vitor constancio : establishing the single supervisory mechanism speech by mr vitor constancio, vice - president of the european central bank, at the baft - ifsa 2013 europe bank - to - bank forum, frankfurt am main, 29 january 2013. * * * ladies and gentlemen, it is a great pleasure to be here today at this event organised by the baft - ifsa ( bankers ’ association for finance and trade – international financial services association ) in frankfurt. considering the recent steps towards a banking union, i would like focus my remarks on the establishment of the single supervisory mechanism ( ssm ), following the landmark agreement reached by the ecofin council on 13 december. reasons for the establishment of the ssm i will start with some considerations on the expected benefits stemming from the establishment of the ssm, and on the reasons underlying the decision to confer a central role to the ecb. there are two main objectives in establishing the ssm. first, it aims at addressing the so - called “ financial trilemma ”, which can be defined as the impossibility of achieving at the same time, financial stability, financial integration and maintaining national financial policies in an integrated financial market. 1 this is especially the case in a monetary union with a high degree of interconnectedness between financial institutions and markets. the current financial crisis showed how rapidly and forcefully problems in one country ’ s financial system can spread to another and even threaten the stability of the entire euro area banking system. such developments can best be assessed and addressed by a central supervisory authority with a bird ’ s eye view of the entire euro area banking sector rather than through cooperation between national ones. the second objective of the ssm is to help breaking the negative feedback loops between sovereigns and banks, which were key features during the present crisis. this manifested itself in increasing debt levels of sovereigns that had to provide financial support to struggling banks as well as losses for banks from exposures to sovereigns under stress. we also saw increases in the correlation between the cost of funding of euro area banks and that of their respective sovereigns, particularly in some countries under stress. against this background, the need to weaken the spillover chain between banks and sovereigns by taking responsibility for the stability of the banking system at the european level with a single supervisory mechanism becomes evident. the ssm will also contribute to achieving a more integrated banking system which supports a fully - fledged economic and monetary union. this is also reinforced by

ecb with an effective set of powers that encompass all the elements of the toolbox related to micro - prudential supervision. we can say that the ecb tasks would concern all the span of life of credit institutions, from their birth ( i. e. the authorisation to operate ) to their death. more specifically, the ecb will have the tasks to grant and withdraw authorisations to credit institutions, to assess mergers and acquisitions concerning credit institutions under its responsibility, to ensure the compliance with pillar i and ii requirements and, to carry out consolidated supervision. the ecb will be able to fulfil the tasks allocated to it both by using the direct supervisory and investigatory powers conferred by the ssm regulation, as well as asking for the assistance of national supervisory authorities as appropriate. at this point in time you may wonder what would be the consequences for your banks, once the proposed ssm regulation would be finally adopted and the new system will enter into force. an important point to stress is that the legislative framework agreed by the council bis central bankers ’ speeches ensures full continuity with the existing supervisory system. as i said, the ecb will carry out its tasks within the single supervisory mechanism, working together with national supervisory authorities. therefore, there would be no additional burden for the industry. on the contrary, banks are expected to greatly benefit from the fact that the ssm will facilitate the application of the single rulebook and thus likely reduce the compliance costs for banks with cross - border presence across the participating member states. the ssm and macro - prudential supervision another important element of the ssm regulation is the conferral on the ecb of macro - prudential tasks. let at this point, turn our view back for some years. in most countries, before the crisis, banking supervision was essentially “ micro - based ”. it was mostly focused on ensuring the safety and soundness of individual institutions while taking the rest of the financial system as given. the implicit assumption was that stable individual institutions would automatically deliver a stable system. this micro - based supervisory approach is likely to underestimate the systemic component and is not able to internalise and target the negative externalities that could build up as a result of increased risks for the system as a whole. the lending booms that we have experienced in some euro area countries before the crisis offer a good illustration : during the upswing banks reported high levels of profitability and low levels of measured risk. both of these