REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013
Date: 2017-10-11
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: European Central Bank, application of EU law, banking policy, banking supervision, credit institution, market supervision, powers of the institutions (EU)

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 11.10.2017  COM(2017) 591 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013 {SWD(2017) 336 final}  
 
 
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the Single Supervisory Mechanism established pursuant to Regulation (EU) 
No 1024/2013 

I. Introduction 

As  highlighted  by  President  Juncker  in  his  State  of  the  Union  Address  on  13  September 
2017,1 the Banking Union must be completed if it is to deliver its full potential as part of a 
strong  Economic  and  Monetary  Union.  Together  with  the  Capital  Markets  Union (CMU),  a 
complete Banking Union will promote a stable and integrated financial system in the EU. It 
will increase the resilience of the Economic and Monetary Union towards adverse shocks by 
substantially facilitating private risk-sharing across borders, while at the same time reducing 
the need for public risk-sharing.  

The financial and sovereign debt crises experienced in the EU during the last decade showed 
that  EU’s  incomplete  economic  and  financial  framework  was  not  sufficient  to  prevent  the 
emergence of unsustainable policies during the boom years or to allow negative shocks to be 
effectively  absorbed  during  the  subsequent  macro-economic  correction  phase.  In  particular, 
the  crises  revealed  the  existence  of  undesirable  links  between  national  banking  sectors  and 
their sovereigns – the so-called doom loop. The Banking Union was created to break that link 
and prevent national budgets from being used to bail out ailing banks.  

For these purposes, based on the single rulebook, the Commission roadmap envisaged three 
Pillars for the Banking Union: a single supervisory mechanism, a single resolution mechanism 
for banks and a common system for deposit guarantees. 

In  line  with  the  European  Council  conclusions  of  19  October  2012,  a  single  supervisory 
mechanism  was  established,  in  order  to  ensure  supervision  of  the  highest  quality,  to 
implement  the  Union's  policy  related  to  prudential  supervision  of  credit  institutions  in  a 
coherent  and  effective  manner,  and  to  apply  consistently  the  single  rulebook.  The  Single 
Supervisory  Mechanism  (SSM)  was  conceived  as  a  system  composed  of  the  national 
competent authorities (NCAs) in the participating Member States (the Member States which 
are part of the Euro area, and any other Member State entering into a close cooperation with 
the  SSM)  and  the  European  Central  Bank  (ECB).  For  this  purpose,  specific  tasks  were 
conferred on the ECB concerning the prudential supervision of credit institutions, via Council 
Regulation (EU) No 1024/2013 (further referred to as SSM Regulation). 

This report provides an assessment of the setting up and functioning of the SSM, in view of 
determining  its  effectiveness  as  the  first  pillar of  the  Banking  Union.  It  is  part  of a  broader 
assessment  of  the  progress  achieved  in  relation  to  the  Banking  Union,  as  set  out  in  the 
Commission Communication on "Completing the Banking Union". The report also represents 
the  first  review  by  the  Commission  of  the  application  of  the  SSM  Regulation  pursuant  to 
Article 32 of the said Regulation.  

1 https://ec.europa.eu/commission/state-union-2017_en  

2 

 
 
                                                 
The  SSM  Regulation  requires  the  Commission  to  undertake  a  broad  review  of  the  overall 
application of the SSM Regulation, with an emphasis on identifying the potential impact on 
the smooth functioning of the internal market. This report briefly analyses the central aspects 
of  the  SSM  Regulation  and  of  its  application,  listing  the  main  findings.  The  accompanying 
Commission working document gives more insight in relation to the topics discussed. Given 
the  early  stage  of  the  SSM  not  all  the  aspects  listed  in  the  Commission's  review  mandate 
enshrined in Article 32 of the SSM Regulation could be assessed to the same level of detail. 
Due to the scope of the review mandate in the SSM regulation, this report is focussed on the 
legislative,  institutional  and  procedural  framework  of  the  SSM.  The  Commission  welcomes 
other assessments which are currently being carried out, such as the ongoing Financial Sector 
Assessment Programme (FSAP) of the International Monetary Fund, the convergence checks 
by the European Banking Authority (EBA) and the various reviews by the European Court of 
Auditors,  which  are  complementary  to  this  report,  and  will  contribute  to  a  comprehensive 
assessment of the SSM involving different aspects and perspectives. 

Based  on  document  analysis  and  interviews  with  relevant  stakeholders,  the  Commission 
comes to an overall positive assessment of the application of the SSM Regulation and the first 
years of the ECB acting in its supervisory capacity. The first Pillar of the Banking Union has 
now  been  fully  implemented  and  is  functional,  with  clear  benefits  in  terms  of  level  playing 
field and confidence emerging from the integrated supervision of credit institutions. 

In some areas there is scope to further improve the functioning of the supervisory framework. 
In order to address some of the identified difficulties, the report provides interpretations of the 
regulatory framework, refers to ongoing discussions of amendments to relevant Union law or 
suggests  how  the  ECB  could  reflect  this  in  its  operation.  At  the  current  juncture,  the 
Commission does not consider it necessary to propose amendments to the SSM Regulation.  

This  report  acknowledges  that  the  supervisory  pillar  of  the  Banking  Union  has  been 
successfully put in place and is fully functional with clear added benefits in terms of financial 
stability  and  market  integration.  This  is  an  important  premise  for  preceding  with  the 
completion  of  the  Banking  Union  before  the  end  of  2019  as  set  out  by  the  Commission 
Communication on Completing the Banking Union, adopted at the same time as this Report, 
and in line with calls made in the 2015 Five Presidents Report2 and the Reflection paper on 
the deepening of the Economic and Monetary Union (EMU) (hereafter the ‘EMU reflection 
paper’). 

II. Assessment of the application of the SSM Regulation 

The review focuses on the most important aspects of the functioning of the SSM as a single 
supervisory  mechanism  for  banks.  The  analysis  is  structured  around  five  broad  themes  that 
cover the key topics listed in the review mandate enshrined in the SSM Regulation: 

 
 
 
 

the governance of the SSM;  
the key tools developed by the ECB to perform its supervisory tasks;  
the performance of supervisory tasks by the ECB;  
the interaction with relevant EU and international bodies; and  

2 

https://ec.europa.eu/commission/publications/five-presidents-report-completing-europes-economic-and-
monetary-union_en. 

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 

the cost-effectiveness of the SSM.  

A  number  of  overarching  issues  cut  across  these  five  themes,  and  are  therefore  taken  into 
account  across  the  report  to  give  an  overall  view  of  the  functioning  of  the  SSM.  These 
concern in particular: 

 

 

 
 

the  viability  of  the  SSM  construction  and  the  effectiveness  of  the  safeguards 
embedded in the SSM Regulation;  
the  balance  between  the  tasks  and  responsibilities  conferred  to  the  various  parties 
within the SSM;  
the impact of the SSM on the internal market; and  
the adequacy of the tools and powers available to the ECB to perform its tasks.  

Several aspects in the mandate given to the Commission in Article 32 of the SSM Regulation 
could not be assessed in detail, as at this stage there was no sufficient information available to 
draw substantial conclusions. 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. Also, in relation to the potential impact on national banking systems, although 
some emerging trends may be noticed, it is too early to attribute this to a possible impact of 
the  SSM  and  to  identify  other  possible  impacts  on  the  structures  of  the  national  banking 
systems. Finally, the mandate to assess the fiscal effects that supervisory decisions may have 
on  participating  Member  States  and  the  impact  of  developments  in  relation  to  resolution 
financing arrangements has been affected significantly by the subsequent establishment of the 
Single Resolution Mechanism (SRM), and therefore should more appropriately be considered 
once the SRM is reviewed. 

