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Luigi Chiarella
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European Banking Union
The Single Supervisory Mechanism: the Building Pillar of the European Banking Union
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Luigi Chiarella
2016/07/25
10.6092/issn.2531-6133/5499
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The Single Supervisory Mechanism: the Building Pillar of the European Banking Union
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1
ARTICLES & ESSAYS                                                                    DOI 10.6092/issn.2531-6133/5499




The Single Supervisory Mechanism: the Building Pillar of the European
Banking Union


                                             LUIGI CHIARELLA†



TABLE OF CONTENTS: 1. The Origins of the European Banking Union; 2. The Rationale
Behind a Centralized Supervision; 3. The Single Supervisory Mechanism (SSM). Scope,
Division of Tasks and Cooperation Within the SSM; 4. Non-participating Member
States. The Opt-in Regime; 5. The Impact of the SSM on the Supervision of Cross-
border Banking Groups; 6. The ECB as a Prudential Supervisor. Governance and
Powers; 7. The Relationship Between the ECB and the Other E.U. Supervisors; 8.
Balances and Perspectives of the SSM.



ABSTRACT: One of the lessons learned from the 2008 financial crisis is that when a
bank in Europe goes into trouble the ensuing effects can reach far beyond the
immediate threat to its depositors and shareholders. In particular, the crisis has
revealed the extent to which irresponsible behavior in the banking sector could
undermine the foundations of the financial system and threaten the real economy by
turning a banking crisis into a sovereign debt crisis, as occurred in the Eurozone in
2011. In response to this lesson, Member States first tried to address the systemic
fragility of their banking systems through national policy tools. The interdependency
of countries which share a common currency however required more integrated
responses. Therefore, at the euro area summit in June 2012, the European Council
agreed to break the vicious circle between banks and sovereign debt by creating a
banking union. The union would institute a centralized supervision for banks in the
euro area through a newly established Single Supervisory Mechanism (SSM). The
SSM, which became operational in November 2014, represents the building pillar of
the banking union. After a brief description of the causes that led to the introduction
of the European banking union and of the rationale behind a centralized approach to
supervision (Par. 1 and Par. 2), this paper purports to analyze the SSM and illustrate
its functioning (Par.3) and impact on cross-border banking groups (Par. 4). The
analysis then shifts its focus on the position and powers of the ECB within the SSM
and on its relations with the European authorities introduced in 2010 (Par. 5 and Par.
6). Finally, this work remarks a few aspects of the balances and perspectives of the
new regime (Par. 7).



KEYWORDS: Single Supervisory Mechanism; SSM; European Banking Union.




                                           UNIVERSITY OF BOLOGNA LAW REVIEW

                                                   ISSN 2531-6133

                                                   [VOL.1:1 2016]

          This article is released under the terms of Creative Commons Attribution 4.0 International License


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    1.   THE ORIGIN OF EUROPEAN BANKING UNION

The recent financial crisis helped regulators to discover that when a bank in
Europe goes into trouble the ensuing effects can reach far beyond the
immediate threat to its depositors and shareholders. In particular, the crisis
has revealed the extent to which irresponsible behavior in the banking sector
could undermine the foundations of the financial system and threaten the
real economy by turning a banking crisis into a sovereign debt crisis. This
scenario describes the situation of the Eurozone in 2011.

         Since 2008 there has been a strong correlation between the finances
of Eurozone banks and the sovereign debts of its Members. This correlation
has created a vicious cycle between bank risks and sovereign risks.

         In countries where domestic supervisors acted in an overly permissive
fashion towards national champions, 1 public finances absorbed the costs of
the crisis and, therefore, inevitably deteriorated.2 Examples are offered by
Ireland and Spain, where the rescue of failing banks has drained huge
amounts of public resources.3 In other countries events evolved differently.
For instance, in Greece and, to a lesser extent, Italy huge public debts




†
 Ph.D. degree from the University of Genoa. He is also Associate at the New York office of
Chiomenti, a leading Italian law firm.

1
  See EDDY WYMEERSCH, The European banking union, a first analysis (Fin. Law Inst., Working Paper
No. 07, 2012), http://ssrn.com/abstract=2171785; Luigi Federico Signorini, Direttore Centrale per
la Vigilanza bancaria e finanziaria, Banca d’Italia, 6ª Commissione permanente del Senato della
Repubblica        (Finanze        e      Tesoro),       L’Unione       bancaria     (Oct.     24,
2012),https://www.bancaditalia.it/pubblicazioni/interventivari/intvar2012/unione_bancaria_sig
norini.pdf, and GUIDO A. FERRARINI & LUIGI CHIARELLA, Common Banking Supervision in the Eurozone:
Strengths    and     Weaknesses      (ECGI     Law,    Working      Paper     No.   223,    2013),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2309897. In order to promote the local
banking systems, some supervisors did not adequately counter risky behaviors of intermediaries,
such as granting credit to certain sectors of the economy like real estate.
2
  See JEAN PISANI-FERRY, ANDRÉ SAPIR, NICOLAS VÉRON & GUNTRAM B. WOLFF, What Kind of European
Banking Union?, BRUEGEL.ORG (Jun. 25, 2012), http://www.bruegel.org/publications/publication-
detail/publication/731-what-kind-of-european-banking-union, emphasizing that banks that
were European in ordinary circumstances have become national in crisis times, as they depend
on national governments for support.
3
  See DOUGLAS J. ELLIOTT, Key issues on European banking union (Glob. Econ. & Dev., Working Paper
No. 52, 2012), http://www.capitalis.com/admin/white_papers/file188.pdf, noting that in Ireland
and Spain, failing banks added massive liabilities to the balance sheets of the sovereigns,
weighing them down.




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affected domestic banks as a result of the strong domestic component of
their bond portfolios.4

         Under such circumstances, national politicians, as well as public
authorities, tried to avoid burdening taxpayers for the consequences of
credits that national banks had spread to other jurisdictions. 5 Banks and
national supervisors restricted the circulation of liquidity between countries,
including transfers of capital within cross-border banking groups. As a
result, the interbank markets ceased to function: intermediaries preferred to
allocate liquidity into non-interest bearing deposits at the European Central
Bank. In addition, significant funds were moved from peripheral countries to
central jurisdictions, even though the interest rates offered by the latter
produced negative returns in real terms.6

         Additionally, the mechanism of monetary policy also came to a halt:
this highlighted the pivotal role of financial integration in a well-functioning
of the Monetary Union.7 In particular, the financial system of the Eurozone is
fragmented along national borders8 which leads to the formation of severe
macroeconomic imbalances.9 The remuneration of bank deposits and the
interest rates paid on bank loans diverged considerably between countries.
Despite the European Central Bank set the same level of reference rate for
monetary policy, the costs of credit to households and businesses varied

4
  See Benoît Coeuré, Member of the Exec. Bd., European Cent. Bank, Why the euro needs a banking
union (Oct. 8, 2012), http://www.ecb.int/press/key/date/2012/html/sp121008_1.en.html.
5
  See PISANY-FERRY, SAPIR, VERON & WOLFF, supra note 2, arguing that banks have been encouraged
by national authorities to cut cross-border lending, which is understandable from a national
viewpoint. However, the pursuit of national policies to fight the crisis has not led to financial
stability.
6
  See ELLIOTT, supra note 3, at 14.
7
  See Vítor Constâncio, Vice-President of the ECB, Towards a European Banking Union (Sep. 7,
2012), http://www.ecb.int/press/key/date/2012/html/sp120907.en.html, arguing that a high
degree of financial integration, where financial institutions diversify their assets and liabilities
across eurozone countries, is essential for an effective transmission of monetary policy.
Imperfect financial integration complicates the task of the central bank in a currency union
making it more difficult to achieve a uniform impact in the transmission of monetary policy and
ensures uniform levels of interest rates across countries. It is therefore essential to reverse this
fragmentation and restore the proper transmission mechanism of monetary policy. See also
EUROPEAN      CENT.    BANK,      Financial   integration   in    Europe,    ECB.EUROPA.EU      (Apr.
2009),http://www.ecb.eu/pub/pdf/other/financialintegrationineurope200904en.pdf; André Uhde
& Ulrich Heimeshoff, Consolidation in Banking and Financial Stability in Europe: Empirical Evidence,
33 J. BANK. & FIN., 1299 (2009). See also, A.SAPIR & G.B. WOLFF, The Neglected Side of Banking Union:
Reshaping Europe’s Financial System, BRUEGEL.ORG (Sep. 13, 2013),http://bruegel.org/2013/09/the-
neglected-side-of-banking-union-reshaping-europes-financial-system/.
8
    See EUROPEAN CENT. BANK, Financial integration in Europe, ECB.EUROPA.EU (Apr. 2012),
https://www.ecb.europa.eu/pub/pdf/other/financialintegrationineurope201204en.pdf.
9
   See WYMEERSCH, supra note 1, at 6.




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substantially between Eurozone countries. The highest costs were recorded
in the countries with the weakest economic conditions. Therefore, rather
than a single currency, there were as many “euros” as countries in the
Monetary Union.

         In reaction to this economic scenario, Member States first tried to
address the systemic fragility of their banking systems through national
policy tools. These measures were however insufficient: indeed, as countries
that share a common currency are more inter-dependent they required more
integrated responses. Therefore, at the euro area summit in June 2012 10 the
European Council in order to break the vicious circle between banks and
sovereign debt introduced a banking union so as to provide centralized
supervision for banks in the Eurozone. These objectives were realized by
establishing the Single Supervisory Mechanism (SSM) and the Single
Resolution Mechanism (SRM). Whereas the former is devoted to the
monitoring of banks in the euro area, the latter provides a centralized
resolution system for credit institutions.11

         Consequently, on the 12th of September 2012, as part of a roadmap
towards the establishment of the SSM as the building pillar of the banking
union in the Eurozone, 12 the European Commission published a Regulation
proposal which conferred supervisory tasks on the European Central Bank


10
   On May 23, 2012, the European Council - in order to “strengthen economic union and make it
commensurate with the monetary union” - asked president Van Rompuy and other top
European officials to identify “building blocks”, among which “a more integrated banking
supervision and resolution, and a common deposit insurance scheme” - in short, a banking
union: see Herman Van Rompuy, President, European Council, Remarks Following the Informal
Dinner      of    the     Members      of    the    European      Council     (May    24,     2012),
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/130376.pdf. On June
19, 2012, the G20 leaders expressed support for “the intention to consider concrete steps
towards a more integrated financial architecture, encompassing banking supervision, resolution
and recapitalization, and deposit insurance”: see G20 Leaders Declaration (Jun. 19, 2012),
http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/131069.pdf.
On June 29, 2012, the euro area Heads of State or Government called on the Commission to
present proposals to provide for a single supervisory mechanism involving the ECB – See how
the           European          Council          concluded,         (Jun.         29,         2012),
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf. On the euro
area Summit of June 2012 see Pedro Gustavo Teixeira, The Single Supervisory Mechanism: Legal and
Institutional Foundations, QUADERNI DI RICERCA GIURIDICA DELLA BANCA D’ITALIA, March 2014, at 73.
11
   See Jens-Hinrich Binder, The European Banking Union - Rationale and Key Policy Issue in THE
EUROPEAN BANKING UNION: A COMPENDIUM 1 (Jens-Hinrich Binder & Christos V. Gortsos eds., 2015).
12
   See European Commission Proposal [hereinafter SSM Commission Proposal] for a Regulation
conferring specific tasks on the European Central Bank concerning policies relating to the
prudential supervision of credit institutions COM (2012) 511 final (Sep. 12, 2012), http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2012:0511:FIN:EN:PDF.




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(ECB). The Regulation provided the ECB with a clear mandate and broad
direct and indirect supervisory powers on all Eurozone banks.

         The Commission also gave new impetus to the European legislative
project (CRR/CRD IV) which, according to the 20th recommendation of the De
Larosière Report,13 was expected to overcome the inconsistencies caused by
different implementations of the European Directives on banking and
supervision between national legislations. 14 On the 12th of June in 2012, the
Commission presented a Draft Directive with the intent to harmonize and
strengthen national banks resolution mechanisms. 15 The Commission also
proposed the establishment of a SRM for the euro area. One year later on the
10th of June, this project was formalized in a Draft Regulation Proposal.16 In
greater detail, this proposal placed the Single Resolution Board at the top of
the SRM hierarchy. This decision-making body was established to secure the
resolution of the serious difficulties of credit institutions with minimal costs
to taxpayers and to the real economy. For the same purpose, the proposal
also included the establishment of a Single Resolution Fund. With the aim of
further harmonizing national DGS, the original banking union roadmap also
provided for the quick approval of the Directive on Deposit Guarantee




13
     The De Larosière Report is available on the E.U. Commission’s website
http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf;for a comment,
see Guido Ferrarini & Filippo Chiodini, Regulating Cross-border Banks in Europe: A comment on the
De Larosière Report and a Modest Proposal, 1 CAP. MKT. L. J., 123 (2009).
14
   See European Commission Proposal for a Directive of the European Parliament and of the
Council on the access to the activity of credit institutions and the prudential supervision of credit
institutions and investment firms COM (2011) 0453 final (Jul. 20, 2011), http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52011PC0453, and Proposal for a Regulation of
the European Parliament and the Council on prudential requirements for credit institutions and
investment firms COM (2011) 0452 final (Jul. 7, 2011). http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52011PC0452.
15
   See European Commission Proposal for a Directive of the European Parliament and of the
Council establishing a framework for the recovery and resolution of credit institutions and
investment      firms     COM      (2012)      280     final      (Jun.   6,   2012),    http://eur-
lex.europa.eu/%20LexUriServ/LexUriServ.do?uri=COM:2012:0280:FIN:EN:PDF.
16
   See European Commission Proposal for a Regulation of the European Parliament and the
Council establishing uniform rules and a uniform procedure for the resolution of credit
institutions and certain investment firms COM (2013) 0520 final (Jul. 10, 2013).
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52013PC0520:EN:NOT.




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Schemes (DGS) which amended Directive 94/19/EC.17

         By shifting the focus of the discussion to the European Banking
Authority (EBA), the Commission, on the one hand, confirmed its authority
to act as a non-binding mediator for the regulatory harmonization of cross-
border supervision and bank resolution in the European Union. 18 On the other
hand, the proposed amendments to Regulation (EU) No. 1093/2013 would
reinforce the powers and functions of the EBA with respect to the ECB.
Coherently with this project, the regulation proposed a change in the voting
mechanisms in order to prevent Members of the SSM from holding a block
majority in the EBA.19

         The Regulation for the establishment of the SSM was repeatedly
amended until its final approval by the European Council on October 15,
2013.20 A few days later, the Council also amended the EBA by approving
Regulation (EU) No. 1022/2013.21




17
    See European Commission Proposal for a Directive of the European Parliament and the Council
 on Deposit Guarantee Schemes COM (2010) 0368 final (Jul. 12, 2010). http://eur-
 lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52010PC0368. The Proposal provided shorter
 pay-out periods (that would be limited to seven working days) and funding arrangements,
 where the lack of common standards has allowed for diverging models of ex ante and ex post
 funding schemes. On DGS see FRANCESCA ARNABOLDI, DEPOSIT GUARANTEE SCHEMES: A EUROPEAN
 PERSPECTIVE (2014).
 18
    See SSM Commission Proposal, supra note 12, art. 4(1)(3): “The ECB will carry out its tasks
 within in the framework of the European System of Financial Supervision and will closely
 cooperate with the three European supervisory Authorities. The EBA will keep its powers and
 tasks to further develop the single rulebook and ensure convergence and consistency of
 supervisory practice. The ECB will not take over any tasks of the EBA and the exercise of its
 regulatory powers in accordance with art. 132 of the TFEU will be limited to areas which are
 necessary for the proper exercise of the tasks conferred on the ECB by this regulation”.
19
    See European Commission Proposal for a Regulation amending Regulation No. (EU) 1093/2010
 establishing the European Banking Authority COM (2012) 512 final (Sep. 12, 2012).
 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2012:0512:FIN:IT:PDF.
20
     See Regulation 1024/2013 [hereinafter SSM Regulation or Regulation] of the European
 Parliament and of the Council of 15 October 2013, Conferring specific tasks on the European
 Central Bank concerning policies relating to the prudential supervision of credit institutions,
 2013O.J.(l.287),56(EU).http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:287:0063
 :0089: EN: PDF.
21
    See Regulation 1022/2013 [hereinafter EBA amended Regulation] of the European Parliament
 and of the Council of 22 October 2013, amending Regulation 1093/2010 and establishing a
 European Supervisory Authority (European Banking Authority) as regards the conferral of
 specific tasks on the European Central Bank pursuant to Council Regulation 1024/2013, 2013 O.J.
 (L      287)     5.    (Oct.    15,    2013),     which      is   available     at     http://eur-
 lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:287:0005:0014: EN: PDF.




