How the new European Banking Supervision affects smaller banks

18 June 2015

On 16 June, in a lecture at the CFS lecture series “Risk and Regulation”, Joachim Wuermeling, Chairman of the "Verband der Sparda-Banken e.V.", discussed a topic that, according to him, has received little attention in the debate on the European banking supervision so far: the impact of the Single Supervisory Mechanism (SSM) on “Less Significant Institutions“ (small and medium-sized banks in the euro area such as the Sparda banks).

Since November 2014, the new Single Supervisory Mechanism (SSM) at the European Central Bank (ECB) directly supervises 21 large and systemically important financial institutions (SIFIs) in Germany. The around 1,700 small and medium-sized banks in Germany are still supervised by the national supervisors and only indirectly by the SSM: The national supervisors receive guidelines and recommendations from the ECB and, under exceptional circumstances, the SSM can completely take over the supervision for individual banks.

However, the European banking supervision will also directly influence small and medium-sized banks, Wuermeling said. For example, the ECB can decide on whether or not a banking licence is granted or whether it will be withdrawn. Also, the ECB has a say on whether a bank or parts of it can be sold. How much direct influence the ECB will finally have on smaller institutions, is, according to Wuermeling, not clear at this stage and will depend on the decision of the ECB to what extent it wants to exercise its supervisory tasks.

Smaller banks are afraid that rules that apply to SIFIs will increasingly be extended to smaller institutions as well, Wuermeling said. This could cause enormous costs for these banks which they might not be able to bear. For example, if more and more specific data has to be transmitted to the supervisory authorities, also smaller banks would have to upgrade their IT systems which would cause disproportional high costs for them. Wuermeling also warned that the SSM focuses too much on quantitative criteria and does not pay enough attention to specific business models or characteristics of banks. In contrast, national supervisors, such as the Deutsche Bundesbank, have a greater focus on qualitative criteria and assess different business models of banks more individually.