Speakers of the session
Luigi Federico Signorini
Deputy Governor and Member of the Governing Board, Banca d’Italia
Governor, National Bank of Slovakia
Director of Supervision, De Nederlandsche Bank
Chairman of the Board, Bank of Lithuania
Director Micro-Prudential Supervision I, European Central Bank (ECB)
Head of Public Affairs Group, Crédit Agricole SA
Head of Group Regulatory Affairs, Unicredit
Member of the Management Board & Chief Regulatory Officer, Deutsche Bank AG
Objectives of the sessionThis session will discuss whether the expectations related to the SSM have been met so far. The objective of this session is also to review the priorities of the SSM and the significant challenges of how to achieve trust in the banking system of the Eurozone and make banks’ business models sustainable in the current monetary, economic and regulatory environment.
Points of discussion
After 16 months of Eurozone single banking supervision, have expectations been met?
- Do cross-border groups reap all the expected benefits of a single supervisor notably regarding the fungibility of capital/liquidity?
- Drawing lessons from the “Maximum Distributable Amount” (MDA), how should the SSM inform investors about their pillar 2 decisions in order to avoid the negative impacts of supervisory policy uncertainties?
- What are the possible coordination issues to be addressed by the Single Resolution Board (SRB), the SSM, National Supervisory Authorities and banks?
- What are the evolutions already witnessed in the SSM in countries where the banking system is mainly made up of foreign banks?
What are the priorities of the SSM for achieving trust in the banking system of the Eurozone and making banks’ business models sustainable in the current environment?
- In the current environment, the opacity of some bank assets has proved to be an issue. Non-Performing Loans remain high in certain Eurozone countries, while in other countries level 2 or 3 assets are significant. What lessons can be drawn from the initiatives taken in some Eurozone countries to tackle this issue? What could be initiated at the EU/Eurozone level to further improve the transparency of banks’ balance sheets and further repair them?
- Are there banking business models which raise concerns and what can the SSM do to address this issue? How can banks improve their profitability in the current monetary and regulatory context without contributing to the creation of asset bubbles (high yield, real estate…)? Is the EU competitive landscape an obstacle to increase the profitability of banks? How can EU institutions contribute to improve, if needed, the situation?
Background of the sessionSince November 2014, the Single Supervisory Mechanism (SSM) has been responsible for supervising the most significant banks in the Eurozone, with the aim of ensuring consistent supervisory practices and increasing the soundness and stability of the banking system.
In order to treat equally all supervised banks showing the same characteristics, the ECB needs homogeneous rules and homogeneous ways of applying them. Major steps have been taken in both areas.
Regarding the application of prudential rules, the SSM has established a common methodology for the Supervisory Review and Evaluation Process (SREP) applicable to all significant institutions (Pillar 2 requirements).
A unified, integrated and harmonized supervisory framework requires harmonized regulation
A truly single rulebook has not been set up yet, and therefore a full harmonization of supervisory practices is not possible. One issue in this respect is the Options and National Discretions (OND) in CRR and CRDIV. The ECB has identified 167 ONDs and managed to address most of them (122) according to a unified approach. The others are in the hands of EU and national legislators. Differing national banking rules might prevent an effective and single supervision. These divergences – which are often related to the different legal/tax frameworks prevailing in the Member States – have various sources.
- EU legislation currently grants options to Member States, which can be exercised through national law. Therefore legislative initiative is necessary to address them.
- Another substantial source of divergence arises from the use of directives instead of regulations. For example, being an EU directive, the BRRD left the transposition into national law to the Member States. As a result the ECB is confronted with 19 different legislations to follow in the euro area. Consistent legislation in this area should be achieved through EU regulations, even if the lack of a EU-harmonized legal framework for bankruptcy and insolvency procedures is clearly an issue.
- National legislation can also be a problem for the level playing field in the Banking Union. In some countries, for example, non-binding supervisory practices are converted into binding legal acts. In order to achieve a genuine banking union, Member States should refrain from raising obstacles to uniform supervisory practices.
Banks and the ECB are facing challenges
In such a context, despite the set-up of the SSM, cross-border banks are still facing local requirements (capital, liquidity) from national supervisory authorities within the banking union where the SSM is both the home and host supervisor. This shows that domestic legislators/supervisors still need to be convinced of the workability of the EU supervision and resolution framework. Moreover, in view of the large number of banks supervised by the ECB, there might be a risk of adopting a mainly compliance-based (rather than risk-based) supervision. Centralized supervision might also create the risk of a one-size-fits-all approach and, as a result, a less diversified banking sector.
Lastly banks are facing two difficulties:
- First, many of them have elevated levels of non-performing loans (NPLs). However, during the comprehensive assessment, these NPLs have been identified, using, for the first time, a harmonized definition and have also been adequately provisioned, according to the ECB. Non-performing loans weigh on profitability and capital, hampering banks ‘ability to provide new lending to customers. European banking supervision now has to develop a consistent approach for reducing the level of these NPLs in an orderly manner over the next few years.
- Second, the low-interest rates and low-growth environment, together with the recent wave of new regulations, are impacting on profitability. The need to adapt business models and preserve profitability without taking on too much risk is a challenge facing many banks in the euro area.