Towards a Banking Union - Panel I: Are growth and stability compatible? - Steven Keuning Director General HR, Budget and Organisation 20 March 2013

Outline 1.Relevant to EU/EMU: compatibility of growth, financial stability… and financial integration 2.Supervisory lessons from the financial crisis 3.Rationale for Single Supervisory Mechanism (SSM) 4.State-of-play to establish the SSM 5.SSM: Guiding Principles 6.SSM: Key Success Factors 7.SSM: Challenges & Opportunities 8.(SSM) 2

3 Financial integration implies: Cheaper and easier cross-border payments Larger variety of financial products available at lower cost (loans) or higher remuneration (e.g. internet deposit accounts) More buyers and sellers on larger financial markets Enhanced transmission of monetary policy decisions Yet: possibly also more cross-country distress contagion and larger impact of excessive risk-taking  strengthening European supervision Relevant to EU/EMU: compatibility of growth, financial stability … and financial integration

4 Willingness to act in a timely and adequately strict fashion Need to test resilience to (truly) adverse stress test scenarios Need for independent supervision, avoiding local ‘capture’ Stronger risk-based capital and liquidity requirements More focus on verification and monitoring of compliance with best risk management and internal control practices Cross-border dimension is crucial Minimisation of home-host conflicts of interest (in a crisis) Harmonisation of risk and asset quality assessment Stronger interplay between micro- and macro-prudential supervision (early macro-warnings, spotting contagion risks) Supervisory lessons from the financial crisis

Rationale for Single Supervisory Mechanism Single Supervisory Mechanism (SSM) essential to: Promote sustainable growth through financial integration while containing financial instability (e.g. cross-border contagion) Improve EMU functioning: smooth monetary policy transmission and functioning of money markets; containing imbalances Help breaking negative feedback loops between governments and banks (together with the Single Resolution Mechanism) Remove any national bias of national supervisory authorities Converge to the best (of the national) supervisory practices Substantially reduce the supervisory ‘burden’ for cross-border banks (through the Single SSM Supervisory Manual) Reduce (crisis) coordination failures among national supervisors Promote reinforced coordination by European Banking Authority 5

State-of-play to establish the SSM 13 December 2012: ECOFIN Agreement on SSM Regulation Trilogue with the European Parliament (including the EBA regulation) expected to be concluded in a few weeks Adoption of the SSM Regulation by the Council and Parliament in early summer, with a possible publication and entry into force in the course of July ECB decisions on SSM (organisation, staffing, location, recruitment) only after entry into force of SSM Regulation; preparation started SSM begins supervision one year after entry into force 6

SSM: Guiding Principles Effective single supervisory authority within the ECB (including macro-prudential powers, legal competence for all credit institutions) Independent and accountable Separation between ECB’s supervision and monetary policy responsibilities (e.g. decision-making by Supervisory Board) Establishment as a System, with participation of National Competent Authorities (NCAs), and not a ‘college’ of NCAs Leverage NCAs expertise (convergence towards the best national practices, ECB to directly supervise only (about 140) systemic banks) Financing by supervised entities (level playing field across SSM) 7

SSM: Key Success Factors Ensure full and smooth cooperation between ECB and NCAs ( Joint supervisory teams; strong horizontal functions) Homogeneous approach to risk and asset quality assessment and supervisory requirements (e.g. Single SSM Supervisory Manual, reporting) Strong on- and off-site supervision Effective workflow management and well-functioning IT-systems Smooth management of the transition period 8

SSM: Challenges & Opportunities Time (only 18 months to set up SSM versus 4 years to set up ECB) All SSM institutions’ alignment towards a truly European system, with effective reporting lines and commitment of resources Utilise national experience and skills, while developing the ECB’s horizontal and specialised expertise (e.g. risks’ assessment) Unlike monetary policy, there is no well-defined single overall objective; more visibility of ECB towards national public opinion Reap synergies between ECB’s ‘central banking’ functions (analytical capacity) and its macro- and micro-prudential supervision tasks Staff recruitment, (regular) relocation (language issues?), training A smooth, yet rapid transition (continuity without entrenching national approaches; balance sheet assessment) Unified supervision needs a common resolution mechanism 9

Towards a Banking Union - Panel I: Are growth and stability compatible? - Steven Keuning Director General HR, Budget and Organisation 20 March 2013