EUROPEAN COMMISSION Brussels, 11.10.2017 SWD(2017) 336 final COMMISSION STAFF WORKING DOCUMENT Accompanying the document Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013 {COM(2017) 591 final}



The first Commission report based on Article 32 of the SSMR briefly analyses the central aspects of the SSM Regulation and of its application, listing the main findings. The present Staff document is accompanying the Commission report, covering in more detail the aspects dealt with in the report. In undertaking its review, the Commission has relied on document analysis, interviews and informal discussions with relevant stakeholders. Both publicly available information, as well as non-public documents requested and received from the European Central Bank (ECB) were included in the analysis. Input was received from members of the European Parliament's ECON committee, national representatives in the Council, ECB staff, European Banking Authority (EBA) staff, Single Resolution Board (SRB) staff, technical experts and senior management and staff from several NCAs in participating and non-participating Member States, a sample of banks categorised as significant institutions (SI) and less significant institutions (LSI), and representatives of banking industry associations. Decisions directly addressed to individual institutions or bank-specific data were neither submitted by the SSM nor requested by the Commission. All samples shared by the ECB were in anonymised form. Given the early stage of the SSM there was no or not sufficient experience to assess to the same level of detail all the aspects listed in the Commission's review mandate enshrined in Article 32 of the SSM Regulation. For instance, given that no close cooperation arrangements were concluded with Member States outside the euro area, it is not possible to assess the impact of those Articles. Furthermore, as the initial stage of the SSM has required intense efforts for putting in place workable arrangements between the various participating parties, and ensuring the effectiveness of supervisory tools, this report will not focus directly on the interaction between the SSM and competent authorities in non-participating Member States. Also, in relation to the potential impact on national banking systems, although some emerging trends may be noticed, such as an increased use of cross-border branches instead of subsidiaries, there was no sufficient information available to attribute this to a possible impact of the SSM and too early to identify other possible impacts on the structures of the national banking systems. Furthermore, it was too early to grasp the fiscal effects that supervisory decisions may have on participating Member States or the impact of developments in relation to resolution financing arrangements. Such assessment requires observing the interactions between the SSM and the Single Resolution Mechanism (SRM) and ongoing discussions on establishing a fiscal backstop. The Staff working document follows closely the structure of the Report providing the underlying analysis for the different sections of the Report. Part A deals with the fundamental aspects of the SSM setup, and addresses the areas of evaluation mentioned in sub-paragraphs (e), (g), (i), (l) and partly (a) and (b) of the mandate in Article 32 of the SSMR. It contains an evaluation of the practical implementation of accountability and independence arrangements, scrutinises the decision-making process at the ECB, examines the mechanisms for separation between the monetary and supervisory functions, and the division of tasks between the ECB and the NCAs. Part B covers practical aspects, analysing the effectiveness of the most prominent tools developed by the ECB for performing its supervisory tasks, such as the categorisation of the supervised institutions, the functioning of the Joint Supervisory Teams (JSTs) and the horizontal supervisory functions. It reflects elements falling under the sub-paragraphs (a) and (b) of the mandate in Article 32. Part C evaluates the performance of the main supervisory tasks. This includes an analysis of the way the ECB performs the common procedures towards all credit institutions in the Banking Union, the way the ECB performs the direct supervision of significant institutions (the fit and proper tests, the approval of capital instruments, the Supervisory Review and Evaluation Process (SREP) for significant institutions, the approval of internal models), the responsibilities carried out vis-à-vis NCAs in the context of the supervision of less significant institutions, the exercise of the macro-prudential tasks conferred on the ECB. Lastly, the ECB's enforcement and sanctioning powers are evaluated. Sub-paragraphs (c), (d) and partly (b) of Article 32 are corresponding to this Part. Part D is dedicated to the relationship of the ECB with other relevant bodies, examining the role of the ECB in ESFS, and specifically its interaction with the EBA and the SRB and with relevant international bodies. Sub-paragraphs (a) and (f) of Article 32 mandate correspond to this Part. Part E deals with cost effectiveness of the SSM as envisaged in sub-paragraph (j) of Article 32. It analyses the supervisory fees, indicators of the quality of the supervision, including empirical evidence of the structural changes in the euro area since the establishment of the SSM. Conclusions and recommendations corresponding to the analysis in this accompanying document are spelled out in the Report itself, and reflect the Commission's views regarding, inter alia, the possible ways of dealing with identified shortcomings. Overall this review sets out a positive assessment of the first two years of the ECB acting in its supervisory capacity. Some difficulties have been identified at this stage, however none of them concerns essential structural aspects that impinge on the functionality of the SSM and that would therefore justify proposing amendments to the SSM Regulation at the current juncture. For addressing some of these difficulties, the report provides interpretations of the regulatory framework, refers to ongoing discussions of amendments to relevant Union law or invites the ECB to take certain measures.

A. Governance of the SSM A.1. Accountability, due process and independence arrangements [Article 32(e) SSMR] Significant supervisory powers have been transferred for direct exercise to the European Central Bank (ECB) on the condition that any "shift of supervisory powers from the Member States to the Union level should be balanced by appropriate transparency and accountability requirements" . To that end a framework has been put in place through the SSMR, which aims to ensure that ECB's exercise of supervisory powers is subject to political, judicial and administrative accountability, whilst respecting the independence of the ECB and guaranteeing fair treatment and procedural rights for all those concerned. This section will assess the use and effectiveness of these arrangements during the first two years of Single Supervisory Mechanism (SSM) operation. A.1.1. Political Accountability [Article 32(e) SSMR] The SSMR requires that the ECB shall be accountable to the European Parliament (EP) and to the Council for the implementation of that Regulation and specifies the relation with the EP, the Council, and national parliaments. Annual Report The ECB is required by Article 20(2) of the SSMR to submit on an annual basis to the EP, the Council, the Commission and the Eurogroup a report on the execution of the tasks conferred on it by that Regulation, including information on the envisaged evolution of the structure and amount of the supervisory fees. This report shall also be forwarded to the national parliaments of the participating Member States. Since the SSM became operational, the ECB has submitted 3 comprehensive annual reports, which are also published on its website and presented in the European Parliament and the Eurogroup. Accountability towards the European Parliament Article 20 of the SSMR provides the right of the EP to request the Chair of the ECB's Supervisory Board to participate in hearings on its supervisory tasks. Confidential oral discussions with the Chair and Vice-Chairs of the competent committee of the EP can also be held upon request. Moreover the ECB shall answer, orally or in writing, to the questions referred to it by the EP. Furthermore, the ECB and the EP signed an inter-institutional agreement to define the practical modalities of the exercise of democratic accountability . Under these arrangements the ECB shall participate in bi-annual ordinary public hearings, may be invited for ad-hoc exchanges and confidential meetings and shall respond to written questions. The ECB shall also forward to the EP a meaningful record of the Supervisory Board proceedings including annotated decisions. The Chair of the Supervisory Board attended three hearings of the ECON committee in 2015, three in 2016 and one in 2017, two ad-hoc meetings in 2015 and three in 2016. No confidential meeting has been held so far. Additionally, the ECB answered 88 letters on supervisory issues from Members of the European Parliament since the set-up of the SSM (17 so far in 2017, 34 in 2016, 26 in 2015 and 11 in 2013-2014).

