The ECB and Banking Supervision: Does Single Supervisory Mechanism Provide an Effective Regulatory Framework?

Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

See Alexander (2012a, b).

See Alexander (2012b).

See Ferran (2014), p. 3.

Ibid.

See Ferran (2014), p. 2.

See generally Gortsos (2015).

See Maastricht Treaty Text and Committee of Governors’ Draft of the Statute of the European Central Bank.

The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.

See European Council, President, ‘Towards a Genuine Economic and Monetary Union’, Report by the President of the European Council, Herman van Rompuy, EUCO 120/12, Brussels (2012), pp. 1–2. Available at http://​ec.​europa.​eu/​economy_​finance/​focuson/​crisis/​documents/​131201_​en_​pdf. Accessed 23 August 2015.

Ibid., pp. 3–4.

Ibid., pp. 6–7.

See House of Lords, ‘Genuine Economic and Monetary Union’ and the implications for the UK 8th Report of Session 2013–14, HMSO, HL Paper 134, (14 February 2014), pp. 23–25.

Council, Conclusions, EUCO 76/12. (29 June 2012), p. 3.

Commission, Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, COM(2012) 511 final, Brussels (12 September 2012).

Ibid.

SSM draft Regulation, Article 4 (1)-(4).

Article 4(1)(k).

See supra note 12.

See SRM Proposal, p. 5.

Treaty on the Functioning of the European Union (TFEU) Title IV ‘Free movement of persons, services and capital’, Articles 45–66. See Andenas and Snell (2002), pp. 69–139.

See Dermine (2003), pp. 31–96.

TFEU, Chapter 1 Workers, Articles 45–48, Chapter 2 Right of establishment, Articles 49–55, Chapter 3 Services, Articles 56–62, Chapter 4 Capital and payments, Articles 63–66.

See Single European Act 1986, Article 18 (implementing Article 100a of the EEC Treaty). The Act also provided for qualified majority voting by Council (instead of unanimity) for banking and financial services directives and regulations. See Andenas and Hadjiemmannuilt (1997), pp. 373–417.

Second Council Directive 89/446/EEC of 15 December 1989 on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, O.J. L. 386, p. 1.

See Walker (2007), pp. 16–18.

Case C-442/02 CaixaBank France [2004] ECR I-8961. In Caixa bank, the ECJ interpreted the proportionality and necessity principles to apply to a Member State’s regulation of a subsidiary of a cross-border banking group by holding that ‘[a]ll measures which prohibit, impede or render less attractive the exercise of that freedom must be regarded as such restrictions’ (para. 11). A regulatory measure ‘hinders credit institutions which are subsidiaries of foreign companies in raising capital from the public, by depriving them of the possibility of competing more effectively’, ‘with the credit institutions traditionally established in the Member State of establishment’ para. 12; and a regulatory measure ‘may be justified where it serves overriding requirements relating to the public interest, is suitable for securing the attainment of the objective it pursues and does not go beyond what is necessary in order to attain it’ (para. 17). See also Case C-411/03 Sevic (that the distinction on the ground of different nationalities was discriminatory and contrary to the right of establishment). See also Gambling cases, C-64/08, C-316/07, C-358/07, C-360/07, C-409/07 and C-410/07)(invalidating non-discriminatory restrictions on gambling if the measure lacks proportionality and not necessary to achieve a regulatory objective).

The High-Level Group on Financial Supervision in the EU (chaired by Jacque de Larosiere), Report, Brussels: EU Commission, 25 February 2009, 39–41, 57. Available at: http://​ec.​europa.​eu/​internal_​market/​finances/​docs/​de_​larosiere_​report_​en.​pdf. Accessed 28 October 2014. The De Larosiere Report recognised the difference between ‘regulation’, defined ‘as a set of rules and standards that govern financial institutions’, and ‘supervision’, defined as ‘the process designed to oversee financial institutions in order to ensure that rules and standards are properly applied.’?

