The European banking landscape has been profoundly reshaped in recent years, particularly since the financial crises that have shaken the global economy. At the heart of this transformation is the Banking Union, an ambitious project aimed at strengthening the solidity of banks and harmonising their supervision within the eurozone and its partner countries. The Single Supervisory Mechanism (SSM) is the cornerstone of this project.. It establishes a centralised supervision system entrusted mainly to the European Central Bank (ECB). Understanding its role and operation has become essential for economic players interacting with the European banking sector.
What is the Single Supervisory Mechanism (SSM)?
The ESM cannot be dissociated from the broader European Banking Union initiative. Its main objective is to ensure the safety and soundness of credit institutions and, by extension, the stability of the European financial system.. By entrusting specific prudential supervision tasks to the ECB, Europe has sought to restore confidence and put an end to the fragmentation of national markets observed during previous crises..
European Banking Union: a necessary context
Born of the desire to learn the lessons of the 2008 financial crisis and the 2010 sovereign debt crisis, the Banking Union was designed to break the vicious circle between banking difficulties and national public finances.. It is based on three pillars: the ESM for supervision, the Single Resolution Mechanism (SRM) to manage bank failures in an orderly manner, and the ESM for supervision.and a harmonised deposit guarantee scheme to protect savers. This architecture is designed to ensure consistent application of prudential rules (the "uniform regulation" based on the Basel III agreements and its developments). and to limit recourse to public money in the event of bank failure.
Key players in the ESM: ECB and national authorities
The MSU is a composite system. It coordinates the activities of the European Central Bank (ECB) and the national competent authorities (NCAs) of the participating Member States.. Although the ECB is the central authority and has the final decision-making powerIt relies heavily on ACN's expertise and knowledge of the field.. This cooperation is essential to the smooth running of the system. In carrying out its supervisory tasks, the ECB acts with complete independence.but is accountable to the European Parliament and the Council.. A specific body, the Prudential Supervisory Council, plans and carries out supervisory tasks within the ECB.Its draft decisions are submitted to the ECB Governing Council..
Who is affected by MSU monitoring?
The MSU does not cover all credit institutions in the same way. A fundamental distinction is made between "significant institutions" (SIs) and "less significant institutions" (LSIs).. This distinction determines which authority is responsible for direct prudential supervision.
Major" institutions under the direct supervision of the ECB
The ECB is responsible for the direct prudential supervision of banks deemed "important".. The criteria of importance are precisely defined and include size (total assets greater than €30 billion), importance for the economy of the country or the Union (assets greater than 20% of national GDP, unless assets €5 billion and significant proportion of cross-border assets/liabilities > 20%), or the fact of having received direct public financial assistance via the European stability mechanisms.. The three largest credit institutions in each participating Member State shall also be regarded as important. The list of these establishments is public and is revised annually by the ECB.. Around 113 banking groups were under the ECB's direct supervision at the end of 2021.. For more details on principles and scope of the MSUFor more information, see our dedicated article.
The role of national authorities for other establishments
The thousands of credit institutions considered "less important" remain under the direct supervision of their national competent authority (NCA).. However, this supervision is carried out within the framework defined by the ECB and under its indirect supervision.. The ECB may issue general guidelines and instructions to NCAs to ensure consistent application of supervisory standards.. It also retains the right to decide, if necessary, to directly supervise a smaller institution itself.. This distribution is designed to ensure proportionate supervision while maintaining high standards for the sector as a whole.
The ECB's main tasks in the context of the ESM
In addition to day-to-day supervision, the ESM Regulation entrusts the ECB with specific and exclusive tasks that have a decisive impact on the banking landscape.
Bank authorisation and withdrawal of authorisation
The ECB has the exclusive power to grant or withdraw the authorisation required to carry on the business of credit institutions in the participating Member States.. Although the initial application is filed with ACNThe latter prepares a draft decision which is then submitted to the ECB for final approval.. The ECB shall ensure that the conditions laid down in Union law are met. The withdrawal procedure may be initiated by the ECB or the ACN, in particular if the institution no longer fulfils the conditions of its authorisation or commits certain serious offences..