The EP has issued two reports on the Banking Union , in which it expresses its views about the functioning of the SSM. These reports generally welcome the efforts made by the ECB while underlying areas that could benefit from further improvement. One of the reports also welcomes "the efficient and open way in which the ECB has so far fulfilled its accountability obligations towards Parliament" . Accountability towards Council and the Eurogroup According to Article 20 of SSMR, the Eurogroup may request the Chair of the Supervisory Board to participate in hearings on its supervisory tasks. The ECB shall also answer questions orally or in writing. The Council and the ECB have concluded a Memorandum of Understanding on cooperation which includes the obligation for a bi-annual hearing of the Chair of the Supervisory Board to the Eurogroup, and the duty to respond to oral or written questions of the Euro Group. The ECB in its supervisory capacity was present at five ECOFIN and informal ECOFIN meetings in 2014, none in 2015 and one in 2016. It attended the Eurogroup once in 2015 and twice in 2016, and the Euro working group twice in 2015 and twice in 2016. Reporting to national parliaments Pursuant to Article 21 of the SSMR, national parliaments of the participating Member States may address observations or questions to the ECB on the performance of its supervisory tasks. National parliaments may also invite the Chair or a representative of the Supervisory Board, together with a representative of the national competent authority (NCA), to participate in an exchange of views in relation to the supervision of credit institutions in that Member State. The SSM was heard six times by committees from national parliaments between 2014 and 2016 and received one direct question from the Latvian Parliament. These reporting channels allow national parliaments to form an opinion on the functioning of the SSM. Some difficulties may have emerged in those participating Member States where Parliaments can set up investigative committees which under national law may have access to supervisory information . A.1.2. Judicial accountability [Article 32(e) SSMR] Judicial accountability in the SSMR is designed to reflect the judicial control framework applicable to the ECB as laid down in the Treaty on the Functioning of the European Union (TFEU) and the Statute of the European System of Central Banks and of the ECB (ESCB Statute). Whilst there is no dedicated Article in the SSMR, recital 60 of the SSMR recalls that the legality of ECB acts, other than recommendations and opinions, intended to produce legal effects vis-à-vis third parties shall be reviewed by the Court of Justice of the European Union (CJEU) pursuant to Article 340 TFEU and Article 35.1 ESCB Statute. Equally, Article 24(11) SSMR confirms that the internal review mechanism implemented through the Administrative Board of Review (ABoR) should be without prejudice to rights to bring proceedings before the CJEU. In addition, recital 61 SSMR confirms the extension of the liability regime of the ECB to make good any damage caused by it or its servants in the performance of their supervisory duties. Judicial review of ECB supervisory decisions has been requested on several occasions since the set-up of the SSM. Until January 2017, 13 actions have been brought to the CJEU by significant and less significant institutions against decisions taken by the ECB, requesting legality checks in light of the SSMR, of Union law, as well as of national law transposing Directives. Whereas to date, only in one of these cases a judgement has been issued, ongoing procedures show that the judicial review is actively used to hold the ECB to account. The liability regime and the legal standing recognised for addressees of ECB decisions might make the ECB prone to be subject to litigation to a larger extent than some national competent authorities, whose liability is more restrained under applicable national law. A.1.3. Administrative accountability [Article 32(e) SSMR] Apart from the political accountability arrangements specified in the SSMR, the ECB is subject to various reviews by administrative bodies. The relevant arrangements may be found in the SSMR, as well as in the statutory acts of these bodies. Primarily, these concern the regular review of the functioning of the SSMR by the Commission, the European Court of Auditors' and the European Banking Authority. Moreover, international bodies such as the International Monetary Fund (IMF) assess to a certain extent the ECB when operating in its supervisory capacity. SSM review by ECA Pursuant to its mandate to examine the operational efficiency of the management of the ECB - as provided in the TFEU, the ESCB Statute and the SSMR - the European Court of Auditors (ECA) issued on 18 November 2016 its first audit report on the SSM. The ECA report portrays as a success the set-up of the SSM by the ECB within a narrow timeframe, but criticises what it perceives as over-reliance on national competent authorities. The ECA report points to several aspects of the SSM functioning that could be improved and makes recommendations in the areas of governance, accountability, off-site supervision and on-site supervision. The ECB has recognised the validity of most of the ECA's recommendations and committed to address them in a constructive way. In addition, the ECA report emphasises difficulties encountered in obtaining from the ECB information that the ECA considers necessary for performing its audit mandate. This resulted, in the ECA's view, in several areas of the SSM activities not being covered by the audit . The reluctance to share certain documents was justified by ECB on grounds that such documents would not be necessary for the ECA to perform the audit of the operational efficiency of the ECB's management and on the basis of confidentiality rules binding the ECB. The ECA links problems in accessing ECB information to the "audit gap" signalled by the Contact Committee of the Supreme Audit Institutions (SAIs) in the EU. The Contact Committee of SAIs in the EU, which comprises Member States' heads of national audit offices and the ECA, has issued a statement concluding that "an audit gap has emerged in those euro area countries where previous audit mandates of national SAIs over national banking supervisors are not being replaced by a similar level of audit by the ECA over the ECB's supervisory activities" . At the same time the Contact Committee acknowledged a second dimension to the audit gap, reflecting the fact that in some countries audit mandates of national SAIs over national banking supervisors are limited or absent altogether. The ECA report has been discussed in both EP and Council , with a special emphasis on the ECA's difficulties in accessing ECB information. Both EU institutions have expressed their concern as regards the disagreement between the ECB and the ECA on the information that should be shared and encourage more cooperation between the two institutions. Following such criticism the ECB has expressed its willingness to discuss with the ECA. As concerns the more contentious issue of the sharing of information, problems raised by the ECA have a double dimension: different views over the scope of the ECA's mandate to audit the ECB and different views over the concrete information to be exchanged under that mandate.

With regard to the former, the Commission notes that the ECA's mandate of auditing the ECB. This mandate covers the operational efficiency of the management of the ECB (see Article 287 of the TFEU, Article 27.2 of the ESCB Statute, and the SSMR). This is indeed more limited than the mandates of certain national SAIs over national banking supervisory authorities, although not all national SAIs have mandates over national banking supervisors. Yet, whether this amounts to a potential audit gap affecting the ECB's accountability needs to be assessed in the broader context that accounts also for the fact that the ECB is subject to additional accountability arrangements for its supervisory activities that might not necessarily be found in the national audit frameworks. In this context, it is important that the ECB's accountability is assessed holistically in light of all accountability arrangements to which it is subject. As for the differences in opinion between the ECB and the ECA on the information to be shared, the Commission notes that Article 27(2) of the SSMR authorises the ECB to exchange information with Union authorities and bodies in the cases where relevant Union law requires national competent authorities to disclose information to those entities and within the limits and conditions provided under such Union law. The Commission notes also that Articles 56 and 57 of the CRD require competent authorities to exchange information with "persons responsible for carrying out statutory audits of the accounts of institutions", but do not list persons in charge of the audit of the competent authority itself. However, the absence of such an explicit reference should not preclude the ECB from sharing information with the ECA, as it is bound directly by the obligation to provide information under Article 287(3) second subparagraph of the TFEU . Consequently the ECB is subject to a clear obligation to provide to the ECA any document or information necessary for the ECA to carry out its task, within the limits of its mandate. EBA review of SSM The European Banking Authority (EBA) was entrusted, amongst others, with the essential tasks of contributing to the establishment of high-quality common regulatory and supervisory standards and practices, contributing to a common supervisory culture and conducting peer-review analyses of competent authorities in order to strengthen consistency in supervisory outcomes . Furthermore, under Article 107 of the CRD, the EBA is given a specific mandate to check consistency of supervisory reviews, evaluations and supervisory measures, whilst all competent authorities are obliged to provide the EBA with information to enable it to perform such assessment. Pursuant to these mandates the EBA has so far issued two reports on supervisory convergence. The second report issued in July 2016 considers the state of play at the end of 2015 and includes in the assessment also the ECB. For the purpose of the report, the EBA has performed a thorough review of ECB's supervisory practices, including scrutinising parts of ECB's supervisory manual, its information management system IMAS used by the ECB for supervisory purposes, bilateral discussions and visits. The ECB has been generally cooperative with the EBA for the purpose of this exercise, whilst not always being able to provide all the relevant background documentation to enable an accurate review by the EBA. Following this exercise, the EBA has prepared conclusions and recommended follow-up actions for the ECB, which were partly addressed by the ECB through the review of its Supervisory Review and Evaluation Process (SREP) methodology. The EBA has been also endowed with tools to discipline competent authorities, especially under its breach of Union law powers. Such procedure allows the EBA to start upon request, or on its own initiative, an investigation over an alleged breach or non-application of Union law by competent authorities, including the ECB, and eventually to address a recommendation to them. It is however noted that the EBA does not use frequently the breach of law tool to issue a recommendation for compliance with Union law. Such procedure could be even more difficult to carry out in the context of the SSM, given the specific voting requirements in the EBA's Board of Supervisors involving a double majority from NCAs in participating and in non-participating Member States. To succeed, such a procedure would require a majority of the competent authorities that are in the Supervisory Board to take a stance different from the one adopted by the same authority in the Supervisory Board. In this context, it seems that one of the key tools of the EBA can be less effective in the case of the ECB than it would potentially be in case of another competent authority. It results that the ECB is subject to close scrutiny by the EBA as regards its compliance with the Single rulebook, and its efforts of aligning supervisory practices and supervisory outputs within a common supervisory culture. The EBA also disposes of soft but influential tools to require the ECB to take action. However, although possible in theory, the EBA's power to make formal recommendations to the ECB to comply with Union law may hardly be applied in practice due to the potential conflict of interests described above. Review by the IMF The IMF periodically assesses countries' financial sectors in an exercise known as Financial Sector Assessment Program (FSAP). They mainly cover the risks to macro-financial stability, the financial stability policy framework and the authorities’ capacity to manage financial crises. They include also an assessment of compliance with international financial sector standards such as the Basel Core Principles for Effective Banking Supervision (BCP) . Since the establishment of the SSM, the ECB is actively involved in the FSAP of the participating Member States, especially regarding the assessment of compliance with the BCP. As a consequence, IMF receives extensive information on, among others, the supervisory methodology applied by the ECB. This information feeds into the IMF's conclusions on compliance with the