Regulation of the European Parliament and of the Council, No. 1093/2010 establishing a European Supervisory Authority (European Banking Authority), O.J. 2010 L331/12; Regulation of the European Parliament and of the Council, No. 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pension Authority), O.J. 2010 L331/48; Regulation of the European Parliament and of the Council, No. 1095/2010 503 establishing a European Supervisory Authority (European Securities and Markets Authority), O.J. 2010 L331/84.

Regulation of the European Parliament and of the Council, No. 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board, O.J. 2010 L331/1.

Ibid.

See discussion in European Council, President, ‘Towards a Genuine Economic and Monetary Union’, 05.12.2012 (‘Four Presidents’ Report), pp. 6–9. Available at: http://​www.​consilium.​europa.​eu/​uedocs/​cms_​data/​docs/​pressdata/​en/​ec/​134069.​pdf. Accessed on 23 August 2015.

See European Commission, European Financial Integration Report 2009, Commission Staff Working Document, Brussels: (11 December 2009), SEC(2009) 1702 final, demonstrating the fragmentation of EU banking and financial markets after the onset of the financial crisis of 2007–08.

Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, OJ L 287/63 (29 October 2013).

SSM Regulation, Article 33 (2).

SSM Regulation, Article 1.

SSM Regulation, Article 7 (1) & (2) (a)–(c), providing the legal requirements for ECB cooperation with national competent authorities that enter ‘close cooperation’ with the SSM, including rules that apply directly to banks established in participating countries.

SSM Regulation, Article 8.

SSM Regulation Article 6 (7)(b).

The criteria used to define a bank as significant are: total value of assets, whether it is one of the top three largest banks in its home Member State; its importance to the economy of its home state or the EU as a whole; and whether it has requested or received direct public financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (ESFS). SSM Regulation, Article 6 (4) (i)–(iii).

SSM Regulation, Article 4 (1).

‘Credit institution’ is defined as a firm which accepts deposits from the public that are insured by the EU Deposit Guarantee Scheme Directive. See Capital Requirements Directive IV (CRD IV Package) (including the Capital Requirements Directive and Capital Requirements Regulation), entered into force 1 January 2014. The CRD IV transposes into European law the prudential capital requirements for credit institutions and investment firms which are based on the internationally-agreed Basel Capital Accord (Basel III agreement).

The SSM does not apply to most conduct of business rules that govern a credit institution’s capital market activity—such as prospectus requirements, insider dealing and market abuse rules, or mis-selling of retail financial products. These are subject to other areas of EU and national law and are regulated by that country’s national competent authority (not the ECB).

SSM regulation, Article 26 (‘planning and execution of the tasks conferred on the ECB shall be fully undertaken by an internal body composed of its Chair and Vice Chair’).

SSM Regulation, Article 6,(7) (a)-(c). See also Article 25 (8) (SSB shall adopt ‘draft decisions’ ‘to be transmitted… to the national competent authorities of the Member States concerned.’).

SSM Regulation, Article 6 (5)(b), ‘when necessary to ensure consistent application of high supervisory standards, the ECB may at any time, or on its own initiative after consulting with national competent authorities or upon request by a national competent authority, decide to exercise directly itself all the relevant powers for one or more credit institutions’.

SSM Regulation, Article 25 (‘Separation from monetary policy function’). Article 25 (2) states ‘[t]he ECB shall carry out the tasks conferred on it by this Regulation without prejudice to and separately from its tasks relating to monetary policy and any other tasks.’

Peter Mulbert, Presentation at European Company and Financial Law conference, Bundestag, Berlin (7 Nov 2014) (on file with author).

SSM Regulation, Article 25(2).

Article 26(3).

Article 26(8).

Article 7(7). The European Parliament March compromise expanded this procedure in allowing non-euro participating Member States to also disagree with the SSB’s draft decision itself (rather than the Governing Council’s objection to it), which may result in the Member State terminating its SSM participation for a 3 years.

