The Single Supervisory Mechanism was formed to prevent a repeat of the 2008 financial
Frankfurt - AFP
A year after it took up its duties as Europe's banking watchdog, observers say the Single Supervisory Mechanism is doing a good job, but challenges nevertheless remain.
Setting up the SSM has been "a huge achievement. It has worked very well," said Bert Van Roosebeke, financial markets expert at the Freiburg-based think tank, the Centre for European Policy.
"The importance of the SSM is enormous. There isn't a bigger banking supervisor anywhere else in the world," he told AFP.
The SSM officially started work on November 4, 2014 when it was entrusted with overseeing some 123 banking groups within the 19-country eurozone.
Around 3,500 "less significant" credit institutions continue to be monitored by the national authorities of the individual eurozone countries, but under the overall oversight of the SSM.
The aim was to prevent a repeat of the 2008-2009 financial crisis that nearly led to the collapse of the euro.
The SSM is one of the three main pillars of a planned European banking union, alongside a single banking rule-book and a Single Resolution Mechanism (SRM) in charge of winding up failing banks.
"We want the banks to be well-capitalised," even if it remains "up to the banks themselves to decide what their business model will be," insists Daniele Nouy, who is head of the new authority which employs a workforce of more than 1,000.
In concrete terms, the SSM can order fragile banks to recapitalise themselves and can even veto the appointment of managers who are not deemed suitably qualified.
It also conducts regular "stress tests" of banks and in-depth audits of their balance sheets to determine their current financial health.
While the SSM is formally part of the ECB, it is run totally independently.
- Conflict of interests -
The idea of placing it under the ECB's umbrella was to ensure banking supervision from a Europe-wide perspective.
But critics, particularly in Germany, were quick to point out a potential conflict of interests.
By having the ECB in charge of both monetary policy and banking supervision, there were concerns that its policy decisions could be influenced and distorted by the perceived needs of banks.
For example, it could be tempted to set low interest to assist weak banks, it was suggested.
In order to get around this, the different operations were strictly separated, not only organisationally but physically, too.
The SSM is housed in the ECB's former Eurotower headquarters in downtown Frankfurt, while the monetary policy operations have moved to the bank's spectacular new skyscraper a few kilometres away in the east of the city.
CEP's Van Roosebeke conceded the set-up is not ideal.
"But it was the best solution, given the speed with which it had to be set up," he argued.
- Making banks safer -
Taking the SSM out of the ECB altogether and turning it into a legally separate body would require a change in EU treaties and would have to be voted unanimously by all member states, he noted.
And Van Roosebeke felt the concerns were primarily German ones.
"It doesn't bother other countries so much, who see other more pressing issues," he said.
Andreas Dombret, who is in charge of supervision within the German central bank or Bundesbank, said the new system "is functioning very well," even if there was still room for improvement, for example in the decision-making structures and processes.
"A year ago, lots of people had doubts that it could work. There were a lot of banks, too, that didn't like it. But now most of them have come to accept the new mechanism," a German financial source said, speaking on condition of anonymity.
Sabine Lautenschlaeger, former deputy chief of the Bundesbank, but now vice chair of the SSM, called it a "successful but stressful year. We've made good progress in the better oversight of European banks and making them safer."
In France, too, the first year of the SSM is seen as largely positive.
It has "helped calm the situation in the wake of the financial crisis, and reassured markets," said one banker.
While the regulatory environment in Europe was becoming increasingly complex, "that will help restore credibility in the eurozone financial system, and that is a good thing," said another.
Fernando Restoy, deputy governor of the Bank of Spain and a member of the SSM's supervisory board, admitted that "the first year has, in fact, been difficult, but the results have been satisfactory on the road to a more stable and more solvent European banking system."