On the two-day European Council meeting of December 12 and 13, 2012, an agreement was reached to proceed with the formation of the Single Supervisory Mechanism (SSM) that will confer supervisory powers to the European Central Bank (ECB), over all European banks within the confines of the European Union Member States whose currency is the euro. The SSM is expected to enter into force on March 1, 2014 or twelve months after the promulgation of the relevant piece of legislation.
The decision under consideration has followed an earlier European Council agreement, namely that of June 28 and 29 of 2012, while additional input and negotiations influencing it, were provided, inter alia, by the president of the European Central Bank, Mr. Mario Draghi in his November 23, 2012 speech, by the vice-president of the ECB Mr. Vítor Constâncio in his speech on November 26, 2012, by the entry into force of the European Stability Mechanism (ESM), by the introduction of the Outright Monetary Transactions (OMT) programme of the ECB, and by the blueprint for the Completion of the Economic and Monetary Union that the Commission published on November 30, 20127.
Within this political, legal, economic and institutional milieu and against the backdrop of existing dynamics on the dichotomy of the EU into euro and non-euro Member States, it is pertinent to bring under closer scrutiny the proposed SSM, to consider its compatibility with the given order and to perhaps forecast or speculate the impetus for change it will provide. Towards that end the present analysis shall encompass the subtleties that exist between the notions of a banking union and a financial union and shall place the rise of the sovereign Euro-state in the context of the relations between the European System of Central Banks (ESCB) and the Eurosystem, with all the concomitant implications and political ramifications these have. Moreover the discussion shall delve into the transformation of the ECB from a quasi-federal to a truly federal institution, that will have, the right to intervene directly in any part of the area under its jurisdiction, in the context of the supervisory powers, conferred by the SSM.
Elucidating or perhaps outlining these themes is perhaps the most reliable way to appreciate the impact this new set of powers will have on the broader institutional order of the EU, both in strict legal terms, and in political ones. The present author is of the opinion that the SSM shall have important ramifications in various parts of the EU architecture. Perhaps this conclusion shall also be discerned by the reader, in appreciating the information and commentary provided herein, or it may at least be inferred from these perhaps inadequate references and explanations. Ultimately the present essay is nothing more than the prolegomenon to knowledge on this subject, maybe not even that, certainly not exhausting or prejudicing any other research on it, in its legal, political and economic aspects or emanations.
The Single Supervisory Mechanism has often been identified with a banking union rather than a major aspect of a financial union and has been branded as an integral part of the efforts to draw a line under the financial, economic and debt crisis that has been affecting the Euro area at least ever since the beginning of the Great Recession in the late 2007. As was clearly postulated by ECB vice-president, Mr. Vítor Constâncio in his recent speech of January 29, 2013:
The current financial crisis showed how rapidly and forcefully problems in one country’s financial system can spread to another and even threaten the stability of the entire euro area banking system. Such developments can best be assessed and addressed by a central supervisory authority with a bird’s eye view of the entire euro area banking sector rather than through cooperation between national ones.
The second objective of the SSM is to help breaking the negative feedback loops between sovereigns and banks, which were key features during the present crisis. This manifested itself in increasing debt levels of sovereigns that had to provide financial support to struggling banks as well as losses for banks from exposures to sovereigns under stress. We also saw increases in the correlation between the cost of funding of euro area banks and that of their respective sovereigns, particularly in some countries under stress.
The objectivity of Mr. Constâncio’s arguments cannot be discerned in full, for while it certainly is plausible that an integrated financial system, within the framework of a single currency, ultimately needs to be underpinned by a coherent system of prudential supervision, the introduction of the SSM seems to be in line with demands for European supervision over domestic banks, in exchange for direct recapitalizations from the European Stability Mechanism. The underlying rationale is that the feedback loop between Member States and the banks under their purview cannot be really disrupted without addressing the profound incentives that exist or may be engendered in a compartmentalized and fragmented financial and monetary system; for if a government, trapped in a precarious fiscal position, finds it more amiable or convenient not to insist on the conformity of its banks with prevailing rules, in the expectation of enjoying more favorable conditions in the domestic demand for sovereign debt, then no genuine solution to the debt crisis can be found. In that light, the introduction of the Single Supervisory Mechanism must be appreciated as the end product of a bargaining process over European funds as against national sovereignty, with the former, represented by the EU or rather the Eurogroup (though an unofficial body), gaining the upper hand in the process.