SSM Regulation, Article 20. See also Article 26 (3), providing for the ‘Interinstitutional Agreement between the European Parliament and the European Central Bank on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the Single Supervisory Mechanism’, 2013/694/EU, OJEU L320/1. See also Memorandum of Understanding between the Council of the European Union and the ECB on the cooperation on procedures related to the Single Supervisory Mechanism (SSM) 11.12.2013. Available at: https://​www.​ecb.​europa.​eu/​ecb/​legal/​ssm/​framework/​html/​index.​en.​html. Accessed on 23 August 2015. Inter-institutional Agreement (IIA) between the European Parliament and the ECB.

The Inter-institutional Agreement part 1 (reports) provides that the ECB has a duty to submit a report every year to the Parliament (defined as ‘Annual Report’). This report is concerned with the execution of the task conferred to the ECB under Regulation (EU) No 1024/2013. The Chair of the Supervisory Board must present the report to Parliament at a public hearing. Available at: https://​www.​ecb.​europa.​eu/​ecb/​legal/​ssm/​framework/​html.​en. Accessed on 23 August 2015.

SSM Regulation Article 17aa.

On 26 October 2014, the ECB published the outcomes of a year-long financial health check (the Comprehensive Assessment) of 130 banks in the Euro area. The assessment detailed the results of the asset quality review (AQR) and a forward-looking stress test of the banks. The comprehensive assessment was carried out under the current EU Capital Requirement framework (CRR/CRD IV) and brought to attention the following results: (1) capital shortfall of €25 billion detected at 25 participant banks; (2) banks’ asset value need to be adjusted by €48 billion, €37 billion of which did not generate capital shortfall; (3) shortfall of €25 billion and asset value adjustment of €37 billion implies overall impact of €62 billion on banks; (4) additional €136 billion found in non-performing exposure; and (5) adverse stress scenario would deplete bank’s capital by €136 billion reducing median CET1 ratio by 4 percentage points from 12.4 to 8.3 %. European Central Bank (ECB), ‘Aggregate Report on the Comprehensive Assessment’ (26 October 2014). Available at: https://​www.​bankingsupervisi​on.​europa.​eu/​ecb/​pub/​pdf/​aggregatereporto​nthecomprehensiv​eassessment20141​0.​en.​pdf. Accessed 28 October 2014.

SSM Regulation Article 33 (2). The original draft Regulation proposed that the ECB’s supervisory powers be phased-in from 1 January 2013 until January 2014 with the creation of the Single Supervisory Board on 1 January 2013 with responsibility for overseeing the largest euro area cross-border banks and those banks seeking bailouts from the ESM, and then on 1 July 2013 with the ECB/SSB beginning to supervise the remaining 6000 small and medium-sized credit institutions in the euro area and on 1 January 2014 with the ESM authorised to inject capital into banks requiring recapitalisation and who have agreed a restructuring plan. However, the Council and Parliament agreed that the timetable was too ambitious and that ECB/SSB operations should begin 12 months after entry into force of the Regulation, which was 4 November 2013. SSM Regulation, Article 27 (2). The one year lag was designed to give the ECB time to conduct the AQR and stress tests in conjunction with the European Banking Authority.

As Spain began to lose access to sovereign debt markets in May 2012, urgent action was considered necessary by EU policymakers to restore confidence in financial markets so that fragile euro area countries could regain access to debt markets on sustainable terms. See House of Lords, Genuine Economic and Monetary Union, and the implications for the UK 8th Report of Session 2013–14, HMSO, HL Paper 134, (14 February 2014), pp. 8–9.

See supra note 12.

Indeed, it seemed unlikely until just before Eurozone sovereign debt crisis re-erupted in May 2012 that the Council (Ecofin) would activate the enabling clause of Article 127 (6) TFEU. EU Ministers of Finance had rejected formal activation of the clause on a number of previous occasions. See Davies (2006), p. 42.

See above notes 23–25 and accompanying text for discussion of ESM bank recapitalisation instrument.

