Conference: European Banking Union: Democracy, Technocracy and the State of Integration - Global Governance Programme, Robert Schuman Centre for Advanced Studies, European University Institute By: Niamh Moloney, London School of Economics and Political Science

1. 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

2. 2
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

3. 3
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

4. 4
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

5. 5
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)

6. 6
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

7. 7
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?

8. 8
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

9. 9
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

10. 10
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

11. 11
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….

12. 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
12

13. 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?
13

14. 14
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

15. 15
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

16. 16
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