Mr. Aidan Carrigan:

I thank the Chairman and the committee for the invitation to brief it today on the European Commission's legislative proposals to bring about a single supervisory mechanism, which constitutes a key element of the proposed banking union for Europe. I am accompanied today by colleagues from the Department of Finance and the Central Bank.

As the committee is aware, the single supervisory mechanism constitutes two regulations which were published by the European Commission on 12 September 2012. Taken together, the regulations will introduce the first stage of the banking union, the single supervisory mechanism, SSM. The remaining elements are the completion of CRD IV – the Basel III capital requirements for banks, the common deposit insurance and a common resolution framework, to which I will return later.

The two proposals before the committee which we are discussing today are a proposal for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions - the ECB proposal; and a proposal for a regulation of the European Parliament and the Council amending Regulation (EC) No.1093/2010 establishing a European supervisory authority - the European Banking Authority - the EBA proposal. The Commission also issued a communication to the European Parliament and the Council, A Roadmap towards a Banking Union (COM 510) on 12 September. The communication sets the single supervisory mechanism in context and indicates further work towards a banking union beyond these first proposals.

The ECB proposal aims to introduce a new single supervisory mechanism, SSM, within which the ECB and national competent authorities, NCAs, will co-operate. Under the proposal, the ECB will have responsibility for the supervision of credit institutions in the euro-area member states and, with a view to maintaining and deepening the Internal Market, member states whose currencies are not the euro will have the right to opt into the SSM. The EBA proposal aims to introduce the necessary changes to the 2010 EBA regulation in order to ensure decision-making structures continue to be balanced and effective and preserve the interests of all its members. That will assist in avoiding fragmentation of the Internal Market following the establishment of the SSM. The banking union will be complete when the single supervisory mechanism is joined with European bank resolution and deposit guarantee mechanisms. The completion of CRD IV will be also an important element in that regard.

I propose to take a few minutes to set out the main elements of the ECB regulation under the proposal as published by the Commission in September, which is the subject matter of today's discussion. The main elements were the conferral on the ECB of specific tasks and policies relating to the prudential supervision of all euro area credit institutions.

The main elements were, as follows. The conferral on the ECB of specific tasks and policies relating to the prudential supervision of all euro area credit institutions. The ECB would have exclusive competence for a list of prudential supervisory tasks, including authorisation and licensing. The ECB, with the support of the national supervisors, would form the single supervisory mechanism. National supervisors would assist the ECB and comply with its instructions. National supervisors would remain responsible for supervisory tasks not transferred to the ECB, such as supervision of third country branches, supervision of payment services, on-site verifications, implementing guidance or regulations issued by the ECB, and anti-money laundering prevention. It would have explicit and significant responsibility to safeguard financial stability in the EU. The ECB would be responsible for co-ordinating the position of the competent authorities of participating member states in EBA decision-making contexts. There would be a full separation between the ECB's role in monetary policy and the exercise of supervisory functions. A supervisory board encompassing the specific expertise of national supervisors would be set up to achieve this. The ECB governing council would remain ultimately responsible for supervisory decision-making, with the supervisory board carrying out clearly defined tasks and related decisions. Any non-euro area member state and the ECB could enter into close co-operation. The ECB would then carry out its supervisory tasks in relation to credit institutions established in that non-euro member state. The ECB would be required to act independently in carrying out supervisory functions. It would be accountable to the EU Parliament and to the Council. While the ECB would start supervisory tasks as soon as possible, implementation would be on a phased-in basis.

Accompanying the ECB regulation was the EBA regulation, which is the second element of the single supervisory mechanism proposals. It is the proposed regulation amending the existing regulation establishing the European Banking Authority.

From January 2011, the regulation of financial services across Europe has been overseen by the European Supervisory Authorities, ESAs. There are three European supervisory authorities: the European Banking Authority, EBA; the European Securities and Markets Authority, ESMA; and the European Insurance and Occupational Pensions Authority, EIOPA. The EBA is the regulatory agency tasked with improving co-operation between national supervisors and continuing the development of a single rule-book for financial services in the EU.

