The document summarizes the supervisory priorities and acknowledges that the key priorities are unlikely to be fully addressed within one year and will remain on the list in future years.
The report confirms that the biggest Banking Union challenge is business model and profitability risk at significant institutions - return on equity was 4.6 percent on average in 2015. One of the keys to addressing this is to proactively address non-performing loans (NPLs). The supervisory pressure to develop a profitable strategy is likely to lead to loan disposals as banks exit less profitable lines and enter core profitable markets. Of course, this raises capital management issues.
The SSM’s three special initiatives of 2015: Options and National Discretions; the Supervisory Review and Evaluation Process (SREP); and Non-Performing Loans remain on the agenda for 2016. Of note, the rules for Options and National Discretions came into force in March 2016.
The report outlines some interesting details on supervisory activities and organizational design:
- The ECB is now nearly operating at full capacity with staffing of approximately 1,000 people. However, KPMG’s ECB Office understands that this number is being significantly supplemented by national experts seconded to the ECB.
- Supervisory fees levied in 2015 were €296mn. This is a relatively high figure but not unexpected given the startup phase. For comparison, BAFIN charged just over 200mn to industry for the 2014 industry levy. BAFIN had over 2,500 staff and covers banking, insurance and securities firms.
- While discussing cooperation with other regulators, the report mentions that Memorandum of understanding with priority third countries will be presented throughout 2016.
- The capital conservation buffer will be phased in by 2019, the pillar 2 requirements currently imposed should be reduced in equal fashion.
- The ECB conducted 250 on-site inspections in 2015. Credit, governance and operational risk accounted for almost 70 percent of these inspections.
- A network of senior model experts from National Competent Authorities (NCAs) and the ECB has been established to execute the Targeted Review of Internal Models (TRIM). It foresees on-site investigations of selected credit, market and counterparty credit risk models from 2017 to 2018 (or to 2019, if the project is extended for credit risk), while 2016 will be devoted to the required horizontal analyses that will define the harmonization goal of the project.
- The report also gives detail on the range of decisions made by the Supervisory Board in 2015 as well as reporting of breaches to it and the extent of recourse to the Administrative Board which can be used to challenge SSM decisions. It is also implicit in the report that the ECBs current decision making approach requires refinement- this will need to be addressed in the near future. Simply, too many small decisions require Supervisory Board approval thus clogging the decision making process. This is consistent with feedback from clients awaiting decisions on operational issues such as fit or proper reviews or model change requests.
For those seeking a better understanding of the mechanics of the Single Supervisory Mechanism (SSM), the report (PDF 879 KB) is essential reading. For further information please contact Ciaran Rogers (firstname.lastname@example.org) or Mehdi Bouih (email@example.com).