24.07.2024
Ten years of the Single Supervisory Mechanism: key aspects of
modern banking supervision*
KPMG
Madrid
Margarita Delgado
Acting Governor
*lEnglish translation from the original in Spanish.
E
Good morning.
Welcome to this celebration of the tenth anniversary of the Single Supervisory Mechanism
(SSM). This is a landmark occasion: a chance to, first of all, cast our eyes back and look at
what has happened in the banking sector over the last ten years and, second, reflect on
what the near future may hold for us in supervision.
This anniversary represents, then, an opportunity to take stock of the current situation of
the banking sector, how it has been affected by the new supervisory model implemented a
decade ago and, above all, what lessons can we learn to continue improving, thereby
strengthening our financial system?
I will divide my speech today into three parts. I will begin by considering the current situation
of the banking sector under direct SSM supervision, before looking back at what has been
achieved in these ten years and then finishing with my perspective on the challenges facing
supervision in the future.
First, we must acknowledge that the banking sector is in generally good health, as indicated
by the main ratios we use to measure the most significant risks.
Beginning with credit risk, the non-performing loans (NPL) ratio stood at 2.31%1 in
2024 Q1, according to the latest report by the European Central Bank (ECB), with NPLs
amounting to €354.8 billion, which was a slight increase, of 1 basis point (bp), over the
previous quarter, although it remains at a low level historically speaking, as we will see later.
These figures are the Eurosystem average but, as usual, vary across countries.
Thus, for example, NPL ratios in the large economies range from 3.26% in Spain to 1.55%
in the Netherlands. The extremes are found in Greece (4.60%) and Latvia (0.54%). The range
narrows if analysed by business model, with ratios between 3.07%, for banks deemed to
be diversified lenders, and 1.17%, for custodian banks.
1
Excluding central bank exposures.
French and German banks have the largest NPL portfolios by volume, which is
understandable given their joint weights in the banking system as a whole. Indeed, French
banks hold 34.8% of all loans by euro area significant institutions, far ahead of German
banks (in second place, with 16.6%) and Spanish banks (in third place, with 15.3%).
Turning to solvency, the CET1 ratio stood at 15.74% in 2024 Q1, with the total capital ratio
at 19.81%, figures similar to those of the previous quarter. Similary to credit quality, the
differences across areas and business models are even starker in the case of solvency. The
CET1 ratio varies between 14.14% among global systemically important institutions and
33.68% among development and promotional banks. The most robust CET1 ratios in the
large economies range between 16.52% in Germany and 12.66% in Spain, with the latter
having the lowest rate in the euro area. As we have often noted, the predominant business
model of Spanish banks revolves around international activities that generate recurring
revenue, but which also lock up larger amounts of capital in risk-weighted assets (RWAs).
As also mentioned in the past, internal models (normally linked to lower capital
requirements) are less commonly used by Spanish banks. 51% of credit RWAs in Spain are
reported under the standardised approach, compared with 43% in Italy, 37% in France,
29% in Germany and 13% in the Netherlands. The average leverage ratio in the European
Union is 5.71%.
At 158%, the average liquidity coverage ratio (LCR) remains well above the legal minimum.2
The situation is comfortable in all countries, given that this ratio drops no lower than 145.2%
(in Germany), and the same can be said if we group by business model.
2
The legal minimum LCR is 100%.
The same is true for the net stable funding ratio, which, at 126.8% in 2024 Q1, is also well
above its regulatory minimum.
This shows that the system still has a high level of liquidity despite the ECB's gradual
reduction of its balance sheet and the repayment of the targeted longer-term refinancing
operations.
This comfortable level of liquidity in the system is one of the reasons why banks have not
had to raise remuneration rates on retail deposits as forcefully as policy interest rates have
increased. As a result, strong net interest income has led to broad-based growth in return
on equity, which reached an average of 9.67% in 2024 Q1 (12.43% in Spain), 36 bp above
its level at end-2023. Net interest income reached 1.62% (2.90% in Spain), with low levels
for the cost of risk, at 0.50% (1.15% in Spain). These developments ought to be seen against
the backdrop of weak credit among banks supervised by the SSM. Indeed, the amount of
loans to households increased by just 0.1% in the last quarter and by 0.6% over the past
year. Lending to firms rose by 0.3% in the last quarter and remained stable over the last
year.
Spanish significant institutions also continued to improve their profitability as the increase
in net interest income offset both the growth in operating costs and credit impairments and
the outlay of the bank levy. Net interest income was mainly driven by the price effect as
lending volumes remained somewhat subdued. On the other hand, net fee and commission
income grew at an annual rate of 9.6%, mainly among international banks. Notably, there
was a 34% increase in the bank levy, to €1,652 million (from €1,236 million in 2023) owing
to growth in the base used to calculate the levy (net interest and fee and commission
income). Naturally, domestic banks were relatively more affected. Moreover, overhead costs
increased above inflation (7.7% year-on-year), driven by staff costs (up by 10.9%).