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Regulation (EU) No. 575/2013 and Directive 2013/36/EU were later approved
on June 26, 2013 with the intent to harmonize the legislation in the banking
sector (CRR/CRD IV).22

        After several delays, the Directives on deposit guarantee schemes and
on the resolution of banks, have been approved on April 15, 2014. 23 Similarly,
the Regulation for the establishment of a SRM has finally been adopted by




22
    See Memorandum from the European Comm’n on Capital Requirements (Jul. 16, 2013),
http://europa.eu/rapid/press-release_MEMO-13-690_en.htm?locale=en. Among the main
innovations, a special mention has to be made regarding the general strengthening of
supervision (e.g. through supervisory plans, onsite inspections, more robust and intrusive
supervisory assessments) and a harmonization of sanctions to ensure uniform application of
Basel II and III by limiting national options and discretions. The CRR also tightens large
exposure limits, liquidity ratios, and public disclosure requirements, and introduces an
indicative leverage ratio. Ensuring full consistency of rules is a natural policy response to the
high degree of financial and monetary integration in the European Union in general and in the
euro area in particular. The CRR/CRD IV acknowledges that financial stability risks differ across
jurisdictions and institutions, and provides national authorities with the flexibility to impose
stricter standards to respond to macro-prudential concerns. In particular, Common Equity Tier 1
capital ratios can be increased by up to 3% (systemic risk buffer) on all exposures or up to 5% on
domestic or non-EU exposures without the Commission’s pre-approval. For higher buffers, pre-
approval is required. Member States keep the power to impose temporarily (for up to two years,
but extendable) some stricter prudential requirements for domestically licensed financial
institutions. The Regulation maintains the national authorities’ capacity to require Pillar 2
capital add-ons for individual institutions, based on their risk profile. The texts of Regulation
(EU) 575/2013 [hereinafter CRR] of the European Parliament and of the Council of 26 June 2013,
2013 O.J, on prudential requirements for credit institutions and investment firms and amending
Regulation (EU) 648/2012, and of Directive 2013/36/EU [hereinafter CRD IV] of the European
Parliament and of the Council of 26 June 2013, 2013 O.J, on access to the activity of credit
institutions and the prudential supervision of credit institutions and investment firms,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. See:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0001:0337:IT:PDF;
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0338:0436:IT:PDF.
23
   See Directive 2014/59/EU [hereinafter BRRD] of the European Parliament and of the Council of
15 April 2014, Establishing a framework for the recovery and resolution of credit institutions and
investment        firms,     2014       O.J.    (173)      190    which      is     available    at
http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm and Directive
2014/49, of the European Parliament and of the Council of 16 April 2014, on Deposit Guarantee
Schemes,       2014     O.J.   (173)      149.    available    at   http://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:32014L0049&from=EN. Moreover, with respect to DGS on
November 24, 2015 the European Commission published a Proposal for a Regulation of the
European Parliament and of the Council amending Regulation (EU) 806/2014 in order to
establish a European Deposit Insurance Scheme [hereinafter EDIS] COM (2015) 586 final (Nov.
24, 2015), http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52015PC0586. According
to such Proposal the EDIS would be developed over time and in three stages. It would consist of a
reinsurance of national DGS, moving after three years to a co-insurance scheme, in which the
contribution of EDIS will progressively increase over time. As a final stage, a full European
Deposit Insurance Scheme is envisaged in 2024. The scheme includes a series of strong
safeguards against “moral hazard” and inappropriate use, in order to give incentives to national
schemes to manage their potential risks in a prudent way. In particular, a national scheme will
only be able to access EDIS if it fully complies with relevant Union law.




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the European Council on July 15, 2014.24




     2.   THE RATIONALE BEHIND A CENTRALIZED SUPERVISION

This paragraph is intended to illustrate the main reasons that have driven
recent European regulatory reforms towards major centralization in banking
supervision by focusing in particular on the position of cross-border banking
groups. These credit institutions are usually integrated groups which operate
through branches or subsidiaries. Subsidiaries are incorporated under the law
of the jurisdiction in which they operate. By becoming legally separate
entities as a result of the process of incorporation subsidiaries can benefit
from the rules on limited liability. On the contrary, as branches are not
legally separated from the parent company, they are subject to a regime of
joint liability with the latter and share the same applicable laws.

          Traditionally, the division of responsibility between the home country
and the host jurisdiction depended on whether the bank operated through
branches or subsidiaries.25

          Moreover, notwithstanding the process of harmonization of the
prudential regulation initiated by the European Union, diverging national
implementations         and     supervisory       practices     have     always         generated




24
   See Regulation 806/2014 of the European Parliament and of the Council of 15 July 2014,
Establishing uniform rules and a uniform procedure for the resolution of credit institutions and
certain investment firms in the framework of a Single Resolution Mechanism and a Single
Resolution Fund and amending Regulation 1093/2010, 2014 O.J. (225) 1, available at
http://eurlex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.225.01.0001.01.ENG.
25
   In the European Union, mutual recognition and the single license allow a European financial
institution to establish branches in other Member States under the prudential regulation and
supervision of the home country. Subsidiaries, on the contrary, fall under the competence of
their State of incorporation. However, the single license system has enjoyed limited success in
practice as international banking groups often chose to establish subsidiaries rather than
branches in other Member State. See Jean Dermine, European Banking Integration: Don’t put the cart
before the horse, 15 FIN. MKT., INSTITUTIONS & INSTRUMENTS 57 (2006), see also Guido Ferrarini &
Filippo Chiodini, Nationally Fragmented Supervision over Multinational Banks as a Source of Global
Systemic Risk: a Critical Analysis of Recent EU Reforms, in FINANCIAL REGULATION: A POST CRISIS
ANALYSIS (Guido Ferrarini, Eddy Wymeersch & Klaus J. Hopt eds., 1st ed. 2012).




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substantial discrepancies.26 As a result, cross-border banking groups were
generally subject to nationally fragmented regulation and supervision.

         In particular, the mismatch between the scope of cross-border groups
and the national character of the supervision had a negative impact on crisis
prevention and increased systemic risk. This was especially true in a political
context in which the absence of credible agreements between governments
on how to share the burden of crisis was a barrier to cross-border bank
bailout. As a consequence, there was the considerable risk of spreading
contagion to other banks. In addition, the belief that governments need to
save insolvent banks has been a source of moral hazard for the management
of the banks and for the behavior of shareholders and creditors. At the same
time, the fact that some countries were not able (or simply did not want) to
implement a         bailout     of troubled banks with public money created
competition distortions by penalizing banks in countries with weaker
economies (or smaller in terms of GDP).

         It seems therefore evident that greater centralization in the
supervision      resolves      at   least part        of   these problems. 27         Indeed,         the
fragmentation between national regulations as well as the related systemic
risk would be reduced if national regulators transfer some of their powers to
a supranational body and Member States give up part of their sovereignty. 28
Therefore, it is not surprising to notice that the typical legislative response to



26
   See Dirk Schoenmaker & Sander Oosterloo, Cross-Border Issues in European Financial Supervision
in THE STRUCTURE OF FINANCIAL REGULATION (Davis Mayes and Geoffrey Wood eds., 2005); Eva
Hüpkes, Form Follows Function - A New Architecture for Regulating and Resolving Global Financial
Institutions, 10 EUR. BUS. ORG. L. REV. BOR. 369, 377 (2009).
27
    However, critics of centralization advocate “more national” solutions, in which national
authorities would be better empowered to supervise regulated entities in view of safeguarding
domestic financial stability. According to similar proposals, new powers would be attributed to
host regulators, including the power to impose “subsidiarization” of foreign branches that are
systemically significant in the host State; in other words, regulators would be entitled to treat
these branches like subsidiaries for supervisory purposes. In addition, host authorities would be
empowered to regulate cross-border financial operations on the basis of their potential effect on
host economies (so-called “effect based regulation”). These enhanced powers would supposedly
facilitate coordination and cooperation with home authorities. Host regulators would be in a
position to “bargain” with home regulators, who would be incentivized to take the financial
stability of host economies seriously into account. On this point see in particular KATARINA
PISTOR, Host's Dilemma: Rethinking EU Banking Regulation in Light of the Global Crisis (European Corp.
Governance Inst. – Fin. & Columbia Law Sch., Working Paper No. 286, 2010),
http://www.ecgi.org/wp/wp_id.php?id=447.
28
    See Nicolas Veron, The Economic Consequences of Banking Union in EUROPEAN BANKING UNION
(Guido Ferrarini & Danny Busch eds., 2015).




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the financial crisis is the introduction, or the enhancement, of forms of
regulatory and supervisory centralization. 29

         In particular, a centralized approach to supervision can be achieved
along three different routes: (i) cooperation and coordination between
authorities in different Member States; (ii) lead home (or consolidating)
supervisor;30 (iii) supranational authority. These three models can be
combined to form two-tier systems consisting of a national and a
supranational level.31

         Following the De Larosière Report on the reform of the European
supervisory architecture, the legislation approved on 24 November 2010, 32                            33


represented      a   significant      step    towards     regulatory      convergence             and
centralization of cross-border supervision. The most recent regulatory
framework indeed combines “enhanced” cooperation with elements of the
other two models of centralization. In particular, the 2010 reform institutes a
European System of Financial Supervision (ESFS). Firstly, it assigns the
macro-prudential supervision to a newly established European Systemic Risk
Board (ESRB). Secondly, a network of national supervisors, which re-
employs pre-existing European Supervisory Committees and is subject to the
coordination of the new European Supervisory Authorities (ESA), is




29
    See David T. Llewellyn, Role and Scope of Regulation and Supervision, in HANDBOOK OF
SAFEGUARDING GLOBAL FINANCIAL STABILITY: POLITICAL, SOCIAL, CULTURAL AND ECONOMIC THEORIES AND
MODELS 451 (Gerard Caprio ed., 2013).
30
    The lead supervisor model consists of a single authority with supervisory powers over the
whole cross-border group, irrespective of whether operating through branches or subsidiaries. It
avoids duplication of regulatory requirements and reduces compliance and enforcement costs.
The home authority is the lead supervisor, retaining responsibility for consolidated supervision
over the banking group and its individual entities. A variant of this model keeps host authorities
involved, so as to ensure supervisors’ proximity to cross-border establishments and allow local
conditions to be sufficiently taken into account.
31
   See Ferrarini & Chiodini, supra note 25, at 8, 10.
32
   The relevant legislation includes: Regulation (EU) 1092/2010 of the European Parliament and
of the Council of 24 November 2010, Establishing the new ESRB in charge of macroprudential
supervision, 2010 O.J. (L 331) 1; Regulation (EU) 1093/2010 [hereinafter EBA Regulation], of the
European Parliament and of the Council of 24 November 2010, Establishing the EBA, 2010 O.J. (L
331) 12; Regulation (EU) 1094/2010 of the European Parliament and of the Council of 24
November 2010, 2010 O.J, establishing the European Insurance and Occupational Pensions
Authority [hereinafter EIOPA], and Regulation (EU), 1095/2010 of the European Parliament and
of the Council of 24 November 2010, 2010 O.J, Establishing the European Securities Markets
Authority [hereinafter ESMA], in charge of microprudential supervision, respectively of the
banking, insurance, and securities sectors, 2010 O.J. (L 331) 84. The Regulations are available,
among others, on the website of the EBA at http://www.eba.europa.eu/.
33
   See supra note 13.




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appointed as micro-prudential supervisor.34

         The creation of a centrally coordinated network was aimed at
enhancing effective cooperation between competent authorities in the
supervision of cross-border financial institutions, while leaving day-to-day
supervision to national authorities.35

         This architecture, however, as it represents the result of a political
compromise, is ultimately a weak form of centralization which is based on
cooperation among competent authorities. 36 As unquestionably proven by the
recent financial crisis cooperation is doomed to fail in emergency situations
because national supervisors tend to privilege domestic interests. 37

         The lack of a sufficiently consistent system to supervise the banking
sector of Member States which became interdependent after the creation of a
Monetary Union was highlighted by the simultaneous crisis of both credit
institutions and sovereign debts. With the aim to restore confidence in the
financial stability of Eurozone banks and to temper the connection between

34
   The EBA, in particular, has been provided with the power to: (i) develop proposals for
regulatory technical standards to be submitted to the European Commission, under EBA
Regulation, supra note 32, art. 10 and 15, (ii) to adopt guidelines and recommendations addressed
to national authorities or to financial institutions with a view to establishing consistent, efficient
and effective supervisory practices, and to ensuring the common, uniform and consistent
application of E.U. law (EBA Regulation, supra note 32, art. 16), (iii) to adopt, in emergency
situations, acts in place of the national authorities in the event of a breach of E.U. law and to
resolve disputes between competent authorities in cross-border situations (respectively
pursuant to EBA Regulation, supra note 32, artt. 17, 19 and 19).
35
    See Marco Mancini, Dalla vigilanza nazionale armonizzata alla banking union [From the
Harmonized National Supervision to the Banking Union], QUADERNI DI RICERCA GIURIDICA DELLA BANCA
D’ITALIA, Sep. 2013, at 1 (It.). With the exception of the ESMA, which have been entrusted with
the task of direct control over transnational bodies such as rating agencies and managers in
post-trading facilities, and aside from the limited powers granted to EBA only in the cases set
out in note 34, the European legislator merely attributed to the European Supervisory
Authorities responsibilities for coordination of the national authorities, while leaving to them
the exercise of direct supervision of intermediaries. See also EMILIOS AVGOULEAS & DOUGLAS W.
ARNER, The Eurozone Debt Crisis and the European Banking Union: A Cautionary tale of Failure and
Reform     (Univ.   of    H.     K.  Faculty     of   Law,   Working     Paper    No.    37,   2013),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2347937.
36
   See, for comments, F. Recine and P. G. Teixeira, 'Towards a New Regulatory Model for the Single
European Financial Market', 4 Revue Trimestrielle de Droit Financier (2009); Anders Neergaard,
European Supervisory Authorities–A New Model for the Exercise of Power in the European Union?,
2009 EUREDIA 603; Guido Ferrarini & Filippo Chiodini, Regulating Multinational Banks in Europe: An
Assessment of the New Supervisory Framework, 6 CURRENT DEVELOPMENTS IN MONETARY AND FIN. L. 93
(2012); Eilis Ferran, Understanding the New Institutional Architecture of EU Financial Market
Supervision in FINANCIAL REGULATION: A POST CRISIS ANALYSIS (Guido Ferrarini, Klaus J. Hopt & Eddy
Wymeersch eds., 2012).
37
   Voluntary cooperation and coordination mechanisms tend to fail when the financial stability
and national taxpayers' money are at risk. Due to a problem of collective action, similar to that
of the prisoner's dilemma, the national mandate and the consequent misalignment of incentives
of supervisors prevent them to seek cooperative, although more efficient, solutions, by giving
precedence to nationalistic and protectionist solutions. See Ferrarini & Chiodini, supra note 36.




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bank solvency and government debt, centralized banking supervision
emerged as a necessary response to the crisis of the euro. 38 In practice, even
though the need to rethink bank surveillance in Europe was often highlighted
before the 2008 financial crisis, most countries, including euro countries,
were reluctant to transfer additional sovereignty to European institutions in
this crucial sector. After the 2011 sovereign debt crisis, national self-interest
was however put aside and the idea of a centralized supervisory mechanism,
also widely supported by scholars, became more broadly accepted.

         Centralized supervision allows, inter alia, to mitigate national interest
concerns which, in the past, have been responsible for deteriorating public
finances. Indeed, in some instances, domestic authorities have turned a blind
eye to the accumulation of considerable imbalances in the balance sheets of
credit institutions with the intent to promote national champions.

