BRUSSELS (MNI) – The following is the first part of a text
published by the European Commission, which answers a number of
questions regarding its proposal for a centralised Eurozone banking
supervisor:

What is being proposed today?

The Commission adopted today a package of proposals to set up a single
supervisory mechanism (SSM) that contains:

– a legislative proposal for a Council Regulation to give specific
tasks related to financial stability and banking supervision to the
European Central Bank (ECB);

– a legislative proposal for a Regulation of the European Parliament
and of the Council designed to align the existing Regulation
1093/2010 on the establishment of the European Banking Authority
(EBA) to the modified framework for banking supervision; and

– a communication outlining the Commission’s overall vision for the
banking union, covering the single rulebook and the single
supervisory mechanism, as well as the next steps involving a single
bank resolution mechanism.

Why is this proposal necessary?

There are currently vulnerabilities in the banking sector which
have a negative impact on the sovereign debt crisis. The negative
feedback loops between individual Member State budgets and some of their
banks are a threat to financial stability in the EU. This problem poses
specific risks within the euro area where the single currency increases
the likelihood of negative spill-over effects across borders.
Furthermore, the trend of financial institutions to increasingly focus
on their national home markets significantly undermines the single
market for financial services which constitutes an important basis for
economic growth. It also impairs the transmission of monetary policy
impulses by the ECB into actual lending to the real economy.

Therefore, in May 2012, as part of a longer term vision for
economic and fiscal integration, the Commission called for a banking
union to restore confidence in banks and the euro.1 In tandem, the
on-going reforms of the EU regulatory framework for the financial sector
need to be completed to ensure the integrity of the single market. Both
a deeper single market for the entire Union and a stronger Economic and
Monetary Union (EMU) for Member States in the euro area are necessary.
Decisive and rapid steps to achieve both are required. It is in this
context that the June 2012 European Council decided that the countries
of the euro area would create a single supervisory mechanism for banks.
Such an integrated supervision is necessary to make sure that all
euro-countries can have full confidence in the quality and impartiality
of banking supervision, opening the way for the European Stability
Mechanism (ESM) to directly recapitalize banks that fail to raise
capital on the markets.

Will all banks be covered or only big banks from the euro area?

The single supervisory mechanism will cover all (approximately
6,000) banks in the euro area. Although large banks of systemic
importance are at the heart of the European supervisory framework,
recent experience shows that relatively smaller banks can also pose a
threat to financial stability. It is therefore essential that the
supervisory tasks conferred on the ECB can be exercised over all those
banks.

The degree of direct European supervision by the ECB on a daily
basis and the role played by national supervisors may vary according to
the size of banks. But the ECB will be responsible for ensuring
appropriate monitoring of all those banks’ performance of their
supervisory tasks.

Why do you want to cover all banks from the euro zone? Will the ECB be
able to supervise several thousand banks?

While the safety and soundness of large banks is essential to
ensure financial stability, recent experience has shown that smaller
banks can also pose a threat to it. Therefore it is important that the
new regime applies to all banks. This is also consistent with the
approach agreed by Member States that any bank can potentially benefit
from ESM interventions.

A two-tier system, where a subset of banks would be subject to ECB
supervision while others would remain under full national responsibility
would introduce significant asymmetries within the same country and is
inherently unstable: depositors and banks could easily move to the
segment that is perceived to be safer. This would increase volatility
risks and make parts of the banking sector less, rather than more
stable.

While the SSM would cover all banks in the euro zone, national
supervisors would continue to carry out day-to-day verifications and
prepare and implement the ECB’s acts in their capacity to assist the
ECB, since they are best placed for such activities.

Why will the ECB only supervise European systemically important banks as
a first step?

It is proposed to have the SSM in place as of 1 January 2013. In
order to allow for a smooth transition to the new mechanism, a
phasing-in period is envisaged which would allow the ECB and national
supervisors sufficient time to prepare. As a first step, as of 1 January
2013, the ECB may decide, at its discretion, to assume full supervisory
responsibility over any credit institution, particularly those which
have received, or requested public funding.

As of 1 July 2013 all banks of major systemic importance will be
put under the supervision of the ECB. The phasing-in process should be
completed within one year from the entry into force of this Regulation
at the latest, that is on 1 January 2014, when the new SSM will cover
all banks.

Why should the ECB be the institution in charge of supervising the euro
area banking system?

Recent developments have demonstrated that the single monetary
policy needs to be complemented by a single supervisory function. There
are several reasons why the ECB is best placed for carrying out banking
supervision:

– The Treaty on the functioning of the European Union (TFEU, article
127(6)) stipulates that supervisory tasks can be conferred on the
ECB.

– The ECB will ensure a truly European supervision mechanism that is
not prone to the protection of national interests and which will
weaken the link between banks and national sovereigns.

– The ECB’s strong focus and expertise on financial stability will
ensure that financial stability risks are sufficiently taken into
account.

– Finally, the organisational principles laid down in the proposal
will ensure the separation of the ECB’s monetary policy tasks from
its supervisory tasks.

What exactly would the powers of the ECB be? What would it do in
practice?

The ECB would be exclusively responsible for key tasks concerning
the prudential supervision of credit institutions. In particular, it
would:

– authorise and withdraw the authorisation of all credit institutions
in the euro area; assess acquisition and disposal of holdings in
banks;

– ensure compliance with all prudential requirements laid down in EU
banking rules and set, where necessary, higher prudential
requirements for banks, for example for macro-prudential reasons to
protect financial stability under the conditions provided by EU
law;

– carry out supervisory stress tests to support the supervisory
review, and carry out supervision on a consolidated basis – such
stress tests are a supervisory tool also used by national
authorities to assess the stability of individual banks; they will
not replace the stress tests carried out by the EBA with a view to
assessing the soundness of the banking sector in the Single Market
as a whole;

– impose capital buffers and exercise other macro-prudential powers;

– carry out supplementary supervision over credit institutions in a
financial conglomerate;

– apply requirements for credit institutions to have in place robust
governance arrangements, processes and mechanisms and effective
internal capital adequacy assessment processes

– carry out supervisory tasks in relation to early intervention when
risks to the viability of a bank exist, in coordination with the
relevant resolution authorities;

– carry out, in coordination with the Commission, assessments for
possible public recapitalisations;

– coordinate a common position of representatives from competent
authorities of the participating Member States in the Board of
Supervisors and the Management Board of the EBA, for topics
relating to the abovementioned tasks.

National authorities would assist the ECB. They would prepare and
implement the ECB acts under the oversight of the ECB, including
day-to-day supervision activities.

Moreover national supervisory authorities would remain responsible
for carrying out tasks not conferred on the ECB, including, for example,
on issues of consumer protection, receiving notifications from credit
institutions in relation to the right of establishment and the free
provision of services, supervising credit institutions from third
countries establishing a branch or providing cross-border services in
the EU, supervising payments services, carrying out day-to-day
verifications of credit institutions, preventing the use of the
financial system for the purpose of money laundering and terrorist
financing.

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