Tasks and powers of the ECB within the Single Supervisory Mechanism (SSM)

Since the financial crisis of 2007-2008 and the ensuing sovereign debt crisis, the European Union has undertaken an in-depth reform of banking supervision.. The creation of the Banking Union, and within it of the Single Supervisory Mechanism (SSM), marked a major turning point.. This mechanism gives the European Central Bank (ECB) a central role in the supervision of credit institutions in participating Member States.. Understanding the ECB's remit and extensive powers within this framework is essential for those involved in the banking sector and their partners. This article details the ECB's key competences within the ESM, shedding light on the functioning of this enhanced supervisory architecture at European level. For an overview, please consult our article on the overall operation of the MSU.  

The fundamental tasks entrusted to the ECB by the ESM

The MSU Regulation (Regulation (EU) No 1024/2013) is the cornerstone of the ECB's prudential supervisory powers.. It assigns it specific tasks aimed at ensuring the safety and soundness of credit institutions and the stability of the EU's financial system.. These missions cover essential aspects of the life of a banking establishment, from its creation to its day-to-day operation, including the structuring operations it may undertake..  

Granting and withdrawing banking authorisations: a shared responsibility

One of the most fundamental tasks entrusted to the ECB is its exclusive competence to grant and withdraw banking authorisations for all credit institutions (whether large or small) located in the participating Member States.. This means that any entity wishing to carry on the business of a credit institution, defined as taking deposits or other repayable funds from the public and granting credit for its own accountmust be approved by the ECB.  

The authorisation procedure, although ultimately the responsibility of the ECB, involves close cooperation with the national competent authorities (NCAs).. The application is initially lodged with the NCA of the Member State in which the establishment wishes to set up, in accordance with national law.. ACN carries out an initial assessment to check whether the national and European conditions (in particular those stemming from the CRD IV/V directive and the CRR/CRR II regulation) have been met.. If the assessment is positive, the ACN forwards a draft authorisation decision to the ECB..  

The ECB then carries out its own assessment. It has a set period of time (generally 10 working days after notification of the project by the ACN, which may be extended) to examine the project and raise any objections.. If the ECB considers that the conditions have not been met, it may oppose the granting of authorisation, after giving the applicant the opportunity to present its observations.. If there is no objection within the time limit, approval is deemed to have been granted (principle of non-objection).. The ACN notifies the applicant of the final decision (grant or refusal)..  

Symmetrically, the ECB has the exclusive power to withdraw an authorisation, either on its own initiative or on a proposal from the ACN.. The grounds for withdrawal are governed by EU law (in particular Article 18 of the CRD IV Directive) and the applicable national law.. They include failure to use the authorisation, express renunciation, cessation of activity, obtaining the authorisation by irregular means, or continued non-compliance with the authorisation conditions or prudential requirements.. The withdrawal procedure also involves consultation with the ACN and, where appropriate, the resolution authority, while guaranteeing the right of the institution concerned to be heard..  

Valuation procedure for acquisitions and increases of qualifying shareholdings

The ECB also has sole responsibility for assessing proposals to acquire or increase "qualifying holdings" in credit institutions covered by the ESM.. A qualifying holding is defined as the direct or indirect ownership of at least 10% of an institution's capital or voting rights, or any other possibility of exercising significant influence over its management.. The procedure also applies when the thresholds of 20%, 30% (or one third depending on national law, as in France) are crossed. ) and 50%, as well as transactions making the target institution a subsidiary of the acquirer.  

As with approvals, the procedure involves the national competent authority (NCA) of the target establishment.. The prospective purchaser must notify the relevant ACN of its intention to purchase.. It will carry out an initial assessment against the criteria set out in CRD IV (article 23). These criteria are designed to ensure the sound and prudent management of the target institution and include the good repute and financial solidity of the proposed acquirer, the competence of future management, the institution's ability to continue to comply with prudential requirements, and the absence of suspicions relating to money laundering or terrorist financing.  