The main amendments to the EBA regulation under the Commission's proposal, as published in September, were as follows. In imposing a binding decision to resolve disagreement between supervisors or to require action in an emergency situation, the EBA could request the ECB to follow its decision but could not require the ECB to do so. Where the ECB did not comply, it would have to provide adequate justification for non-compliance. There would be given to an independent panel dealing with the EBA, powers concerning breaches of EU law and the settlement of disagreements between national supervisors. It was proposed that a three-person panel would be required to include at least one member from a non-participating member state. The EBA management board would be required to include at least two representatives from member states not participating in the single supervisory mechanism. EBA voting on decisions relating to regulatory matters would continue to be based on qualified majority voting but with certain safeguards for non-euro member states.
That is a description of the proposal as presented in September.

Following the publication of the proposals, the European Council set up an ad hoc working party. In view of the importance of the proposals and their complexity, officials and experts from each member state came together to examine the proposals. The ad hoc working party met eight times between late September and early December. The negotiations allowed the Presidency to submit to ECOFIN ministers compromise draft texts on both regulations for final political agreement. The committee might note that, judging by the way the Council works, this was an exceptional measure. It involved a considerable commitment to these regulations and reflected the priority given at EU level to drawing a conclusion as soon as possible.

Arising from the work of that group, on 12 December, ECOFIN finance ministers reached a Council general agreement on the ECB and EBA regulations. As part of the council deliberations the text was amended to take on board the concerns of member states, so there has been considerable amendment to the original proposals as I have just outlined.

As EU President from 1 January, Ireland will now be tasked to represent the Council position in trialogue negotiations with the European Parliament. I will now briefly describe the current agreed proposal by the ECOFIN ministers.

Chapter I, articles 1 and 2, deals with subject matter, scope, and definitions. Chapter II deals with co-operation and tasks, and comprises articles 3 to 7. These are some of the important provisions of the regulation. Article 3 ensures the ECB and national supervisors co-operate closely in pursuit of high supervisory standards and that the ECB co-operates with the European Financial Stability Facility, EFSF, and the European Stability Mechanism, ESM. Article 4 provides for the tasks conferred on the ECB. Article 5 establishes the criteria by which the ECB will determine which credit institutions it will supervise directly and those where it will rely on national supervisors to implement the supervisory guidelines and instructions of the ECB.

The criteria for this assessment are based on an assets on balance-sheet threshold of €30 billion or an assets-to-GDP ratio of 20%. It is important to keep in mind that the ECB will exercise oversight over the functioning of the entire system and will retain the right to intervene to supervise directly any credit institution in any participating member state where it considers it to be necessary.

Article 6 provides for non euro-area member states to enter into a close co-operation with the ECB to join the SSM. It provides for circumstances where one of these objects to a decision of the governing council of the ECB. Chapter III deals with powers of the ECB, and comprises articles 8 to 15. The ECB can, within the SSM, direct national supervisors to take action.

Under article 9, the ECB has rights to information from legal and natural persons, and provides for the sharing of this information with the national supervisors. The ECB, supported by national supervisors, as the case may be, can conduct on-site investigations. Article 13 provides for specific powers relating to authorisations and article 15 allows for the ECB to issue administrative sanctions.

Chapter IV deals with organisational principles and comprises articles 16 to 25. Article 16 confirms the independence of the ECB and the supervisory board. Article 17 makes the ECB accountable to the European Parliament and to the Council. Significantly, it includes a separate provision allowing for national parliaments to ask questions of the ECB and to invite the chair of the supervisory board to participate in an exchange of views. National supervisors will continue to be accountable to national parliaments. Furthermore, article 17 requires the ECB to prepare reports on the execution of tasks under the regulation. Article 18 ensures the operation of ECB monetary policy is separate from supervisory policy.

