Banking Regulation and Banking Supervision: Current Structure and Challenges

This paper presents the current structure of banking regulation and banking supervision in Europe. We discuss three main challenges resulting from the specific structure of the European system. Firstly, with the integration of the European banking market, main supervisory tasks were conferred on the European Central Bank (ECB). In consequence, new conflicts of interest arise, because the functions of monetary policy and prudential supervision are no longer separated. Secondly, the prudential supervision by European authorities and national authorities might differ to a certain extent. Although this is reasonable with respect to the proportionality principle, it may affect the domestic competitive environment. Thirdly, the European level playing field is harmed by differences in the supervisory stringency among European countries. We conclude that there is still need for action, and a structural solution is not generally apparent. Instead, incentives need to be corrected to eliminate conflicts of interest and agency problems, in particular regarding implicit bail-out guarantees. The recent introduction of a bank recovery and resolution regime might be a first step in the right direction.