The ACN then sends the ECB a proposal for a decision (opposition or non-opposition) at least 15 working days before the end of the overall assessment period, which is a maximum of 60 working days from receipt of a complete file.. This period may be suspended once for a request for additional information (suspension limited to 20 or 30 working days depending on the case).. The ECB makes the final decision. If the ECB does not object within the time limit set (in practice, within the remaining 15 working days after receipt of the ACN's proposal), the draft is deemed to be approved.. In the event of a reasoned objection by the ECB, the proposed acquirer shall be informed and may exercise the following remedies. The ECB's intervention is intended to ensure a harmonised assessment and reduce the risk of decisions being biased by national considerations..  

Monitoring compliance with prudential requirements (capital, liquidity, governance)

In addition to the key stages of authorisation and equity investment, the ECB's main task is the ongoing prudential supervision of credit institutions, in particular those classified as "major".. The ECB shall ensure that these institutions comply at all times with the requirements laid down in EU law, in particular the CRR/CRD IV legislative package (and its CRR II/CRD V amendments) and national transpositions..  

This covers several key areas:  

• Capital requirements (Pillar 1 and Pillar 2) : The ECB monitors compliance with the minimum capital ratios (CET1, Tier 1, Total Capital) defined by the CRR regulation. It also assesses the need to impose additional capital requirements (so-called "Pillar 2" or P2R requirements) to cover risks specific to the institution that are underestimated or not covered by Pillar 1. It may also issue recommendations for additional capital (P2G). The ECB also approves the use of internal models by banks to calculate their capital requirements for credit, market or operational risks.  
• Risk management : The ECB ensures that institutions have adequate processes and systems in place to identify, measure, manage and monitor all the risks to which they are exposed: credit risk, market risk, operational risk, liquidity risk, interest rate risk, concentration risk, etc.
• Liquidity : The supervision covers compliance with liquidity ratios (such as the Liquidity Coverage Ratio - LCR and the Net Stable Funding Ratio - NSFR) and the bank's ability to meet its short- and long-term obligations. The ECB may impose specific liquidity requirements.  
• Major risks : The ECB monitors banks' exposure to single counterparties or groups of related customers in order to avoid excessive concentration of risk. It may set stricter limits than those provided for in the regulations.  
• Governance and internal control : The ECB examines the soundness of governance arrangements, the adequacy of organisational structures, the effectiveness of internal control systems, and compliance with requirements relating to the composition and suitability (good repute, competence, experience, availability) of management bodies. It also monitors remuneration policies.  
• Transparency and publication of information : The ECB monitors the quality and reliability of the prudential information that banks must declare to the authorities (reporting) and publish for the market (Pillar 3).  

To carry out its supervisory role, the ECB relies on a range of tools and prerogatives, including the analysis of data reported by banks, ongoing dialogue with their managers, and more in-depth controls such as the SREP, on-site inspections and stress tests.

Direct prudential supervision of major institutions

While the ECB is responsible for the authorisation and qualifying holdings of all institutions in the participating Member States, its prudential supervision direct on a day-to-day basis focuses on Significant Institutions (SIs). Less Significant Institutions (LSIs) remain under the direct supervision of their national competent authority (NCA), although the ECB exercises indirect supervision and may decide at any time to assume direct supervision of an LSI if necessary.. The criteria defining the importance of an institution relate to its size (total assets in excess of €30 billion), its economic importance for the country or the EU (assets/GDP ratio in excess of 20%, unless assets < €5 billion), the scale of its cross-border activities, or the fact that it has received direct public financial assistance via the ESM or the EFSF.. The three largest establishments in each participating Member State are also considered to be important by default. This direct supervision is based on key processes.  

The Supervisory Review and Evaluation Process (SREP)

SREP is at the heart of the ECB's prudential supervision of major institutions. This is a comprehensive annual assessment of each bank, designed to provide a coherent, forward-looking assessment of its overall risk profile and the viability of its business model.. The SREP enables the ECB to determine whether a bank complies with all prudential requirements and to decide on any supervisory measures to be taken.  

