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Banking Union: update on supervisory issues - Resilience of the EU financial sector in the global context

European supervision vs National supervision: the glass is half full

By Aucoin Alban - Head of Public Affairs Group, Crédit Agricole SA


The transition towards a European supervisory authority can be characterised by three main evolutions:

The strengthening of the euro zone stability by promoting consistent supervisory practices across the banking union. Benchmarking supervisory practices, where banks are compared to each other based on the best practices from the nineteen euro zone countries, is a way through. Although this is a positive development, it should be applied cautiously as bank business models and local markets are different while diversity is also a source of stability since it allows for risk diversification.

The supervisory structure now lies on both centralised and decentralised processes. While prudential supervision has been given to the SSM, the other supervisory areas (compliance, AML, payment, etc.) have been left to the National Competent Authorities. This means that banks need to address two distinct authorities, each with their own mandates, objectives and procedures, and interpretation of the Single Rulebook. This sometimes raises issues of coordination and coherence.

A more intrusive supervisory approach resulting from a broader and stricter regulatory framework. The SSM attends banks’ Board meetings. In general banks have been facing more intense, more frequent and more detailed supervisory requests, for instance on risk appetite and governance, on conduct risk, etc. This increases the responsibility of the SSM and its accountability towards depositors, creditors and shareholders in case of a bank failure or resolution.

Overall, the launch of the SSM has been successful but it is still in a start-up phase. There is room for progress and the SSM should address the operational challenges identified by banks to avoid their transformation into more structural issues.

There is room for progress.

Progress is also needed as regards the benefits of the free flow of capital and liquidity within cross-border banking groups. Despite the establishment of the SSM, banks are still facing local requirements (solvency, liquidity) from host authorities within the banking union where the SSM is theoretically both the home and the host supervisor.

For example, an NSFR based on cross-country liquidity sub-groups within the SSM, as envisaged by EBA, could be considered as a cause of restriction to the free movement of liquidity within the SSM in contradiction with the banking union spirit. Although the legislation may provide waivers for solo requirements, it is increasingly difficult to be granted a waiver at local level as shown in the recent SSM consultation on national options and discretions (e.g. legal opinion requirements).

As far as own funds requirements are concerned, local requirements within the Banking Union go against the centralised capital management of cross-border banking groups and efficient allocation of resources. A case in point is the future Minimum Requirement for own funds and Eligible Liabilities (MREL) that may be imposed at entity level even for groups which qualify for resolution tools applied at the consolidated level (Single Point of Entry resolution strategy).

We believe the SSM should be considered as one competent authority and banking union as one jurisdiction where capital and liquidity can be allocated where they are most needed within a cross-border banking group.