The approaching Brexit and the different measures taken by supervisory authorities over the past two years have reminded us of the importance of cooperation between supervisory authorities to ensure financial stability. In this context, on March 20, the European Banking Authority announced that it had agreed on the general characteristics that MoUs (memoranda of understanding) relating to cooperation in banking supervision and information exchange signed by EU and UK supervisors must have.
Beyond Brexit, the existence of this type of MoU with authorities from third countries (outside the EU) where our banks provide their services has always been very important. On the one hand, to ensure adequate cooperation and coordination in the supervision of banks; on the other, to provide legal certainty to banks regarding how supervisory functions are divided between local and home authorities and what type of information can be shared with each.
Last November marked the fourth anniversary of the full entry into force of the Single Supervisory Mechanism (SSM), one of the three pillars of the European Banking Union. This has meant the transfer of supervisory powers over credit institutions from national banking authorities to the European Central Bank (ECB), which since then has consolidated prudential supervisory powers for all eurozone countries.
The SSM is composed of the ECB and national supervisors (in Spain’s case, the Bank of Spain) who work together on prudential supervisory functions with the main objective of ensuring consistent, harmonized, and high-quality supervision.
One of the difficulties the SSM has had to face has been the need to establish common processes among this network of European national supervisors. Four years after its creation and following significant efforts by the authorities and supervised entities, the SSM functions as a single authority. However, regarding relations between supervisory authorities in third countries, the SSM’s progress has been less ambitious.
When expanding internationally, larger Spanish banks have followed a similar pattern based largely on the acquisition of local entities that have been provided, always under the close monitoring of the Spanish parent company, with a high degree of autonomy. This decentralized management model has traditionally been supported by the Bank of Spain despite the costs it entails for banks. One of its advantages is that, in situations of instability in any of the markets where the banking group is present, it is possible to financially isolate the other parts of the group so they are not affected. In other words, this model acts as a crisis firewall.
On the other hand, supervisory activities are carried out on a consolidated basis. This means that the supervisor needs to know all the risks of a banking group, those located in the European Union and those arising in other jurisdictions, to have an overall view. To understand these risks, the group supervisor needs access to information from subsidiaries; in some cases, the local legal framework of the subsidiary’s jurisdiction establishes limitations regarding, for example, the possibility of sharing information with authorities from other countries.
The existence of MoUs partially resolves this limitation, as they establish the rules for an authority to carry out its supervisory tasks in countries other than its own.
Since the entry into force of the SSM, the ECB has been in a process of analyzing and updating the different MoUs signed between national supervisors and authorities in third countries where European banks have subsidiaries. However, this process is taking longer than expected.
In some cases, the SSM supervises risks in third countries relying on the MoUs that national authorities signed in the past. This creates legal uncertainties for banks that, on the one hand, are obliged to share information with the SSM to comply with its requirements and, on the other, face certain legal limitations when sharing information with foreign authorities.
The signing of MoUs is a short-term priority for banks with international activity. It would provide the SSM with all the necessary tools for the proper analysis of the risks of European banking groups and would allow entities to have a certain legal framework when sharing information with all the authorities responsible for their supervision.
Pedro Cadarso Palomeque, Public Policy Advisor at the Spanish Banking Association
