1

Technocratic and Centralized

Decision-making in Banking

Union: A Comment from the

Financial Regulation Perspective

EUI, May 2015

Niamh Moloney, London School of Economics and Political Science

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Introduction

A staging post reached → reflect on recent experience; implications of

centralization of decision-making in BU; degree of speculation

First order effects within BU: compromises between functional imperatives

and competing imperatives

Second order effects on the ESFS

ESFS/single market implications a major determinant of the effectiveness

of the new system

Containment of systemic risk; management of transaction costs

Third order effects? Consumer financial governance?

A modest and empirical contribution

Functional effectiveness: capacity to achieve outcomes related to market

efficiency, transparency, integrity; financial stability; consumer protection

and be legitimate and accountable

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Introduction

Transformation of EU financial system governance

Governance system within which institutions and processes which support financial intermediation in the single market operate

2015

Stability returning (?)

Beyond institution building – Capital Markets Union and deregulation

ESFS: first review (summer 2014)

BU: from abstraction to execution to operation

Major claims being made - ECB 2015 and integration

But uncertainties

Fiscal backstop

Centrifugal effects on single market

But a reasonably stable basis for speculation

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EU Financial Governance

ESFS

A network: NCAs (+ ECB); ESRB; ESAs

Pivotal role of ESAs, but elusive status

Ex: political - fiscal redline; constitutional - agency

constraints

Supranational/intergovernmental?

Board of Supervisor QMV dynamics

Evidence? Consensus v QMV; impact of Commission

Accountability processes

Quasi-rulemaking; supervisory governance

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EU Financial Governance

BU

Beyond co-ordination; institutionalized support for fiscal risk

mutualization; centralization of supervisory (and some regulatory)

governance

Revolutionary rather than evolutionary

But framed within a perimeter

Thick rule-books (ex: BRRD + level 2 + soft law; CRD IV/CRR +

level 2 + soft law). Limited discretion (?) – although proportionality

mechanisms

SSM and SRM

Mechanisms (SRM to a greater extent – SRB does not execute

resolution decisions in steady state)

Direct oversight for largest banks (123 banking groups – 1,200 banks;

82% of euro area banking assets)

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First Order Effects

Effectiveness of BU decision-making (SSM)

Defining feature: impact of re-/up-cycling effects and political/constitutional compromises (recurring pattern of institutional design for financial governance)

Rickety processes

Will they support flexible and nimble decision-making?

Changes to operating environment

Financial system conditions

Managing uncertainty

NCA relationships (the mechanism)

Examples of weaknesses

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First Order Effects

Monetary/supervisory conundrum

The Supervisory Board; adoption by Governing Council

Silent assent/non-objection; default: decisions ‘deemed adopted’

Mediation Panel

Parallel with ESA/Commission endorsement

Independence

Some degree of ambiguity arising from tensions between supervisory independence/monetary independence

Primacy of Governing Council

Exclusion of non-euro-area

Remedial fixes – but sustainable?

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First Order Effects

But..

Supranational quality (Supervisory Board)

Constrained operating environment

Enumerated powers

NCAs and the mechanism

CRD IV/CRR; EBA

The SRB

Otiose to underline difficulties from a financial governance perspective

The famous 48 hours decision-making procedure for resolution decisions; SRB + Commission endorsement + potential engagement of Council

But a pragmatic solution

Builds on enhanced supervision, resolution planning, early warnings, crisis prevention

Compare international progress on resolution

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First Order Effects

Early Lessons (SSM)

Scale of the operational achievement

Procedural basis; Mediation Panel; Board of Review

Allocation of banks to direct oversight (and related review process)

Comprehensive Assessment

1,000 staff (cultural challenges)

Data collection and management (FINREP and COREP)

IT/system readiness

Joint Supervisory teams for 123 groups

Supervisory Review and Evaluation Process (SREP) and ‘SSM Supervisory Manual’

First sets of SREP reports

Implications?

Decision making functionality

Establishment of hierarchy

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First Order Effects

But.. movement to ‘business as usual’

Change of incentives politically within SSM-zone from Comprehensive

Assessment/build-up phase

Previously, few incentives to disrupt given signalling risks but may change

2015 ECB/SSM agenda

Comprehensive Assessment follow up/SREP

Monitoring non-performing loans; viability of bank business models

and profitability drivers; ‘a more intrusive approach to banking

supervision’

Accountability pressures

Output legitimacy and benchmarks?

Parliament role

2015 Annual Report

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Second Order Effects

Multiplicity of BU effects on ESFS

Ex: Commission position; ESMA incentives

EBA/BU the most immediate

EBA/BU and regulatory governance

Single rule-book functions (BTS proposal + guidelines: ‘regulatory products’): critical for single market

Complex operating environment

BU caucusing ?

Governances fixes through the double-lock

Competing ECB standard-setter (rules, instructions, and guidelines)?

Identification of primacy of EBA soft law

Communication?

The ‘observer’ issue – recent ECB evidence

EBA engagement with ECB….

Second Order Effects

EBA/BU and Supervisory Governance

Notionally separate: executive v. coordinator

But supervision v regulation?

The SREP

And powers in tension?

Stress testing

ECB 2015 Report

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Second Order Effects

Early Lessons

Rule-making Governance

CRD IV/CRR and EBA credibility/capacity

EBA as custodian of data collection (FINREP/COREP)

Monitoring divergences and shaping level 1

Opinions; definition of capital instruments

Astute EBA sense of institutional position

Emerging ECB/EBA ‘axis of technocracy’

The Basel III Regulatory Consistency Assessment

Programme (RCAP) experience

Aligned interests?

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Second Order Effects

Supervisory Governance

The Comprehensive Assessment

Potential for tension; competing incentives; dual mandates

Outcome augurs well

The SREP

Purpose and importance: critical to CRD IV/CRR (Basel III ‘Pillar 2’)

EBA → Guidelines (‘Single Supervisory Handbook’); ECB → operation

But divergence risks and prejudice to single market

ECB to follow EBA ‘Handbook’ but operationalizes it through its ‘Manual’

2015 Annual Report: follows Handbook; complementary

ECB ‘SSM Supervisory Manual’ v EBA ‘Single Supervisory Handbook’?

EBA and SREP: SREP Report on 2014; colleges of supervisors

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Second Order Effects

The ESFS and inter-governmentalism

Challenges it poses within the ESFS

Complexity of ESA/NCA relationship

Ground for contestation (increasing…?)

Disruptive quality of inter-governmentalism

Forces for change?

ESFS Review

The evolutionary nature of financial governance and the ECB/SRB

example

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Third Order Effects

The Consumer Financial System Governance Problem

Impact of contestation fundamental here

Is there a governance system? Is this a problem?

Similarities with international financial governance

BU effects?

ESA incentives to engage with consumer markets limited

ESMA and the financial stability agenda

EBA

An uncomplicated space? Recent evidence

But mandate difficulties and priorities