The need for a banking union emerged from the financial crisis of 2008 and the subsequent sovereign debt crisis. In response to this, the European Commission pursued a number of initiatives to create a safer financial sector for the single market. These initiatives form a single rulebook for all financial actors in the 28 EU countries. They include:
- stronger prudential requirements for banks;
- improved protection for depositors (such as the harmonisation and simplification of protected deposits, faster pay-outs and improved financing, notably through the ex-ante funding of deposit guarantee schemes paid for by contributions from banks and a mandatory borrowing facility between national schemes within certain fixed limits);
- rules for managing failing banks.
This single rulebook is the foundation for the banking union. In fact, a banking union based on three pillars was created to place the banking sector on a more sound footing and restore confidence in the Euro as part of a longer term vision for economic and fiscal integration. Shifting the supervision of banks to the European level was a key part of this process and besides integrated bank crisis management will subsequently be combined with other steps such as a common system for deposit protection. The purpose of the banking union is to make European banking:
- more transparent – by consistently applying common rules and administrative standards for supervision, recovery and resolution of banks;
- unified – by treating national and cross-border banking activities equally and by delinking the financial health of banks from the countries in which they are located;
- safer – by intervening early if banks face problems in order to help prevent them from failing, and – if necessary – by resolving banks efficiently.
The first two pillars of the banking union – the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) – are now in place and fully operational. However, a common system for deposit protection has not yet been established and further measures are needed to tackle the remaining risks of the banking sector within Europe.
Single Supervisory Mechanism
The SSM refers to the system of banking supervision in Europe. It comprises the ECB and the national supervisory authorities of the participating countries which, in Malta’s case, is the MFSA.
The SSM’s main aims are to:
- ensure the safety and soundness of the European banking system
- increase financial integration and stability
- ensure consistent supervision
The ECB directly supervises the 117 “significant banks” of the participating countries. These banks hold almost 82% of banking assets in the euro area. Ongoing supervision of the significant banks is carried out by Joint Supervisory Teams (JSTs). Each significant bank has a dedicated JST, comprising staff of the ECB and the national supervisors. In Malta, three of the MBA’s members are designated as significant banks. These are:
- Bank of Valletta p.l.c.
- HSBC Bank Malta p.l.c.
- MeDirect Bank (Malta) p.lc.
Banks that are not considered significant are known as “less significant” institutions. In this case they continue to be supervised by their national supervisors, in our case the MFSA, in close cooperation with the ECB. At any time the ECB can decide to directly supervise any one of these banks to ensure that high supervisory standards are applied consistently.
Single Resolution Mechanism (SRM)
Resolution is the restructuring of a bank by a resolution authority through the use of resolution tools in order to safeguard public interests, including the continuity of the bank’s critical functions, financial stability and minimal costs to taxpayers.
The main purpose of the SRM is to ensure the efficient resolution of failing banks with minimal costs for taxpayers and to the real economy. The Single Resolution Board (SRB) is the central resolution authority within the Banking Union and will ensure swift decision-making procedures, allowing a bank to be resolved over a weekend. Thus the SRB together with the National Resolution Authorities (NRAs) of participating Member States, form the SRM. As a supervisor, the ECB has an important role to play in deciding whether a bank is failing or likely to fail. A Single Resolution Fund, financed by contributions from banks, will be available to pay for resolution measures.
The SRB works closely with the NRAs, the European Commission, the ECB, the European Banking Authority (EBA) and national competent authorities, in our case the MFSA.
Resolution Authority and Resolution Committee
Within the local context the Resolution Authority is the NRA, whose composition, powers and functions are governed by provisions set out in the First Schedule to the MFSA Act and the Recovery and Resolution Regulations (RRR). The Resolution Committee is appointed by the Resolution Authority and in this respect the Resolution Authority has assigned all its powers to the Resolution Committee which has all the necessary powers in order to carry out its functions. The Resolution Committee is ultimately responsible for taking resolution decisions pursuant to the MFSA Act and the RRR. The Resolution Committee also interacts and collaborates closely with the SRB which is responsible for resolution matters at Banking Union level as established in the SRM Regulation.
The Resolution Authority and the Resolution Committee operate independently from each other and from the supervisory arm of the MFSA to ensure that the statutory responsibilities are achieved in a transparent and credible way and be in line with the provisions of the Banking Recovery and Resolution Directive.