Ignazio Visco: Legal foundations of the Single Supervisory
Mechanism - a retrospective look at future challenges
Opening address by Mr Ignazio Visco, Governor of the Bank of Italy, at the "SSM
Regulation, ten years since" conference, organised by the Bank of Italy in cooperation
with the University of Rome "Roma Tre" and the Paolo Ferro-Luzzi "Grandangolo"
Research Centre, Rome, 20 October 2023.
* * *
On June 29, 2012, the Heads of State and Government of the euro-area countries
issued a statement announcing that the Commission would present a proposal on the
basis of Article 127(6) of the Treaty on the Functioning of the European Union (TFEU)
for a single supervisory mechanism. This was meant to be a forceful response to the
severe stress experienced by the banking sector in the wake of the Global Financial
Crisis and the harsh consequences of the sovereign debt crisis that had hit some of the
euro-area economies.
Just over a year later, that statement was followed by the adoption of the Single
Supervisory Mechanism (SSM) Regulation on October 15, 2013.
At that juncture, given the urgency, it was decided not to amend the Treaties, but to
leverage on the enabling clause of the above mentioned Article 127(6) TFEU, which in
any case prescribes a complex and burdensome legislative process, to entrust the
European Central Bank (ECB) with extensive and direct micro-prudential supervisory
powers over the most important ('significant') banks of the euro area, while at the same
time also granting the ECB substantial powers to guide and coordinate the prudential
supervision of smaller ('less significant') credit institutions that remained at national level.
The Regulation - whose tenth anniversary we are celebrating today - represented a
pioneering experiment in the field of EU administrative law, marking a major advance in
the EU integration process. While it involved a substantial transfer of national
sovereignty to the ECB, the SSM was conceived as a network with no legal
autonomous personality, with a Union Institution at its centre - indeed, the ECB -
vested for this purpose with considerable direct and intrusive administrative powers
visà-vis third parties. The national competent authorities (NCAs) were required to assist
the ECB 'in the preparation and implementation' of the acts necessary to perform the
supervisory tasks. This included the assessment, on an ongoing basis, of banks'
situations, and on-site inspections.
The basic principles of a Banking Union were then drawn up over a very short period,
especially so if compared with the time that it took to define the framework and the rules
at the basis, within the Economic and Monetary Union, of a common monetary policy
and a common currency, the euro. Furthermore, and also because of this, the SSM can
only operate on the basis of a set of multiple (and at times complex) legal schemes.
Ten years ago, the first priority was deemed to be aligning the supervisory practices
within the euro area, through a significant but not complete centralisation of
administrative powers. At that time, further accelerating the process for harmonising
substantive banking law, which had already been under way for years, was not being
considered: this is also because, contrary to what the Treaty (Article 140 TFEU)
envisages for access to the single currency, primary Union law does not make
participation in the single banking supervision conditional on legal convergence.
Thus, the time pressure has certainly imposed some trade-offs. I will just recall three of
them.
The first concerns the decision to concentrate the key administrative powers of
microprudential supervision on the ECB, despite the lack of a fully harmonised substantive
banking law. The application of different national laws by the ECB and the need to
ensure the equality of treatment among the supervised entities has led to a rather
peculiar outcome: that of a Union Institution required to apply the national law of each of
the (now 20) EU member states belonging to the euro area when implementing the
SSM.
Accordingly, the SSM's administrative decisions must be adopted on the basis of many
different domestic legal frameworks, without at the same time jeopardising the
obligation to interpret them in accordance with EU law, given the goal of ensuring
equality of treatment for the credit institutions concerned. At the same time, the ECB
has the power to issue opinions on draft legislation, including national legislation, in the
field of banking supervision. While this is only an advisory role, given that it is also
aimed at ensuring harmonised rules, it is certainly significant.
The second issue concerns the division of powers between the ECB and the NCAs. A
'political compromise' between the Commission's initial proposal and the significantly
divergent stances voiced by the delegations of some Member States was only reached
at the end of a complex negotiation. This is reflected in some uncertainty, if not
ambiguity, in the SSM Regulation with regard to the exact allocation of powers between
the ECB and the NCAs in the matters covered by the Regulation itself.