A. The governance of the SSM  

To  achieve  its  overall  objectives  of  ensuring  the  safety  and  soundness  of  the  EU  banking 
system,  the  SSM  requires  effective  governance and  internal  procedures,  balanced  by  proper 
accountability,  due  process  and  independence  arrangements,  subject  to  clear  separation 
between  the  monetary  and  supervisory  functions,  and  an  effective  distribution  of 
responsibilities between the ECB and the NCAs within the SSM. This section summarises the 
Commission's findings in relation to the governance of the SSM. 

Accountability, due process and independence arrangements 

The  Commission  has  assessed  the  ECB's  accountability  taking  into  account  its  political, 
judicial  and  administrative  dimensions.  Based  on  the  information  analysed,  the  review 
assesses that the accountability arrangements applicable to the ECB are overall effective.  

In  particular,  the  various  processes  and  procedures  in  place  for  ensuring  accountability 
towards political bodies such as the European Parliament, the Council, the Euro Group, and 
national parliaments are used frequently in practice.  

The ECB is called to account in front of the Court of Justice of the European Union (CJEU) 
relatively  often  by  addressees  of  ECB  supervisory  decisions,  which  shows  that  the  judicial 
accountability arrangements are used in practice. Given the liability regime applicable to the 
ECB and the CJEU's mandate to review the legality of ECB decisions, the ECB offers broader 
opportunities for judicial review than many NCAs. 

4 

 
 
As to administrative accountability, the ECB is subject to extensive complementary reviews 
by various administrative bodies in the EU, namely the Commission, the European Court of 
Auditors (ECA), the European Banking Authority (EBA) and the European Ombudsman. The 
ECB  has  demonstrated  that  it  takes  recommendations  issued  pursuant  to  such  reviews 
seriously,  often  translating  them  into  adaptations  of  its  own  rules  or  behaviour.  In  addition, 
the  ECB  actively  contributes  to  the  surveillance  exercises  carried  out  by  the  International 
Monetary Fund (IMF) in euro area Member States, and is playing a key role in the ongoing 
EU/EA FSAP.  This review also looked at the effectiveness of the external audit applicable to 
the ECB, considering that the scope of ECA's audit mandate over the ECB should be looked 
at  in  the  context  of  the  overall  accountability  arrangements  applicable  to  the  ECB  in  its 
supervisory capacity and in  light  of the fact that the mandates  of national audit bodies over 
NCAs are very divergent. At the same time it should be highlighted that in accordance with 
the  TFEU,  the  ECB  is  subject  to  an  obligation  to  provide  the  ECA  with  any  document  or 
information necessary for the ECA to carry out the task corresponding to its legal mandate. It 
would  be  welcomed  if  the  ECB  and  the  ECA  conclude  an  inter-institutional  agreement  to 
specify the modalities of information  exchange in  view of permitting the ECA access to  all 
information necessary for performing its audit mandate. 

The  convergence  reports  prepared  by  the  EBA  seem  to  be  another  effective review  tool  for 
ensuring  compliance  by  the  ECB  with  the  single  rulebook.  Conversely,  based  on  anecdotal 
evidence, the EBA's competences to act in cases of breach of Union law appear less effective 
with  respect  to  the  ECB  given  that  the  decision  making  procedure  in  the  EBA  requires  a 
double  majority  from  NCAs  in  participating  Member  States  and  NCAs  in  non-participating 
Member States,  whereas a majority of NCAs from participating Member States would have 
already  supported  the  ECB  decision  when  adopted  by  the  Supervisory  Board  and  the 
Governing Council.  

The  review  also  shows  that  adequate  independence  arrangements  are  in  place  and  has  not 
found evidence that calls their effectiveness in question. 

The ECB has  established consultation, due process and internal recourse mechanisms based 
on detailed frameworks. It is welcomed that the ECB develops a consultation culture beyond 
its  formal  obligations  and  the  ECB  is  encouraged  to  make  use  of  consultations  wherever  it 
intends  to  further  contribute  to  the  harmonisation  of  rules  and  practices.  Due  process  rules 
appear to be backed by a solid framework. It is considered important that the ECB strikes the 
right balance when setting timelines or labelling documents as confidential, so as to avoid any 
undue restrictions to the procedural rights of parties concerned by its decisions.  

The available recourse mechanism against decisions of the ECB - the Administrative Board of 
Review  (ABoR)  -  is  actively  used  by  those  concerned  and  ECB  maintains  that  its  opinions 
have had an influence in the ECB’s supervisory practice broader than the individual cases to 
which they relate to. This report finds no evidence of shortcomings. It would be useful to take 
advantage  of  the  growing  jurisprudence  developed  by  the  ABoR  by  ensuring  more 
transparency over the work undertaken by the ABoR, for instance through publication on the 
ECB's website of summaries of ABoR decisions and with due observance of confidentiality 
rules. 

5 

 
 
 
Decision-making 

The  Commission  has  scrutinised  the  governance  arrangements  underpinning  the  ECB's 
decision-making in relation to supervisory activities. 

The  ECB's  decision-making  bodies  consist  of  the  Governing  Council  and  the  Executive 
Board.  The  Governing  Council  is  also  ultimately  responsible  for  the  decisions  taken  by  the 
SSM. However, to  reflect the specific tasks of the SSM, special supervisory structures (e.g. 
the Supervisory Board) and procedures (e.g. non-objection procedure) have been established 
in order to support the Governing Council, when acting upon the tasks conferred to the ECB 
through the SSM-Regulation. 

Given  the  high  number  of  decisions  and  their  varied  typology,  the  involvement  of  the 
Supervisory Board and Governing Council in every decision appears to be 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 approvals 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).  Such  differences 
were not taken into account in the decision-making process, which led to a disproportionate 
use  of  the  ECB's  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  the  NCAs  in  preparing  the  formal  decision-making 
process3.  To  address  these  issues  the  ECB  has  streamlined  decision-making  via  templates, 
written  procedures,  bundling  of  decisions,  and  adopted  a  delegation  framework  for  certain 
routine  decisions or  decisions  with reduced  potential impact.4 It is  still to be tested whether 
the delegation framework will strike an adequate balance between decisions that are delegated 
and those that are not, and ultimately lead to a better use of resources.  

Separation between supervisory and monetary functions  

In order to prevent conflicts of interest between the ECB's supervisory tasks, on the one hand, 
and  monetary  policy  and  all  other  tasks  exercised  by  the  ECB,  on  the  other  hand, the  SSM 
Regulation requires separation between monetary and supervisory functions.  

The  ECB  implemented  this  through  a  set  of  procedural  rules,  ensuring  organisational 
separation of staff, differentiated meetings and decision-making procedures for the Governing 

3  NCAs  have  complained  about  the  resources  they  need  to  dedicate  for  preparing  their  position  for  the 
Supervisory  Board  and  the  Governing  Council  on  issues  which  are  not  at  all  relevant  from  their  point  of 
view and which used to be dealt with at middle management level within their organisations. 

