Challenges to an Efficient European Centralised Banking Supervision (SSM): Single Rulebook, Joint Supervisory Teams and Split Supervisory Tasks

Abstract

The establishment of centralized supervision by means of the Single Supervisory Mechanism (SSM) had to ensure the quality and impartiality of banking supervision, as well as the establishment of a supervisory system more properly aligned with the characteristics of the banking sector. The far-reaching mixed administration of the European Central Bank (ECB) and national competent authorities (NCAs) must also ensure strong and consistent supervision across the participating member states while using the NCAs’ local and specific know-how. All elements indicate that a more effective banking supervision was necessary for the Eurozone. This may be challenging given the conflict between the required centralisation of supervision, on the one hand, and the far-reaching mixed administration and composite legal order in place on the other. The first years of experience with the SSM provide a multi-faceted picture of the effectiveness of centralised supervision. This paper discusses the effectiveness of centralised supervision within the context of a far-reaching mixed administration and legal order on the basis of three different elements. Firstly, the basis of supervision is discussed, i.e. the applicable substantive laws for which compliance must be ensured by the ECB, and which concerns the so-called Single Rulebook. Secondly, the organisation of supervision, in practice, is discussed on the basis of one of its most important features: the Joint Supervisory Teams. Lastly, the delineation of supervisory tasks is discussed, as well as its impact on the ECB and, based on the Dutch example, its impact on national supervisory models. These elements illustrate the many steps that have been taken to improve the effectiveness of centralised supervision. They also show how many obstacles are still left to overcome.

1 Introduction

The Single Supervisory Mechanism (SSM) has been operational for almost 2 years with the Single Resolution Mechanism (SRM) fully operating as of the beginning of this year. As discussed below, for European standards, both pillars of the banking union were set up in a relatively short time frame. Both supervision and resolution are already up and running on a European level, which is quite an achievement in itself. As their creation was considered urgent and necessary, all parties involved did everything necessary to make it happen. Beginnings can be difficult, however, and needless to say there are still numerous points to be worked out. The establishment of the SSM has resulted in a number of general challenges, caused in part by the political desire to establish the SSM within the existing legal framework as well as the lack of fully harmonised European banking rules. Overcoming these challenges has required creative thinking on the part of the European legislator and has resulted in what is often referred to as a ‘lawyers’ paradise’. Besides, ensuring a separation of tasks within the European Central Bank (ECB) without amending the Treaties and ensuring close cooperation between the ECB and national competent authorities (NCAs) entails a long bureaucratic process. Regardless of these general challenges, the aforementioned political objectives for the establishment of the SSM can hardly be achieved without a more centralised supervision in place such as the SSM. With respect to the problems that the Eurozone faced during the crisis, and taking into account the current banking landscape, a more centralised supervision seems necessary for effective supervision. On the other hand, the far-reaching mixed administration between the ECB and NCAs also seems unavoidable as a result of the necessary involvement of administrations at both national and supranational levels, and Europe’s legal reality of composite legal orders.¹ This inevitably results in friction. The impact of the resulting tension on objectives of the SSM establishment is studied on the basis of the initial experiences with three elements of supervision. Firstly, the basis of supervision is reviewed, i.e. the applicable substantive law for which compliance must be ensured by the ECB. This concerns the so-called Single Rulebook. Secondly, the organisation of supervision, in practice, is discussed on the basis of one of its most important features, the Joint Supervisory Teams (JSTs). Thirdly, the delineation of supervisory tasks is discussed, by means of a Dutch example, and the impact thereof on the ECB. Where relevant, Dutch examples will be used to illustrate the first experiences with the SSM. Before going into details for specific elements, the underlying reasons for establishing a single supervisory mechanism will be briefly considered. This highlights what is to be expected of centralised supervision by the SSM. These expectations are all part of what is to be a more effective supervision. Looking at the three specific elements, we see that many steps have been taken to support the ECB’s effectiveness, but that there are still many hurdles to overcome. It turns out that some challenges can be addressed by the supervisory authorities themselves, some can only be taken away by the legislator, and others may be inherent to the interplay between the national and European levels in the supervisory landscape. This paper discusses the elements from an effectiveness perspective only. A complete review of the first years of the SSM would require a broader perspective in order to be able to assess the general picture. It must be determined whether the current supervisory set up adequately supports a more effect supervision, but also whether this new set-up lives up the standards upon which the European Union is founded, such as democracy and the rule of law.² This gives plenty of food for thought after these first years’ experience with the SSM.

2 The Establishment of a Banking Union

For further reading about the banking union, see inter alia: Binder and Gortsos (2016); Busch and Ferrarini (2015); Hinojosa-Martínez and Beneyto (2015). For more information about the SSM, see: Gortsos (2015); Verhelst (2013); Wolfers and Voland (2014), pp. 1463–1496; Ferran and Babis (2013); Tröger (2013).

On the 29th of June 2012, the Euro area summit adopted a statement about the need to establish a single supervisory mechanism in order to break the vicious circle between banks and sovereigns. This vicious circle, resulting in a negative feedback loop between Member State budgets and some of their banks, was considered to be a threat to financial stability in the EU. An effective single supervisory mechanism, involving the ECB, was to be a condition for direct capitalization by the European Stability Mechanism (ESM) to banks that failed to raise capital on the markets. By having in place a single supervisory mechanism, all euro member states could trust the quality and impartiality of banking supervision. Thus, a single supervisory mechanism opened the way for direct capitalization by the ESM and, as such, for breaking the vicious circle between banks and sovereigns.⁴ Shortly thereafter, on 12 September of that same year, a Commission proposal for a draft regulation assigning specific supervisory tasks to the ECB was published.⁵ Almost a year later, the regulation was formally adopted,⁶ and on the 4th of November 2014, the SSM formally became operational. Such a quick legislative process, in European terms, was considered necessary in order to ensure financial stability within the EU.