         In this scenario of sovereign debt crisis, the European Commission
published a draft Regulation which conferred supervisory tasks on the ECB,
which was intended to represent a milestone in the establishment of a single
supervisory mechanism in the Eurozone as the central pillar of the banking
union.

         The ECB was therefore given a clear mandate and broad powers to
supervise all Eurozone banks. As the ECB was endowed with extensive
internal expertize in the areas of both macroeconomics and financial
stabilization, it was well-equipped to conduct supervisory tasks with the
purpose of preserving the stability of the European financial system.




38
  See Gianni Lo Schiavo, From National Banking Supervision to a Centralized Model of Prudential
Supervision in Europe, 21 MAASTRICHT J. EUR. & COMP. L. 110 (2014).




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Indeed, the establishment of a new agency would have required the revision
of the Treaty.39

         Major forms of centralization in banking supervision in the Eurozone
was also interpreted as a pre-condition to the establishment of a jointly-
funded common mechanism for the resolution of crises in the banking sector
and the prevention of growing moral hazard.

         The SSM entered into force on November 4, 2014. 40 Therefore, the
SSM essentially belongs to the third model of centralization - single
supervisor - described above. The following paragraphs illustrate the
functioning of the single supervisory mechanism, the role of the EBC within
it, its impact on the supervision of cross-border banking groups and its
potential weaknesses.


39
   See Francesco Guarracino, Il Meccanismo Unico di Vigilanza sugli Enti Creditizi tra Diritto Primario e
Riforma dei Trattati, 2013 RIVISTA TRIMESTRALE DI DIRITTO DELL’ECONOMIA 171 (It.) and CONCETTA
BRESCIA MORRA, From the Single Supervisory Mechanism to the Banking Union: The Role of the ECB and
the EBA (Luiss Guido Carli Sch. of European Political Econ., Working Paper No. 2, 2014),
http://sep.luiss.it/sites/sep.luiss.it/files/WP%20SEP%20C.%20Brescia%20Morra%20def.pdf.
According to the “Meroni doctrine”, in fact, tasks that involve the exercise of discretionary
powers cannot be assigned to newly established bodies not provided by the Treaties. In
particular, the term “Meroni Doctrine” refers to the position taken by the European Court of
Justice in its judgment of 13 June, 1958, Case 9/56, Meroni & C. v. High Authority,
ECLI:EU:C:1958:7, where the CJEU considered the delegation of power - by the European Union
institutions to external bodies - to be unlawful if the delegation includes so much “freedom” to
take the form of a real discretion. However, in January 2014 the CJEU (Case C-270/12, United
Kingdom v. Parliament and Council, ECLI:EU:C:2014:18) has delivered a decision that repositions
the extent to which European institution can organize separate bodies to whom part of their own
decision making power can be transferred. In particular, in a case opposing the United Kingdom
to the European Council and Parliament involving the powers of ESMA to directly prohibit short
selling in certain circumstances, the Court held that this conferral of powers did not infringe the
“Meroni rule”, that only prohibits to delegate a wide margin of discretion. The Court analysis
based its finding on the existence of strict objective criteria in the contested provision in the
Short Selling Regulation, and the fact that its decisions are amenable to judicial review. The
ESMA judgment does not reject the “Meroni doctrine” outright but it attenuates its impact by
making it clear that the test for the legality of the conferral of discretion on an agency is a
nuanced one: provided there are conditions and criteria to limit the discretion, and the power is
precisely delineated so as to be amenable to judicial review, the requirements laid down in the
“Meroni rule” are satisfied. See JACQUES PELKMANS & MARTA SIMONCINI, Mellowing Meroni: Hows
ESMA can help build the Single Market, CEPS.EU (Feb. 18, 2014),
http://www.ceps.be/book/mellowing-meroni-how-esma-can-help-build-single-market.                       On
this point see also LORENZO CUOCOLO, Constitutional Issues of the Banking Union, between European
Law and National Legal Orders (Baffi Carefin Ctr., Working Paper, No. 10, 2015).
40
   See Francesco Ciraolo, Il Regolamento UE n. 1024/2013 sul Meccanismo Unico di Vigilanza e l’Unione
bancaria Europea. Prime riflessioni (2014) [EU Regulation No. 1024/2013 Regarding the Single
Supervisory        Mechanism          and      the       European        Banking          Union]        ,
http://www.amministrazioneincammino.luiss.it/app/uploads/2014/07/Ciraolo_Unione-
bancaria.pdf; Klaus Lackhoff, How will the Single Supervisory Mechanism (SSM) Function? A brief
overview, 29 J. INT’L. BANK. L. & REG. 498. (2014); CHRISTOS V. GORTSOS, THE SINGLE SUPERVISORY
MECHANISM (SSM): LEGAL ASPECTS OF THE FIRST PILLAR OF THE EUROPEAN BANKING UNION (2015).




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       3.   THE SINGLE SUPERVISORY MECHANISM (SSM). SCOPE, DIVISION OF TASKS AND
            COOPERATION WITHIN THE SSM

The single supervisory mechanism is composed by the ECB and by the
national competent authorities.41 The European Central Bank is appointed as
central prudential supervisor of financial institutions in the euro area. Given
that the ECB is responsible for its effective and consistent functioning, this
model aims at more than enhanced cooperation.

            While the SSM covers all credit institutions which are established in
the Eurozone, most of the less significant supervisory tasks are normally
carried out by national authorities under a two-tier regime.42 Indeed, the
criteria to determine whether banks fall under the direct supervision of the
ECB include the bank’s size, its importance for the economy of the European
Union, as well as for the economy of the Member State, and the extent of its
cross-border activities.43

            More specifically, in order to fall under the direct supervision of the
ECB one of the following conditions needs to be met: (i) the assets of the
bank exceed 30 billion euros, (ii) the ratio of its total assets to the GDP of its
Country of establishment is above 20%, or (iii) the competent national
authorities define the institution as significant. The ECB, however, retains
the power to bring any bank under its direct supervision, when necessity so
requires.44 For example, the ECB may consider an institution as significant if
it has substantial cross-border assets or liabilities, if it relies upon the ESM


41
   For an in-depth analysis of the respective competences of the ECB and the national authorities
see Raffaele D’Ambrosio, The ECB and NCA liability within the Single Supervisory Mechanism, 78
QUADERNI DI RICERCA GIURIDICA DELLA BANCA D’ITALIA 1 (2015); see also E. WYMEERSCH, The single
supervisory mechanism or “SSM”, part one of the Banking Union (Nat’l Bank Of Belg., Working Paper
No. 255, 2014), https://www.nbb.be/doc/ts/publications/wp/wp255en.pdf. See also EUROPEAN
CENT.      BANK,    Guide    to     banking     supervision,    ECB.EUROPA.EU     (Nov.,   2014),
 https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmguidebankingsupervision201411.en.
pdf.
42
    The Regulation is without prejudice to the responsibilities and related powers of the
competent authorities of the participating Member States to carry out supervisory tasks not
conferred to the ECB. See SSM Regulation, supra note 20, art. 1.
43
     See SSM Regulation, supra note 20, art. 6(4).
44
   According to the SSM Regulation, supra note 20, art. 6(4), 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.




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for financial assistance, or if it is one of the three largest institutions in its
Country of establishment. The ECB is therefore able to exercise direct
supervision on the largest banks in smaller countries. According to these
criteria, banks that fall under the direct supervision of the ECB account for
about the 80% of the aggregate banking assets of the euro area.45

         The SSM’s prudential supervision46 applies to banks or, more
precisely, “credit institutions”, which are defined as an undertaking whose
business is to “receive deposits or other repayable funds from the public and
to grant credits for its own account”.47

         Institutions that national laws may define as “banks” even if they do
not receive deposits, would therefore be excluded from the SSM as they do
not qualify as banks under E.U. law.48 The European definition of “credit
institution” prevails as otherwise Member States would be able to determine
the scope of the SSM.49

         Several categories of financial institutions that do not formally qualify
as banks are therefore not subject to the SSM. This may result surprising as
some of these institutions are clearly significant, and may even be
systemically relevant.

         However, even though non-banking activities remain supervised
nationally, they are not entirely excluded from the supervision of the SSM.
These activities will often have a direct impact on the risk profile of the
banking group and, therefore, they will also fall within the orbit of the
banking supervisor.50




45
    See Klaus Lackhoff, Which Credit Institutions will be supervised by the Single Supervisory
Mechanism?, 28 J. INT’L. BANK. L. & REG. 454 (2014); G.B.WOLFF & C. DE SOUSA, A banking union of
180 or 81%?, BRUEGEL.ORG (Dec. 14, 2012), www.bruegel.org/nc/blog/detail/article/965-a-
abanking-union- of-180-91- percent.USX4lh03hWI.
46
    On the scope of the SSM see E. Wymeersch, The Single Supervisory Mechanism for Banking
Supervision: Institutional Aspects in EUROPEAN BANKING UNION (Danny Busch & Guido Ferrarini eds,
2015).
47
   See SSM Regulation, supra note 20, art. 2(3).
48
   According to French law, specialized financing institutions - leasing, factoring and similar -
are subject to prudential supervision, without receiving deposits from the public. For the list see
www.acp.banque-france.fr/controle-prudentiel/les-assujettis- au-controle.html.
49
   See WYMEERSCH, supra note 41, at 27.
50
   See WYMEERSCH, supra note 41, at 28.




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In this respect, art. 127 (6) of the TFEU would allow “other financial
institutions”, with the exception of insurance undertakings, to be included in
the SSM’s remit.51

         However, while insurance firms have been expressly excluded, the
increasing similarities between banking and insurance supervision and the
recognition of their systemic significance 52 will, sooner or later, lead to the
introduction of a more integrated form of supervision for insurance firms. 53

         The Regulation conferred to the ECB the following tasks when
dividing the duties within the SSM between the ECB and national authorities:
to authorize credit institutions and withdraw their authorizations; to assess
applications for the acquisition and disposal of qualifying holdings in credit
institutions; to ensure compliance of credit institutions with prudential
requirements (e.g. own funds requirements, large exposure limits, liquidity,
leverage, etc.) as well as governance arrangements (“fit and proper”
management, risk management processes, internal control mechanisms,
remuneration policies, etc.); and finally, to carry out supervisory reviews,
including stress tests and other supervisory tasks such as, for instance,
recovery and early intervention plans.54

         On the other hand, by looking at the tasks which are conferred upon
the ECB by art. 4, competent national authorities carry out, and are
responsible for, all relevant supervisory decisions in accordance with art. 6
(7). They also have to regularly report to the ECB on the performance of their
supervisory activities. They are also exclusively responsible for consumer
protection and anti-money-laundering tasks, for receiving notifications from
credit institutions in relation to the right of establishment, for supervising



51
   See Consolidated Version of the Treaty on the Functioning of the European Union art. 127(6)
Jun. 7, 2016, 2016 O.J. (C 202) 47 [hereinafter TFEU].
52
   See INT’L ASS’N OF INS. SUPERVISORS, Consultation on G-SIIs, Global Systemically Important Insurers:
Proposed Policy Measures, IAISWEB.ORG (Oct., 2015),
http://www.iaisweb.org/index.cfm?pageID=988&lyrHighlightWord=systemic%20&searchvalue=s
ystemic; Jaime Caruana, Gen. Manager, Bank for the Int’l Settlements, Insurance and financial
stability: a Basel view (Mar. 20, 2013), http://www.bis.org/speeches/sp130408.htm; PWC, 'The
supervision    of     global  systemically    important    insurers     -   G-SII',    (Jul.,   2013),
http://www.genevaassociation.org/portals/0/Geneva_Association_Systemic_risk_in_Insurance
_Report_March20 10.pdf.
53
   See WYMEERSCH, supra note 41, at 27.
54
   See SSM Regulation, supra note 20, art. 4(1).




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the activities of branches of credit institutions from third countries as well as
payment services.55

        The Regulation pays ample attention to the functioning of the SSM as
a cooperative mechanism. The ECB and the competent national authorities
must cooperate in good faith cooperation and have an obligation to exchange
information.56 Additionally, national authorities are responsible for assisting
the ECB with the preparation and implementation of acts in connection with
the tasks conferred to the ECB by the Regulation.57

        In particular, according to art. 6 (5) and (6) the ECB and national
authorities share responsibility for the exercise of regulatory oversight on
credit institutions which are only indirectly supervised by the ECB.
Competent national authorities shall perform these supervisory tasks in
conformity with the regulations, guidelines and general instructions issued
by the ECB. When necessary to ensure the consistent application of high
supervisory standards the ECB may decide to exercise its powers directly in
relation to one, or more, credit institutions. Moreover, as the ECB oversees
the functioning of the system, it may, at any time, exercise its investigatory
powers and request information from the competent national authorities on
the performance of the tasks that fall within their purview.

        This kind of cooperation between the ECB and competent national
authorities is, however, innovative with respect to previous experiences.
Whereas the old model is generally horizontal, with supervisory authorities
standing at the same level, in the SSM cooperation is vertical so as to ensure
the overall functioning of the SSM under the leadership of the ECB. 58




55
   See SSM Regulation, supra note 20, pmbl. 28.
56
   See SSM Regulation, supra note 20, art. 6(2), referring probably to TFEU, supra note 51, art.
4(3), stating: “Pursuant to the principle of sincere cooperation, the Union and the Member
States shall, in full mutual respect, assist each other in carrying out tasks, which flow from the
Treaties”.
57
   See SSM Regulation, supra note 20, art. 6(3).
58
   See WYMEERSCH, supra note 41, at 41.




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This cooperation has been further refined in the Framework Regulation for
the SSM,59 an instrument developed by the ECB in consultation with national
authorities.60 The Framework Regulation develops and illustrates cooperation
procedures between the ECB and competent national authorities within the
SSM as specified by the SSM Regulation itself. This document is particularly
important as it coordinates and defines the relationship between the two
levels of supervision. In particular, The Framework Regulation illustrates
three main aspects: the methodology for determining the quantitative
criteria for classifying banks as significant, or less significant, with special
attention to changes in the regime; 61 arrangements with respect to the
exercise of powers by both national supervisors and the ECB; procedures
governing the relation between the ECB and national supervisors for the
supervision of significant, as well as less significant, banks. The ECB has to
be informed by national authorities about their concrete supervisory
procedures      in    relation    to    less   significant      credit    institutions           (e.g.
administrative or disciplinary measures, including sanctions and their
implementation). The ECB can request further information and impose
additional supervisory duties. Before the national supervisor adopts its final
decision, it must obtain the opinion of the ECB, which does not, however,
amount to a binding approval.

         On the other side, the Framework Regulation establishes Joint
Supervisory Teams (JSTs) for the supervision of significant banks. Every
significant institution will have one team made up of personnel from both
the ECB and competent national authorities. The team will be coordinated by
a member of the ECB who, as a rule, will not have the same nationality of the
supervised      institution.     The    effectiveness     of    day-to-day         supervision,
however, largely depend on the support from the regulator of the State of

59
   See Regulation 468/2014 [hereinafter SSM Framework Regulation] of the European Central
Bank of 16 April 2014, Establishing the framework for cooperation within the Single Supervisory
Mechanism between the European Central Bank and national competent authorities and with
national designated authorities, 2014 O. (L 141) 1
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014R0468.
60
   See SSM Regulation, supra note 20, art. 6 (7) (b) (iii).
61
   In accordance with the SSM Framework Regulation, supra note 59, art. 49(1), the ECB
published a list containing the name of each entity and group directly supervised by the ECB and
the list of entities supervised by a national competent authority as of December 30, 2015. The
significant entities directly supervised by the ECB amount at 129. The list is available at
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/list_for_publishing_20151230en.pdf.




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establishment. Indeed, whilst leading the supervisory activities, the ECB still
has to utilize the local knowledge and the expertise of national authorities.

       From this perspective, a potential limit of this regulatory setting is
the extensive reliance on cooperation among supervisors as well as the
delegation of supervisory functions to national authorities. The SSM, despite
the strong powers conferred to the ECB, largely functions by delegating
supervisory tasks to national authorities and by relying on their cooperation.
The duties of cooperation and exchange of information 62 should prevent, or
at least mitigate, information asymmetries between the periphery and the
center of the SSM. The responsibility of the ECB for the system, together
with the powers of direction and substitution with respect to national
supervisors, lead to the conclusion that this model does not simply provide
for enhanced cooperation.