BCP in that country, which are made public. In the context of the FSAPs carried out since the SSM became operational, the IMF welcomed the harmonisation and benchmarking of supervisory practices and praised the ECB's supervisory process as "robust and conducive to a more structured, intense and intrusive supervision", while also signalling some areas of further improvement, especially the "time-consuming and cumbersome decision making process." Until now, the evaluation of the ECB (as supervisory authority) by the IMF has only been carried out as part of the assessment of individual countries. However, the upcoming FSAP of the euro area (part of the ongoing IMF Article IV consultation with the euro area) will focus, as regards banking supervision, on the SSM and especially the ECB as a supervisor. Control by the European Ombudsman Citizens of a Member State or undertakings with a registered office in the Union can make a complaint to the European Ombudsman if they think that there can be a case of maladministration in the institutions and bodies of the EU, including the ECB. In this regard, the European Ombudsman has launched so far four investigations in relation with the supervisory functions of the ECB and an exchange of views took place between representatives from the ECB and the office of the European Ombudsman on the transparency of the SREP. A.1.4. Consultation, due process, internal recourse mechanisms and the Administrative Board of Review [Article 32(i) SSMR] When acting in its supervisory capacity the ECB needs to ensure fair treatment and observe the fundamental procedural rights of the parties directly affected by its decisions. This requires that information is provided to such parties, that discussions may take place with such parties, and that this may possibly lead to changes in the approach taken by the ECB. Three important mechanisms have been set up to ensure that fundamental procedural rights of affected parties are observed: consultation requirements, the due process requirement for adopting supervisory decisions and the internal administrative review mechanism. Consultation of stakeholders According to Article 4(3) SSMR, the ECB shall conduct open public consultations before adopting a Regulation. Furthermore, although there is no legal obligation for public consultations in the case of non-binding instruments, the ECB often conducts them (as was the case of the Guide on Options and Discretions). Since the SSM became operational, the ECB has carried out 9 public consultations (some of them including more than one legal instrument). Moreover, during the preparatory phase it released 3 draft regulations for public consultation. Whilst wide public consultations are normally not required to underpin supervisory activities, they are rather common as regards the rule-making component of supervision. The ECB thus appears to develop a welcome consultation culture, where it intends to promote more harmonisation of supervisory practices. Due process

Required under Article 22 of the SSMR, and further developed in Articles 25 to 35 of the ECB's SSM Framework Regulation (the SSMFR), due process shall inform all supervisory decisions taken by the ECB. The essence of due process under Article 22 SSMR consists of the right to be heard, right to defence, right to access to the ECB file, and obligation for the ECB to state reasons for its decisions . These core elements are further developed in the SSMFR with rules on representation of parties, on general obligations in supervisory procedures, on evidence, witnesses and experts to be used in supervisory procedures, on the timing and modalities of the right to be heard through written or oral procedures, on the process and limits of access to files, on the motivation, possible suspension and notification of supervisory decisions. Where the right to be heard applies, the ECB may not take a final decision before the hearing period has elapsed and without taking due account of the arguments made by the parties concerned. The due process framework appears to be solid and applied consistently. Some concerned parties complained about inadequate deadlines for comments, and insufficient motivation of decisions, which impinge on their procedural rights. Furthermore, there are concerns that ECB uses an extended interpretation of "confidential information" that prevents parties to have access to internal ECB documents relevant for their supervisory file. There was no sufficient documentation available to the Commission to verify such observations. Internal recourse mechanism: ABoR The third mechanism aiming to ensure accountability towards addressees of ECB supervisory decisions or other parties directly and individually concerned by such decisions consists of the Administrative Board of Review (ABoR), conceived as an internal administrative review mechanism for ECB decisions. Provided for by Article 24 of the SSMR, the ABoR was set up pursuant to an ECB decision in order to review the procedural and substantive conformity of ECB supervisory decisions with the SSMR. The ABoR is composed of individuals who are subject to high reputational and expertise standards, who have to act independently and in the public interest . Any ECB supervisory decision may be challenged in front of ABoR, without this having automatic suspensory effects. Recourse to ABoR is not compulsory and does not affect parties' rights to bring proceedings before the CJEU . ABoR may organise oral hearings and has to issue a reasoned opinion within maximum 2 months after an application for review. Although the ABoR opinion is not binding (in terms of conclusions) on the Supervisory Board and the Governing Council, the Supervisory Board is compelled to submit a new complete draft decision after each ABoR review. The internal administrative review mechanism has acquired already some substantial experience through 19 review cases completed by 13 December 2016. Out of these 19 cases, 4 were withdrawn following subsequent agreements reached between the ECB and the parties concerned. 6 ABoR reviews resulted in identical supervisory decisions, whilst 7 ABoR reviews triggered amended supervisory decisions (most of them adding motivation to the initial decision, in one case deleting part of the motivation and in one case extending the deadline). Two cases were considered inadmissible, as they did not concern supervisory decisions, but letters by the Supervisory Board Chair or by ECB senior management. Overall, it appears that the Supervisory Board does react in its decisions to the comments made by the ABoR, but it is not possible for the Commission to assess to what extent such adjustments correspond to the substantial recommendations by ABoR and to what extent these recommendations are adequate. Some of the redrafted decisions are currently under proceedings in front of the CJEU. In its first judgement on a challenge of an ECB supervisory decision, the CJEU confirmed the legality of the ECB’s decision which had taken into account the opinion of the ABoR. Furthermore, the ECB maintains that ABoR opinions have had an influence in the ECB’s supervisory practice broader than the individual cases to which they relate to. Overall the due process framework and the internal administrative review mechanism appear to be applied consistently. They are effective in setting relevant procedural standards and giving means for safeguarding the procedural rights of the parties that may be affected by ECB decisions. The ECB appears to be committed to observe due process standards and is willing to review its own decisions in light of dialogue with the parties concerned or of the suggestions given by the ABoR. It is considered important that the ECB strikes the right balance when labelling documents as confidential, so as to thereby avoid any undue restrictions to the right of information of parties concerned by its decisions. ABoR can be held to have had a positive start, and has proven to work professionally. While the ABoR proceedings are subject to confidentiality rules that prevent their publication, it would be useful to take advantage of the growing jurisprudence developed by ABoR by ensuring more transparency over its work, for instance through publication on the ECB's website of anonymised summaries of ABoR decisions. A.1.5. Independence [Article 32(e) SSMR] Independence from other EU institutions and bodies The independence of the ECB is warranted by Article 130 of the TFUE, which states that the ECB shall neither seek nor take instructions from other Union institutions, bodies, offices or agencies, when performing the tasks and duties conferred to it by the Treaties and the Statute of the ECB . Both the Treaty and the Statute of the ECB lay down a framework that strengthens this independence, mainly through a differentiated legal personality, a separate budget and the functioning of its decision-making bodies. The independence of the ECB when performing supervisory tasks is confirmed in the SSMR. According to its Article 19, the ECB shall act independently when performing the tasks conferred on it by the SSMR. Moreover, the members of the Supervisory Board and of the steering committee shall act independently in the interest of the EU and without following instructions from the institutions or bodies of the EU. The rules concerning financing and governance of the ECB's supervisory function also reinforce its independence. On the one hand, the expenditure incurred by the ECB as a result of its supervisory functions shall be covered by fees levied on the credit institutions established in participating Member States, as set forth by Article 30 of the SSMR. On the other hand, Article 26 of the SSMR lays down the rules regarding the appointment and removal of the Chair of the Supervisory Board. The Chair will be appointed on the basis of an open selection procedure from among individuals of recognised standing and experience in banking and financial matters. Once appointed, the Chair will be a full-time professional. The Chair's term of office shall not be renewable and the Chair can be removed only if she/he no longer fulfils the conditions required to perform her/his duties or has been guilty of serious misconduct. Interactions with stakeholders The ECB shall also be independent from other stakeholders, and the members of the Supervisory Board and its steering committee shall act without following instructions from any public or private body, as set forth by Article 19 of the SSMR. The ethics framework of the ECB lays down the rules for interaction with stakeholders. This framework is built upon different elements. Thus, the members of the Governing Council and their alternates, when acting as members of the Governing Council, shall comply with the Code of Conduct for the Members of the Governing Council . The members of the Supervisory Board and their alternates, in the performance of their duties as members of the steering committee or of the Supervisory Board, shall comply with the Code of Conduct for the Members of the Supervisory Board of the ECB . The ECB staff is bound by the Conditions of Employment, the Staff Rules, and specially by the Ethics Framework . This Framework was reviewed in December 2014 to reflect ECB's new tasks in banking supervision. Moreover, in 2015 the ECB issued a Guideline and a document of Implementation Practices setting the principles for a common ethics framework for the SSM. They are addressed to both the ECB and the NCAs, which are responsible for their implementation. Finally, the Ethics Committee of the ECB, regulated by Decision ECB/2014/59 , provides advice on questions of ethics on the basis of individual requests. Its members shall not be current staff of the ECB or current members of bodies involved in the decision-making processes of the ECB, the national central banks or the national competent authorities. These ethics rules regulate, among others, conflicts of interests, post-employment restrictions, relations with external parties and private financial transactions. A.2. Decision-making [Article 32(g)] This section scrutinises governance arrangements underpinning the ECB's decision-making in relation to supervisory activities, by identifying the typologies of ECB acts, assessing the role of the parties involved in their adoption and the decision-making processes. The governance structure supporting the ECB's supervisory activities is largely constrained by the TFEU's designation of the ECB's decision-making bodies as consisting of the Governing Council and the Executive Board . The SSMR could not amend such fundamental aspect laid down in the Treaty, and developed instead specific supervisory structures and procedures to support the Governing Council, when acting upon the tasks conferred to the ECB through the SSMR. A.2.1. Typology of acts Pursuant to the powers conferred through the SSMR, the ECB may take various supervisory actions that can be classified as follows: 1) acts addressed to individual institutions (supervisory decisions and operational acts ), 2) horizontal acts addressed to all or groups of credit institutions (regulations, recommendations, guides, decisions of general application), 3) acts addressed to NCAs (regulations, guidelines, recommendations, decisions and instructions), 4) organisational acts (regulations, guides, decisions providing the practical arrangements for the functioning of the SSM), and 5) other acts (e.g. answers to MEP questions, communications with other institutions, etc.).