The SSM is a system of banking supervision composed of both the ECB and NCAs.⁷ The ECB is exclusively competent to carry out the prudential supervisory tasks listed in the SSM Regulation, whereby the responsibilities for most of the tasks are divided between the ECB and NCAs according to the significance of a credit institution.⁸ This essentially means that the ECB is the direct competent authority for significant credit institutions (i.e. large banks) while the NCAs directly supervise the less-significant credit institutions (i.e. smaller banks). The ECB is, furthermore, responsible for the effective and consistent functioning of the SSM.⁹ The NCAs are responsible for assisting the ECB with the preparation and implementation of any acts relating to its supervisory tasks and shall follow the instruction given by the ECB when carrying out its supervisory tasks.¹⁰ The result is a far-reaching form of a mixed administration, in which both the ECB and NCAs have an important role to play.¹¹

The establishment of the SSM was part of the vision presented by the President of the European Council, Van Rompuy, in order to strengthen the Economic and Monetary Union (EMU).¹² This report, for the establishment of a genuine EMU, set out a vision for the future for a stronger EMU architecture, based on four building blocks. These building blocks refer to an integrated financial, budgetary and economic policy framework, supported by a stronger democratic legitimacy and accountability. The first building block, an integrated financial framework, must ensure financial stability and minimise the cost of bank failures to European citizens. The SSM is one of the three elements of this first building block.¹³ Another is a common mechanism to resolve banks. This has been implemented by means of the SRM.¹⁴ A Commission proposal for the SRM was published 10 July 2013,¹⁵ with the final regulation adopted on the 15th of July 2014.¹⁶ The SRM became fully operational on 1 January 2016.¹⁷ The third building block, a European Deposit Insurance Scheme, is still being negotiated.

As pointed out in the Commission’s roadmap, the crisis has shown that mere coordination between supervisors is not sufficient and that there is a need for common decision-making.¹⁸

The establishment of a single supervisory mechanism composed of both the ECB and NCAs must ensure strong and consistent supervision across the Euro area, using the NCAs’ local and specific know-how in order to ensure awareness of all national and local conditions relevant for financial stability.¹⁹

The SSM was established with the intention of creating more effective banking supervision in the Eurozone. In the context of this paper, effectiveness will refer to achieving the objectives of prudential supervision.²⁰ In the SSM Regulation, the ECB’s objective is: ‘contributing to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage’.²¹

Elements that may improve the supervisor’s effectiveness are the aforementioned quality and independence of the supervisor, and a supervisory structure that better matches the banking sector. These elements were explicitly mentioned as reasons for establishing the SSM. The effectiveness may, however, also be affected by other elements, such as ensuring a sufficiently broad set of supervisory competences, speed of decision-making and judicial protection given the dynamic and quickly developing market, transparency in order to take into account the market’s knowledge and interests as well as to increase the supervisor’s legitimacy and control, due process by the supervisor, the principle of proportionality, legal certainty, adequate enforcement tools for the supervisor and effective legal protection.²² Hereinafter it will be considered how the Single Rulebook, JSTs and division of supervisory tasks may affect these elements and, thus, the effectiveness of supervision in the Eurozone.

3 The Role of the Single Rulebook for Centralised Decision Making

When setting up the SSM, the European legislator repeatedly stressed the importance of the unity and integrity of the entire single market. An SSM for the Eurozone only should not hamper the single market for all Member States. An important basis for the ‘singleness’ of the single market is the Single Rulebook. The term ‘Single Rulebook’ is used for the aim of providing a set of uniform substantive rules for the financial sector in the EU.²³ It goes without saying that such a set of uniform substantive rules for the financial sector is also an important basis for the banking union.²⁴ After all—in Sabine Lautenschläger’s words—‘Banking supervision can only be as harmonised as the rules and regulations that govern it’.²⁵

The main elements relevant for banks are the Regulation on prudential requirements for credit institutions (CRR),²⁶ the Directive on access to the activity of credit institutions and the prudential supervision of credit institutions (CRD IV),²⁷ and the accompanying Binding Technical Standards drafted by the European Banking Authority and adopted by the Commission.²⁸ In general, also EBA’s recommendations and guidelines are considered to be part of the Single Rulebook.²⁹ The use of directly applicable legislation was first introduced in the so-called CRD IV-package, i.e. the successor of the capital directives I, II and III.³⁰ This was a major step towards further harmonisation of the banking rules in the EU. However, the Single Rulebook does—as of yet—not consist of fully harmonised rules and is as such not as ‘single’ yet as the name seems to pretend. It refers to rules laid down in different kinds of legislation, such as regulations and directives, which both in turn include national options and discretions. Accordingly, the SSM Regulation states that the ECB has to apply all relevant Union law, including national legislation transposing relevant directives and exercising Member States’ options provided in the CRR.³¹ Besides, the relevant directive, the CRD IV, sometimes provides for general obligations only, such as in case of the fit and proper requirements for members of the management board of banks.³² This results in significant differences in implementation of such directive provision,³³ and accordingly for different procedures to be applied by the ECB.