       In other words, the hierarchical structure of the SSM should solve
problems of coordination between authorities, as well as information
asymmetries which might otherwise advantage national authorities because
of the apical position of the ECB. Information asymmetries can, however, be
exploited, especially in times of crisis, to protect local and particular
interests from the scrutiny of the ECB. National authorities may, for
example, delay the transmission of important information to the ECB or
procrastinate actions against national banks that are under their direct
supervision regardless of the European interest to financial stability.

       The recourse to this multifaceted architecture - based on cooperation
and delegation under the direction and control of a central authority - was,
to some extent, unavoidable. Indeed, out of more than 6,000 banks which are
established in the Eurozone the top 150 institutions count for the 80% of
banking assets.63 Limited resources, political expediency, the existence in the
Eurozone of different legal, accounting and taxation frameworks, as well as
the coexistence of many languages and business backgrounds were all




62
  See SSM Regulation, supra note 20, art. 6(1) and (2).
63
   See IMF, Staff Discussion Notes A banking union for the euro area (Feb. 13, 2013),
https://www.imf.org/external/pubs/ft/sdn/2013/sdn1301.pdf.




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relevant     factors   in   deciding      to   lean   on   national     authorities. 64         Full
centralization was not an option even with regard to banks which operate
transnationally: resources are mainly national and successful supervision
still depends on the proximity of the banking institutions. Decentralization
to domestic supervisors should not, however, mean that the central
supervisor is merely validating decisions taken locally. Supervision is to be
consistent throughout the Eurozone.65

        As highlighted above, the SSM Framework Regulation tries to balance
centralization and delegation by taking into account the size of banks as well
as their national, or transnational, nature. 66

        Delegation, in fact, is a better solution for domestic institutions, even
if the ECB is empowered to instruct national authorities and also to replace
them    in    the   supervision      of   one    or   more     institutions. 67      Delegation
mechanisms are, however, also in place for transnational banks, even though
the ECB still exercises a stronger control.

        On the other hand, cooperation mechanisms tend to fail in the event
of a crisis. Rather than acting from a European perspective, supervisors tend
to pursue their national interest. Delegation, indeed, inherently suffers from
information asymmetries which allows the delegated authority to exploit
information advantages. Duties to cooperate and share information are
insufficient to compensate for similar imbalances, as national supervisors
are often incentivized to disregard them, particularly when approaching a
crisis. Moreover, the the ECB’s powers to direct and substitute, which aim at
preventing failures in the supervisory system, may be impaired by the non-
cooperation of local supervisors, including non-compliance with their duty
to share relevant information.68




64
   See TOBIAS H. TRÖGER, The Single Supervisory Mechanism – Panacea or Quack banking Regulation?
(Inst. For Monetary and Fin. Stability, Working Paper No. 73, 2013),    http://www.imfs-
frankfurt.de/fileadmin/user_upload/pdf/WP_73.pdf.
65
   See IMF, supra note 63.
66
   See SSM Framework Regulation, supra note 59.
67
   See SSM Regulation, supra note 20, art. 6(5).
68
    See G.FERRARINI, Single Supervision and the Governance of Banking Markets (European Corp.
Governance      Inst.   –    Law,     Working    Paper    No.    294,    2015),   available   at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604074&download.




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     4.   NON PARTICIPATING MEMBER STATES. THE OPT-IN REGIME

As highlighted, the SSM essentially applies to Member States within the euro
area. The Regulation, however, allows Member States from outside the
Eurozone to adhere to the SSM by entering a “close cooperation scheme” on
a “contractual” basis. Adhesion requires the drafting of a Memorandum of
Understanding.69In particular, States from outside the euro area must declare
their adhesion to the SSM along with the commitment of their national
authorities to respect the guidelines and comply with the requests of the ECB
by furnishing all necessary information. These declarations are rendered by
simultaneously notifying a request to other Member States, to the
Commission, to the ECB and to the EBA.70

          E.U. Member States that opt into the SSM are treated as States of the
Eurozone, with the exception of a few aspects mentioned below.

          Prudential supervision will be exercised according to the rules of the
SSM and all banks established in the requesting Member State will be subject
to the SSM regime. The abovementioned two-tier mechanism of the SSM
would then equally apply.71 Only the most significant banks are going to be
supervised by the ECB which will then instruct national supervisors
according to the protocol for banks in tier-one. Less significant institutions
would remain under national supervision. 72

          The Treaty provides viable legal foundations for making the ECB the
central supervisor for the Eurozone.73 It does not, however, provide legal
underpinnings for fully including countries from outside the Eurozone within
the ECB’s supervisory scope. In particular, the Treaty stipulates that non-
Eurozone countries are not allowed to vote in the final decision-making body
of the ECB. Similarly, non-Eurozone countries are not bound by the



69
    See SSM Regulation, supra note 20, art. 7.
70
    However, technically, admission to the SSM is a unilateral decisions of the ECB under art. 7 (2)
 (a) of the SSM Regulation, supra note 20, art. 7(2)(a).
 71
    See SSM Regulation, supra note 20, art. 7(2)(a) referring to artt. 5 and 6. As a consequence the
 entire two tier system, with significant and less significant banks becomes applicable and is
 notified to all Member States, whether or not belonging to the SSM.
72
    See SSM Regulation, supra note 20, art. 7(2)(a) referring to art. 6, meaning that the distinction
 between significant and less significant banks also apply here.
 73
    See TFEU, supra note 51.




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deliberations of the ECB.74 As a consequence, Member States from outside the
Eurozone cannot become full members of the banking union as they do not
enjoy the same rights and obligations as Eurozone countries. Whereas they
can be full members of the Supervisory Board, only a change of the Treaty
could allow them to become members of the Governing Council. 75 On this
point, a few mitigating instruments have been implemented such as, for
instance, the right to send an observer to the Governing Council.76

        As a consequence, even when a non-Eurozone State has entered the
SSM, the ECB is not allowed to take a decision that directly applies to a bank
of that country.77 The ECB has to communicate its decisions to the national
supervisor, which will then ensure the bank’s compliance. On the other hand,
banks which are established in the Eurozone receive direct instructions from
the ECB. “Close cooperation” agreements have a duration of at least three
years. The loss of sovereignty which is inherent to this supervisory regime
only allows to make provisional arrangements. Whereas States from the
Eurozone do not have an option to leave the SSM as their adhesion is a
consequence of their membership, States from outside the Eurozone could
leave the SSM if the regime is no longer beneficial to them or if they disagree
with its development. This clause has been drafted in order to safeguard
sovereignty.78 When the three years period expires, due to the voluntary
nature of the close cooperation agreement, as well as to the ECB’s inability to
enforce supervisory decisions outside the Eurozone, the agreement can be
terminated any time. The ECB and the participating third State can both
terminate the agreement.79 Termination would typically be the result of a
disagreement on a supervisory decision.

        On the one side, the ECB has two options to terminate. Firstly, the
ECB can issue a warning to a State in which it declares that the State does not
respect one of the aforementioned conditions. After the warning if sufficient


74
   See TFEU, supra note 51, art. 139(1)(b).
75
   See TFEU, supra note 51, art. 139(1)(b).
76
    See SSM Regulation, supra note 20, pmbl. 43. The Governing Council and the Supervisory
Board are the governing bodies of the SSM. On their composition and tasks see below the
relevant paragraph.
77
   See SSM Regulation, supra note 20, art. 7 (4).
78
   See SSM Regulation, supra note 20, art. 7(5).
79
   See SSM Regulation, supra note 20, artt. 7(8) and 26(8).




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actions to stop the breach are not implemented, the ECB can terminate the
close cooperation agreement. Secondly, if the Governing Council objects to a
decision by the Supervisory Board, the State can then notify the Governing
Council that it objects to the resolution of the Supervisory Board, as amended
following the objection of the Governing Council. If the latter maintains its
decision nonetheless, the State can choose whether to apply the supervisory
decision. The Governing Council has then to evaluate the impact of the
State’s failure to implement the decision and decide whether to suspend or
terminate the close cooperation agreement. 80

         On the other side, States from outside the Eurozone are given more
options to terminate. A State can terminate the close cooperation agreement
whenever it disagrees on a draft decision by the Supervisory Board.
Moreover, if a State has been part of the SSM for more than three years its
termination does not require any specific motivation. In the event of
termination, the terminating State is not allowed to send a new proposal of
close cooperation for the following three years. 81 This last provision82 is
intended to deter a State from interrupting the close cooperation agreement,
by imposing costs of leaving the system83, with the sole purpose of avoiding a
decision of the Supervisory Board.84

         The flexibility of the close cooperation agreement was inspired by the
desire to include non-Eurozone States in the SSM. As a consequence, the
final Regulation is more accommodating than the original SSM Commission
Proposal.      Too    much       flexibility    can,    however,       undermine           the      ECB’s
supervisory authority as non-Eurozone States could at any point threaten not
to apply a supervisory decision, or even leave the SSM altogether. 85

         The opt-in regime aimed at alleviating the evident shortcomings of a
supervisory system that covers only part of the European Union. It is
however doubtful whether States from outside the Eurozone have interest to

80
   See SSM Regulation, supra note 20, art. 7(7).
81
   See SSM Regulation, supra note 20, art. 7(9).
82
   See SSM Regulation, supra note 20, art. 7(9).
83
   See WYMEERSCH, supra note 41, at 63.
84
   See WYMEERSCH, supra note 41, at 63.
85
   On this point see STIJN VERHELST, Assessing the single supervisory mechanism: passing the point of no
return     for    Europe's    banking     union       (Egmont,      Working      Paper      No.      58,
2013),http://www.egmontinstitute.be/wp-content/uploads/2013/07/Egmont-papers-58.pdf.




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enter the SSM. Reputational advantages, cost saving, as well as an overall
simplification of the regulatory regime, may be contributing factors in
attracting banking groups with large activities within the SSM jurisdiction.
Ideally, after some time, markets will prefer a solid supervisory regime under
the leadership of the ECB whose actions are not skewed by national interests.
This choice will then lead to more favorable interest rates, credit ratings and
equity prices. By obeying to a single supervisory regime these groups will
benefit from uniform regulations and, therefore, they will all stand on the
same footing in terms of supervisory standards. However, only “significant”
groups would enjoy such benefit. Hence, the structure of the national
banking systems will be a key factor in deciding whether to adhere to the
SSM. Even States without major banking groups but with a considerable
presence of branches and subsidiaries might prefer to reduce their
involvement in prudential matters, as well as the costs of supervision, by
adhering to the SSM. In addition, the adhesion to the single supervisory
regime may have a beneficial effect on the credit rating of adhering States,
especially in the run-up to joining the Monetary Union. By contrast, this
regime entails a relevant loss of sovereignty and, therefore, the advantages of
joining the regime are not so evident, not only for less significant banking
groups.86




       5.   THE IMPACT OF THE SSM ON THE SUPERVISION OF TRANSNATIONAL BANKING
            GROUPS

The impact of the SSM Regime on transnational banking groups deserves a
specific analysis, which, for the purposes of this paper, will be confined to
the attribution of key supervisory competences.

            First of all, the ECB exercises direct supervision on all activities in the
Eurozone of the branches of significant banking groups whose headquarters
are located in States which are under the supervision of the SSM. In
particular, when a branch qualifies for direct ECB supervision (which is to be
determined according to the abovementioned criteria) the whole group falls


86
     On the reasons to opt-in see WYMEERSCH, supra note 41, at 61.




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under the supervision of the ECB. In this respect, the SSM regime is merely
applying the “home country rule” where the home supervisor, whose
functions have now been transferred to the ECB, is fully in charge of both
home and host activities. Additionally, the same principle will apply to
branches which operate in non-participating States. The ECB, indeed,
maintains identical supervisory functions with respect to significant banking
groups which, though under the supervision of the SSM, have established
branches in non-participating States.87

        Secondly, subsidiaries of significant banking groups that qualify for
ECB’s direct supervision are also directly supervised by the ECB regardless of
their individual importance. As anticipated, since the assessment is done on a
consolidated basis, national supervisors would not, therefore, maintain any
direct supervisory competence.88 Subsidiaries of banking groups that do not
fall under the ECB’s remit continue to be supervised nationally by the
supervisors of the host country.

        There are some significant consequences which stem from this new
regime.89 For instance, in term of prudential supervision differences between
branches and subsidiaries are likely to disappear. 90 With respect to
supervisory activities, differences in banking operations, regardless of
whether they involve branches or subsidiaries, will in some respects become
less relevant. As a consequence, it may become more profitable to exercise
the   activity    through     branches,      as     this   would    avoid     the      additional
requirements of having to manage separate entities (e.g. own capital
requirements, separate liquidity, management, boards, auditors, different
regulators, etc.).91 On the other hand, other aspects, such as for instance




87
    See SSM Regulation, supra note 20, art. 4(1)(b). But this obviously only refers to banking
groups under the ECB’s direct supervision, as this task is placed within the framework of SSM
Regulation, supra note 20, art. 6(6).
88
   See SSM Regulation, supra note 20, art. 9(1).
89
    For an overview of the consequences of the SSM on the supervision of cross-border banking
groups see E. WYMEERSCH, supra note 41, at 32-37.
90
    Indeed, underlying banking law may still contain some differences that the ECB will have to
respect. Other factors may continue to play an important role in decisions as to where additional
operations will be established.
91
   See WYMEERSCH, supra note 41, at 34.




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taxation, labor law, minority shareholders rights and local culture might,
however, still be relevant in deciding whether to maintain a subsidiary. 92

        Less significant groups continue to be governed by the previous
scheme: while branches fall under the purview of the home supervisor, the
host supervisor is competent to supervise subsidiaries. Medium sized groups,
that are active in several E.U. States, are now subject to a multitude of
supervisors. For these institutions this regime is likely to be quite
burdensome: all their activities, regardless of whether they are located in
participating or in non-participating States, will have to deal with a
fragmented supervisory landscape. An adequate response might be to convert
the subsidiary into a branch so as to trigger a uniform, though national,
supervisory regime. The structure of medium sized groups is relevant in
determining whether the ECB might be able to retain competence. The ECB,
indeed, in the presence of considerable cross border activities, and when the
network of subsidiaries is significant, can decide to supervise them as tier
one banking groups.93 On the basis of the abovementioned criteria, only the
ECB is, however, entitled to decide whether to exercise direct supervision on
a credit institution. Indeed, according to the SSM regime cross-border
banking groups are not offered an “opt-in option”.94

        With respect to participating States from outside the Eurozone, the
rules to determine supervisory competence remain unchanged. Whether the
ECB will be able to retain competence over national supervisors depends on
the abovementioned criteria. The parent company’s consolidated data will be
utilized to determine the applicable supervisory regime.

        A comparable national regime is applicable to less significant groups
where the supervision is exercised by the national supervisors of the home
State for the parent company and its branches. Subsidiaries, on the other
hand, fall within the purview of the host State.




92
   Cf. SSM Regulation, supra note 20, art .1(5).
93
   The Regulation mentions the ECB competence only with respect to subsidiaries but the
assessment on a consolidated basis should prevail and therefore also the branches of the parent
should be included in this calculation.
94
   See WYMEERSCH, supra note 41. at 34.




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The basic regime, as laid down in the Directives, then continues to apply to
branches of banks which are established in non-participating States. The
home supervisor of the State where the subsidiary is located will be the
competent supervisory authority for their subsidiaries in the SSM area. The
ECB     will   not     be   involved,      even       when    banking       groups        cross       the
abovementioned consolidated quantitative thresholds. 95

        When quantitative thresholds are met exclusively by subsidiaries (on
sub-consolidated basis) the ECB would be the competent supervisory
authority as the subsidiary is a separate legal entity which is established in
the SSM area. Under these circumstances, the ECB and the home supervisor
of this group would have to conclude a Memorandum of Understanding
(MOU) so as to define their respective positions in the college of
supervisors.96

         Even within the SSM area, the SSM Regulation approaches differently
branches whose banking groups are established in a non-participating State.
According to the relevant Directives, whereas the home supervisor is
normally competent, the host supervisor has limited intervening powers.97 In
accordance with the SSM Regulation, “the ECB shall carry out the tasks for
which the national authorities are competent in accordance with relevant
Union law”.98 Therefore, all branches, regardless of their importance or
volume, will be supervised by the ECB and in accordance ECB standards. Vice
versa, according to E.U. law, when banking groups that fall within the
purview of the SSM establish branches in non-participating States, these
branches fall under the home competence of the ECB.99

         On the basis of the rules on consolidated supervision, the local
supervisor is competent to supervise subsidiaries of banking groups within
the Eurozone even if they are located in a non-participating State.

