The Single Supervisory Mechanism: the Building Pillar of the European Banking Union

• Autore: Luigi Chiarella
• Carica: Ph.D. degree from the University of Genoa. He is also Associate at the New York office of Chiomenti, a leading Italian law firm
• Pagine: 34-90

ARTICLES & ESSAYS

DOI 10.6092/issn.2531-6133/5499

UNIVERSITY OF BOLOGNA LAW REVIEW

ISSN 2531-6133

[VOL.1:1 2016]

This article is released under the terms of Creative Commons Attribution 4.0 International License

34

The Single Supervisory Mechanism: the Building Pillar of the European

Banking Union

LUIGI CHIARELLA†

TABLE OF CONTENTS: 1. The Origins of the European Banking Union; 2. The Rationale

Behind a Centralized Supervision; 3. The Single Supervisory Mechanism (SSM). Scope,

Division of Tasks and Cooperation Within the SSM; 4. Non-participating Member

States. The Opt-in Regime; 5. The Impact of the SSM on the Supervision of Cross-

border Banking Groups; 6. The ECB as a Prudential Supervisor. Governance and

Powers; 7. The Relationship Between the ECB and the Other E.U. Supervisors; 8.

Balances and Perspectives of the SSM.

ABSTRACT: One of the lessons learned from the 2008 financial crisis is that when a

bank in Europe goes into trouble the ensuing effects can reach far beyond the

immediate threat to its depositors and shareholders. In particular, the crisis has

revealed the extent to which irresponsible behavior in the banking sector could

undermine the foundations of the financial system and threaten the real economy by

turning a banking crisis into a sovereign debt crisis, as occurred in the Eurozone in

2011. In response to this lesson, Member States first tried to address the systemic

fragility of their banking systems through national policy tools. The interdependency

of countries which share a common currency however required more integrated

responses. Therefore, at the euro area summit in June 2012, the European Council

agreed to break the vicious circle between banks and sovereign debt by creating a

banking union. The union would institute a centralized supervision for banks in the

euro area through a newly established Single Supervisory Mechanism (SSM). The

SSM, which became operational in November 2014, represents the building pillar of

the banking union. After a brief description of the causes that led to the introduction

of the European banking union and of the rationale behind a centralized approach to

supervision (Par. 1 and Par. 2), this paper purports to analyze the SSM and illustrate

its functioning (Par.3) and impact on cross-border banking groups (Par. 4). The

analysis then shifts its focus on the position and powers of the ECB within the SSM

and on its relations with the European authorities introduced in 2010 (Par. 5 and Par.

6). Finally, this work remarks a few aspects of the balances and perspectives of the

new regime (Par. 7).

KEYWORDS: Single Supervisory Mechanism; SSM; European Banking Union.

University of Bologna Law Review

[Vol.1:1 2016]

DOI 10.6092/issn.2531-6133/5499

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1. THE ORIGIN OF EUROPEAN BANKING UNION

The recent financial crisis helped regulators to discover that when a bank in

Europe goes into trouble the ensuing effects can reach far beyond the

immediate threat to its depositors and shareholders. In particular, the crisis

has revealed the extent to which irresponsible behavior in the banking sector

could undermine the foundations of the financial system and threaten the

real economy by turning a banking crisis into a sovereign debt crisis. This

scenario describes the situation of the Eurozone in 2011.

Since 2008 there has been a strong correlation between the finances

of Eurozone banks and the sovereign debts of its Members. This correlation

has created a vicious cycle between bank risks and sovereign risks.

In countries where domestic supervisors acted in an overly permissive

fashion towards national champions,1 public finances absorbed the costs of

the crisis and, therefore, inevitably deteriorated.2 Examples are offered by

Ireland and Spain, where the rescue of failing banks has drained huge

amounts of public resources.3 In other countries events evolved differently.

For instance, in Greece and, to a lesser extent, Italy huge public debts

† Ph.D. degree from the University of Genoa. He is also Associate a t the New York office of

Chiomenti, a leading Italian law firm.

1 See EDDY WYMEERSCH, The European banking union, a first analysis (Fin. Law Inst., Working Paper

No. 07, 2012), http://ssrn.com/abstract=2171785; Luigi Federico Signorini, Direttore Centrale per

laqVigilanaqbancaiaqeq finaniaiaqBancaqdIaliaqq CommiioneqemaneneqdelqSenaoqdellaq

Repubblica (Finanze e Tesoro), LUnione bancaria (Oct. 24,

2012),https://www.bancaditalia.it/pubblicazioni/interventivari/intvar2012/unione_bancaria_sig

norini.pdf, and GUIDO A. FERRARINI & LUIGI CHIARELLA, Common Banking Supervision in the Eurozone:

Strengths and Weaknesses (ECGI Law, Working Paper No. 223, 2013),

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2309897. In order to promote the local

banking systems, some supervisors did not adequately counter risky behaviors of intermediaries,

such as granting credit to certain sectors of the economy like real estate.