The core of the supervisory tasks entrusted to the ECB is reflected in the adoption of supervisory decisions, which are legal acts addressed to individual credit institutions, that are binding upon their addressees. Examples of supervisory decisions are the decisions imposing prudential requirements on credit institutions pursuant to the SREP, decisions in the context of common procedures (authorisations, withdrawals, acquisition of qualifying holdings), orders, permissions or other decisions granting, changing or withdrawing rights, decisions defining particular qualifications or characteristics, decisions imposing administrative penalties. In 2015, about 1500 supervisory decisions were adopted, of which most common were 921 approvals (covering more than 2000 individual procedures on authorisation applications, authorisation withdrawals, acquisitions of qualifying holdings, management and supervisory board appointments), 213 SREP decisions and 137 own funds decisions. In 2016, 1835 supervisory decisions were taken, of which most common were 1191 decisions on approval procedures (covering 2686 individual procedures), 192 own funds decisions and 130 SREP decisions. The largest number of approval decisions each year represents the so-called "fit and proper" decisions on the suitability of management and supervisory board members of credit institutions. Whilst most supervisory activities involve operational acts taken outside formal decision-making channels, the ECB needs often to make recourse to legally binding decisions, especially supervisory decisions. The number of decisions adopted every year shows that there is a very high number of formal decisions adopted with regard to individual credit institutions and a vast typology of supervisory decisions. A.2.2. Parties involved in decision making There is large panoply of actors involved in the various stages of the ECB's process for adopting supervisory decisions. The originators of draft supervisory decisions are usually the Joint Supervisory Teams (JSTs), which prepare the very first draft based on their ongoing supervisory activities. NCAs may also originate draft decisions especially with regard to common procedures (i.e. authorisation, qualifying holdings) or may be requested by the ECB to prepare draft decisions, given their expertise in national law. Directorates General of the ECB, including those responsible for horizontal services contribute to the preparatory process and are mainly responsible for reviewing, approving or providing quality assurance for draft decisions prepared by JSTs, whilst they may also act as originators (e.g. proposing to take over the supervision of an LSI, initiate common procedures, proposals for instructions to NCAs, enforcement or sanctioning measures). The Secretariat to the Supervisory Board represents the next layer, responsible for ensuring efficient decision-making and institutional quality of the decision-making process. In this capacity it prepares the documentation, procedures and meetings of the Supervisory Board (which includes additional review and preparation of draft decisions) and takes care of the follow up, including the coordination with the Secretariat to the Governing Council, but also the registry and notification of supervisory decisions. The Supervisory Board is the decision-making body entrusted with the "planning and execution of the tasks conferred on the ECB" in supervision and ultimately responsible for carrying-out the "preparatory works regarding the supervisory tasks conferred on the ECB" (Article 26 SSMR). In this capacity it has to prepare complete draft decisions to be submitted to the Governing Council. The Supervisory Board may approve draft decisions, amend them directly or send them back to the organisational units for revision. Two voting modalities apply to the Supervisory Board. Decisions are usually taken by simple majority with each member of the Supervisory Board having one vote and the Chair having the casting vote in case of draw (Article 26(6) SSMR). By way of derogation, decisions on the adoption of regulations organising or specifying the arrangements for carrying out ECB supervisory tasks conferred through the SSMR require qualified majority in the Supervisory Board (Article 26(7) SSMR and Article 13c ECB Rules of Procedure). The Governing Council is the final decision-making body that endorses or objects to the draft supervisory decisions. Although the decision making chain is long, ultimately all supervisory decisions adopted prior to the implementation of the delegation framework were taken by the Governing Council, with no final decision adopted at any lower level. Many of the decisions taken by the Governing Council reflect routine decisions or recurrent decisions that prior to the creation of the SSM were taken at managerial level by NCAs. No information was available to the Commission as regards the exercise of voting rights; hence it is not possible in this report to assess the effectiveness of voting arrangements. A.2.3. Decision-making process for binding acts The ECB in its supervisory capacity acts on the basis of four decision making procedures: 1) the non-objection procedure for the bulk of decisions related to the supervisory tasks transferred to the ECB pursuant to Article 4 SSMR, whereby the Governing Council by non-objection endorses draft decisions adopted by the Supervisory Board or rejects such draft decisions in case of an objection , 2) the procedure for adopting decisions for the purpose of carrying out macro-prudential tasks referred to in Article 5 SSMR, whereby the Governing Council may endorse, object or amend a proposal by the Supervisory Board, may request the Supervisory Board to submit a proposal or may take itself a decision in the absence of a proposal by the Supervisory Board; 3) decisions on the general framework specifying the arrangements for carrying out supervisory tasks, which are taken by the Governing Council on the basis of a proposal from the Supervisory Board, outside the scope of the non-objection procedure and 4) the standard ECB decision making procedure whereby the Governing Council adopts decisions prepared by the ECB's Executive Board on issues affecting the organisational set up of the ECB, such as rules of procedure, the setting up of the Administrative Board of Review and the separation between monetary and supervisory functions. Among these procedures, the non-objection procedure is considered the standard decision-making procedure for tasks conferred under the SSMR as it is required to be used for adopting most of the ECB's acts under the SSMR. Given the high number of decisions and their varied typology, the involvement of the Supervisory Board and Governing Council in every decision appeared to put an important strain on the resources of these two bodies, involving all NCAs and National Central Banks. There are important differences across supervisory decisions, in terms of complexity, impact and relevance for supervised entities. Such diversity exists across types of decisions (e.g. SREP decisions compared to approval of CET1 instruments), as well as within the same category of decisions (e.g. fit and proper decision for the Board of a major parent company compared to fit and proper decision for the management of an integrated subsidiary). Prior to the implementation of the delegation framework of decision-making powers, such differences were not taken into account in the decision-making process, which appears to imply a disproportionate impact on resources in case of routine decisions, or decisions with a lower overall impact. This situation prevented the ECB's decision-making bodies from focusing on important supervisory matters, and often required a disproportionate amount of efforts and resources from both the ECB and NCAs in preparing the formal decision-making process . The ECB introduced in 2015 the written procedure for decision-making by the Supervisory Board, to speed up and allow bundling of similar decisions. This has become the standard modality for the adoption of routine draft decisions to be endorsed by the Governing Council under the non-objection procedure, decisions on technical issues, or in case of emergency . Since it is expedient (giving Supervisory Board members maximum 5 days for consideration and allowing for the bundling of certain procedures into single decisions), the written procedure has alleviated time constraints and the decision overload for the Supervisory Board but did not resolve the decision making burden for the Governing Council, nor the time constraints stemming from the length of the non-objection procedure. Some national authorities have raised transparency concerns in relation to the assessment of comments made during written procedures. However, the ECB has put in place procedures that ensure the evaluation of all comments by the relevant business areas within the ECB and effective communication with the NCAs as a follow-up to comments received in written procedures. The application of these procedures could not be verified, as the Commission did not have access to confidential documents related to concrete cases. Despite some positive effects of measures taken during the first year to address challenges of supervisory decision-making, the volume of decisions to be taken by the Supervisory Board and the Governing Council remains extremely high (about 1500 decisions taken in 2015 and 1800 decisions taken in 2016). A.2.4. Delegation framework Against this background, the ECB has acknowledged that the adoption of each and every supervisory decision by the Governing Council is unsatisfactory from an operational efficiency perspective. To address this, it has envisaged the use of delegation to allow certain supervisory decisions to be taken at managerial level. Upon an explicit mandate given by the ECB's Executive Board and following consultation of the ECB's Legal Committee and of the Supervisory Board, the Governing Council has adopted on 16 November 2016 a legal framework for delegation that has been published on 1 June 2017 in the Official Journal of the European Union and will become operational on 21 June 2017. The delegation framework adopted by the ECB is based on a layered legal structure consisting of three levels and will initially be applied to a limited type of supervisory decisions. The general framework (first layer) establishes the possibility of delegating decision-making powers to ECB managerial staff carrying out supervisory tasks, on the basis of a delegation decision adopted by the Governing Council under the non-objection procedure (second layer) and a nomination decision issued by the Executive Board (third layer). The general framework clarifies the procedural requirements for adopting a delegation decision, the transparency requirements attached to the exercise of delegation and the revocability of delegations. The general framework does not restrict the application of delegation to specific supervisory activities. Delegation decisions are proposed by the Supervisory Board and adopted by the Governing Council under the non-objection procedure. Two areas have been identified as being the most suitable for testing the system, namely fit-and-proper decisions for members of the management board of significant supervised entities and minor amendments to significance decisions. These delegation decisions set out the perimeter of delegation and the substantive criteria for exercising delegated powers, thereby establishing proportionate boundaries to supervisory discretion and ensuring that the procedural rights of the concerned parties are safeguarded. For example, the delegation of fit and proper decisions covers a broad scope of decisions, applying to all decisions, except for those excluded pursuant to several criteria: size and nature of the supervised entity, the anticipated outcome of the decision (negative decisions are excluded), the timely submission of the proposal by the relevant NCA and a set of specific aspects of the fit and proper assessment (e.g. reputational issues related to criminal proceedings, or administrative actions related to non-compliance with financial services regulation). The envisaged criteria for the performance of the fit-and proper assessment through delegation stem from national laws transposing CRD IV and from the ECB's Guide to Fit and Proper Supervision. The delegation decision in the area of amendments to significance decisions aims at rendering more efficient the regular update of the list of entities subject to ECB's direct supervision. Delegation is excluded for the "initial" determination of significance or whenever the entity at the highest level of consolidation changes, but is possible for changes in status from significant to less significant. Although the declassification of an entity from a significant to a less significant institution implies that the institution will exit the perimeter of direct ECB supervision, such declassification was included in the scope of delegation as it covers situations where there is very little supervisory discretion. Generally such declassification relates to intra-group operations that do not affect the significance of the supervised group at the highest level of consolidation, but the reduction of its perimeter (e.g. a subsidiary is sold but the group remains significant) or to cases where the supervised entity has completed a three consecutive years period during which the criteria for being considered significant have not been met, and therefore the supervisory discretion attached to such a decision is not only very limited but also its implications have been prepared in advance with the relevant national competent authorities (Article 47 of the SSMFR). The ECB estimates that the implementation of the delegation framework on the basis of these two selected areas would significantly reduce the number of supervisory decisions to be adopted by the Governing Council in a year. The ECB does not expect delegation to affect the quality of the decisions, nor the amount of preparation underpinning them. Yet, delegation would significantly alleviate the burden of the Supervisory Board and the Governing Council and help them concentrate on important supervisory issues. The Commission understands that the ECB needs to make operational adjustments in order to ensure that a dual track decision-making is available in the respective areas that results in legally sound decisions, of the same quality, that respect due process and are adequately notified and registered. Depending on the result of these two pilot cases, the ECB is also willing to consider expanding the framework to other areas. A.3. Separation between monetary and supervisory functions within ECB [Article 32(l) SSMR]

