Eurozone Banks Wake Up To A New Supervisor. What’s Next?

The Single Supervisory Mechanism (SSM) formally opens for business today. For months, supervisors and banks have been preparing for the transfer of supervisory responsibilities to the European Central Bank (ECB). Yet the 4 November milestone is just the start of a much longer, possibly testing journey for all involved.

Over time, the SSM will change the terms of engagement between supervisors and banks. It will introduce higher supervisory standards than some banks have been used to in the past; greater standardisation of approach, and a change in perspective (so that different issues might come to the fore of the supervisory relationship).

Related insight:

Meeting the challenge of the SSM | How banks should get ready for the new regime.

Banks need to seize the initiative, recognise the raised expectations and take the opportunity to make a fresh start in the supervisory sphere. The first 12 months of the SSM will be key for establishing the priorities and approach of the SSM. Through a careful analysis of the SSM supervisory objectives, the experience of banks during the comprehensive assessment, and of other supervisory regimes, banks can cut through uncertainty around what these priorities and approach will be.

Four characteristics stand out as drivers for change in day-to-day supervision. Each of these could affect the supervisory expectations placed on banks substantially, although the effect will be felt more and more rapidly by directly supervised 'significant' banks:

The SSM will harmonise how risk-based, forward looking supervision is conducted in the Eurozone. The SSM will integrate qualitative and quantitative analysis, but may have a stronger quantitative approach to supervision than most NCAs currently have, at least initially. Seeking supervisory consistency will be a key driver for how banks are supervised. Peer group analysis will be a key new supervisory tool, in part to deliver consistency between countries. Under the risk-based approach, supervisory interactions will increasingly move towards focusing on areas of concern. The intensity of supervision will be affected by the efficiency of banks' risk and risk appetite management, and how effective is the link between risk management and strategy when calibrating the intensity of its supervision. While this is not a novel approach, the ECB will have an opportunity to apply it more rigorously and consistently. The ability of banks to coordinate internally, between Eurozone...