Building responsive supervision over smaller banks in Europe: an insight from the Principal-Agent perspective

Abstract

The Single Supervisory Mechanism (SSM) is an administrative arrangement of national assistance to the ECB in exercising its exclusive supervisory competence. It sets two systems of assistance: ECB Direct Supervision (for large banks) and Indirect Supervision (for smaller and medium-sized banks) supervision. This paper analyzes dynamics between the ECB Banking Supervision as the principal and NCAs as its agents in the system of ECB Indirect Supervision. It identifies six formal (statutory) accountability and control mechanisms which are put at the ECB’s disposal to monitor the way how the NCAs carry SSM supervisory tasks when exercising the ECB’s exclusive supervisory competences under the SSM Regulation.

Keywords:

• Banking Union
• Single Supervisory Mechanism
• Principal-Agent
• LSI supervision
• accountability and control

Notes

1. See Article 4(1) of Council Regulation No. 1024/2013 (SSM Regulation) which lists nine prudential tasks which have been delegated to the ECB. They include such supervisory activities as: (1) granting and withdrawal of authorization of a credit institution; (2) supervision of cross-border entities; (3) assessment of changes in the shareholder structure of a supervised institution; (4) ensuring the compliance of supervised institutions with key micro-prudential requirements, including own funds (capital) requirements and securitization, liquidity requirements, leverage and public disclosure of information on those matters; (5) ensuring the compliance of a supervised institution with other micro-prudential requirements, including robust governance arrangements and internal capital adequacy assessment processes (ICAAP); (6) conducting supervisory reviews (“Supervisory Review and Evaluation Processes”, SREPs) together with stress tests together and the imposition of ad hoc additional requirements (“Pillar 2” measures); (7) supervision of banking groups on a consolidated basis; (8) supplementary supervision of financial conglomerates; (9) pre-resolution, including recovery planning of a credit institution and early intervention.

2. This system is built on the existence of remote, predominantly NCA staffed but ECB-led, administrative structures, joint supervisory teams (JST), which carry out operational supervision of each significant institution on the ECB behalf and submit proposals for supervisory activities to be carried out by the ECB and supervisory decision to be taken by the ECB (ECB 2014b; (FMA) Financial Market Authority (Austria) 2014).

3. This understanding of ECB indirect supervision was confirmed by the Court of Justice of the European Union in its recent case T-122/15 Landeskreditbank Baden-Württemberg – Förderbank, see in particular par. 54.

4. This criterion is understood as the total value of its assets exceeds EUR 30 billion; or as the ratio of its total assets over the GDP of the participating Member State of establishment exceeding 20%, unless the total value of its assets is below EUR 5 billion.

5. This criterion is understood as importance for the economy of the Union or any participating Member State.

6. The ECB may also, on its own initiative, consider an institution to be of significant relevance where it has established banking subsidiaries in more than one participating Member States and its cross-border assets or liabilities represent a significant part of its total assets or liabilities subject to the conditions laid down in the methodology. The methodology sets this criterion as the total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%.

7. This criterion is applied to those banks for which public financial assistance has been requested or received directly from the EFSF or the ESM. They shall not be considered less significant.

8. This criterion is an obligation for the ECB shall carry out the tasks conferred on it by this Regulation in respect of the three most significant credit institutions in each of the participating Member States, unless justified by particular circumstances.

9. See Article 4(1) of the SSM Regulation.

10. See Article 6(1) of the SSM Regulation.

11. On this aspect, see also Gren, Howarth, and Quaglia (2015, 184–190).

12. In order to capture the specificities of these mechanisms in the SSM context, this paper will refer to them as “accountability and control mechanisms”. The reasons for this are twofold. Control in the Anglo-Saxon sense is broader than accountability and relates to steering of behavior of one party by another party (top-down design) (Scott 2000, 39). Accountability, in turn, is about an obligation owed by one party to explain and justify his actions before the other party and together with a possibility to face consequences (bottom-up design) (Bovens 2007). Since the analysis presented in this paper identifies both aspects, it is plausible to refer to them in conjunction rather than dissect separate sub-groups of “accountability” and “control” mechanisms. This is without prejudice to well-established literature on accountability, see for example, Iglesias-Rodriguez (2015), Bovens, Goodin, and Schillemans (2014), Scholten (2014), Busuioc (2009), Bovens (2007), Flinders (2001), Woodhouse and Alderman (1994).

13. See Article 1 of the SSM Regulation.

14. Bounded rationality expresses the institutionalist approach to rational choice. It recognizes that decisions of rational actors are constrained (bounded) by a number of factors, such as their cognitive limitations or notably structures of the environment in which they operate.

15. The SSM Regulation lists nine tasks which belong to the ECB’s exclusive competence. See supra n.1.

16. See Article 1 of the SSM Regulation.

17. See Article 6(4) of the SSM Regulation.

18. See Article 2(26) of the SSM Framework Regulation, which defines the notion of an NCA supervisory procedure. According to this definition, NCA formal supervisory decision-making does not foresee engagement of the ECB in this regard.

19. This school focuses on the functioning and role of institutions in the US Congress.

20. Also referred to as framing agreements, see Hodson (2009).

21. See supra n.1.

22. See Regulation of the ECB of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17).

23. See Article 96 of the SSM Framework Regulation.

24. See Article 97 and 98 of the SSM Framework Regulation.

25. See Article 97 (2a) of the SSM Framework Regulation.

26. See Article 97 (2b) of the SSM Framework Regulation.

27. See Articles 97(4) and 98(3) of the SSM Framework Regulation.

28. See Article 4(1)(a) of the SSM Regulation.

29. Ibid.

30. See Article 4(1)(c) of the SSM Regulation.

31. For the criteria governing the licensing procedures, cf. in particular Articles 8–15 of the CRDIV. For the criteria governing the acquisitions of qualifying holdings, see Article 23(1)(a)-(e) of the CRDIV.

32. See Article 6(5)(b) of the SSM Regulation (excluding however those related to the common procedures).

33. The key pieces of ‘the Single Rulebook’ legislation – the CRR and CRD IV – provide competent (supervisory) authorities and Member States’ legislatures with the possibility to choose how (‘an option’) and whether (‘a discretion’) to apply certain prudential requirements to credit institutions.

34. See Article 6(1) of the SSM Regulation; see also ECB (2014a, 7).

35. See Articles 99 and 100 of the SSM Framework Regulation.

36. See Article 31(2) of the SSM Regulation.

37. See Article 6 (5b) of the SSM Regulation.

38. See supra n.4–8.

39. See Article 67(2)(f) of the SSM Framework Regulation.

40. The ‘Single Rulebook’ legislation provides some useful yardsticks against which the interconnectedness could be measured. These include participation of a bank in question in institutional protection schemes and existence of interconnections between credit institutions based on common or shared personnel, facilities and systems; capital, funding or liquidity arrangements; existing or contingent credit exposures; cross-guarantee agreements, cross-collateral arrangements, cross-default provisions and cross-affiliate netting arrangements; or risk transfers and back-to-back trading arrangements; service level agreements . See Recital (14) of the BRRD, Recital (49) of the SRM Regulation, and Annex Section B (15) of the BRRD.

41. See Article 67(2)(d) and (e) of the SSM Framework Regulation.

42. See supra n.10.

43. See Article 14(3) of the SSM Regulation.

44. See Article 26(6)-(8) of the SSM Regulation.

45. Interview, DNB, March 2017.

46. See supra n.16.