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The watershed between significant and non-significant institutions: What are the profound implications for bank regulation?
In the European banking regulatory framework, the watershed between significant and non-significant institutions plays a crucial role. With the establishment of the Single Supervisory Mechanism (SSM), the European Central Bank (ECB) is responsible for the direct supervision of banks that are identified as significant institutions. Under this framework, other banks are supervised by national banking regulators. This level of differentiation will undoubtedly affect overall financial stability and the ability to respond to crises.
This norm is not necessarily just a simple distinction of numbers, but affects the health and stability of the entire euro area banking system.
Significant institutions generally refer to banks with total assets exceeding 30 billion euros, accounting for a significant proportion of domestic GDP or with cross-border business. According to this criterion, 113 banks are currently recognized as significant institutions, and their assets account for 85% of the euro area bank assets. This regulatory structure is designed to increase the transparency and accountability of large banks, while also promoting their risk management and soundness.
For non-notable institutions, although their regulation remains the responsibility of each country's national competence authority, the ECB provides a regulatory framework to ensure consistency of standards and processes. This regulatory approach is intended to reduce differences among regulatory agencies in various countries and avoid the spread of risks caused by inconsistent policy implementation. Can this layered supervision mechanism for banks effectively prevent future financial crises?
In terms of crisis management, significant institutions need to comply with higher capital requirements and undergo regular stress testing.
Stress testing is a key element designed to assess the resilience of these banks to economic shocks. Every year, the ECB conducts at least one stress test on banks under its jurisdiction to ensure that banks can comfortably cope with potential market fluctuations and economic crises. At the same time, banks' capital adequacy ratios are closely monitored to ensure their operational stability during the crisis.
For significant institutions that fail to meet the standards, the ECB may require these banks to develop recapitalization plans and even take more stringent supervisory measures if necessary. Such measures not only apply to significant institutions, but may also affect non-significant institutions, which may change the competitive landscape of the overall banking industry.
It is worth noting that as the overall framework of European banking supervision is gradually improved, there are still a number of key issues that have not been fully resolved. These include the regulatory challenge of how to effectively manage a country’s sovereign debt. For example, an oft-cited discussion is how to strike a balance between the quality and quantity of bank capital, both to meet the requirements of the Basel Accord and to adapt to the special needs of the current market.
The debate on these issues will, over time, play an important role in future regulatory policies.
In any case, the establishment and operation of a single supervisory mechanism has sent a strong signal to the banking industry: future bank supervision will no longer rely solely on the capabilities of a single country, but will be a transnational collaboration mechanism. As the regulatory framework continues to evolve, the European banking industry will also face challenges that require it to demonstrate its ability to respond flexibly. How to ensure that the capital structure and regulatory compliance of significant and non-significant institutions will become an important issue in the next few years, and how to ensure that all participants can succeed in the changing environment?
