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Banking Union: update on supervisory issues - Resilience of the EU financial sector in the global context
The SSM: how to unlock the full potential of a revolutionary idea?
By Vasiliauskas Vitas - Chairman of the Board, Bank of Lithuania
The revolutionary idea of single euro area banking supervision is still young and the full potential of this idea has yet to be unlocked, but the SSM is on the right path to ensure effective, transparent and high quality banking supervision. The SSM is still gaining momentum, but everyone has already begun to observe the benefits of this institutional arrangement.
At the beginning of the SSM, euro zone countries saw an unprecedented (in terms of scope, size and coordination efforts) exercise of Comprehensive Assessment, consisting of a thorough assessment of banks’ assets and stress testing following a single methodology. Of course, as in every exercise, especially such a large and complex one, there are lessons to be learned, but considering the challenging timetable it was a very successful first step towards euro zone bank comparability and the application of single supervisory standards. This exercise has also set a new benchmark in supervisory transparency and comparability of euro area banks.
The subsequent benefits brought by the SSM include the SSM Supervisory Manual, the Supervisory Review and Evaluation Process of 2015, as well as the joint decisions on capital and liquidity. All these were great examples of developing and setting harmonised, high-quality supervisory standards towards banks. At the end of the value chain, this is a clear benefit for banks themselves as well as their customers, as the standardisation ensures uniform expectations, and results in a level playing field in terms of supervisory requirements, thereby less discretionary (domestic) barriers and more competition within the single market. Thus, the SSM reduces market segmentation.
Furthermore, the SSM is taking an active stance in standardising the application of European Union banking law, i.e. it is aiming for the consistent exercise of options and discretions across euro area member countries. That is another major step towards creating a level playing field and harmonising the supervisory practices in the euro area. We at Lietuvos bankas believe that this initiative could be extended to other — non-euro area — countries of the EU, thereby removing the persistent supervisory differences beyond the SSM.
SSM standard” in supervision must become a role model institutional arrangement.
The experience of the Baltic States in the SSM is rather unique due to the structure of their banking markets. All 3 significant institutions in Lithuania, the direct supervision of which was assumed by the ECB, are subsidiaries of Nordic banking groups located outside of the SSM. This resulted in an additional layer of communication as all supervisory standards and expectations now have to be aligned between Lietuvos bankas, the ECB (host) and the consolidating (home) supervisors in Sweden and Norway. As the host supervisor, the ECB has thus become a full-fledged member of the supervisory colleges, continuing and contributing to the previous productive experience of Lietuvos bankas in cooperation with respective Swedish and Norwegian authorities. Given that two Swedish banks that have significant subsidiaries in Lithuania also have their significant subsidiaries in Latvia and Estonia and the ECB is also the direct supervisor of these, there is a new dimension to the “home–host” cooperation as the ECB currently embodies what, before, used to be 3 different supervisors. Such a new framework should be beneficial in terms of resulting in a more coordinated Pan-Baltic supervisory effort under a well-established institutional trademark.
The start of the SSM was impressive and the “SSM standard” is becoming a benchmark in banking supervision, although it remains to be seen whether it will become a role model European institutional arrangement, which will help ensure Europe’s competitiveness and effectiveness on a global scale and fair conditions for competition in the internal market.