AFME: SSM to over-simplify EU prudential regulation

Author: | Published: 25 Sep 2013
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  • The European Parliament voted last week in favour of the regulation to set up a single supervisory mechanism (SSM) in Europe;
  • This marks the final step in a year-long legislative process, which began with a September 2012 proposal from the European Commission (EC);
  • It forms the first of the three pillars of a European banking union. The other two are a single resolution mechanism and a common system of deposit protection;
  • The SSM transfers responsibility for approximately 130 of the biggest European-based banks from Eurozone national authorities to the European Central Bank;
  • But an Association for Financial Markets in Europe advisor and non-executive director has warned its implementation could provoke an over-simplification of prudential regulation in the region.

The implementation of a single supervisory mechanism (SSM) in Europe could provoke an over-simplification of prudential regulation in the region, an Association for Financial Markets in Europe (AFME) advisor and non-executive director has warned.

The SSM mechanism transfers responsibility for approximately 130 of the biggest European-based banks from Eurozone national authorities to the European Central Bank (ECB). The Bank will also be responsible for the overall oversight of prudential supervision in the Eurozone.

The European Parliament (EP) voted last week in favour of the regulation to set up the mechanism. This marks the final step in a year-long legislative process, which began with a September 2012 proposal from the European Commission (EC), and forms the first of the three pillars of a European banking union. The other two are a single resolution mechanism (SRM) and, a common system of deposit protection.

But AFME’s Eddy Wymeersch warned delegates at yesterday’s AFME Financing Growth conference, that the SSM regulation could have an adverse effect on prudential regulation in the eurozone.

"As a result of this, I believe the differences in bank branches and subsidiaries will disappear over time," he said. "And that will lead to a significant simplification of the prudential regulation of Europe’s banks, which is contradictory with the overall regional banking system."

See also

ECB: how to make Europe's banking union work

Europe’s banking union: the market responds

Banking sector reform: a definitive guide to the latest developments

The SSM’s key features

Agreement on nearly all aspects of the SSM was reached between the EP, the European Council and the EC in March 2013.

Ahead of last week’s EP vote, an institutional agreement between the ECB and the EP was reached to address remaining concerns.

These concerns centred on fears that the ECB’s existing accountability mechanisms were insufficient to maintain the separation between the Bank’s monetary policy function and its newly-acquired supervisory role.

The key terms of the agreement were reported as follows:

  • The ECB must submit the most important information from the minutes of the Board of Supervisors to the EP;
  • If the Governing Council of the ECB rejects a decision of the Board of Supervisors, the President of the European Parliament or the chairperson of the relevant committee must be informed;
  • The SSM chair must be appointed by the EP and the European Council. The Parliament can initiate the dismissal of the Chair;
  • The vice chair must also be approved by the EP;
  • If the EP initiates inquiries the ECB has to cooperate as for a committee of enquiry. This makes scrutiny much easier for the Parliament; and
  • The ECB must inform the Parliament about supervisory activities regularly.

Wymeersch believed it was all too easy to argue that the ECB’s new powers would prompt the Bank to refuse monetary activity for prudential reasons. Citing the US Federal Reserve by way of example, he said it was quite clear there would be Chinese walls between the ECB Governing Council and its supervisory board – the bank’s decision-making unit.

Nonetheless, BNP Paribas’s global head of market economics Paul Mortimer-Lee expressed concern that the ECB’s credibility as a regulator would be damaged sooner rather than later. "That could harm their implementation of monetary policy," he said. "If things go badly, you’re credibility is damaged. And for central banks, credibility is 90% of the game."

Removing distortionary regulations

Goldman Sachs’ chief European economist Huw Pill, believed responsibility both on the fiscal side and the structural side of European banking remained very much at the national level.

"The interaction between domestic politics and European policies is a key area to focus on," he said. "Very broadly, in countries that became very distorted in the boom phase, their main challenge is now to restructure and rebalance their economies."

"Price competitiveness also needs to be addressed to improve productivity in many countries but that will likely be a natural outcome of successful restructuring initiatives," he said.

"The implications for policies is removing distortionary regulations," he added. "The crucial thing about structural reform is there is no one size fits all. You need to recognise the nature of faults and reforms needed in each country and go from there."

Next steps

The SSM regulation must now be officially approved by the European Council. Following the Council's agreement, the regulation can enter in the Official Journal (OJ). Publication in the Journal typically takes a few weeks.

OJ publication is an especially important trigger point in this instance, not only because it brings the SSM regulation into effect, but also because it enables the ECB to formally begin the required preparative work.

This includes:

  • the appointment of an SSM Supervisory Board, which will be tasked with key decisions on SSM operation; and,
  • the implementation of an asset quality review of the banks it will directly supervise.

The ECB will have up to one year from OJ publication to take over its new supervisory responsibilities. But the EC, EP and the European Council are able to delay this if deemed necessary.

It is anticipated the European policy-makers’ attentions will now shift to the establishment of a SRM. The EC proposed this on July 10 2013.

The European Commissioner for internal market and services Michel Barnier, has reiterated his commitment to seek agreement on SRM by the end of 2013, or by March 2014 at the latest.

Related articles

ECB: how to make Europe's banking union work

Europe’s banking union: the market responds

Banking sector reform: a definitive guide to the latest developments

 


 

 

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