The kind of financial oversight that has been propounded as a remedy to the present economic and financial crisis can be understood as a tissue of exaggerations or misrepresentations of a broader rationale on the outlook of the Economic and Monetary Union. At first it is rather presumptuous to assume that an integrated system of supervision would in and of itself prevent or even mitigate a crisis; for while European opinion molders and decision-makers may suggest otherwise, other major economies that have had unified and coherent supervisory mechanisms couched in a perhaps more robust and inclusive institutional framework, failed lamentably in standing up to the alleged potential power such a system has in dealing with a major financial and economic crisis. The very existence and persistence of the Great Recession, though perhaps obfuscated or downplayed by the semantic fiat of mainstream economists and the expansionary monetary policies of major central banks, is a point in notice.
Value judgements notwithstanding, a penetration of the hermeneutic patina of the terms “banking union” and “financial union” is deemed necessary, so that the overall technical and political palaver over the necessity of the SSM does not obscure the underlying changes that are taking place. A strict interpretation of the terms must not oscillate between the ideological predispositions of pro- or anti- integrationists, but must instead focus on the specifics of the legal and institutional aspects they touch upon. To carry on with this task, consideration of the two separate reports that currently are discussed in the ECON committee of the European Parliament is deemed necessary, one belonging to Ms. Marianne Thysen and the other to Mr. Sven Giegold.
A banking union is a system featuring a single rulebook for all banks within its boundaries, on those issues pertaining to the micro-prudential sphere of bank regulation. The fields which are affected and regulated by micro-prudential measures are the leverage ratio of banks, the reserves they are supposed to have, the definition of core tier capital, the adequacy of such capital, the overall calculation of notional risk, the liquidity ratio and other aspects of on- and off- balance sheet parameters. As a general rule the aim is to single out the most important factors that determine the sustainability and solvency of a financial institution, and to provide legislation that will aim at setting a number of minimal thresholds on these issues, with the expectation or hope that these can indeed provide a legitimate backstop to a sustained period of market duress. In the case of the EU, the enforcement of such a single rulebook has been trusted to the European Banking Authority (EBA), which was established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of November 24, 2010. The EBA exists within the framework of the European System of Central Bank (ESCB), which in simple terms means that it covers the entire territorial compass of the EU and it involves the supervisory authorities of all Member States, including those whose currency is not the Euro, nor is it envisaged to be under present legislation.
“Banking union” is therefore tantamount to a fully integrated network of micro-prudential supervision, where regardless of which authority actually enforces the rules, the legal framework is uniform or fully harmonized. For that very reason, it becomes crystal clear why the rapporteur of the Parliament, Mr. Sven Giegold has proposed the following amendment in his recent draft report (pp. 6-7):
(4) The conferral of supervisory tasks to the ECB in the banking sector for part of the Member States of the Union should not in any way hamper the functioning of the internal market in the field of financial services. It is therefore necessary to ensure the proper functioning of the EBA, as the ultimate guarantor of the harmonised implementation of prudential rules for banks in the Union, following that conferral. Moreover the establishment of a single supervisory mechanism in the banking sector for part of the Member States of the Union should not hamper the implementation of the European single rulebook applicable to all financial institutions in the Union. It is therefore crucial that full harmonisation of prudential definitions and rules is achieved in the banking sector and EBA effectively guards their uniform and consistent application.
In contradistinction, the financial union is a level of integration beyond that of micro-prudential uniformity, for it also encompasses a single macro-prudential framework. Policies along these lines are exercised by a single authority, in this case the European Central Bank, and are conceived in the spirit of (and with the objective of) identifying and preempting or mitigating the concentration or build up of systemic risk, in the parts of the financial system where are most prone to it, whereby the notion of “parts” may be interpreted as a sector or a niche, or occasionally, as a single financial institution. In principle, the macro sphere of prudential supervision relates to the monitoring and adjusting of macroeconomic aggregates relevant to the overall condition of the financial system, such as the liquidity and integrity of money markets, the functioning of the credit channels connecting the various parts of the system with one another and with the real economy, the exposure of the entire system to external or internal financial bubbles, the accumulation of non-performing assets or financial derivatives on a systemically-significant level and in general anything else, both endogenous and exogenous, that can disturb the overall stability and operation of the system.