The SREP assessment is generally based on four main elements:

1. Business Model Analysis : Review of the viability and sustainability of the bank's business strategy and revenue streams.  
2. Assessment of internal governance and risk management : Analysis of the quality of the management body, the risk culture, the effectiveness of the internal control framework and the risk management processes.  
3. Capital risk assessment : Quantitative and qualitative analysis of risks likely to impact the bank's equity (credit risk, market risk, operational risk, interest rate risk in the banking book).
4. Assessment of risks to liquidity and financing : Analysis of the bank's ability to meet its short-term liquidity needs (liquidity risk) and maintain a stable funding structure over the long term (funding risk).  

On the basis of this overall assessment, the ECB assigns each bank a SREP score (ranging from 1 to 4, with 1 being the best score) reflecting its risk profile and level of prudential concern. This assessment leads to an annual SREP decision for each major bank. This decision may include :

• Legally binding Pillar 2 capital requirements (P2R) in addition to the minimum Pillar 1 requirements.  
• Non-binding Pillar 2 (P2G) capital recommendations, indicating the level of capital the ECB expects the bank to have to face potential crisis scenarios (often based on the results of stress tests).  
• Specific liquidity requirements.  
• Other qualitative measures aimed at correcting weaknesses identified in governance, risk management or the business model.  

SREP is a dynamic process, led by the Joint Supervisory Teams (JSTs), which combines quantitative data analysis and qualitative judgement by supervisors..  

Organising and conducting on-site inspections

On-site inspections are an intrusive and essential surveillance tool for the ECB. They enable specific aspects of a bank's operations, risks or controls to be examined in depth, directly on the bank's premises.. In contrast to continuous "documentary" monitoring (based on the analysis of data and documents), inspections offer a direct view and enable detailed investigations to be carried out.. They may be triggered as part of the annual monitoring programme (planned inspections) or in response to specific events requiring rapid analysis (ad hoc inspections)..  

The ECB may carry out on-site inspections of all entities subject to its supervision (major and minor credit institutions, financial holding companies, etc.).. Inspections are carried out by dedicated teams, separate from the JSTs responsible for day-to-day monitoring, in order to guarantee the independence of the examination.. These teams are composed of ECB staff and may include staff from the ACNs concerned, or even external experts if necessary.. The head of mission is always an ECB or ACN staff member..  

An on-site inspection is initiated by a formal decision of the ECB, adopted under the non-objection procedure by the Governing Council, and notified to the institution concerned (with certain exceptions justifying an unannounced inspection).. Inspectors have extensive powers:  

• Access to business premises.  
• Request any relevant documents.  
• Examination of books and recordings, taking copies.  
• Obtaining written or oral explanations from any person belonging to the entity or its representatives.  
• Questioning (on a voluntary basis) of any other person (e.g. external auditors).  

Inspections result in a report detailing the findings (weaknesses, shortcomings). This report is sent to the JST, which then makes recommendations to the bank, often in the form of a "follow-up letter".. The JST then monitors the bank's implementation of these recommendations.. Failure to comply may result in more stringent monitoring measures or even penalties..  

Carrying out stress tests

Stress tests are another fundamental tool of modern prudential supervision.. They involve simulating the impact of unfavourable economic and financial scenarios (severe recession, interest rate shock, market downturn, etc.) on banks' financial position, in particular on their equity capital and profitability.. The aim is to assess the resilience of banks and identify potential vulnerabilities before they materialise..  

The ECB plays a key role in conducting stress tests within the euro zone. It participates in the EU-wide stress tests coordinated by the European Banking Authority (EBA), generally every two years.. The ECB contributes to the definition of the scenarios (in conjunction with the European Systemic Risk Board - ESRB) and the methodology, and then supervises the implementation of the exercise for the major banks under its direct supervision..  

In addition to these European exercises, the ECB also conducts its own annual stress tests, in accordance with CRD IV.. These tests can target specific risks or particular portfolios.  

The results of stress tests are an important element taken into account in the SREP.. In particular, they enable the ECB :  

• Refine its assessment of each bank's risk profile.
• Calibrate Pillar 2 capital requirements (P2R).  
• Make Pillar 2 (P2G) capital recommendations to absorb potential losses in the event of a crisis.  
• Identify weaknesses requiring specific monitoring measures (qualitative or quantitative).  

