The first pillar of the banking union has been put in place and has begun its work

“Almost everything that could be reformed has been reformed.” That is how Sabine Lautenschläger – then Vice President of the Bundesbank, now a member of the Executive Board of the European Central Bank (ECB) – described the European Banking Union reform project in December 2012, launched in response to the financial crisis. While two of the pillars of the banking union – i.e. the Single Resolution Mechanism and the European Deposit Guarantee Fund – are still “under construction”, the Europe-wide banking regulation has already begun to operate under the lead of the ECB.

As part of its role as single banking regulator, the ECB took over direct supervision of more than 120 “systemically important” institutions in the Eurozone in November 2014 with its predominantly new team which will ultimately comprise up to 2,500 people. However, the remit of the Single Supervisory Mechanism, which is based primarily on the EU Regulation 1024 / 2013 (SSM Regulation), extends far beyond supervision of systemically important banks. In fact, the ECB is capable of exercising supervision over every financial institution in the Eurozone via the SSM (Article 4 (5) (b) SSM Regulation). Additionally, some of the reforms to get the Banking Union off the ground lead to substantial modifications of the decision-making structures between the European Banking Authority (EBA) and the ECB.

The ECB as the new “super-regulator”

While the ECB was not granted complete responsibility for EU banking supervision, the catalogue of tasks assigned to it is nonetheless extensive. For instance, under Article 6 (4) in conjunction with Article 4 (1) (a) and (c) of the SSM Regulation, the ECB is responsible for authorisation matters and for assessment of notifications of the acquisition and disposal of qualifying holdings in credit institutions.

The ECB is also in charge of all additional central supervisory tasks in relation to the 120 institutions classified as “significant”, such as reviewing own funds requirements and liquidity, and monitoring large exposures and leverage. Accordingly, the ECB can take administrative measures in order to avoid or remedy breaches of supervisory requirements. These range from instructions regarding the application of funds to divestment of company activities and withdrawal of an institution’s banking licence (see in particular Articles 14 (5) and 16 (2) SSM Regulation).

The ECB is supported in its tasks by the National Competent Authorities (NCAs). However, the NCAs only have limited areas of genuine authority (for example, in relation to consumer protection and combating money laundering), and despite the fact that all institutions classified as “not significant” are regulated by the national supervisory authorities, it is the ECB that truly exercises control. Thus, in addition to issuing regulations and guidelines to the NCAs (Article 6 (5) (a) SSM Regulation), the ECB can also – as mentioned above – directly supervise institutions which are not classified as significant if it determines that this is necessary. There are already early indications that the ECB will interpret its mandate widely and liberally make use of these powers. A member of the Executive Board of the ECB has reportedly already announced that in the near future, the ECB intends to focus more on networks of smaller banks (especially the so called German savings banks (Sparkassen) and cooperative banks (Genossenschaftsbanken)).

Furthermore, the role of the NCAs in the authorisation procedure is essentially restricted to preparatory activities. Corresponding applications must still be submitted to the respective NCA, as set out in Article 14 (1) of the SSM Regulation. However, if the application complies with the statutory requirements, the relevant NCA merely forwards it to the ECB with a proposed decision. The ECB then takes the actual decision (Article 14 (2) SSM Regulation).

It should be noted that it is not yet clear whether the far-reaching transfer of powers to the ECB is covered at all by the European treaties. Former German constitutional judge Udo Di Fabio is not alone in believing that the ECB banking supervision could only have been “legitimately introduced via amendment to the EU treaties”; a corresponding constitutional complaint has been filed and is pending before Germany’s Federal Constitutional Court.

The EBA’s role as coordinator and controller in case of emergency

Even in SSM framework, the EBA remains primarily responsible for developing harmonised supervisory standards. This will mostly involve continually updating a single European supervisory handbook (the “Single Rulebook”; see the associated comments and references in Article 4 (3) of the SSM Regulation), aimed not least at stopping the phenomenon of “regulatory arbitrage”. Additionally, as part of its coordinating role, the EBA can take the same action vis-à-vis the ECB as vis-à-vis other supervisory authorities. Thus, the EBA can, inter alia, issue binding instructions to the ECB in the event of a crisis, and in extreme cases even issue direct instructions to banks (see Article 18 of the amended EBA Regulation 1093/2010).This appears somewhat problematic in view of European legislation and the independence of the ECB.

A new era which creates considerable legal uncertainty

The purpose and effectiveness of the new supervisory mechanism will inevitably be measured against the work of the national supervisory authorities. The new supervisory regime is fraught with legal uncertainty. This is particularly true for those banks directly supervised by the ECB, as the ECB has yet to establish reliable administrative practices such as those developed by the individual national supervisory authorities. There are also concerns about protection against legal acts of the ECB, since there is no codified European administrative law. Developments need to be monitored closely in order to avoid any unpleasant surprises due to changes in administrative practice.