Single Supervisory Mechanism - New regime


The Single Supervisory Mechanism

Getting to grips with the new regime

Executive Summary

In the wake of the global financial crisis, regulation and supervision have become integral components of banks’ strategies and business models. Bank management teams recognise this; boards and shareholders expect business strategy to anticipate and accommodate regulatory and supervisory change. But for banks in the Single Supervisory Mechanism (SSM), the task of responding to regulatory change is complicated by the new and evolving supervisory framework. It is difficult for banks to define their strategy whilst the supervisory approach is still in flux, and without a clear perspective on trends or on the approach of their peers.

We identify three key planning horizons for banks to consider:

  • In the near term, banks need to manage the uncertainty in the transition to the new regime. The Joint Supervisory Team (JST) structure initially adds complexity to the supervisory framework. A lot remains to be done with respect to implementation, and putting all the pieces of the new approach into practice.
  • It is also important to focus on what the ECB’s supervisory priorities mean for banks. The European Central Bank’s (ECB) first annual report on the SSM’s supervisory activities, published in March, provided some insights: the drive to establish a more level playing field is important here.
  • Looking forward, a strategic area of focus is business models and supervisory strategy. This is a major priority for the ECB. The ECB has emphasised the importance of business model analysis on a number of occasions.
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Each of these has implications for the actions banks should take:

  • Banks need to establish strong, sustainable relationships with ECB supervisors, whilst maintaining links to national supervisors who
    are still in many instances responsible for the execution of day-to-day supervision. Some banks have strengthened or set up dedicated supervisory relationship teams to establish these links early on.
  • The drive for consistency in the application of regulations and in the supervisory approach is leading supervisors to review options and national discretions, and to examine risk-weighted asset calculations. The ECB is embarking on major initiatives in these areas. Banks need to understand the implications of changes for their capital position and capital planning. In some cases, there may also be consequences for decisions on legal entity and operational structures.
  • Senior management needs to engage with its board to discuss what steps should be taken to make the business model sustainable from a supervisory perspective, and whether those changes could be a source of additional strength.
Single Supervisory Mechanism - Implications
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