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

What the SSM’s introduction has meant for countries in which the banking sector is dominated by subsidiaries of foreign banks

By Makúch Jozef - Governor, National Bank of Slovakia

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As the first pillar of the EU’s banking union, the Single Supervisory Mechanism (SSM) is certainly one of the most significant post-crisis reforms of the European banking system. It pertains to all national banking sectors in the euro area, not only those that received state aid during the financial crisis. Slovakia is among those euro area countries whose banking sector was relatively unscathed by the crisis and has what may be termed a typical ‘host-country’ structure.

The Slovak banking sector
A total of 13 banks and 14 branches of foreign banks currently operate in Slovakia, and their aggregate assets amount to €68 billion. More than 90% of the Slovak banking sector is owned by foreign investors.

The three largest Slovak banks are categorised as ‘significant’ and are therefore subject to direct supervision by the ECB though the SSM. A further three banks are indirectly treated as ‘significant’ by virtue of their parent institution being so categorised. These six banks – accounting for almost 70% of the total assets in the Slovak banking sector – are subsidiaries of foreign banks established in SSM-participating countries. This ownership structure is a legacy of the restructuring and subsequent privatisation of Slovak banks that took place in the late 1990s.

The benefits and challenges of the SSM
One of the most notable benefits of the SSM has been the establishment of Joint Supervisory Teams (JSTs) responsible for day-to-day monitoring and analysis of significant banks. The JSTs examine all areas of activity within their supervisory remit and produce annual assessments of the significant banks to which they are assigned.

The SSM’s introduction has helped ensure that national competent authorities (NCAs) responsible for supervising bank subsidiaries are informed about the overall situation in parent groups. In the case of Národná Banka Slovenska, the NCA in Slovakia, involvement in JSTs has added a new dimension to its supervisory activities. As NCA staff learn more about the situation in banking groups, they are in a better position to understand and analyse local subsidiaries.

Joint decisions on capital and liquidity tend to take account of local banks in terms of their position within a banking group. As far as SSM banks are concerned, these joint decisions are not simply a summary of decisions on all legal entities in the banking group, but rather have regard to the complexity and structure of the whole group.

The understanding of the risks to which banks and banking groups are exposed has been greatly improved by the implementation of a uniform methodology for determining the risk profiles of banks and by other areas of gradual harmonisation.

All these benefits of the SSM also entail challenges, especially for smaller countries. For example, quality requirements for supervisory staff members are increasing. Supervision now requires familiarity with different national laws and ability in foreign languages.

SSM is the first and most important pillar of the banking union.

Process harmonisation is fundamental to the efficient functioning of the SSM. As regards the SSM in relation to the Slovak banking sector, it is important to establish rules for the supervision of subsidiaries and branches of foreign banks.

Conclusion
The SSM is the first and most important pillar of the banking union. The union will not be fully operational until the completion of its other two pillars: the Single Resolution Mechanism and a uniform deposit insurance scheme. The particularities of banking sectors in ‘host countries’ will need to be taken into account also in the establishment and implementation of the second and third pillars. Let me conclude by expressing my firm conviction that the banking union will bring substantial benefits in the long term, not only for the euro area banking system as a whole, but also for the individual euro area countries.