The failure of several European banks during the 2008 crisis and the utilisation of the European Stability Mechanism (the “ESM”) to save the Spanish banking system in 2012, resulted in broad political agreement that more needs to be done at an EU level to protect Member States from the spill-over effects of bank failures. This led to the eventual introduction of the Single Supervisory Mechanism (the “SSM”) which transfers certain prudential regulatory and supervisory powers from national competent authorities (“NCA”) to the European Central Bank (the “ECB”). In fact, the SSM and the ECB were seen as a pre-requisite for any direct bank recapitalisations that were to take place through the use of the ESM.

The SSM is one of the pillars of a European Banking Union, comprising centralised supervision, a centralised resolution regime (including a centralised resolution fund) and a European-wide deposit protection scheme. It has been described as the most momentous step towards unification of the Eurozone area following the creation of the Euro currency. The shift in functions and powers will result in a reduction of powers of the MFSA and will lead to a centralisation of certain central prudential powers at EU level. In creating the SSM, the following legislative instruments have been used: firstly the SSM Regulation (Regulation No 1024/2013), which confers specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions; and secondly, the regulation amending the European Banking Authority Regulation (Regulation 1093/2010), which has been amended to clarify the role and powers of the European Banking Authority (the “EBA”) under the SSM.

MFSA – ECB – Division of tasks

All banks within the eurozone, including Malta, will have the ECB as a new regulatory authority. The ECB will be given specific tasks in relation to the prudential supervision of eurozone banks, financial holding companies and mixed financial holding companies. However, the extent of the ECB’s powers of supervision will vary depending on whether the bank is judged to be “significant” or “less significant”.

The SSM Regulation sets out what is considered to be a ‘significant’ bank when compared to a ‘less significant’ bank and this depends on whether a bank, on a consolidated basis, satisfies one of the following criteria: (1) the total value of the banks assets exceed €30 billion; (2) the ratio of the banks total assets over the GDP of its member state of establishment exceed 20% (unless less than €5 billion); (3) whether the bank has ever requested any public assistance in the past; and (4) the three largest banks in each member state will automatically be considered to be significant.

Other factors that the ECB will take into consideration include the significance of the cross-border activities of the bank and the importance of the economy of that bank’s member state of establishment. In any case, the ECB has the discretion to decide that a bank is of significant relevance notwithstanding that it doesn’t satisfy any of the above criteria. At the moment, we understand that the three Maltese banks deemed to be ‘significant’ for this purpose are HSBC Bank Malta, Bank of Valletta and Deutsche Bank Malta, but this is yet to be confirmed.

For the ‘less significant’ banks, the majority of tasks will remain within the competence of the MFSA, except for the following matters which will in all cases be the exclusive domain of the ECB:

  • authorisation and withdrawal of authorization of banks; and
  • authorisation of changes in qualifying shareholdings in banks.

In practice, this means that any acquisitions and/or disposals of shareholdings exceeding 10% in any Maltese bank will be decided upon by the ECB. The SSM Regulation clarifies that notification of an acquisition of a qualifying shareholding must first be introduced with the national competent authority which then assesses it and forwards the notification and a proposal for a decision to oppose or otherwise to the ECB. The ECB will have the power, even for less significant banks, to issue regulations, guidelines or general instructions to the MFSA and the ECB will retain the power to step in and supervise a less significant bank directly.

Insofar as ‘significant’ banks are concerned, the ECB will be exclusively responsible for:

  • authorisation and withdrawal of authorization of banks;
  • authorisation of changes in qualifying shareholdings in banks;
  • ensuring compliance with prudential requirements in the areas of own funds requirements, securitisation, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on such matters;
  • ensuring compliance with rules relating to governance requirements, including the fit and proper requirements for the persons responsible for the management of credit institutions, risk management processes, internal control mechanisms, remuneration policies and practices and effective internal capital adequacy assessment processes;
  • carrying out supervision on a consolidated basis; and
  • carrying out supervisory reviews, including stress tests, in connection with the European Banking Authority, where appropriate.

Functions not given to the ECB will remain vested with the MFSA. The ECB’s powers will not extend to consumer protection, securities trading, payment services, anti-money laundering, passporting notifications and MiFID related matters, which will remain the responsibility of the NCAs. Therefore, for local purposes, there will be a clear distinction between the powers of the ECB and the MFSA, with the former focusing on the prudential supervision of credit institutions, and the latter retaining its tasks in relation to conduct of business and consumer protection. Furthermore, until the introduction of any recovery and resolution directive, the MFSA will be responsible for resolving failing banks, even though the ECB still has the power to take control of such banks itself where the ESM unanimously requests it.

Similarly to the MFSA, the ECB will have many of the regulatory, supervisory, investigatory and administrative powers that the MFSA currently has; these include the power to investigate, inspect and issue fines, as well as the power to intervene and take remedial action (for example, when a bank is in breach of its capital requirements).

The ECB, which will take over these tasks and powers from early November 2014, will have to ensure there is property separation between its roles of being responsible for the monetary system and for prudential review.

It is anticipated that there will be an increase in supervisory fees, as local banks would be required to pay fees to both of the ECB and the MFSA. During the initial stages of the transfer of powers, the ECB will have a demanding task on its hands as it would suddenly be responsible for the prudential supervision of all eurozone banks; it will require a substantial increase in its staff and their training and expertise, and there are questions as to whether it will be able to handle the increase in work-load immediately. In this regard, it has been reported that Madame Daniele Nouy, who will be at the helm of the ECB, will be hiring 1,000 bank supervisors and support staff for this purpose.

In the meantime the Commission and the EBA continue to move towards achieving a genuine single rule book which will be applicable to all EEA banks (not just eurozone banks). Such a rule-book may also be complemented by possible changes to the Deposit Guarantee Scheme Directive and the proposed Recovery and Resolution Directive, which would grant the ECB further powers and tasks in relation to the prudential supervision of all banks within the eurozone member states and will represent a further change to the supervision of EEA banks and to the banking union landscape.

We are actively monitoring developments in this area and we hope to keep you updated along the way.