The European Central Bank (ECB) has published a letter that it has sent to Sven Giegold MEP. The letter provides an overview of how the principle of proportionality is applied in the Single Supervisory Mechanism (SSM).

Key points in the letter include:

  • one of the main objectives of the ECB in its supervisory capacity is to ensure consistent supervision of financial institutions throughout the SSM. Consistency in this sense does not mean “one-size-fits-all” supervision, but rather that supervisory activities and their scope and intensity need to be commensurate to the circumstances of the supervised credit institutions;
  • the principle of proportionality applies to all EU acts as well as the institutions of the EU and provides that “the content and form of EU action shall not exceed what is necessary to achieve the objectives of the Treaty”;
  • the Regulation on the SSM calls for an application of the principle of proportionality by the ECB in its supervisory approach;
  • when discussing proportionality in the SSM framework the ECB states that the principle of proportionality also guides the SSM beyond its day-to-day supervisory work. For instance, in developing the reporting requirements imposed on credit institutions regarding supervisory financial information, as well as in designing its methodology on the calculation of supervisory fees to be levied on supervised entities;
  • when discussing the application of the principle of proportionality to the direct supervision of significant institutions (SIs) the ECB sets out certain examples that demonstrate how the proportionality principle is applied. In particular, the ECB notes that applying proportionality means that supervisory practices must be commensurate not only with the systemic importance (which is reflected in the minimum levels of supervisory activities), but also with the individual risk profile of each credit institution under supervision. Accordingly, the intensity of the ECB’s supervision varies across credit institutions, with a stronger focus on institutions with a higher risk profile, on the largest and more complex systemic groups and on the more relevant subsidiaries within an SI banking group. This is consistent with the SSM’s risk-based and consolidated supervisory approach;
  • when discussing proportionality in the SSM’s approach to the oversight of less significant institutions (LSIs) the ECB notes that it exercises oversight over the supervision that is conducted by national competent authorities (NCAs). The ECB applies proportionality both in its own oversight activities as well as in the guidance that it develops for NCAs for their day-to-day supervisory activities. This guidance takes the form of supervisory standards to be applied consistently by NCAs and which ensure that they apply proportionality in the intensity of their supervision and in their risk and capital adequacy assessment; and
  • the main tool used by the ECB to ensure that it performs its oversight over the NCA’s supervision in a proportionate manner is the assignment of priority ranks to LSIs. The ECB has categorised LSIs as high, medium or low priority. This categorisation is subject to an annual review in cooperation with the NCAs. The prioritisation of the LSIs is based on, first, the impact of the LSI on its domestic financial system and, second, the intrinsic riskiness of the LSI. Therefore, higher riskiness and a bigger potential impact on the financial system require more intensive supervisory attention to the respective LSI. The ECB uses this prioritisation of LSIs to apply the principle of proportionality in a number of its oversight tasks including the development of supervisory standards and policies for LSI supervision, or in relation to notifications and reports from NCAs on the performance of their supervisory tasks and the oversight of individual LSIs.

View The principle of proportionality: application in the Single Supervisory Mechanism, 2 October 2015