The supervisory board of the SSM is created under article 19. It will be composed of members of the ECB and the national competent authority from each participating member state. In most cases, the supervisory board will take decisions on the basis of one member, one vote. A steering committee of the supervisory board will be appointed on a rotational basis to support the work of the supervisory board. Article 24 allows the ECB to levy fees on the supervised entities in relation to the costs incurred by it in the operation of tasks conferred upon the ECB by the regulation.

Chapter V deals with general and final provisions, and comprises articles 26 to 28. The ECB will assume its full tasks under the regulation on 1 March 2014, or 12 months from the date the regulation enters into force. In the transitional period from when the regulation enters into force and the ECB assumes its full tasks, the ECB is required to prepare a quarterly report on the implementation of the regulation for the European Parliament, the Council and the Commission. During this transitional period, the ECB will retain the right to assume the supervision of any credit institution in a participating member state where it considers it necessary, or if the ESM requests that it do so, as a precondition for direct recapitalisation by the ESM.

Article 26 provides for a review at the end of 2015, which will be repeated every three years thereafter.

As regards the EBA amending regulation, the main change from September is that additional safeguards are given to member states who are not participating in the SSM in relation to decision making in the EBA. Decisions on regulatory matters will continue to be made by qualified majority voting, QMV. However, it will have an additional safeguard in that decisions will be deemed adopted only if they are supported by a simple majority of member states participating in the SSM and a simple majority of non-participating member states.

When decisions are taking on a breach of law or binding mediation, an independent panel will be established to prepare the relevant decisions. Each such panel will consist of a chairperson, three representatives from participating member states and three representatives from non-participating member states. Decisions of a panel will be taken by simple majority. Where a panel proposes a decision to the board of supervisors, the board will adopt it by a simple majority of participating member states and a simple majority of non-participating member states.

The SSM is the first element of the package of banking union measures. It is necessary to conclude as a matter of priority discussions on the remaining elements. The December European Council conclusions call on co-legislators to agree proposals for a recovery and resolution directive and deposit guarantee scheme prior to June 2013. A more harmonised deposit guarantee mechanism would contribute to a more complete banking union. Its absence has increased the cost of bank failures to taxpayers and complicated their handling. The Commission's recent proposals on a bank recovery and resolution mechanism represent an important first step towards an efficient, financially sound, Europe-wide bank resolution regime. They aim to provide a harmonised toolbox at EU level. To overcome the challenges surrounding the orderly resolution of cross-border institutions an independent resolution authority will be required to exercise independently the bank resolution function across the eurozone. Heads of state and the Commission have indicated their commitment to bring forward proposals on such a resolution function mechanism.

Members will be aware that the capital requirements regulations and directive are currently under discussion in the trilogue negotiations in the Commission and European Parliament. The package known as CRD4 aims to strengthen the effectiveness of the regulation of credit institutions and investment firms and to enhance financial stability. The proposals aim to transpose the agreement reached by the Basel committee on banking supervision as endorsed by G20 leaders. Ireland has taken over from the Cypriot Presidency of the EU and it is our intention to complete negotiations under this file. We have commenced initial discussions with Council, Parliament and the Commission and early indications are that all parties will enhance their co-operation with a view to reaching an early agreement with the European Parliament. CRD4 is seen as important to a single supervisory mechanism which provides common standards to be applied across the single supervisory mechanism area. Under the EBA proposal the Presidency has commenced trilogue negotiations with the European Parliament. The ECB proposal will be decided according to the procedure set out in Article 127(6) of the Treaty which requires consultation with the European Parliament only, however both regulations will be considered as a package in the negotiations with that body.

Ireland's Presidency will give priority to the banking union package to ensure the remaining pillars, CRD4 and harmonised resolution and deposit are put in place as soon as possible to complement the single supervisory mechanism. As President of the Council, Ireland will be required to reflect the views of all member states in concluding negotiations and will act as an honest broker while having due regard to national considerations. I am happy to take questions or clarify anything.