Single Supervision and Cross Border Banking

IGNAZIO ANGELONI
This article describes the actions undertaken by the European Union towards the establishment of a Single Supervisory Mechanism (SSM), with a special focus on its rationale, on its priorities to promote the soundness and stability of the banking system across the Euro Area. This work also discusses the need to implement an harmonised regulatory framework in the estimation of bank risk and in the calibration of prudential requirements.

Cross-Border Banking and the SSM

GUIDO FERRARINI
In this article, I try to assess the likely impact of the Single Supervisory Mechanism (SSM) on cross-border banking in Europe. Firstly, I analyse the limits of the SSM, which is grounded on supervisory cooperation even though the ECB has powers of direction and substitution with respect to national supervisors. Indeed, the SSM represents a system of semi-strong centralisation, which may give rise to agency problems, particularly in the relationships with supervisors of non-euro area countries. Secondly, I examine the decoupling of supervision from regulation, which derives from the fact that the ECB lacks sufficient regulatory powers when acting as a supervisor of the Eurozone banking systems. The separation of regulation – which is harmonised at EU level – and supervision – which is centralised in the euro area – may create problems to the extent that the single supervisor cannot issue a prudential rulebook for the Eurozone but is subject to EU prudential regulation and national law provisions, often unduly limiting its supervisory discretion.

Governance and Policy Challenges of Forming and Running a Supervisory and Regulatory Union: A Theoretical Perspective

GIOVANNI DELL’ARICCIA
During the global financial crisis integrated markets and financial institutions operating across borders clashed with supervisory and regulatory architectures that remained largely nation bound. This spurred a debate on the costs and benefits of more internationally integrated and coordinated prudential policies. This paper presents theoretical explorations of the policy and governance challenges associated with forming and running a regulatory and supervisory union when national prudential authorities have different objective functions.

Should the ‘Outs’ Join the Banking Union?

PIA HÜTTL AND DIRK SCHOENMAKER
The Single Market stimulates cross-border banking throughout the European Union. This paper documents the banking linkages between the 9 ‘outs’ and 19 ‘ins’ of the Banking Union. We find that some of the major banks, based in Sweden and Denmark, have substantial banking claims across the Nordic and Baltic region. We also find large banking claims from banks based in the Banking Union to Central Eastern Europe. These findings indicate that these ‘out’ countries could profit from joining the Banking Union, because it would provide a stable arrangement for managing financial stability. From a political perspective, member states’ opinion on joining the Banking Union ranges from an outright “no” towards considering Banking Union membership.

The Coordination of Micro and Macro-Prudential Supervision in Europe

PIERGIORGIO ALESSANDRI AND FABIO PANETTA
With the creation of the Banking Union and the launch of a new macroprudential policy framework, banking supervision in Europe has become significantly more complex than it used to be. The coexistence of micro- and macro-prudential regimes that rely on similar tools to pursue different objectives may at times give place to conflicting policy interventions. This risk is structurally higher in bank-based economies with highly concentrated banking sectors. It may be further heightened in the contractionary phase of the cycle, when policymakers face a short-run trade-off between the resilience of the financial sector and the speed of the recovery. Coordination is thus a critical issue today in the euro area. In order to deal with it, supervisors need to agree on a ranking between their policy objectives, internalise the interactions between micro and macroprudential tools, and consider the general equilibrium effects of their interventions on the economy of the area.

QUESTIONS & ANSWERS

The European Banking Union: Challenges Ahead

HOWARD DAVIES
With the creation of the Banking Union and the launch of a new macroprudential policy framework, banking supervision in Europe has become significantly more complex than it used to be. The coexistence of micro- and macro-prudential regimes that rely on similar tools to pursue different objectives may at times give place to conflicting policy interventions. This risk is structurally higher in bank-based economies with highly concentrated banking sectors. It may be further heightened in the contractionary phase of the cycle, when policymakers face a short-run trade-off between the resilience of the financial sector and the speed of the recovery. Coordination is thus a critical issue today in the euro area. In order to deal with it, supervisors need to agree on a ranking between their policy objectives, internalise the interactions between micro and macroprudential tools, and consider the general equilibrium effects of their interventions on the economy of the area.

The Banking Union: a Panacea for Eastern Europe?

RALPH DE HASS
This Q&A Section discusses the evolution of Multinational Banking in Europe, focusing on the halt to the integration process that occurred after the recent financial crises. How could institutions learn from the past and revitalize the integration process?