European banking supervision taking shape, say EU Auditors
2 Jul 2014 10:38 AM
A report published
by the European Court of Auditors reveals that the Commission’s reform of
banking sector legislation and the creation of the European Banking Authority
were important first steps in response to the financial crisis. However,
shortcomings were identified in cross-border banking supervision, the
assessment of the resilience of EU banks, and the promotion of consumer
protection.
“The
financial crisis sent shockwaves throughout the EU’s banking sector,
resulting in the economic and sovereign debt crisis, and the EU acted to
stabilise it”, stated Mr Milan Martin Cvikl, the
ECA Member responsible for the report, “However, the
European Banking Authority lacks the authority to make or enforce decisions on
supervisory convergence and had a limited legal mandate and staff to conduct
the 2011 stress tests. Now, with the agreement on the single
supervisory mechanism and other elements of the banking union further important
activities are underway.”
In response to the financial and
economic crisis, emergency action was taken in a bid to restore confidence
in financial institutions, followed later by regulatory and supervisory
reforms. The Court reviewed this focussing on the period 2011 to early
2013. It found that the Commission and the European Banking Authority reacted
to the financial crisis with a broad regulatory agenda. However there was
limited time for stakeholder consultation and there was no cross-sectoral
impact assessment.
The European Banking Authority
contributed to improving the cross-border supervision of banks as a facilitator
and coordinator of the work of national supervisory authorities. However the
day-to-day supervision of banks was carried out by national supervisory
authorities, and the European Banking Authority did not have direct access to
financial institutions. Supervisory convergence through the colleges of
supervisors was limited, and colleges spent too much time discussing procedures
rather than focusing on risks. The European Banking Authority lacks the
authority to make or enforce decisions on supervisory convergence and to
resolve disputes between NSAs.
The European Banking Authority
had a limited legal mandate and staff to conduct the 2011 stress tests which
were conducted without financial ‘back stop’ measures at EU level.
Although stress tests were helpful in initiating the recapitalisation of a
large number of banks, they revealed the limitations of such exercises when not
combined with an assessment of the quality of the asset
portfolio.
The EU auditors put forward a
set of recommendations aimed to increase the effectiveness of the colleges of
supervisors, reliability of bank stress tests and to ensure a successful
banking union and effective banking supervision.
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Notes to the
editors:
European Court of Auditors (ECA)
special reports are published throughout the year, presenting the results of
selected audits of specific EU budgetary areas or management
topics.
This special report (No 5/2014)
entitled “European banking supervision taking shape - EBA
and its changing context” assessed whether the Commission
and the European Banking Authority (EBA) had satisfactorily carried out their
responsibilities in setting up the new arrangements for the regulation and
supervision system of the banking sector and to examine how successfully those
new arrangements were functioning.
The ECA found that the
Commission and EBA reacted to the financial crisis with a broad regulatory
agenda. The Commission has in general been timely when drafting banking
sector legislation. However, the strict deadlines stemming from global
agreements in G20 and the Basel Committee, and the delays in political
negotiations, have reduced the time available for external stakeholders to
provide input through public consultation. Furthermore, it has resulted in
short deadlines for EBA to draft technical standards and EBA has not been able
to comment on the mandates and timeliness in the legislative process in a
systematic fashion. Although many legislative proposals have been made in
recent years (and others are currently in preparation) there has been no
cross-sectoral assessment of the impact of the whole package of
proposals
EBA has contributed to improving
the cross-border supervision of banks as a facilitator and coordinator of the
work of national supervisory authorities (NSAs). However, its role in banking
supervision tasks has been limited in many areas. The day-to-day supervision of
banks remains in the remit of the NSAs, and EBA does not carry out direct
supervision of financial institutions. Supervisory convergence through the
colleges of supervisors is limited, and these colleges spent too much time
discussing procedures rather than focusing on risks.
EBA lacks the authority to make
or enforce decisions on supervisory convergence and to resolve disputes between
NSAs. Although EBA has made significant efforts to resolve disputes between
NSAs, it has limited legal powers in mediation. EBA had the role of
facilitating and coordinating the 2011 stress test, but it had neither the
staff nor the necessary mandate to ensure the reliability of the stress test
exercise. In addition, the stress test was conducted without financial
‘back stop’ measures at EU level. Although the 2011 stress test was
helpful in initiating the recapitalisation of a large number of banks, it has
also revealed the limitations of such exercises when not combined with an
assessment of asset portfolio quality.
From autumn 2014, the European
Central Bank (ECB) will have the authority to supervise the banking sector in
all the euro-area Member States and other Member States that wish to
participate. This Single Supervisory Mechanism (SSM) will involve cooperation
between the ECB and the NSAs, where the ECB will be responsible for the overall
functioning of the SSM. In its regulatory role, EBA has a mandate to
develop technical standards and could usefully use its expert knowledge to
continue in this task. However, questions arise over its future role in the
supervision of banks, as its role is limited to coordinating and facilitating
NSAs work and it lacks the power to impose specific decisions on NSAs. As a
consequence, there is a risk of uncertainty over roles and responsibilities and
of overlap between EBA and the ECB.
Among the set of
recommendations, the ECA considers that successful EU-wide banking supervision
requires a clear division of roles and accountability between EBA, the ECB and
the NSAs, both those in and those outside the SSM. To avoid the risk of
overlapping tasks and unclear responsibilities in some areas between the ECB,
NSAs and EBA, the EU auditors recommend that roles and responsibilities be
further clarified in legislation or memoranda of understanding. The ECA also
recommends that procedures be set up to ensure close and frequent cooperation
and information exchange between the different bodies and that particular
attention should be paid to the period of transition before the SSM is fully
established.
A short video interview with the
ECA Member responsible for the report is available at:
https://www.youtube.com/user/EUAuditorsECA