95
   See WYMEERSCH, supra note 41, at 35.
96
   See SSM Regulation, supra note 20, art. 3(6), makes this mandatory for States housing the
systemically important institutions. For the other non-participating States, a MOU in general
terms will be concluded: see SSM Regulation, supra note 20, pmbl. 14.
97
   See CRD IV, supra note 22, artt. 40 ss; see also the regime for the significant branches set out in
CRD IV, supra note 22, art. 51.
98
   See SSM Regulation, supra note 20, art. 4(2), irrespective whether there will be one or several
branches. By incorporating one of these, supervision may shift to the national level, provided
this group is “non-significant”.
99
   See SSM Regulation, supra note 20, art. 4(1)(b), applying general Directive principles.




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Coordination among competent supervisors follows the existing E.U.
Directives and supervisory coordination rules within colleges of supervisors
for deciding between home and host supervisors. Therefore, if the
headquarter of a significant banking group is located in the Eurozone, the
ECB will be the leading supervisor, and the supervisory college will include
supervisors from the non-participating jurisdictions where the subsidiaries
are located. Vice versa, where a subsidiary in the euro area is part of a
banking group whose place of establishment is in a non-participating
jurisdiction, the supervisors of the States where these subsidiaries are
located will normally join and lead the supervisory college, while the ECB is
merely invited as a member. When a subsidiary is crossing the thresholds,
the consolidated supervisor that is in charge of the group will not participate
and the ECB will be in charge of the subsidiaries within the Eurozone.

        Finally,    with     respect     to   banking      groups       in     third       countries’
jurisdictions, the SSM Regulation remains largely silent.100 Their subsidiaries
and branches are therefore subject to the national supervisor of their place of
establishment within the European Union and the regime of that jurisdiction
will apply. This would mean that these groups could continue to operate
under a regime of freedom to provide services while their subsidiaries would
be subject to the supervision of national authorities on capital, management
and all other aspects of banking regulation. Only if significant subsidiaries
are subject to the supervision of the ECB. As mentioned above, the regime
subjecting branches to direct ECB supervision                    101
                                                                       is only applicable to
activities of groups established in non-participating States, but it does not
apply to third country groups. From the perspective of systemic protection
this difference could be justified: protection is merely offered to creditors of
banks which are in the Eurozone. It may, however, create unfair advantages


100
    SSM Regulation, supra note 20, pmbl. 28, reminds that their supervision remains a national
matter. With third countries, international agreements could be concluded by the ECB (pmbl.
80), but respecting the competences of the E.U. institutions, of the EBA and of the Member
States. The European Union banks have to be considered third country banks.
101
    See SSM Regulation, supra note 20, art. 4(2). Host supervision for branches and services has
been redefined and extended in CRD IV, supra note 22: if branches are not subject to host
authorization (art. 17), there has to be close cooperation on a broad range of issues for both
supervisors of branches (artt. 51 - 53). The host can request a branch to be qualified significant
(art. 52) in which case special supervision is needed on liquidity and risks. Inspection for
financial stability reasons are initiated by the host, although action from the home is expected
(art. 53).




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for banks which are established in third countries. In this case, the national
supervisory regime would be competing with the SSM. 102

        In conclusion, the effects of the SSM regime on the legal position of
subsidiaries and branches which are located in the Eurozone are likely to be
quite significant. Institutions which fall under the direct supervision of the
ECB enjoy full advantages from the new regime and only deal with one
supervisor. Therefore, notwithstanding the discrepancies between their
domestic regimes, these groups, branches and subsidiaries are subject to the
same supervisory regime regardless of their location. Conversion from
subsidiary to branches is likely to become more frequent, as this may result
in a better use of capital, including full exploitation of economies of scale, as
well as considerable savings in administrative and legal costs. Moreover,
other formalities, including reporting, should be centralized and significantly
simplified; assessment will take place on a fully consolidated basis allowing
for a better risk spreading. These advantages, however, exclusively exist at
prudential     level.103   If   local   authorities      have     implemented            diverging
obligations, requirements and practices, these standards would nevertheless
remain in place and continue to be different from State to State. 104

        According to the guidelines of the ECB, banks which are supervised
nationally should be subject to a simplified supervisory regime, especially
considering their marginal impact in terms of financial risk. However, if
these banking groups operate in multiple Member States they would still be
subject to several diverging regimes unless they convert subsidiaries into
branches. On the other hand, little has changed for banking groups from
non-participating Member States. Unless they restructure into subsidiaries,
which would then remain under the supervision of national authorities, the
ECB has now authority over incoming branches and services. When branches
are converted into subsidiaries the SSM Regulation requires the conclusion of




102
    See WYMEERSCH, supra note 41, at 36.
103
     See Benedikt Wolfers & Thomas Voland, Level the Playing Field: the New Supervision of Credit
Institutions by the European Central Bank, 51 COMMON MKT. L. REV. 1463 (2014).
104
    See WYMEERSCH, supra note 41, at 37.




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a MOU between the ECB and the supervisors of the non-participating
States.105



      6.   THE ECB AS A PRUDENTIAL SUPERVISOR. GOVERNANCE AND POWERS

The governing bodies of the SSM are the Governing Council and the
Supervisory Board. The former was already operating at the top of the ECB
and it comprises the members of the Executive Board as well as the
governors of the national central banks. 106 The latter is an “internal organ”
of the ECB,107 which carries out preparatory activities, including specific
competences of national supervisors. 108 It is necessary to draw a line between
these tasks and the maintenance of price stability which is the primary
objective of the ECB's monetary policy.109 As stated in the preamble to the
SSM Regulation, supervisory duties must be fulfilled separately in order to
avoid interferences and ensure that each function is carried out in accordance
with its specific objectives. Article 25 of the Regulation indeed contains both
abstract principles and practical guidelines for achieving a complete
separation      between      supervisory      duties     and    monetary       policy.110        First,
monetary policy and prudential supervision must be kept separate. No
prejudice to the monetary policy should stem from the exercise of
supervisory tasks. Indeed, supervisory duties should neither interfere nor
influence the monetary policy of the ECB.111 In addition, the organization and


105
     See SSM Regulation, supra note 20, pmbl. 14, dealing with the effects of the ECB’s decision on
branches and subsidiaries of SSM banking group in non-participating states, and vice versa.
Here a MOU should intervene, including the ECB and the national supervisors.
106
     On the composition of the Governing Council see C. ZILIOLI AND M. SELMAYR, THE EUROPEAN
CENTRAL BANK (Giuffré, 2007) and R. SMITS, THE EUROPEAN CENTRAL BANK: INSTITUTIONAL ASPECTS
(1997).
107
    See SSM Regulation, supra note 20, art. 26(1).
108
    See SSM Regulation, supra note 20, pmbl. 67.
109
     About the need to ensure a clear separation between monetary policy and supervisory tasks,
see PISANY-FERRY, SAPIR, VERON & WOLFF, supra note 2, at 10, and ECB, Opinion of November 27,
2012 on the proposal for a Council Regulation entrusting the European Central Bank with
specific tasks concerning policies relating to the prudential supervision of credit institutions and
on the proposal for a Regulation of the European Parliament and of the Council amending
Regulation (EU) 1093/2010 Establishing the European Banking Authority (EBA), 2013 O.J. (C 30)
6, http://www.ecb.europa.eu/ecb/legal/pdf/c_03020130201it00060011.pdf.
110
    See HANSPETER K. SCHELLER, The European Central Bank: History, Role and Functions, ECB.EUROPA.EU
(Oct. 25, 2004), https://www.ecb.europa.eu/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf.
111
    See Code of conduct for the members of the Supervisory Board of the ECB (2015/C93/02),
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmlegalframeworkforbankingsupervisi
on.vol3.en.




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hierarchy of the personnel which performs supervisory tasks keeps them
separate from other employees within the ECB. 112 As a consequence, based on
whether they perform functions of monetary policy or supervision, the
agenda and meetings of the Supervisory Board are kept separate. 113 Lastly, the
separation between supervision and monetary policy is ensured by creating a
Mediation Panel. The Panel deals with the different views of the competent
authorities of participating States with respect to an objection of the
Governing Council to a draft decision of the Supervisory Board. 114 Each
participating States can appoint to the Panel one member which is to be
chosen among the members of the Governing Council and the Supervisory
Board. All votes count equally and the Panel decides by simple majority. 115

        In particular, the Supervisory Board consists of a chairman and a
vice-chairman, four representatives of the ECB (which do not perform tasks
which are directly related to the monetary functions of the Bank) and a
representative of the national authority which is responsible for the
supervision of credit institutions in each participating State. The chairman is
selected among persons of recognized standing and professional experience
in banking and financial matters. Members of the Governing Council are
automatically excluded. The Vice-Chairman is chosen among the members of
the Executive Board of the ECB. For both positions, the ECB shall transmit to
the European Parliament a proposal of appointment and wait for the
approval. Once the proposal is approved, the Board shall appoint the
Chairman and Vice-Chairman of the Supervisory Board. These positions are
full time and incompatible with other positions with the competent national
authorities.116

        The decisions of the Supervisory Board are adopted by the simple
majority of its members. Each member has one vote, but in the event of a
draw, the vote of the Chairman is decisive. Exceptionally, regulations are



112
    See SSM Regulation, supra note 20, art. 25(2).
113
    See S. ANTONIAZZI, LA BANCA CENTRALE EUROPEA TRA POLITICA MONETARIA E VIGILANZA BANCARIA
[EUROPEAN CENTRAL BANK BETWEEN MONETARY POLICY AND BANKING SUPERVISION] (2014).
114
    On the Mediation Panel see the ECB Annual Report on supervisory activities (2014),
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmar2014.en.pdf.
115
    See SSM Regulation, supra note 20, art. 25(5).
116
    See SSM Regulation, supra note 20, art. 26(1) and (3).




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adopted by qualified majority.117 The Supervisory Board established an
internal Steering Committee made up of its own members. The Committee
provides support to the activities of the Supervisory Board, including the
preparation of meetings.118 However, it has no decision-making powers.119
The Supervisory Board plans and executes the tasks which have been
assigned to the ECB and acts under the supervision of the Governing Council.
All final decisions pertain to the competence of the Governing Council and
are adopted by tacit consent. This mechanism purports to avoid that
supervisory decisions are overturned as a consequence of the direct
involvement of the Governing Council. In fact, the Supervisory Board, after
the preparatory work, submits to the Governing Council its draft decisions.
Draft decisions are automatically adopted unless the Governing Council
objects within ten working days.120

         A special provision applies to participating States whose currency is
not the euro. As noticed before, they participate to the Supervisory Board, but
they are not members of the Governing Council of the ECB. Pursuant to art. 7
(8), a participating Member State whose currency is not the euro shall notify
the Governing Council when it disagrees on a draft decision of the
Supervisory Board. The notification, which is to be drafted within five
working days upon receiving the decision. The Governing Council decides on
the merits of the dissent within five working days, by taking into account the
motivations of the dissenting State. The State is also entitled to ask the ECB
to immediately terminate the close cooperation agreement.

         Special attention is given then to the independence of the ECB from
the competent national authorities. The accountability of the ECB vis-à-vis
the European Parliament, the Council and national parliaments is also to be
illustrated.121 Firstly, the members of the Supervisory Board and of the
Governing Council shall act independently and objectively in the interest of

117
    See SSM Regulation, supra note 20, art. 26(6) and (7).
118
    See SSM Regulation, supra note 20, art. 26(10).
119
    See EUROPEAN CENT. BANK, Rules of Procedure of the Supervisory Board of the European Central Bank,
ECB.EUROPA.EU(Dec.15,2014),https://www.ecb.europa.eu/ecb/legal/pdf/rop_sb_consolidated_ver
sion.pdf.
120
    See SSM Regulation, supra note 20, art. 26(8).
121
    See SSM Regulation, supra note 20, artt. 19 and 20. See DONATO MASCIANDARO & MARIA NIETO,
Governance of the Single Supervisory Mechanism: Some Reflections (Baffi Ctr. Research, Working
Paper No. 149, 2014), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2384594.




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the whole Union. They should not seek or take instructions from
communitarian institutions or bodies, Member States governments or other
entities.122 Secondly, the ECB responds to the European Parliament and to the
Council for the implementation of supervisory tasks under the Regulation.
The ECB then transmits an annual report to the European Parliament, to the
Council and to the Eurogroup. The same document is also transmitted to the
national parliaments of participating Member States. 123 Moreover, the
Eurogroup may host hearing sessions with the President of the Supervisory
Board of the ECB with regard to the execution of supervisory tasks. On the
other hand, the European Parliament may, when necessary for exercising its
powers in accordance with the TFEU, require the Chairman of the
Supervisory Board to attend in camera hearings before the relevant
committees. In particular, practical arrangements between the ECB and the
European Parliament should be implemented in order to ensure full
confidentiality, as required by the relevant rules.124

         National parliaments of participating States may invite the Chairman,
as well as other members of the Supervisory Board, to discuss with a
representative of the competent national authority the supervision of credit
institutions within their jurisdiction. 125

         In order to fund the supervisory activities of the ECB credit
institutions, as well as branches which have been established in a
participating Member State by a credit institution whose main place of
establishment is in a non-participating State, pay annual contributions. 126
These fees, which should not exceed the actual costs of supervision
(according to artt. 4 to 6 which illustrate its supervisory duties) will be
calculated according to objective criteria, such as for instance the relevance




122
    See SSM Regulation, supra note 20, art. 19(1).
123
    See SSM Regulation, supra note 20, art. 20(2).
124
    See SSM Regulation, supra note 20, art. 20(6) and (8).
125
    See SSM Regulation, supra note 20, art. 21.
126
    See SSM Regulation, supra note 20, art. 30(1).




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and risk profile of individual credit institutions.127 Furthermore, competent
national authorities are responsible for enforcing these payments, as well as
for recovering the costs which arise from their duties to cooperate with and
assist the ECB.128

         In order to ensure high supervisory standards, the ECB shall apply
relevant EU law, which is broadly defined as encompassing all national acts
which       implement       EU     directive.        To   that     effect,      all      guidelines,
recommendations and decisions of the ECB should comply and be subject to
the requirements of Union law.129 The ECB may also adopt Regulations to the
extent necessary to organize or clarify the modalities of its supervisory
tasks.130

         In this respect, however, it must be highlighted that the semi-strong
harmonization of the single rulebook for the supervised entities, which is the
foundation of the banking union as well as an important precondition of the
SSM, could be a potential flaw of the present regime. 131




127
    See Regulation (EU) 1163/2014 of the European Central Bank of 22 October 2014 on supervisory
fees (ECB/2014/41), 2014 O.J (L 311) 23 and Decision (EU) 2015/530 of the European Central Bank
of 11 February 2015 on the methodology and procedures for the determination and collection of
data regarding fee factors used to calculate annual supervisory fees (ECB/2015/7), 2015 O.J. (L
84)67,https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmlegalframeworkforbankingsu
pervision.vol3.en.
128
    See SSM Regulation, supra note 20, art. 30(3) e (5).
129
    See SSM Regulation, supra note 20, art. 4(3).
130
    Before adopting a Regulation with regard to matters having a substantial impact on credit
institutions, the ECB shall conduct open public consultations and analyze the potential related
costs and benefits, unless such consultations and analyses are disproportionate in relation to the
scope and impact of the Regulations concerned or in relation to the particular urgency of the
matter, in which case the ECB shall justify the urgency. See SSM Regulation, supra note 20, art.
4(3).
131
    The single rulebook is the foundation of the banking union. It consists in E.U. Regulations,
Directives, implementing acts and recommendations, guiding principles and other non-binding
instruments that all banks in the European Union must comply with. These rules, among other
things, lay down capital requirements for banks, ensure better protection for depositors, and
regulate the prevention and management of bank failures.
The European Banking Authority plays a key role in building up of the single rulebook. The EBA
is mandated to produce a number of Binding Technical Standards (BTS): legal acts that specify
particular aspects of an E.U. legislative text (Directive or Regulation) and aim at ensuring
consistent harmonization in specific areas. BTS are always finally adopted by the European
Commission by means of Regulations or decisions. At that point they become legally binding and
directly applicable in all Member States. This means that, on the date of their entry into force,
they become part of the national law of the Member States and their implementation into
national law is not only unnecessary but also prohibited. See Andrea Enria, Chairperson
European     Banking     Auth.,   Developing a Single Rulebook in Banking             (Apr.    27,
2012),http://www.eba.europa.eu/documents/10180/27011/Andrea-Enria-s--Speech-at-CBI-
Dublin---FINAL.pdf.