4  Decision (EU) 2017/933 of the European Central Bank of 16 November 2016 on a general framework for 
delegating  decision-making  powers  for  legal  instruments  related  to  supervisory  tasks  (ECB/2016/40); 
Decision (EU) 2017/934 of the European Central Bank of 16 November 2016 on the delegation of decisions 
on the significance of supervised entities (ECB/2016/41); Decision (EU) 2017/935 of the European Central 
Bank of 16 November 2016 on delegation of the power to adopt fit and proper decisions and the assessment 
of fit and proper requirements (ECB/2016/42); Decision (EU) 2017/936 of the European Central Bank of 23 
May  2017  nominating  heads  of  work  units  to  adopt  delegated  fit  and  proper  decisions  (ECB/2017/16); 
Decision (EU) 2017/937 of the European Central Bank of 23 May 2017 nominating heads of work units to 
adopt delegated decisions on the significance of supervised entities (ECB/2017/17). 

6 

 
 
                                                 
Council,  differentiated  reporting  lines,  confidentiality  rules  and  mediation  of  conflicts  of 
interest.  Most  of  the  staff  performing  supervisory  tasks  is  located  within  organisationally 
separated  departments,  has  clear  reporting  lines  to  the  Supervisory  Board  and  is  subject  to 
strict confidentiality rules. Certain services, such as the legal service, internal audit or human 
resources are "shared" by the two functions. This does not undermine the separation principle 
to the extent that they only perform support functions. However, where such shared services 
provide advice that is key for the ECB's policy decision-making, reinforced safeguards should 
be considered.  

The  preparatory  work  for  the  macro-prudential  tasks  conferred  to  the  ECB  by  the  SSM 
Regulation is carried out by the ECB's department responsible for financial stability, which is 
involved in both supervisory and other ECB tasks. At the same time, the specific procedure 
dedicated  to  the  adoption  of  macro-prudential  decisions  based  on  Article  5  of  the  SSM 
Regulation  gives  the  Governing  Council  a  more  prominent  role  throughout  the  decision-
making  process,  than  the  role  held  by  the  Governing  Council  in  adopting  micro-prudential 
supervisory decisions. Whilst the ECB's decision to leverage on the expertise and capacity of 
its  existing  department  for  anchoring  its  new  supervisory  tasks  related  to  macro-prudential 
powers is understandable, it is important that the ECB ensures that the Supervisory Board is 
appropriately  involved  in  the  decision-making  process  and  that  all  decisions  pursuant  to 
Article 5 of the SSM Regulation are based on a complete draft proposed by the Supervisory 
Board.  

Division of tasks and responsibilities between the ECB and the NCAs 

The SSM as a system consists of the ECB entrusted at central level with ensuring the overall 
functioning  and  efficiency  of  the  system,  and  the  NCAs  as  a  decentralised  layer.  The  SSM 
Regulation sets out a clear distribution of responsibilities. It entrusts NCAs with assisting the 
ECB  in  all  its  supervisory  actions  and  designates  them  as  primary  responsible  for  the 
supervision  of  less  significant  institutions  (LSIs).  The  ECB,  with  the  assistance  of  NCAs, 
conducts  direct  supervision  of  significant  institutions  (SIs),  adopts  decisions  related  to 
common  procedures,  oversees  the  consistency  of  NCAs'  supervision  of  LSIs,  gives 
instructions to NCAs and may take over the direct supervision of LSIs.  

This distribution of tasks and responsibilities appears to work well in practice, with the ECB 
building up knowledge and expertise in its constant interaction with the NCAs, and the NCAs 
reinforcing their know-how on the basis of more intensive interaction with other NCAs and 
the ECB. At this stage of the SSM, the distribution of roles between the ECB and the NCAs 
seems overall balanced.  

Although  there  is  no  evidence  of  any  existing  conflict  or  intrusive  intentions  by  the  ECB, 
there is some concern from certain NCAs as regards the ECB's role in relation to LSIs. Those 
NCAs call for predictability over the extent to which the ECB may influence LSI supervision 
or eventually take it over. The default attribution of supervision of LSIs was given to NCAs 
and the ECB's right to take over LSI supervision could only be exercised if there is necessary 
and  sufficient  justification  for  departing  from  that  rule.  However,  provisions  in  the  SSM 
Regulation conferring responsibilities in relation to LSIs to the ECB should be interpreted as 
providing the ECB with sufficient flexibility to intervene when necessary for performing its 

7 

 
 
tasks.5 Thus, the possibility to  give guidance and instructions to  NCAs is a key tool for the 
ECB to ensure a coherent and effective implementation of prudential supervision throughout 
the  Banking  Union.  Equally  important  is  the  ECB's  capacity  to  take  over  LSI  supervision 
where  needed  for  warranting  the  consistent  application  of  high  supervisory  standards.  The 
ECB's flexibility to use these tools should not be subject to additional constraints. 

Some  questions  arise  in  relation  to  the  remaining  competences  of  NCAs,  and  the  way  they 
may  be  used  for  circumventing  the  distribution  of  responsibilities  within  the  SSM.  Recent 
structural  market  developments  show  a  trend  for  third  country  groups  to  have  increasingly 
complex structures in the Union, operating through entities that escape ECB supervision. For 
instance,  the  ECB  would  not  have  powers  over  investment  firms  or  EU  branches  of 
institutions having their head office in third countries, which may constitute a loophole in its 
overall  mandate  and  opens  the  door  to  regulatory  and  supervisory  arbitrage.  A  specific 
concern  exists  in  relation  to  the largest investment  firms  that  provide  key  wholesale  market 
and investment banking services across the EU, which are "bank-like" in nature. These firms 
therefore  present  a  clear  risk  to  financial  stability,  given  their  size  and  interconnectedness. 
This  is  why  they  are  subject  to  essentially  the  same  obligations  as  credit  institutions. 
However, they are not necessarily authorised and supervised by the same authorities as credit 
institutions, which might  create an un-level  playing  field in the application  of the CRD and 
CRR.  The  ongoing  reviews  of  the  CRD-CRR  and  of  the  prudential  treatment  of  investment 
firms may provide a good opportunity to address this aspect. 

The  Commission's  assessment  acknowledges  the  specificity  of  the  ECB's  duty  to  apply 
national legislation transposing relevant Directives and its capacity to derive concrete powers 
from  such  national  legislation.  Clear  principles  are  needed  to  underpin  such  unprecedented 
situation.  Thus,  it  is  highlighted  that  the  ECB’s  supervisory  powers  under  the  SSM 
Regulation  should  be  construed  broadly  enough  to  include  powers  given  to  national 
authorities by national law for carrying out supervisory functions under the CRD and the CRR 
in relation to credit institutions. However, as the ECB’s powers can be exercised only within 
the limits of the tasks conferred on the ECB, it needs to be ascertained on a case-by-case basis 
whether  a  specific  power  given  under  national  law  is  within  the  remit  of  the  specific  tasks 
conferred on the ECB or not. Given that such case-by-case analysis is cumbersome and not 
always  predictable,  it  is  suggested  that  future  relevant  EU  legislation  spells  out  explicitly 
supervisory powers in directly applicable provisions. 

B. Supervisory tools 

In order to perform its supervisory tasks, the ECB has developed and applied a number of key 
supervisory  tools  based  on  the  powers  conferred  to  it  in  the  SSM  Regulation.  This  section 
summarises the Commission's findings on these tools and their utility for ECB's exercise of 
supervisory tasks.   

