This legal alert discusses the proposal of the Council of the European Union for a Single Supervisory Mechanism (SSM) for banks in the Eurozone. The SSM is the first pillar of the European Banking Union and grants the ECB direct supervisory powers with respect to the most significant banks in Eurozone countries, as well as with regards to smaller Eurozone banks.

In the Council's proposal, published on 14 December 2012, the ECB becomes directly responsible for the market access and prudential supervision of the most significant Eurozone banks. This includes, at a minimum, the three most significant banks of each Eurozone country. For these banks, the ECB will have the power to grant or withdraw authorisations, to assess qualifying holdings, to give specific instructions and to impose fines.

The proposal also has far-reaching consequences for smaller Eurozone banks. The ECB is responsible for the authorisation of smaller banks and the assessment of qualifying holdings in such banks. Although smaller Eurozone banks will be supervised directly by the national authorities regarding prudential requirements, the ECB may give instructions to national supervisors regarding the use of their supervisory powers. Moreover, the ECB may at any time decide to directly exercise all the relevant powers itself with regard to one or more smaller banks.

The ECB is intended to fully exercise its powers under the SSM as of 1 March 2014, which may be later if the ECB is not able to exercise its tasks on this date. On 16 January 2013, the EP is scheduled to vote on the Council's proposal. The regulation is intended to enter into force in Q1 2013.

Banks under direct ECB supervision

In the Council's proposal, the ECB will be the competent supervisory authority of the most significant Eurozone banks, regarding among others the following tasks:

  • authorisation
  • tasks related to the establishment of a branch or the provision of cross-border services
  • assessment of qualifying holdings
  • own funds requirements, securitisation, large exposure limits, liquidity, leverage and reporting and public disclosure of information on these matters
  • governance arrangements, including the fit and proper requirements for the persons responsible for the management of credit institutions
  • risk management processes, internal control mechanism, remuneration policies and practices of internal capital adequacy assessment processes
  • supervisory reviews, including stress tests, and the publication thereof
  • supervision on a consolidated basis, including over (mixed) financial holding companies, and supplementary supervision of financial conglomerates, and
  • recovery plans and early intervention.

The national authorities will be responsible for assisting the ECB with the preparation and implementation of acts relating to these tasks.

Whether or not a bank is considered significant depends on its size, importance for the economy of the EU or its home member state and the significance of its cross-border activities. The ECB will assess this on a consolidated basis.

In any case, the ECB will supervise a bank directly if:

  • the total value of its assets exceeds EUR 30 billion
  • the ratio of its total assets over the GDP of its home country exceeds 20%, unless the total value of its assets is below EUR 5 billion, or
  • public financial assistance has been requested or received directly from the European Financial Stability Facility ("EFSF") or the European Stability Mechanism ("ESM").

Banks not matching any of these criteria are considered to be less significant. However, at a minimum, the three most significant banks of each Eurozone country will be supervised directly by the ECB. It is expected that in total 150 to 200 European banks will be supervised directly by the ECB.

Smaller banks

The national authorities will remain competent with regard to banks that are considered to be less significant, as set out above, regarding among others the following tasks:

  • tasks related to the establishment of a branch or the provision of cross-border services
  • own funds requirements, securitisation, large exposure limits, liquidity, leverage and reporting and public disclosure of information on these matters
  • governance arrangements, including the fit and proper requirements for the persons responsible for the management of credit institutions
  • risk management processes, internal control mechanism, remuneration policies and practices of internal capital adequacy assessment processes
  • supervisory reviews, including stress tests, and the publication thereof
  • supervision on a consolidated basis, including over (mixed) financial holding companies, and supplementary supervision of financial conglomerates, and
  • recovery plans and early intervention.

The ECB will be the competent authority regarding the authorisation of banks that are considered less significant and the assessment of qualifying holdings in such banks.

When executing their tasks, the national authorities must provide information to the ECB on its request. Moreover, the national authorities must follow general and specific instructions given by the ECB, including instructions to make use of their powers.

The ECB may at any time decide to directly exercise all the relevant powers itself for smaller banks when necessary to ensure consistent application of high supervisory standards. The ECB may do so on its own initiative after consulting with national authorities or on the request of national authorities, including in the case where financial assistance has been requested or received directly or indirectly from the EFSF or ESM.

Powers of the ECB

Under the SSM, the ECB has all the powers and obligations which the national authorities have under the relevant EU law. In addition, the SSM grants the ECB the following powers:

  • to authorise banks
  • to assess qualifying holdings
  • to request information
  • to conduct on-site inspections
  • to impose higher capital buffers
  • to issue instructions
  • to impose administrative pecuniary sanctions
  • to withdraw banks' authorisation.

Authorisation

Under the SSM, the ECB is competent to decide whether or not a bank may take up its business in a participating member state. To this end, the national authorities will propose a draft decision to the ECB. The draft decision is considered adopted unless the ECB objects within a maximum period of 10 working days, extendable once for the same period in duly justified cases. The ECB can only object to the draft decision where the conditions for authorisation as set out in the applicable law are not met.

Assessment of qualifying holdings

The ECB will be competent to assess applications for the acquisition of qualifying holdings. To this end, anyone intending to acquire a qualifying holding in a Eurozone bank must notify its national authorities, which will assess the proposed acquisition and send a draft decision to the ECB at least ten working days before the expiry of the applicable assessment period.

