The central bank could in particular be inclined to continue lending to weak banks for fear that winding them up would trigger losses.13 Although this literature is not conclusive, we take such concerns extremely seriously.
To protect against such effects both the regulation proposed by the European Commission and the ECB’s Opinion on this regulation call for a governance structure that strictly separates the monetary functions from the supervisory functions.14 This should entail a separation of the decision-making bodies, including procedures to strictly limit the ECB Governing Council’s involvement in supervisory decisions.