5  This interpretation has been confirmed recently by the CJEU, which highlighted that the exercise by NCAs 
of  direct prudential supervision of LSIs "is overseen by the ECB, which, under Article 6(5)(a) and (b) of the 
Basic Regulation [SSM Regulation], has the competence to communicate to those authorities ‘regulations, 
guidelines or general instructions to national competent authorities, according to which the tasks defined in 
Article 4 [of that regulation] … are performed’ and, moreover, to remove authority from a national authority 
and  to  ‘decide  to  exercise  directly  itself  all  the  relevant  powers  for  one  or  more  credit  institutions’."  See 
Case T-122/15, Judgment of the General Court (Fourth Chamber, Extended Composition) of 16 May 2017 
Landeskreditbank Baden-Württemberg - Förderbank v European Central Bank, paragraph 24. 

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Categorisation of supervised entities  

In  order  to  determine  the  exact  role  of  the  ECB  and  the  NCAs  in  relation  to  individual 
supervised entities, based on the SSM Regulation the ECB must establish whether entities are 
significant or less significant institutions. Whilst the starting point under the SSM Regulation 
is  a  classification  based  on  quantitative  criteria,  the  ECB  also  takes  into  account  possible 
"particular circumstances" that would justify a deviation from these criteria. Even though the 
ECB  only  exceptionally  deviated  from  the  default  allocation,  more  transparency  would  be 
welcomed as regards the rationale for re-classification decisions. 

The  ECB  also  frequently  uses  further  sub-classifications  of  supervised  entities  for  various 
purposes,  such  as  determining  the  extent  of  its  engagement,  exercising  day-to-day 
supervision,  applying  proportionality,  ensuring  peer  comparison,  determining  what 
information should be transmitted by NCAs etc. These classifications are useful for the ECB 
to  ensure  a  supervisory  level  playing  field  between  comparable  institutions  and  an  efficient 
organisation  of  its  activities.  The  interplay  between  the  different  classifications  and  their 
relevance  for  various  supervisory  activities  is  however  not  always  straightforward.  It  is 
therefore  recommended  that  the  ECB  improves  its  communication  on  the  methodologies 
underlying  these  classifications,  as  well  as  on  the  implications  of  the  various  categories  in 
terms of supervisory action. 

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.  They  are  responsible  for  the  ongoing 
supervision  of  the  SIs,  being  entrusted  with  the  implementation  of  the  tasks  listed  in  the 
Supervisory  Examination  Programme,  the  coordination  of  on-site  inspections  and  liaising 
with NCAs. 

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  genuine  form  of 
supervisory cooperation that  requires integration of resources within a new institutional set-
up.  During  the  first  years  of  functioning,  JSTs  have  proved  to  be  functional  and  credible, 
doing  most  of  the  groundwork  for  supervisory  decisions.  The  ECB  has  made  substantial 
efforts  to  develop  JSTs  into  a  key  tool  for  harmonised  supervision  in  the  euro  area.  Some 
concerns however  arose in  relation to  certain structural aspects  of the framework that  could 
affect JSTs' efficiency in practice, such as uncoordinated reporting lines, language problems 
and insufficient staff allocation. The ECB is encouraged to deal timely with these concerns in 
order to ensure the efficient functioning of JSTs. 

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 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 setting up of the 
horizontal functions is welcomed, as it is essential in ensuring consistency in the application 
of high-quality supervisory standards to all the banks in the Banking Union. 

9 

 
 
To be effective in their tasks, the horizontal functions need to promote a balanced cooperation 
with  NCAs.  This  balance  has  been  largely  achieved  in  the  area  of  supervisory  policy 
development,  especially  through  the  establishment  of  informal  support  structures  with  an 
advisory role  (e.g.  expert  networks).  The  ECB's  use  of  networks  to  request  NCA's  input  on 
policy  issues  should  be  welcomed  as  a  flexible  tool  of  cooperation  within  the  SSM.  Whilst 
there is no need for formalising all such structures, a clearer status for stable and influential 
networks  could  give  a  better  overview  of  their  mandate,  governance  and  reporting  lines. 
Furthermore,  the  proliferation  of  networks  should  be  avoided  by  streamlining  existing 
structures and identifying areas that would most benefit from the output of such cooperative 
structures. 

Some  NCAs  expressed  criticism  as  regards  cooperation  with  the  horizontal  functions, 
especially  in  relation  to  the  way  the  horizontal  work  influences  the  output  of  JSTs.  For 
increased  transparency  towards  NCAs  and  to  prevent  bottlenecks  in  decision-making,  the 
ECB could envisage to report more systematically and timely to the relevant JST coordinators 
and  sub-coordinators  on  changes  proposed  by  its  horizontal  functions  to  draft  decisions 
coming from JSTs.  

On-site inspections 

On-site  inspections  are  an  essential  tool  for  supervisors  to  examine  compliance  and  gather 
information necessary for performing their duties, directly at the place where the supervised 
entity  is  located.  The  ECB  has  made  good  progress  in  setting  up  its  on-site  inspection 
function.  Rules  and  procedures  already  provide  for  a  significant  level  of  harmonisation  of 
supervisory  practices  in  this  area.  This  will  be  further  reinforced  in  the  near  future  by  a 
welcomed  common  SSM  training  curriculum  for  on-site  inspectors.  The  ECB  should 
cooperate closely with the EBA on such training program in order to avoid duplications and 
ensure synergies for inspectors throughout all Member States. 

However, the implementation of harmonised procedures still shows divergences, especially in 
relation to the quantification of the findings from inspections by investigation teams and JST's 
reactions to those findings. The ECB should foster a consistent implementation of its common 
procedures for on-site inspections, ensuring that also the outcome of such inspections is duly 
harmonised. 

Moreover,  further  improvement  is  still  necessary  with  regard  to  the  staffing  of  on-site 
inspection  teams.  This  could  be  achieved  by  increasing  the  proportion  of  ECB  staff,  and 
creating predictability for the ECB as to the availability of NCAs' staff for on-site inspections. 
It  is  acceptable  for  the  ECB  to  occasionally  rely  on  external  consultants,  especially  where 
specific  technical  knowledge  is  required,  which  sometimes  cannot  be  easily  found  within 
SSM resources. However the use of external experts in on-site inspections should be limited 
and  accompanied  by  appropriate  safeguards.  For  instance,  external  experts  should  not  be  in 
lead of on-site inspection teams, or should not account for more than half of the members of a 
team,  as  this  might  give  rise  to  potential  reputational  risk  and  confidentiality  issues  for  the 
SSM.  

Colleges 

Overall colleges remain the forum to coordinate 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, which appear to value significantly the ECB as 

10 

 
 
their new counterparty. The ECB has proved to be a credible, well organised chair of colleges 
and  has  contributed  with  high-quality  input  to  college  discussions.  The  colleges  are  also  an 
important  tool  for  the  ECB  to  perform  its  tasks  in  relation  to  significant  branches  of  credit 
institutions  from  non-euro  area  countries,  for  which  it  acts  as  a  host  supervisor.  The  ECB 
should be praised for the cooperation arrangements it concluded in a short period of time and 
is encouraged to finalise the remaining negotiations with all relevant authorities. 

