European Banking Union, conceived in response to the financial turmoil of 2007-2008 and the sovereign debt crisis that followed, represents a major step forward in financial integration within the European Union.. At the heart of this union is the Single Supervisory Mechanism (SSM), an integrated system of prudential supervision of banks. Its main objective is to guarantee the safety and soundness of the European banking sector, strengthen financial stability and promote consistent, high-quality supervision across the participating Member States.. Understanding the workings of the ESM, its founding principles and its scope of action is essential for credit institutions operating in the eurozone and beyond. This article details these fundamental aspects. For a overview of the single supervisory mechanismadditional information is available.
The MSU: a pillar of the European Banking Union
The Banking Union is built around three main pillars: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and a harmonised deposit guarantee scheme.. The MSU is the first pillar and the foundation on which much of the edifice rests.
Origins and objectives of the creation of the MSU
The MSU was created against the backdrop of the global financial crisis, which highlighted the weaknesses of fragmented banking supervision at national level.. The crisis in subprimes and then the sovereign debt crisis revealed the deep interconnectedness of European banking systems and the need for a more centralised approach to preventing and managing systemic risks.. Isolated national responses had proved insufficient, and even distorting, as the perceived solidity of a bank became too dependent on the ability of its home state to support it in the event of difficulty..
Given this situation, European leaders decided in 2012 to launch the Banking Union, with the MSU as its cornerstone.. There were a number of objectives:
- Ensuring the safety and soundness of banks: Implement rigorous, harmonised prudential supervision for all the institutions concerned, thereby limiting the risk of bank failures.
- Restoring confidence : Strengthen depositor, investor and market confidence in the eurozone banking sector.
- Breaking the vicious circle between banks and governments: To ensure that the difficulties of a national banking sector do not weigh on the public finances of the State concerned, and conversely, that the fragility of a State's public finances does not affect the solidity of its banks.
- Harmonising conditions of competition : Put an end to the fragmentation of the European banking market and guarantee equivalent supervisory conditions for all banks in the eurozone, whatever their size or location.
The MSU was officially created by the Council Regulation (EU) No 1024/2013 of 15 October 2013 (hereinafter "MSU Regulation") and became fully operational on 4 November 2014. It entrusts the European Central Bank (ECB) with specific tasks in the area of prudential supervision.
Relationship with the Single Resolution Mechanism (SRM)
The ESM is intrinsically linked to the second pillar of the Banking Union: the Single Resolution Mechanism (SRM), established by the European Council. Regulation (EU) No 806/2014. While the ESM aims to prevent banking crises through enhanced supervision, the SRM intervenes when a bank is in a situation of actual or foreseeable failure, despite the supervision exercised.. Its objective is to manage the resolution (i.e. the orderly restructuring or liquidation) of the failing bank in an efficient manner, minimising the impact on taxpayers and the real economy..
The link between the ESM and the ESM is essential. The ECB, as the sole supervisor, is responsible for determining whether a bank is in default or likely to default (failing or likely to fail). This assessment is then forwarded to the Single Resolution Board (SRB), the central body of the ESM, which decides on the appropriate resolution measures.. Close cooperation and a fluid exchange of information between the ECB and the CRU are therefore essential to the smooth functioning of the Banking Union..
Structure and governance of the Single Oversight Mechanism
The ESM is not a single entity but an integrated system based on cooperation between the ECB and the national supervisory authorities of the participating countries..
The ECB: central supervisory authority
The ESM Regulation gives the ECB ultimate responsibility for the operation of the ESM and the prudential supervision of banks in the participating Member States.. It has extensive powers to carry out its tasks, ranging from granting and withdrawing banking authorisations to imposing additional capital requirements or sanctions.. However, the ECB carries out its tasks in close cooperation with the competent national authorities (NCAs)..
In carrying out its supervisory tasks, the ECB enjoys independence from national political influences or private interests.. However, this independence is counterbalanced by an obligation to report on its actions to the European Parliament, the Council of the European Union and the national parliaments of the participating Member States.. An interinstitutional agreement of 2013 sets out the arrangements for this democratic responsibility.. In particular, the ECB must publish an annual report on its supervisory activities..
A strict separation is maintained within the ECB between its monetary policy functions and its new tasks of prudential supervision, in order to avoid conflicts of interest.. This translates into distinct organisational structures, separate reporting lines and dedicated meetings for each function within the Governing Council.. A specific budget finances supervisory activities, funded mainly by annual fees paid by supervised banks..
The key role of the Prudential Supervisory Council
Within the ECB, a specific body has been created to manage supervisory tasks: the Prudential Supervisory Council (Supervisory Board). It is responsible for the planning and execution of the ECB's supervisory tasks.. Its main task is to prepare draft prudential supervisory decisions (authorisations, sanctions, capital requirements, etc.) which are then submitted to the ECB Governing Council for adoption..