The ECB may decide to publish all or part of the results of the stress tests it conducts, thereby contributing to transparency and market discipline.. The full assessment (including QRA and stress test) carried out in 2014 prior to the operational launch of the MSU was a major founding exercise. Since then, these exercises have become a recurring feature of the European prudential landscape..  

The ECB's extensive supervisory powers

To carry out its supervisory tasks, the ECB has an arsenal of extensive powers, defined mainly by the ESM Regulation (in particular Articles 10 to 13 for investigations and Article 16 for supervisory measures) and supplemented by the prerogatives inherited from the national competent authorities via the CRD IV/V Directive and the CRR/CRR II Regulation.. These powers must be exercised in compliance with Union law and the principle of proportionality..  

The power to require corrective measures (additional capital, recovery plans)

When the ECB identifies breaches of prudential requirements, risks that could jeopardise a bank's viability, or weaknesses in its governance or risk management, it may impose corrective measures.. These measures, listed in Article 16 of the ESM Regulation (which largely reproduces Article 104 of CRD IV), are varied and graduated. The ECB may in particular :  

• Requiring additional capital (Pillar 2) : Impose capital requirements (P2R) in excess of the regulatory minimum (Pillar 1) to cover specific risks or risks poorly assessed by the bank.  
• Impose specific liquidity requirements : Ask the bank to hold additional liquid assets or to review its management of maturities between assets and liabilities.  
• Requiring the application of a special provisioning or asset treatment policy: Impose stricter accounting rules for certain assets deemed to be particularly risky.  
• Call for the strengthening of systems, processes and strategies : Demand improvements in governance, internal control, risk management systems, etc.  
• Require submission of a compliance restoration plan : Ask the bank to submit a detailed plan explaining how it intends to remedy the shortcomings identified, with a precise timetable. The ECB may also require changes to existing remedial plans if they are deemed insufficient.  
• Restricting or limiting activity : Prohibit or limit certain activities, operations or network expansion if they pose excessive risks to the Bank.  
• Require the divestment of risky activities: Ask the bank to divest certain activities deemed too dangerous for its solidity.  
• Demand a reduction in inherent risk: Impose measures to reduce the risks associated with certain activities, products or systems (for example, through hedging or divestment).  
• Limiting or prohibiting the distribution of dividends or variable remuneration : Intervene in the distribution policy if it is deemed incompatible with maintaining a sound financial base.  
• Requiring profits to be used to strengthen shareholders' equity.  
• Resigning members of the management body : Demand the replacement of managers deemed unfit.  

The choice of measure depends on the seriousness of the situation and the principle of proportionality. The ECB generally favours dialogue and the least intrusive measures before resorting to formal injunctions..  

Investigative powers: requests for information, hearings

As detailed above, the ECB has broad investigative powers to gather the information it needs to carry out its supervision.. These powers apply mainly to large establishments, but may also apply to smaller establishments. They include :  

• Requests for information (article 10 MSU) : The ECB may require any supervised entity (credit institution, financial holding company, etc.), its employees or even its external service providers to disclose any information or document relevant to its tasks within a reasonable time. Professional secrecy (except that of lawyers) may not be invoked. These requests may be one-off or recurring (regular or specific prudential reporting).  
• General enquiries (article 11 MSU) : If requests for information are not sufficient, the ECB may launch a formal investigation. This enables it to examine books and records, take copies and receive written or oral explanations from the persons concerned. It may question any person belonging to the entity concerned (managers, employees) and, on a voluntary basis, any other person (e.g. auditors).  
• On-site inspections (article 12 MSU) : The most intrusive power, allowing ECB (and NCA) officials access to the entity's business premises to conduct in-depth on-site investigations. The inspectors have the same powers as in a general investigation (access to documents, hearings, etc.).  

These investigative powers are essential to enable the ECB to verify banks' compliance with regulations, assess their risks independently and base its supervisory decisions on complete and reliable information.

