Banks meet the new boss

The ECB will soon be regulating all big eurozone banks, but many questions of accountability remain

On 12 September the European Parliament approved a regulation on the single supervisory mechanism (SSM) conferring bank prudential supervision tasks on the European Central Bank (ECB). It is expected that in the second half of 2014 the ECB will assume its role for all significant banks in the eurozone and other participating EU member states. But a number of questions remain.

The shift from harmonisation to centralisation of bank regulation and supervision cannot be halted. A single rulebook for banks will be in place and supervisory authorities in the UK and other non-participating EU countries will have a heavyweight counterpart.

 In line with the subsidiarity principle the ECB will only be responsible for 6,000 banks of “significant” size and importance. Banks will be under ECB supervision if their asset value either exceeds €30bn (£25bn) or 20 per cent of the home state’s GDP, or if the ECB considers them significant. Given the discretion granted to an authority without immediate political control the ECB needs a methodology to create predictable thresholds. 

Another challenge is that the relationship between the ECB and its network of member state supervisors will have to be governed by rules. The ECB will instruct national competent authorities (NCAs). NCAs will undertake the bulk of day-to-day work. As with eurozone monetary policy this will require exchange of intelligence, co-operation and co-ordination among member state authorities and the ECB. 

The industry has many concerns: Who makes decisions? Whose decisions can be challenged? Where does judicial review take place? Will multi-layered decisions be reviewed by national and European courts? Which procedural laws apply? Can national supervisors challenge ECB instructions?

Banks will have to work with an ever-more diverse group of regulators and supervisors. With respect to market as opposed to prudential supervision, national supervisors will keep jurisdiction. Rules will be largely drafted by the European Banking Authority, the European Securities and Markets Authority and the European Commission, but with experience ECB can be expected to lead the way. From day one the ECB will also be responsible for working on recovery plans and taking intervention measures. Also, ECB’s mandate is to be involved in devising structural changes if required under EU law. This may give it a say in ring-fencing actions proposed by the Liikanen report and already implemented in Germany and France. However, the ECB has no resolution powers which will, for the time being, stay with the individual member states.

 Before assuming its role, the ECB has pledged to perform an asset quality review to disclose legacy problems on banks’ balance sheets. Given an ambitious timetable, limited resources and methodological uncertainties this will be the first challenge for ECB’s new role – and for the entire venture as it remains unclear if the ECB will deny undercapitalised banks SSM access at the gate in Frankfurt.