Case C-133/06 Parliament v Council (Safe Countries of Origin) [2008] ECR I-3189, holding, inter alia, ‘each institution is to act within the powers conferred upon it by the Treaty.’ para 44, and ‘it has already been held that the rules regarding the manner in which the Community institutions arrive at their decisions are laid down in the Treaty and are not at the disposal of the Member States or of the Institutions themselves’ para 54.

Case C-133/06, [2008] ECR I-3189, para 55. The TFEU Article 13 (2) provides ‘[e]ach institution shall act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions, and objectives set out in them’.

See discussion in Chambers et al. (2011), p. 60.

The Financial Stability Board has defined shadow banking as ‘a system of credit intermediation that involves entities and activities outside the regular banking system’. See The Financial Stability Board, Shadow Banking: Scoping the Issues (12 April 2011), p. 2.

This is why Principle 2 of the Basel Core Principles for Effective Banking Supervision recommends that the functions of the bank supervisor and monetary policymaker be independent from one another. See Principle 2 of Basel Committee’s Core Principles for Effective Banking Supervision (September 2012). Basel: Bank for International Settlements.

See discussion in Hertig (2013).

Ibid.

See Article 18(3a) of the 19th March 2013 tripartite agreement (“March compromise”).

Article 18(2) first subparagraph of the March compromise.

Article 18(3a) March compromise.

Article 18(3b) March compromise.

Article 18(2) first subparagraph of the March compromise.

Article 17(9) March compromise.

Article 19(2) March compromise.

Experts have observed that countercyclical buffers could be difficult to implement. See Brunnermeier et al. (2009) Chapter 4 (discussing design of countercyclical regulation).

Basel Committee on Banking Supervision (2011) Macroprudential Policy Tools and Frameworks. Progress Report to G20. Available at: http://​www.​bis.​org/​publ/​othp17.​htm. Accessed on 5.06.2014.

See generally for a review of the literature, Alexander (2012c), p. 332.

Ibid.

See Report of the High Level Group on Financial Supervision in the EU, chaired by Jacques De Larosiere (25 February 2009) Brussels: EU Commission. See also The Turner Review (March 2009 London: UK Financial Services Authority.

Indeed, the Financial Stability Board has stated in its Key Attributes of Effective Resolution Regimes that:

[t]o improve a firm’s resolvability, supervisory authorities or resolution authorities should have powers to require, where necessary, the adoption of appropriate measures, such as changes to a firm’s business practices, structure or organisation […] To enable the continued operations of systemically important functions, authorities should evaluate whether to require that these functions be segregated in legally and operationally independent entities that are shielded from group problems. (FSB Key Attribute 10.5).

Article 4 (1)-(4) SSM Regulation.

Article 4 (1)(k) SSM Regulation.

Article 5 SSM Regulation.

Article 4a(1) SSM Regulation.

Article 4a(2) SSM Regulation.

Article 4a(3) SSM Regulation.

Article 4a(2a)-(2b) SSM Regulation.

2. Where the authority determined in accordance with paragraph 1 identifies changes in the intensity of macroprudential or systemic risk in the financial system with the potential to have serious negative consequences to the financial system and the real economy in a specific Member State and which that authority considers would better be addressed by means of stricter national measures, it shall notify the European Parliament, the Council, the Commission, the ESRB and EBA of that fact and submit relevant quantitative or qualitative evidence.

Single Resolution Mechanism Regulation, Article 16 (1).

Proposal for a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions COM/2014/043 final—2014/0020 (COD) Article 9(1).

Article 10(2). Once the separation initiated, the ECB will review the separation plan submitted by the entity and can require its amendment (Article 18).

Article 4(2).

Article 5(1) SRM Regulation.

Article 5(2) SRM Regulation.

Article 5(3) SRM Regulation.

Article 5(4) SRM Regulation.

The ECB’s strong-form of independence is set forth in Articles 130 and 282(3), TFEU, Article 7 ESCB Statute (to carry out its tasks to achieve its overriding objective of price stability).

See discussion in Alexander (2009), pp. 197–229.