Opinion

ECB published report on sanctioning activties in SSM for 2022

Published Date
Jul 6, 2023
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The ECB has published its annual report on sanctioning activities in the Single Supervisory Mechanism (SSM) for 2022, which shows how the ECB and national competent authorities (NCAs) enforced compliance with prudential requirements in the Eurozone banking sector.  The report reveals that internal governance and reporting were the main areas of sanctioning activity, with most penalties being imposed on smaller banks. The ECB also already fined two significant banks for misreporting capital needs in 2023. In this blog post, we will explain the key findings of the 2022 report, the ECB’s methodology for imposing penalties, and the implications of the 2023 fines for banks in the SSM.    

Areas of enforcement activity

The 2022 report again highlights a strong emphasis on internal governance (40% of all proceedings), and supervisory reporting infringements (22% of all proceedings). Additionally, the areas of large exposures, qualifying holdings, own funds, and public disclosure all saw a marked increase in sanctioning proceedings.

Number of proceedings

During 2022, there was a slight increase in the number of newly-opened proceedings (286 compared to 259 in 2021). Notably, eight proceedings were opened at the request of the ECB in 2022, whereas in 2021 none of the proceedings were ECB-initiated.

Subjects of sanctioning activities

A majority of proceedings conducted in 2022 involved less significant institutions, and proceedings against individuals almost halved compared to 2021. Conversely, proceedings concerning significant institutions remained relatively low, accounting for approximately 5% of all proceedings.

Imposition of administrative penalties

In 2022, the competent authorities in the SSM imposed 155 administrative penalties, meaning 83% of sanctioning proceedings ended in some form of penalty. Most penalties (99 in total) involved a fine and amounted to a total of EUR 17.3 million.

This was a considerable decrease compared to 2021 (around EUR 31.7m). The highest pecuniary penalty of EUR 4.275m was paid by French bank Crédit Agricole SA, a significant institution, for classifying shares as Common Equity Tier 1 capital without prior ECB permission. This penalty was re-imposed after Crédit Agricole had successfully challenged the first penalty before the General Court on procedural grounds.  

The remaining 56 penalties were non-monetary, mainly written warnings. Such warnings were issued mostly for breaches of reporting and qualifying holding requirements. Figures suggest that about half of the penalties in the area of reporting, and most of the penalties in the area of qualifying holdings, took the form of a warning rather than a fine.

Key takeaways from the 2022 Annual Report

The 2022 Sanctioning Report shows that internal governance and reporting are the focal point of the ECB’s enforcement activities. Against this background, it is crucial for banks  to prioritise sound governance structures, particularly in areas such as risk management, internal controls, and organisational requirements (Read our blog post on the ECB’s thematic review on governance within smaller banks).

ECB methodology for imposing sanctions

The ECB imposes penalties based on its 2021 Guide to the method of setting administrative pecuniary penalties. The guide generally contemplates a two-step approach:

  • First, the ECB determines a base amount based on the severity of the breach. For this purpose, it classifies breaches as minor, moderately severe, severe, very severe or extremely severe based on the impact of the breach and the degree of misconduct. 
  • Second, the ECB adjusts the base amount where it finds that there are aggravating or mitigating circumstances, consequently increasing or reducing the base amount determined in the first step.

The maximum fine cannot exceed 10% of the total annual turnover of the bank concerned in the preceding business year, or twice the amount of profits gained or losses avoided as a result of the breach. For banks that belong to a supervised group, the total annual turnover that is used for this purpose will be the total annual turnover resulting from the most recent available consolidated annual financial accounts for the supervised group.
 

Sanctioning activities in 2023

Since the beginning of 2023, the ECB has sanctioned two entities, Landesbank Hessen-Thüringen Girozentrale (Helaba) and Goldman Sachs Bank Europe SE (Goldman Sachs), for misreporting capital needs, imposing penalties of around EUR 6.8m and EUR 6.6m, respectively, and classifying both breaches as “severe”.
While these penalties may seem high, they squarely fall within the ECB’s average fines according to is penalty grid for “Group 2” institutions. That grid suggests a base penalty of around EUR 10m for severe breaches. 

Penalty gird

For Helaba (approx. EUR 211 bn total assets according to its 2022 annual report) the ECB took into account the bank’s cooperation and remedial actions as mitigating factors and adjusted the fine in line with the proportionality principle.
The penalty imposed on Goldman Sachs – while in the same ballpark - seems somewhat stricter given the bank’s smaller size (EUR 100 – 150 bn according to the ECB’s list of supervised entities). This is particularly notable, considering the fact that the bank self-notified the breaches, comprehensively cooperated with the ECB and took remedial actions. 
 

Further reading

 

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This content was originally published by Allen & Overy before the A&O Shearman merger