The ECB’s half-baked supervision mandate Or, how to get serious about shadow banking again

ABSTRACT

In debates on the need to “complete” the banking union, there has been little attention to the omission of shadow banks from the supervision mandate given to the European Central Bank with the establishment of the Single Supervisory Mechanism (SSM). We argue that there can be no completion of the banking union without dedicated pan-European supervision of all non-banking financial institutions. We identify four explanatory modalities for the omission of shadow banking from the SSM mandate and discuss organizational options for institutionalizing European supervision of its shadow banking sector.

KEYWORDS:

• Financial supervision
• banking union
• single supervisory mechanism (SSM)
• European central bank (ECB)
• shadow banking
• systemic risk

Acknowledgements

The authors would like to thank Peter Gibbon, Charles Goodhart, Allan Dreyer Hansen, Jesper Jespersen, Grahame Thompson and two anonymous reviewers for highly appreciated feedback on earlier versions of this paper. We should also like to gratefully acknowledge co-funding received for the research from the Foundation of European Progressive Studies (FEPS).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Rogoff (2019) recently warned that “risky debt … has migrated to the shadow financial system”, noting that these debts “can inflate quite quickly”.

2. Some argue that the most substantive issues is contagion not interconnectedness (Scott 2016). Our stance is that both issues are important and that comprehensive pan-European financial supervision can contribute on both registers.

3. See Article 127(6) of the Treaty on the Functioning of the European Union

4. See Thiemann (2018), Angeloni (2015), Angeloni and Beretti (2015), Ferran and Babis (2013) and Wymeersch (2014).

5. Many post-crisis regulatory initiatives require strengthening (Howarth and Schild 2019; Howarth and Quaglia 2018; Mayer 2018).

6. ESMA, for instance, have “no legal authority over domestic regulations and no real power in terms of supervision or rulemaking”; it is little more than a forum for national supervisors to monitor and coordinate actions (Thiemann 2018, 229).

7. In Peirce’s seminal account, the logic of abduction proceeds as follows: “The surprising fact, C, is observed; But if A were true, C would be a matter of course; Hence, there is reason to suspect that A is true” (Peirce, Collected Papers, 5.189).

8. Here we take inspiration from Nietzsche’s perspectivism: “There is only a perspective seeing, only a perspective “knowing”; and the more affects we allow to speak about one thing, the more eyes, different eyes, we can use to observe one thing, the more complete will our “concept” of this thing, our “objectivity”, be (Nietzsche, On the genealogy of morals III, §12). For introduction to Nietzchean perspectivism, see Welshon (2009, 28–29).

9. While the reframing of shadow banking was brewing from 2012 onwards, the shift from the Barroso to the Juncker Commission in November 2014, and the launch of the CMU, reinforced and accelerated it.

10. The two FAQ’s released by the Commission had no Q&A on why shadow banking institutions were not included in the SSM mandate (EC 2012a, 2013b).

11. For the division of labour between national and supranational authorities, instituted with the SSM, see Donnelly (2014, 99) and Quaglia (2013).

12. It was left to the discretion of member states, whether to attribute the financial supervision responsibility to its national central bank or to a separate supervisory entity.

13. For the role of the European Parliament, see Rittberger (2014).

14. Yves Mersch’s comments were quoted by Bloomberg in September 2018.

15. The Articles exempt only insurance companies.

Additional information

Funding

This work was supported by the Foundation for European Progressive Studies (FEPS).