On 4 November 2014, the Single Supervisory Mechanism (the "SSM") became fully operative. The SSM has been established by the Council Regulation No 1024/2013 of 15 October 2013 (the ''SSM Regulation'') conferring specific tasks on the European Central Bank (the "ECB") concerning policies relating to the prudential supervision of credit institutions, itself complemented by the Regulation (EU) n° 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (the "SSM Framework Regulation").

Pursuant to the SSM, the European Central Bank becomes the central prudential supervisor of financial institutions in the Eurozone (including approximately 6000 banks) with a possibility to extend the scope of its activity so as to cover EU Member-States outside the Eurozone which choose to join the SSM. It represents one of two pillars of the wider European banking union project, together with the Single Resolution Mechanism (the "SRM").

The Single Supervisory Mechanism (SSM)

Scope of application

Financial institutions which fall within the scope of the SSM Regulation are (i) credit institutions (including banks and other licensed entities as defined by the Regulation (EU) no 575/2013 "Credit Institutions"); (ii) financial holding companies; (iii) mixed financial holding companies; and (iv) branches of Credit Institutions whose head offices are established abroad (all together referred to herein as "Supervised Entities").

Amongst all the Supervised Entities, the ECB (i) directly supervises approximately 130 Supervised Entities considered as significant (which represent about 85 percent of total Eurozone banking assets); and (ii) maintains supervisory oversight of all remaining Supervised Entities.

Significant Supervised Entities

A Supervised Entity is deemed significant when it meets one of the following conditions (which have to be verified on an individual basis (a "Significant Supervised Entity") as well as on a consolidated basis for a group (a "Significant Supervised Group" referred to hereafter, together with a Significant Supervised Entity, as "Significant Supervised Entities")):

  • The total value of its assets exceeds EUR 30 billion;
  • The total value of its assets exceeds (i) EUR 5 billion; and (ii) 20% of the Gross Domestic Product of its host member-state;
  • The Credit Institution is amongst 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 (the "ESM") or the European Financial Stability Facility (the "FESF").

In addition to these criteria, the ECB may, on its own initiative, after consulting the relevant national competent authority (the "NCA"), decide to directly supervise 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 has been published on 4 September 2014 (the "List of Significant Supervised Entities") following a comprehensive assessment by the ECB which began in November 2013.

Impact on the supervisory framework in Luxembourg

According to the List of Significant Supervised Entities, there are 5 Luxembourg Supervised Entities considered as significant :

  • Banque et Caisse d'Epargne de l'Etat, Luxembourg;
  • Precision Capital S.A. (as Significant Supervised Group including, amongst others, Banque Internationale à Luxembourg S.A., KBL European Private Bankers S.A., and Banque Puilaetco Dewaay Luxembourg S.A.);
  • RBC Investor Services Bank S.A.;
  • State Street Bank Luxembourg S.A.; and
  • UBS (Luxembourg) S.A.. 

In addition to the aforementioned entities, there are also about 45 entities located in Luxembourg which are related to Significant Supervised Groups that are subject to a direct supervision from the ECB. All the other Supervised Entities which are considered as less significant remain under the principal monitoring of the Commission de Surveillance du Secteur Financier.

Overview of the ECB's competence

The ECB is competent for granting and/or withdrawing authorizations (either on its own initiative or upon proposal by a relevant NCA) of all Credit Institutions (regardless of whether they are significant). Applications for authorization still have to be submitted to the NCA 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 NCA shall notify the ECB with a draft decision for its final approval.

As it relates to Significant Supervised Entities, the ECB is entitled with specific competences, amongst which:

  • Adopting and ensuring the compliance with, guidelines, recommendations, and decisions imposing on credit institutions to put in place robust governance arrangements, including requirements for persons responsible of 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, conduct investigations or on-site inspections;
  • Carrying out supervisory reviews, including stress tests (in cooperation with EBA) and based upon which imposing specific additional own funds requirements, specific liquidity requirements or other measures;
  • Supervising Credit Institutions' parents established in one of the participating Member States, on a consolidated basis, including over 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 NCA assessment and recommendations; and
  • Carrying out supervisory tasks in relation to recovery plans and early intervention where a Credit Institution or group in relation to which the ECB is the consolidating supervisor, does not meet or is likely to breach the applicable prudential requirements.

The Single Resolution Mechanism

On 30 July 2014, the Regulation (EU) No 806/2014 establishing a Single Resolution Mechanism for the banking union (the "SRM Regulation") was published into the Official Journal of the EU. The SRM Regulation is completed by an Intergovernmental Agreement (IGA) which has been signed by 26 member-States as of today.

The SRM will complement the SSM in order to provide a single European mechanism for the resolution of credit institutions. In the cases where a Credit Institution fails, the mechanism will allow the resolution to be managed effectively through a Single Resolution Board (the "SRB") and a Single Resolution Fund (the "SRF"). The SRF will be initially segregated in national compartments which will be gradually merged as of 1 January 2016 during a transitional period of 8 years.

As of 1 January 2015, the SRF will be funded by contributions of the banking industry with the objective to reach, within a period of 8 years, at least 1 percent of the amount of covered deposits of all the Credit Institutions of the Eurozone. Credit Institutions' actual amount of contributions to the SRF will be determined each year by the SRB and will be based on criteria provided by the SSM Regulation, Delegated Acts of the European Commission and the Council Implementing Act adopted by the European Commission on 21 October 2014, taking into account the risk profile of the given Credit Institution.