Its composition reflects the integrated nature of the ESM. It comprises a Chairman and a Vice-Chairman appointed specifically for this function, four representatives of the ECB (who must not exercise functions related to monetary policy) and a representative of the national competent authority of each participating Member State.. This structure ensures that national perspectives are taken into account in the European decision-making process. The President is appointed for a non-renewable five-year term, following a procedure involving the ECB, the European Parliament and the Council of the European Union.. The Vice-President shall be chosen from among the members of the Executive Board of the ECB..
The Prudential Supervisory Council is assisted in its work by a steering committee (Steering Committee), made up of a limited number of members, which prepares its meetings and decisions. The composition of this committee shall ensure balanced representation of the various participating Member States, organised by rotation.
Cooperation between the ECB and national competent authorities (NCAs)
The success of the ESM depends fundamentally on loyal cooperation and a constant exchange of information between the ECB and the ACNs of the participating Member States.. ACNs retain an important role, particularly in the day-to-day supervision of "less important" banks and in assisting the ECB in the supervision of "important" banks..
Le MSU Framework Regulation (EU) No 468/2014 establishes the practical arrangements for this cooperation. ACNs must provide the ECB with all the information necessary for it to carry out its tasks, including that obtained in the course of its own audits.. Reciprocally, the ECB shares relevant information with ACNs.
For the supervision of major banks, cooperation is mainly organised around the Joint Supervision Teams (Joint Supervisory Teams - JST). Each major bank or banking group has its own JST, made up of staff from the ECB and the ACNs of the countries where the institution has a significant presence (head office, major subsidiaries).. These joint teams carry out prudential supervision on a day-to-day basis, under the coordination of an ECB official (the JST coordinator).. This structure makes it possible to combine the local expertise of the ACNs with the European perspective of the ECB.. The JSTs draw up and implement the prudential supervision programme for the bank concerned, prepare draft decisions and liaise with the institution.. The size and composition of the JSTs are adapted to the complexity and risk profile of each bank..
The ECB also has a power of instruction vis-à-vis the ACNs: it can ask them to use their own powers (for example to sanction an individual, which the ECB cannot do directly) if this is necessary to carry out the tasks of the ESM..
Scope: which entities are supervised?
The scope of the MSU is defined geographically and by type of entity. It mainly covers credit institutions.
The concept of a "credit institution" is harmonised at European level: it is an undertaking whose business is both to receive deposits or other repayable funds from the public and to grant credit for its own account (Regulation (EU) no. 575/2013art. 4). This definition is more restrictive than some previous national definitions. Entities that carry out only one of these two activities, such as finance companies in France, which grant loans but do not receive deposits from the public, are not considered to be credit institutions in the European sense and remain under the exclusive supervision of the NCAs.. Certain specific establishments, listed in the CRD V Directive (art. 2), are also excluded from the scope of the ESM, such as investment firms (subject to a separate regime) or certain public interest bodies (such as the Caisse des Dépôts et Consignations in France)..
Geographically, the ESM automatically applies to all credit institutions located in euro zone Member States.. EU Member States that have not adopted the euro may choose to join the ESM by establishing "close cooperation" with the ECB.. Bulgaria and Croatia were the first to opt for this cooperation, which came into effect in October 2020.. The request for close cooperation is voluntary and implies that the State adapts its legislation to enable the ECB to carry out its supervisory tasks, often via instructions to local NCAs.. Such cooperation may be suspended or terminated by the ECB or by the State concerned under certain conditions.
Criteria for distinguishing between "major" and "minor" establishments
Within the participating Member States, the MSU Regulation (art. 6) makes a fundamental distinction between "major" credit institutions (significant institutions - SI) and "less important" (less significant institutions - LSI). This distinction determines the method of supervision: direct by the ECB for IS, indirect via the ACNs (under the aegis of the ECB) for SIFs..
A credit institution (or a banking group at the highest level of consolidation in the participating States) is considered significant if it meets at least one of the following criteria:
- Size : The total value of its assets exceeds €30 billion.
- Economic importance : Its total assets exceed 20% of the GDP of the Member State in which it is established (unless its assets are less than €5 billion).
- Significant cross-border activities : The total value of its assets exceeds €5 billion AND the ratio of its cross-border assets/liabilities (held in other participating Member States) to its total assets/liabilities exceeds 20%.
- Direct public financial assistance : The institution has applied for or received direct financial assistance from the European Stability Mechanism (ESM) or its predecessor, the European Financial Stability Facility (EFSF).