Given the importance for the banking union of having in place an actual single set of substantive rules for the financial sector, the completion of harmonisation of substantive rules for the financial sector is considered important.³⁴ However, though full harmonisation would probably be best for centralised supervision, this does not seem possible for all prudential rules due to the different legal bases. Whereas the CRR is based on Article 114 TFEU,³⁵ which allows for the use of a regulation,³⁶ the CRD IV is based on Article 53(1) TFEU.³⁷ Contrary to Article 114 TFEU, Article 53(1) TFEU only provides for the possibility of adopting a directive. It must, however, be borne in mind that the rules currently laid down in the CRR were previously also included in a directive instead of a regulation.³⁸ Thus, apparently room existed to change the legislative basis.³⁹ Whether this would also be the case for the rules still laid down in the CRD IV has yet to be seen.⁴⁰

Besides, the Single Rulebook still ensures flexibility through its more than 150 national options and discretions.⁴¹ Some options and discretions are granted to the competent authorities and some options are granted to Member States. Whereas the ECB, as competent authority for significant credit institutions, to a certain extent can harmonise the first category, it cannot decide on the latter. Such options must be exercised by the national legislators and cannot be harmonised by the ECB. The ECB has to apply the national implementation of such options.⁴² With regard to this first category, the ECB has worked hard, together with the NCAs, to create a uniform application. The ECB published a Regulation⁴³ and Guide⁴⁴ on options and discretions, whose aim is to harmonize supervisory practices and create a level playing field for credit institutions.⁴⁵ The general options and discretions in Union law are exercised via the Regulation, which is directly binding upon significant credit institutions. The ECB’s interpretation and implementation of such general options and discretions apply to all large banks without further individual assessments. The individual options and discretions included in relevant Union law require, to the contrary, a case-by-case assessment. They are laid down in the Guide, i.e. a non-legally binding instrument, which provides guidance to JSTs for the assessment of such individual options and discretions. The Regulation and Guide are the result of a thorough process in which the existing national implementations by competent authorities, international best practices, and policy discussions in relevant international fora have been taken into account. In close cooperation with the NCAs, the ECB established a policy which has been implemented in the Regulation and Guide.⁴⁶ As such, the ECB has reduced the risk of having in place different supervisory approaches and national implementations by supervisors.

The steps made so far towards harmonised rules can be considered to be the foundation of the SSM and are, as such, clearly supporting the centralised decision-making within the SSM. Nevertheless, the above shows that the Single Rulebook is not as of yet as unified as it needs to be for a banking union.⁴⁷ The fact that part of the rules are laid down in a directive which needs to be implemented by Member States in national rules, that the rules still contain options and discretions for Member States, and that there is still room for additional national rules, result in legal and practical challenges for the ECB’s centralised decision making. Some of these challenges are discussed below.

First, the lack of full harmonisation of Union rules means that the ECB is confronted with national laws that must be applied in order to fully supervise the compliance of all relevant prudential rules.⁴⁸ This requires a comprehensive knowledge of national laws not necessarily present in Union institutions. In practice, the ECB could use their in-house national law expertise as well as the available expertise within the relevant NCAs. For exercises of comparison or general knowledge, questionnaires can be a helpful tool to gather information about relevant national laws. In individual cases, the ECB and NCAs closely cooperate to ensure knowledge about the applicable rules at hand. Thus, in practice, the ECB can manage to get the necessary knowledge, but it is needless to say that having to apply national law does not support its effectiveness as a supervisor. It results in an increased risk of inconsistencies in supervision and differences between ECB and NCAs’ interpretation of the same rules.⁴⁹ This may be detrimental to the principle of legal certainty and the principle of legitimate expectations,⁵⁰ since banks may be faced with ECB interpretations of national rules, which may be different from previous national interpretation. The ECB and NCAs are, however, conscious of these risks and take into account the general principles of Union law, including the principle of legitimate expectations.⁵¹ Another issue that may hamper the ECB’s effectiveness in this respect is the uncertainty about the judicial protection in case of ECB decisions based on the application of national law. So far, the Court of Justice of the EU has never applied national laws and it remains to be seen how it will deal with this in future cases.⁵²

Furthermore, this can result in the ECB being dependent on Member States for the implementation of Union law. The ECB must apply national legislation transposing directives, yet does not participate in the implementation process. Whereas, as Lefterov points out,⁵³ the implementation and application were previously the responsibility of a single party, i.e. the Member State including both the parliament and the competent authority, both tasks are now separated.⁵⁴ When everything is in the hands of a Member State, the NCA is generally consulted about the implementation and is sometimes also allocated rulemaking powers by the formal legislator. Although, on the basis of the Treaty, the ECB shall be consulted by national authorities with respect to draft legislation in its field of competence,⁵⁵ provisions for which the exclusive purpose is the transposition of Union law in national legislation, are excluded from consultation.⁵⁶ Consequently, it is likely that the ECB will be less involved in the implementation process than the national authorities. Furthermore, rulemaking powers that are granted to competent authorities are generally accompanied by adequate checks and balances, such as certain accountability obligations towards the minister or the possibility for a minister to overrule such rules in specific circumstances. These checks and balances emphasize the role of the supervisor as part of the Member State in this respect.⁵⁷ Within the context of the SSM, such delegation of rulemaking powers seems to lose its relevance. A national legislator cannot grant rulemaking powers to a Union institution and, in any case, the ECB does not take part in these checks and balances. This setup is less than ideal for the national legislator. As the ECB is the competent authority for significant credit institutions, it also seems undesirable that the NCA be granted such powers. This would imply that the NCA can draft the rules to be applied by the ECB. Thus, the possibility of involving competent authorities in the implementation process is minimised by the SSM, making the competent authorities more dependent on the implementation of Union law into national laws by the national legislator. It may increase the risk of competent authorities applying laws that are not in line with their own interpretations of relevant Union law.⁵⁸

Additionally, the fact that applicable banking rules are still laid down partly in national laws and that there is still room for national options and discretions and additional national rules may lead to an uneven playing field for banks. In a single supervisory mechanism, it seems highly undesirable that banks within such system are subject to different rules. As Enria concluded: ‘A supervisor cannot apply different requirements to two banks facing similar risks, just because they are headquartered in different parts of its jurisdiction’.⁵⁹

