17 January 2013

Bundesbank/Lautenschläger: A banking union for Europe - How is it best constructed?

Lautenschläger said that, in the medium term at least, the European banking supervision should be placed on a firmer foundation, and work should be done on its structural soundness.

Establishment of a sound and effective supervisory mechanism

So, what is the right foundation for an SSM, and what load will it have to bear? A sound supervisory mechanism requires a strong foundation – simply because banking supervision involves the monitoring of compliance with regulatory requirements and the necessity of swift and effective intervention in the event of non-compliance. Thus, first of all, the SSM needs the “single rule-book” of harmonised European requirements on which to base its actions... 

The legal framework for the SSM – the second essential basis – remains in need of clarification. The political consensus settled at an early stage on using Article 127 (6) TFEU as the basis for the single supervisory mechanism, because provision is made therein for the transfer of specific tasks to the ECB in connection with banking supervision. The challenge for policymakers is to find a legal framework for the SSM which will allow it to be put in place in a short space of time, and which will also give the European supervisor suitable powers...

So, what is to be the legal basis for the actions and interventions of the ECB and/or of national supervisors? There are a number of conceivable answers to this question – one might be to give the European supervisor the right to instruct national authorities to exercise their national powers in a particular way. The text of the regulation which was agreed at the special ECOFIN meeting of 12 and 13 December 2012, and which will now form the basis for forthcoming negotiations with the European Parliament, envisages the ECB applying national law itself. However, this solution, along with other options discussed, involves a number of problems and imponderables, such as how the discretion which naturally accounts for a significant part of supervisory law is to be exercised and controlled, or where the relevant competent jurisdiction is to lie in matters of legal protection. At present, there is no fully elaborated, genuinely European administrative law for EU institutions enabling this to be dealt with. Policymakers have to take corrective action in this regard, and to develop and implement both effective and legally viable solutions.

There is another key issue in the architecture of banking union which has not been satisfactorily resolved, as I see it: the governance structures within the SSM. With the transfer of banking supervision to the ECB, the question arises – in addition to the voting arrangements which are always keenly debated at European level – as to how supervisory duties are to be separated from monetary policy in institutional terms. Without this separation, there may sooner or later be conflict between the differing goals of the two areas. At its special meeting, the ECOFIN Council decided to try to erect Chinese walls by creating two new bodies within the ECB: a Supervisory Board is to draft supervisory decisions and submit them to the ECB Governing Council, which may accept or reject these decisions but will not be able to amend them; if the Governing Council votes against a proposed decision, it will have to state its reasons, with reference in particular to monetary policy considerations. If differences of opinion between the Governing Council and the Supervisory Board cannot be resolved in this way, then a mediation panel is to step in.

This solution is a well-intentioned attempt to ensure the separation between supervisory and monetary policy decisions while at the same time retaining the ECB’s existing institutional framework under the prevailing treaties. However, the arrangement really fails on both counts; instead, it will lead to overcomplicated decision-making processes, in which, as well as the national supervisors involved in any crisis, three different bodies, potentially with differing memberships, will have to come to a decision in a short space of time. Furthermore, the arrangement blurs the lines of responsibility, as the establishment of a mediation panel makes it unclear who has the final say.

According to the treaties and the ESCB Statute, the Governing Council would have to have the final say. Nor is it likely that the ECB’s institutional framework, enshrined in primary law, can be amended by the planned SSM regulation, which will be a secondary legal instrument. Under this scenario, the Governing Council would continue to be the ECB’s highest decision-making body for all tasks transferred to the ECB, including the new task of banking supervision. Therefore, a number of questions arise with respect to the decision-making processes. Will the mediation panel actually have the final say? Will it thereby issue instructions to the Governing Council? Would this be at all compatible with the independence of Governing Council members as stipulated by Article 130 TFEU? Why will the Governing Council, which will have responsibility for banking supervision, only be able to accept or reject the decisions put forward by the Supervisory Board, and have to give reasons based on monetary policy considerations? I am assuming that these are questions which will have to be answered in the coming months.

The success of the single supervisory mechanism will depend on more than a sound legal framework and robust governance structures. Optimal collaboration between the ECB and national supervisors will be equally important, with a view to combining national expertise at European level and utilising it in making cross-border comparisons. This will also require all those involved to know, first of all, where their responsibilities and duties lie.

However, it will also be crucial to develop and implement a single uniform approach to supervision and to ensure clear definition of reporting lines and reporting content between the supervisory levels. It would be impossible for all the day-to-day supervisory work – such as ongoing oversight tasks and on-site examinations at institutions – to be carried out solely by the staff of the new European banking supervisor under the aegis of the ECB. Nor would this be desirable, as the expertise of domestic supervisors should continue to be used for assessing risk profiles at the banks concerned. After all, even at institutions with international operations, it is national market structures and national legal regimes, such as tax law and company law, which will continue to be the determining factors for a lot of business decisions. The danger of “home bias” referred to above might be countered, for instance, by the use of mixed examination teams comprised of ECB staff from various countries and the domestic supervisors...

From the SSM to banking union

A further point should be highlighted which I have so far left aside: who will be liable under the new structure and for any loss following its completion? According to the summit decision in June 2012, effective European supervision is the precondition for direct provision of funds to banks by the ESM. This will mean that any financial assistance furnished is shifted from a national to a European level. To prevent European taxpayers from having to bear the consequences of previous “sins” committed on the watch of national authorities, the balance sheets of banks supervised at European level should be thoroughly examined beforehand. A consistent approach to dealing with banks’ problematic legacy assets is therefore required. In addition, European legislators have to tackle the issue of resolution and restructuring. The principle of matching liability and control means that banks supervised at European level should also be wound up at European level.

Full speech

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