The use of macroprudential instruments (capital buffers)

In addition to micro-prudential supervision (focusing on the soundness of individual banks), the ECB also plays a role in macro-prudential policy, which aims to prevent and mitigate systemic risks that threaten financial stability as a whole.. Article 5 of the MSU Regulation gives it specific powers regarding the macro-prudential instruments provided for in European legislation (CRR/CRD IV/V), in particular the various capital buffers.  

In principle, the implementation of these instruments is the responsibility of the designated national authorities in each participating Member State.. However, the ECB does have top-up powers:  

1. Right to object : When a national authority intends to activate or modify a macroprudential instrument (e.g. set the rate of the countercyclical capital buffer), it must notify the ECB of its intention. The ECB has 5 working days to object to the proposed measure if it considers it inappropriate. If there is no objection, the national measure may be applied.  
2. Power to impose stricter measures : If the ECB considers that the measures taken (or not taken) by a national authority are insufficient to counter an identified systemic or macro-prudential risk, it may decide to impose stricter requirements on the credit institutions concerned. This may involve increasing the rates of the various capital buffers (conservation, countercyclical, systemic risk, for institutions of global systemic importance or other) or applying other measures provided for in Article 458 of the CRR (e.g. more stringent requirements on large exposures, disclosure of information, etc.). The ECB must notify its intention to the national authority concerned, which may raise objections.  

This "top-up" power enables the ECB to ensure a more consistent and potentially more rigorous application of macroprudential tools within the ESM area, thereby contributing to better prevention of systemic risks. The ECB exercises these powers in close collaboration with the national authorities and the European Systemic Risk Board (ESRB)..  

The ECB's power to impose sanctions

To ensure compliance with prudential regulations and its own decisions, the ECB has the power to impose administrative fines. This power is defined principally by Article 18 of the MSU Regulation and supplemented by Regulation (EC) No 2532/98 (amended to take account of surveillance missions)..  

Types of administrative monetary penalties

The ECB can impose administrative fines on entities that commit certain offences. Infringements that may be penalised directly by the ECB mainly concern:  

• Breaches of directly applicable European regulations (mainly CRR/CRR II) committed by institutions important.
• Breaches of regulations or decisions by the ECB itself, committed by institutions large or small.  

Penalties are exclusively financial. The ECB cannot impose professional sanctions (such as a ban on practising) or criminal sanctions..  

Fines are capped:  

• Twice the profit made from the offence or the loss avoided as a result of the offence, if these amounts are quantifiable.  
• Or 10% of the total annual sales for the previous financial year of the legal entity concerned (or its ultimate parent company in the case of a subsidiary).  

The ECB must set the amount of the fine in accordance with the principles of effectiveness, proportionality and deterrence, taking into account the seriousness of the infringement, the financial situation of the entity, its cooperation and any repeat offences..  

For breaches of national provisions (transposing directives such as CRD IV/V) or to sanction individuals (managers, board members), the ECB must ask the national competent authority (NCA) to open proceedings and use its own national sanctioning powers. The NCA then informs the ECB of the action taken..  

Penalty procedure and guarantees of the rights of the defence

The sanction procedure initiated by the ECB respects fundamental rights and procedural guarantees. Where it suspects an infringement falling within its direct competence, the ECB may open an investigation entrusted to an independent internal investigation unit.. This unit has the investigative powers of the ECB (requests for information, hearings, access to documents)..  

At the end of the investigation, if grievances are upheld, the investigation unit notifies the entity concerned, which then has a period in which to submit its written observations and has the right to access the file (subject to confidentiality).. A hearing can be organised.  

The investigation unit then forwards its file and a proposed decision (sanction or closure) to the Prudential Supervisory Board.. The latter examines the case, may ask for further investigations or modify the proposal.. It adopts a final draft decision, ensuring that the entity has been able to present its defence on all the objections raised.. This draft is submitted to the Board of Governors in accordance with the usual no-objection procedure..  

