European Union: Commission Proposes New ECB Powers For Banking Supervision As Part Of Planned European Banking Union

On 12 September 2012, the European Commission ("EC") published its proposal for a single supervisory mechanism ("SSM") which covers the granting of far reaching supervisory powers to the European Central Bank ("ECB") over the Eurozone credit institutions starting 1 January 2013. In addition, the EC has submitted proposals for a single rulebook on capital requirements, harmonized deposit protection schemes and a single European recovery and resolution framework, all aiming at full implementation of an integrated banking union.

Creation of SSM

As already discussed recently, the ECB will be granted far reaching supervisory powers over all Eurozone credit institutions. This will be implemented in three steps. As at 1 January 2013, ECB shall supervise all credit institutions which have requested support from the European Stability Mechanism ("ESM"). As at 1 July 2013, the ECB supervision shall cover all credit institutions of major systemic importance in the Eurozone, and already as at 1 January 2014, ECB shall have authority over all of the nearly 8,000 credit institutions in the Eurozone.

States outside the Eurozone can opt for ECB supervision of their credit institutions on a voluntary basis.

In order to meet concerns regarding possible conflicts of interest at ECB level (namely, between ECB's monetary role and its supervisory function), a separate supervisory board independent of ECB's Governing Council will be established.

Relationship of ECB towards European Banking Authority and National Supervisors

The European Banking Authority ("EBA") will in particular retain its technical rule making powers, whereas the tasks of prudential supervision will be conferred upon the ECB. EBA will continue developing the single rulebook applicable to all 27 EU Member States and their credit institutions.

The powers of the ECB will include: (i) authorization for any bank in the Eurozone (national "gold plating" remaining possible), (ii) compliance with capital, leverage and liquidity requirements, (iii) supervision of financial conglomerates, and (iv) imposition of early intervention measures.

By those measures, the EC aims to achieve a more harmonized and coherent approach of prudential supervision over the Eurozone banks and, in particular, to strengthen the financial stability of all Eurozone banks, thus preventing bank failures. The EC feels that current coordination of national supervisors is no longer sufficient in order to foster financial stability in the Eurozone.

National Supervisors will remain responsible for those matters which are not assigned to the ECB (including day to day supervision in accordance with ECB guidelines).

For cross-border banks active both within and outside EU Member States participating in the SSM, existing home/host supervisor coordination procedures will continue to exist as at present. Still, conflicts may arise in relation to banks active both in the Eurozone and outside of it (as e.g. Austrian credit institutions with Austrian headquarters and subsidiary banks in CEE). Supervisory authorities outside EU Member States participating in the SSM may reach conclusions different from those of the ECB in relation to local subsidiaries of banks subject to the SSM. Since the ECB will also be competent for consolidated supervision of credit institutions in the Eurozone, it may in such instances request (remedial) action (e.g. increase of capital or improvement of liquidity situation) from the ECB supervised credit institution on a consolidated level.

Outlook

Although the banking union will be applicable only to the Eurozone, the legislative proposals by the EC will require unanimous consent by all 27 EU Member States.

Further, the banking union aims at the creation of a single European recovery and resolu-tion fund, as well as harmonized deposit protection schemes.

The proposals are expected to be discussed at the Eurogroup meeting on 15 September 2012 and at the EU summit on 18 and 19 October 2012.

The EC has stated that bank recapitalization by the ESM will not take place until the SSM will be in place and operational. This may result in any actual bank recapitalization by the ESM being accomplished only (later) in 2013.

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