Fulfilling this function of macro-prudential oversight is what the SSM aims at. Yet while in theory the scope of action is contained in the macro-sphere, the reality is that the ECB shall have the discretionary power to intervene in individual financial institutions and to impose pecuniary penalties or demand conformity with ad hoc micro-prudential rules it may consider necessary. In this regard, attention should be given to the Commission Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, dated September 12, 2012. As the present author has noted in an article published on December 16, 2012, in an effort to elucidate the essential features of this proposal:
As is always the case with such supervisory capacity, the ECB will be granted the privilege of being the sole issuer and thus withdrawer of bank licenses within the context of its mandate and will, within this framework, be tasked to authorize or not the operations of credit institutions. This is an integral part of the bundle of powers that fall under the conceptual umbrella of financial supervision, yet it can at the same time be considered as a robust preventive or corrective tool for intervening in a part of the financial system, or even a single financial institution, to either call for changes in business practices or even impose the cessation of operations of the bank in question, always if the circumstances impel such a far-reaching and drastic course of action.
[...] Adding to the above, the ECB will demand from institutions under its supervision to comply with criteria on capital adequacy, financial leverage, liquidity etc. In this respect the ECB might deem it appropriate to recommend the formation of capital buffers or the consolidation of balance sheets through other means, if it assumes that some of the standards it has set to monitor are not upheld.
It thus should be suggested, as a recapitulation of the profound distinction between a banking union and a financial union that the former lacks a single entity for macro-prudential regulation, whereas the latter has such a feature. Hence as I have also noted in a previous article published on this blog:
The combination of these two distinct areas of policy, of the micro- and macro- prudential spheres, we may call it a “financial union”. For the financial union to work, there is no doubt whatsoever that both elements are essential [...]
The distinction that has been drawn between the banking union and the financial union may appear to some as an exercise in hermeneutic creativity, as an effort to discern some hidden truth in the essential meaning of particular phenomena. While that could be true, the present author holds that such a conceptual separation is necessary, to provide the conduit to the broader understanding of the impact of the SSM, in regard to the specific political, economic and institutional context that it is immersed in. With the aforementioned having been outlined we may proceed to an assessment of the introduction of the Outright Monetary Transactions programme, on how it influenced the agreement on the SSM.
The Outright Monetary Transactions programme of the European Central Bank can withstand examination from a number of perspectives, ranging from its purely technical economic impact to the political and legal repercussions it has had and is expected to foster. The present essay’s scope demands that a politico-institutional approach is adopted, in line with an eclectic rationale that recognizes the validity inherent in otherwise disparate fields of research and analysis. The OMT programme was anticipated in July 26, 2012 by Mr. Mario Draghi, the president of the ECB, who, speaking before the Global Investment Conference in London, uttered the following:
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
These words reverberated across the financial markets and were met with exuberant enthusiasm by investors, who believed the ECB was finally willing to uphold the role of an ultimate backstop in the Euro area. The high expectations were however brought back to the nadir of pessimism when a few days later, on August 2, 2012, Mr. Draghi, in a press conference at the premises of the ECB, offered nothing substantive, other than vague remarks and otherwise empty promises. The decisive step to indeed put some flesh to the bones of the “whatever it takes to preserve the euro” tagline, was made on September 6, 2012, when again at an ECB press conference, Mr. Draghi introduced the OMT programme, which effectively positions the ECB as the “dealer” of last resort in the Euro area (see also the discussion I had with Craig James Willy, economic historian and fellow blogger).
In a first assessment of the OMT programme on September 11, 2012, I had enumerated the following features:
1. the ECB will buy "unlimited" amounts of sovereign debt in the secondary markets,
2. before any purchase of such debt, a memorandum of understanding of some sort will have to be signed by the country in need of the OMT and the bailout mechanism EFSF/ESM,
3. the maturity of that debt will be up to three years either if that is newly introduced debt or with a residual 3 years,
4. that any purchase of debt will be followed by a sterilization process to minimize the inflationary pressures,
5. all collateral for liquidity will no longer be subject to a minimum credit rating threshold, meaning that any asset may be accepted,
6. the ECB will have no seniority over private creditors on any bonds it purchases,
7. the Securities Markets Programme, which was initiated under Mr. Trichet, the previous ECB President, will now be terminated and all acquired debt will be held to maturity.
This list reflects the remarks made by Mr. Draghi as well as the text that was also published on the day of the press conference now under examination, which referred to the technical features of the Outright Monetary Transactions. Analysis of the modalities and likely medium-term effects of the OMT is not our chief concern in this paper, for such a task would extend to topics that can scarcely be related to our current subject. Instead, we shall isolate one particular aspect of the OMT, namely its accompanying conditionality clause, the way in which this is connected to the region’s bailout fund, the combined body of the then-temporary European Financial Stability Facility (EFSF) and now-permanent European Stability Mechanism (ESM); and how such a conditionality scheme was a necessary step towards the formulation of the Single Supervisory Mechanism, to ultimately operate in tandem with the ESM, in realizing the two-fold objective of removing all convertibility risks in the Euro area and of preparing the grounds for the financial union.