The SSMR requires that the supervisory tasks of the ECB are carried out separately from its monetary policy function . This means that each function has to be exercised in accordance with its objectives, that there should be organisational separation and separate reporting lines for staff and that the Governing Council should operate in completely differentiated settings as regards monetary and supervisory functions. To implement the separation requirement, the ECB has adapted its procedural rules and adopted a Decision on the implementation of the separation between monetary policy and supervision functions. Separation is primarily reflected in the organisational separation of the ECB staff dedicated to the two functions, separate management lines, specific decision-making procedures entailing different reporting lines, professional secrecy requirements and regulated exchanges of confidential information. Furthermore, potential conflicts resulting from differences of views expressed by the competent authorities regarding an objection by the Governing Council to a draft decision of the Supervisory Board have to be dealt with by the mediation panel set up in the ECB, which has not been used so far in the absence of any objection raised by the Governing Council to draft decisions submitted by the Supervisory Board. Notwithstanding the separation arrangements, the ECB remains a unitary institution, where in addition to the common decision-making body (i.e. the Governing Council), the Executive Board retains overall responsibility for organisational, human resources and administrative issues, covering both functions. Furthermore, certain internal ECB services that existed prior to assumption of supervisory tasks under the SSMR continue to serve both functions. This is particularly the case of the so-called shared services and of services responsible for tasks related to macro-prudential supervision. A.3.1. Shared services The shared services referred to in the ECB Decision are departments providing support functions within the ECB. At the current juncture, all business areas identified as shared services already existed before the creation of the SSM. They include Administration, Information Technology, Communication, Human Resources, Budget and Organisation, Internal audit and Legal service. The SSMR does not preclude that internal ECB support functions be used by both the monetary and supervisory functions. A duplication of internal support functions would arguably undermine efficiency and cost effectiveness within the ECB, therefore, the concept of shared services is in principle compatible with the separation requirement. At the same time, it is imperative that the support functions are adequately reinforced and equipped to deal with the increased workload stemming from the addition of the new supervisory functions, to prevent competition for resources and to manage potential conflicts. A business area may be identified as shared service because of the technical nature of the support or advice offered, which assumes there is little potential for conflicts of interest. Nonetheless, certain shared services may be more prone to conflicting objectives when exercising both functions, and therefore need to be carefully scrutinised in terms of applicable safeguards, particularly the existence of separate reporting lines. This issue has been identified also in the ECA report on the SSM and as a follow-up the ECB is currently undertaking an assessment of the risks related to the use of shared services, in particular in view of identifying potential conflicts of interest and conflicting needs which shared services may be exposed to, and developing and implementing the necessary safeguards. The most prominent example of shared services is the Legal Service of the ECB, as it regularly provides input for monetary and supervisory decisions. The ECA and several NCAs raised concerns as to the possible conflicts of interest with which the ECB's Legal Service might be confronted and a potential incompatibility with the separation requirement. In general, issues relating to the ECB's supervisory function appear to be dealt with by the Supervisory Law Division, whose organigram presents separated reporting lines up to Deputy Director General level, and which reports to the Vice-Chair of the Supervisory Board. Nevertheless, there have been instances where questions regarding the interpretation of the SSMR, when they involve also institutional issues, or the interpretation of CRD/CRR have been treated by other divisions within the ECB's Directorate General Legal Services, which report directly to the relevant Executive Board member; in this case it remains unclear how reporting lines to the Vice-Chair of the Supervisory Board are applied and how potential conflicts are solved. It is noted that NCAs that are also central banks have a single legal department serving all functions of the NCA/CB and that these precedents were considered relevant for maintaining a single Legal Service at the ECB. At this stage there is no evidence available to the Commission as regards concrete conflicts of interest within ECB's Legal Service. However, in light of the fact that the ECB's Legal Service opinions are often used as input for ECB's policy decisions under both functions, it would be necessary to assess in depth whether current separation arrangements within the Legal Service are sufficient or need to be reinforced. A.3.2. Separation of the macro-prudential tasks provided in the SSMR In line with its Treaty mandate to contribute to the smooth conduct of policies related to the stability of the financial system the ECB has always performed a macro-prudential oversight function through a dedicated department that became the Directorate-General Macro-prudential Policy and Financial Stability (DG-MF). With the conferral to the ECB of specific macro-prudential tasks (the so-called top-up powers) in Article 5 of the SSMR, the Governing Council decided to leverage on the expertise and capacity of the existing department and anchor these additional tasks within DG-MF. At the same time, the ECB designed a dedicated decision-making process providing for the involvement of the Supervisory Board. The dedicated process requires the national competent or designated authorities to notify both the Supervisory Board and the Governing Council on the intention to adopt macro-prudential measures. The Supervisory Board should submit its proposal in relation to such initiative, on the basis of input prepared by DG-MF, with the contribution of JSTs and Directorate-General Micro-Prudential Supervision IV (DG MS IV), and of the relevant committees. The Governing Council is responsible for the final decision. Different from decision-making for other tasks conferred through the SSMR (i.e. micro-prudential tasks based on Article 4 of the SSMR), the dedicated process for adopting macro-prudential decisions gives the Governing Council a more prominent role throughout the whole decision-making process, allowing the Governing Council to request the Supervisory Board to act and to adopt on its own a decision where the Supervisory Board did not propose a draft. A.4. Division of tasks between ECB and NCAs [Article 32(a) and(b)] A.4.1. Distribution of tasks and responsibilities The SSM was conceived as a system composed of the ECB and the NCAs, where all components play an active role and where the nature of responsibilities incumbent on the various components is defined. The ECB is in charge of the overall functioning of the SSM as a system, whilst all components of the SSM are subject to the duty of cooperation in good faith. NCAs are responsible for assisting the ECB with the preparation and implementation of acts relating to the tasks conferred on the ECB, and should observe the ECB's instructions when doing so. Whilst the system was built on the idea to fully use the specific knowledge and expertise of the NCAs, the degree of direct involvement of the ECB was conceived to increase with the size, complexity and systemic importance of the supervised entities, as well as to ensure a consistent and coherent supervision within the Banking Union. Such embedded cooperative framework has been further specified in the SSMFR adopted by the ECB. It is within this cooperative framework that the ECB exercises direct supervisory responsibilities, which include not only the overall supervision of significant institutions, but also direct responsibilities as regards the licencing and withdrawal of authorisation for all credit institutions in the participating Member States, the assessment of qualifying holdings, as well as the exercise of the additional macro-prudential tasks over credit institutions in the participating Member States. NCAs remain responsible for the direct ongoing supervision of less significant institutions, as well as for all other tasks that were not conferred on the ECB via the SSMR. Additionally, they are involved in the tasks directly entrusted to the ECB providing draft decisions (in the case of authorisation, qualifying holdings), undertaking preparatory work (e.g. outsourcing of certain activities to NCAs subject to some materiality threshold is currently discussed) and participating in JSTs, on site-inspections, networks or ad hoc groups to the Supervisory Board and Governing Council. Their key preparatory role with regard to the licencing and withdrawal of authorisation and the assessment of qualifying holdings for all credit institutions is highlighted in the SSMR and is largely justified by the fact that most of the substantial rules are enshrined in national legislation transposing the relevant CRD provisions. Furthermore, authorities designated for macro-prudential purposes maintain their primary responsibilities in relation to the application of capital buffers and other measures aimed at addressing systemic or macro-prudential risks, whilst the ECB's macro-prudential tasks are supplementary. NCAs are not only involved in the execution of SSM related tasks in their own jurisdiction, but also participate in decision-making regarding entities in other jurisdictions, through their representative in the Supervisory Board. Thereby a cross-fertilisation of supervisory practices takes place, which is beneficial to all parties and contributes to a bottom-up development of the SSM culture. The involvement of NCAs in support of ECB's activities has been resource intensive, especially in the set-up phase and resulted in several NCAs increasing their staff to be able to cope with extensive responsibilities in the context of the SSM. In parallel, the ECB has also steadily reinforced its resources and is constantly developing its own expertise at a fast pace. ECB staff is fully in charge of the coordination, overall functioning and coherence of the system, where NCAs contribution is largely limited to preparatory policy discussions and preparation of national representatives in the Supervisory Board and the Governing Council. The ECB is also in lead of all JSTs and has gradually increased its participation in such teams. Most of the JSTs, which account for the largest contribution in terms of NCA assistance, are currently composed of 1/3 ECB staff against 2/3 NCA staff. At this stage of the SSM, such a ratio may be considered to be balanced in view of the statutory distribution of responsibilities and the duty of assistance by the NCAs. Conversely, the composition ratio of on-site inspection teams appears to be problematic, as only 10% of such teams consist of ECB staff. A specific dimension of the division of tasks between the ECB and the NCAs relates to the supervision of less significant institutions. The ECB's responsibilities with regard to LSIs are integrated in the construction of the SSM . The ECB is entrusted with the overall functioning of the system and its tasks are conferred for all credit institutions, but need to be exercised in accordance with the distribution of responsibilities provided in Article 6. Thus, unless otherwise decided by the ECB, it is for NCAs to perform supervisory tasks over LSIs. The ECB has an oversight function but also an overall duty to ensure consistency of supervisory outputs throughout the Banking Union and to intervene directly by taking over LSI supervision, should this be needed. Given the ECB's ultimate responsibility for the effective and consistent functioning of the SSM, the ECB has, at any point, the right (and obligation) to make use of available tools if deemed necessary for fulfilling its mandate. This implies flexibility, and some uncertainty as to the role of the ECB vis-a-vis LSIs, in terms of both the extent to which the ECB can give instructions to NCAs for the supervision of LSIs and the situations in which it would take over direct supervision of LSIs.