Options and discretions 

In its start-up phase, the ECB has dedicated remarkable efforts to harmonising the exercise of 
options and discretions. These efforts were successful and need to be praised, as the resulting 
harmonised  rules  on  the  exercise  of  options  and  discretions  by  competent  authorities 
contributed to improving the level playing field in the euro area, for both SIs  and LSIs. It is 
welcomed  that  the  ECB  does  not  take  a  broad-brush  approach  towards  harmonisation,  but 
considers each option and discretion individually in the context of different starting points in 
the  participating  Member  States  and  different  needs  characterising  the  national  banking 
sectors. It is also appreciated that the ECB aims to achieve a level playing field by extending 
the  harmonisation  exercise  to  the  supervision  of  LSIs,  whilst  taking  due  account  of 
proportionality.  However, it is regrettable  that for some options and discretions the goal of 
issuing  a  fully  harmonized  standard  has  not  been  reached,  with  the  ECB  accepting  that 
different regimes will coexist.6  

C. Performance of supervisory tasks 

The SSM Regulation entrusted the ECB  with  a number of  specific  supervisory tasks with  a 
view to ensure the safety and soundness of banks under its supervision. Under this third theme 
the Commission has assessed the performance of the main supervisory tasks conferred to the 
ECB. 

Common procedures for authorisations and assessment of acquisitions 

The ECB has been conferred three 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").  These  tasks  are 
special not only because of the broad scope in terms of entities covered, but also because of 
the prominent role given to NCAs in performing preparatory work.  

The  common  procedures  for  authorisations  and  assessment  of  acquisitions  represent  a 
challenging  task  for  the  ECB,  given  the  tight  deadlines  applicable,  the  high  number  of 
decisions and the complexity of assessing proposals prepared by NCAs based on 19 different 
national legal frameworks. These procedures intrinsically rely on close cooperation between 
the  ECB  and  the  NCAs.  Such  cooperation  is  an  obligation  within  the  SSM  and  should  be 
pursued by all parties, in good faith and at all stages (i.e. the initial approval stage as well as 
the ongoing verification of compliance). The ECB and NCAs have done a remarkable job and 
managed  to  create  tools  and  procedures  that  help  the  ECB  deliver  on  its  tasks  within  the 
applicable  constraining  timeframe.  The  evolution  of  common  procedures  shows  that  mutual 

6 As for example, regarding the transitional arrangements for own funds calculations under CRR. 

11 

 
 
                                                 
trust  between  the  ECB  and  the  NCAs  is  increasing,  thus  constructively  supporting  the 
functioning of the SSM. 

On-going supervision of significant institutions: fit and proper assessment 

In  order  to  ensure  banks  manage  their  risks  in  a  qualified  manner,  the  ECB  is  tasked  with 
assessing each member of a significant institution's management as to whether he or she is fit 
and  proper  to  carry  out  their  tasks.  This  has  caused  a  very  high  operational  burden  for  the 
Supervisory Board and the Governing Council, mainly due to the high number of proceedings 
and the diverging procedural timelines foreseen in national regimes. For this reason this area 
was  chosen  for  the  first  trial  of  the  upcoming  delegation  framework,  which  is  expected  to 
accelerate  the  decision-making  and  reduce  backlogs.  However,  it  will  not  simplify  the 
complexity of the analysis for the ECB as long as the details of substantial rules develop in a 
non-harmonised way. 

The ECB has been actively involved when the EBA developed its consultation document on 
revised  guidelines  on  fit  and  proper  assessments.  The  ECB  has  issued  in  parallel  its  own 
consultation on a guide on fit and proper assessment, which it finalised and published before 
the finalisation of the EBA guidelines. It is welcomed that there is a clear commitment from 
the ECB to revise the ECB Guide in light of eventual changes to the finalised EBA guidelines 
so as to ensure full alignment in terms of content.  

On-going supervision of significant institutions: Own funds approvals and waivers 

Approvals  of  capital  instruments  reflect  core  supervisory  responsibilities,  which  should  be 
applied consistently throughout the Union. This  area is  particularly  scrutinised by the EBA, 
which has a general mandate to review the quality of own funds. Given the EBA's extensive 
expertise in scrutinising the compatibility of capital instruments issued throughout the Union 
with  the  CRR  eligibility  criteria  for  own  funds  purposes,  it  is  important  that  competent 
authorities cooperate closely with the EBA in this area. Therefore the ECB is encouraged to 
set-up  a  framework  ensuring,  on  the  one  hand,  the  internal  horizontal  scrutiny  of  all  own 
funds  instruments  issued  by  institutions  supervised  by  the  ECB  and,  on  the  other  hand,  an 
effective and consistent cooperation with the EBA as regards the quality assessment of such 
own funds instruments, in line with the tasks conferred to the EBA. 

As regards the use of waivers, it is observed that the ECB has applied some waivers relatively 
frequently  following  the  definition  of  conditions  for  such  waivers  in  the  ECB  Guide  on 
options  and  discretions.  The  prudent  application  of  waivers  provided  for  in  legislation  is 
welcomed  and  should  be  further  pursued  by  the  ECB,  including  by  further  facilitating  the 
conditions for their exercise7 within the limits of the CRR. The harmonised conditions for the 
application of waivers developed by the ECB could be built upon in the context of ongoing 
efforts to further develop the Banking Union that consider the possibility of applying waivers 
on  a  cross  border  basis,  when  this  leads  to  more  efficient  capital  or  liquidity  management 
without raising prudential concerns. 

7  Especially in the case of cross-border liquidity waivers. 

12 

 
 
 
 
                                                 
On-going supervision of significant institutions: internal models 

The ECB has successfully set up a robust procedure to assess internal models. On balance, the 
available evidence suggests that the ECB's process for approving internal models is rigorous 
and well managed. It will improve the credibility of the internal models used by banks under 
SSM  supervision  and  consequently  the  trust  of  investors  in  the  adequacy  of  banks'  capital 
requirements  and  ultimately  in  their  resilience.  The  Targeted  Review  of  Internal  Models 
(TRIM  project) is  also seen as  a good supervisory investment  that will lead to  an enhanced 
level playing field and greater harmonisation of supervisory practices.  

The setting up of the model approval and review functions was time-consuming and has led to 
some backlog in model approvals and potentially increased the duration of model approvals in 
the initial phase. However, evidence  provided by the ECB suggests that this will not be the 
case anymore in the near future. In addition, it has  to  be highlighted that the ECB provides 
real added value in terms of quality of model supervision, given the depth of its expertise in 
particular compared to some smaller NCAs. Also in comparison to larger NCAs, the ECB can 
provide  improved  supervision  due  to  its  larger  peer  group  size,  allowing  for  more  detailed 
benchmarking of models. 

It is important that the SSM engages with the EBA with a view to sharing good practices with 
non-euro  area  competent  authorities,  thereby  contributing  to  supervisory  convergence  not 
only in the euro area, but in the whole EU single market. 

On-going  supervision  of  significant  institutions:  Supervisory  Review  and  Evaluation 
Process (SREP) 

The ECB has succeeded in applying within a very short timeframe a unitary SREP to all SIs, 
based on a common methodology that incorporates best practices. The 2015 and 2016 SREP 
exercises have fostered increased capital levels in banks, further reinforcing the stability and 
resilience of the euro area banking system. In addition, the ECB has proven to be an adaptable 
and  learning  organisation  by  addressing  shortcomings  and  swiftly  incorporating  regulatory 
developments  into  its  methodology.  In  this  sense  the  ECB's  achievements  in  relation  to  the 
SREP are remarkable and the ECB's efforts very much welcomed. 

The ECB should continue to engage constructively with the Commission and the EBA when 
further  developing  its  methodologies  and  processes,  especially  as  regards  the  application  of 
Pillar  2  guidance.  Also,  the  ECB  is  invited  to  incorporate  in  its  SREP  methodology  the 
feedback given by the EBA in the context of its convergence assessment work. 