The lack of a fully harmonised Single Rulebook also has consequences from a procedural perspective. The fact that banking rules and supervisory powers are still partly laid down in national laws has resulted in quite a complex allocation of ECB powers. As the ECB cannot directly exercise national powers, the SSM Regulation provides, for the exclusive purpose of carrying out the tasks conferred on the ECB by Articles 4(1), 4(2) and 5(2) of the SSM Regulation, for a legal basis for the ECB to exercise all the powers which competent authorities shall have under the relevant Union law, unless otherwise provided for in the SSM Regulation.⁶⁰ This concerns, for example, the assessment of the members of a management body, since this stems from the CRD IV. Such national supervisory powers, however, are not fully harmonised. Member States have also provided supervisors with powers under national law that are not explicitly mentioned in the CRD IV, such as the power to approve mergers.⁶¹ This is for example the case in the Netherlands.⁶² The answer so as to whether or not the ECB itself is capable of exercising such power directly subsequently depends on the question if such power must be considered to be a power that competent authorities shall have under the relevant Union law. If it concerns national powers not considered powers that NCAs shall have under relevant Union law, the ECB may—to the extent necessary to carry out its supervisory tasks—require an NCA, by way of instructions, to make use of such power, under and in accordance with the conditions set out in national law.⁶³ Recital 35 of the SSM Regulation, more specifically, points out that, within the scope of the tasks conferred on the ECB, national law confers on NCAs certain powers which are currently not required by Union law. The ECB should be able to require NCAs to make use of those powers in order to ensure the performance of full and effective supervision. The question of whether the ECB can directly or indirectly use a national power boils down to the question of what can be seen as a transposition of relevant Union law, i.e. does this include only national powers that implement the CRD IV verbatim, or also national powers ‘rooted’ in the CRD IV?⁶⁴ This is a grey area in practice, and with respect to a supervisor’s competences is best avoided.

Furthermore, the ECB is only competent to impose administrative penalties when credit institutions breach a requirement under relevant directly applicable acts of Union law under the conditions laid down in Article 18(1) SSM Regulation. In case of—inter alia—a breach of national law transposing a directive, the ECB may require NCAs to open proceedings with a view to taking action to ensure that appropriate penalties are imposed in accordance with relevant Union law and any relevant national legislation which confers specific powers which are currently not required by Union law.⁶⁵ This concerns, for example, all governance requirements, which are included in the CRD IV and, subsequently, are implemented in national laws. Such legal construction can result in complex procedures and may make the ECB more dependent on NCAs, which in turn may be detrimental to its effectiveness.

Lastly, one must keep in mind that the Single Rulebook covers European banking rules. The applicable administrative rules for the ECB can be found in general administrative law principles of the Court’s jurisprudence and its accompanying literature. Europe does not have a general administrative act covering actions by the Union’s institutions. Consequently, it may be challenging to know the exact administrative rules to which the ECB has to adhere, since these rules are not concentrated in a single act. Besides, when the Single Rulebook does not provide for applicable timelines or administrative procedures, the ECB may need to fall back on more specific national timelines and procedures. This may be different per member state, as it is not harmonised under Union law. The timelines for deciding whether to grant an authorisation⁶⁶ are, for example, in the Netherlands still shorter than in many other Member States. Dutch law states that the competent authority has to prepare a draft decision for the ECB within 13 weeks of receiving the notification, and the final decision has to be adopted within 6 months at the very maximum,⁶⁷ whereas the maximum period under the CRD IV is much longer (i.e. a year). In line with the maximum period for granting an authorisation under CRD IV, many Member States have timelines between 6 and 12 months.⁶⁸ A European administrative act may better guarantee high standards for authorities’ actions.⁶⁹ This, of course, applies to the ECB’s actions, but also to the NCAs’, when assisting, for example, the ECB to prepare for a decision.

The above shows that the existence of national substantive law and national supervisory powers required some creativity on the part of the legislator, resulting once again in challenges to the ECB’s effectiveness. The effectiveness of prudential supervision may be hampered, since the differences in substantive law and supervisory powers are contrary to the ECB’s objective of taking into account the unity and integrity of the market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage. Differences in national laws may result in unequal treatment of credit institutions which are all part of the SSM, which may also trigger regulatory arbitrage. The differences in national law also result in complex use of powers, which slows down the speed of decision-making. The grey areas with regard to the ECB’s competences may, furthermore, affect the ECB’s legitimacy. Also the adequacy of the ECB’s enforcement tools may be negatively affected as a result of the ECB’s dependence of NCA’s. Above all, the complexity with regards the ECB’s powers results in equally complex judicial procedures.⁷⁰ All these elements may hamper the effectiveness of the ECB as prudential supervisor. Thus, further harmonisation of relevant Union law seems to be an important corner stone for effective centralised supervision.⁷¹ The extent to which full harmonisation is possible is debatable, however, given the legal context and the required flexibility to accommodate different legal systems and cultures and political wishes.⁷² Hereinafter, it will be discussed how supervision is carried out and whether or not this supports the effectiveness of the SSM.

4 Joint Supervisory Teams

The author would like to thank Saskia Bezoen, Koen Vreke and Sandra Wesseling for sharing their experiences and providing input for this section.

The ongoing supervision is carried out by so-called JSTs. Each significant bank is supervised by a JST. The team is composed of staff members from both the ECB and NCAs.⁷⁴ A Joint Supervisory Team is coordinated by an ECB staff member, who is, in principle, from a member state other than that where the bank is established.⁷⁵ The NCA staff consists of individuals of the Member States in which a bank, its subsidiaries, or significant cross-border branches of a given banking group are established. The size, overall composition and organization of such team depend on the nature, complexity, scale, business model and risk profile of the bank.⁷⁶ So far, the balanced composition of the supervisory team seems to be working well.

