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European Central Bank's role in supervising banks

The European Central Bank's role in supervising banks

SUMMARY OF:

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

SUMMARY

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) countries.

WHAT DOES THE REGULATION DO?

It establishes the SSM as a new system to supervise banks in the euro area and other participating EU countries. 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’s monetary policy and supervisory tasks are separated to avoid any conflict of interest between the two. Tough restrictions enforce the division; for example, by 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 EU countries which are not part of the SSM.

The SSM is the first pillar of Europe’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 European banking authority’s (EBA) voting arrangements to ensure countries participating in the SSM would not unduly dominate the EBA’s board of supervisors.

BACKGROUND

The creation of a truly European supervision mechanism weakens the link between banks and national sovereigns*. This indirectly helps to rebuild trust in Europe’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 more information, see financial stability on the European Central Bank’s website.

Following the COVID-19 outbreak and introducing measures to cope with the impact of the crisis, the European Commission adopted:

Recommendation of the European Central Bank of 27 March 2020 on dividend distributions during the COVID-19 pandemic and repealing Recommendation ECB/2020/1 (ECB/2020/19)

KEY TERMS

* Financial holding company: a financial institution, the subsidiary undertakings of which 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.

ACT

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)

RELATED ACTS

Regulation (EU) No 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending Regulation (EU) No 1093/2010 establishing a European supervisory authority (European banking authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) No 1024/2013 (OJ L 287, 29.10.2013, pp. 5-14)

Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ L 225 of 30.7.2014, pp. 1-90)

last update 08.05.2020

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