coordinate within colleges will apply fully to the ECB. Colleges of supervisors will be the forum for coordination between the ECB and national supervisors of non-euro area Member States.
For coordination within the Eurozone, the new arrangements within the SSM will substitute the complex interaction between home and host country authorities and within colleges. The ECB will exercise at the same time the powers of the former home supervisor and the former host supervisor. Both will be represented on the ECB supervisory board and will therefore have a voice over the exercise of all those powers. The SSM will be free to set up internal coordination groups dealing with the supervision of specific cross-border banks and involving the relevant national supervisors.
How would non-euro area countries be able to join the single supervisory mechanism?
Under the Treaty, the ECB cannot exercise binding powers outside the euro area. Therefore, non-euro area Member States cannot be fully part of the single supervisory mechanism. Nevertheless, non-euro area countries may notify the ECB of their intention to join the SSM by establishing close cooperation between their competent authorities and the ECB. To that purpose, they will have to take all necessary measures to ensure that their national competent authorities will abide by and implement relevant ECB acts. Where all the conditions for establishing close cooperation are met, the ECB would be obliged to take a decision to establish such close cooperation, allowing the non-euro area country to take part in deliberations in the supervisory board, which would thereby gain access to all information available within the SSM.
The ECB may decide to terminate the close cooperation if the conditions are no longer met.
What about the European Banking Authority? Does today's proposal mean that EBA was not credible or strong enough?
The European Banking Authority (EBA) and the European System of Financial Supervision established in 2011 have significantly improved cooperation between banking supervisors within the Union. The EBA is making important contributions to the creation of a single rulebook for financial services in the Union, and has played a crucial role in implementing in a consistent way the recapitalisation of major credit institutions of the Union as agreed by the informal Meeting of Members of the European Council in October 20112. It is responsible for the EU-wide stress test exercises to assess the resilience of financial institutions to adverse market developments, as well as to contribute to the overall assessment of systemic risk in the EU financial system. However, day-to-day supervision has remained at national level.
The ECB will carry out supervisory tasks which are currently carried out by national supervisors in the Euro area, not by the EBA. The ECB will cooperate with the EBA within the framework of the European System of Financial Supervision. The role of EBA will be preserved. It will continue developing the single rulebook applicable to all 27 Member States and enhance convergence of supervisory practices across the whole Union. The Commission also asks today that the EBA develops a Single Supervisory Handbook to complement the EU's single rulebook and ensure consistency in bank supervision across the 27 countries in the single market.
How would the ECB interact with EBA?
The new European Supervisory Authorities – the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA) – will all retain existing powers and tasks.
In particular they will continue to contribute to the creation of a single rulebook and to establishing a level playing-field in the single market.
The proposed amendments to the EBA Regulation will ensure that the EBA can continue to fulfil its mission effectively as regards all Member States. In particular, the EBA is enabled to exercise its powers and tasks not only vis-à-vis national supervisors but also vis-à-vis the ECB as a European institution.
In order to ensure consistency with the framework of the European System of Financial Supervision (ESFS) set up in 2010 (MEMO/09/404), the ECB will coordinate and express a common position of the Euro area Member States for matters falling under its supervisory tasks when they participate in the Board of Supervisors and the Management Board of the EBA. However in order to ensure EBA decision-making structures continue to be balanced and effective and preserve the interests of all its members, the amendments to the EBA Regulation will adapt voting arrangements within the EBA, allowing the EBA to continue fulfilling its mission in an optimal way.
Furthermore, the effective impact of the SSM on the operational functioning of ESFS will be specifically examined in the forthcoming review on the functioning of the ESAs to be presented by the Commission at the beginning of 2014.
How will the voting modalities under the EBA regulation be modified (decisions subject to qualified majority/ simple majority)?
Within the EBA, today as a matter of principle decisions are taken by simple majority (one member, one vote) by the members of the EBA's Board of Supervisors. As regards binding EBA powers, this includes decisions on the application of EU law in the context of the breach of law procedure, action in emergency situations and settlement of disagreements between national authorities (in the latter case subject to a specific voting procedure in certain cases). On the other hand, decisions in relation to the adoption of guidelines and recommendations and of draft technical standards as well as on budgetary matters are taken by qualified majority (as defined in Article 16 (4) TEU and in Article 3 of the Protocol (No 36) on transitional provisions based on the rules applicable in the Council.
