The establishment of pan-European oversight (a Single Supervisory Mechanism, "SSM") on the banking sector in the Eurozone is proposed in the European Commission's proposal (the "Proposal") for a new regulation. The Proposal was published on 12 September 2012. The pan-European oversight should promote the safety and soundness of banks and ultimately restore confidence in the financial system. The Proposal also aims to centralise group-wide supervision of financial conglomerates in which banks are included.

Pursuant to the proposal the European Central Bank ("ECB") will supervise the banks in the Eurozone and will be exclusively competent for those key supervisory tasks that are indispensable to detecting risks for banks' viability. Currently, this is the responsibility of the national authorities. The tasks which will be conferred on the ECB include:

  • licensing and authorisation of banks
  • ensuring banks live up to solvency and liquidity standards
  • imposing monetary sanctions and periodic penalty payments on non-compliant banks.

In the Proposal, the national authorities will still have a role to play. Most of the activities required to prepare and implement the ECB's acts can be carried out by these national authorities which will then operate as an integral part of the SSM. In addition, banks will probably continue to report to their national authorities, which in turn will advise the ECB on decisions.

EU Member States that have not adopted the Euro but wish to participate in this scheme have the possibility to enter into a close supervisory cooperation with the ECB. Those Member States will then have to abide by and implement relevant ECB acts.

The centralisation of supervision is part of a broader project to create a European banking union. The banking union also involves:

  • a single rulebook for banks in the European Union, in order to create a harmonised framework of rules
  • common rules for preventing bank failures (the crisis management measures described elsewhere in this Europe Update)
  • a single deposit guarantee scheme for the EU instead of national deposit guarantee schemes (this proposal is yet to be published)