The review of SREP decisions by the horizontal functions of the ECB allows for a consistent 
application  of  the  SREP  and  contributes  to  achieving  similar  SREP  outcomes  for  similar 
institutions.  It  is  important  that  the  right  balance  is  maintained  and  that  the  quest  for 
consistency does not lead to outcomes being constrained into a very narrow band that would 
de facto ignore the bank-specific nature of the SREP. Furthermore, the ECB is encouraged to 
improve the communication with NCAs as regards the methods employed to adjust the SREP 
decisions proposed by JSTs at horizontal level.  

In particular: possibility to influence banks provisioning for non-performing loans 

Finally,  the  ECB  is  encouraged  to  apply  the  whole  panoply  of  supervisory  powers  to  allow 
risks to be addressed through the most suitable supervisory tools. Existing powers include the 

13 

 
 
possibility  for  the  competent  authority  to  influence  a  bank's  provisioning  level  within  the 
limits  of  the  applicable  accounting  framework  and  to  apply  the  necessary  adjustments 
(deductions  and  similar  treatments)  in  case,  for  example,  accounting  provisioning  is  not 
sufficient  from  a  supervisory  perspective.8  This  is  particularly  important  in  the  context  of 
tackling non-performing loans, as highlighted by the EU Action Plan on NPLs.9 

On-going supervision of significant institutions: Enforcement and sanctioning 

During its start-up phase the ECB focused on gaining knowledge of the prudential situation of 
supervised  entities,  exercising  on  relatively  few  occasions  its  sanctioning  and  enforcement 
powers. The effectiveness of the sanctioning and enforcement framework will thus need to be 
assessed  more  closely  once  more  extensive  practical  experience  is  accumulated.  For  the 
sanctioning framework to be implemented in an effective way, it is crucial that both the ECB 
and the NCAs continue cooperating in good faith.  

Some obvious asymmetries (such as the different scope of sanctioning powers as opposed to 
supervisory powers), the lack of a common set of enforcement and sanctioning measures, as 
well  as  a  wide  margin  in  interpreting  existing  EU  sanctioning  rules  may  already  be  noted. 
These have the potential of impinging on the level playing field and would need to be closely 
monitored in terms of implications for the effectiveness of ECB's performance of supervisory 
tasks. 

Oversight of NCA supervision of LSIs 

The  LSI  sector  is  very  diverse  and  was  deliberately  left  to  the  direct  supervision  of  NCAs, 
with  the  ECB  being  in  charge  of  overseeing  the  conduct  of  supervision  by  NCAs  to  ensure 
consistency  of  supervisory  outcomes  and  a  consistent  application  of  high  supervisory 
standards. The ECB’s oversight role is instrumental in shaping such conduct to the extent it 
would ensure coherent and consistent implementation of prudential rules. Where necessary to 
ensure a consistent application of high supervisory standards, the ECB may take over direct 
supervision  of  LSIs.  Given  this  framework,  the  ECB  has  to  strike  a  balance  between 
harmonisation  on  the  one  hand  and  flexibility  and  proportionality  on  the  other  hand. 
Harmonisation  means  ensuring  a  sufficient  level  of  convergence  with  regard  to  the 
supervisory approach  applied to  LSIs across  participating Member States  and between LSIs 
and  SIs  within  participating  Member  States.  This  implies  the  development  of  common 
approaches for LSI supervision on core NCA competences. 

8 

Such  powers  are  enshrined  in  Article  16(2)(d)  of  the  SSM  Regulation,  which  has  the  same  wording  as 
Article  104(1)(d)  of  the  CRD.  They  do  not  amount  to  accounting  powers  that  would  allow  the  ECB  to 
impose a specific provision, but they allow the ECB to influence the provisioning policy of a bank within 
the  limits  of  accounting  standards,  for  instance  where  such  framework  allows  for  flexibility  in  selecting 
policies or requires subjective estimations, and the specific implementation chosen by the institution is not 
adequate  or  sufficiently  prudent  from  a  supervisory  point  of  view.  Furthermore  they  allow  the  ECB  to 
require credit institutions to apply specific adjustments (deductions, filters or similar measures) to own funds 
calculations  where  the  accounting  treatment  applied  by  the  bank  is  considered  not  prudent  from  a 
supervisory perspective. 

9  Action  plan 

to 

tackle  non-performing 

loans 

in  Europe  -  Council  conclusions  (11  July  2017), 

http://www.consilium.europa.eu/register/en/content/out/?&typ=ENTRY&i=ADV&DOC_ID=ST-11173-
2017-INIT 

14 

 
 
                                                 
Flexibility and proportionality means that NCAs are able to adapt their supervisory activities 
to the size, complexity and riskiness of the respective institutions. In this context, especially 
the  ECB's  efforts  to  develop  a  SREP  methodology  for  LSIs  that  is  based  on  the  SREP 
methodology  for  SIs,  but  embeds  features  that  allow  for  proportionality  and  supervisory 
flexibility, are much welcomed.  

Performance of macro-prudential functions 

The  macro-prudential  powers  and  tools  in  the  CRD-CRR  are  relatively  new,  with  limited 
experience  acquired  by  NCAs  and  designated  authorities  as  regards  their  application.  The 
ECB's additional macro-prudential powers can only be assessed properly in the context of a 
more extensive analysis of the use of macro-prudential powers by national authorities. At this 
stage there do not appear to be major obstacles for the ECB to participate in the coordination 
of macro-prudential measures within the Banking Union, nor in exercising its top up powers. 
Timelines for procedures are very challenging, but - as in other instances - may be managed 
by appropriate timely cooperation. 

There are however certain open questions as regards the scope of macro-prudential tools, as 
well  as  the  interaction  between  the  various  tools  that  can  be  used  for  macro-prudential 
purposes and the corresponding competences of the relevant authorities. One aspect, namely 
the use of Pillar 2 measures for macro-prudential purposes is currently considered by the co-
legislators, on  the  basis  of  the  Commission's  November  2016  proposal  on  the  CRD  review, 
where proposed changes envisage prohibiting the use of Pillar 2 requirements for addressing 
macro-prudential and systemic risks.  

D. Relationship with other relevant bodies 

The  ECB  when  performing  its  supervisory  responsibilities  closely  interacts  with  other 
European and international bodies. Effective cooperation is necessary to ensure that the SSM 
exercises its mandate while contributing to effective bank crisis management and to broader 
supervisory convergence at EU and international level. The fourth theme of the Commission's 
review is focusing on the interaction between the ECB and the EBA, the European Systemic 
Risk  Board  (ESRB),  the  Single  Resolution  Board  (SRB),  international  standard  setters  (the 
Financial Stability Board – FSB and the Basel Committee on Banking Supervision – BCBS), 
and the European Commission due to its role in relation to the issues covered by the SSM and 
these other bodies.  