Today, supervisors of euro area Member States – if they all cast their votes in the same way - have a simple majority but do not have a qualified majority of the votes in EBA's Board of Supervisors.
In order to ensure EBA decision-making structures continue to be balanced and effective and preserve the interests of all its members, voting arrangements within the EBA on breach of law and settlement of disagreement would be adapted.
When decisions are taken in relation to a breach of law or in relation to binding mediation, an independent panel will be set up to prepare the relevant decisions, consisting of the Chairperson and one representative from each a participating and a non-participating Member State to the SSM. These decisions are to be considered as adopted unless they are rejected by a simple majority which shall include at least three votes from each of the participating and the non-participating Member States to the SSM. Under a scenario where only four or less Member States are not participating in the SSM, the simple majority is met as long as at least one vote of a non-participating Member State is cast.
It is not proposed to adapt the voting modalities on matters subject to qualified majority voting and on action in emergency situations. In those cases, the existing rules provide sufficient safeguards to ensure balanced and effective decision-making, taking into account the interests of the internal market as a whole. For example, draft technical standards are subject to qualified majority voting in the Board of Supervisors and are ultimately adopted by the Commission which can amend them in particular to protect the internal market.
Today's proposal does not propose to amend the composition of the Board of the EBA, which deals with matters both related to the future activities of the SSM and other matters. Of course, the ECB will coordinate the positions of the Euro area Member States when they participate in the board of the EBA.
How will the proposal interact with the Capital Requirements Directive (CRD) IV proposal? Will the CRD IV package have to be amended?
The proposed CRD IV package currently under discussion by the European Parliament and the Council is set to regulate the activities of banks and the prudential framework that governs the whole EU internal market and therefore constitutes an important element of the Single Rulebook. Supervision at European level will build on the Single Rulebook, just as supervision outside of the SSM will.
The ECB will exercise its supervisory tasks in accordance with the EU supervisory framework to be established by the CRDIV proposals. Consequently, the creation of the single supervisory mechanism will not in principle require substantive changes to the proposed CRDIV legislative package, although in a limited number of areas, some fine-tuning may be required to reflect the new situation. During the final stages of the CRDIV negotiations, the Commission will pay particular attention to ensure that the texts agreed are technically compatible with the proposed SSM Regulation, and will work with the European Parliament and the Council in this respect. This will include in particular ensuring that all provisions of the proposed CRDIV Directive are operational for application both by Member States and national authorities and by the ECB.
What does this mean for the proposals on deposit guarantee schemes and bank resolution?
Work on finalising the current proposals on deposit guarantees schemes (DGS) (IP/10/918) and bank recovery and resolution (IP/12/570) should be accelerated in order to have them adopted by the end of 2012. This will establish the common framework of rules for protecting deposits and for dealing with banks in difficulty across the EU's single market, covering all relevant definitions, powers, objectives, principles, tools, procedures, safeguards etc. Most importantly, it will set in motion the process of making instruments available to make sure that banks pay for bank restructuring, rather than taxpayers, via bail-in mechanisms and national resolution funds.
How would the ECB relate to resolution? Will the ECB be able to exercise certain resolution powers, like intervening in a bank's structure?
Today's proposal concerns the daily task of banking supervision. Consistent with the existing EU regulatory framework for banking supervision as well as the Commission's proposal for bank recovery and resolution (IP/12/570), it includes some powers in terms of early intervention if a bank breaches some of its regulatory requirements. In such a scenario, some of the possible measures which the supervisor could take include requiring the bank to reduce its exposures to certain risks, to increase its capital, or to implement changes to its legal or corporate structures. All other tasks related to resolution remain with the national authorities.
What further steps are foreseen in relation to a more centralised system of bank resolution at EU level?
Reinforced supervision within the banking union will help improve the robustness of banks. If a crisis nonetheless occurs it is necessary to ensure that institutions can be resolved in an orderly manner and that depositors are assured their savings are safe. A banking union should therefore include a more centralised management of banking crises.
