November 4, 2014 marked a turning point in European banking supervision. It was the day the Single Supervisory Mechanism (SSM) took over responsibility for banking supervision in the Eurozone. Compared to many other European endeavours, the SSM was set up quickly; the vision for the Banking Union, of which the SSM is a part, was created only in 2012. During this period a whole new organisation had to be made operational, with supervisory approaches and processes drawn from best practices across Europe, and staffing and governance adapted to the new arrangements. On its first birthday, how is the SSM getting on?
Since it took over responsibility for banking supervision in the Eurozone much has been achieved. The European Central Bank (ECB), at the SSM's hub, has set up a functioning organisation with almost 1000 employees, developed its supervisory approach and got to know the banks under its supervision. It has conducted its first Supervisory Review and Evaluation Process (SREP) and rolled out the accompanying short-term exercise (STE). To further strengthen its understanding of the banks under its supervision – significant and less significant banks alike - the SSM has developed the "Regulation on supervisory financial information" requiring banks to provide detailed information on a single entity level. How the SSM is using that wealth of information, which will soon be complemented by further exercises, will be interesting to see.
Besides data, the SSM has also clearly articulated other priorities on its supervisory agenda. These include business model analysis, in particular of profitability, assessment of credit risk and non-performing loans, risk governance, capital and liquidity assessments, cyber security and IFRS 9. In the first year cross-sector ('horizontal') reviews on cyber risk, risk governance and risk appetite have been conducted. But while most of the other work was also originally planned for 2015, the SSM has now extended its work programme into a second year, when more detailed reviews will be carried out.
Going forward, the SSM is preparing for the model quality review (MQR). This will be a horizontal analysis of all internal Pillar I models currently in place. It is most likely to start with credit risk models and is aimed at reducing RWA variability. This of itself is a significant undertaking and we expect the MQR and its follow-ups to last some years. At the same time supervisors will be learning more about the banks under their supervision, including through on-site work, and also the differences in national supervisory practices that existed in the past.
The first year of anyone's life is a period of learning, development and improvement. In the SSM's case there will be a need in its second year to look at streamlining governance processes, ensuring national competent authorities (NCAs) and the ECB consistently speak with a single voice towards banks, and further enhancing the consistency of supervision across the Eurozone.
Looking forward, it will be interesting to see how the SSM evolves, and how fast it can achieve its goals. The SSM has become a powerful instrument in enhancing supervisory consistency across the Eurozone and this will continue. At the same time, as for any other supervisor, it will need both to implement a raft of new rules, and be involved in policymaking to address the challenges of the ever-changing external environment.
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