On this day five years ago, the European Central Bank (ECB), with little more than a brief press release, ushered in a new era in European banking supervision. At midnight, it assumed responsibility for the oversight of banks in the Eurosystem. This marked the birth of the Single Supervisory Mechanism (SSM). Europe thus implemented one key lesson learned from the financial crisis, providing a clear European response to the question as to the future of European banking supervision. What have we achieved since then, and where do we go from here? Let us look at the question from a Franco-German perspective.

For five years now, 1,200 supervisors from the ECB and 5,000 supervisors from France, Germany and the other 17 euro area countries have been working together, day by day, to make our banks more stable. All decisions are prepared by a joint body, the Supervisory Board, on which all national authorities are represented.

Moving supervision up from the national level to the European level has been considerably successful. One example is the reduction of non-performing loans. Roughly €1 trillion worth of such loans had accumulated on European banks’ balance sheets during the financial crisis. The figure is now down to €600 billion. Although that is still too much, the decline has been considerable and is continuing. “More Europe” – which involves developing a joint strategy and implementing it rigorously in all Member States – has been key to the success of this project.

The SSM merges the collective experience and expertise of euro area supervisors and bank examiners. The ECB directly supervises 116 significant banks and thus a large portion of the European banking market. On the other hand, the national supervisory authorities supervise small to medium-sized financial institutions, with the ECB ensuring the uniform quality of supervisory results. This means that the SSM collectively monitors far more banks than did each individual national supervisor previously. Its insights are more comprehensive and also deeper. This framework enables risks to be detected at an earlier stage, better assessed and specifically contained.

A key achievement of the SSM has been to place national interests in the background where European decisions need to be taken. Our priority is stability across all of Europe. And what will be the key going forward? We currently see three decisive challenges facing the SSM.

First, we have to develop new instruments to combat new risks in the financial sector. Digitalisation of banking operations, tokenisation of money and securities and the use of blockchain technology represent many opportunities but also pose new types of risk. Still, regulators and supervisors have to allow banks to conduct digital innovation.

The second challenge rests in using digitalisation itself. Digital approaches can help us better detect risks and use our resources more efficiently. In the process, we need to subject our instruments and metrics to a constant and pragmatic cost-benefit analysis.

Third and last, the SSM must continue to give a high priority to the expert judgement of supervisors and their knowledge of the unique features of the national banking markets, applying a single rulebook and joint practices. This is intended to guarantee high-quality and impartial supervision, thereby ensuring healthy competition.

The banking industry has been undergoing upheaval since the financial crisis of 2008. Established institutions are facing stiff competition; bigtech firms  are making inroads into financial business and fintech companies are threatening classical business models. The competitiveness of traditional banking business could be called into question altogether.

We hope that a new financial crisis is not awaiting us in the years to come. But even in the absence of a shock, a variety of challenges have arisen in Europe’s banking landscape. These are the result not only of the emergence of new competitors but also of vulnerabilities which we are currently looking at: a cyclical downswing could lead to a greater incidence of credit defaults, and an abrupt rise in interest rates could entail losses in market activities. In addition, banks operating in continental Europe will have to assume new tasks post-Brexit.

The first five years of the SSM have shown that European cooperation can work to everyone’s benefit. Stable banks leave all parties better off: households, firms, investors and, not least, government. Though the experience we have gained thus far has been positive and instructive, one thing is clear: the challenges faced by banks and their supervisors will become greater rather than smaller. If we look at it that way, the future of supervision can only be European. We believe: that is as it should be. We therefore wish the SSM Bon anniversaire! Alles Gute zum Geburtstag! Happy Birthday!

Denis Beau is First Deputy Governor of the Banque de France. Joachim Wuermeling is a member of the Executive Board of the Deutsche Bundesbank. Both are members of the SSM Supervisory Board.