European Banking Union
Key Issues and Challenges
Presented at CIRSF Summer Conference
28th of June
Pedro Duarte Neves
Deputy-Governor
Banco de Portugal
TP0013 / Versão 1.0
Prudential Supervision Department
Agenda
• The
Th need
d for
f a Banking
B ki
Union
U i
• The Single Supervisory Mechanism
• Banking Supervision
Security level: Public
1/15
The need for a Banking Union
Security level: Public
2/15
The need for a Banking Union as a response to the
shortcomings of governance model of the EMU
Weak public finances in many countries
Inconsistencies and
vulnerabilities in the
economic governance
model of the EMU
Accumulation of macroeconomic imbalances
Perverse connection between sovereign
g risk and
banking risk (in both directions)
Shortcomings of economic governance model of the EMU paved the way for the
b k off financial
break
fi
i l integration,
i t
ti
inhibiting
i hibiti
the
th effective
ff ti transmission
t
i i
off Monetary
M
t
Policy, thus becoming a source of systemic risk in the euro area
Security level: Public
3/15
How financial integration gave way to fragmentation in
the wake of financial crisis
Euro Area 10Y sovereign
g bond yields
y
Commercial interest rates on new operations
p
Germany
Spain
France
Greece
Ireland
Italy
Portugal
Euro area
8
7
6
5
%
%
4
3
2
1
0
Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12
Source: Thomson Reuters and ECB and BdP
Security level: Public
4/15
The financial trilemma and the impossibility of
achieving three core objectives simultaneously
Financial Stability
Financial Integration
National Financial Policies
With increasing financial integration, pursuing national financial policies will
generally not lead to financial stability, because national policies seek to benefit
national
ti
l welfare,
lf
while
hil nott taking
t ki
into
i t accountt externalities
t
liti off their
th i supervisory
i
practices on other countries
Security level: Public
5/15
Banking
Union
2nd
Resolution
3rd
Depositors Protection
Fiinancial S
Stability
Supervision (SSM)
Trusst
1st
De-lin
nk sovereign-ban
nks
Currently the implementation of a Banking Union is
set to occur step by step
Political Response (29th of June 2012):
•
Report: “Towards a genuine Economic and Monetary Union”
•
Euro Area Summit decisions:
o
o
Security level: Public
Mandate to the European Commission to present proposals for creating a Single Supervisory Mechanism
(SSM), based on the Article 127 (6) of the Treaty and the EU Council “to consider these Proposals as a matter
of urgency by the end of 2012”
Commitment to: “When an effective single supervisory mechanism is established, involving the ECB, for banks
in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly”.
6/15
The Single Supervisory Mechanism
Security level: Public
7/15
The Single Supervisory Mechanism in the context of
the Banking Union
Single
g Supervisory
p
y Mechanism (SSM)
(
)
ECB
Responsibility for the
oversight of the SSM
functioning and for
ensuring supervisory
consistency
SSM Common
Supervisory Framework
Supervisory Decisions
over All Banks: exclusive
competence or use of
specific powers
Decision to Directly
Exercise Supervision
Direct Supervision of
Significant Banks
Security level: Public
+
National Competent
Authorities (NCA)
Euro Area
Direct Supervision of
Less Significant Banks
Assistance to the ECB
in the Supervision of
Significant Banks
+
NCA
other Member States
(optional – close cooperation
agreement)
t)
The supervisory
p
y
framework will mirror the
one applied within the
Euro Area, but the ECB
will exercise its tasks
indirectly always through
instructions to the NCA
Exclusively Competent
for Supervisory Tasks
not conferred on the
ECB
8/15
Single Supervisory Mechanism impacts for the
Portuguese financial sector
Allocation of supervisory
tasks depends on the
significance
of
the
institution.
Scope – Tasks Conferred
on the ECB by the SSMR
Microprudential
Supervision
Significant institutions
Quantitative
Criteria
Macroprudential
Supervision
Less significant institutions
• Assets in excess of 30 bn euros or in excess of
20% of GDP (except if assets are less than 5bn
euros)
• Other Institutions (falling within the SSM scope)
Qualitative
Criteria
Security level: Public
• Institutions considered by national authorities
relevant in the national economy, with the
consentt off the
th ECB;
ECB
• The ECB, in its discretion, considers the
institution relevant in the face of cross-border
activity
public funding
g of the
• Institutions with direct p
EFSF or ESM
9/15
The Single Supervisory Mechanism
Organization and Structure
Supervisory Board
President
Experienced in Banking and
Finance and not an ECB
Governing Council member.
Vi P
Vice-President
id t
Must
be
and
ECB
Executive Board member.
ECB R
Representatives
t ti
Four ECB representatives
nominated byy the Governing
g
Council.
Security level: Public
NCA R
Representatives
t ti
One NCA representative
p
per Member State.
10/15
Roadmap for the Single Supervisory Mechanism
implementation (I/II)
July/September 2013
SSM Regulation enters
into force
2014Q1-Q2
2014Q1
EBA Stress Tests
ECB Framework Regulation
+ Balance-Sheet
Balance Sheet Assessment Results (AQR)
2013 Q4
Public Consultation - Draft ECB
Framework Regulation
July 2013 (Expected)
First (Internal) Draft of ECB Framework
Regulation
July/September 2014
ECB fully assumes its supervisory tasks
(in principle, one year after the SSMR enters into force)
From this date onwards the ECB will be able to:
• Request to national supervision authorities information, including asset quality evaluations, in
particular for those institution subject to ECB’s direct supervision;
• Start supervising institutions on request of the European Stability Mechanism (ESM)
(ESM), as a
prerequisite for recapitalization processes
Security level: Public
11/15
Roadmap for the Single Supervisory Mechanism
implementation (II/II)
December 2013
ESM backstop to SBRF
Parliamentary Approvals
1 Jan 2014
CRD P
Package
k
Before April 2014
EP – Council agreement on the SRM
July/September
y p
2014
SSM full implementation
Security level: Public
2015-2017
SRM – Single Resolution Mechanism
ESM – backstop to SBRF (Single Bank Resolution
Fund)
BRRD (Bank Recovery and Resolution Directive)
Implementation on 1 January 2015
DGSD (Deposit Guarantee Schemes Directive)
12/15
Banking Supervision
Security level: Public
13/15
What model for banking supervision?
1
Permanent on-site presence
2
Horizontal asset quality and RWA reviews through on-site inspections
3
Forward looking approach
4
Straight ties between micro and macroprudential supervision
5
Strengthen the role of internal and external auditors
Security level: Public
14/15
European Banking Union
Key Issues and Challenges
Presented at CIRSF Summer Conference
28th of June
Pedro Duarte Neves
Deputy-Governor
Banco de Portugal
TP0013 / Versão 1.0
Prudential Supervision Department