The supervision of large banks in the euro area is the responsibility of the European Central Bank (ECB). The Single Supervisory Mechanism (SSM), established in 2014, comprises the ECB and the national supervisory authorities of the participating Member States.
The European Court of Auditors (ECA) has published a special report following an audit which examined the operational efficiency of the ECB’s management of one specific task – crisis management. This is the process used by supervisors for identifying banks which are experiencing financial difficulties and intervening when necessary.
The ECA notes that overall, in its supervisory role, the ECB has established a substantial framework for crisis management procedures. The ECB’s organisational set-up and resourcing for the assessment of recovery plans and the supervision of banks in crisis are satisfactory, despite weaknesses in initial planning and a need to improve the allocation of staff to the most urgent situations.
The report also finds that the:
- ECB is finalising arrangements for external cooperation and coordination with other supervisory authorities and the Single Resolution Board. Nevertheless, the outstanding issues have the potential to delay and restrict information-sharing and detract from the efficiency of coordination;
- ECB’s process for the assessment of banks’ recovery plans is positive. Submission and monitoring procedures are in place, and assessors have access to useful tools and guidance, even though it could be enhanced, namely for the area of recovery plan indicators. Also, the results of the recovery plan assessments are not systemically used for crisis identification and response. The ECB cannot conclude on the operational efficiency of the management of this process in practice due to a lack of evidence provided by the ECB; and
- ECB’s operational framework for crisis management has some flaws, and there are signs of inefficient implementation. Guidance for early intervention assessments is underdeveloped and does not define objective criteria or indicators for determining that a bank has entered a crisis situation. There is no guidance on the best use of the ECB’s powers or the most appropriate measures to be considered in specific scenarios. The ECA obtained no comprehensive evidence on the actual use of its powers so it cannot conclude on the efficiency of its management in practice. Guidance on “failing or likely to fail” assessments is also lacking in scope and detail.
The ECA makes certain recommendations including:
- the ECB should improve co-ordination with external actors and adopt an internal framework for the supplementary supervision of financial conglomerates;
- for recovery planning the ECB should provide additional guidance regarding the calibration of recovery plan indicators;
- for crisis identification, the ECB should further develop its guidance on early intervention assessments and set indicators for determining deterioration in the financial condition of a bank. It should make systematic use of information from recovery plan assessments in these circumstances too; and
- in the area of crisis response, the ECB should ensure that issues are quantified before crisis response measures are considered, and establish reporting for systematically monitoring asset quality. It should also further develop its operational guidance on early intervention assessments, including making systematic use of insight it has gained through the assessment of banks’ recovery plans. In the area of “failing or likely to fail assessments”, the ECB should further develop its operational guidance.