The European Central Bank’s role in supervising banks

SUMMARY OF:

Regulation (EU) No 1024/2013 on conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions

WHAT IS THE AIM OF THE REGULATION?

The financial crisis demonstrated how problems can spread throughout the financial system and directly affect people’s lives. To strengthen oversight of the system, a single supervisory mechanism (SSM) has been created to oversee banks in the euro area and other participating European Union (EU) Member States.

The regulation establishes the SSM as a new system to supervise banks in the euro area and in other participating Member States. The SSM consists of the European Central Bank (ECB) and national supervisory authorities.

It gives the ECB, in cooperation with the national supervisors, responsibility for the effective and consistent functioning of the SSM.

KEY POINTS

The ECB does the following.

Directly supervises significant banks. A bank may be deemed as significant depending on its size, its importance to the domestic banking sector or whether it has been recapitalised by public funds. The ECB has the authority to:
- conduct supervisory reviews, on-site inspections and investigations;
- grant or withdraw banking licences;
- assess a bank’s acquisition and disposal of qualifying holdings;
- set higher capital requirements (‘buffers’) to counter current or future financial crises;
- impose sanctions for any breach of EU law on credit institutions, financial holding companies* and mixed financial holding companies*.
Indirectly supervises banks that are considered to be less significant and are directly supervised by their national supervisory authorities.

The ECB levies annual supervisory fees on the supervised credit institutions to cover the expenditure incurred by the ECB in relation to its supervisory tasks.

Member States whose currency is not the euro can participate in the SSM by requesting the establishment of close cooperation between the ECB and their national competent authority.

The ECB’s monetary policy and supervisory tasks are separated to avoid any conflict of interest between the two. Tough restrictions enforce the division, for example, allowing for the exchange of sensitive information only when certain safeguards are observed.

National supervisors remain responsible for issues such as consumer protection, money laundering, payment services and the supervision of branches of banks in Member States that are not part of the SSM.

The SSM is the first pillar of the EU’s banking union. The second is the single resolution mechanism, which aims to deal quickly and efficiently with failing banks.

With the creation of the SSM, changes were made to the voting arrangements of the European Banking Authority (EBA) to ensure that Member States participating in the SSM would not unduly dominate the EBA’s board of supervisors.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 3 November 2013.

BACKGROUND

The creation of a truly European supervision mechanism weakens the link between banks and national sovereigns*. This indirectly helps to rebuild trust in the EU’s banking sector.

The recent financial crisis demonstrated how contagious problems in the financial sector of one country can be, especially in a monetary union, and how these problems can directly affect citizens across the euro area.

For further information, see

Financial stability and macroprudential policy (European Central Bank)
Supervisory practices of the ECB (European Central Bank).

KEY TERMS

Financial holding company. A financial institution, whose subsidiary undertakings are either exclusively or mainly credit institutions or financial institutions.

Mixed financial holding company. A parent undertaking, other than a regulated entity (i.e. a credit institution, an insurance undertaking or an investment firm), which together with its subsidiaries, at least one of which is a regulated entity that has its head office in the EU, and other entities, constitutes a financial conglomerate.

National sovereigns. National governments and their agencies.

MAIN DOCUMENT

Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, pp. 63–89).