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Member States have, in fact, traditionally enjoyed considerable discretion in
the implementation of Directives. The banking system in the Eurozone is
indeed characterized by regulatory polycentrism: whereas the SSM provides
for a centralized supervisory regime, a plethora of rule-makers is still
involved in the process. As a consequence, the ECB conducts its supervisory
duties according to the diverging rules of all participating States. 132

         As long as regulation and supervision remain national, cross-border
differences in legislation create international frictions and give rise to
regulatory arbitrage. However, this is not necessarily a problem for domestic
supervisors. Centralized cross-border supervision, on the other hand, may be
negatively affected by diverging national legislations. 133 In particular, the ECB
may incur into higher information costs as it constantly has to consult
national authorities on the applicable rules. In addition, the ECB may
encounter issues in the interpretation of national legislation implementing
EU Directives. The ECB will also face challenges in areas where no common
rules are in place, such as for example non-performing loans, for which
accounting standards and prudential requirements largely differ from one
jurisdiction to the other.134

         On the other hand, the ECB has the same powers which are available
to competent supervisory authorities according to EU law. 135 To the extent
necessary to carry out its tasks under the SSM Regulation, the ECB may




132
    See Guido Ferrarini & Fabio Recine, Verso un Testo Unico Bancario Europeo [Towards a European
Single Banking Act], BANCARIA, Jun. 2015 (It.).
133
    For an analysis, see WYMEERSCH, supra note 41, at 12.
134
     See Sabine Lautenschläger, Member of the Exec. Bd. of the ECB & Vice-Chair of the
Supervisory Bd., Single Supervisory Mechanism, After one year of European banking supervision,
have     expectations    been    met?      (Jan.   13,    2016),   which      is     available    at
https://www.bankingsupervision.europa.eu/press/speeches/date/2016/html/se160113.en.html.
135
    According to SSM Regulation, supra note 20, art. 9(1), “for the exclusive purpose of carrying
out the tasks conferred upon it by art. 4(1), (2) and 5 (2), the ECB shall be considered, as
appropriate, the competent authority or the designated authority in the participating Member
States as established by the relevant Union law. For the same exclusive purpose, the ECB shall
have all the powers and obligations set out in this Regulation. It shall also have all the powers
and obligations, which competent and designated authorities shall have under the relevant
Union law, unless otherwise provided for by this Regulation. In particular, the ECB shall have the
powers listed in Sections 1 and 2”. See Marcello Clarich, I Poteri di Vigilanza della Banca Centrale
Europea [ECB’s Supervisory Authority] in L’ORDINAMENTO ITALIANO DEL MERCATO FINANZIARIO TRA
CONTINUITÀ E INNOVAZIONI (Alessio Bartolacelli, Vincenzo Calandra Buonaura, Filippo Rossi eds.,
2014.) (It.)




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instruct national authorities to utilize their powers when the Regulation does
not confer this authority upon the ECB itself. 136

        In particular, the ECB is vested with broad investigatory powers: it can
request credit institutions, as well as other legal or natural persons, to
provide information. Additionally, the ECB can conduct all necessary
investigations on any relevant person. This includes on-site inspections of
its business premises (after being authorized by a judicial authority if the
applicable national law so requires).137 National authorities will also assist the
ECB in the exercise of their specific supervisory powers in relation to the
authorization of credit institutions and assessment of acquisitions of
qualifying holdings.138 Furthermore, the ECB is empowered to require
institutions to exceed their capital requirements; to reinforce arrangements,
processes, mechanisms and strategies; to present a plan to restore
compliance with supervisory requirements; to apply a specific allocation
policy; to restrict or limit their business, operations or network; to limit
variable remuneration; to invest their net profit into strengthening their own
funds.139

         The    ECB     can    merely     sanction      breaches      by   legal       persons         of
immediately enforceable acts of Union law. Otherwise, the ECB may require
competent national authorities to initiate proceedings in order to ensure that
effective, proportionate and dissuasive sanctions are implemented.

        The legal position of the aforementioned credit institutions vis-à-vis
the ECB is also to be properly eviscerated. 140 The Administrative Board of
Review internally revises the decisions of the SSM. However, even though the
SSM Regulation mentions a right to judicial review, no procedure is currently
in place.




136
    See SSM Regulation, supra note 20, art. 9(1), last period.
137
    See SSM Regulation, supra note 20, artt. 10 - 13.
138
    See SSM Regulation, supra note 20, artt. 14(2) and 15(2).
139
    See SSM Regulation, supra note 20, art. 16(2).
140
    For an overview of the legal position of the credit institutions versus the ECB see Tomas M.C.
Arons, Judicial Protection in EUROPEAN BANKING UNION (Guido Ferrarini and Danny Busch eds.,
2015); Raffaele D'Ambrosio, Due Process and Safeguards of the Persons Subject to the SSM Supervisory
and Sanctioning Powers, QUADERNI DI RICERCA GIURIDICA DELLA BANCA D’ITALIA, Dec. 2013, at 1.




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The decisions of the ECB can directly affect individual credit institutions. The
ECB can also issue binding decisions and instructions to national authorities
in relation to individual credit institutions. The SSM Regulation does not
provide for the right to appeal against subsequent decisions by national
authorities. When the ECB asks for the intervention of national authorities,
and the national laws of the participating State applies during that
procedure, issues of applicable law and jurisdiction need to be discussed. The
CJEU, as well as national administrative courts, might be able to exercise
jurisdiction over a potential dispute. The latter would then presumably apply
national rules of procedure.141 The effectiveness of the SSM might be
undermined by the absence of clear division of judicial competences. 142

         In particular, the directly applicable decisions of the ECB are subject
to a two-fold system of review. Internal administrative review, as well as
external judicial review can both be relevant. The procedure of administrative
review is described in art. 24 of the SSM Regulation. Upon request by the
affected institution, the Administrative Board of Review has to carry out an
internal administrative review of the decision of the ECB. 143

        However, the scope of paragraph 1 of art. 24 is still to be assessed. It is
doubtful whether direct decisions by the ECB qualify for the purposes of
internal review when they are taken in accordance with national legislation.
This issue is especially relevant when the applicable national statute is, in
fact, implementing an EU directive. Even though national law applies, the
competence of the ECB stems from the SSM Regulation. Therefore, the
decisions of the ECB are not subject to judicial review at national level even if
they apply national statutes. Indeed, “EU decisions” (here defined as




141
    See Kerstin Neumann, The supervisory powers of national authorities and cooperation with ECB - a
new epoch banking supervision, 25 EUZW BEILAGE 9 (2014) stating that “the SSM creates complex
classification issues and requires further in-depth analysis regarding the legal implications of
different ECB actions. As far as the current understanding suggests, the SSM Regulation permits
multiple legal proceedings which may cause inconsistent results within different fora that make
up the SSM”.
142
    See Arons, supra note 140, at 10.05.
143
    See D’Ambrosio, supra note 140, at 84.




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decisions which have been taken by a EU institution) are reviewed by EU
courts.144

         The scope of the internal administrative review is circumscribed to
the procedural and substantive conformity of the decision of the ECB with
the SSM Regulation.145 On the basis of art. 253 (5) of the TFEU, 146 the ECB has
adopted the Operating Rules of the Administrative Board of Review.147

         In particular, after ruling on the admissibility of the request, the
Administrative Board of Review has to express an opinion no later than two
months upon receiving the request. Within this timeframe, the duration of
the procedure can vary on the basis of the urgency of the matter. This
opinion must be sent to the Supervisory Board of the ECB for the preparation
of a new draft decision. The Supervisory Board must submit to the Governing
Council a new draft decision which takes into account the opinion of the
Administrative Board. If the Governing Council does not object within 10
working days after the submission, the draft decision is automatically
adopted. The draft decision can abrogate, confirm or replace the initial
decision.148 Both the opinion by the Administrative Board of Review and the
draft decision need to be motivated and must be notified to the parties. 149 The
request of review, however, does not suspend the decision. On the other
hand, after receiving a proposal from the administrative board, the
Governing Council may suspend the application of the contested decision
when the circumstances so require.150




144
    The following formalities have to be fulfilled. The request for review must be made in writing,
including a statement of grounds, within one month of the date of notification of the ECB
decision to the person requesting the review. In the absence of notification, the time limit starts
as of the day on which the ECB decision came to the knowledge of the person requesting the
review.
145
    See SSM Regulation, supra note 20, art. 24(1).
146
    See TFEU, supra note 51, art. 263 (5), stating that “Acts setting up bodies, offices and agencies
of the Union may lay down specific conditions and arrangements concerning actions brought by
natural or legal persons against acts of these bodies, offices or agencies intended to produce
legal effects in relation to them”.
147
    See, European Central Bank Decision 2014/16 of on the Establishment of the Administrative
Board of Review and its Operating Rules, 2014 O.J. (L 175) 47 (Apr. 14, 2014),
https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2014_175_r_0017_en_txt.pdf.
148
    See SSM Regulation, supra note 20, art. 24(7).
149
    See SSM Regulation, supra note 20, art. 24(9).
150
    See SSM Regulation, supra note 20, art. 24(8).




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Article    24   (11)   of   the    SSM     Regulation      explicitly    states        that      the
abovementioned proceedings of administrative review do not prejudice the
right to initiate a claim before the CJEU under the relevant Treaty law.
According to article 263 of the TFEU, 151 third parties can ask the CJEU to
review the legality of acts of bodies, offices and agencies of the EU when they
produce legal effects vis-à-vis a third party.152 All natural and legal persons
can initiate proceedings before the CJEU when the contested act has either
been addressed to them or it could potentially impinge upon their rights. The
right to judicial review remains intact even when the contested act does not
have any practical impact.

          In conclusion, on the basis of the aforementioned art. 263 of the TFEU
all decisions by the ECB which directly address a credit institution fall within
the purview of the CJEU. Furthermore, according to paragraph 5 of art. 24 of
the SSM Regulation any natural or legal person can challenge a decision of
the ECB if that decision is directly addressed to them or if it directly affects
their interests.153

          It is however doubtful whether, on the basis of art. 263 of the TFEU,
the CJEU could review decisions of the ECB when the decision making powers
of the ECB stem from a national statute, including statutes implementing EU
Directives on financial supervision. However, when the decision of the ECB
does not directly address the plaintiff or affect its interests the case could be
declared inadmissible. On the other side, standing will be granted if the
decision of the ECB directly affects a credit institution. 154 In general, it could
be desirable to apply national administrative statutes, as interpreted by
national courts. However, according to art. 263 of the TFEU the jurisdiction
of the CJEU encompasses, but it is not limited to, directly applicable E.U.




151
    See TFEU, supra note 51, art. 263, paragraph 1.
152
    The European Central Bank is an E.U. institution. See Consolidated version of the Treaty on
European Union art. 13(1), Jun. 7, 2016, 2016 O.J. (C 202) 13 [hereinafter TEU].
153
    See SSM Regulation, supra note 20, art. 24(5).
154
    See TFEU, supra note 51, art. 263(2).




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law.155

          A fundamental point to determine is whether indirect ECB decisions or
instructions to national authorities can be subject to judicial review.
Furthermore, if they can be subject to review it is important to determine
what court is competent to hear the case. These questions are to be answered
by assessing the nature of the decisions and instructions of the ECB.
According to art. 263 of the TFEU the applicant must be directly affected by
the decision of a E.U. institution. Alternatively, the applicant must have a
direct interest in the outcome of the decision. First of all, ECB decisions
clearly qualify as acts of a E.U. institution. Decisions, however, are not
directly addressed to credit institutions. The ECB instructs national
authorities on the issuance of supervisory decisions. As the decision is not
directly applicable there is no legal standing on the basis of the first ground
for revision.

          However, the second ground could be met. The ECB indeed instructs
national authorities to take a decision which affects the interests of
individual credit institutions.

          Since national authorities mediate between the original decision of the
ECB and the final addressee, the issue of ‘direct interest’ is of critical
importance in order to seek remedy against the original decision before the
CJEU. ‘Direct interest’ is only established when the intermediate authority, in
this case the national authority, has no autonomous or discretionary
decision-making power.156 These criteria are met if national authority merely
implements the decisions of the ECB. Implementation is to be automatic, and
stem from the direct application of E.U. law. It is therefore fundamental to




155
    See SSM Regulation, supra note 20, pmbl. 60, “Pursuant to Article 263 TFEU, the CJEU is to
review the legality of acts of, inter alia, the ECB, other than recommendations and options,
intended to produce legal effects vis-à-vis third parties”. In regard instead of admissibility, the
following formality is important. TFEU, supra note 51, art. 263(5), provides the proceedings must
be instituted within two months of the publication of the ECB decision, or of its notification to
the applicant, or, in the absence thereof, of the day on which it came to the knowledge of the
latter, as the case may be.
156
    See Stichting Woonlinie and Others v. European Commission, No. 133-12, ECLI:EU:C:2014:105
EUR-Lex (CJEU Feb. 27, 2014). See also KOEN LENAERTS, IGNACE MASELIS AND KATHLEEN GUTMAN, EU
PROCEDURAL LAW (2014).




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assess whether there is some discretion as to the implementation of the
original decision of the ECB.157

        Thus, the legal standing of the credit institution depends on the
degree of detail of the ECB instructions. 158 On the one hand, if the ECB
decision itemizes what rules find application and how they are to be
implemented, affected credit institutions will be able to claim before the
CJEU as national authorities have no discretionary powers. National
authorities are merely formal intermediaries. On the other hand, if the ECB
merely lists the objectives, or otherwise leave national authorities with some
degree of discretion (e.g. on the use of supervisory powers) credit institutions
have no claim before the CJEU, even if the discretionary powers of national
authorities are relatively minor. Moreover, it is important to notice that the
competent national administrative courts cannot void the original decision or
instruction of the ECB. Therefore, credit institutions have no effective
remedies against the original decision. Indeed, as partial standing has not
been provided for, affected third parties have no way of independently
challenging the non-discretionary instructions.

        The potential for conflicting judicial decisions increases if the ECB
decision and the decision of the national authority are reviewed by two
different courts. This is a clear issue in the administrative and/or judicial
review of national authorities decisions, which follow the instructions of the
ECB.159 Furthermore, when national authorities are left with no discretionary
decision-making powers, judicial review before domestic courts may
encounter obstacles. For example, national authorities may argue that, since
it had no discretionary power no remedies are available under national
administrative law. National administrative courts cannot void the decisions
of    the   ECB,    as    they   are merely         competent         for the    acts      of     local
administrations.         Therefore,    national      courts     may      declare       the      claim
inadmissible as the affected financial institution has no sufficient interest in
contesting the “decision” of the national authority. Indeed, even if the
national decision is declared void, the national authority is nevertheless

157
    See LENAERTS, MASELIS AND GUTMAN, supra note 156, at 7.91-7.92.
158
    See Arons, supra note 140, at 13.31.
159
    See Arons, supra note 140, at 13.32.




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bound to implement the instructions of the ECB. Therefore, the decision
would also have to be challenged before the CJEU. However, as mentioned
earlier, as partial standing is not a viable path the CJEU is likely to reject the
claim when some autonomous decision-making power rests with the
national authorities.

