EU Banking Union

The ECB will get supervisory powers over all banks in the Euro zone, under the “Banking Union” package of two legislative proposals published by the Commission last week.

The ECB has until now not had a supervisory role; this was the task of the recently created European Banking Authority (EBA), whose governing statutes will also be amended by the Commission’s new proposals, in order to adapt them to what will be the ECB’s new central role in ensuring the stability of Europe’s banking system.

The proposals are designed to create a so-called Single Supervisory Mechanism – “SSM” – for Europe’s banking sector

Context

Vulnerabilities and lack of coordination in the euro area have had an aggravating impact on Europe’s crisis of unsustainable national debt in some countries. The debt itself continues to pose a significant risk within the euro area, where the single currency increases the likelihood of negative spill-over effects across borders.

So in May this year the Commission called for a banking union to restore confidence in banks and the euro. For this to become a reality, the EU regulatory framework for the financial sector needs to be overhauled, to ensure the integrity of the single market. This package of proposals is meant to address this.

First Proposal: Supervision of the Euro area

The first Regulation would give the ECB greater power to supervise banks and other financial entities within the Euro Area, as of 1 January 2013. Banks in distress would be prioritised. Significant European banks would be supervised as of 1 July 2013, and the aim would be for all banks to fall under the ECB’s supervision by 1 January 2014.

The ECB would cooperate with other institutions under the European System of Financial Supervision (ESFS), notably the European Banking Authority (EBA).

ECB supervisory tasks

The ECB’s supervisory tasks would include:
• Authorising and withdrawing its authorisation of credit institutions
• Assessing acquisitions and disposals of holdings in credit institutions
• Ensuring compliance with prudential requirements on credit institutions, to set higher prudential requirements and impose additional capital buffers
• Requiring from the credit institutions to set up governance mechanisms and other specific additional requirements to mitigate potential credit risks
• Carrying out supervisory stress-tests on credit institutions
• Carrying out supervision over credit institutions’ parents established in one of the participating Member States, including holding and mixed holding companies
• Participating in supervision in relation to parents established outside the participating Member States
• Participating in supplementary supervision of a financial conglomerate in terms of participating credit institutions

Close Cooperation

The ECB would carry out its supervisory roles under close cooperation with national competent authorities. In non-participating Member States, the ECB may put forward guidelines or requests to the relevant national competent authorities.

Close cooperation would be established by a Decision adopted by the ECB under conditions of full compliance of the no--participating Member State and its competent authority. The Decision also specifies the conditions of participation of national competent authorities in the Supervisory Board (SB). Close cooperation may be terminated by the ECB in case of breach of compliance.

International Relations

The ECB may also develop contacts and enter into administrative arrangements with supervisory authorities, international organisations and the administrations of third countries, subject to coordination with the EBA. These shall not create legal obligations for the EU and its Member States.

Investigatory Powers

To carry out its tasks, the ECB would be given the power to investigate the following institutions: 
• Credit institutions
• Financial holding companies
• Mixed financial holding companies
• Mixed-activity holding companies
• Persons involved in the activities of these entities and related third parties
• Third parties to whom these entities have outsourced operational functions or activities
• Persons closely connected or related to the activities of these entities 
• National competent authorities

The ECB would not however be given powers to investigate national competent authorities.

On-Site Inspections

The ECB may conduct on-site inspections. This may be done without prior announcement. Personnel authorised by the ECB to conduct the inspection, enjoys full access and assistance from personnel of the competent authority of the Member State under inspection.

Sanctions

If EU law is breached, the ECB would be able to impose administrative sanctions of up to twice the amount of profits gained or losses avoided, in cases where this can be determined. Otherwise, the fine can be up to 10% of the total annual turnover.

Second Proposal: European Banking Authority

The second proposed regulation would amend the existing European Banking Authority (EBA) Regulation, in order to adapt it to the new ECB supervisory tasks envisaged in the first proposal of the package.

The EBA Regulation would be amended to include the ECB in the framework of competent authorities under the SSM. Previously, these constituted the EU-wide national competent authorities.

Some of the EBA’s competencies would be transferred to the ECB under newly-proposed Regulation. Thus, the EBA may request the ECB to take necessary action to respond to adverse developments on the financial markets or in the EU-wide financial system.

Information Exchange

Upon request from the EBA, the competent authorities would be obliged to provide necessary information for the EBA to carry out its tasks, and vice versa. Under new rules, this includes the ECB as well as all Member State competent authorities.

Independent Panel

A board of supervisors would establish an independent panel consisting of a chair and two members appointed by the board of supervisors among its voting members. Under new rules, at least one member of the independent panel would be from a non-participating Member State, to ensure balance on the Board.

Any decision the panel proposes would be subject to a final adoption by the Board of Supervisors.

Decisions of the board of supervisors would be taken by simple majority (one member equals one vote) and by qualified majority under certain conditions. The decision proposed by the independent panel would be considered adopted unless it is rejected by a simple majority that includes three votes from participating Member States and three votes from neither non-participating Member States nor Member States in close cooperation with the ECB.

Management Board

The term of office of the members elected by the board of supervisors would be two and a half years, subject to one renewal. The management board would include a minimum of two representatives from non-participating Member States or Member States that have not entered into close cooperation with the ECB as opposed to proportionate composition under original Regulation.

Further Steps

Finally, the Commission communication, the third and final piece of the package, outlines further steps in the SSM to be taken before the end of 2012. These focus on bank capital requirements (CRD4), common system for deposit guarantee schemes (DGS), prudential requirements for credit institutions and investment firms (CRR) and common European framework on banks recovery and resolution (EBA crucial in this respect).