Valuation of acquisitions and qualifying shareholdings
Any acquisition or increase of a "qualifying holding" (generally 10% or more of the capital or voting rights, or any possibility of exercising significant influence) in a credit institution must be notified to the ACN and assessed by the ECB. The objective is to assess the potential acquirer's good repute and financial soundness, as well as the target institution's ability to continue to comply with prudential requirements after the transaction.. The ECB may oppose the acquisition if these criteria are not met.
Day-to-day prudential supervision
The ECB's most visible task is the ongoing supervision of major institutions.. This means ensuring constant compliance with regulatory requirements in terms of capital (solvency ratio), liquidity, major risks and leverage, as well as internal governance, risk management and remuneration policies.. These specific tasks and powers of the ECB are carried out through 'documentary' surveillance (analysis of reports) and on-site inspections.
How does prudential supervision by the ECB work?
To carry out its tasks, the ECB has extensive tools and powers, implemented by dedicated teams, the Joint Supervisory Teams (JSTs), made up of staff from the ECB and the ACNs..
The SREP assessment process
Each year, the ECB conducts a Supervisory Review and Evaluation Process (SREP) for each major bank under its direct supervision.. The SREP is a comprehensive assessment of the bank's risks (credit, market, operational, liquidity, etc.) and the adequacy of its capital and governance to deal with them.. On the basis of the SREP, the ECB may impose additional capital requirements (known as Pillar 2 - P2R) or issue recommendations (P2G)..
Stress tests
On a regular basis (every two years at EU level, coordinated by the EBA, and annually by the ECB for banks under its direct supervision), the ECB subjects banks to stress tests.. These simulations assess the capacity of banks to absorb severe economic and financial shocks (adverse scenarios).. The results feed into the SREP and may lead to additional capital requirements..
Powers of investigation and sanction
The ECB has extensive powers of investigation to gather the information necessary for its supervision: requests for documents, examination of accounting records, hearings, etc.. It may carry out general enquiries and on-site inspections at bank premises.. In the event of failure to comply with directly applicable European regulations or its own decisions, the ECB may impose significant financial penalties on credit institutions.. For breaches of other rules or to sanction individuals, it must ask ACN to act.
Why use a lawyer for MSU-related matters?
The complexity of European banking regulations and the ECB's extensive powers mean that legal assistance is often essential for credit institutions and their managers. Whether you are applying for authorisation, managing an equity investment, preparing for an inspection, understanding the SREP requirements or challenging an ECB decision (via the Administrative Review Commission or the CJEU ), support from lawyers with expertise in European banking law is a major asset. Our firm can help you navigate these procedures and defend your interests against the supervisory authorities, particularly in terms of regulatory compliance and securing financial transactions through security and guarantee mechanisms. Don't hesitate to call on our expertise in European banking supervision.
If you are faced with a question relating to the Single Supervisory Mechanism or if you are anticipating an interaction with the ECB, contacting our firm can help you approach the situation with clarity and serenity.
Frequently asked questions
What is the difference between MSU and MRU?
The ESM monitors banks to prevent them from failing, while the Single Resolution Mechanism (SRM) intervenes to manage the failure of a bank in an orderly fashion, minimising the impact on taxpayers and financial stability..
Do all EU countries participate in the MSU?
Participation is automatic and compulsory for euro zone countries.. Other EU countries may choose to join the ESM via a "close cooperation" agreement with the ECB.. Bulgaria and Croatia did it in 2020.
What is a "significant" credit institution?
It is a bank that meets at least one of the criteria set out in the regulations: size (assets > €30bn), national economic importance (assets > 20% GDP), significant cross-border activities, recipient of direct public aid via the ESM/EFSF, or one of the three largest banks in the country.. These banks are under the direct supervision of the ECB..
Can the ECB impose sanctions directly?
Yes, the ECB can directly impose financial penalties on credit institutions (large or small) for breaches of its own regulations or decisions, or on large institutions for breaches of directly applicable European law (such as the CRR regulation).. The amount can be up to 10% of annual sales..
How can a bank challenge an ECB decision?
An ECB decision may first be subject to an internal administrative review by the ECB's Administrative Review Board (ABoR).. Independently of or following this review, an action may be brought before the Court of Justice of the European Union (CJEU).
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