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22nd May 2022

ECB takes control as EU bank supervisor

  • The main task of SSM will be to restore public confidence in the banking sector, said Nouy (Photo: Valentina Pop)

The European Central Bank (ECB) formally assumes its new role as the chief supervisor of EU banks on Tuesday (4 November), a major milestone in the creation of the bloc's banking union.

The making of the banking union, whose legal framework was agreed by lawmakers inside two years, is the biggest shift of power over economic policy making since the introduction of the euro.

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The chair of the Single Supervisory Mechanism (SSM), Daniele Nouy, who was speaking at a hearing with the European Parliament's economic affairs committee on Monday, said the main task of the SSM would be to restore public confidence in the banking sector.

The SSM is the ECB unit tasked with carrying out its new oversight responsibilities..

Last month, an audit of the EU's 130 largest banks co-ordinated by the ECB revealed that 25 lenders across the bloc had failed so-called stress tests aimed at assessing whether banks would have the capital to be able to withstand future financial crises.

The 25 banks to fail the tests were revealed to have combined capital shortfalls of €24.6 billion.

Two banks have already covered their capital shortfalls, while the remaining banks need to acquire the extra capital by 10 November.

Nouy said that the asset quality review (AQR) had been "a thorough health check of the banking system" and had provided a "solid and credible basis for the future cooperation with national competent authorities".

Banks had also "gained an initial insight" into how the supervisory regime will operate, she added.

EU leaders promised to break the link between indebted banks and governments in the summer of 2012, by harmonising rules on how to wind up failing banks and guarantee people's bank deposits, and establishing the ECB as the chief supervisor of the bloc's banks.

Unlike the other rules, however, the supervisory regime will only apply to the 130 largest banks among the estimated 6,000 institutions across the EU, although these still account for over 80 percent of the total assets held by banks across the EU.

Nouy, a career central banker at the Bank of France, said that the new regime would be "in a transitional period" until the single resolution mechanism, which features a common resolution fund financed by bank levies, enters into force in 2016.

The fund is designed to cover the costs if a lender goes bust in the future.

In a statement, financial services commissioner Jonathan Hill described the SSM as the "next step towards a fully operational banking union".

Sven Giegold, one of the parliament's two chief negotiators on the new regime, described it as "a milestone for more financial stability in Europe", which would "finally draw a line under the often lax national banking supervision."

But critics, which include Bundesbank chairman Jens Weidmann, say that entrusting the ECB with the power to directly intervene into the banking sector will compromise its role controlling monetary policy.

Under the EU treaties, the ECB's main function is to maintain price stability, although it provides the staff for the European Systemic Risk Board, which was set up in 2010 to monitor and identify future bubbles and risks in financial markets.

Nouy revealed that the ECB has already hired more than 900 banking experts for its new supervisory arm.

The European Parliament had called for the EBA, which is directly accountable to Parliament, to be appointed as the main supervisor with a mandate of supervising all European banks.

However, governments insisted on beefing up the ECB, which only answers to ministers, and on smaller lenders remaining solely under the control of national regulators.

The compromise had resulted in "an undesirable concentration of powers in the ECB", commented Giegold.

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