       The effectiveness of the SSM reform may be further weakened by the
absence of clear judicial protection. Sometimes, when national authorities
are given little discretion, or even no discretion, individual credit institutions
have to challenge both decisions. Indeed, if the ECB decision is left
unchallenged, a successful challenge of the local decision would lead to no
actual remedy. For this reason, national courts could declare the claim
inadmissible for lack of sufficient interest, especially considering that the
instructions of the ECB cannot be challenged before national courts. On the
other hand, if the decision of the national authority is not challenged and the
national authority enjoys some autonomous decision-making power the
annulment of the ECB decision may not suffice. Even though art. 266 of the
TFEU requires the ECB to comply with the ruling of the CJEU and to instruct
national authorities to do the same, the autonomous decisions of national
authorities are not directly affected.

       Moreover, this could generate conflicting court decisions. Whereas the
ECB decision can indeed only be challenged before the CJEU, the decisions of
national authorities are to be brought before national administrative courts.
No remedy to this situation is currently in place. Indeed, no request can be
filed to suspend domestic proceedings if the same case is pending before the
CJEU. Additionally, the current system might give rise to some inequalities
within the EU. As different substantive and procedural administrative laws
apply the chances of conflicting decisions among participating States are rife.
A possible solution would be to centralize the judicial review so as to reflect
the current supervisory policy, as well as the concentration of decision-
making powers. On the other hand, the E.U. dispute resolution mechanism
would have to interpret national administrative law if E.U. directives, as well
as regulations, leave to national authorities some autonomy in the phase of




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implementation.160 Since E.U. provisions normally itemize a range of pre-
established options, the CJEU would have to ascertain whether domestic
authorities have respect the boundaries imposed by E.U. law.

           As a further obstacle to centralization, the CJEU, as well as national
courts, is already dealing with overcrowded dockets.




      7.   THE RELATIONSHIP BETWEEN THE ECB AND THE OTHER E.U. SUPERVISORS

One of the most delicate points of the SSM reform concerns the relationship
between the ECB and E.U. supervisors.161

           With regard to the European Banking Authority, the explanatory
memorandum accompanying                  the SSM proposal emphasized the role and
existence of the EBA without significant changes in its composition and
tasks.162 In the final draft most of these issues were abandoned and
transferred to the EBA amended Regulation,163 which was discussed and
approved together with the SSM proposal.

           Some might have expected that it would have been logical to entrust
the EBA with prudential supervision. The EBA was only operational in 2011
and it was put in charge, inter alia, of “improving the functioning of the
internal market by implementing a thorough, effective and consistent level
of regulation and supervision”.164 There were, however, several legal
impediments that prevented the EBA from being in charge of the SSM. For
instance, the Treaty, as well as the prevailing jurisprudence, did not allow for
discretionary decisions to be delegated to independent bodies165. First of all,


160
    See T. Arons, supra note 140, at 13.93.
161
     See STEFANO CAPPIELLO, The interplay between the EBA and the Banking Union (Robert Schuman
Ctr.      for    Advanced      Studies      Research,     Working     Paper      No.    77,     2015),
http://cadmus.eui.eu/bitstream/handle/1814/37378/RSCAS_2015_77.pdf?sequence=1. See also
Wymeersch, supra note 41.
162
     See European Court of Auditors, 'European banking supervision taking shape -EBA and its changing
context' (2014), http://www.eca.europa.eu/Lists/ECADocuments/SR14_05/SR14_05_EN.pdf.
163
     See EBA amended Regulation, supra note 21.
164
     See EBA amended Regulation, supra note 21, art. 1(5)(a). This was the opinion in the UK: see
House of Lords, The Impact of Banking Union on the EBA and the ESRB (Dec., 2012),
http://www.publications.parliament.uk/pa/ld201213/ldselect/ldeucom/88/8806.htm.
See also Eilis Ferran & Valia Babis, The European single supervisory mechanism, J.CORP.L.STUD. (2013).
165
     On the “Meroni doctrine” of the Court of Justice of the European Union, see supra text
accompanying note 39.




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the EBA implements “horizontal” cooperation not only between the eighteen
Eurozone authorities, but also between the twenty-eight national legislators;
as opposed to the SSM where every significant bank is represented by one
delegate whose authority in the participating States is vertical. Furthermore,
the EBA’s activities do not normally involve supervision and mainly focus on
regulation and standard setting; therefore whereas the ECB will be acting as
an independent supervisor166, the EBA is essentially an agency of the
Commission.167 It is then reasonable to assume that the EBA’s slightly
modified functions will ensure the even application of the EBA Regulation to
the twenty-eight Member States. The internal financial market will thus
remain cohesive by avoiding the creation of a two-speed Europe. This
concern has been one of the main focuses throughout the discussion of the
SSM reform.168

         In order to overcome this issue, the EBA Amended Regulation
modifies the balance between the standard setting powers of the EBA and the
ECB which acts as a new powerful banking supervisor for the Eurozone. 169
Whereas the relative position of the ECB as prudential supervisor has been
weakened the powers of the EBA have been increased. However, the core
powers of the EBA have not been altered by this process. The EBA will
continue to be in charge of implementing and enforcing regulatory
provisions (artt. 10 and 17 to 19). Implementing Regulations will be adopted
solely by the European Commission. The enforcement is largely depending
upon the procedures of the Commission. Individual decisions will have to
closely follow the literal meaning of the directly applicable acts by avoiding
discretionary judgments.170

        The main changes with respect to the previous EBA Regulation have
had an impact on the way the EBA conducts its competences. The new regime

166
    See Veron, supra note 28, at 2.10, for a political explanation: the United Kingdom wanted to
have a countervailing force against an all-powerful ECB. Obviously the argument has received
attention.
167
    Although more independent than most other agencies. See CHRISTOS VI. GORTSOS, The European
Banking Authority within the European System of Financial Supervision (European Ctr. Of Econ. & Fin.
Law,       Working       Paper       No.       1,     2011),     which      is     available      at
http://www.ecefil.eu/UplFiles/wps/WORKING%20PAPER%20SERIES%202011_1.pdf.
168
    See House of Lords, supra note 164, at 27.
169
    See Niamh Moloney, European Banking Union: Assessing its Risks and Resilience, COMMON MKT. L.
REV. (2014).
170
    See WYMEERSCH, supra note 41, at 67.




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has strived to grant equal powers to all supervisory bodies which act
“independently and objectively and in a non-discriminatory way in the
interest of the E.U. as a whole”.171 As the drafters were concerned that the
ECB would have occupied a dominant position with respect to other
supervisory bodies,172 the ECB, despite being given adequate representation
on the Board of Supervisors of the EBA, 173 has no right to vote. National
supervisors, including those of non-participating States, qualify as voting
members.

         The EBA amended Regulation contains a plethora of provisions which
strengthen the EBA’s position in order to avoid “centrifugal” forces in an
effort to re-balance the powers of the EBA with respect to the ECB. 174

         The EBA is, inter alia, responsible for the development of a “European
Supervisory Handbook for the whole Union”. 175 The Handbook itemizes the
best practices, methodologies and procedures. Although this may seem to
limit to the ECB’s discretion in developing its own supervisory techniques.
The Handbook will, indeed, be utilized by the EBA for peer reviews, as well as
for   the    assessment        of    supervisory       practices.     It   contains         traditional
supervisory tools which implement soft law instruments. The Handbook’s
purpose is to avoid supervisory competition between supervisors. 176 By
reviewing the way in which the Handbook has been implemented, the EBA
might advise the Commission that “legislative initiative is needed to ensure
further harmonization of prudential definitions and rules”. 177 The EBA
Regulation indeed states that the Handbook will not be a legally binding act


171
    See EBA amended Regulation, supra note 21, art. 1(5).
172
    See WYMEERSCH, supra note 41, at 67.
173
    See EBA amended Regulation, supra note 21, art. 4(c); the representative will not necessarily
come from the ECB, having been nominated by the Supervisory Board. However a second
representative “with expertise on central banking tasks” may accompany the ECB representative
(EBA amended Regulation, supra note 21, art. 4(c) and (b)).
174
    See Jacques De Larosière, Privilégier une structure légère mais aux aguets, 757 BANQUE (2013); V.
Constâncio, Vice-President, European Cent. Bank, The nature and significance of Banking Union
(Mar. 11, 2013), www.ecb.europa.eu/press/key/date/2013/html/sp130311.en.html, who considers
that the stronger centralization at the ECB will benefit the coordination role of the EBA.
175
    See EBA amended Regulation, supra note 21, art. 8(1)(a).
176
     See D. Nouy, Un superviseur adossé à la BCE est un vrai avantage, Banque, 757 BANQUE (2013); N.
Veron, L’EBA, arbitre des différends entre le Royaume-Uni et l’Union bancaire, 757 BANQUE (2013)
(considering that the development of a single Handbook will be very difficult with the United Kingdom as
main interlocutor).
177
    See Nouy, supra note 176, at 24-26, who sees it as an instrument to support equal competition
especially between the centre and the “periphery”.




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as it will not have an impact on the supervisory judgement. There is,
however, a risk that national supervisors, despite their lack of authority with
respect to significant banking groups, may gain control over supervisory
procedures.

          The competence of the ECB and the EBA are also likely to overlap
with regard to the performance of stress tests:178 the ECB proceeds to stress
testing on individual basis and, as a regular part of its supervision, on
individual banks.179 The EBA, on the other hand, autonomously engages in
Union-wide “assessments of resilience” in cooperation with the ESRB.180 To
accommodate EBA’s requests, both banks and national supervisors, including
the ECB, may be directly asked to undertake specific on-site inspections and
examinations.181

        To summarize, the EBA’s rights to obtain information from credit
institutions has been expanded to banks, holding companies, branches and
non-regulated entities within banking groups. 182

        The EBA also supports the development of more efficient supervision
programs by promoting joint supervisory plans and examinations. 183 Before
the implementation of the EBA Amended Regulation, the EBA had a wide
range of powers. After its implementation, the EBA is also entitled to
convene a College of Supervisors.184

        Special arrangements between governments and the EBA have been
implemented in order to re-balance the powers of participating and non-
participating States.

        Article 40 of the EBA amended Regulation The SSM Regulation 185
states that the ECB can participate to the EBA Board of Supervisors. The
Supervisory Board will nominate a representative for the ECB, which is not

178
    See CAPPIELLO, supra note 161, at 8.
179
    See EBA amended Regulation, supra note 21, art. 44. See Anna Gardella, Banca d’Italia, Ruolo
dell’EBA e della BCE nella Regolamentazione Bancaria Europea [The role of EBA and ECB in the European
Banking Regulation] (May 16, 2014).
180
    See EBA amended Regulation, supra note 21, art. 22(1)(a).
181
    See EBA amended Regulation, supra note 21, art. 32(3)(a) and (6).
182
    See EBA amended Regulation, supra note 21, art. 35(6).
183
    See EBA amended Regulation, supra note 21, art. 21.
184
    See EBA amended Regulation, supra note 21, art. 20(a).
185
    See EBA amended Regulation, supra note 21, art. 3 (2).




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necessarily going to be one of its employees. 186 This representative, despite
sitting as an observer next to national supervisors, has no right to vote. 187

        Moreover,       the    ECB     representative       does    not    represent          the      18
jurisdictions for which it has supervisory capacity. The divergent views
expressed by Member States within the Supervisory Board could undermine
the achievement of a well-balanced regulation.188 On the other hand, it is
likely that over time the relative weight of the ECB in this debate will lead the
EBA to shift its focus on the relationship with supervisors of non-
participating States.189

        When the Board of Supervisors discusses issues which are related to
individual financial institutions, non-voting members, with the exception of
the representative of the ECB Supervisory Board, do not participate to the
meeting. Therefore, the meeting is attended by the ECB representative, the
EBA chairperson and the executive director.190

        As decision-making procedures in the EBA’s Board of Supervisors was
one of the key elements in convincing certain Member States, along with the
European Parliament, to accept the entire SSM this topic deserves to be
further explored. Both the original and the amended Regulation stipulate that
decisions are adopted by the Board of Supervisors, i.e. by the simple majority
vote of the twenty-eight national regulators. The votes of participating or
non-participating Member States count equally.

        Exceptions are nevertheless possible for the few topics. Qualified
majority is needed for deciding on regulatory matters (artt. 10 to 15).
Qualified majority is achieved by requiring the simple majority of both
participating and non-participating States. The increasing influence of the


186
    See EBA amended Regulation, supra note 21, art. 40(1)(b).
187
    See EBA amended Regulation, supra note 21, art. 40(1)(d).
188
    The SSM Commission Proposal, supra note 12, gave the ECB the power to “coordinate and
express a common position” for the participating Member States: SSM Commission Proposal,
supra note 12, art. 4(1)(1). See also Explanatory Memorandum to the SSM Commission Proposal,
supra note 12. This approach has been abandoned by the Parliament in the final version,
restoring the full freedom of the competent authorities of the participating Member States to
agree on subjects within the EBA’s competence.
189
    This fear was repeatedly expressed in House of Lords, supra note 164, at 28. The House of
Lords stated that voting rights should be proportional to the relative significance of the financial
markets in the different Member States.
190
    See EBA amended Regulation, supra note 21, art. 40(4).




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ten non-participating States with respect to the eighteen Eurozone States
may negatively affect the conclusion of “close cooperation” agreements.
Implementing Regulations, recommendations, and decisions to prohibit or
suspend particular financial services obey to this special voting regime.191
Decisions on breaches of Union law, emergency decisions and dispute
settlement can be decided by simple majority. The simple majority threshold
is, however, to be achieved by both groups. The decision is approved when
participating States, as well as non-participating States, successfully
deliberate by simple majority.192

         On the other hand, if the number of non-participating States goes
down to four, or less than four, non-participating States in the European
Union, decisions will be adopted by simple majority as long as at least one
non-participating State votes in favor of the proposal. If this voting system is
implemented the last non-participating State would be able to obstruct the
decision–making process. For instance, the United Kingdom, which is likely
to be the last long-term dissenter, will have to concur on the proposed
measures even when all participating States have already voted in favor of
the proposal. The ECB, with the aid of the EBA as mediating authority, will
have to directly negotiate with the dissenting State.

         In order to prevent stumbling blocks, the Regulation contains a review
clause. As soon as the number of non- participating States goes down to four
the Commission will propose to review the current voting regime. It is
difficult to see how the system could be reviewed without a radical overhaul
in the distribution of regulatory and supervisory powers in the European
Union.

         By moving on to the legal duties of the EBA, the amended Regulation
does not have an impact on the Implementing Regulation. No changes have
therefore been made to articles 10 to 15, which specifically deal with


191
   See EBA amended Regulation, supra note 21, artt. 10 - 16 and 9(5).
192
   See EBA amended Regulation, supra note 21, artt. 17, 18 and 19. For the composition of the
conflict resolution Panel, a supermajority of ¾ of the voting members is required, eliminating
the need for the double simple majority: EBA amended Regulation, supra note 21, art. 44(1) and
(6).




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Regulatory Technical Standards, as well as to art. 16 on Guidelines and
Recommendations. However, as explained above, these kind of changes is to
be adopted by qualified majority. On the other hand, other legal aspects of
the EBA have been modified, i.e. “Breaches of Union law”, “Emergency
situations” and “Settlement of disagreements” (artt. 17, 18 and 19).

        Whenever a national supervisor is accused of breaching the law of the
European Union, the EBA is entitled to act and, under the formal control of
the Commission, officially establish the breach. The EBA, for directly
applicable acts and in conformity with the formal opinion of the
Commission, may then enforce its deliberation. 193 According to the new
regime, an independent Panel would have to be appointed. 194 The Panel
would be made up of the members of the Board of Supervisors of the EBA
which hold no stake in the deliberations. The Panel would then have to
formulate a proposal before the Board of Supervisors. This mechanism would
submit the ECB to its peer supervisors, including supervisors from SSM
jurisdictions. As the Supervisory Board is a non-voting member of the Board
of Supervisors, it cannot be part of the Panel that judges breaches in non-
SSM States.

