The Single Supervisory Mechanism (SSM) is the first pillar of the European banking union and is the legislative and institutional framework that grants the European Central Bank (ECB) a leading supervisory role over banks in the EU. The ECB directly supervises the larger banks while it does it indirectly for the smaller ones. Eurozone countries are required to participate, while participation is voluntary for non-eurozone EU member states. In October 2020, two non-Eurozone countries joined the European banking supervision mechanism through a process known as close cooperation: Bulgaria and Croatia. As of early 2021, the SSM directly supervises 115 banks across the Union, representing almost 82% of banking assets of these countries. The SSM, along with the Single Resolution Mechanism are the two central components of the European banking union.
Genesis
The question of supervising the European banking system arose long before the financial crisis of 2007-2008. Shortly after the creation of the monetary union in 1999, a number of observers and policy-makers warned that the new monetary architecture would be incomplete, and therefore fragile, without at least some coordination of supervisory policies among euro members.
The first supervisory measure put in place at the EU level was the creation of the Lamfalussy Process in March 2001. It involved the creation of a number of committees in charge of overseeing regulations in the financial sector. The primary goal of these committees was to accelerate the integration of the EU securities market.
This approach was not binding for the European banking sector and had therefore little influence on the supervision of European banks. This can be explained by the fact that the European treaties did not allow the EU, at the time, to have real decision-making power on these matters. The idea of having to modify the treaties and of engaging in a vast debate on the Member States’ loss of sovereignty cooled down the ambitions of the Lamfalussy process. The financial and economic crisis of 2008 and its consequences in the European Union incentivized European leaders to adopt a supranational mechanism of banking supervision.
The main objective of the new supervisory mechanism was to restore confidence in financial markets. The idea was also to avoid having to bail out banks with public money in case of future economic crises.
To implement this new system of supervision, the President of the European Commission in 2008, José Manuel Barroso, asked a working group of the think tank Eurofi to look at how the EU could best regulate the European banking market. This group was led by Jacques de Larosière, a French senior officer who held, until 1978, the position of Director General of the Treasury in France. He was also President of the International Monetary Fund from 1978 to 1987, President of the “Banque de France” from 1987 to 1993 and President of the European Bank for Reconstruction and Development from 1993. On a more controversial stance, Jacques de Larosière has also been a close advisor of BNP Paribas.
This group led by de Larosière delivered a report highlighting the major failure of European banking supervision pre-2008. Based on this report, the European institutions have set up in 2011 “The European System of Financial Supervision” (ESFS). Its primary objective was: "to ensure that the rules applicable to the financial sector are adequately implemented, to preserve financial stability and ensure confidence in the financial system as a whole”. The ESFC brought together, in an unconventional manner, the European and the national supervisory authorities.
Despite the creation of this new mechanism, the European Commission considered that, having a single currency, the EU needed to go further in the integration of its banking supervision practices. The idea was that the mere collaboration of national and European supervisory authorities was not enough and that the EU needed a single supervisory authority. The European Commission therefore suggested the creation of the Single Supervisory Mechanism.
This proposal was debated at the Eurozone summit that took place in Brussels on the 28th and 29th of June 2012. Herman Van Rompuy, who was President of the European Council at the time, had worked upstream with the President of the Commission, the President of the Central Bank and of the Eurogroup on a preliminary report used as a basis for discussions at the summit. In compliance with the decisions made then, the European Commission published a proposal for a Council Regulation establishing the SSM in September 2012.