Implications of the Single Supervisor Mechanism

Implications of the Single Supervisor Mechanism

The European Central Bank has published a draft Single Supervisory Mechanism (SSM) Framework Regulation, which sets out the Bank’s responsibilities as supervisor of Eurozone banks from November 2014.

Klaus Lackhoff, of counsel at Freshfields in Frankfurt, explains what we can expect from the European Central Bank (ECB) come November.

Original news

Consultation: Establishing the framework for co-operation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities LNB News 10/02/2014 73.

A draft of the ECB SSM Framework Regulation has been published for public consultation by the ECB. The draft Framework Regulation lays the basis for the work of the SSM when it takes over as supervisor of euro area banks in November 2014. The final version will be published by 4 May 2014. The consultation will run until 7 March 2014.

How will the proposals in the consultation impact on the City, given its scope is largely limited to the Eurozone?

There are several consequences of the SSM (established by Council Regulation (EU) No 1024/2013 of 15 October 2013) and the proposed Framework Regulation for the City and banks from non-participating member states to consider.

With regard to the right of establishment and to provide cross-border services, the ECB might be the relevant host country supervisor (e.g. for significant branches of UK banks in the Eurozone, the ECB is the host country supervisor).

Subsidiaries of UK banks in member states participating in the SSM will be subject to supervision by ECB if they are either significant on a stand-alone basis or on group level provided they form a group in participating member states. Significant are in particular banks or groups of banks if their total value of assets exceeds €30bn. If a UK bank has subsidiaries in different participating countries, they are not looked at in a combined manner if they form a group within participating member states. If these subsidiaries are all held by a UK entity they will be assessed separately.

With regard to the college of supervisors, the ECB might be in the college of supervisors.

Regarding the rule-making, the ECB will be part of the European Banking Authority and will have some influence over rule-making. The UK has negotiated the so-called ‘double majority’ system of qualified majority voting in order to avoid that non-participating member states can be overruled by participating member states.

The Framework Regulation determines how the ECB carries out supervision and is therefore relevant for the first three issues.

What are the major talking points in the consultation?

A number of questions arise:

• How are the Joint Supervisory teams (JSTs) composed, and how will they operate? They will be led by the ECB but how will tasks be allocated between the ECB and national competent authorities. How will it be ensured that the JSTs apply a consistent standard and that ECB will too as regards the right of establishment and freedom to provide services? This has created some uncertainty in the market.

• Is the scope of procedural rights of banks in supervisory proceedings adequately tailored? Two issues will be whether the right to be heard and the access to files should be expanded.

• How is it determined whether a credit institution or a group is significant and therefore supervised by ECB? What are the exceptional circumstances under which a significant bank may still be supervised by the national competent authority (NCA)?

• How will the language regime operate and will there be a burden on the banks (be it in form of delays since translations are required in the internal decision making process of ECB or cost for translations)?

What are the next steps?

Interested parties can provide comments and suggestions on the draft Framework Regulation to the ECB by 7 March 2014. The ECB intends to provide feedback documents sometime in April. By 4 May, the Framework Regulation has to be enacted and published because it has to be published six months before the ECB takes over supervision. The SSM-Regulation entered into force on 4 November 2013 and the ECB shall take up supervision in November 2014, i.e. one year after entering into force of the SSM Regulation.

What advice can lawyers give to the international clients at this stage?

They need to look at the SSM Regulation and the draft Framework Regulation because they change the supervisory environment substantially. Significant credit institutions (i.e. those that will be supervised by the ECB—and almost all should know whether they will be significant or not) have to strategically assess how they will deal with the shift in the supervisory landscape.

With regard to their internal structure, institutions will have to think about how to deal with the fact that there will be centralised supervision for prudential purposes, but decentralised supervision for other purposes (securities trading, money laundering).

Some banks might want to raise issues they had with national supervisors with the single supervisor (e.g. limitation of intragroup loans).

The ECB may play a vital role in making suggestions for future amendments to the Capital Requirements Regulation 2006, SI 2006/3221 (CRR) and the Capital Requirements Directive IV and in the drafting of implementing technical and regulatory standards by the EBA. Despite the fact that a double majority voting was established in the EBA Regulation it has to be seen whether the influence of the City on rulemaking might be reduced.

Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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