The Single Supervisory Mechanism: A Further Step Towards the Banking Union
From 4 November 2014, the Single Supervisory Mechanism (SSM)
The ECB will also be responsible for the monitoring of the supervision carried out by national competent authorities on less significant banks (approximately 6,000) in the Euro-area.
The launch of the SSM constitutes a further step towards the integration of the European banking sector and paves the way for the establishment of a banking union among the Euro-area Member States
The Banking Union
The banking union is based upon three foundation stones:
1. a Single Rulebook, of European-wide harmonized prudential rules incorporating (a) the so-called “CRD IV package” (i.e., the Capital Requirements Regulation
2. the SSM; and
3. a Single Resolution Mechanism (SRM), establishing, among others, a single resolution fund (fully financed by banks’ contributions) to ensure the orderly resolution of failing banks
SSM: What and How?
The key element of the SSM is the granting to the ECB of a prudential supervision role, including the responsibility for:
directly supervising most significant banks (including all banks having assets of more than €30 billion or representing at least 20% of their home country’s GDP);
monitoring the supervision carried out by national competent authorities on other banks, which will include the power to take over supervisory functions, to ensure consistent application of high supervisory standards;
granting/revoking authorization to carry out the banking business and assessing the acquisition/disposal of qualifying holdings in credit institutions; and
ensuring the coherent and consistent application of the Single Rulebook in the Euro-area Member States.
The ECB has been granted extensive supervisory and investigatory powers (including the power to request information, conduct general investigations, and perform on-site inspections) and the power to impose administrative penalties. Among the supervisory powers, it is worth mentioning, inter alia, the power to:
restrict or limit the business, operations or network of institutions or to request the divestment of activities posing excessive risks to the soundness of an institution;
require institutions to limit variable remuneration as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base;
require institutions to use net profits to strengthen own funds;
restrict or prohibit distributions by the institution to shareholders, members or holders of Additional Tier 1 instruments where the prohibition does not constitute an event of default of the institution;
impose specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities; and
remove at any time members from the management body of credit institutions who do not fulfil the requirements set out in European or national legislation.
A Game-changer for the Banking Business
The establishment of the SSM is a regulatory development of unprecedented magnitude and is likely to profoundly change the face of the industry.
Further integration of the sector is to be expected: unified supervision is, in fact, likely to drive banks towards the path of consolidation, in an attempt to optimise internal management of capital and liquidity and reduce compliance costs.
The newly-established regulatory landscape may also prove to be a game-changer for the way banks carry out their operations: purely domestic business paradigms are likely to be gradually replaced by a wider, pan-European, model. Banks will have to adapt to a new, and not purely domestic, legal framework and regulator.
If you have any questions concerning these developing issues, please do not hesitate to contact any of the following Paul Hastings lawyers:
Flavio A. Acerbi
Paul Hastings LLP
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