With the plethora of information available, it can be assumed that even the uninitiated to the mechanics of the Euro and the Economic and Monetary Union have recognized the importance of a financial union to underpin the single currency and to ensure its integrity, at least financial-wise. What has yet to be made clear is the subtle conceptual and practical dichotomy between the notions of a banking union on the one hand and the Single Supervisory Mechanism (SSM) on the other; with the latter being expected to be infused in the corpus of the European Central Bank’s competencies within the next months (a year or so from now).
Banking Union and the Single Supervisory Mechanism are not the same
Strictly speaking, the concept of a banking union is profoundly distinct from that of the SSM, in that it encompasses areas of policy pertaining to what may be referred to as ‘micro-prudential’. These are regulations on the specific workings of the components of the financial system—of individual financial institutions—and relate to factors and metrics determining the various aspects of risk. A banking union is a system featuring an integrated rulebook on microprudential policy with provisions on issues such as core tier capital, liquidity, leverage etc.
In simple terms, a banking union in the EU will exist when all Members States adopt uniform rules on the regulation of their banks, perhaps with ancillary discrepancies on non-substantive aspects of the laws. Responsible for such competencies, at least for the time being, is the European Banking Authority (EBA) which was established on January 1, 2011 and which carries out its operations by conducting, inter alia, those ‘stress tests’ and exercises on capital adequacy some might have recently heard of. In addition, the distinction is important for legal purposes as the EBA is competent over the whole single market, whereas the SSM shall be confined to the euro area (remember that the Euro area does not encompass all EU Member States). With that said, it should also be noted that in light of decisions towards further integration, there currently is a draft report at the European Parliament, on this very subject, by Mr. Sven Giegold.
In contradistinction, the Single Supervisory Mechanism, which shall become part of the European Central Bank, and which shall, by that account, concern the Member States whose currency is the euro, is devoted to the ‘macro-prudential’ supervision of the financial system, in overseeing developments on those factors which are perceived to contribute to systemic risk, i.e. to a bank, network of banks, transaction or web of transactions, placing a perceived or actual risk of contagion—of an externalization of a shock—on other economic magnitudes locally or, most importantly, across the area. The perhaps debatable rationale supporting this decision is that the ECB, being the institution that performs the monetary function of the EMU, may balance or complement monetary policy with macro-prudential measures, in whatever modalities these may be woven together, to produce a coherent and systematic approach vis-à-vis the euro area.
The monitoring of aggregate imbalances is the first priority in this context. However, as I explained in my previous analysis on the SSM, ECB supervision shall be substantiated with effective preventive/intervention powers, eventually delving in the micro sphere of prudential supervision, to address and prevent an undesirable accumulation of risk from resulting in generalized instability. In practice, the ECB shall be expected to investigate specific cases and to enforce pecuniary or other penalties on financial institutions that fail to comply with whatever standards; and, most importantly, the ECB shall become the single issuer and withdrawer of bank licenses in the euro area—a power it may resort to if conditions for the mitigation of contagion call for ‘extraordinary measures’, however interpreted. Moreover, the ECB shall hold the power to decide on the restructuring of a bank by imposing debt-equity swaps to senior and junior bondholders as well as unsecured depositors; a scheme known as bail-in in contrast to the bail-out where funds not directly related to the failing entity are mobilized in its support, without any definite qualifications. For such thoroughgoing powers to be made real the Single Resolution Mechanism (SRM) must also be brought into force, which is to be expected soon after the introduction of the SSM (since I made reference to the Giegold report at the European Parliament, I may also direct the reader to the report of Ms. Marianne Thysen, which deals with the legal aspects of the SSM).
As such it could be suggested that the banking union is essential for the full realization of one of the four freedoms of the single market, namely the free movement of capital; whereas the SSM is an integral part of an integrated currency union whose monetary policy is not compartmentalized along national borders, but which instead represents the federated system it actually is.