Interaction with the European Banking Authority – supervisory convergence & stress tests 

The  SSM  Regulation  did  not  alter  the  role  and  powers  of  the  EBA,  which  remains  the 
regulatory  agency  responsible  for  completing  and  managing  the  Single  Rulebook  of  the 
banking  sector  in  the  EU,  as  well  as  for  ensuring  the  consistent  application  of  the  Single 
Rulebook.  The  ECB  is  required  to  comply  with  the  EBA  rules.  However,  it  should  be 
acknowledged that the ECB has to implement EBA rules through its own instruments, which 
may affect the EBA given the extended application of ECB instruments to 19 Member States. 
It would be advisable that the ECB regularly refers in its own rules, including those adopted 
in  the  form  of  Regulations,  to  the  corresponding  EBA  rules  or  to  relevant  ongoing  EBA 
working  streams.  It  would  also  be  advisable  that  the  ECB  closely  coordinates  its  own 
implementation  initiatives  in  terms  of  both  content  and  timeline  with  those  of  the  EBA. 
Furthermore, in order to avoid overlaps and inconsistencies in the interpretation of the Single 
Rulebook,  the  ECB  is  invited  to  cooperate  closely  with  the  EBA  and  make  every  effort  to 

15 

 
 
avoid  that  its  own  Q&A  tool  covers  issues  that  should  be  dealt  by  the  EBA  or  contradicts 
answers already given by the EBA. 

The  ECB's  intention  to  ensure  full  compliance  of  the  SSM  with  the  EBA  Guidelines  and 
Recommendations is welcomed. The ECB is urged to continue to strive for full compliance 
with  the  EBA  Guidelines  and  recommendations,  including  with  feed-back  from  EBA's 
convergence work. 

At the same time, the introduction of the SSM has provided an opportunity to progress faster 
in  the  pursuit  of  supervisory  convergence.  The  ECB  often  facilitates  the  coordination  of 
positions between the SSM NCAs in the development of regulatory deliverables of the EBA, 
and  provides  valuable  expertise  at  all  levels  of  the  decision-making  process.  The  ECB  is 
encouraged to be consistently pro-active in all EBA working streams, especially where this is 
explicitly called for by the EBA.  

The  ECB  is  also  closely  involved  in  the  context  of  the  EU-wide  stress  test.  Given  that  the 
stress test is a joint exercise where responsibilities are clearly distributed, it is necessary that 
all competent authorities involved (including the ECB) and the EBA cooperate closely with 
each other.  

Cooperation with the European Systemic Risk Board – macro-prudential convergence 

Cooperation between the ECB in its supervisory capacity and the ESRB is necessary to ensure 
coherence between the ECB's tasks and the overall EU macro-prudential coordination within 
the ESRB. The interaction and cooperation between the ESRB and SSM technical committees 
has  improved  over  time,  notably  as  regards  information  sharing  and  the  avoidance  of  work 
duplication,  but  their  scope  and  focus  remains  different.  The  review  of  the  ESRB 
Regulations10  proposes  to  formalise  the  institutional  representation  of  the  ECB  in  its 
supervisory capacity in the ESRB governance structure and further enhance the coordination 
of their activities. 

Cooperation  with  the  Single  Resolution  Board  -  early  intervention  and  triggering  of 
resolution 

Since  the  establishment  of  the  SRB  in  January  2016  as  the  Banking  Union  resolution 
authority, the SSM and the SRB have to cooperate closely. A Memorandum of Understanding 
has been signed that allows for the exchange of information necessary for the SRB to prepare 
and take resolution actions. The actions in 2017 concerning several failing banks showed that 
the cooperation worked well. Experience from recent cases will help all the involved actors to 
further  improve  the  practical  application  of  the  rules  and  the  functioning  of  the  system. 
Among  the  issues  involving  the  SSM,  this  concerns  for  example  the  practical  modalities  of 
cooperation and exchanging information between all European and national bodies involved 

10  Regulation  (EU)  No  1092/2010  of  the  European  Parliament  and  of  the  Council  of  24  November  2010  on 
European Union macro-prudential oversight of the financial system and establishing a European Systemic 
Risk  Board  ("ESRB  Regulation")  and  Council  Regulation  (EU)  No  1096/2010  of  17  November  2010 
conferring  specific  tasks  upon  the  European  Central  Bank  concerning  the  functioning  of  the  European 
Systemic  Risk  Board  ("ECB/ESRB  Regulation").  On  20  September  2017,  the  Commission  put  forward 
legislative proposals that propose to formalise the role of the ECB's Supervisory Board in the ESRB. See 
https://ec.europa.eu/info/law/better-regulation/initiatives/com-2017-538_en. 

16 

 
 
                                                 
in  early  intervention  and  resolution,  the  procedures  leading  to  a  decision  whether  or  not  a 
bank  is  failing  or  likely  to  fail  and  the  use  of  asset  quality  reviews  in  order  to  determine 
whether  the  conditions  for  a  precautionary  recapitalisation  are  met.  With  ever  more 
experience  being  gained  in  practice  it  is  important  that  the  cooperation  framework  is 
constantly assessed and improved should this be necessary. The Commission will continue to 
coordinate  with  the  SSM  and  the  SRB  for  these  purposes,  with  regard  to  the  overall 
functioning of the resolution mechanism, and including also from the perspective of the EU 
State aid framework.   

When  early  intervention  measures  are  planned  to  be  taken  by  the  ECB  with  regard  to  a 
supervised  institution  for  which  SRB  is  the  resolution  authority,  such  measures  should  be 
notified  to  the  SRB,  which  may  prepare  for  the  resolution  of  the  institution  concerned  and, 
together  with  the  ECB,  shall  closely  monitor  the  compliance  with  the  early  intervention 
measures. Some inconsistencies in the legal framework for early intervention measures have 
been  observed  and  could  be  addressed  by  clarifying  the  use  of  early  intervention  powers 
where they overlap with supervisory powers. Furthermore, it could be envisaged to enshrine 
early  intervention  powers  directly  in  the  Regulation  establishing  the  Single  Resolution 
Mechanism, so as to allow the ECB to use powers provided for in directly applicable Union 
law. Until such clarifications are made in the law, including on the instances triggering early 
intervention,  it  is  recommended  that  the  ECB  develops  its  crisis  management  strategy, 
especially  defining  the  circumstances  that  require  early  intervention  measures,  and  clearly 
communicates to the SRB all measures addressed to institutions whose financial situation is 
deteriorating, to enable more effective cooperation. 

Finally, the ECB as the competent authority is empowered to make the determination when an 
institution under its supervision is failing or likely to fail (FOLF). This determination is a pre-
condition for triggering resolution, and the way it is exercised should be examined in future 
reviews of the SRM. 

Participation in the Basel Committee on Banking Supervision and the Financial Stability 
Board – international regulatory convergence 

It is welcomed that the ECB has obtained and is actively using its membership status in the 
relevant  international  standard  setting  bodies,  the  FSB  and  the  BCBS.  In  this  capacity  the 
ECB  may  actively  contribute  to  the  international  standard  setting  relevant  for  the  banking 
sector in a more influential way than the EBA or the Commission, which only have observer 
status in  the BCBS.  It remains  challenging to  achieve  full alignment of European members' 
input in Basel, but the ECB's efforts in this respect, in cooperation with the Commission, are 
important and should therefore be encouraged. 

E. Cost effectiveness of the SSM 

This section focuses on the cost-effectiveness of the SSM, assessing the developments in the 
effectiveness  of  the  supervisory  process  and  in  the  cost  of  supervision  in  the  first  years  of 
existence of the SSM.  

