Internationalised banking, alternative banks and the Single Supervisory Mechanism

Abstract

This paper sets out to explain the preferences of the seven northern euro area member states on the Single Supervisory Mechanism (SSM) concerning the threshold set for direct European Central Bank (ECB) control over bank supervision. Building on the concept of the ‘financial trilemma’, it argues that different bank internationalisation patterns in the seven northern member states explain different preferences on the transfer of supervisory powers over less significant banks to the ECB. In particular, the reach of internationalisation into a national banking system – notably the extent to which even smaller banks were exposed to foreign banking operations – is shown to be the core factor explaining different national preferences on threshold. In the five countries with a large number of small and parochial alternative (cooperative and savings) banks, it is necessary to examine the system-specific structures of these banks to explain better the reach of internationalisation and national preferences on the threshold. Determined German opposition to ECB supervision of smaller alternative banks is juxtaposed with either less hostile or more positive support of at least four other countries despite the important presence of small alternative banks.

Keywords:

• Banking union
• Single Supervisory Mechanism
• SSM
• banking supervision
• banking system
• Economic and Monetary Union

Notes

1. The selection of these cases is explained below. Other papers in this special edition focus more specifically on the negotiations on the SSM (see notably Epstein and Rhodes 2016). See also Howarth and Quaglia (2013b).

2. This claim has been confirmed in interviews with a large number of national ministry of finance and permanent representation officials from nine different member states. While less specific, several public statements by ministers and ministry officials of these three countries at the time of the negotiations also appear to confirm this point.

3. ‘Talks on European banking union end in failure’, http://www.euronews.com/2012/12/04/talks-on-european-banking-union-end-in-failure/, 4 December 2012; accessed 12 December 2014.

4. All seven national finance ministers/ministries confirmed this logic publicly. On Wolfgang Schäuble’s support for ECB supervision of the biggest cross-border banks, see: ‘ECB should only supervise big banks: Schaeuble’, in Reuters.com, 3 September 2012; available at http://www.reuters.com/article/2012/09/03/us-eurozone-banks-schaeuble-idUSBRE88204U20120903. All our interlocutors in national financial ministries also confirmed this logic.

5. The term ‘alternative’ banks is used because these entities – mostly cooperative and savings banks – normally did not issue equity and were not principally, or only, profit-oriented. Cooperative banks by definition are controlled by their depositors which became members with a single vote regardless their level of investment. Cooperatives pursue the interests of their members rather than profit-maximisation per se. The cooperative banking sector in all EU member states diversified over the past few decades and came to include a number of larger central financial institutions created to provide services to and for members of the smaller banks. Some of these larger institutions issued shares and operated similarly to commercial banks. Ayadi et al. (2009) discuss the challenge of defining a saving bank – created under public law, locally rooted with a clear social function – which has also created a central financial institution.

6. For example, see ‘Finnish finance minister opposes joint liability bank union’, Reuters.com, http://uk.reuters.com/article/2012/06/13/finland-urpilainen-idUKH7E8FC02H20120613, 13 June 2012; accessed 4 January 2015.

7. The expert officials in the other eight finance ministries and/or permanent representations interviewed for this paper interpreted the German position on necessary treaty reform as a delaying tactic designed to push the move to SSM to the future.

8. See ‘Europe nears deal to make ECB chief bank watchdog’, Reuters.com; available at: http://www.reuters.com/article/2012/12/12/us-eu-banking-idUSBRE8BB00820121212; accessed 2 December 2014.

9. The German government’s willingness to compromise on the inclusion of the DZ-Bank (the central financial institution to the cooperative banks) and the Landesbanks in the remit of direct ECB supervision is beyond the scope of this paper and involved a range of considerations. However, the decision to lower the threshold sufficiently to include these banks confirms the internationalisation argument presented in this paper in that DZ-Bank and the Landesbanks all held a significant percentage of their assets in other EU member states. The damage caused to some Landesbanks during the financial crisis, large government bail-outs, Commission-imposed restructuring and stagnant lending placed them in a politically weakened position (Deeg and Donnelly 2016). German federal governments and the Bundesbank have long called for the consolidation of banks in this sector (Hardie and Howarth 2009; 2013; Financial Times, 14 September 2010). Clearly, the German preference to extend ECB direct supervision to the unstable Spanish cajas also encouraged compromise.