These figures must be understood in the context of a European banking system that is
generally traditional in nature, with loans constituting the bulk of the balance sheet (60.8%),
followed by cash and balances at central banks (12.3%). Loans are principally concentrated
in lending to households (37.9% of loans) and firms (34.9%). In turn, Spanish banks subject
to SSM supervision operate with an even higher share of retail customers, who constitute a
higher share of lending (65.5% of the total balance sheet), centred around credit to
households (48.2% of all loans).
By business type, global systemically important institutions account for 44% of assets, while
universal banks account for 34.3%.
Following this overview of the current context of the most significant banks in Europe, let us
now look back at the path trodden. Over the past ten years, this road has not been easy
and we should acknowledge that banks have proven resilient to recent exogenous shocks,
from the COVID-19 crisis to the economic tensions brought about by bottlenecks, inflation
driven by energy price rises as a result of the war in Ukraine and the various banking crises
in 2023, to give just some examples. This is undoubtedly the fruit of our work to strengthen
solvency, governance and, in many cases, also adapt business models to a historically low
interest rate environment that lasted for years.
We should remember that the SSM was created at a very complicated time, when the
consequences of the great financial crisis could still very much be felt, some countries'
sovereign debt was coming under scrutiny and parts of the banking system were
undergoing critical moments. I would like to highlight four key aspects of the last ten years:
First, the balance sheet restructuring performed by banks.
This has seen NPLs fall from nearly €1 trillion (€989 billion) to slightly less than €355 billion
today. NPL ratios have dropped from 7.48% to 1.91%.3 One contributor to this process was
supervisory pressure to improve balance sheet quality, which weighed on banks' profitability
over a number of years when interest rates were even negative. This was particularly
significant in some areas that were severely affected by the build-up of portfolios with high
NPL ratios. Other contributory factors were banks' improved credit management policies
and a more favourable macroeconomic environment.
3
Including amounts held by central banks.
The outcome of this exercise, and of containing other costs, was that banking profitability
remained at between 5% and 6%, in spite of such an adverse interest rate environment. As
we have pointed out before, the normalisation of monetary policy has strongly driven bank
profitability in the last two years.
Second, and as a result of the above, European banking solvency has also been
strengthened over the last decade.
The CET1 ratio rose from 12.7% in 2015 Q2 to 15.7% in 2024 Q1. The regulatory changes
to the solvency framework made in the light of the great financial crisis drove this significant
increase. Nevertheless, the leverage ratio saw a more modest rise, from 5.04% at end-2016
to 5.71% in 2024 Q2.
The third aspect to consider is liquidity. Here, banks have also strengthened their liquidity
positions, with the LCR rising from 138% in 2015 to 158% at present.
At a time when accommodative monetary policy - with high liquidity indices in the system
- is becoming tighter, liquidity management has taken on particular significance, and
despite there still being comfortable liquidity levels, it is an area that will need closer
monitoring and management. Moreover, the markets are more sensitive in these times of
geopolitical turmoil and uncertainty and, therefore, susceptible to volatilities that have an
impact on liquidity.
The final aspect I would mention, and perhaps the most important one, is improving
governance and risk management. This has been, and continues to be, a supervisory
priority, because we are convinced that the first line of defence for a strong, profitable and
efficient banking system is a well-defined, robust and professional governance structure
and a solid and prudent risk management framework. This is a message often repeated by
supervisors, but reality shows that banks with weak risk management systems or
governance frameworks can find themselves in situations that jeopardise their own
existence or financial system stability, as we saw last year with the US banking crises.
Although numerous supervisory activities focused on governance have been conducted
over the last decade (from strengthening the fit and proper procedures to reviewing data
management and aggregation systems, among many other tasks), in the past three years
they have centred more on aspects related to organisational structures, management
bodies and risk management functions. Since the SSM was created, 8,735
governancerelated findings (accounting for nearly 14% of the total) have been detected, of which 1,624
currently remain open. In addition, a higher percentage of governance-related findings have
been closed than those related to other risks. As a result of all this, banks are much better
managed today than a decade ago. However, as I have mentioned, this is an area that is
and will continue to be a supervisory priority in the future owing to its extraordinary
importance.
The progress made over the last decade can therefore be clearly appreciated. In a relatively
short period of time, we have been able to integrate different supervisory cultures and
sensitivities into a single mechanism capable of supervising banks with a wide variety of
profiles and activities. There has also been a successful drive towards more prudent and
efficient risk management, which has simultaneously reinforced banks' positions in aspects
as diverse as solvency, liquidity and governance.
But the supervisor must not fall into complacency, and it is precisely at this point that I would
like to reflect on the future of supervision and the changes we need to implement to adapt
it to the new age. Back in September 2022 the ECB considered it necessary to assess the
functioning of the SSM, and appointed a group of independent external parties to prepare
a report with proposed improvements. Published in April 2023,4 the report contains a wide
range of proposals, and reforms to supervisory tasks have since begun to be implemented.
The most noteworthy reform aims to establish a more risk-based approach to supervision.