A longer observation period would be required for a more fundamental analysis of the SSM 
contribution  to  the  smooth  functioning  of  the  single  market.  Nevertheless,  despite  the 
challenges  inherent  in  the  first  years  of  SSM  functioning,  a  vast  majority  of  banks  under 
direct supervision of the ECB noticed an improvement in the quality of supervision in 2015, 
particularly  in  terms  of  supervisory  consistency  across  entities  of  a  banking  group.  This 

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positive  development  has  also  been  confirmed  by  NCAs,  which  observed  marked 
improvements in the functioning of the supervisory colleges thanks to the effective leadership 
of the ECB. Moreover, significant institutions have signalled improved interactions with the 
ECB in 2016.  

At the same time, supervisory fees increased since the start of the SSM as the contributions to 
build-up resources  at  ECB  level  are  not  offset  by  a  reduction  of  contributions  for resources 
and costs in NCAs. Also in 2016 fees increased slightly compared to 2015, reflecting higher 
staff levels at the ECB.  

The current framework for supervisory fees provides for a clear, transparent and simple way 
of distributing fees to supervised institutions. Using the average of bank risk weighted assets 
and  total  assets  as  a  fee  distribution  key  among  supervised  banks  is  the  right  way  forward 
given  remaining  uncertainties  on  the  extent  to  which  risk  weights  applied  by  banks  reflect 
their  actual  riskiness.  The  current  ECB  fee  methodology  provides  for  proportionality  by 
splitting the budget for SIs and LSIs depending on the cost allocation. This budget splitting 
has ensured that the fees, as a share of total assets paid, are roughly two times lower for LSIs 
than SIs. 

In  its  upcoming  review  of  the  fee  methodology,  the  ECB  should  consider  whether  more 
proportionality  could  be  introduced,  e.g.  by  possibly  differentiating  between  high  priority 
LSIs, the supervision of which is more resource intensive, and other LSIs.  

It  is  noted  that  the  ECB  has  put  in  place  a  functioning  performance  measurement  system, 
which  enables  to  track  the  progress  achieved  in  different  supervisory  and  other  internal 
processes, and provides a necessary basis for assessing cost efficiency and effectiveness. This 
is  a  laudable  initiative  that  could  be  further  improved  to  encompass  all  aspects  of  ECB's 
supervisory activities and eventually also include NCAs.  

III. Conclusions 

On  the  basis  of  the  analysis  reflected  in  this  report  as  well  as  in  the  accompanying 
Commission Staff working document, the Commission's review shows that the establishment 
of  the  Single  Supervisory  Mechanism  was  overall  successful.  Certain  organisational 
challenges could be observed in the initial stage, but the ECB and the NCAs have managed 
them well, demonstrating a high capacity to react and adapt.  

The ECB, with the support of the NCAs, has set up the necessary procedures and tools that 
enabled the smooth transfer of supervisory competences over SIs and the exercise by the ECB 
of  its  coordinating  and  oversight  functions.  On  the  basis  of  such  framework  the  ECB  has 
taken up fully its supervisory role and has managed to establish in two years a good reputation 
as an effective and rigorous supervisory authority. This represents a remarkable achievement 
especially  in  the  context  where  timelines  were  extremely  challenging  and  the  underlying 
supervisory realities of the 19 participating Member States were very diverse. 

Building  on  the  governance  structure  of  the  ECB  as  laid  down  in  the  Treaty,  the  SSM 
Regulation  intended  to  set-up  workable  decision-making  procedures  that  reflect  the features 
of the SSM. It is hoped that this aspect will be largely improved through the new delegation 
framework that will allow the adoption by intermediate levels of management within the ECB 
of routine or supervisory decisions having a lower impact. 

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No major issues have been detected in relation to the independence of the ECB. As regards 
the separation principle, the ECB should ensure that all safeguards are in place and applied, 
especially as regards services underpinning both the supervisory function of the ECB and all 
other  functions  performed  by  the  ECB.  The  ECB  is  also  invited  to  ensure  the  appropriate 
involvement of the Supervisory Board in macro-prudential decision-making. 

This initial phase of the SSM was important for gaining the trust of all relevant stakeholders. 
To establish such trust the ECB in its supervisory capacity was repeatedly assessed and held 
accountable  by  political,  judicial  and  administrative  bodies.  The  use  of  mechanisms  for 
holding  the  ECB  accountable  has  been  intense  and  regular,  and  did  not  demonstrate  major 
shortcomings in the way the ECB pursues its supervisory tasks. Certain disagreements arose 
concerning the scope of the mandate of the ECA to review the ECB – an issue that is expected 
to  be  solved  through  the  declared  commitment  to  better  cooperation  in  the  context  of  the 
second review that will be conducted by the ECA.  

A  fundamental  dimension  of  the  SSM  consists  of  the  interaction  between  the  ECB  and  the 
NCAs. Apart from some initial uncertainties as regards the supervisory powers enshrined in 
national law, no major problems have been identified as affecting the distribution of tasks and 
responsibilities in the SSM Regulation. In practice cooperation has been gradually evolving, 
with trust between the various parties being progressively built up in parallel with ever more 
shared  experiences.  NCAs  in  participating  Member  States  demonstrated  their  willingness  to 
efficiently  cooperate  with  the  ECB  and  assist  it  in  developing  supervisory  policies  and 
implementing  supervisory  acts.  The  cooperation  in  good  faith  between  the  ECB  and  the 
NCAs is essential and all parties are invited to continue to cooperate loyally. 

The  relationship  between  the  ECB  and  the  EBA  constitutes  another  important  aspect  of  the 
functioning of the SSM in the context of the internal market. This review observed a positive 
dynamic  of  interaction  which  is  mutually  beneficial,  and  encourages  the  ECB  to  continue 
cooperating and coordinating with the EBA, especially as regards the implementation of the 
single rulebook. 

The effectiveness of supervision of euro area banks has improved already in the first years of 
SSM functioning. For SIs, the regulatory framework is more harmonised, and supervision is 
based  on  common  methodologies  applied in  a consistent  way.  The  quality  of  supervision is 
perceived  as  having  increased  in  relation  to  several  core  supervisory  areas,  especially  the 
SREP, internal models, fit and proper assessments and the functioning of colleges. The ECB 
also  took  important  steps  in  harmonising  supervisory  practices  for  LSIs,  but  more  time  is 
required to increase the level of harmonisation and promote the use of common best practices 
in  the  supervision  of  LSIs.  Overall,  there  is  a  positive  impact  on  the  level  playing  field 
between  SIs  in  the  participating  Member  States,  as  well  as  between  SIs  and  LSIs  in 
participating Member States. Furthermore, given the very positive appraisal of the ECB's role 
in  the  supervisory  colleges  and  its  substantial  contributions  to  the  discussions  at  the  EBA, 
there are positive spill-over effects throughout the internal market. 

Overall,  the  application  of  the  SSM  Regulation  appears  to  work  well  in  practice,  with  no 
major  changes  needed  to  the  legal  framework  at  this  stage.  The  shortcomings  noted  in  this 
report  may  be  corrected  mainly  through  actions  to  be  taken  by  the  ECB  or  through 
amendments  to  relevant  Union  law  that  are  currently  discussed  by  the European  Parliament 
and the Council in the context of the Proposals made by the Commission in November 2016. 
Certain  aspects  of  the  application  of  the  SSM  Regulation  will  need  to  be  further  monitored 
and assessed in more detail once more experience with the SSM is acquired. 

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The  Commission  concludes  that  the  supervisory  pillar  of  the  Banking  Union  has  been 
successfully  established,  functions  well  and  proves  its  effectiveness.  The  SSM  represents  a 
solid reliable element of the Banking Union that could prove its full potential in the context of 
a completed Banking Union. 

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