- Relative national importance : The institution is one of the three largest credit institutions in its participating Member State (in terms of assets).
The ECB checks annually whether these criteria have been met for each institution.. An establishment that crosses a threshold becomes important immediately, but only loses this status if it no longer meets the following criteria no criteria for three consecutive years, to avoid too frequent changes in status. In exceptional cases, special circumstances may justify an establishment that meets one criterion not being classified as important, or vice versa..
Direct supervision of large entities by the ECB
Institutions classified as "important" (SI) are subject to direct prudential supervision by the ECB.. This means that the ECB is the main competent authority for these banks with regard to the tasks defined by the MSU Regulation (authorisations, qualifying holdings, compliance with CRR/CRD IV prudential requirements, capital buffers, supervision on a consolidated basis, etc.)..
Day-to-day supervision is carried out by dedicated JSTs, made up of staff from the ECB and the ACNs concerned, as described above.. The JST is the main point of contact for the supervised bank. It assesses risks, prepares supervisory decisions (which are then formally adopted by the Prudential Supervisory Council and the Board of Governors) and monitors the implementation of requirements.. The specific powers of the ECBsuch as on-site inspections or sanctioning powers, are exercised directly in respect of these major entities..
Indirect supervision of smaller entities via ACNs
Credit institutions that do not meet any of the significance criteria are classified as "less significant" (LSI).. At the end of 2018, there were around 2,400 of them, although this number is constantly falling.. These SIFs remain under the direct prudential supervision of their national NCA..
However, this national supervision is carried out within the framework of the ESM and under the general supervision of the ECB (oversight). The ECB ensures the consistent application of high supervisory standards for all banks in the Banking Union.. To this end, it may :
- Issue regulations, guidelines or general instructions to NCAs concerning the supervision of SIFs.
- Ask NCAs to provide information on the SIFs they supervise.
- Decide, if necessary to ensure consistent application of high supervisory standards, to exercise direct supervision of one or more SIFs itself, on its own initiative or at the request of the relevant ACN. Criteria for such a direct takeover include proximity to materiality thresholds, interdependence with other banks, or non-compliance with ECB instructions by the ACN.
Although supervised by the ACNs, SIFs remain subject to the exclusive competence of the ECB for granting and withdrawing authorisations and assessing acquisitions of qualifying holdings.. The ECB may also impose sanctions on SIFs for breaches of its own regulations or decisions..
Specific cases: branches, investment firms
- Branches : Branches established in a participating Member State by a credit institution headquartered in another Member State (participating or not) are subject to the ESM. If the branch itself meets the size criteria (assessed separately), it is considered a large entity and supervised directly by the ECB. If it is less significant, it is supervised by the host Member State's NCA, under the aegis of the ECB. The ECB acts as host or home authority for cross-border activities involving SIs and non-participating Member States. Branches of non-EU institutions remain under the supervision of the NCA of the host Member State.
- Investment firms : They are explicitly excluded from the scope of the MSU Regulation. They are subject to a separate regulatory and supervisory framework (notably MiFID II).
The decision-making process within the MSU
Prudential decisions taken in the context of the ESM follow a structured process involving the various ECB bodies and guaranteeing respect for the rights of the entities concerned.
Preparation of decisions by the Prudential Supervisory Board
The starting point for most formal prudential decisions is the Prudential Supervisory Council.. On the basis of the preparatory work carried out by the JSTs and the ECB's horizontal departments, the Supervisory Board deliberates and adopts projects decision. These projects cover all of the ECB's tasks: granting or withdrawing authorisation, authorising qualifying holdings, imposing additional capital requirements (P2R), specific supervisory measures, initiating sanction proceedings, etc..
These proposals are generally adopted by a simple majority of the members of the Supervisory Board, each member having one vote (with the Chairman casting the deciding vote in the event of a tie).. A specific qualified majority procedure applies to the adoption of regulations by the ECB..
Validation by the ECB Governing Council (no-objection procedure)
Once adopted by the Prudential Supervisory Council, the draft decision is forwarded to the ECB's Governing Council, the institution's supreme decision-making body.. The Board of Governors then examines the project. The standard procedure is that of "tacit non-objection" (tacit non-objection procedure). The Board of Governors has a set period of time (generally 10 working days, sometimes less in an emergency) in which to formulate a reasoned objection to the draft..
If no objections are raised within this period, the draft decision is deemed to have been adopted by the ECB.. If the Governing Council issues a reasoned objection, the draft is referred back to the Prudential Supervisory Council, which must then amend it to take account of the objection, or abandon it.. The amended draft may then be resubmitted to the Board of Governors.