This means that the inspection teams will have more flexibility in flagging the areas of focus
for their supervisory activity. The aim is not to conduct a global and comprehensive review
of the banks every year, but rather to focus resources on the most significant risks at each
bank. This will help make more efficient use of the ever-scarce resources available. Although
this new approach will entail risk-taking by the supervisor (as some areas will be left outside
the supervisory perimeter for some time), it is a risk we must take if we are to become more
efficient, focused and, at the same time, more flexible.
4
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/annex/ssm.pr230417_annex.en.pdf.
Flexibility and agility are essential in such turbulent and evolving times, and we must be able
to react swiftly to any new scenarios that could affect the financial system. Although the
events of recent years have demonstrated how, as supervisory authorities, we have been
able to adapt our activity, priorities and procedures to the circumstances of any given
moment, this quality needs to be reinforced and incorporated more explicitly into our
methodology.
In this respect, I consider that the suptech tools we currently have and the ones we will
develop over time will prove to be highly efficient in the early detection of weaknesses and
areas for improvement in banks' management and their risk profiles. This will improve the
efficiency of supervision.
Another key element we need to reinforce is the implementation of supervisory measures.
Unless the corrective measures are duly complied with, any problems or shortcomings
detected will not be properly addressed. This is another lesson learned from the crisis at
mid-sized US banks in spring 2023. Such tools should be governed by the principle of
proportionality and able to adapt to the seriousness of the shortcomings they seek to
address. Moreover, the deadlines set for implementing the corrective measures should also
be reasonable and commensurate with their complexity and the severity of the deficiencies,
establishing intermediate milestones where applicable. To this end, an escalation ladder has
been designed, which specifically seeks to strengthen the corrective measures process
following these criteria. There are a wide variety of tools available to the SSM in this respect,
and this new escalation ladder will allow adaptation to the specific circumstances in each
case. Corrective measures can range from quantitative and qualitative requirements to
periodic penalty payments or other types of sanctions in the event of a serious breach of
any ECB decision or regulation.
But not all shortcomings can be addressed with quantitative measures. Matters related to
governance or business models, for example, can only be mitigated through qualitative
measures. Perhaps we have put too much focus on capital requirements over the years, at
the expense of these other measures. This is why we need to strengthen this other aspect
because, as I have pointed out, governance is key to strengthening the banking system.
For instance, we have found that there are still numerous shortcomings related to data
governance that have not been adequately addressed in a proper and timely manner.
Therefore, we need to recognise the importance of qualitative measures and ensure that
they are sufficiently clear and specific, that they have fixed deadlines and that
noncompliance would in any event entail other more forceful measures within the escalation
system I mentioned earlier.
In increasingly digital environments where data management is key and will become even
more so in the future, proper data governance is a cornerstone for the sound management
of banks.
This is why I believe that supervision over the coming years will increasingly target aspects
related to digitalisation and new technological environments, such as operational resilience
frameworks, the management of external providers and the adaptation of business models
to new customer needs, new operators and new products.
The results of the recent cyber resilience stress tests will be announced in the coming days.
This exercise, which focused more on qualitative aspects, has been very useful in
understanding banks' responsiveness to such events, as these will doubtless become an
increasing priority, against which banks must establish safeguards.
Nor can we forget other emerging risks, such as those posed by climate change. The
materialisation and management of such risks are and will continue to be subject to
supervision, which will no doubt evolve in step with regulatory requirements.
Lastly and again looking to the future, I would like to recall that the banking union is
incomplete. We have not yet finished the work we began ten years ago. Although the single
supervisory and resolution mechanisms are fully operational, the European Deposit
Insurance Scheme (EDIS) is still pending. In the absence of political consensus, work is
currently under way on an intermediate solution, namely the Bank Crisis Management and
Deposit Insurance Framework (CMDI). Last June5 the Council of the EU agreed on a joint
position with the European Parliament, which has to be ratified. Without going into detail, I
firmly advocate aiming for the creation of this common framework, in order for the banking
union to have true substance.
In conclusion, the uncertain and changing environments in which banks operate today
require that supervisory processes also be adapted so as to quickly and flexibly capture all
elements related to their risk profile and be able to establish timely corrective and mitigating
measures.
Supervision needs to be more efficient, targeted and transparent, both now and in the future.
As with the world around us, supervision also has to evolve, if it is to fulfil its purpose: ensure
a robust and stable financial system that provides the real economy with the resources it
needs for its activity.
Banks' ability to react to unexpected shocks, and the existence of operational frameworks
that strengthen their resilience in vulnerable digital environments with unforeseen or
deliberate failures, will be key elements of tomorrow's supervisory agenda. Nor must the
other aspects I have mentioned be neglected, such as governance, climate risk
management and liquidity. If it is to be efficient, supervision needs to evolve in step with
changes that impact the financial system.
5lhttps://www.consilium.europa.eu/en/press/press-releases/2024/06/19/bank-crisis-management-and-depositinsurance-framework-council-agrees-on-its-position/.