10 November 2017

European Central Bank’s role also relevant for smaller banks

The European Central Bank (ECB) has published a report on the supervision of smaller banks in the euro zone. The ECB directly supervises the significant institutions in the euro zone, whereas smaller banks, known as “less significant institutions”, are supervised by national supervisory authorities. In the Netherlands, the Dutch Central Bank (DNB) is the national supervisory authority. However, the report emphasises that less significant institutions must be aware of the ECB’s influence, even though they are not directly supervised by the ECB.

According to the ECB, the Single Supervisory Mechanism can only be effective and consistent if there is a harmonised approach on rules and supervision across the euro zone. The ECB must ensure a level playing field among all banks (regardless of whether they qualify as significant or less significant), and it has a number of tools it can use to achieve this. These tools include issuing guidelines, regulations or general instructions to national supervisory authorities, and joining or leading on-site inspections of less significant institutions. The ECB can even take over the direct supervision of less significant institutions under certain circumstances.

According to the report, the ECB and the national supervisory authorities have made substantial progress in the promotion of a common supervisory approach, methodologies and toolkit. This has been done by developing a supervisory approach incorporating an institution-specific and a sectoral focus, as well as by adopting joint supervisory standards and common supervisory approaches.

The ECB and national supervisory authorities apply a proportionate approach to supervision and supervisory oversight. To this end, they have adopted a methodology that classifies less significant institutions as low, medium or high priority, based on their intrinsic level of risk and their potential impact on the domestic financial system. So far, the ECB and national supervisory authorities have only designated certain less significant institutions as ”high priority”.

The joint supervisory standards and common supervisory approaches, which are developed in close cooperation between the ECB and the national supervisory authorities, aim to contribute to consistently high supervisory standards. For example, joint supervisory standards and common supervisory approaches have been prepared for supervisory planning, recovery planning, and licensing of fintech credit institutions, ensuring consistency of outcomes within the euro zone. The joint supervisory standards and common supervisory approaches impact how national supervisory authorities supervise less significant institutions. Less significant institutions may also be impacted by the introduction of a joint supervisory standard for the SREP methodology (currently still a work in progress).

Even if a less significant institution is directly supervised by the DNB, it is important to be aware of the decisions and opinions of the ECB, as the report makes it clear that these decisions and opinions will most likely also impact the business of the less significant institution.