Single Supervisory Mechanism
The Single Supervisory Mechanism (SSM) is the banking supervision system that comprises:
- the European Central Bank (ECB);
- the national competent authorities of the participating countries (see question "Which countries participate?"), which include Banco de Portugal.
Came into operation on 4 November 2014.
The ECB is responsible for the effective and consistent functioning of the SSM. The national competent authorities are charged with assisting the ECB in exercising their respective prudential supervision powers.
The SSM's supervision model distinguishes between the significant credit institutions (under the direct supervision of the ECB) and the less significant credit institutions (under indirect supervision of the ECB and direct supervision of the national competent authorities, articulating with and reporting to the ECB), based on quantitative and qualitative criteria.
This classification is regularly updated. An institution can switch between a classification of significant and less significant.
This framework affords harmonised supervision to all the credit institutions of Member States participating in the euro area.
Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions
Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17).
The SSM and the Banking Union
The SSM was the first step to creating a Banking Union in Europe.
In time, the Banking Union should be based on three complementary pillars: the Single Supervisory Mechanism, the Single Resolution Mechanism and a Common Deposit Guarantee Scheme.
The Single Resolution Mechanism has been fully operational since January 2016 and is designed to ensure the resolution of insolvent banks without affecting systemic stability and the financial situation of the countries where they operate.
The future Common Deposit Guarantee Scheme will help minimise the probability of 'bank runs', which in a contagion situation would rapidly affect liquidity in the banking system.
The three pillars of Banking Union assume the existence of a single set of prudential rules – the 'Single Rulebook' – which may be adapted for macroprudential policy reasons, subject to coordination at EU level.
What is the importance of the SSM?
The SSM has the following main aims:
- To ensure the safety and soundness of the European banking system;
- To increase financial integration and stability in Europe;
- To ensure consistent supervision, based on knowledge-sharing between the participating authorities and the ECB.
A sound and resilient banking system, duly regulated and subject to harmonised, high-quality supervision, is key to ensuring depositor confidence, the safety of the funds entrusted to institutions and the correct allocation of saving to productive investment, an essential condition for the sustained growth of the European economy.
Which countries participate?
All euro area countries participate automatically in the SSM.
The European Union countries not using the euro may participate in the SSM. If they choose to do so, their national supervisors enter into “close cooperation” with the ECB.
How does the SSM work?
The Supervisory Board of the ECB plans and executes the SSM's supervisory powers, and presents draft decisions for adoption by the Governing Council of the ECB, the ECB's main decision-making body.
The Supervisory Board is made up of:
- A Chair;
- A Vice-Chair;
- Four ECB representatives;
- Representatives of national supervisors.
Under the SSM, the supervisory responsibilities are allocated to the ECB and the national competent authorities (including Banco de Portugal) based on the significant or not significant nature of the entities covered.
The ECB has direct supervisory competence in respect of credit institutions, financial companies, mixed financial companies established in participating Member States, and branches in participating Member States of credit institutions established in non-participating Member States that are significant.
The national competent authorities are responsible for directly supervising the credit institutions that are less significant, without prejudice to the ECB's power to take on, in specific cases, direct supervision of such entities where this is necessary for the consistent application of supervisory standards.
Which decisions are the responsibility of the ECB?
The ECB can take decisions which are compulsory for all the institutions covered by the SSM, including:
- Imposing prudential requirements on credit institutions, in regard to capital requirements ('buffers'), limits on large exposures, liquidity, financial leverage and public disclosure on these topics;
- Deciding on the significance status of supervised credit institutions (i.e. categorised as significant or less significant);
- Granting or withdrawing banking licences;
- Assessing notifications of acquisitions of qualifying holdings and deciding whether or not to oppose the acquisition.
In the case of the significant institutions, the ECB may impose supplementary conditions, enforcement measures and sanctions on significant credit institutions.
The ECB also decides on the suitability of members of the management body and key function holders in significant institutions.
The Supervisory Board of the ECB prepares the draft decisions, which are adopted by the Governing Council of the ECB under the non-objection procedure. This means that the Governing Council may decide to object or not to the Supervisory Board's drafts, but may not change them. If the Governing Council does not object within a defined period of time (not more than 10 working days), the decision is deemed adopted.
