Single Supervisory Mechanism: The basis for a Financial Union (analysis)

2012-12-16

This post is archived. Opinions expressed herein may no longer represent my current views. Links, images and other media might not work as intended. Information may be out of date. For further questions contact me.

Frankfurt.Headquarters of the ECB. Picture credit: Wikipedia

As I noted in my extensive analysis of the conclusions of the European Council meeting of December 13-14, the agreement on the Single Supervisory Mechanism (SSM) would merit an article devoted solely to it. My intention in this post is not to follow up on the praxis of my previous analysis, i.e. engage in a paragraph-by-paragraph examination of the actual text of the proposed regulation, but instead to provide an overview of the proposal, accompanied by various comments, considerations and concerns of mine on the various facets of the mechanism as well as on issues that are concomitant with or, which might arise from, its installation. The document I shall predicate my textual exegesis on can be found here and is dated September 12, 2012 (all quotes in this article are excerpted from that link).

General Information

To provide a summary of the 33-page-long Council regulation, it is important to know that the SSM will be established as an independent board within the European Central Bank and will constitute a substantial part of its “macro-prudential” powers. Supervision will be limited to the physical boundaries of the euro area, as the new responsibilities and powers that will be conferred to the ECB by virtue of the SSM, will become applicable only to the Member States whose currency is the Euro.

The ECB will initially place under its purview only the largest banks of the region, meaning that it will supervise about 200 out of the roughly 6000 European banks. Nevertheless after a transitional period of a bit more than a year, the ECB shall be expected to be fully prepared to uphold the task of supervising all banks within the Euro area.

Lastly a technicality worth mentioning is that the ECB will also be the host supervisor of non-Euro banks who have established branches in the Eurozone. Such was not the standard method with the previous system where a cross-border branch of a bank would still fall under the control of its respective national bank.

Tasks and powers of the ECB

As is always the case with such supervisory capacity, the ECB will be granted the privilege of being the sole issuer and thus withdrawer of bank licenses within the context of its merit and will, within this framework, be tasked to authorize or not the operations of credit institutions. This is an integral part of the bundle of powers that fall under the conceptual umbrella of financial supervision, yet it can at the same time be considered as a robust preventive or corrective tool for intervening in a part of the financial system, or even a single financial institution, to either call for changes in business practices or even impose the cessation of operations of the bank in question, always if the circumstances impel such a far-reaching and drastic course of action. What is clear though, is that Damocles’ Sword now lies in the hands of the ECB and it can be used as a force for benign reforms or to inflict a great deal of harm.

Adding to the above, the ECB will demand from institutions under its supervision to comply with criteria on capital adequacy, financial leverage, liquidity etc. In this respect the ECB might deem it appropriate to recommend the formation of capital buffers or the consolidation of balance sheets through other means, if it assumes that some of the standards it has set to monitor are not upheld. What is tacitly proposed from this perhaps non-exhaustive list of assessment tests, is that the ECB will have to actively collect masses of information on a quite systematic basis, process them and deliver timely as well as accurate policy responses, based on their judicious interpretation. This implies quite a Herculean task for the ECB or national authorities in the Eurosystem (ECB + the central banks of all Euro Member States), and might eventually raise doubts over the effectiveness of such a gargantuan system, especially once all the eurozone’s banks, with the multitude and plethora of their activities, are brought under the Single Supervisory Mechanism.

Related to all this busy data-grubbing is the responsibility to assess and single out internal underlying risks or other brewing malignancies in individual banks and, wherever necessary, initiate the envisaged processes for the introduction of ‘necessary actions’ that will aim at mitigating the notional or real peril. If we are to combine this with the licensing powers of the ECB, we can infer that under conditions of extreme duress, actual or perceived, the ECB can ultimately resort to the withdrawal of the license of any bank, provided a persuasive justification can be presented, even though strictly and legally speaking this is not a prerequisite. A final act of this sort that cannot occur regularly and unexpectedly. It is nonetheless an potentiality that will need to be counter-balanced by strong and effective safeguards, which are still absent from the official texts on the matter.