The combination of these two distinct areas of policy, of the micro- and macro- prudential spheres, we may call it a ‘financial union’. For the financial union to work, there is no doubt whatsoever that both elements are essential; nevertheless, it should be stressed that their conceptual separation is the prolegomenon to the propounding of a systematic politico-economic interpretation of the topic, one that stands up to the requirements of academic precision and rigorous analysis. Besides, we may already discern that once these compounds are set in place the Euro area shall feature a financial union, it shall be more fully integrated that is; whereas the EU shall be sufficed with a banking union, which will nonetheless remain segregated, in financial terms, between Euro and non-euro member states, whatever the political implications of that may be.
Federal sovereignty of the European Central Bank
With the above-mentioned categorization in mind we may also appreciate some more profound political elements of the integration process, pertaining to the emergence of a sovereign, federal state within the EU, comprising the Euro bloc. Notwithstanding the developments occurring on the fiscal and budgetary fronts, regarding the economic governance of the Economic and Monetary Union, the Single Supervisory Mechanism shall bring into being the ‘federal sovereignty’ of the ECB over the Eurosystem, as it shall confer to it the most important of all powers in a two-tier political edifice, viz. the right of intervention as a preponderant/superior entity.
In formal terms, or rather as a starting point, the ECB shall place under its purview only a limited number of European banks, perhaps around 200 out of the total of 6000, while the rest shall fall under the oversight of national supervisory authorities. It is assumed that the ECB need only stick to the task of checking on those banks that are systemically important, probably due to their intense cross-border operations. Nevertheless, a number of factors, practical, legal and economic shall make the ECB responsible for all euro area banks, probably in a system of delegated powers, in accordance with the so-called principle of subsidiarity, where national authorities are merely carrying out operational tasks, as assignees of the ECB and not as ‘independent’ (aka sovereign) bodies.
One such element, often escaping the attention of policy-makers, relates to the very nature of modern finance, where systemic risk, direct or indirect, is inherent in all banks. The complex, interweaving web of transactions that concatenate and bind together a number of financial institutions, in multiple ways and varying degrees, effectively suggests that no bank can be insulated from the vicissitudes of systemic instabilities or distortions. The federal right of intervention shall be brought into force, sooner or later, once it becomes readily apparent, even to those oblivious of the anatomy of the financial system, that any effort to draw an artificial division between ‘small’ and ‘large’ banks, to keep the ones hermetically shut from the others, shall eventually be rendered futile and self-defeating. Once a financial instability, or a local stress perceived of affecting the European level, surfaces and reverberates within the confines of the euro area, ‘federal action’ shall be brought to the foreground, as the most evident realization of the ECB’s sovereignty.
Understandably the issue can withstand scrutiny from at least three angles, namely the political, the economic and the legal. What has been written herein certainly does not exhaust the subject. The EU is on its own account a very complex system in all these respects and (unfortunately) it so happens that details or distinctions such as the above, which superficially appear to be nothing more than exercises in hermeneutics—perhaps tantamount to the efforts of medieval monks to discern the number of angels fitting on the head of a pin—can be of paramount importance in influencing or decisively shaping the conduct of individual citizens.
As I already noted in my previous article, the ECB, equipped with its prudential powers, shall
represent, in relative terms, the most complete version of a federal institution in the EU. With the euro-state asserting shape within the institutional milieu of the EU, we shall wait to see how other state functions, namely legislative, executive and judicial, will be developed. Will the European Parliament metamorphose into a genuine federal parliament, with the Council of Ministers becoming one of its two chambers? Will the Commission transform into a directly elected government? Will the lacunae over the supremacy of EU law be covered in a European constitution, clearly delineating the institutional order of Europe? Or shall the technical aspects of the system be reinforced in the rise of a confederal order, where the European Council in tandem with a technocratic Commission shall reign supreme?
These and many others are the questions for the months ahead; questions that can be inferred from the appreciation of those seemingly minor features of the broader picture, which historiographers of the future may pass without notice.