Throughout the procedure, the entity concerned benefits from the rights of the defence, including the right to be heard, the right to an effective remedy and the principle of the right to a fair hearing. ne bis in idem (not to be sanctioned twice for the same acts). Sanction decisions may be appealed before the ECB's Administrative Review Committee and/or the Court of Justice of the European Union (CJEU). If you are faced with a sanction procedure, it is advisable to call on the services of an MSU lawyer to ensure that your rights are protected.  

Publication of penalties

As a general rule, financial penalties imposed by the ECB are published on its website.. The publication shall state the identity of the entity penalised, the nature of the infringement and the amount of the fine.. This publication takes place even in the event of an appeal.  

However, the ECB may decide to delay publication or to publish the sanction anonymously if immediate publication by name would seriously disrupt the financial markets, prejudice an ongoing criminal investigation, or cause disproportionate harm to the entity concerned.. Information on sanctions shall remain accessible on the ECB's website for at least five years.. Information on possible appeals before the CJEU is also published.. Sanctions are also communicated to the EBA.  

Cooperation and exchange of information

The smooth functioning of the ESM is fundamentally based on close cooperation and a fluid exchange of information between the ECB and the many national and international authorities involved in banking supervision.. The MSU Regulation and the MSU Framework Regulation lay down the principles and procedures for this cooperation.  

Collaboration with national authorities (ACN and resolution authorities)

Cooperation between the ECB and the national competent authorities (NCAs) of the participating Member States is the cornerstone of the ESM.. The ACNs assist the ECB in the preparation and implementation of its supervisory tasks.. They are the first point of contact for applications for authorisation or notifications of qualifying holdings, and carry out an initial analysis before forwarding them to the ECB.. For smaller institutions, the ACNs carry out direct supervision, but under the indirect supervision of the ECB and in accordance with any guidelines or instructions it may issue..  

A constant and complete exchange of information is provided for: the ACNs must provide the ECB with all the information it needs to carry out its tasks, and conversely, the ECB shares the relevant information with the ACNs. This sharing is intended to ensure a complete overview of the situation of banks and to avoid redundant requests.. Cooperation takes the form of Joint Surveillance Teams (JSTs), made up of staff from the ECB and the relevant NCBs, which carry out the day-to-day supervision of major institutions..  

The ECB also cooperates with national resolution authorities (NRAs). Although resolution is not the direct responsibility of the MSU but of the Single Resolution Mechanism (SRM), coordination is essential.. The ECB is consulted during the preparation of resolution plans by NRAs and provides them with all relevant information, in particular when it considers that an institution is "failing or likely to fail", a precondition for triggering a resolution procedure.. Withdrawal of authorisation by the ECB is also coordinated with the resolution authority..  

Cooperation with authorities in third countries

The international dimension of the banking sector requires cooperation between the ECB and the supervisory authorities of countries outside the European Union (third countries).. Article 8 of the MSU Regulation authorises the ECB to establish contacts and conclude administrative agreements (Memoranda of Understanding - MoUs) with the supervisory authorities of third countries.. The main purpose of these agreements is to facilitate the exchange of confidential information (subject to equivalent guarantees of professional secrecy) and to coordinate supervisory activities for banking groups present on both sides of the border..  

Within this framework, the ECB may also organise the participation of third country authorities in the colleges of supervisors that it sets up for European banking groups with significant activities abroad.. This international cooperation is essential to ensure effective supervision of global banking groups and prevent regulatory arbitrage. The ECB coordinates its actions in this area with the EBA. The exact scope of the MSU is also a key element; you can find out more on the scope of the MSU.  

The tasks and powers conferred on the ECB within the ESM have profoundly transformed the landscape of banking supervision in Europe. If you are confronted with questions relating to the application of these regulations or if you interact with the ECB in the context of its supervisory missions, our firm can assist you in analysing your situation and defending your interests, including with regard to the implementation of securities and guarantees.

Please do not hesitate to contact us to discuss your options.

Sources

• 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 laying down the framework for cooperation within the single supervisory mechanism between the European Central Bank, national competent authorities and national designated authorities (MSU 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), amended in particular by Directive (EU) 2019/879 (BRRD II).
• Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions.