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Why Europe's banking supervision is one of the most forward-thinking innovations in the world
The European banking supervision system, formally known as the Single Supervisory Mechanism (SSM), is a policy framework led by the European Central Bank (ECB) and aimed at providing prudential supervision of banks in the euro area. The core of this system is to build up banking management capabilities across Europe, counter the shortcomings that emerged during past financial crises, and rebuild trust in financial markets.
The creation of the European banking regulatory system came as European leaders realized the need for a more effective banking regulatory approach after the 2008 financial crisis.
The formation of the SSM dates back to 1999, when the monetary union structure was considered fragile in the absence of effective supervision. The Lamfalussy Process was launched in 2001 as an attempt to regulate the financial industry through various committees. However, due to restrictions in EU treaties at the time, this measure had limited impact on bank supervision. That changed as the 2008 financial crisis intensified, with calls for a centralized banking regulator growing louder.
Against this background, the EU established the European System of Financial Supervision (ESFS) in 2011, whose main goal is to ensure the full implementation of financial rules. However, this still fell short of the need for unified banking supervision, which eventually evolved into the SSM's proposal. The proposal was widely discussed at the Eurozone summit in June 2012, then formally adopted in October 2013 and came into effect in November 2014.
The core of this regulatory system is to ensure that the supervision of all "important institutions" is directly the responsibility of the ECB, while other "secondary institutions" are the responsibility of national regulators under the supervision of the ECB.
By the end of 2022, the ECB directly supervised 113 banks identified as important, whose assets accounted for around 85% of the total assets of the euro area banking system. This system not only lays the foundation for ongoing assessment of bank health, but also ensures greater economic stability. The European banking supervision system is also an important part of the construction of the entire banking union, and its overall goal is to achieve financial stability in the euro area.
Risk assessment has become crucial in the process of European banking supervision. Under the Supervisory Review and Evaluation Process (SREP), banks' risk management and capital and liquidity levels are closely monitored. Regulators will assess banks' operating models, internal governance and risks to capital and liquidity based on various indicators. This highly transparent regulatory model enables banks to remain robust in the face of market challenges.
The core of this risk management and supervision system is to ensure that all banks can withstand potential financial shocks and prevent systemic crises from happening again.
These achievements highlight Europe's efforts to improve bank stability. Through these regulatory measures, banks can further strengthen their capital base, reduce their non-performing loan ratio, and improve their ability to respond to sudden economic crises. In recent years, the Non-Performance Loan (NPL) Action Plan has also demonstrated the mechanism's persistence in continuously tracking and managing financial risks.
However, the EU's banking supervision work does not end here, as the construction of a complete banking union still needs to be promoted, including the development of crisis management and resolution mechanisms, as well as comprehensive consideration of the supervision of sovereign risks. According to current plans, this requires full collaboration between regulators in various countries and the ECB to ensure that effective preventive measures can be taken in the face of a financial crisis.
Globally, Europe's banking regulatory framework demonstrates its unique forward-looking philosophy, especially in terms of regulatory uniformity and stability. This not only protects the integrity of the financial market, but also provides a confidence basis for the future development of banking institutions. Looking back at these achievements, should readers also think about which direction future banking regulation should take as global financial markets continue to change?
