ECB assumes role of euro zone banking watchdog

The European Central Bank today assumed the role of Europe's banking watchdog, directly overseeing the euro zone's 120 largest banks, which make up 82 per cent of total banking assets in the single currency area.

The ECB assumed its role as Europe's banking watchdog under a new system called the Single Supervisory Mechanism (SSM), which comprises the ECB and the national supervisory authorities of the participating countries.

It aims at ensuring the safety and soundness of the European banking system, increase financial integration and stability and ensure consistent supervision.

The SSM, which will work in tandem with the single banking rule and the single resolution mechanism, will shore up the financial system to ward off another euro-threatening crisis.

The ECB, in cooperation with the national supervisors, will be responsible for the effective and consistent functioning of the SSM. It will have the authority to conduct supervisory reviews, on-site inspections and investigations, grant or withdraw banking licences, assess banks' acquisition and disposal of qualifying holdings, ensure compliance with EU prudential rules and set higher capital requirements (buffers) in order to counter any financial risks.

Around 3,500 "less significant" banks will continue to be monitored by the national authorities of the individual euro zone countries but under the broad oversight of the ECB.

Until now, each member state had been responsible for supervising its own banks.

But Europe`s long financial crisis that nearly led to the collapse of the euro brought into sharp focus the varying degrees of success of that system.

German finance minister Wolfgang Schaeuble said in a statement that the SSM's introduction had made the euro zone`s financial sector "more resistant".

"We are now better armed against imbalances in the banking system. That is also good news for tax payers."

EU financial services commissioner Jonathan Hill also welcomed the move.

"Greater confidence in European banks will encourage affordable lending to the wider economy, to households and SMEs", he said in a statement.

ECB has already conducted a stringent financial health check of the euro zone`s 130 biggest banks in a year-long audit. A large majority of banks passed the test.

The ECB, in charge of monetary policy for the 18 single currency countries, will see its banking supervisory and interest-rate setting bodies strictly separated from each other organisationally and physically.

All euro area countries participate automatically in the SSM.

Other EU countries that do not yet have the euro as their currency can choose to participate. To do so, their national supervisors enter into ''close cooperation'' with the ECB.

For those EU countries that are not participating in the SSM, the ECB and the relevant national supervisors will set out in a memorandum of understanding how they will cooperate on supervisory matters.

The SSM is being housed in the ECB`s current Eurotower headquarters in downtown Frankfurt with a totally separate staff - around 1,000 have been recruited - from the other ECB employees.