Two months left until implementation of the Single Supervisory Mechanism
The new Single Supervisory Mechanism (SSM) for European banks will take effect already in two months, 4 November 2014. This means that the European Central Bank (ECB) will take up supervisory reins over the largest banks in the euro area and in cooperation with national supervisory authorities will take charge of safety and soundness of the European banking system.
In Latvia, three largest banks in terms of assets – JSC Swedbank, JSC SEB banka and JSC ABLV Bank will come under the oversight of the ECB in close cooperation with the Financial and Capital Market Commission (FCMC).
Explaining the intended sharing of supervisory duties, the FCMC Chairman Kristaps Zakulis emphasises: “The workload of national supervisors won’t reduce after 4 November, quite the contrary – the range of our responsibilities will expand, because we will become also “the eyes and ears” of the ECB, collecting and submitting the information necessary for oversight, drawing up draft decisions, assisting in enforcement of decisions etc.”
Ensuring direct supervision of the largest banks in the euro area, the ECB will follow whether the strategy, procedures and measures taken by the credit institutions provide for adequate risk management, whether the own funds of credit institution are adequate to cover the risks that it is or might be exposed to. However, the FCMC will still be responsible for above tasks as regards all other banks. Moreover, the FCMC will notify the ECB of all significant supervisory decisions regarding other credit institutions in Latvia.
The matters of money laundering and prevention of terrorist financing by credit institutions will remain within the FCMC’s competence, as well as monitoring of compliance with the provisions of the Law on the Financial Instruments Market and other activities of banks.
The national competent authorities will continue monitoring of other market segments – credit unions, insurers, financial instruments market players, pension funds, payment institutions, electronic money institutions etc.
The market operators themselves will cover expenditures related to the ECB supervision. The three Latvian banks subject to the direct supervision of ECB are comparatively small against the background of other banks in the euro area. At a rough estimate, the annual fee of those banks to the ECB will be between EUR 200 000 to EUR 300 000 a year, not exceeding 0.5% of total administrative expenditures of the banks. Whereas the financing related to expenditures incurred by the ECB for Latvian other banks will constitute a smaller proportion – between 10 and 20 thousand euros a year for largest banks, but for the smallest ones – about 6 to 7 thousand euors annually.
Assessment of “financial health” of the banks
Before assuming supervisory responsibilities over 128 banking groups by the ECB, an in-depth examining of banking balance sheets and resilience – comprehensive assessment – has been performed involving also national supervisors and the European Banking Authority (EBA) (EBA).
The comprehensive assessment comprises three phases:
• risk assessment for supervisory purposes, in order to qualitatively and quantitatively assess the main risks, including liquidity, the amount of loans and financing;
• asset quality review (AQR), in order to enhance transparency of banking exposures in performing banking AQR, including compliance of assets and collateral assessment and related regulations;
• stress test, in order to assess banking balance sheet resilience under the stress scenario.
The ECB comprehensive assessment differs from previous EU-wide stress tests as it provides for a thorough asset quality review, as well as ensures linking the results of asset quality review and stress testing.
The ECB is planning to release the results of comprehensive assessment in the second half of October and it will enhance transparency of banking balances and easier access to information on the bank performance, thus promoting confidence in the financial sector.
From the point of view of banks
Māris Mančinskis, Chairman of the Board of JSC „Swedbank” in Latvia: „After the 2009 crisis, the Latvian banking market has successfully passed balance, capital and increased efficiency exercises. This initiative promotes aligning the industry at European level and visibly demonstrates that the banks are firmly regulated institutions and have sound requirements for financial health in place and transparent data communication. This means security for banking customers, which is an increasingly important factor nowadays. At a time when the customers are addressed by various non-banking solution providers, most often poorly supervised, such a stringent regulation framework carries added value to the banks. Nowadays, banks are introducers of modern service on a number of occasions, at the same time in the heart of matter still continuing their conservative business, as they are responsible for deposits entrusted to them.”
Ainārs Ozols, Chairman of the Board of JSC „SEB banka”: „SEB bank’s strategy has been always based on building up a responsible and transparent business model, focused on long-term relations with our customers. Therefore the fact that in two months the responsible and well-reasoned operation of “SEB banka” and other major Latvian banks will be subject to oversight by not only the Latvian financial sector regulator but also by the ECB we may regard as the benefit to our competitiveness and the possibility to enhance mutual confidence between the bank and customers. “SEB banka” has done all the necessary homework and we are prepared for closer cooperation with the ECB.”
Ernests Bernis, Chairman of the Board of JSC „ABLV Bank”: „We are sure that the introduction of the ECB Single Supervisory Mechanism will contribute to our and our customer sense of security and will promote the further development of the bank. We are pleased that “ABLV Bank”, along with our subsidiary bank in Luxembourg, as the only private bank from the Baltic States will be supervised within the single framework together with the major and most prominent European banks. This is the result of our purposeful work for over 20 years and proof of properly chosen strategy.”
Financial and Capital Market Commission
Telephone: +371 67774808; email: email@example.com