The conditionality of the OMT relates to the signing of a memorandum by the Member State in need of the OMT programme, for its short-term funding, with the region’s bailout fund. Enshrined in such a memorandum shall be provisions on thoroughgoing internal reforms on a host of economic, social and other policies that may influence the fiscal and macroeconomic fronts. On the fiscal side measures shall focus on cost-saving reforms, on deficit and debt reduction plans. On the macroeconomic level, issues of primary interest shall be the balance of payments, unit labor costs and the robustness of the financial sector. The latter sector of the economy is particularly important in light of the SSM since the health of a financial system largely rests on the sustainability of its constituent banks, and therefore capital buffers may need to be increased, most probably by means of direct recapitalizations, that are to be funded by the ESM. It is here where the rationale of European supervision for European funds comes out in full panoply; for the final success of the OMT in regard to its two-fold objective depends on the effectiveness of the conditionality clause and especially of the community supervision over domestic banks, indirectly via the ESM’s recapitalization programme.
Understandably the tectonic plates of European diplomacy had decisively shifted in favor of the formation of a single supervisory authority in the Euro area—the SSM—once the OMT was announced, even though it has not been invoked and implemented yet (and there is a chance it might never actually have to). It was readily apparent that sovereign bond yields were falling all across the Euro area, courtesy of the positive expectations the OMT’s announcement had engendered, and it also was evident that to sustain these benign market conditions policy-makers would have to persist on assembling the institutional jigsaw they set to form over the years, preceding and during the eurocrisis. It is in this very sense that the OMT stands as both the prerequisite and the prolegomenon to the agreement of the Single Supervisory Mechanism and to whatever else might be considered necessary in rationalizing and reinforcing the measures that have been adopted (e.g. the creation of the Single Resolution Mechanism).
Lastly a more subtle aspect of the OMT that must not pass without mentioning is the role the ECB would assert by bringing it into force. The ECB would effectively become, or may already be, a dealer of last resort (to be contrasted with the now-standard “lender” of last resort), since the ECB has actually preempted political decisions, both on fiscal issues and on the broader problématique of European integration. In demanding conditionality for fulfilling its obligations to conduct open market operations in the secondary markets, it clearly delves in the realm of fiscal policy (still a more or less national competence); while by prejudicing the decisions on the Single Supervisory Mechanism it clearly overstepped its institutional role as a central bank. The realization of the dealer of last resort is therefore a milestone in European Union politics without prejudice to the political and democratic concerns one may justly raise in light of these and other closely-related events.
Having already provided a morphological understanding of the distinction between a banking and a financial union and of the relationship between the SSM and the OMT programme, we now turn to a perhaps more speculative approach, of engaging in the interpretive analysis of the statute of the European System of Central Banks (ESCB), in light of the expected entry into force of the Single Supervisory Mechanism. A close textual exegesis of important paragraphs and provisions of the said statute shall cover this section, in our effort to make sense of the underlying forces that are expected to affect future decisions on political, economic, institutional and other legal issues.
Starting from Article 2 of the ESCB statute on the objectives of this institutional order, we read thus (emphasis added):
In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 4 of this Treaty.
Given that the Single Supervisory Mechanism shall be infused into the corpus of the European Central Bank, and shall, by that account, remain confined within the physical boundaries of the Euro zone, how should we expect the ESCB to support the general objectives of the Community, when it seems that the schism between euro and non-euro states has in fact widened? The SSM with its concomitant financial union heralds the emergence of a sovereign, two-tier state within the EU, comprised of the single currency bloc (the issue of ECB sovereignty is discussed in the next section). The interests of such an integrated core shall be expected to be more or less harmonized or even common, at least in as far as economic governance is concerned; whereas the non-Euro Member States now face the trilemma of either succumbing to or joining the centripetal forces at the heart of the EMU that have now been reinforced; to remain on the fringes of many important decisions at the EU level; or to follow the logic of repatriating powers, thus reverting many of the benign (for others “deleterious”) spillover effects of European integration.