In a far-reaching mixed administration, such as that in place in the SSM, close cooperation is crucial. The mix of staff members from the ECB and relevant NCAs in JSTs is a useful ‘tool’ to ensure the required close cooperation. Supervisors can easily contact each other and discuss day-to-day supervisory issues. Banks are given a clear contact person in the SSM. Due to a professional IT-system, information exchange—as well as confidentiality—is guaranteed, which is, needless to say, a must for effective supervision.

The involvement of national supervisors is considered to be important given their long-established expertise in the supervision of banks established in their Member State, and in their economic, organizational and cultural specificities.⁷⁷ Their proximity to the institution and having the same mother tongue as the institutions are also relevant aspects in this regard. However, as pointed out in the introduction, guaranteeing impartiality in banking supervision was one of the reasons to centralize supervision in the Eurozone. The SSM must therefore ensure that relevant Union law is applied in the same manner in all Member States, and that credit institutions are subject to ‘supervision of the highest quality, unfettered by other, non-prudential considerations’.⁷⁸ Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the SSM, particularly pointed out that the establishment of a single supervisor must avoid national bias in the regulatory and supervisory treatment⁷⁹ and that the SSM must establish a common standard that ‘allows banks to be supervised without the influence of national interests’.⁸⁰

The involvement of NCA staff may of course create a higher risk of regulatory capture, but this risk seems to be diminished by several factors.⁸¹ For instance, by the ECB coordinator, who is not from the country where the bank is established. Furthermore, the decision-making procedures in place in the SSM have an important role to play to diminish the risks of regulatory capture. The mere fact that most supervisory decisions addressed to significant credit institutions have to be adopted in draft by the ECB’s Supervisory Board—i.e. inter alia all representatives of the NCAs in participating Member States⁸²—and finally adopted by the Governing Council—the ultimate decision-making body of the ECB—creates more distance from a bank. A JST or NCA may prepare a draft decision,⁸³ but such decision must be explained and justified towards the members of the Supervisory Board and Governing Council. After all, the Supervisory Board must prepare a draft decision, which will be sent to the Governing Council for adoption.⁸⁴ This means that little room is left for unjustified national interests.

Another relevant factor is that JST coordinators are appointed for a period of 3–5 years, depending on the risk profile and complexity of the institution. JST coordinators and members are expected to be rotated on a regular basis.⁸⁵ As such, close involvement of national supervisors as well as impartial supervision can be ensured. Furthermore, the fact that JSTs consist of staff members from different NCAs with different experiences, backgrounds and focus areas, may increase the chance that draft decisions are better challenged within the team. Lastly, the ECB is literally and figuratively further away from the credit institutions, which may also ensure impartiality of the supervisor.

The strength of the JSTs—i.e. the close cooperation of staff members appointed by different authorities—also creates certain challenges. The mix of staff members from different authorities in one supervisory team results, for example, in employment law questions, since the formal employer of the national staff members (i.e. the NCAs) differs from the actual coordinator of such staff members (i.e. an ECB staff member). The close cooperation may, furthermore, give rise to questions regarding the scope of the JST-members’ tasks—e.g. can they also carry out supervisory tasks relating to the remaining national tasks at the same time?—which may not immediately be clear to credit institutions. These uncertainties may, again, affect the ECB’s effectiveness.

A more practical challenge for the effectiveness of the SSM are language barriers that exist between various staff members as well as between the supervisors and credit institutions. Despite the fact that all parties involved generally speak proper English, miscommunications or misinterpretations may occur when English is not the mother tongue of parties involved.⁸⁶

To ensure that the closely intertwined administrations of the ECB and NCA overcome practical hurdles for the effective supervision, it could be helpful to have, beside the mixed composition of JSTs, a link within the ECB between the ECB and the NCA of the Member State where the bank is established. Knowledge of the local language, culture and national laws are, for example, an important requirement for effective supervision and close cooperation between staff members. The ECB must ensure that possible miscommunication or the lack of knowledge about national law do not become practical hurdles for effective supervision. In practice, most JSTs have an ECB staff member from the country where the bank is established, who can serve as an intermediary to overcome such risks.

The JST proper functioning is obviously also dependent on participating team members. A JST must consist of knowledgeable, skilled, and dedicated team members with the competences and ambition necessary to make it work. Furthermore, it is important that the members have a sense of ‘cultural awareness’. At times, it may be hard to understand the responses of colleagues from other cultures, but staff members must at least be aware of possible differing responses as a result of cultural differences. Discussing such differences must be possible, which is only the case if people are aware of their existence. Good cooperation between various staff members requires an openness to the views, experiences and opinions of others.

Furthermore, the ECB’s inability to decide on the NCAs’ capacities can be potentially challenging. Due to the mixed administration established by the SSM, the ECB is dependent on NCAs to decide on the number of staff to allocate to JSTs. Nevertheless, the ECB has a number of tools at its disposal to direct the supervisory teams. It is in charge of the composition of the JSTs, and may request that the NCAs modify the appointments they have made, if such a modification is deemed appropriate for the purpose of the composition of the team. Furthermore, the ECB and NCAs are to consult each other and agree on the use of NCA resources with respect to the JSTs.⁸⁷

Despite these challenges, the establishment of JSTs seems to be in general an adequate tool to ensure close and effective cooperation between the ECB and NCAs, without sacrificing its impartiality. It seems to create a supervisory structure, in practice, that better matches the banking sector, and could speed up the decision-making procedure as a result of the relevant authorities’ involvement in earlier stages. As such, the JSTs seem to support the effectiveness of the ECB as prudential supervisor.

5 Division of Supervisory Tasks; Its Impact on the ECB and on National Supervisory Models Based on a Dutch Example

The ECB has been allocated specific tasks concerning policies relating to the prudential supervision of credit institutions.⁸⁸ This implies that the ECB’s tasks are restricted in a number of ways. The restriction of the ECB’s supervisory tasks follows, first and foremost, from the legal basis of the SSM Regulation, i.e. Article 127(6) TFEU, which reads:

The Council, acting by means of regulations in accordance with a special legislative procedure, may […] 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.

