The State of the Union: understanding the new European banking union

Overview of the proposed changes

The Banking Union initiative is Europe’s most ambitious integration project since the creation of the Euro. It represents a fundamental redesign of the supervision of the financial sector, as well as being an essential complement to monetary union. Ultimately, this project will have significant consequences for European integration and the structure of the banking sector.

Progress on the Banking Union is now well under way:

  • Under the Single Supervisory Mechanism, the European Central Bank (ECB) is now responsible for prudential supervision of banks in the Eurozone. EU Member States outside the Eurozone have the choice to opt into the SSM.
  • National-level deposit guarantee schemes will be harmonized under the forthcoming Deposit Guarantee Schemes Directive, whose implementation date is in 2016.
  • National-level recovery and resolution regimes will be harmonized under the new Bank Recovery and Resolution Directive, whose implementation deadline is 2015, with bail-in of debt (in effect conversion into equity) to be introduced in 2016. Additionally, a Single Resolution Mechanism will assume the responsibilities of a resolution authority for Eurozone banks from 2016.

The project is underpinned by the work the European Banking Authority (EBA) has been and will be engaging in on the single banking rulebook in the EU.

In 2014, the largest banks headquartered in the Eurozone and those whose significant subsidiaries are in scope for the SSM took part in the ECB’s Comprehensive Assessment exercise (which included an Asset Quality Review and the EBA’s stress test). The results of the Comprehensive Assessment, both in terms of addressing the capital shortfalls it revealed and the weaknesses it highlighted in banks’ governance and risk management, will inform the ECB’s supervisory priorities in its first year of operation. It is vital that banks in scope of the SSM recognise these priorities as they are formed and actively manage their relationships with the new supervisor.

Initial assessment

As expected these are far-reaching proposals which will fundamentally change the balance of responsibility for banking supervision within the Euro area.  Inevitably the initial focus will be on the political debate and negotiation that will follow – very quickly if the Commission's ambition of having the proposed Regulation agreed by the end of the year is to be realised. In this note we focus instead on providing a summary of the proposals (see further below) and on the main practical issues and challenges, of which we have identified six:

  1. Giving the ECB responsibility for prudential supervision of all credit institutions in the Union is a necessary step in creating the SSM. But it is not in itself sufficient if the SSM is to correct the “supervisory failings” that have eroded confidence in the EU banking system. A single supervisor requires a common and consistent supervisory culture, approach and risk assessment framework to be in place across the SSM, encompassing both the ECB and the NCAs.  This process of convergence of supervisory practice to produce real consistency will take years rather than months. The full benefits that the SSM is intended to deliver to policymakers, taxpayers and the industry will emerge gradually as this process completes.
  2. The division of tasks and activities between the ECB and the NCAs needs to be developed.  This is hardly surprising at this early stage, but the helpful practical examples given in the papers need to be clarified as soon as possible and it would be a very positive first step if the ECB and NCAs engaged the industry in this debate. To add to an already complex picture, NCAs will remain responsible for conduct of business and anti-money laundering supervision.  As we know, there is no bright line between prudential and conduct of business in certain areas, such as governance, and there will almost certainly be some overlap.  Agreeing clear and practical co-ordination arrangements will therefore be essential.
  3. The EBA will have a vital role in producing the single rulebook for the EU as a whole and for ensuring consistency of its interpretation and implementation inside and outside the Union. Changes will be made to its governance and voting arrangements to assist the EBA in this regard. Notwithstanding these safeguards, the ECB/SSM will come to exercise a very powerful, possibly dominant, role in EBA policy-making.
  4. The Commission proposes giving the ECB the power to impose significant financial penalties on credit institutions for rule breaches. It is silent on procedural safeguards, including rights of representation and appeal.  These will need to be put in place in due course.
  5. The proposals have little new to say on resolution, although the Commission has indicated that it will bring forward proposals for a single resolution mechanism to co-ordinate resolution activities.  The role and nature of this mechanism will be critical to ensuring effective crisis management and resolution proceedings.  The details, when they emerge, need to answer decisively the question of which body is ultimately in charge in a crisis.
  6. The ECB will fund its supervisory activities by a levy on credit institutions.  It is possible that some of these additional costs may be offset by reduced fees levied by NCAs. However, it seems unlikely that a new layer of supervision can be added without some net increase in costs to the industry.  More positively, the ECB will be required to publish a separate budget and accounts for its supervisory function, which will introduce useful transparency.

