Explaining the sudden creation of a banking supervisor for the euro area

ABSTRACT

While banking supervision in the European Union (EU) had been subject to slow incremental changes in the 2000s, the establishment of the Single Supervisory Mechanism (SSM) in 2012/2013 amounted to a comparably swift and significant transfer of sovereignty. This article explores the institutional dynamics behind this sudden shift from incremental to punctuated change. We show that powerful ‘reproduction mechanisms’ of institutional stability were decisively weakened by the euro area crisis and the existential need to break the feedback loop between banks and sovereigns. The institutional breakthrough came about as a package deal, linking banking supervision to a short-term crisis management measure for direct bank recapitalization. In focusing on the twin dynamics of previous stability and sudden change and structural and institutional factors behind the decisive turning point at the June 2012 summit, this article adds a new perspective to previous accounts and their emphasis on individual actors, functionalist learning processes or ideational aspects.

KEYWORDS:

• Banking union
• EMU
• historical institutionalism
• punctuated change
• rational choice institutionalism
• Single Supervisory Mechanism

Acknowledgements

The authors are employees of the European Central Bank and are themselves alone responsible for the views expressed in the article, which do not necessarily represent the views, decisions or policies of the European Central Bank. We would like to thank Stefaan de Rynck, David Howarth, Demosthenes Ioannou, Lucia Quaglia, and the anonymous reviewers for their comments, as well as Stephanie Bergbauer and Johannes Kleibl for valuable research assistance.

Disclosure statement

No potential conflict of interest was report by the authors.

Notes on contributors

Gabriel Glöckler is head of the secretariat division, at the European Central Bank.

Johannes Lindner is head of the EU institutions and fora division, at the European Central Bank.

Marion Salines is principal economist, at the European Central Bank.

Notes

1. For example, when the European Banking Authority (EBA) was created in 2011, it was given only limited powers over national supervisors, and a safeguard clause was introduced to ensure that its decisions do not have fiscal implications.

2. Lindner (2003a, 2003b) also points to the interdependence of subfields as a separate, fourth reproduction mechanism, which this article subsumes in the other mechanisms as it seems less relevant for this empirical case.

3. As part of the banking union, it was identified as a central building block of the long-term vision towards a genuine EMU (Van Rompuy 2012).

4. According to the Bank for International Settlements (2011), German lenders had the highest risk exposure in Europe to Spain, which stood at around $242 billion at the end of 2010, of which $85 billion alone was exposure to banks. At this time, Deutsche Bank on its own had a total exposure to Spanish financial institutions of around €7.6 billion (Wall Street Journal 2012).