In line with this legal basis, the ECB is exclusively competent to carry out tasks for prudential supervisory purposes in relation to credit institutions established in the participating Member States.⁸⁹ Furthermore, in line with this legal basis, specific tasks, listed in Articles 4(1), 4(2) and 5(2) of the SSM Regulation, are conferred to the ECB. The SSM Regulation explicitly states that other tasks remain within the jurisdiction of national authorities.⁹⁰ These ‘other’ tasks concern, amongst other things, the supervision of institutions that are not covered by the definition of credit institutions under Union law but supervised as credit institutions under national law, the supervision of payments services, the supervision of credit institutions in relation to markets in financial instruments, the supervision of anti-money laundering and terrorist financing rules, and consumer protection.⁹¹ The national authority deemed competent to carry out these ‘other’ tasks may be different per Member State. The limitations of the ECB’s supervisory tasks may create, in practice, a number of challenges. It affects the existing national supervisory models, which has been illustrated below on the basis of the Dutch example, and may affect the ECB’s effectiveness. Above all, it may be demanding for the ECB given the large number of other supervisory authorities it has to liaise with due to the division of tasks. Both advantages and disadvantages are discussed below.

The new supervisory set-up in the participating Member States is still young, and Member States have already implemented their own supervisory models in their territory, in line with the principle of national procedural autonomy. This principle refers to the general idea that Union law is implemented, applied, and enforced within a national legal order.⁹² It is, therefore, up to the Member States themselves to decide how to meet their Union obligations, which will concern, for instance, the appointment of national authorities responsible for the implementation and application of EU law, and lay down the procedures to be followed.⁹³ However, such autonomy is limited by several factors. As discussed by Hofmann, Rowe and Türk,⁹⁴ national autonomy is first limited, since national substantive and procedural law is only applicable in the absence of any requirements in Union law with respect to the procedural or organisational implementation of Union law. Secondly, the national procedural rules must be in line with the principle of equivalence and the principle of effectiveness.⁹⁵ Thirdly, Member States are subject to the general principles of Union law and fundamental rights in case of indirect administration. Consequently, when Union law provides for requirements with respect to procedures or organisation of the implementation of Union law, then national administrations must act in conformity. The principle of primacy of Union law and the principles of direct effect require that national law is set aside in case of conflict with Union law.⁹⁶ In line with this principle, national supervisory models had to be amended wherever necessary to ensure compliance with the SSM Regulation. This, in turn, will directly impact the Member States and will precede national law.

Taking the example of the Netherlands, the supervisory laws had to be slightly amended in order to ensure compliance with the SSM Regulation.⁹⁷ The responsibilities of certain supervisory tasks were not aligned with the prudential ones allocated to the ECB. In the Netherlands, a so-called Twin Peaks Model is in place. This means that prudential supervision and conduct of business supervision are allocated to different authorities. The Dutch Central Bank (De Nederlandsche Bank, DNB) is the competent authority for prudential supervision, with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) the competent authority for market and conduct supervision.⁹⁸ One of the underlying reasons for this Twin Peaks model is the idea that both tasks have different objectives,⁹⁹ require a different skill set, and that a distinction between decision-making responsibilities is necessary in order to do justice to both objectives.¹⁰⁰ Certain overlapping supervisory tasks were previously considered to be joint responsibilities of both DNB and the AFM in the Netherlands, whereas now the ECB is exclusively competent on the basis of more recent Union law. When the Dutch legislation was amended in order to ensure alignment with the SSM Regulation, the legislator clarified in the explanation to the amendment that the cooperation between DNB and the AFM should stay in place to the greatest possible extent. Some provisions did not need to be amended, and only required the addition of a general clause stating that, for the application of a certain part of the relevant law, the ECB substitutes DNB when this follows from Articles 4, 5 and 6 of the SSM Regulation.¹⁰¹ Other provisions have been slightly amended in order to bring them in line with the new supervisory structure. For example, when both DNB and the AFM carry out supervision of an institution, they will provide the other authority with a reasonable time frame to submit its view before taking certain specific measures.¹⁰² These measures include, amongst other things, the right to withdraw a license. In the context of the SSM, DNB must still provide the AFM with a reasonable time frame to submit its views when it has to prepare a withdrawal of an authorisation, while the ECB is ultimately competent to withdraw licenses.¹⁰³ This is also the case when DNB must prepare a draft decision for granting an authorisation, which is also the ECB’s competence, but is prepared by the NCA.¹⁰⁴ DNB shall request the AFM for advice in case such an application also concerns requirements that are considered to be conduct supervision under Dutch law. The AFM’s advice is to be part of the draft decision.¹⁰⁵ The Dutch legislator also laid down cooperation arrangements for the AFM with the ECB for specific cases, assuming the ECB cooperates with the AFM in accordance with the Union principle of loyal cooperation, despite the lack of an explicit legal basis for such cooperation within the SSM Regulation.¹⁰⁶ A similar construction has been introduced for draft decisions with regard to the approval of an acquisition of a qualifying holding in a credit institution.¹⁰⁷ In these cases, the ECB makes the final decision based on a draft NCA decision. The Dutch legislator used these formal two-step procedures in the SSM to ensure close cooperation between the Dutch authorities with full respect of the ECB’s exclusive competences.