The ECB has spelled out in the SSMFR the criteria to be taken into account for taking over direct supervision of LSIs. However such criteria are not exhaustive and do not reflect for instance developments in the area of resolution. Whilst there seems to be overall clarity as to the tasks remaining with NCAs , it is legitimate to ask how these remaining NCA tasks affect the capacity of the ECB to perform its competences especially in view of its objective to ensure the stability of the Union's financial system and the unity and integrity of the internal market. This has to be analysed in the context of structural developments in the banking sector, where financial actors are extremely adaptable, including in terms of corporate structure, and ready to exploit any regulatory or supervisory loophole. For instance, third country groups are becoming ever more complex and interconnected, operating through complicated networks, involving a wide range of entities taking often the form of branches or investment firms. A.4.2. Reliance on national law National law has major relevance in the carrying out of ECB's supervisory tasks, as national law not only transposes substantial Union law included in relevant Directives (particularly CRD and BRRD) but also frames the powers and tools available to supervisory authorities for performing their tasks. This is an unprecedented situation, with the ECB being the first Union institution required to apply national law and acting on the basis of national laws. It is in relation to this interaction between national and EU levels that the precise scope of ECB powers has to be defined, particularly the extent to which the ECB may exercise supervisory powers laid down in national laws transposing or implementing Union law. A clear division of powers between the ECB and the NCAs, which does not depend on the willingness of the ECB and individual NCAs to agree how powers should be exercised, would avoid an inconsistent approach and much legal uncertainty. Based on the joint reading of the SSMR and the CRD, the ECB has been clearly endowed with broad supervisory powers for the purpose of performing the tasks conferred to it. This is not limited to the powers explicitly listed in the SSMR but extends to all supervisory powers set in national transposition laws even when these are not explicitly listed in the text of the CRD . Hence, where a supervisory power enshrined in national law is intended to underpin a supervisory function under Union law, the ECB should be capable of exercising such power within the limits of its supervisory tasks set in Articles 4 and 5 of the SSMR. On the contrary, where a supervisory power enshrined in national law is purely provided to underpin functions that a competent authority has under national law (but not under relevant Union law) the power should be exclusively exercised by the national competent authority, such as the power to approve mergers or acquisitions for competition purposes. Nor does the ECB have powers conferred to national authorities under the relevant Union law, but which do not relate to the specific tasks conferred to the ECB under Articles 4 and 5 SSM-Regulation, such as for instance supervision of credit institutions as regards markets in financial instruments and anti-money laundering. However, the ECB may instruct national authorities to exercise their powers if and insofar this proves necessary to carry out the tasks conferred on the ECB under Article 4 and 5 SSMR (in accordance with Article 9(1) third subparagraph). B. Supervisory tools [Article 32(a), (b) SSMR] This section assesses the main tools that the ECB has developed in view of performing its supervisory tasks. During the first two years of existence of the SSM, the following instruments and processes have proved essential to ensure the effectiveness of the exercise of ECB competences and the smooth functioning of the SSM itself: categorisation of institutions within the Banking Union, based on the distinction in the SSMR between significant and less significant institutions, the setup of joint supervisory teams, the roles of horizontal services, on-site inspections, the participation in colleges of supervisors and the harmonisation of options and discretions. B.1. Categorisation of supervised entities In view of performing its supervisory tasks, the ECB has developed the concept of "supervised entity", which includes the following entities established in a participating Member State: credit institutions, financial holding companies, mixed financial holding companies and branches of credit institutions established in non-participating Member States. In addition, the ECB uses the concept of "supervised group" to refer to groups whose parent undertakings are located in a participating Member State. Such concepts are useful for the ECB to identify the perimeter of entities under SSM supervision, including at consolidated level. On the basis of the criteria and conditions listed in Article 6 of the SSMR , the ECB assesses on an annual basis whether a supervised entity or supervised group is significant. Such assessment is done at the highest consolidated level in the participating Member States. A list of significant and less significant supervised entities is published every year on the ECB website, with regular updates to reflect changes in banking groups composition; as of 1 January 2017, it comprised 125 significant entities or groups. This list constitutes a transparent communication tool distinguishing between entities under direct ECB supervision and entities supervised by NCAs. Although the default criteria for determining significance are enshrined in the SSMR, the ECB has some discretion to change the default qualification. It may ascertain the existence of particular circumstances that would qualify a supervised entity as being less significant even where it meets the size criteria. The ECB has broadly specified how it assesses "particular circumstances". In a few instances the ECB exercised its discretion to exempt entities from being considered significant, without however rendering public the justification for such assessment. According to the ECB, the few cases where particular circumstances were applied represented outlier situations. As a matter of principle, a re-qualification of an institution as a LSI could be considered as reasonable as long as there are specific factual circumstances to support that decision, and the objectives of the SSM are not affected. Re-qualification was conceived to remain exceptional, which requires the notion of "particular circumstances" to be interpreted restrictively. To be transparent about the way it exercised its discretion, the ECB has disclosed the institutions benefitting from particular circumstances, but did not make public detailed information justifying the application of particular circumstances. Branches of credit institutions established in non-participating Member States that fulfil the significance criteria are also considered significant supervised entities. They are however not signalled in the ECB's list of supervised entities. The ECB exercises for such branches the powers granted under Union law to the competent authorities of the host Member State, whilst NCAs in host Member States remain competent for branches that are less significant. Significant supervised branches do not necessarily coincide with significant branches determined in accordance with Article 51 CRD or with 'significant plus' branches, a subcategory currently envisaged by the EBA as part of its revised Guidelines on supervision of significant branches. The two sets of concepts have to be considered in conjunction for identifying the involvement of the ECB in the supervision of such branches. The ECB uses further categorisations of supervised entities in view of conducting proportionate supervision, enabling peer comparisons and defining the level of supervisory engagement. Based on institutions' systemic importance and complexity, the ECB divides SIs into 5 different clusters, with cluster 1 institutions representing the highest systemic impact and the highest supervisory complexity. These clusters should not be confused with the different scores assigned by the ECB to institutions reflecting their "riskiness". These, as well as further categorisations developed by the ECB appear to be instrumental to the performance of various supervisory activities, especially within the SREP. Their relevance and interaction is however not always straightforward, especially when used to determine the level of supervisory engagement or the choice of supervisory output. Also, the EBA noted in its supervisory convergence related work that the ECB's categorisations may not be fully aligned with the categorisation developed in the EBA's Guidelines on the Supervisory Review and Evaluation Process. As the LSI sectors across participating Member States differ significantly in terms of the number of banks per Member State and the size of those banks, a proportionate approach was warranted. Thus, a categorisation based on riskiness and potential impact of institutions on the relevant domestic market, has been developed by the ECB together with NCAs to determine supervisory engagement by the ECB and the level of information to be provided by the relevant NCA to the ECB. This prioritisation framework qualifies LSIs as high, medium or low priority, whereby the medium and low priority categories are used only for statistical and internal purposes and not subject to approval by the SSM decision-making bodies, whilst the high-priority category requires more intense communications from the NCAs to the ECB and increased vigilance from the ECB. It proves useful for a better understanding of the ECB's engagement in LSI supervision, and for shaping cooperation of NCAs with the ECB. B.2. Joint Supervisory Teams (JSTs) The Joint Supervisory Teams (JSTs) are representative of the SSM as a system; they constitute the tool whereby the ECB leverages on the expertise of NCA staff for performing its direct supervisory responsibilities towards SIs. The JST were created on the basis of the SSMFR and are not mentioned in the SSMR. They are responsible for the ongoing supervision of the SIs, that is, they are entrusted with the implementation of the tasks listed in the Supervisory Examination Programme, including performing the SREP, coordination with on-site inspections, liaising with NCAs. A JST is established for each SI and comprises staff from both the ECB and the NCAs of the participating Member States in which the parent credit institution, subsidiaries or cross-border branches of that banking group are established. Whilst approximately 2/3 of JST members are NCA staff, each JST is led by a coordinator from the ECB and one or more sub-coordinators from the NCAs (one per NCA involved in the supervision of that SI). For large JSTs, a core JST is also established. A core JST is composed of the JST coordinator and sub-coordinators, and it organises the allocation of tasks among JST members, prepares and revises the Supervisory Examination Programme and monitors its implementation. The development of the framework for JSTs has been a learning-by-doing process, which still undergoes adaptations. Challenges relate to the fact that JSTs represent a new form of supervisory cooperation that requires resources integration within a new institutional set-up. Existing supervisory teams have been enriched through the JSTs with a new European dimension, which adds a cross-border perspective and offers mutual learning experience. During these first years of functioning, JSTs have proved to be functional and credible, doing most of the groundwork for supervisory decisions. However, they have also shown some structural weaknesses that could hinder their efficiency in practice. The main concerns relate to the following aspects: ·Double uncoordinated reporting lines: NCA staff report to the JST coordinator for tasks related to the JSTs and to their NCA superior for any other task. However, the ECB has no formal managerial control over the NCA members of the JST, and human resources matters are managed by the NCA. These double reporting lines (functional and hierarchical) may expose NCA staff in the JST to possible conflicts in terms of staff issues (workload, appraisals etc), and may also interfere with due information sharing.