        The    Regulation       also   illustrates     the   fashion     for     implementing
emergency actions.195 The EBA may “adopt individual decisions requiring
competent authorities to take the necessary action (...) to address any such
developments by          ensuring that financial institutions and                      competent
authorities satisfy the requirements laid down in that legislation”. As the
ECB is a “competent authority”, as well as a central bank, it will surely be
involved in emergency matters.196

        The EBA also plays a role in the dispute settlement of disagreements
between supervisors in a transnational context. The EBA intervenes in
dispute resolution between national supervisors by establishing committees


193
    See EBA amended Regulation supra note 21, art. 17(6) and (7); for details see also, WYMEERSCH,
supra note 41.
194
    See EBA amended Regulation, supra note 21, art. 41(1) (a). By consensus within the Board of
Supervisors, and if not possible, by a ¾ vote: cf. EBA amended Regulation, supra note 21, art.
44(6).
195
    See EBA amended Regulation, supra note 21, art. 18.
196
    See EBA amended Regulation, supra note 21, art. 18(2).




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similar to ones mentioned earlier.197 In these cases the decisions of the EBA
would be directly applicable. Decisions would either be addressed to the
competent authorities or, in case of non-implementation, to the individual
market participants.198 However, the EBA has very limited room for
discretion. It can only act on provisions that are directly applicable. In other
words, once the EBA has identified the applicable rules it can only intervene
on the unwillingness of national supervisors to effectively implement them.
This also means that the EBA is not creating additional rules, but it is merely
implementing already applicable provisions.199

        When the ECB acts as supervisor for significant banking institutions,
or the national supervisor operates under the oversight of the ECB, this
dispute resolution mechanism does not apply to disagreements between
supervisors of participating States and the ECB.

        As a result, art. 19 only encompasses disputes between the ECB and
supervisors of non-participating States, as well as conflicts between
domestic supervisors of different States. Within the SSM, there is no
mechanism for settling disputes between supervisors, as the Governing
Council would ultimately judge upon differences of opinion. Its decisions can
however be reviewed by the CJEU.

         On the other hand, The Regulation does not pay particular attention to
the relationship between the ECB and the European Systemic Risk Board
(ESRB). The Regulation ignores the ESRB, it merely states that the ECB may
replace other supervisory bodies, including the ESRB.200

        Like the EBA the European Systemic Risk Board was created by the
2010 Reform as a response to the financial crisis. Before the crisis,
supervisors focused mostly on the health of individual financial institutions.
Therefore, as the overall stability of the financial system was overlooked
potential risks to the whole financial sector were underestimated. As a
reaction to this failure, the supervisory focus moved to the overall stability of
the system (“macro-prudential supervision”).

197
    See EBA amended Regulation, supra note 21, art. 19(4).
198
    See EBA amended Regulation, supra note 21, art. 19(3) and (4).
199
    See WYMEERSCH, supra note 41, at 71.
200
    See SSM Regulation, supra note 20, art. 3.




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The ESRB is the macroprudential supervisor within the European Union. 201 In
contrast with the EBA, after the establishment of the SSM no formal changes
to the tasks or membership of the ERSB were introduced, even though after
the establishment of the SSM the ECB obtained larger competences and
expertise in the field of macro-prudential supervision.202

        A practical consequence of the ECB’s expertise is that SSM countries
could frequently take the same stance in the ESRB. If this is the case, the
position of the SSM-countries is likely to be the determining factor in the
decisions of the ESRB. Eurozone Member States hold 19 of the 38 votes in the
SSM. SSM countries therefore almost reach the simple majority of voting
members. On the other hand, they would be able to stop the adoption of any
decision. Whether the SSM-countries will have an absolute majority in the
future will depend on the evolutions of the European Union, as well as SSM,
memberships.203

        Even though it may appear hazardous, the power of the SSM in
determining the decisions of the ESRB does not pose any real threat. First of
all, national supervisors and the ECB will not always vote in a similar way.
Discretionary judgment is always a key factor in assessing the scale of a
macro-prudential risk. This will likely lead to diverging voting strategies.
Most importantly, the decisions of the ESRB have no binding power.
Therefore, even if the SSM could impose its decisions on other members of
the ESRB, major consequences would be avoided.204




201
    The essential task of the ESRB is therefore to supervise the financial system in order to detect
potential risks that can affect the financial system and the real economy. When such a risk is
detected, the ESRB can emit warnings and recommendations to the Member States and other
E.U. bodies. The ESRB, however, lacks the competence to make decisions that are binding on
others, as the Member States and E.U. bodies are not obliged to act upon the warnings and
recommendations issued by the ESRB. In its present configuration, the ESRB is a rather bloated
body. In an European Union with twenty-eight Member States, the ESRB has sixty-seven
members of which thirty-eight have voting rights. Voting members comprise representatives of
all Member States, the President and Vice-president of the ECB and other representatives of E.U.
bodies. Most decisions in the ESRB are made by simple majority. A majority of ⅔ is needed only
when a recommendation or warning is to be made public.
202
    See ESRB, The ESRB Handbook on Operationalizing Macro-Prudential Policy in the Banking Sector,
ESRB.EUROPA.EU(Mar.,2014),https://www.esrb.europa.eu/pub/pdf/other/140303_esrb_handbook
_mp.en.pdf. See also Goeffrey P. Miller, Risk Management and Compliance in Banks: The United States
and Europe in EUROPEAN BANKING UNION (Guido Ferrarini and Danny Busch eds., 2015).
203
    See WYMEERSCH, supra note 41, at 68-70.
204
    See VERHELST, supra note 85, at 36-37.




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In conclusion, the general framework of E.U. banking regulation and
supervision has been left substantially unaltered by the SSM reform. The ECB
shall indeed cooperate with other European authorities 205 such as the ESAs
(which include the EBA) and form the ESFS in accordance with the De
Larosière report.206 Moreover, the models of enhanced cooperation and
supervision of the general framework of the European Union is not affected
by the introduction of the SSM.207 Whereas Eurozone countries have a
centralized supervisory framework, models of enhanced cooperation and
supervision still characterize bank supervision in the rest of Europe.



      8.   BALANCES AND PERSPECTIVES OF THE SSM

This work highlights the weaknesses of the European banking system. The
previous banking supervision and resolution framework, which was mainly
based on cooperation amongst national authorities, and, as the recent
financial crisis has shown, it was therefore doomed to fail in a situation of
crisis. Moreover, the absence of common resolution mechanisms and of
common deposit guarantee schemes led to an aggravation of the costs of a
banking crisis, increasing systemic risk as well as the chances of a bailouts.

           In order to overcome the previous fragilities of the European banking
system a new major form of centralization and resolution was introduced in
the European Banking Union. The SSM, one of the pillars of the European
banking union, however, includes elements of cooperation and delegation.
On the one hand, this will help the ECB to perform its tasks as a central
supervisor. On the other hand, it will give rise to conflicts of interest and
information asymmetries which could endanger the effectiveness of the
mechanism. The SSM can be described as a semi-strong form of supervisory
centralization.208 Furthermore, the SSM will be limited to the Eurozone.
Forms of enhanced cooperation and lead supervisor models will nevertheless
apply in the relationships with other countries. Moreover, as already


205
    See GUIDO FERRARINI & DANNY BUSCH, A BANKING UNION FOR A DIVIDED EUROPE (Guido Ferrarini and
Danny Busch eds., 2015).
206
    See supra note 13.
207
    See also Ferrarini & Chiodini, supra note 25, at 8-10.
208
    See Ferrarini & Chiarella, supra note 1, at 5.




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established by the 2010 reform, the ECB will have to cooperate with the EBA,
which will nevertheless keep its regulatory and mediation tasks. As a result,
cross-border banking groups will often be subject to substantial supervisory
fragmentation. Therefore, the flaws of the previous supervisory framework
have not been overcome by the reform.

            As highlighted, these flaws could be partially compensated, if the SSM
will be extended to a sufficient number of non-euro countries under the
close cooperation regime.209 However, non-euro countries have little
incentives to join the SSM. They could benefit from their outsider position by
exploiting the voting power of non-euro countries in the Supervisory Board
of the EBA.

            The SSM Regulation establishes that the European Commission will
submit a review report on the functioning of the SSM. This therefore
represents a good opportunity to implement the current framework. The
report must, inter alia, assess the possibilities of developing further the SSM
and in particular the appropriateness of the governance arrangements of the
SSM. The functioning of the SSM within the ESFS, the division of tasks
between the ECB and the national competent authorities within the SSM and
the interaction between the ECB and the EBA are also to be ascertained. 210 The
report shall be forwarded to the European Parliament and to the Council. The
Commission           shall   then     draft    accompanying            proposals,    as     it    deems
appropriate. The hope is therefore that these flaws will be overcome in the
future.

           At this stage it’s still uncertain whether the newly introduced
framework will be sufficient to break the connection between sovereign
States and banks inside the Eurozone, as still there is no evidence of the SSM
reliability. Many structural weaknesses therefore indisputably emerge from
the architecture of the SSM. For instance, resources constraints and as well
as the difficult balance between the interests of individual Member States




209
      On the regime of close cooperation see supra the para. ad hoc.
210
      See SSM Regulation, supra note 20, art. 32.




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and the, often conflicting, interests of the Eurozone. The current framework
is, in fact, the outcome of political compromises.211

        If legal and political constraints had not played a major role in the
shaping of the current regime, the SSM would certainly look different. 212 As
the role of central banks in prudential supervision has been highlighted by
the recent crisis, the ECB probably would still be in charge of the supervisory
functions. The allocation of responsibilities between national supervisory
authorities and the ECB would however be much more straightforward. 213

        The ECB’s remit would be broader. It would continue to include banks
while also     encompassing other entities, such as for instance systemically
relevant insurance companies and providers of market infrastructures. 214 As
already highlighted, the breadth of the ECB’s remit was nevertheless dictated
by art. 127 (6) of the TFEU. If no amendments are implemented, the existing
Treaty framework does not allow the SSM to extend its prudential oversight
over all systemically relevant factors in the financial market. Although in
principle a more elastic approach would have been preferred the SSM reflects
a traditional and overly narrow view of the sources of systemic risk. This is
one more hint that the design of the current supervisory system is fatally
flawed.

        Even though piecemeal reforms and technocratic fixes are not ideal it
is desirable to implement the current framework in the future. 215

        However, it is important not overlook the major changes in the
financial regulation of the Eurozone since 2008. The overhaul of prudential
regulation and supervision has been far-reaching. There has been a
considerable shift of power from national to European authorities. As

211
    See E. WYMEERSCH, Banking Union: Aspects of the Single Supervisory Mechanism and the Single
Resolution Mechanism Compared (Univ. of Gent & ECGI, Working Paper No. 290, 2015),
http://www.webankon.com/wp-content/uploads/2015/11/SSRN-id2599502_Art.ECGI_Banking-
Union.-Aspects-of-the-Single-Supervisory-Mechanism....pdf.
212
    On possible different features of the European banking union see EILIS FERRAN, European
Banking Union: Imperfect, But It Can Work (Univ. of Cambridge & ECGI, Working Paper No. 30, 2014)
(Guido Ferrarini and Danny Busch eds., 2015).
213
    On the possible conflict of interest between the ECB and the relevant national authorities see
FERRARINI & CHIARELLA, supra note 1, at 51-53.
214
    See TFEU, supra note 51.
215
     See ASHOKA MODY, A Schumann Compact for the Euro Area, BRUEGEL.ORG (Nov. 20, 2013),
http://www.bruegel.org/publications/publication-detail/publication/802-a-schuman-compact-
for-the-euro-area/.




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anticipated, although the connection between banks and sovereign States,
which has been the primary cause of the European banking union, has
certainly been weakened. Moreover, as a consequence of the crisis the
implementation of a E.U. regime for the resolution of failing banks was
instituted. It now consist of a sophisticated array of procedures and tools,
including bail-in powers that, over time, should considerably reduce the
need to call upon public funding.216

        Those who think that the SSM is an unfinished reform have strong
arguments.217 On the other hand, by taking into account the abovementioned
constraints, the argument that the current structure is the best realistically
possible outcome is more compelling. In order to strengthen the banking
system of the Eurozone, piecemeal reforms which relies on market
developments so as to further evolve into a more cohesive framework was
probably the best option. Objections to expanding the purview and powers of
new institutions do not necessarily set the pace for the evolution of those
institutions. Fears can recede in the face of proven institutional usefulness,
and issues that were once highly controversial can lose their political
saliency while persistent objectors can become accustomed to the new
order.218

         The long term success of the SSM will depend on the operational
efficiency and effectiveness of its various components and on its ability to
overcome its current limits.

         In the meantime, however, the introduction of the SSM helped to
change perception and improve the levels of trust and confidence in the
market. The current legal framework seems sufficiently robust. Additionally,
it enjoys sufficient authority and credibility to help reversing the trend
towards financial market disintegration in the EU. Even in its incomplete
form, the SSM has had a major stabilizing impact. Even though it is currently

216
    See supra note 23 and accompanying text.
217
    See, e.g., Fritz Breuss, European Banking Union: Necessary, but not Enough to fix the Euro Crisis,
CESIFO FORUM, Winter 2012, at 26; A. VON BOGDANDY, et al., Towards a Euro Union', BRUEGEL.ORG
(Aug. 25, 2014), http://bruegel.org/2014/08/towards-a-euro-union/; Miranda Xafa, European
Banking Union, Three Years on, 73 CIGI PAPER (2015); S. VERHELST, Banking Union: are the EMU design
mistake being repeated? (European Policy Briefs, Working Paper No. 12, 2012),
http://www.egmontinstitute.be/wp-content/uploads/2013/10/EPB12.pdf.
218
    See FERRAN, supra note 212, at 3.55.




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impossible to assess whether it has broken the vicious circle between
sovereign States and banking institutions it has certainly contributed to its
mitigation.219

         Although the SSM reform presents considerable limits, it is still too
early to judge on its effectiveness. It has been implemented with the purpose
to overcome the fragility of the previous European banking system by
loosening the connection between banks and sovereign debt, which is
achieved by transferring sovereignty from the single States to the SSM. This
should stop the weakening of the financial market.220

         The current hope is that Eurozone leaders do not forget what led to
these reforms and effectively implement them in the future. Regulations and
Directives can effectively be reviewed. These chances to fill the gaps and
overcome the flaws of the current system cannot be missed.

         In the meantime, the scenario could substantially change if a
sufficient number of non-euro countries adhere to the system of “close
cooperation” which is established by the SSM Regulation. By entering a close
cooperation agreement with the ECB non-euro countries will be subject to
almost the same regime as the Members of the Eurozone. 221 By assuming that
most E.U. Member States will join the SSM, issues of cooperation between
the EBA and the competent authorities of non-participating countries could
substantially improve.

         The system, however, offers little incentives for joining the banking
union. No doubt, systemic stability will benefit from the extension of a
common supervisory regime to the majority of the EU, as well as to their
banking institutions. However, even though this argument is sound on
paper, this will not necessarily determine that this regime is going to be
implemented in practice. Indeed, by participating to the SSM Member States
would give up most of their supervisory powers in favor of the ECB.


219
     See D. Nouy, Chair of the Supervisory Bd., Single Supervisory Mechanism, The Single
Supervisory Mechanism after one year: the state of play and the challenges ahead (Nov. 24, 2015),
https://www.bankingsupervision.europa.eu/press/speeches/date/2015/html/se151124.en.html.
220
    See Fritz Breuss, The Stabilizing Properties of a European Banking Union in case of Financial Shocks
in the Euro Area, 550 ECONOMIC PAPERS (2015).
221
    See SSM Regulation, supra note 20, art. 2(1).




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Politicians have few incentives to push for this solution. While the loss of
sovereignty would be easily noticeable, voters could easily miss the benefits
in terms of systemic stability and financial integration.

       Moreover, these benefits will largely depend on how many non-euro
countries will decide to join the ECB. If this number is low, incentives to
participate will be modest, and therefore issues of collective action will not
be easily solved. Furthermore, non-participating Member States are going to
enjoy some voting power within the Supervisory Board of the EBA. The
current voting system could offer to non-participating States a reason not to
join the SSM. Therefore, all recent efforts to rebalance voting powers within
the EBA Supervisory Board, which, officially, aim at protecting the financial
interests of the Union, could paradoxically make it undesirable for non-euro
Countries to join the SSM.




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