These examples illustrate the possible far-reaching impact of European delineation of supervisory tasks upon national supervisory models. In the Dutch example, it affected the close cooperation arrangements in place between the prudential and market-conduct supervisors, as well as the division of supervisory tasks. This had an effect not only on DNB’s competences, but also on competences of the Dutch market authority. Nevertheless, the Dutch legislator tried to align the national supervisory model with the SSM without losing the advantages of the existing national model. The Dutch example illustrates that national supervisory models may generally be in line with the European supervisory set-up, but nonetheless contain subtle nuances and differences. Moreover, national authorities with competences necessary for the tasks that are not transferred to the ECB, i.e. remain national, may differ per Member State. Consequently, the ECB faces a different supervisory environment in each participating Member State, and will have to cooperate with various authorities in each participating Member State. This requires knowledge at the level of the ECB about the national situation in order to effectively carry out its tasks. It also demands a certain degree of flexibility in order to adapt the cooperation arrangement to the specific situation of every participating Member State. The NCAs’ experience and its knowledge about their national supervisory landscape will come in useful for the ECB, making close cooperation between the ECB and NCAs pivotal in order to have effective supervision.

A division of tasks may better ensure that different objectives of each task will need to be considered. This, however, will require close cooperation and an exchange of information between different authorities in order to ensure that all relevant authorities receive any information that is relevant for their supervision, and to overcome any overlap or gaps in supervision. A possible breach of non-prudential banking rules may, for instance, have an impact on the soundness of a credit institution. One could think of the reputational damage of breaches of market-conduct rules, or the impact on an institution’s capital in case it has to pay high fines due to a breach of law.¹⁰⁸ In both examples, the ECB must be informed in order to be able to carry out its supervisory tasks effectively. It is, therefore, crucial for the ECB’s effectiveness to be fully aware of issues in other supervisory areas which may affect the banks under their supervision. This means that adequate powers to closely cooperate with other supervisors must be guaranteed at the very least. Ensuring close cooperation and information exchange between the ECB and national authorities may pose more of a challenge than the exchange amongst national authorities. Whereas national authorities may easily contact each other, it may be more difficult for national authorities to negotiate cooperation arrangements with a Union institution such as the ECB. The ECB may, in turn, face difficulties given the large number of national authorities to cooperate with and the literal and figurative distance of other national authorities. It may, furthermore, be difficult for the ECB—as an ‘outsider’—to grasp the national division of responsibilities and dynamics between national authorities. It will take time for the ECB to achieve a similarly close cooperation with other national authorities like the NCAs have with their national counterparts. To make sure that the baby is not thrown out with the bathwater, the ECB could take advantage of national cooperation in place, as illustrated above by the Dutch example. In this example, DNB ensures on a national level that the market-conduct are taken into account, without burdening the ECB with any additional liaising obligations. It seems advisable, however, that the ECB also creates and maintains contact with other national authorities, so that it can contact them directly, quickly, and smoothly whenever necessary for its supervisory tasks.

In order to ensure strong cooperation with other supervisory authorities, the ECB has to enter into a broad variety of memoranda of understanding. This does not only concern memoranda of understanding with regard to the cooperation with market-conduct authorities, but also competent authorities for all other banking supervisory tasks that have not been transferred to the ECB. Memoranda of understanding between the ECB and competent authorities of Member States that are not participating in the SSM,¹⁰⁹ and memoranda of understanding with competent authorities responsible for markets in financial instruments are two such examples.¹¹⁰ Furthermore, it also concerns the horizontal relations between the ECB and other Union bodies. The ECB has, for example, entered into a memorandum of understanding with the Single Resolution Board with respect to cooperation and information exchange.¹¹¹ To take another example, there exists a memorandum of understanding (MoU) between the European Securities and Markets Authority (ESMA) and the ECB, which includes a template MoU to be used between national authorities responsible for markets in financial instruments and the ECB.¹¹² It goes without saying that some time is necessary to be able to enter into such memoranda of understanding. The SSM Framework Regulation therefore ensures continuation of already existing cooperation arrangements, while providing the ECB with the possibility of participating in such existing cooperation arrangements, or establishing new arrangements in their place.¹¹³

Another point of attention in the cooperation between the ECB and other relevant authorities due to the division of supervisory tasks, is the possible imbalance between the ECB—as Union institution—and other authorities—often being either national authorities or EU agencies.

A former member of the executive board of the Netherlands Authority for the Financial Markets once mentioned in an interview the importance of building a system to counter-balance the prudential system built around the SSM. He referred to a future with a European ‘twin peaks’ system, with separate bodies for prudential and conduct supervision.¹¹⁴ Although such a system may ensure a counterbalance for the ECB on a Union level, it is debatable if centralised market-conduct is justified by the objectives of this type of supervision. As discussed in Sect. 2, the crisis has shown that mere coordination between prudential supervisors was not sufficient. The objectives of market-conduct supervision, i.e. orderly markets and fair treatment of consumers,¹¹⁵ may be more nationally oriented. The question of having centralised market-conduct supervision as well requires, at the very least, a broader discussion than only possible cooperation between supervisors.

Despite the abovementioned challenges due to the—sometimes artificial—split of supervisory powers, alternative approaches will create their own specific challenges. The scope of financial supervision is so broad that it cannot be allocated to a single supervisory authority. Thus, choices will need to be made. In light of the legal basis, the current limitations seem justified. It is, however, worth to briefly explore here the possibility of centralising other parts of the financial supervision on the European level as discussed above. Such centralisation could result in a counterpart for the ECB on the European level, limiting the number of memoranda of understanding to be entered into. At the same time, it may provide for a better set of checks and balances between supervisory authorities, as their geographical scope will be similar. It is likely, however, that such counterpart would be an existing or new agency,¹¹⁶ which would result in an institutional imbalance of a Union institution (ECB) on the one hand, and the EU agency allocated with other banking supervisory tasks on the other. The latter could, above all, only be allocated with limited discretionary powers. It may be logical to allocate market-conduct supervisory tasks to the ESMA, given its current objectives to contribute, inter alia, to ensuring the integrity, transparency, efficiency and orderly functioning of financial markets.¹¹⁷ However, the EBA has to promote transparency, simplicity and fairness in the market for consumer financial products or services across the internal market for banks.¹¹⁸ Thus, even an allocation of such tasks to ESMA would require an amendment of the current system on a European level. Should a new agency need to be established, it seems logical that such agency would also become part of the European System of Financial Supervision (ESFS), just like inter alia the European Banking Authority, ESMA and the ECB, given the broadly formulated ESFS’ objectives.¹¹⁹ Regardless of its institutional advantages and disadvantages, it seems that this, as said above, requires at the very least a broader discussion about the need of centralising other supervisory tasks given the specific objectives of such tasks. The latter should, at the end, be determining for the decision to centralise other parts of financial supervision or not. Institutional advantages and disadvantages must be taken into account, but should not be determining.