In the case where Member States currently not expected to participate in the SSM, choose to enter into the core of the EMU, then it is safe to suggest that the interests of the Community will become identical to those of the EMU. If however non-euro members prefer to either cling on to their status despite the clearly unfavorable balance of power they will face, or even more, to repatriate powers, how should the interest of the community be interpreted and how should the European System of Central Banks, composed of both euro and non-euro Central Banks reconcile with tendencies that might be contradictory? If the praxis of enhanced cooperation is to be followed, then the notion of “Community interest” will first of all be a matter of sheer strength of numbers and second, it will effectively be equivalent to the interest of the EMU as against the rest of the EU. Perhaps we must remain aporetic and zetetic (for a book on philosophical skepticism read Emmpiricus, Sextus. Outlines of Pyrrhonism) to see how things shall evolve, what interrelations may be formed, which complementaries can emerge, what sort of order or structure might we behold, what additional scaffolds may be appended to this edifice, before holding judgement of this potential antithesis in the institutional order of the ESCB.
Carrying our textual interpretation further, we proceed to Article 7 of the aforementioned statute, on (institutional) Independence, which reads as follows (emphasis added):
In accordance with Article 108 of this Treaty, when exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and this Statute, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.
Assuming that the introduction of the Single Supervisory Mechanism in conjunction with the gradual rise of the Euro-state shall create an almost omnipotent core within the EU architecture, how must one regard the institutional independence that all Central Banks of the ESCB currently enjoy, when the ECB is clearly placed on a substantially more advantageous position, as being the “economic tzar” of all things monetary, and to an extent also financial, in the majority of Member States of the EU, and in the Euro-core which shall have the power to effectively usurp the EU and tailor all policies in such a way, so as to fit its needs? In addition, can a National Central Bank of any Member State whose currency is the euro, be considered as tangentially independent when the ECB shall uphold the right of intervention, clearly forcing its sovereignty, whenever necessary, as in the case of preventing or mitigating some systemic risk on a particular locus of the Euro area? And a fortiriori how can the National Central Banks of non-euro Member States be perceived of as genuinely independent, when it is fathomable that circumstances might arise that will place their own policy agenda at odds with the interests of the Euro-core, and as such with an otherwise preponderant force they will have a hard time resisting?
As with above, we may only speculate at this stage of the process, but there certainly exists a possibility that these challenges may well confront political leaders who have not yet solved the conundrum of a multi-speed Europe. In the end, conflicts of interest and/or of power may arise in all other areas of the EU that are affected by the dichotomy between Euro and non-euro Member States. Ultimately it remains to be seen whether the Aristotelean golden mean can be a feasible way of doing politics in the European Union, or whether the strength in numbers, manifested in, or euphemistically labelled as, “enhanced cooperation” shall become the norm henceforth. It seems quite possible though that the method of consensus politics has been swept into the dustbin of history, perhaps awaiting to be dredged up when circumstances undergo a drastic change.
How will integration proceed, in what ways will the aforementioned chasm be bridged or forever keep on growing till the day it reaches its political terminus; how shall the increasing complexity of legislation over legislation and particularity over particularity, all woven together in complex ways and in different parts, influence the integration process; and above all, what may be the final impact on the everyday life of citizens, and on those currently aloof from the fray of EU politics? No definite answer can be provided at this point in time, given the existence and operation of many variables in the political equation and the institutional uncertainty they necessarily create.
To suggest that the EU is a sui generis polity is not a novelty. The modalities emulating systems of both a federation and confederation, blended with other methods of international cooperation, in different facets of the broader architecture, render it such a peculiar entity. A judicious investigation of these particularities merits an essay of its own, for it is a subject too vast to be addressed in this section. What is of importance in this specific context, is the decisive change, or chain reaction of changes, the introduction of the Single Supervisory Mechanism will bring along, in transfiguring the European Central Bank from a quasi-federal entity, to a genuinely federal one, incomplete perhaps, but still asserting a clearly-delineated sovereign authority over a given territory, in a two-level system of economic governance.
Concerning economic governance, the present author finds it appropriate to re-direct the reader to the previously referenced documents on the completion of the Economic and Monetary Union. In addition, it should be stressed, perhaps as a caveat for readers who may come across this text in the remoter future, that we are laboring in a dynamically shifting political and to some extent institutional environment, where nothing must be taken as an ultimate given and where the decisions of one European Council meeting might transcend, reverse or otherwise alter the ways in which certain policies seem to be morphing into. Towards that end, one must also pay close attention to the forthcoming European Council summit of February 7 and 8, 2013 where negotiations on the Multi-annual Financial Framework are expected to be held; negotiations whose outcome may place the foundations upon which future talks on an integrated EU or EMU-specific budget might be predicated, to complement and reinforce the tools for economic governance that have been established (see here and here) and/or are envisaged in legislative procedures that are still underway. [UPDATE February 10, 2013: The conclusions of the European Council on the MFF can be found here. The result does not affect the SSM.]