2 See JEAN PISANI-FERRY, ANDRÉ SAPIR, NICOLAS VÉRON & GUNTRAM B. WOLFF, What Kind of European

Banking Union?, BRUEGEL.ORG (Jun. 25, 2012), http://www.bruegel.org/publications/publication-

detail/publication/731-what-kind-of-european-banking-union, emphasizing that banks that

were European in ordinary circumstances have become national in crisis times, as they depend

on national governments for support.

3 See DOUGLAS J. ELLIOTT, Key issues on European banking union (Glob. Econ. & Dev., Working Paper

No. 52, 2012), http://www.capitalis.com/admin/white_papers/file188.pdf, noting that in Irel and

and Spain, failing banks added massive liabilities to the balance sheets of the sovereigns,

weighing them down.

University of Bologna Law Review

[Vol.1:1 2016]

DOI 10.6092/issn.2531-6133/5499

36

affected domestic banks as a result of the strong domestic component of

their bond portfolios.4

Under such circumstances, national politicians, as well as public

authorities, tried to avoid burdening taxpayers for the consequences of

credits that national banks had spread to other jurisdictions.5 Banks and

national supervisors restricted the circulation of liquidity between countries,

including transfers of capital within cross-border banking groups. As a

result, the interbank markets ceased to function: intermediaries preferred to

allocate liquidity into non-interest bearing deposits at the European Central

Bank. In addition, significant funds were moved from peripheral countries to

central jurisdictions, even though the interest rates offered by the latter

produced negative returns in real terms.6

Additionally, the mechanism of monetary policy also came to a halt:

this highlighted the pivotal role of financial integration in a well-functioning

of the Monetary Union.7 In particular, the financial system of the Eurozone is

fragmented along national borders8 which leads to the formation of severe

macroeconomic imbalances.9 The remuneration of bank deposits and the

interest rates paid on bank loans diverged considerably between countries.

Despite the European Central Bank set the same level of reference rate for

monetary policy, the costs of credit to households and businesses varied

4 See Benoît Coeuré, Member of the Exec. Bd., European Cent. Bank, Why the euro needs a banking

union (Oct. 8, 2012), http://www.ecb.int/press/key/date/2012/html/sp121008_1.en.html.

5 See PISANY-FERRY, SAPIR, VERON & WOLFF, supra note 2, arguing that banks have been encouraged

by national authorities to cut cross-border lending, which is understandable from a national

viewpoint. However, the pursuit of national policies to fight the crisis has not led to financial

stability.

6 See ELLIOTT, supra note 3, at 14.

7 See Vítor Constâncio, Vice-President of the ECB, Towards a European Banking Union (Sep. 7,

2012), http://www.ecb.int/press/key/date/2012/html/sp120907.en.html, arguing that a high

degree of financial integration, where financial institutions diversify their assets and liabilities

across eurozone countries, is essential for an effective transmission of monetary policy.

Imperfect financial integration complicates the task of the central bank in a currency union

making it more difficult to achieve a uniform impact in the transmission of monetary policy and

ensures uniform levels of interest rates across countries. It is therefore essential to reverse this

fragmentation and restore the proper transmission mechanism of monetary policy. See also

EUROPEAN CENT. BANK, Financial integration in Europe, ECB.EUROPA.EU (Apr.

2009),http://www.ecb.eu/pub/pdf/other/financialintegrationineurope200904en.pdf; André Uhde

& Ulrich Heimeshoff, Consolidation in Banking and Financial Stability in Europe: Empirical Evidence,

33 J. BANK. & FIN., 1299 (2009). See also, A.SAPIR & G.B. WOLFF, The Neglected Side of Banking Union:

Rehaping Erope Financial Sem, BRUEGEL.ORG (Sep. 13, 2013),http://bruegel.org/2013/09/the-

neglected-side-of-banking-union-reshaping-europes-financial-system/.

8 See EUROPEAN CENT. BANK, Financial integration in Europe, ECB.EUROPA.EU (Apr. 2012),

https://www.ecb.europa.eu/pub/pdf/other/financialintegrationineurope201204en.pdf.

9 See WYMEERSCH, supra note 1, at 6.