To sum up, the division of tasks may make it more difficult for the ECB to achieve its goals, since it requires close cooperation with many—perhaps too many—authorities and, consequently, may slow down the decision-making process. Close cooperation is made maybe even more difficult by the risks of an imbalance in the relationship between the ECB and other authorities. The division of tasks, on the other hand, enables the ECB to focus on achieving the prudential supervisory objectives instead of having to take into account the various kinds of objectives. Such focus will likely benefit the ECB’s effectiveness. The establishment of several authorities may also ensure that they keep each other on their toes, further improving effectiveness. In order to actually improve its effectiveness in its division of tasks, the ECB must at least make sure that close cooperation and adequate information exchange is guaranteed. Given the possible impact of issues in other supervisory fields that may impact the credit institutions supervised by the ECB, as well as to avoid any overlap or gaps in supervision, this is necessary in order to achieve the supervisory objectives.

6 Conclusion

The establishment of the SSM had to ensure the quality and impartiality of banking supervision and the establishment of a supervisory system more properly aligned with the characteristics of the banking sector. This required a more centralised supervision within the Eurozone. The far-reaching mixed administration of the ECB and NCAs must, on the other hand, ensure strong and consistent supervision across the Euro area, while using the NCAs’ local and specific know-how. All elements indicate that banking supervision needed to become more effective for the Eurozone. This has been translated into the ECB’s objectives, as laid down in the SSM Regulation, of ‘contributing to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage’.¹²⁰ Effectiveness refers, in the context of this paper, to achieving these supervisory objectives. One must keep in mind that the current institutional supervisory set-up also results in an inherent tension between a more centralised supervision on the one hand, and a far-reaching mixed administration in place and the legal reality of composite legal orders in the EU, on the other. The paper discusses the ECB’s effectiveness—as central supervisor—in the context of a mixed administration and legal order on the basis of three elements of supervision. Respectively, the first experiences with the Single Rulebook, JSTs and delineation of supervisory tasks have been looked at.

The first experiences indicate that numerous obstacles still need to be overcome, but they also highlight the many steps that have been taken to improve the effectiveness of supervision. The ECB’s centralised supervision of compliance with the applicable banking rules (i.e. important parts of the Single Rulebook), for example, can only be fully effective if these rules are harmonised. Although major steps have been taken towards further harmonisation of the substantive banking rules, national law and national differences still exist. The ECB has to apply these various national laws and manage the ensuing risk of inconsistencies in supervision and in the interpretation of rules. All this may lead to an uneven playing field for banks within the SSM. Moreover, this results in quite a complex allocation of powers, creating undesirable grey areas, and makes the ECB dependent on national procedural rules where European law does not provide for such rules. The second element discussed concerns the JSTs that, in practice, are an important feature in the organisation of supervision. The JSTs seem to be an adequate form of organising supervision for ensuring close cooperation between the ECB and NCAs’ staff members, and ensuring, as such the ECB’s effectiveness, without compromising the impartiality of supervision. Lastly, the advantages and disadvantages of a division of supervisory tasks are discussed, as well as the impact of a division on a central level on the national supervisory model and the ECB’s effectiveness.

It is clear that many challenges cannot be changed by the supervisor itself, but will require legislator’s actions, for example for further harmonisation of the Single Rulebook and more harmonised European administrative law. Other challenges may be inherent to certain choices, such as the fact that the ECB has to cooperate with many other authorities involved in banking supervision. This is counter to the intended effectiveness of supervisors by means of a division of tasks. Nevertheless, such division of tasks enables the ECB to focus on achieving the objectives of its specific tasks, which may increase the ECB’s effectiveness.

Other challenges, however, could be dealt with by the supervisors themselves in order to improve their effectiveness. The ECB has, for instance, harmonised the options and discretions granted to competent authorities as much as possible, and is entering into Memoranda of Understanding with several authorities so as to ensure close cooperation between them. Furthermore, the establishment of JSTs for the supervision of significant credit institutions plays an important role in ensuring close cooperation between the ECB and NCAs and, consequently, effective supervision.

The first years of experience with the SSM thus provide a multi-faceted picture of the effectiveness of supervision within the Eurozone. It does not seem possible to have effective banking supervision at present without centralised supervision. Though the SSM was set up in a relatively short timeframe with impressive results, there still remain enough challenges to overcome. These challenges have been discussed in this paper from an effectiveness perspective. It is, however, needless to say that other perspectives must also be taken into account, as they may provide solutions for the discussed challenges that are different from those considered solely from an effectiveness perspective. This concerns, for instance, the fundamental principles of a state based on the rule of law. A centralised supervision in the Eurozone should also meet these standards. After all, the EU is founded on the values of the rule of law, amongst others.¹²¹At the end, all perspectives should be considered in order to get a good overview of the first experiences with the SSM. As we have experienced the first years of the SSM, now may also be a good moment to review the new supervisory landscape that has been created as a result. We should be asking ourselves if effective supervision is in place in the Eurozone, if this is the wished-for form for what should be created, and if this new organisation is living up to the standards that the European Union represents.