Notwithstanding the potential changes that may result from these constantly shifting pieces of the greater puzzle, the powers that will be conferred to the ECB by virtue of the SSM clearly indicate an institutional “promotion”, so to speak, to a genuinely federal plateau, where it will have the final say on all issues under its jurisdiction. Ever since the inception of the euro the ECB was trusted with the monetary function of the EMU, i.e. to carry out its operations on all these issues that relate to the quantity and supply of the legal means of transaction within the single currency, and moreover to conduct all necessary operations for the sustainability and integrity of the money markets and credit channels across the eurozone. Nevertheless, supervisory powers remained confined within national borders, as was the case with the ultimate responsibility over domestic banks, in such cases as deposit guarantee schemes and in the somewhat related interconnection of the Eurosystem’s National Central Banks via the Target2 payment system. In short, the architects of the Euro wished to confront the so-called financial trilemma33by choosing national independence over genuine or relative financial integration (the third option is financial stability, which can be regarded as concomitant to the other two). This presumable error is now being rectified by means of the SSM, which shall substitute the principle of national independence, for that of financial integration.
To appreciate the significance of the introduction of the SSM in the concatenation and combination of laws and events leading to the complete federalization of the ECB, we must consider that the SSM is envisaged to confer powers of micro-prudential intervention, apart from the apparent macro-prudential ones, in any bank within the Euro area, regardless of what national authorities may think of it. This complete prudential power, this concentration of duties, we shall refer to as the right of intervention; “right” in the sense that it will be held as a residual power, not necessarily an active one, in line with the principle of subsidiarity and due to the sheer magnitude of transactions that occur on a daily basis, as well as the size of the European banking system, that make the indiscriminate use of such power virtually impossible. The right of intervention is the manifestation of the ECB’s sovereignty over the authorities of Member States participating in the SSM.
Before one may dismiss this theory as mere speculation from an outsider, we may turn our attention to the January 31, 2013 speech of ECB vice-president, Mr. Vítor Constâncio, on the Establishment of the Single Supervisory Mechanism as the first pillar of the Banking Union. In regard to the “extensive powers” the SSM shall provide the ECB with, he stated the following, confirming the afore-mentioned, as well as what I have written in previous blog posts on this very issue, long before this speech (emphasis added):
[An] important feature of the SSM regards its extensive powers in the conduct of its supervisory function. The SSM, with the ECB at its centre, is entrusted with an extensive set of micro- and macro prudential powers, covering all key tasks relating to the prudential supervision of credit institutions. The inclusion of macro-prudential powers is a key element because as shown by the crisis, macro- and micro- risks can actually be mutually reinforcing.
This is not some bizarre interpretation of an otherwise limited mandate provided by the draft legislation. In fact it is what is actually provided for in the proposed text of the Commission (emphasis added):
4.2.1. Tasks of the ECB
The ECB will be exclusively competent for key supervisory tasks which are indispensable to detect risks for banks' viability and require them to take the necessary action. The ECB will, inter alia, be the competent authority for licensing and authorizing credit institutions, assessing qualifying holdings, ensuring compliance with the minimum capital requirements, ensuring the adequacy of internal capital in relation to the risk profile of a credit institution (Pillar 2 measures), conducting supervision on a consolidated basis and supervisory tasks in relation to financial conglomerates. Furthermore, the ECB will also ensure compliance with provisions on leverage and liquidity, apply capital buffers and carry out, in coordination with resolution authorities, early intervention measures when a bank is in breach of, or is about to breach, regulatory capital requirements. The ECB will also coordinate and express a common position of representatives from competent authorities of the participating Member States in the Board of Supervisors and the Management Board of the EBA, for topics relating to the abovementioned tasks.
