Empowering the ECB to Supervise Banks: A Choice-Based Approach

55 Pages Posted: 14 Jan 2009 Last revised: 9 May 2011

See all articles by Gerard Hertig

Gerard Hertig

ETH Zurich; European Corporate Governance Institute (ECGI)

Ruben Lee

Oxford Finance Group

Joseph A. McCahery

Tilburg University - School of Law; European Banking Center (EBC); Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Date Written: August 2009

Abstract

The reform of bank supervision represents one of the great institutional challenges for the European Union. The recent pattern of cross-border failures in supervision reflects the extent to which a better functioning system of supervision is critical for the safe operation of the banking system in the EU. Within this framework, the main institutional reforms currently being proposed are likely to fail. It is thus worth considering alternatives. This paper explores the merits of a choice-oriented approach under which individual Member states have the option to delegate prudential supervision of their largest banks to the European Central Bank, while still retaining the right to re-assume such a role at a later date. Responsibilities, commitments and costs would be allocated by means of a binding agreement with the ECB that can be tailored to Member states’ specific circumstances, to the extent permitted by supervisory coherence and equal treatment. The proposal offered here is superior to existing supervisory arrangements, and is likely to produce a more socially desirable outcome than the proposed alternatives.

Keywords: Banking supervision, European Central Bank, European integration, prudential supervision, opt-in, supervisory colleges

JEL Classification: D02, E42, E58, G21, G28, K23

Suggested Citation

Hertig, Gerard and Lee, Ruben and McCahery, Joseph A., Empowering the ECB to Supervise Banks: A Choice-Based Approach (August 2009). TILEC Discussion Paper No. DP 2009-001; ECGI - Finance Working Paper No. 262/2009; Paolo Baffi Centre Research Paper No. 2009-58; Amsterdam Center for Law & Economics Working Paper No. 2009-01. Available at SSRN: https://ssrn.com/abstract=1327824 or http://dx.doi.org/10.2139/ssrn.1327824

Gerard Hertig (Contact Author)

ETH Zurich ( email )

IFW E 49
Haldeneggsteig 4
CH-8092 Zurich
Switzerland
+4144-632-4008 (Phone)
+4144-632-1097 (Fax)

HOME PAGE: http://www.hertig.ethz.ch

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Ruben Lee

Oxford Finance Group ( email )

United Kingdom

HOME PAGE: http://www.oxfordfinancegroup.com

Joseph A. McCahery

Tilburg University - School of Law; European Banking Center (EBC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands
+31-(0)13-466-2306 (Phone)
+31-(0)13-466-2323 (Fax)

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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