That said, it ought to be stressed that a Single Resolution Mechanism (SRM) is not yet finalized, suggesting that the ECB will not be able to proceed with the dismantling of any financial institution in the near future by forcing the new paradigm of targeted bail-ins. Given that the broader legal framework on the financial union is still in a rather embryonic form, we can expect a substantial number of additions to such schemes, including (hopefully) among others, the necessary checks and balances at each and every aspect of these new “federalized” powers.

Notwithstanding the discussion on resolving individual banks, the ECB can opt for less radical measures such as impose pecuniary sanctions or other similar penalties that will aim at bringing the non-conforming financial institution in line with established rules. For these more standardized corrective operations to be fair and well-grounded, we must expect the ECB to assume investigatory powers, so as to be in a position to sufficiently carry out on-site inspections wherever necessary, in an effort to substantiate its information of the case it examines.

All of the above constitute a massive amount of necessary daily work that the ECB will simply not be able to keep up with. As such national supervisory bodies will retain some of their existing powers and will most probably be tasked to uphold the day-to-day operations of the SSM. We can fathom some sort of a subsidiarity principle applied in this edifice, or if we want to avoid euphemisms, we can expect the ECB to hold the final say on all decisions, but delegate to national authorities all the “manual labor” of the SSM.

Independence and accountability

On this issue I find it necessary to quote the exact text, emphasize where necessary and provide my interpretation and commentary below:

[page 7] The ECB shall therefore be accountable for its tasks to the European Parliament and to the Council/the Eurogroup. The ECB will be subject to regular reporting requirements and will respond to questions. The chair of the supervisory board will present an annual report on the ECB’s supervisory activities to the EP and the Eurogroup and may be heard by the competent committees of the EP on any other occasions. The ECB will also be obliged to respond to any questions asked by the EP and its members on its supervisory activities. Moreover, under the Treaty, the President and the Vice-President of the Governing Council as the body with final responsibility for the ECB’s action, as well as the other members of the Executive Board, are appointed by the European Council after consultation of the European Parliament.

At first, it must be made clear and above board that this reference—which in effect is nothing more than the replication of the necessary though inadequate administrative principle of transparency—pertains only to the supervisory powers of the ECB, not to the ECB’s monetary policy in general.

Secondly, I believe that the above quote signifies, once again, what the much-touted concept of “democratic accountability” amounts to. For any reader who might not be acquainted with the use of this phrase, I who have had the patience to read through stacks of such documents over the last months and have listened to speeches of all sorts of EU officials, especially the President and Vice-President of the ECB, must assure you that it is one of their favorite and most convenient fig leaves; one that perfectly covers the otherwise technocratic modus operandi and the humbuggery it involves. As I also noted in my previous analysis on the Council’s conclusions for the completion of the EMU, “democratic accountability and legitimacy” are not tantamount to genuine democracy. My proposition can be better understood once we consider the “accountability” part in line with the above-quoted text. In particular the provisions that are envisaged to merely answer questions before the European Parliament’s committee’s or to publish regular reports, are already an established custom, which in my humble opinion leaves much to be desired, at least for all those who hold certain high standards for democracy.

To provide ambiguous answers to deputies, often embellishing them with ample technical jargon that only financial specialists may really comprehend, is not really the kind of accountability a citizen would expect from policy-makers, especially when such policy-moulders hold the most awesome of all economic, state powers—monetary policy—to effectively manipulate the entire economy, if they wish to. “Transparency” is already the kind of healthy activity all EU bodies, agencies and quangos perform.

For the principle of accountability to be meaningful, the European Parliament, the only democratic EU institution at the moment, must hold the right to impose conditions on any body, agency or bureau whose activity it considers unsatisfactory. For the time being the European Parliament remains a rather restrained institution, in many cases it resembles a hearing court, which by the way cannot even legally decide on its seat but must instead cling on to this preposterous and wasteful practice of holding 12 plenary sessions per year in Strasbourg, while all of its political operations are centered in Brussels.