Interpreting the emphasized parts of this paragraph shall clarify some of the perhaps inchoate truths that have been outlined in the present essay. At first, the ECB shall have the ultimate say over the operation of any and all banks within the confines of participating Member States; for being the sole issuer of a bank license also entails the power of being the sole withdrawer of such a license. However this, as well as the broader shift in paradigm towards the modus operandi of bail-ins, will require the entry into force of the Single Resolution Mechanism, but this is only a matter of time, not principle. Secondly, the ECB is tasked to deal with issues that clearly fall within the sphere of micro-prudential powers, such as the notions of minimum capital requirements, capital adequacy, capital buffers, leverage and liquidity, risk profile etc. All these relate to individual financial entities and therefore also imply the right of intervention, whenever and wherever that may be or perceived as necessary. Thirdly and in tandem with the previous two, the ECB shall effectively dictate the agenda on all micro- and macro- prudential issues that are to be considered at and probably endorsed by the European Banking Authority (EBA). The latter issue also has implications that relate to the previous section on the mechanics of the Euro-state within the ESCB, but what is important here is to note once again that the ECB is clearly given micro-prudential powers, further consolidating its capacity, in clear legal grounds, for direct intervention.
What should also be incorporated in this textual exegesis is that the concept of “risk profile” of an individual bank is rather problematic and may open a sluice gate for broad interpretations. For reasons that escape the scope of the present paper, “risk” is impossible to determine with precision and the task of identifying all of its potential parameters is most likely destined to end in failure. In simple terms, the interconnections of the system are such, the vicissitudes of the market process so unpredictable, the world so rapidly evolving, that no genuine certainty can ever be realized, at least not in the modern financial system; a rather unstable or constantly evolving habitat. Conditions may be such that what was initially perceived as a major component of risk, ends up being irrelevant, while another minor factor becomes the source of instability and so on. What we must draw out of this is that such language allows a rather generous margin of discretionary power to the ECB, however that may be used, in the frame of the new federal powers of the ECB (right of intervention).
As if the above were not convincing, Mr. Constâncio also noted this in his last speech (emphasis added):
The SSM in conducting the initial assessment of the banks’ situation will benefit from the fact that the ECB is well prepared to conduct these reviews and related assessments on individual banks, in cooperation with other national and EU authorities and possibly third parties.
Here too the extent of the ECB’s powers to deal with micro-prudential tasks, is explicitly confirmed.
Having outlined the reality over the two-dimensional powers of the ECB on both the micro- and macro- spheres of prudential supervision, and in order to carry our analysis further, we may proceed to another statement of Mr. Constâncio from that same speech (emphasis added):
Creating a strong centre in a decentralised system such as the SSM, will be crucial to provide the ECB with the necessary means to ensure it will have the resources to effectively fulfil its functions without endangering its reputation. In this context, the articulation of appropriate decentralisation procedures through close cooperation arrangements with national authorities within the unity of the supervisory system will be essential.
The knowledge and skills of the system’s human capital will contribute to creating a strong centre. Therefore the recruitment of skilled and experienced staff, particularly banking supervisors, will be a priority.
How should the allusion to a “strong centre” be interpreted in the light of the otherwise awesome new powers mentioned previously? And what does “decentralization” really imply in the presence of such a strong centre? Aren’t the two mutually exclusive, or is the latter merely relating to operational competences, not substantive ones?
Starting from the last rhetorical question, it is easy to fathom the impossibility of conferring all supervisory operations to the ECB, for the simple reason that the organizational capacity of this institution is too limited to gather, properly asses, and if necessary, intervene in the multitude of transactions that take place on a daily basis, across the Eurozone. For practical reasons therefore the participation of national authorities, of more bureaus that is, is essential. Also it is true that the ECB may be understaffed, both in terms of numbers and in regard to the expertise necessary for these specific new tasks. Given that operational duties must necessarily be delegated to national authorities, it is perfectly reasonable to expect the concomitant use, and probably related re-assignment of functions, of the existing human capital, residing in national supervisory authorities.
Practical need and “common sense” rationalization of tasks shall therefore bring into being the kind of decentralization Mr. Constâncio refers to. While that may be the indubitable fact, one should withhold any judgement at least until after considering the powers underlying this structure. In particular this arrangement no longer represents a confederal order, where both (or more) tiers of authority are holding substantial power on certain issues; but rather stands as a robust hierarchy, with the ECB at the top and the national authorities below it, in what shall be an outright federal design, with no confederal elements whatsoever, bar the resolution schemes and the deposit guarantees, both of which are also expected to be incorporated into the ECB’s range of powers in the near-to-medium term.