Today’s proposals provide all credit institutions in the EU with ample food for thought.  The ambitious implementation timetable, the expected raft of documents on how the new regime will work in practice and the upcoming proposal on the ‘missing link’ (i.e. single resolution mechanism) will further add to firms’ ‘to-do’ list. It is thus essential that all those affected start assessing the potential impact of these proposals on their operations and their supervisory relationships as soon as possible.    

Summary of key proposals

Membership and scope

  • At the heart of the SSM is the proposal to designate the ECB as the body responsible for specific tasks concerning the prudential supervision of credit institutions which are established in Member States whose currency is the Euro (currently 17).
  • Member States whose currency is not the Euro are allowed to participate in the SSM and will be able to enter into “close (supervisory) cooperation” with the ECB, subject to meeting specific conditions.
  • The ECB will carry out supervisory tasks assigned to it in Member States with which it is in close cooperation, and the NCA of that Member State will have to abide by ECB guidelines and requests.


  • Applications for authorisation are to be submitted to a relevant NCA which determines if it meets conditions for authorisation in national law.
  • If the application meets national criteria, the NCA proposes to the ECB that the ECB should grant authorisation.
  • ECB will then determine whether the application meets the provisions of EU law and grants authorisation if they are.
  • Authorisation may be revoked either at the initiative of the NCA or the ECB.

Rule and policy making

  • Policy and rules will continue to be made by the EBA with a strong commitment to a single rulebook.
  • The EBA will now be able to exercise its powers and tasks with respect to the ECB as well, which has been designated a “competent authority” for this purpose (in addition to NCAs).
  • ECB will co-ordinate and “express a common position” of the Euro area Member States for matters falling under its tasks when they participate in the Board of Supervisors (BoS) and the Management Board of the EBA.
  • The Management Board will always include at least two Member States which do not participate in the SSM.
  • EBA decisions concerning regulatory matters (binding technical standards, guidelines and recommendations, decisions to reconsider restrictions on financial activities) and budgetary matters will continue to be taken by the BoS by qualified majority of its members.
  • Voting on action in emergency situations will also remain unchanged (taken by simple majority).

Settlement of disputes and disagreements

  • EBA’s powers have been amended to allow it to address binding decisions to the ECB on action on settlement of disagreements.
  • Decisions on breaches of EU law and settlement of disagreements will be considered by a new independent panel of experts, consisting of a Chair and two members (one each from Member State participating and not participating in the SSM) appointed by the EBA BoS from its voting members.
  • Decisions proposed by this panel are considered as adopted unless rejected by the BoS by a simple majority, but only if it includes at least three votes from each of the participating and non-participating Member States in the SSM.


  • Prudential supervision of credit institutions will transfer to the ECB.  The ECB will carry out its tasks within a SSM which will include NCAs.
  • Conduct supervision, anti-money laundering responsibilities and the supervision of third country credit institutions establishing branches/providing cross-border services within a Member State will remain with the NCA.
  • The ECB will assess acquisitions and disposals of holdings in credit institutions.
  • The ECB will monitor compliance against capital requirements, large exposure rules, liquidity and leverage rules, own funds requirements and public disclosure obligations.
  • Where provided for in EU acts the ECB will have the power to set higher prudential requirements and apply additional measures to credit institutions.  
  • The ECB will be able to impose additional capital buffers including a conservation buffer and a countercyclical buffer and monitor compliance against them.
  • The ECB will carry out supervisory stress tests.
  • Supervisory powers will extend to governance arrangements, systems and controls and Pillar 2.
  • Not only will the ECB be the consolidated supervisor for parent credit institutions established within the Union, but it will also participate in consolidated supervision of groups outside of the Union.
  • The supervisory responsibilities of a NCA for a credit institution in a Member State outside the Union which establishes a branch/provides cross-border services within the Union will transfer to the ECB.
  • The ECB will participate in relevant supervisory colleges, including those for credit institutions outside the Union which operate a branch/provide cross-border services within the Union.  
  • The EBA will be tasked with devising a single supervisory handbook to complement the single rulebook.


  • To inform investigations the ECB will have the power to request information from credit institutions, financial holding companies (including mixed financial/activity holding companies); persons involved in the activities of any of these institutions;  third parties with outsourced responsibilities; or persons otherwise “closely connected” with the institutions.
  • The ECB will have also the power to interview these institutions and persons and to examine their books of record.
  • All entities and persons outlined above may be subject to an on-site inspection including without prior announcement.


