Achievements and challenges of the Single Supervisory Mechanism

23 July 2015

On 21 July, in a lecture at the CFS lecture series “Risk and Regulation”, Korbinian Ibel, head of the Directorate General Micro-Prudential Supervision IV of the European Central Bank, described how the Single Supervisory Mechanism (SSM) works, which he had helped to set-up last year. He told about the first achievements of the European Banking Supervision but also about future challenges.

Ibel explained that, before the crisis, national bank supervisors were often home biased with regard to banks in their own countries and, thus, supervision was mostly too lenient. Also, at that time, there were too few bank supervisors in the euro area as a whole. With the establishment of the SSM, that comprises 5,000 supervisors who directly oversee 123 significantly important financial institutions in 19 European countries, this gap has been closed.

According to Ibel, a main advantage of the SSM is that it is not oriented towards national interests so that it can supervise banks in an objective way. Furthermore, the SSM has extensive possibilities to compare financial institutions and markets across national borders. However, Ibel stressed that, to fulfill its tasks, the SSM depends on the help of national supervisors who have the necessary expertise. The SSM has already succeeded in achieving more transparency and harmonization in the European banking market, inter alia, with carrying out the comprehensive assessment. The long-term objective is to create a level playing field for banks in the euro area, Ibel said.

Since its implementation, the SSM checks on a regular basis whether new risks in the European financial sector arise. Currently, the low profitability of many banks in Europe is a problem which results in a low capital accumulation. This is due to the overall difficult economic situation in Europe but also to the persistently low level of interest rates, Ibel explained. Besides, the SSM reviews the viability of the banks’ business models. Among other things, the SSM observes that the search for yield induces banks to invest in high-risk and non-transparent products again, as they did before the crisis. There are also operational risks, such as IT risks, as well as an increasing threat of cybercrime.

The supervision of banks takes place in context of an ongoing monitoring, on-site inspections, horizontal analyses and stress tests, Ibel stated. On the basis of these reviews, bank supervisors determine capital and liquidity requirements as well as additional measures for the respective banks.