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A vital goal of the European integration process is to make the EU-wide financial system more efficient. To ensure the financial system orderly functioning and stability, the European Banking Authority, EBA is monitoring and analyzing risks and vulnerabilities relevant to the regulations for banks, investment companies and firms. EBA also facilitates information sharing among authorities and institutions through supervisory reporting and data disclosure as part of the banking union.
Background
There is a so-called “single supervisory mechanism” SSM among the EU-27, which serves as a “pillar” in the EU banking union. Under the SSM, the European Central Bank, ECB performs as the central prudential supervisor of the EU-wide financial institutions, both in the euro-zone area and in non-euro EU countries that have joined the SSM. The ECB directly supervises the largest banks, while national supervisors continue to monitor the remaining banks.
The ECB and the national supervisors work closely together in order to: a) to check that banks comply with the EU banking rules and b) to “tackle problems” on an early stage.
The SSM was established in November 2013 as a key first step towards a new EU “sub-banking union” to ensure high-quality supervision of credit institutions in the EU, implement the EU’s policy on prudential supervision of credit institutions and to apply the single rulebook consistently. The SSM was conceived as an integrated architecture combining the ECB (as a supranational authority) and national competent authorities (NCAs) in the member states (both in the euro area and those with close cooperation agreement with the ECB).
The first SSM report was completed and published during 2017; the second review was prepared in April 2023. The second one concluded that the SSM had become a “mature, established supervisory authority that delivers on the set out objectives”, it helped to ensure that the “banks were well prepared and capitalised for economic and financial crises” and provided “good quality and proactive banking supervision, rapidly adapting to supervisory challenges”.
Source and citations from the Commission’s report (2023): https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52023DC0212
Towards efficient banking union
The EBA contributes to the single set of the EU-wide rules that lay down the banks activities and ensure consistent supervision of the banks. These rules are written with two main goals in mind: a) to foster the single market, with a level playing field and the possibility of providing services across the EU, and b) creating the so-called “prudential rules”, which aim to make sure the rules are written in a way that ensures banks operate in a prudent manner, i.e. providing proper services to customers, while operating those services in a way that both ensures financial stability and satisfies the needs of the customers in areas such as prevention of fraud, prevention of crime and anti-money laundering.
More on prudential rules in: https://finance.ec.europa.eu/banking/banking-regulation/prudential-requirements_en
There is also an issue of safety and security in payments: i.e. innovations in the payment system shall be properly regulated to make sure they are carried out in a safe way. As to the citizens, the EBA “cooperates” in such areas are lending, providing other monetary and cash-related activities, while at the same time providing services that are more related to hedging, and/or covering the risks of financial products.
Reference to an interview with José Manuel Campa, who has been heading EBA since March 2019, in: https://finance.ec.europa.eu/news/jose-manuel-campa-2024-06-03_en
Dealing with potential crises: lessons learned
The EBA’s authorities underlined that “currently the banking sector is in good shape, i.e. in terms of capital and liquidity levels, as well as in terms of asset quality and governance”. Thus, every two years, the EBA performs stress tests of the banks for which the authority has head “unlikely but possible negative scenario” to test the banks’ performance: the latest test was done in July 2023, and the next one will be done in the first half of 2025. The outcome of the July 2023 stress test was positive, i.e. despite adverse scenario banks were able to continue providing adequate credits to national economies.
As to some recently banking turmoil in some developed countries (e.g. in the US and Switzerland), the EU banks were isolated from those events and there was not really any significant turbulence in the European banking sector. The lessons learned were such that: first, there were obvious weaknesses in the governance of the banks that were affected; second, there were weaknesses and delays in supervision by the authorities. In the latter, the EBA has been “enhancing activity” in the banking union during the last decade by creating the SSM with the ECB at the core of that mechanism.
The third lesson was that rules were not applied in the same way across all banks world-wide: in some states (particularly in the US), weaker regulations were being applied; however in the EU, the EBA applies the same rules to all institutions.
In the perspective, the EBA has to be “more vigilant” to avoid possible risks: i.e. geopolitical tensions represent major sources of risks in a number of different areas. For example, cyber attacks, as well as possible fragmentation of world economic activity, could affect the “evolution of the EU’s integrated financial markets”.
Digitalization in the banking sector
Digitalization and technological development are already heavily impacting the EU banking sector in numerous ways: e.g. cyber resilience and cybersecurity, both introducing new ways for banks to operate and manage possible risks. The EBA has to make sure that banks’ resilience remains robust with the needed digital operational security.
Another key area is innovation: new technologies are bringing new products and new financial management, which provide for new approaches for the financial sector and for regulators. Therefore, the sector shall better use the innovations, e.g. restructuring management, reinvent processes, produce new products, provide customers with better services, etc.
From the regulatory point of view, the risks shall be properly managed to avoid systemic risk or unintended negative consequences. However, regulators have to be careful and remain neutral when it comes to the introduction of technology: e.g. in making rules, the regulators are not supposed (implicitly or explicitly) favour one technology over another or one player over another; it also includes both established financial companies and the newcomers that are disrupting the industry. For example, in advanced technologies like artificial intelligence and machine learning, over 70 percent of the banks in EU were exploring the ways in which these technologies will be introduced.
Implementing Basel-III rules
The Basel III rules were developed as a response to the global financial crisis of 2008-2010 – so these rules are addressing an issue that was identified already 15 years ago. They have been implemented in different stages, and the EBA is now in the final phase. This set of rules has already been approved during 2019 by the EU co-legislators in level one under the Capital Requirement Regulation, CRR and the Capital Requirement Directive, CRD. These rules have introduced the Basel-III international standards into the EU law.
On CRR in consolidated version: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02019R0876-20200627
On CRD in: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019L0878
The second level of Basel-III legislation will be developed over the next three or four years and it is in the EU interest to finalize the implementation of the international standards.
At the same time, these rules shall be implemented worldwide in a coordinated and timely manner given the importance of having an international level playing field with a continued monitoring of all effects. The EBA is going to work on this roadmap over the next three or four years, and this will result in a more coherent set of rules that will give the member states a more robust banking sector able to provide services to citizens and preserving financial stability.
Environmental, social and governance criteria in banks
The EU-wide regulatory framework is actually presently mainly focusing on the environmental, social and governance criteria. ESG in the financial sector: the EBA has realized a clear need for introducing “consistent measures” in sustainable economic activity and the effects on climate change and environmental quality. The EBA suggested using tangible metrics and actions based on information disclosure in provision of services, particularly, with the ESG disclosures; the actions are for instance dealing with managing the risks, at least from the financial perspective.
The EBA has developed its own ESG and climate-related commitments; the authority has also improved the metrics and measuring the rules’ impact.
More on the EU’s “financial future” can be found in the Commission’s website, including such issues as the EU-wide financial institutions and capital markets, digital and sustainable finance, anti-money laundering and sanctions, etc. in:
https://finance.ec.europa.eu/eu-finance-podcast-future-finance_en