Request of information and on-site inspections

In order to carry out its supervisory tasks, the ECB may:

  • require banks and (mixed) financial holding companies, the persons belonging to them and third parties to which they have outsourced operational functions or activities, to provide all information that is necessary in order to carry out its tasks
  • request the submission of documents, examine books and records and to take copies or extracts from such books and records, and obtain written or oral explanation from these persons;
  • request the national authorities to provide assistance for obtaining the requested information, including to obtain access to the business premises of the relevant legal persons, so that these rights can be exercised, and
  • conduct on-site inspections at the business premises of the relevant legal persons and any other undertaking included in consolidated supervision where the ECB is the consolidating supervisor.

If assistance for obtaining information or an on-site inspection requires authorisation by a judicial authority according to national rules, such authorisation must be applied for.

Imposition of higher capital buffers

The national authorities may apply capital buffers, including countercyclical buffer rates, and any other measures aimed at addressing macro-prudential risks, in addition to own funds requirements. If deemed necessary, the ECB may apply higher requirements for capital buffers than applied by the competent or designated authorities of participating member states.

Instructions

If a bank does not comply with the applicable prudential requirements, the ECB may, among others:

  • require banks to hold own funds in excess of the applicable capital requirements
  • require the reinforcement of the arrangements, processes mechanisms and strategies
  • require banks to present a plan to restore compliance with supervisory requirements, and set a deadline for its implementation
  • require banks to apply a specific provisioning policy or treatment of assets in terms of own funds requirements
  • restrict or limit the business, operations or network of banks or to request the divestment of activities that pose excessive risks to the soundness of a bank;
  • require the reduction of the risk inherent in the activities, products and systems of banks
  • require banks to limit variable remuneration as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base
  • require banks to use net profits to strengthen own funds
  • restrict or prohibit distributions by the bank to shareholders
  • impose additional or more frequent reporting requirements, including reporting on capital and liquidity positions
  • impose specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities
  • require additional disclosures
  • remove at any time members from the management body of banks who do not fulfil the requirements applicable to them.

Administrative pecuniary sanctions

When banks and (mixed) financial holding companies intentionally or negligently breach a requirement under directly applicable acts of EU law in relation to which administrative pecuniary sanctions are made available, the ECB may impose administrative pecuniary sanctions of up to twice the amount of the profits gained or losses avoided because of the breach where those can be determined, or up to 10% of the total annual turnover of a legal person in the preceding business year.

Withdrawal of authorisation

The ECB may withdraw a bank's authorisation on its own initiative or after a proposal from the national authorities. The ECB will consult with the bank's national authorities before the withdrawal, giving them sufficient time to decide on the necessary remedial actions, including possible resolution measures. The national authorities may object to the withdrawal of the authorisation on the ground that the withdrawal would prejudice the adequate implementation of or actions necessary for resolution or to maintain financial stability. In those cases, the ECB will abstain from withdrawing the authorisation for a period agreed with the national authorities. If the ECB determines that proper actions necessary to maintain financial stability have not been implemented by the national authorities, the withdrawal of the authorisation will apply immediately.

Legal protection

Due process for adopting supervisory decisions

Supervisory decisions under the SSM are taken by the Supervisory Board of the ECB. Before taking such decisions, the Supervisory Board must give the persons who are the subject of the proceedings the opportunity to be heard on the matters to which the ECB has taken objection. This does not apply if urgent action is needed in order to prevent significant damage to the financial system. In such a case, the ECB may adopt a provisional decision and give the persons concerned the opportunity to be heard as soon as possible after taking its decision.

Panel of Review

Decisions of the ECB's Supervisory Board are subject to review by a Panel of Review consisting of five members, if this is requested by the natural or legal person(s) to whom the decision is addressed. The review is filed in writing at the ECB within one month of the date of notification of the decision to the person requesting the review, or, in the absence thereof, of the day on which it came to the knowledge of the person.

Requesting the review does not suspend the decision. The Governing Council of the ECB may suspend the application of the contested decision, if it considers that circumstances so require. The Panel of Review examines the case within two months from the receipt and remits it for preparation of a new draft decision to the Supervisory Board, which may abrogate the decision or replace it with an identical or amended decision.

The new draft decision is considered adopted unless the Governing Council of the ECB objects within a maximum period of ten working days.

Court of Justice

Parties may challenge decisions of the ECB before the Court of Justice of the European Union.

National authorities and EBA

National authorities will remain in charge of tasks not conferred on the ECB, for instance in relation to consumer protection, money laundering, payment services, and branches of third country banks. EBA will retain its competence for further developing the single rulebook and ensuring convergence and consistency in supervisory practices.

Time frame

In the Council's proposal, the ECB will assume its supervisory tasks on 1 March 2014 or 12 months after the entry into force of the regulation, whichever is later. If the ECB is not ready to exercise its tasks in full before these dates, it may adopt a decision to set a later date to ensure continuity during the transition from national supervision to the SSM.

The ECB may exercise its right to require information immediately upon the entry into force of the regulation. Following a decision of the ECB addressed to the entities concerned and the competent authorities, the ECB may execute its tasks, other than adopting supervisory decisions, immediately upon the entry into force. If the ESM so requests unanimously as a precondition for direct recapitalisation, the ECB may exercise all its powers with regard to banks or (mixed) financial holding companies immediately upon the entry into force.

The final version of the regulation adopted by the European Parliament may differ from the Council's proposal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.