Entry into force

Again I shall quote the original text, this time with no further comment, other than the realization that when politicians really wish to, decisions can be taken swiftly:

[page 8] Due to the urgency of setting up an effective SSM, the regulation will enter into force on 1 January 2013. In order to ensure a smooth start of the mechanism a phasing-in approach is envisaged, which provides for the possibility for the ECB as of 1 January 2013 to apply its supervisory tasks to any banks, in particular banks which have received or requested public financial assistance, while the most significant credit institutions of European systemic importance shall be subject to ECB supervision as of 1 July 2013. The ECB will assume in full its tasks in relation to all other banks as from 1 January 2014 at the latest.

However note that since there are still many issues that remain unclear, further negotiations are expected throughout the first semester of 2013, while the SSM will become fully operational in March 2014.

Assessment and food for further thought

In my opinion and to be fair though critical on how perverse European politics are or can be, the Single Supervisory Mechanism is a structure that should have existed ever since the euro was brought into being. An integrated monetary policy, a single currency, cannot possibly afford to have its credit institutions being supervised by national authorities nor can the entire financial system remain compartmentalized along national lines while capital flows, daily market transactions are quite liquid and cross-border. A “federalized” fiat monetary and financial system must include a single supervisory body/authority/mechanism. It is crystal-clear that the SSM now sets the basis for a genuine financial union that should have accompanied the single currency all along.

Objections can definitely be raised over its modalities, but the principal idea remains unaffected. The only real concern, which effectively enters into the broader institutional and democratic problématique of the emerging sovereign and technocratic Euro-state, is whether such powers should be conferred to an already omnipotent ECB or be trusted on an independent authority. In my opinion the latter would have been a slightly better choice, always in line with the constitutional axiom of the separation of powers. Nevertheless the truth is that even in such a case, the checks and balances would be rather pitiful, as the ECB would still remain in its position of superior strength.

Notwithstanding the concerns I have repeatedly voiced over the rising technocracy within Europe, and the degradation of democratic principles this entails, I would wish to point out that the ECB is among all others a very ‘political’ or ‘politicized’ institution, despite all the litanies to the contrary and the paeans on the importance of its independence. Time and again, decisions pertaining to the conduct of monetary policy have provided the impetus for endless and most-often unnecessary pother and they have set the field for occasionally public disagreements as well as covert bargaining between governments or powerful central banks, especially the German Bundesbank (e.g. on the Target2 payment system or the latest OMT programme and on the bailouts to various member states).

Against this backdrop it is not difficult to fathom a scenario where the balance of power favors certain politico-economic interests within the ECB, who may abuse the over-concentration of powers at the ECB, to forward with greater effectiveness the broader economic or ideological agenda the Commission in tandem with the Council have been meticulously implementing or even enforcing, over the last months and years.

Politics aside, concentration of such authority also engenders two, usually overlapping and interrelated, frailties: (1) corruption, (2) cronyism. As Lord Acton trenchantly put it: power tends to corrupt and absolute power corrupts absolutely. We know well that European banks are not immune to corruption, nor are their owners and agents the knights in shining armor who struggle for the toiling peoples and for those who have been crippled down by rapacious market insiders and inane politicians that have been religiously adhering to manifestly deleterious policies. Recent scandals are but the tip of the iceberg of the fraudulence and mendacity inherent in Europe’s (and the globe’s) financial system. When such financial institutions are considered in conjunction with all the cases of money laundering or related crimes they may facilitate, then we can already expect one day to unearth the sort of graft and corruption that will proudly rival that of Wall Street’s…

Finally, this is an ongoing process and as is always the case, the devil lurks in the details, meaning that future analyses will be necessary to elucidate each and every aspect of the financial union that is rapidly asserting shape, in parallel, or thanks to the emerging technocratic Euro-state.