The Single Supervisory Mechanism (SSM)
Mind the (capital) gap
As from November 2014, the Single Supervisory Mechanism (SSM) will start and the European Central Bank (ECB) will take charge of prudential banking supervision in the Eurozone. The ECB is busy establishing the operational apparatus needed for the new supervisor.
Through the comprehensive assessment the ECB wants to draw a line under doubts about the quality of assets on all significant banks’ balance sheets. At the end of the exercise, the ECB will decide whether any bank needs to improve its capital position.
Estimates of the size of the capital gap vary. It seems likely that some banks will face shortfalls. Mario Draghi, President of the ECB, has spoken about the need for the comprehensive assessment to be credible through being tougher and more conservative in its assumptions than previous European exercises. The Chair of the SSM, Danièle Nouy, has said that it has to be accepted that some banks have no future.
Now is the time to start planning for the results of the exercise, in particular for the possibility that banks have to remedy capital shortfalls. Some banks have already taken action, but others have not. The ECB has indicated that banks will have between six and nine months to address any shortfall after the results are made public in October. For those banks that find themselves with a shortfall, their options will be greater the earlier planning and execution start. Moreover, there is the opportunity to tackle broader, long-standing problems, rather than just apply a quick fix.
In this paper we consider the options available to banks and the practicalities of implementing them in this particular context. None of the options available are simple; all of them may be challenging against the backdrop of a Eurozone-wide exercise, where several banks may be taking similar action and given that by the nature of the exercise, banks will have been found to have material balance sheet weaknesses.