Once agreement on the existing DGS and Bank Recovery and Resolution proposals is achieved, the Commission envisages making a proposal for a single resolution mechanism which would have the responsibility to resolve banks and to coordinate in particular the application of resolution tools to banks within the banking union. This authority would be more efficient than a network of national resolution authorities, in particular in the case of cross-border failures, given the need for speed and credibility in addressing banking crises. It would be a natural complement to the establishment of a single supervisory mechanism. It would also entail significant economies of scale, and avoid the negative externalities that may derive from purely national decisions. It would take its decisions in line with the principles of resolution set out in the single rulebook which are consistent with international best practice and in full compliance with Union state aid rules. In particular shareholders and creditors should bear the costs of resolution before any external funding is granted, and private sector solutions should be found instead of using taxpayers' money.
Moreover, and based on an assessment of its functioning, such a single resolution mechanism could also be entrusted with further tasks of coordination regarding the management of crisis situations and resolution tools in the banking sector, as set out in the report presented in June 2012 by the Presidents of the European Council, the Commission, the ECB and the Eurogroup.
What has the EU done so far in terms of banking regulation?
a. Banking supervision
Three European supervisory authorities (ESAs) started work on 1 January 2011 to provide a supervisory framework (see MEMO/10/434):
b. Bank capitalisation
Banking institutions entered the crisis with capital that was insufficient both in quantity and in quality, leading to unprecedented support from national authorities. With its proposal on capital requirements for banks ("CRD IV") made in July last year (see IP/11/915 and MEMO/11/527), the Commission launched the process of implementing for the European Union the new global standards on bank capital agreed at G20 level (most commonly known as the Basel III agreement). Europe is playing a leading role on this matter, applying these rules to more than 8,000 banks, representing 53% of global assets. The Commission proposals are currently being discussed by the Council and the European Parliament and the Commission expects agreement to be reached shortly.
The Commission also wants to set up a governance framework giving national supervisors new powers to monitor banks more closely and take action through possible sanctions when they spot risks, for example to reduce credit when it looks like it is growing into a bubble. European supervisors would intervene in some cases, for example when national supervisors disagree in cross-border situations.
c. Bank restructuring
Extensive financial sector conditionality has been included in the policy requirements addressed to Member States that have received international financial assistance.
With respect to the banking sector, the required policy measures consist, on the one hand, of the orderly winding-down of non-viable institutions and, on the other hand, of the restructuring of viable banks. Higher capital requirements, recapitalisations of banks, stress tests, deleveraging targets as well as enhancing the regulatory and supervisory frameworks have also been part of the policy initiatives. While not specific to programme countries, these stabilisation measures are most easily implemented in the context of international financial assistance.
The European Financial Stability Facility (EFSF) can provide loans to non-programme euro area Member States for the specific purpose of recapitalising financial institutions, with the appropriate conditionality, institution-specific as well as horizontal, including structural reform of the domestic financial sector.
Specific bank restructuring under the programme goes hand-in-hand with the conditionality of EU state aid rules.
d. Deposit guarantees
Thanks to EU legislation, bank deposits in any Member State are already guaranteed up to €100,000 per depositor if a bank fails. From a financial stability perspective, this guarantee prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences.
In July 2010, the Commission proposed to go further, with a harmonisation and simplification of protected deposits, faster pay-outs and improved financing of schemes, notably through ex-ante funding of deposit guarantee schemes and a mandatory mutual borrowing facility. The idea behind this is that if a national deposit guarantee scheme finds itself depleted, it can borrow from another national fund. This would be the first step towards a pan-EU deposit guarantee scheme. This proposal is still being discussed by the Council and Parliament in second reading. The Commission calls upon the legislators to speed up the process of co-decision on this proposal, retaining the mutual borrowing facility.
In managing a number of bank crises over recent years, national authorities have often created a new structure out of the failing bank and transferred some critical functions of the bank to this structure, such as safeguarding deposits. These resolution mechanisms make sure that depositors never lose access to their savings (for example in the case of Northern Rock, the bank was split into a good bank, which contained the deposits and good mortgage loans, and a bad bank winding down the impaired loans).
For more information on the Commission's proposal for a European system of deposit guarantee schemes, see IP/10/918.
e. In addition to reinforcing the supervision of the financial sector, increasing protection for bank depositors, strengthening capital requirements for financial firms, and improving crisis management in the banking sector, the Commission is also working:
Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank: Action for Stability, Growth and Jobs, COM(2012) 299, 30 May 2012. http://ec.europa.eu/europe2020/pdf/nd/eccomm2012_en.pdf