At the Council meeting on 12 December the EU finance ministers agreed on the general approach on the legislative package that establishes single supervisory mechanism (SSM) for the oversight of credit institutions, which is a key element in the EU's plan to establish a banking union.
The agreement in the Council will enable its rotating presidency (currently – Cyprus) to negotiate the package with the European Parliament, the aim being to adopt the legislation by the end of the year.
The legislative proposal on the SSM contains two regulations: one confers supervisory tasks on the European Central Bank (ECB), while the other modifies the existing regulation on the European Banking Authority.
The SSM will be composed of the ECB and national supervisory authorities.
"The overall aim is to restore confidence in the banking industry. The establishment of the SSM is a necessary precondition for the European Stability Mechanism to contribute directly to bank recapitalisations, rather than doing so via national treasuries as is currently the case. Such a development will enable the vicious circle between banks and sovereigns to be broken", said Vassos Shiarly, Cyprus' minister of finance, who chaired the meeting.
The member states whose currency is not the euro will be able to participate in the mechanism through close cooperation arrangements.
Tasks for the ECB
The ECB will be responsible for the overall effective functioning of the Single Supervisory Mechanism.
It will have direct oversight of the euro area banks. The supervision, however, will be differentiated, and the Bank will carry it out in cooperation with national supervisory authorities.
The ECB will assume its supervisory tasks within the SSM on 1 March 2014 or 12 months after the entry into force of the legislation, whichever is later and subject to operational arrangements.
The ECB's monetary and supervisory tasks will be strictly separated, to avoid a potential conflict of interest between the objectives of monetary policy and prudential supervision.
For this purpose the ECB will have a supervisory board responsible for the preparation of supervisory tasks, in which the participating non-eurozone countries will have full and equal voting rights. The board's decisions will be deemed adopted unless rejected by the ECB governing council.
European Banking Authority (EBA)
The changes to the EBA regulation are related mainly to procedural matters, such as voting rules. The aim of the amendments is to ensure equitable and effective decision-making within the single market, and that countries participating in the SSM do not unduly dominate the EBA's board of supervisors.
The single supervisory mechanism is the first step towards an integrated “banking union”, which includes components such as a single rulebook, common deposit protection and a single bank resolution mechanism.