The reason for this essentially lies in the fact that the original text of the Regulation
proposed by the Commission envisaged the exclusive competence of the ECB over all
the banks in the euro area. Furthermore, the specification of very delicate aspects
relating to the allocation of powers, such as day-by-day supervision, had been assigned
by the Founding Regulation (i.e. the SSM Regulation)to the NCAs as a task concerning
all banks, including the significant ones, whereas under the Framework Regulation (a
'second-level' regulation) it is assigned to the Joint Supervisory Teams chaired by the
ECB.
Thirdly, the ordinary decision-making process within the SSM has been influenced by
the constraints imposed by the Treaties and by the Statute of the ESCB and of the
ECB, with the additional complexity coming from the separation between monetary
policy and micro-prudential supervision. The set-up of the Supervisory Board as a
nondecision-making body that approves complete proposals for supervisory measures and
submits them - through a non-objection procedure - to the Governing Council, entitled
to raise objections especially on monetary policy issues, is the break-even point.
Despite several legal challenges, the SSM has been in many ways a historical
achievement. Not least as evidence of the hard balance reached, the text of the SSM
Regulation was not deemed as requiring any amendment at the outcome of the two
periodic reviews concluded by the Commission on the SSM in 2017 and 2023, pursuant
to Article 32 of the same Regulation.
There is no doubt that greater uniformity and effectiveness of prudential supervision has
been achieved with regard to all the jurisdictions participating in the SSM. The room for
arbitrage within the euro area, fuelled by asymmetrical supervisory approaches, has
since been considerably reduced. Moreover, the SSM has acted as a catalyst for a
significant banking restructuring process, directed at enhancing soundness and
capitalisation. The importance of resilient banks for the euro area became evident
during the COVID-19 pandemic as well as in the context of the Russian aggression
against Ukraine, but it has also been confirmed very recently in connection with the
banking crises that occurred in the United States and in the Switzerland.
The SSM has certainly benefited from the advantages of a single jurisdiction over all
ECB acts and measures: that of the Court of Justice of the European Union. The Bank
of Italy is fully aware of the growing role of the case law of the Court in the process of
building the Banking Union: so much so that we have set up a periodical publication, in
our Legal Research Series (Quaderni di ricerca giuridica), devoted specifically to
reporting and providing comments on these judicial developments.
The Court of Justice - with its rulings - has first and foremost supported the view of the
SSM as a centralised EU mechanism, in which the ECB is acknowledged as the holder
of supervisory powers over all the banks in the SSM (regardless of their significant or
less-significant classification). Meanwhile, the Court has also affirmed its exclusive
jurisdiction over the 'endo-procedural' or 'preparatory' acts adopted by the NCAs, within
the perimeter of the common procedures envisaged by the SSM Regulation. It is
important that the EU Judge has also provided guidance on the application of national
law by the ECB, by making it clear that the ECB - when required to apply national law
in transposing directives - must first look to the interpretation provided by the domestic
courts.
This brings me back to the beginning of these brief opening remarks.
The urgency with which the SSM was established has led, inter alia, to the exercising of
supervisory powers on all credit institutions that operate in the euro area, in compliance
with prudential banking rules that were and continue to be only partially uniform at EU
level. This asymmetry is clearly still a source of imbalance. Ten years after the
enactment of the founding regulation of the SSM, it is now high time to work towards a
much more advanced degree of harmonisation of those rules. From this point of view, it
would certainly be desirable to launch a systematic and comprehensive assessment at
EU level of the extent to which the current dispersive banking rule directives can be
merged into a single comprehensive piece of legislation.
It is time to think about a single EU Banking Code, which not only sets out the Pillar
1capital requirements (as is already the case by virtue of the CRR), but also
standardises the organisational and governance requirements for credit institutions,
with a view to the wide range of activities that banks are authorised to conduct. In
addition, the enforcement mechanisms need to be coordinated with the SSM
Regulation as much as possible.