What is the role of Banco de Portugal in the SSM?
Banco de Portugal is a national competent authority in the SSM, in close cooperation with the ECB and the national competent authorities of the other participating Member States.
Banco de Portugal intervenes in the SSM at various levels:
Representation at Supervisory Board
Banco de Portugal is represented on the ECB’s Supervisory Board. This committee plans and executes the SSM's supervisory powers, presenting draft decisions for adoption by the Governing Council of the ECB, the main decision-making body of the ECB, on which the Governor of Banco de Portugal sits.
Banco de Portugal is represented on the Supervisory Board by the member of the Board of Directors responsible for prudential supervision, or by the Director of the Banking Prudential Supervision Department as alternate.
Collaboration in supervision of significant institutions
In the SSM, the national competent authorities and the ECB share direct supervision responsibilities over the significant institutions.
The list of significant institutions includes the four largest Portuguese banks: Banco BPI, Banco Comercial Português, Caixa Geral de Depósitos and Novo Banco.
Banco de Portugal is a part of the joint supervisory teams that undertake the regular supervision of the significant credit institutions. As well as forming part of the joint supervisory teams allocated to the four Portuguese banking groups, the Bank has members of staff on joint supervisory teams for other significant institutions whose group head is based abroad.
There is a team for each entity or banking group deemed significant. The work of each joint supervisory team is managed by a coordinator from the ECB's staff, and by sub-coordinators from the national supervisors involved.
Banco de Portugal participates in joint supervisory teams with total cooperation, transparency and independence. The fact that Banco de Portugal has in-depth knowledge firstly of the institutions operating in Portugal and secondly of Portugal's specific regulation contributes strongly to effective and close supervision.
The Banco de Portugal teams also form part of the ECB's internal model inspection and assessment teams which are responsible for inspecting the significant institutions.
Supervision of the less significant institutions
As national competent authority, Banco de Portugal directly supervises the less significant institutions (LSIs).
Within this, Banco de Portugal is responsible for monitoring the conduct of the less significant institutions in regard to compliance with prudential regulations. However, direct supervision of these institutions is performed in close articulation with the ECB.
The less significant institutions are classified according to their priority (high, medium or low), and the ECB uses that priority to maintain differentiated control types on the supervision undertaken.
For entities deemed high priority ('high priority LSIs'), the ECB requires ex ante notification of the supervisory decisions of these entities taken by the national authorities.
The ECB may also at any time ask for information from the national authorities on the supervisory activities undertaken on less significant supervised entities.
The national authorities are also subject to duties of notifying the ECB should the financial situation of a less significant entity deteriorate and duties of notifying the ECB regularly about administrative penalties applied to these entities.
In very serious situations, after consulting the national competent authority, the ECB may decide to execute supervisory powers directly over one or more less significant institutions.
Intervention in common procedures
There are "Common Procedures" applying to all credit institutions established in participating Member States (significant and less significant institutions). These procedures relate to the specific powers for:
i) Granting or withdrawing banking licences;
ii) Assessing notifications of acquisitions of qualifying holdings and deciding whether or not to oppose the acquisition.
In both cases, requests are sent to Banco de Portugal, empowered to assess them, in close collaboration with the ECB, and to present the ECB with a draft decision in compliance with Portuguese legislation.
The ECB takes a decision based on its assessment of the request and on Banco de Portugal's draft decision, drawing from applicable Portuguese and EU legislation.
Intervention in procedures for assessing the suitability of members of the management body and key function holders
The institutions are responsible for ensuring that the members of the management body and key function holders are suitable for carrying out their respective functions. For this purpose, they must have a selection and assessment policy and assess the suitability of the individuals in question.
The ECB is responsible for granting authorisation to carry out functions in institutions subject to its direct supervision – the significant institutions. Authorisation requests must be sent to Banco de Portugal, which is responsible for initiating the process and preparing a draft decision, in articulation with the ECB, based on applicable Portuguese and EU legislation.
Banco de Portugal is responsible for granting authorisation to carry out functions in institutions subject to its direct supervision – the less significant institutions.