  • The ECB will have powers to impose sanctions which are aimed at being “effective, proportionate and dissuasive”.
  • The ECB may fine credit institutions for breaches of directly applicable Union acts up to twice the amount of profit made/losses avoided or up to 10% of total turnover in the preceding year.
  • Where the entity being fined is a subsidiary of a parent undertaking, the fine will be calculated on the basis of the total annual turnover of the ultimate parent undertaking.
  • In cases, other than the outlined above, the ECB may require NCAs to impose sanctions if it deems it necessary for the carrying of its supervisory tasks.


  • The ECB will have the power to carry out early intervention actions as defined in EU law including coordinating with the relevant authorities.
  • The ECB will have a role to play in cross-border crisis management groups and resolution colleges.
  • A single resolution mechanism will created (by a separate legal proposal) with responsibility to resolve banks and to coordinate the application of resolution tools for credit institutions within the Union.  Additional crisis management and resolution responsibilities could be given to such a mechanism.
  • It is not envisaged that a single resolution fund will be created.  

Governance and resourcing

  • The proposal recognises the need for the ECB to be held accountable for its decisions given the wide-ranging powers it will acquire. In addition to being bound by general rules on due process and transparency it will be accountable to the European Parliament and the Council of Ministers.
  • Due to concerns around conflicts of interest the ECB will need to ensure that supervisory activities are carried out in full separation from its monetary policy functions.
  • The ECB must exercise its supervisory responsibilities in full independence from Union institutions and governments,
  • A new supervisory Board will be created and comprise of representatives of the ECB and NCAs (including those who have established close cooperation with the ECB). It will have a chair and vice-chair who will be elected from the ECB Governing Council for a non-renewable term of no longer than five years.
  • A new Steering Committee will be formed by a subset of Board members.
  • The Chair of EBA and European Commission will be observers on the Board but will have no role on the Steering Committee.
  • The ECB will levy a supervisory fee on the credit institutions it supervises, which will be proportionate to the risk profile of the firm. This will form a separate ECB budget whose detailed accounts will be published annually.
  • NCAs will second staff to the ECB.

Timetable and transitional provisions

  • Ambition is for the Regulation to be agreed in the coming months and to enter into force by 1 January 2013, with the ECB to assume full powers by January 2014 at the latest.
  • The ECB reserves the right to start carrying out its responsibilities before January 2014, in particular for institutions which have requested or received financial public assistance.
  • For all other credit institutions, ECB supervision will be phased in: on 1 July 2013 for systemically important Euro area credit institutions; on 1 January 2014 for other credit institutions.
  • First group will be determined on the basis of cross-border activity and size, covering at least 50% of the Euro area banking sector as at 1 January 2013. The list will be published before 1 March 2013.
  • From 1 January 2013 the ECB will have the power to request information from NCAs of participating Member States. This information will be used to inform the ECB’s view on the credit institutions which should be captured initially.
  • Until implementation of the Capital Requirements Directive IV and the accompanying Regulation and the changes to the Financial Conglomerates Directive the ECB will exercise its powers over the credit institutions within scope through instruction to the existing NCA.
  • The Regulation allows for the ‘grand-fathering’ of existing credit institutions so that they can carry on their business without reapplying for authorisation. NCAs will need to provide the ECB with a list of currently authorised credit institutions (i.e. beyond the anticipated first cut of credit institutions within scope) together with a report on their supervisory history and risk profile.


  • The impact of SSM will be specifically examined in the forthcoming review on the functioning of the European Supervisory Authorities (ESAs), which will be published by the Commission at the beginning of 2014.
  • In addition, a holistic review of the SSM and its impact will be published by 31 December 2015, and will address the functioning of the ECB within the European System of Financial Supervision (ESFS), effectiveness of independence, accountability and governance arrangements and the interaction between the ECB and the EBA.

About the EMEA Centre for Regulatory Strategy

The EMEA Centre for Regulatory Strategy monitors regulatory developments and provides an expert, objective perspective on opportunities and challenges for clients. It utilises Deloitte’s Risk and Regulation, Strategy Consulting and other relevant areas of expertise to understand, influence and advise on regulatory change, with a particular focus on the strategic business model and aggregate impacts.

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