This procedure ensures that prudential supervision decisions are consistent with the ECB's other objectives and tasks, while at the same time ensuring that the decision-making process is swift and efficient. Specific procedures exist for decisions concerning authorisations or macroprudential cushions. In the event of persistent disagreement between the Governing Council and the Prudential Supervisory Council over an objection, the matter may be referred to an internal mediation committee..
The right to be heard for the entities concerned
The adversarial principle is an essential component of the MSU's decision-making process. Before the ECB adopts a decision which may adversely affect a natural or legal person (e.g. a refusal of authorisation, an additional capital requirement, a sanction), that person must be given the opportunity to be heard (right to be heard).
In practical terms, the ECB must notify the party concerned of the facts and legal grounds on which it intends to base its decision.. The party then has a period of time (generally 2 weeks, sometimes less, potentially extendable) to submit its written observations.. It also has the right to access the file compiled by the ECB, subject to the protection of confidential information (business secrets, internal documents of the authorities, etc.).. The ECB may base its final decision only on evidence on which the party concerned has been able to present its case..
This right may be exercised after the decision has been taken only in duly justified cases of urgency, in order to avoid major damage to the financial system.. This exception does not apply to penalty proceedings..
Appeals against ECB decisions
Decisions taken by the ECB in the course of its prudential supervisory duties may be appealed, thereby ensuring that their legality is monitored. There are two main avenues: internal administrative review and external judicial review.
The Administrative Board of Review (ABoR)
Any natural or legal person to whom an ECB decision taken in the context of the ESM is addressed, or who is directly and individually concerned by such a decision, may request an internal administrative review of that decision by the Administrative Review Committee (Administrative Board of Review - ABoR). This body is internal to the ECB but is independent in the exercise of its functions.. It is made up of five full members and two alternates, appointed for five years, who must not be ECB or ACN staff and must have recognised experience..
The request for review must be made in writing, giving reasons, and must be submitted within one month of being notified of the decision (or becoming aware of it).. In principle, referral to the ABoR has no suspensive effect on the contested decision, although the Board of Governors may decide to suspend implementation under certain conditions, in particular where there is a risk of irreparable damage..
The ABoR examines the procedural and substantive compliance of the contested decision with the MSU Regulation. It does not reassess the appropriateness of the decision. Proceedings before the ABoR are adversarial and may include hearings.. The ABoR issues a (non-binding) opinion, usually within two months.. On the basis of this opinion, the Prudential Supervisory Council proposes a new decision (which may confirm, repeal or amend the initial decision) to the Governing Council for final adoption.. The applicant is notified of the ABoR's opinion and the new decision..
Legal proceedings before the Court of Justice of the European Union (CJEU)
Independently of or following the administrative review by the ABoR, the ECB's decisions may be the subject of an action for annulment before the Court of Justice of the European Union (CJEU), more specifically before the General Court of the EU.. The time limit for lodging this appeal is two months from notification of the decision or its publication.. It is important to note that referral to the ABoR neither suspends nor interrupts the time limit for judicial review.. However, the new decision taken by the ECB following the ABoR's opinion triggers a new time limit for appeals..
The CJEU reviews the legality of ECB decisions. For sanctions imposed on the basis of the Regulation (EC) no. 2532/98The Court has full jurisdiction, allowing it to re-examine the facts and the law and, if necessary, to modify the amount of the sanction. The complexity of these procedures and the financial stakes involved often make it advisable to be assisted by a lawyer who is an expert in banking supervision.
Navigating the regulatory landscape of the Single Supervisory Mechanism requires a thorough understanding of its structures, procedures and scope. If your institution is affected by these rules or if you are faced with an ECB decision, do not hesitate to contact our firm to discuss your options and secure your interests, including on aspects related to securities and guarantees.
Sources
- Treaty on the Functioning of the European Union (TFEU)
- Council Regulation (EU) No 1024/2013 of 15 October 2013 entrusting the European Central Bank with specific tasks concerning policies relating to the prudential supervision of credit institutions (MSU Regulation)
- Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing a framework for cooperation within the Single Supervisory Mechanism (SSM Framework Regulation)
- Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 relating to the taking up and pursuit of the business of credit institutions and to the prudential supervision of credit institutions and investment firms (CRD IV), as amended in particular by Directive (EU) 2019/878 (CRD V).
- Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR), as amended in particular by Regulation (EU) 2019/876 (CRR II)
- Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD), as amended in particular by Directive (EU) 2019/879 (BRRD II)
- Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and procedure for the resolution of credit institutions [...] (MRU Regulation or SRMR), as amended in particular by Regulation (EU) 2019/877 (SRMR II)
- Decision (EU) 2021/490 of the European Central Bank of 12 March 2021 on the total amount of the annual prudential supervisory fees for 2020 (ECB/2021/8)
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