·Language: Although within the JSTs the working language is mainly English, this may not be the case for the supervised institutions, which, in accordance with the SSMFR often opt for the use of their national language in their relations with the ECB. This means that fundamental information generated by SIs for internal use will not be written in English. JSTs' functioning may be affected by this language difference. It may be envisaged to condition the appointment of ECB coordinators to knowledge of the language used by the supervised institution. ·Insufficient staff allocation: The staff allocated to JSTs by both the ECB and the NCAs is not always sufficient, especially as some tasks have proven to be more complex and resource-demanding than anticipated. As a consequence, JSTs may be understaffed. Better allocation of resources and more flexibility in adjusting staff levels to supervisory needs should be possible. B.3. Horizontal functions One of the objectives of the SSM is to ensure harmonised supervision in the Banking Union. To this end, a dedicated Directorate-General (DG IV) hosts the so-called 'horizontal functions', which define the ECB's supervisory policies, ensure convergence of supervisory approaches among JSTs and coordinate the execution of other essential specialised tasks. The scope and nature of tasks of DGIV is reflected in its organisational structure, where each division is responsible for a separate area . Given the nature of the tasks of the DG IV, its interaction with the NCAs also follows special arrangements different than for JSTs. Thus, the SSM has established a number of informal Networks under the auspices of DG IV, which serve as platforms for discussion and development of new policies and procedures related to supervision. B.3.1. Convergence and consistency The horizontal services play a key role in the conduct of the ECB's supervisory tasks, especially in ensuring the convergence of supervisory practices. They assume the main responsibility in the development of the policies supporting the ECB's direct and indirect supervisory tasks and largely shape the ECB's methodologies. Horizontal services also directly carry out procedures that are common for all credit institutions in participating Member States, such as authorisation, withdrawals of authorisation and the assessment of qualifying holdings. Furthermore, they coordinate international cooperation, determine supervisory priorities , benchmarking and quality assurance across the supervised entities, conduct analysis of systemic risks etc. It is worth highlighting the specific role of horizontal services in ensuring the consistency of supervisory decisions. Based on the groundwork of the JSTs or NCAs, the horizontal services review certain decisions with a view to ensure the quality of the decision, but also consistency with the relevant ECB policy and with decisions already applied to peer institutions. DG IV thus contributes substantially to the content of supervisory decisions. This is much welcomed as it appears to be an efficient way to ensure coherent, high-quality supervision for all banks in participating Member States. Questions have been raised as to the transparency related to substantial interventions by DG IV over JST draft decisions. In this sense, some NCAs have raised concerns that changes operated by horizontal functions are not always explained to NCA staff participating in the relevant JST. Sharing timely such information with NCAs is important for the NCAs to prepare their position for the Supervisory Board. To prevent any bottlenecks and ensure transparency, more systematic and timely communication should be ensured to JST coordinators and sub-coordinators about changes proposed by the ECB's horizontal services to the substance of JST proposals for draft decisions. B.3.2. Support Networks The SSMR does not envisage the establishment of formal Committees apart from the Steering Committee which supports the functions of the Supervisory Board. Instead, the SSMR provides for the general duty of assistance by NCAs. To incorporate NCAs' input with regard to supervisory policy developments, the ECB has set up a variety of structures to support its supervisory activities. These structures take different forms (i.e. task forces, working groups, networks, expert groups), may be temporary or long term, dedicated to specific projects or to broad policy areas. The most representative structure consists of informal Networks, a majority of which function under the auspices and in the areas of competence of DG IV. The Networks are chaired by the representatives of the ECB and include participants (predominantly on managerial level) from the NCAs. They cover a wide range of topics and constitute, for NCAs, the main tool to influence policy stances on horizontal areas of supervision, as the most important issues and stances of the ECB and NCAs are discussed in these structures. Networks are heterogeneous in terms of the dynamics of their work, as well as in their ultimate influence on the ECB's processes and decision-making. The absence of formal mandates, accountability, common governance processes and practices makes it difficult to assess and compare their relative effectiveness and impact. Some NCAs signalled that policy stances agreed in the Network by a majority of the members are sometimes not reflected in the corresponding policy proposal presented to the Supervisory Board. Another criticism from NCAs is that issues are not always sufficiently discussed in the Networks before proposals are made to the Supervisory Board. The ECB's use of networks to request NCA's input on policy issues represents a flexible tool of cooperation within the SSM. Whilst there is no need for formalising all such networks, a clearer status for stable and influential networks could give a better overview of their mandate, governance and reporting lines. Furthermore, it would be useful that the proliferation of networks is avoided by streamlining existing structures and identifying areas that would most benefit from output of such cooperative structures. B.4. On-site inspections Prior to the establishment of the SSM, national practices with regard to on-site inspections differed widely among competent authorities. Some NCAs had separate organisational structures specifically dedicated to the conduct of on-site inspections, and independent from the so-called 'account teams', or on-going supervision. Other NCAs did not have a dedicated on-site unit at all, and the on-site inspections were carried out by the members of the accounting teams of each specific bank. In this context, and building on best practices, the ECB has established a dedicated centralised ECB division for on-site supervision. The ECB followed a mixed model where the need for on-site inspections is determined by the JSTs, but the on-site division is responsible for the planning and staffing of the on-site teams. Although the JST members can participate in on-site inspections, they cannot lead an on-site mission. It is the head of the mission (who may be ECB or NCA staff) who signs the inspection report, on the basis of which the JST is responsible for preparing recommendations. The creation of the SSM led a number of NCAs to adjust their own organisational structure to reflect the ECB's approach to on-site inspections. As already pointed out above , the ECB staff dedicated to on-site inspections represents a small proportion of the staff dedicated by NCAs to on-site inspections. In the start-up phase of the SSM, this situation could be justified by the organisational difficulties and higher costs of setting up cross-border inspection teams, the difficulties in finding staff with the necessary language skills for direct interaction with institutions and the importance of local knowledge for on-site inspections compared to on-going supervision. This situation is however not tenable in the long run and a more balanced staff contribution from the ECB and the NCAs is needed, reflecting the same ratio as in the case of JSTs. Furthermore, given that the staff resources for on-site missions are planned by the ECB in advance, it is difficult to accommodate ad-hoc needs for on-site inspections. Allocation of NCA staff for on-site inspections of SIs appears currently not to be sufficiently addressed by joint ECB-NCA planning of resources. The ECB also considered addressing shortages in staff for on-site inspections by increasing reliance on external consultants in on-site inspection teams, but without allowing such external consultants to take the lead on on-site inspections. Notwithstanding the staff shortage for effective inspections, it is important to underline that the dedicated ECB division has successfully developed the framework for conducting on-site inspections. A dedicated chapter of the supervisory manual sets out the processes and activities in relation to on-site supervision, completed by an extensive description of methodologies for each risk category. In addition, the ECB is currently setting up a comprehensive training curriculum for on-site inspectors across the SSM in cooperation with the EBA. B.5. Supervisory colleges As declared by the ECB, "colleges of supervisors are key to coordinating the supervision of cross-border banking groups." This is particularly the case for banking groups with a presence in non-euro area countries. The ECB currently participates in 45 colleges of supervisors and, in its capacity of consolidating supervisor, is responsible for the organisation and functioning of 26 of these colleges. The ECB is particularly valuing college participation where it is the competent authority for subsidiaries of groups headquartered outside the euro area, as well as where it is competent to perform host country supervisory tasks in relation to branches that are considered significant institutions. The JSTs have developed processes and procedures to ensure that colleges are functioning, in line with relevant technical standards. The ECB has also agreed or is in the process of negotiating Memoranda of Understanding with EU and third country authorities to ensure, amongst others, appropriate information exchange, cooperation in ongoing supervision and in emergency situations, conduct of on-site inspections and internal models investigations. Competent authorities outside the euro area that chair supervisory colleges, as well as the EBA , are very positive about the ECB's performance in supervisory colleges, arguing that the ECB carries more weight as a single authority compared to when several authorities from participating Member States were members of these supervisory colleges. Furthermore, they appreciate the quality of the ECB's contributions to supervisory colleges, which contributes to raising the level of discussions.