By making use of the term “federal” and its derivatives we should provide the caveat that we do so, without any tacit proposition on the satisfaction of the need to achieve an amiable degree of legitimacy and accountability, by means of democratizing output (and perhaps input) legitimacy. “Federal” in this respect relates only to a two-or-more level power structure where ultimate control, state sovereignty narrowly understood, is exercised by the highest stratum of authority in the hierarchical order. Normative statements on the democratization of the ECB, as important as these may be, require a separate and rigorous analysis, with the recognition that the task of truly democratizing a central bank, of placing the money supply and the whole monetary function on democratic vote, may contradict the very raison d’être of the central bank, viz. to provide a final and credible backstop to the financial system under its purview (at least in an ideal realm). Perhaps the democratization of the monetary function may only be realized in the Hayekian theme of the de-nationalization of money, but addressing such perplexities will lead us down the slippery slope of economic theory, which is not our chief concern in this case. Democratic or not, the ECB shall represent, at least in relative terms, the most federal institution in the EU edifice; the most elevated entity in the EU’s institutional landscape one could suggest. Besides, democracy is not germane to the distribution of power in a political system; though it would definitely be the only desirable option. What is meant by that is that we may well have a federation that is dictatorial or, in the case of the EMU, that is predominantly technocratic. Democracy is not intrinsic to this or any other particular form of a state, either in its parts or its totality.
The purpose of the present essay was to examine the main aspects of the Single Supervisory Mechanism, which is envisaged to enter into force in about a year or so from now. The analysis herein did not touch upon the narrowly understood technicalities and specificities of the SSM per se, in large part due to the premature stage of the bargaining process, which may well alter substantially, what now is provisioned on these issues. Instead the approach that was adopted, was an institutional one, of political economy one may say, of seeking to identify, concatenate and explain the most important causes and likely effects of the SSM on the broader institutional morphology of the European Union. Towards that end, the present author has found it necessary to discuss the subtleties over the distinction between a banking union and a financial union; the relationship of the Outright Monetary Transactions programme with the SSM; the dynamics of the rising Euro-state with regard to the operations of the European System of Central Banks; and lastly, the explicit sovereign power the ECB will assert by virtue of the SSM.
Concerning the issue of a banking union as contrasted to a financial union, we provided for the main distinction in the scope of powers each system features. The banking union, in a strict interpretation of the terms, concerns a single rulebook on all issues pertaining to the micro-prudential regulation of the banking sector; whereas the financial union is a level of integration beyond that, for it also encompasses a single system of macro-prudential regulation. In this specific case the area under the jurisdiction of the ECB shall become a financial union, while the rest of the EU shall move towards a banking union.
On the existence and impact of the Outright Monetary Transactions programme, we provided for an interpretation that depicted it as both the prerequisite of and the prolegomenon to the Single Supervisory Mechanism. The reason for postulating thus, has been that the OMT programme is accompanied by a conditionality clause, related to direct funding by the European Stability Mechanism, in cases such as the direct recapitalization of banks; and for such a process to be effective or even possible, European funds had to be accompanied by European supervision or control. The introduction of the OMT has therefore prepared the grounds for the SSM, perhaps prejudicing a decision in its favor.
In respect to the relationship between the Euro-core and the European System of Central Banks, the analysis focused on the potential impossibility of preserving the statute of the latter, in particular the allusion to the support of the Community’s interests. The potential antinomy in the ESCB stems from the fact that the Euro-core, equipped with the SSM, shall have a uniform position, suggesting that we might bear witness to a clash of interests between euro and non-euro Member States, whatever that may imply on the interests of the Community as such. The perhaps speculative assertion of the present author has been that the praxis of enhanced cooperation will effectively render the notion of “Community interest” either obsolete or tantamount to “EMU interest”.
Lastly, the current paper featured an analysis of the institutional promotion of the ECB from a semi-federal entity, to a genuinely federal one, by virtue of the SSM. It was suggested that the SSM entails the right of intervention wherever and whenever that may be necessary, not only in the sphere of macro-prudential supervision and regulation, but also in the realm of micro-prudential authority. By asserting a micro-prudential role, the ECB shall intervene in any part of the financial system, regardless of what national authorities may perceive as appropriate; and by that account, it shall exercise its federal supremacy, its sovereignty, over the other authorities in the SSM structure.
With this introduction to all of the above, the present author may now offer his opinion that the Single Supervisory Mechanism is indeed a catalyst in the European integration process, though not necessarily in realizing the gradual reconciliation or convergence of the multiple speeds comprising the European Union; but rather as a powerful impulse that may substantially contribute to the rise of a federal state in Europe, not necessarily from the EU, but most likely, within the EU, whatever that may imply for future European politics.
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