Common Banking Supervision in the Eurozone: Strengths and Weaknesses

69 Pages Posted: 22 Aug 2013  

Guido Ferrarini

University of Genoa - Law Department and Centre for Law and Finance; European Corporate Governance Institute (ECGI)

Luigi Chiarella

Università degli Studi di Genova

Date Written: August 1, 2013

Abstract

In this paper we analyse various instances of supervisory centralization either implemented or proposed in Europe in the aftermath of the financial crisis and the sovereign debt crisis. Our central thesis is that supervisory fragmentation is a cause of systemic risk, as cooperation amongst national authorities is bound to fail in crisis situations, while the absence of common resolution mechanisms and common deposit guarantee schemes aggravates the costs of a banking crisis and increases the chances of a bailout. We argue, in particular, that the current European supervisory architecture introduced in 2010 substantially belongs to the model of ‘enhanced’ cooperation, despite including elements of the other two models of supervisory centralization (lead supervisor and single supervisor), and is the outcome of a political compromise. Presently, European supervisory authorities, including EBA, coordinate the national ones, rather than supervising financial firms directly. National authorities cooperate in a network (the ESFS) under local mandates and are therefore prone to domestic biases, particularly in crisis situations.

The situation will be different under the Banking Union when the Single Supervisory Mechanism (SSM) is in place. We argue, however, that the SSM includes elements of cooperation and delegation, which will help the ECB to perform its tasks as a central supervisor, but will also give rise to conflicts of interest and information asymmetries. Moreover, the SSM will be limited to the eurozone, so that the enhanced cooperation and lead supervisor’s models will nevertheless apply in the relationships with other countries. The ECB will also have to cooperate with EBA that will keep its regulatory and mediation tasks, as already provided by the 2010 reforms. As a result, cross-border banking groups will often be subject to substantial supervisory fragmentation. The seriousness of these weaknesses could be tempered by an extension of the Banking Union to a sufficient number of non-euro countries under the regime of close cooperation. However, we show that the incentives for these countries to opt into a similar regime are modest and that there could be greater incentives to stay out of the SSM and exploit the voting power of non-euro countries within the EBA’s Supervisory Board.

Keywords: Banking Supervision, Banking Union, Euro, European banking, European Banking Authority, European Central Bank, Prudential Regulation

JEL Classification: E50, E52, E53, G01, G21, G28

Suggested Citation

Ferrarini, Guido and Chiarella, Luigi, Common Banking Supervision in the Eurozone: Strengths and Weaknesses (August 1, 2013). ECGI - Law Working Paper No. 223/2013. Available at SSRN: https://ssrn.com/abstract=2309897 or http://dx.doi.org/10.2139/ssrn.2309897

Guido Ferrarini (Contact Author)

University of Genoa - Law Department and Centre for Law and Finance ( email )

Via Balbi, 22
16126 Genova, 16100
Italy
+39 010 209 9894 (Phone)
+39 010 209 9890 (Fax)

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

European Corporate Governance Institute (ECGI)

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

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

Luigi Chiarella

Università degli Studi di Genova ( email )

Via Vivaldi 5
Genova, 16126
Italy
+39 010 2099951 (Phone)
+39 010 2099890 (Fax)

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