On November 4 2014 the Single Supervisory Mechanism (SSM) became fully operative. The SSM was established by the EU SSM Regulation (1024/2013), which conferred specific tasks on the European Central Bank (ECB) concerning policies relating to the prudential supervision of credit institutions, and complemented by the EU SSM Framework Regulation (468/2014), which established the framework for SSM cooperation between the ECB and national competent authorities and national designated authorities.

Pursuant to the SSM, the ECB becomes the central prudential supervisor of financial institutions in the eurozone (including approximately 6,000 banks), with the possibility to extend the scope of its activity to cover EU member states outside the eurozone which choose to join the SSM. It represents one of the two pillars of the wider European banking union project, the other being the Single Resolution Mechanism (SRM).

Single Supervisory Mechanism

Scope of application

Financial institutions which fall within the scope of the SSM Regulation are:

  • credit institutions, including banks and other licensed entities, as defined by EU Regulation 575/2013;
  • financial holding companies;
  • mixed financial holding companies; and
  • branches of credit institutions whose head offices are established abroad (all referred to herein as 'supervised entities').

In regard to supervised entities, the ECB:

  • directly supervises approximately 130 supervised entities considered to be significant (about 85% of total eurozone banking assets); and
  • maintains supervisory oversight of all remaining supervised entities.

Significant supervised entities

A supervised entity is deemed to be significant when it meets one of the following conditions (which must be verified on an individual basis, as well as on a consolidated basis for a group):

  • The total value of its assets exceeds €30 billion;
  • The total value of its assets exceeds:
    • € 5 billion; and
    • 20% of the gross domestic product of its host member state;
  • The credit institution is among the three most significant banks of the country in which it is located;
  • The credit institution has significant cross-border activities; or
  • The credit institution has requested or received assistance from the European Stability Mechanism or the European Financial Stability Facility.

In addition to these criteria, the ECB may, on its own initiative and after consulting the relevant national competent authority, decide to supervise directly less significant entities in application of the SSM Regulation where this is necessary to ensure consistent application of high supervisory standards.

The first list of significant supervised entities was published on September 4 2014, following a comprehensive assessment by the ECB which began in November 2013.

ECB competence

The ECB is competent to grant and/or withdraw authorisations (either on its own initiative or on proposal by a relevant national competent authority) of all credit institutions (regardless of whether they are significant). Applications for authorisation must still be submitted to the national competent authority of the member state where the credit institution is to be established, in accordance with the requirements set out in relevant national law. The relevant national competent authority shall notify the ECB with a draft decision for its final approval.

As it relates to significant supervised entities, the ECB has specific competences, including:

  • adopting and ensuring compliance with guidelines, recommendations and decisions imposed on credit institutions to put in place robust governance arrangements, including requirements for persons responsible for the management thereof, risk management processes, internal control mechanisms, remuneration policies and practices and effective internal capital adequacy assessment processes, including internal rating. To this end, the ECB may request information from the supervised entities and conduct investigations or on-site inspections;
  • carrying out supervisory reviews, including stress tests (in cooperation with the European Banking Authority) and imposing specific additional own funds requirements, liquidity requirements or other measures;
  • supervising credit institutions' parents established in a participating member state, on a consolidated basis, including financial holding companies and mixed financial holding companies;
  • deciding whether to oppose applications made by entities that wish to acquire a qualifying holding in a significant supervised entity, after considering the national competent authority's assessment and recommendations; and
  • carrying out supervisory tasks in relation to recovery plans and early intervention where a credit institution or group of which the ECB is the consolidating supervisor does not meet or is likely to breach the applicable prudential requirements.

Single Resolution Mechanism

On July 30 2014 the EU SRM Regulation (806/2014), which established the SRM for the banking union, was published in the EU Official Journal. The SRM Regulation is completed by an intergovernmental agreement, which to date has been signed by 26 member states.

The SRM will complement the SSM in order to provide a single European mechanism for the resolution of credit institutions. Where a credit institution fails, the mechanism will allow the resolution to be managed effectively through the Single Resolution Board and the Single Resolution Fund. The fund will initially be segregated into national compartments, which will gradually be merged as of January 1 2016 during an eight-year transitional period.

As of January 1 2015, the Single Resolution Fund will be funded by contributions from the banking industry, with the objective of reaching, within eight years, at least 1% of the amount of covered deposits of all of the eurozone credit institutions. The actual amount of credit institutions' contributions to the Single Resolution Fund will be determined by the Single Resolution Board each year, based on criteria set out by the SSM Regulation, delegated acts of the European Commission and the Council Implementing Act adopted by the European Commission on October 21 2014, taking into account the risk profile of the given credit institution.

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