For supervisory colleges chaired by the ECB, supervisors outside the SSM indicated that the ECB has improved the way the colleges work compared to the pre-SSM period, when colleges were hosted by NCAs. Particularly praised were better prepared agendas and high quality discussions. On the shortcomings side, some authorities and the EBA noted that differences remain in the functioning of colleges depending on the jurisdictions involved and that some issues have persisted, such as the failure to adopt Joint Decisions for group recovery plans. Furthermore, on certain topics the ECB does not always communicate clearly within the college as long as final decisions were not taken. Overall, colleges remain the key tool for coordinating the supervision of cross-border banking groups with activities outside the euro area. They are currently the main tool for interaction with NCAs from non-participating Member States. The colleges are also an important tool for the ECB to perform its tasks in relation to branches of credit institutions from non-euro area countries, for which it acts as a host supervisor. B.6. Options and discretions CRR, CRD and the LCR Delegated Act provide for options and discretions that competent authorities may exercise. As those texts entered into force before the SSM was in place, NCAs determined initially how those options and discretions would be applied in their respective Member States. In 2015 the ECB started to work towards the harmonisation of the exercise of those options and discretions, with a view to promote a prudent and harmonized treatment for institutions in the Banking Union. This process was structured in various stages. First, the ECB identified over 120 options and discretions attributed to competent authorities. Following an individual analysis, the Supervisory Board agreed on policy recommendations that were reflected in a draft regulation for options and discretions of a general nature (such as the transitional arrangements for own funds calculations), and a draft guide for options and discretions for which a case-by-case analysis is required (such as capital waivers). Those draft texts were released for public consultation in November-December 2015 and finalised in March 2016. The ECB Regulation that entered into force on 1 October 2016 and the Guide apply exclusively to the exercise of options and discretion in relation to significant institutions supervised by the ECB. In a second phase, the ECB identified 8 additional options and discretions attributed to competent authorities that, given their case-by-case nature were addressed through policy recommendations added to the Guide on options and discretions. In parallel, the ECB developed criteria for assessing the eligibility of institutional protection schemes (IPS). The final Guide that is applicable to all IPS in the Banking Union was published on 12 July 2016. A consolidated version of the Guide covering the initial set of options and discretions, the policies for the 8 additional options and discretions and the criteria for the IPS eligibility assessment was published in November 2016. Finally, in order to enhance the consistency of the rules applied within each participating Member State, the ECB has extended the harmonisation exercise to LSIs . It reviewed the options and discretions applied to SIs with a view to determine whether LSIs should be subject to the same policy recommendations, or whether a different approach is warranted (for example, to ensure proportionality in supervision). Consequently, the ECB prepared two different texts: a draft Guideline, of binding nature, for those options and discretions for which a specific policy rationale justifies the adoption of a common approach; and a draft Recommendation, non-legally binding, for other options and discretions where a common approach would help to promote consistent supervisory practices. The two ECB instruments addressed to NCAs were subject to public consultation between November 2016 and January 2017, and were finally published on 13 April 2017. The NCAs are expected to comply with the Guideline from 1 January 2018. Some stakeholders raised concerns as to whether the ECB is empowered to issue a regulation for this purpose, and on how this exercise would interact with national provisions exercising such options. The ECB is empowered to adopt regulations to the extent necessary to perform specific tasks concerning policies relating to the prudential supervision of credit institutions, in accordance with Article 132 of the Treaty on the Functioning of the European Union and Articles 34 and 25.2 of the Statute of the ECB. Regarding options exercised through national provisions, the ECB must apply national legislation according to Article 4.3 SSMR, where the exercise of options was attributed to Member States. By contrast, options granted only to competent authorities fall within the remit of the ECB as far as they affect SIs. Member States should ensure that national legislation does not constrain the exercise of options given to competent authorities, which derive their competence to exercise such options directly from Union law. The ECB made great efforts to foster harmonisation and has gone a long way in achieving a uniform exercise of options and discretions enshrined in Union law. However, the approach agreed for some options or discretions is not always the most conservative, nor fully harmonised. For instance, regarding the transitional arrangements for own funds calculations, stricter national rules applicable prior to the entry into force of the ECB Regulation shall prevail over the harmonized treatment set forth by the ECB Regulation. Those cases could have benefited from a more ambitious approach. C. Evaluation of performance of the main supervisory tasks This section assesses the performance by the ECB of the core supervisory tasks conferred to it by the SSMR. Given their relevance in terms of substance or workload, the following tasks will be analysed in detail: common procedures (authorisation, withdrawal of authorisation, assessment of qualifying holdings), the ongoing supervision of SIs (involving fit-and proper assessment, own funds and internal model approvals, the supervisory and evaluation review process), the oversight of supervision of LSIs by the NCAs, additional macro-prudential tasks. C.1. Common procedures [Article 32(d) SSMR] The ECB has been conferred three specific tasks with regard to all credit institutions in the Banking Union (SIs and LSIs): authorisation, withdrawal of authorisation and assessment of acquisitions and qualifying holdings (referred to as "common procedures"). Their specificity relates not only to the broad scope in terms of entities covered by such ECB tasks, but also to the prominent role given to NCAs in preparing the relevant decisions. Common procedures are particularly relevant to assess the effectiveness of the cooperation between the ECB and the NCAs. C.1.1. Authorisation of credit institutions and withdrawal of authorisations The SSMR provides the ECB with ultimate responsibility for the authorisation ("licensing") and withdrawal of authorisations for all credit institutions established in a participating Member State. Given that the corresponding substantial rules on authorisation are only subject to minimum harmonisation in the CRD, and are extensively developed in national laws, the NCAs hold a central role in preparing the related decisions in accordance with the special procedure laid down in Article 14 of the SSMR. Credit institutions submit applications for authorisations to the NCAs , which assess compliance with national laws. If the NCA is satisfied from the perspective of compliance with relevant national law, it will send a proposal to the ECB, which has to make its own assessment, and shall object to authorisation where compliance with relevant Union law is not ensured. Unlike authorisations, withdrawals of authorisation may not only be initiated on the basis of NCAs proposals, but also by the ECB, following consultation of the relevant NCA. Furthermore, resolution authorities may object to the ECB's intention to withdraw an authorisation, if they consider that this would affect resolution or financial stability. In such cases, the ECB shall abstain from proceeding to the withdrawal for the period agreed by both authorities. It is noted that resolution authorities may only object withdrawing the authorisation of an institution entering resolution, whilst competences for authorisation of any institution issuing from the resolution (including bridge institutions) follow the distribution of tasks for authorisation in the SSMR. Concrete time limits for authorisation or withdrawal of authorisation are based on national law, as the CRD only requires that a decision be taken within 12 months after the application was lodged. By contrast, the SSMR clearly frames the ECB's timeline, providing that drafts proposed by NCAs are deemed to be adopted unless the ECB objects within 10 working days, extendable once in justified cases. This deadline is not coordinated with deadlines for authorisation set out in national law and may be challenging for the ECB in its current decision making environment, where approval by the Supervisory Board and the Governing Council are likely to consume most of the 10 days. This supposes that the ECB's assessment is done in parallel and in close cooperation with the relevant NCA. In the start-up phase of the SSM, the ECB had difficulties with some NCAs that were reluctant to coordinate their assessment process of an application for authorisation with the ECB in the absence of a specific requirement for cooperation. The obligation of cooperation in good faith is incumbent on all parties in the SSM and the duty of assistance by the NCAs, made explicit in Article 6 of the SSMR, is a fundamental principle for the functioning of the SSM, which does not need to be repeated throughout the SSMR in relation to specific tasks. C.1.2. Assessment of acquisitions and disposals of qualifying holdings The acquisition of a holding of a certain size ("qualifying holding") in a bank allows the acquirer to access the banking business, similarly to the access that would be achieved by the creation of a new credit institution. Therefore, the CRD requires that acquisition of qualifying holdings is notified to the authority that authorised the acquired institution, which can object to the acquisition. Within the SSM, the ECB is the competent authority for assessing acquisitions and disposals of qualifying holdings in both SIs and LSIs. However, unlike the responsibility for authorisations in the context of resolution, the ECB is not competent to assess acquisitions and disposals in the case of a bank in resolution. According to the SSMR, the potential acquirer notifies the NCA of the institution it intends to acquire, which shall submit to the ECB a draft decision to oppose or not the acquisition at least 15 working days before the expiry of the assessment period set in the CRD. Given that in the absence of a reaction by the competent authority the acquisition is deemed to be approved, such timelines have proved challenging for the ECB, as in the case of authorisations. The approval of qualifying holdings is made even more complex in the context of group-wide restructurings, where the ECB has to align and synchronise assessments with regard to related acquisitions in several Member States. In this context coordination and common procedures are crucial to avoid the risk of taking conflicting decisions on related qualifying holdings or being constrained to give unjustified approvals for the sake of avoiding conflicting decisions. To address these challenges the ECB has developed various tools and work processes with NCAs setting out clear procedures and timelines, including for early reporting.

An issue that appeared in the context of approvals of acquisitions of qualifying holdings relates to the allocation of roles between the ECB and the NCAs in connection to the on-going supervisory tasks concerning qualifying holdings. In accordance with A