The significant discrepancies that persist among the various SSM jurisdictions, in the
areas of commercial law, corporate law, labour law and administrative law should not
be an ideological barrier to such an exercise. The regulation of the qualitative prudential
standards to be applied vis-à-vis credit institutions could disregard the corporate models
provided under each single jurisdiction, and focus instead on a functional approach.
One area, perhaps a minor but not a negligible one, that apparently continues to elude
a fully harmonised approach is that of administrative sanctions, as national legislators
still retain wide margins of discretion with reference to those who should be sanctioned
and, above all, under what conditions. The CRD6 proposal, still under negotiation,
seeks to define in a more precise and exhaustive manner the list of infringements that
Member States should be obliged to consider when applying sanctions. However, it is
still a minimal list, naturally subject to gold plating. Likewise, the precise combination of
sanctions against supervised entities on the one hand, and sanctions against their
managers, on the other hand, would also seem to remain a matter of domestic law. In
the last few years, the European Court of Human Rights as well as the Court of Justice
have had a fruitful dialogue with the national judges and drawn up a dense case law on
the fundamental procedural principles to be applied to administrative sanctions ('right to
be silent', 'ne bis in idem', and so on). We believe that these rulings could form the
basis for a fully uniform EU law on sanctions vis-à-vis credit institutions and their
management.
Again with a view to a level playing field in the sensitive area of enforcement, there
should also be some thought on the possibility of harmonising - here at a minimum
level, considering the conditions imposed by Article 83(2) TFEU - a very delicate area
that is still closely governed by national laws: namely that of the criminal law rules
intended to safeguard the exercise of banking supervisory tasks and the general
interests underpinning them, within the constitutional framework of the Member States.
A mature system such as the SSM should be backed and secured by a hard set of
criminal law rules, with their basic features enshrined at EU level. Indeed, any
obstruction to the supervisory functions exercised by the ECB or by one of the 20 NCAs
ought to be subject to homogeneous criminal sanctioning treatments across the whole
SSM area. This would also be true if we refer to an unauthorised exercise of banking
activity: with the European dimension of banking supervision, the transnational
dimension of such offences does seem to exist per se.
My focus today has been on the genesis of the SSM and on possible leverages to
remedy some internal weaknesses within the mechanism. The SSM cannot still be
deemed a self-contained system, but rather a part - albeit the key one - of that Banking
Union which, ten years after the founding regulation of the SSM, has still not been fully
completed, especially on the front of crisis management and depositors' protection. It
goes without saying that no banking supervision mechanism - no matter how efficient -
can extinguish the risk of banking crises, especially when considering the unending
transitions to which the advanced banking sectors are subject in the digital era, as the
recent collapse of some US regional banks shows. Following the further postponement
of the European Deposit Insurance Scheme announced by the Euro group at its
meeting of 16 June 2022, the Commission - on the basis of the outcomes of that same
meeting - presented a proposal last April for a revision of the Crisis Management and
Deposit Insurance framework.
On the one hand, the proposal - which takes into account many of the suggestions we
voiced in recent years - definitely includes some positive elements that could ease the
crisis management for small and medium-sized banks, especially insofar as it enhances
the potential for Deposit Guarantee Schemes to intervene to support a transfer of
assets and liabilities, both in liquidation or in resolution, and to ensure an orderly exit
from the market of failing banks. On the other hand, some critical issues remain: the
enlargement of the scope for resolution should be guided by the principle of
proportionality, requiring an assessment of the bank's actual capacity to issue Minimum
Requirements and Eligible Liabilities, which in the Commission's proposal remains the
main source of funding for resolution, and the lack of financial stability exemption for
addressing systemic crises, such as the one adopted to solve the recent banking crises
in the United States. This is not the time to enter into the details of this very technical
debate, but - in my view - it is not possible to outline the perspectives of the SSM
without considering the frontiers of crisis management.
I leave these thoughts to the eminent panellists of today's conference, which is intended
to be an occasion to celebrate a decade in which legal challenges have mostly been
successfully overcome, but also to openly discuss the many steps that still await the
future generations of colleagues working for and within the EU banking supervision.