Sabine Lautenschläger: Single Supervisory Mechanism - Single
Supervisory Law?
Keynote speech by Ms Sabine Lautenschläger, Member of the Executive Board of the
European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory
Mechanism, at the workshop of the European Banking Institute (EBI), hosted by the
European Central Bank, Frankfurt am Main, 27 January 2016.
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Ladies and gentlemen,
Thank you for being here today to participate in the first conference of the European Banking
Institute (EBI). It is a great pleasure for the European Central Bank (ECB), and for me
personally, to host this conference. We look forward to fruitful discussions and exchanges -
not only today, but also in the future.
The EBI is a very new undertaking - it was set up just at the end of 2015 as a counterpart to
the Single Supervisory Mechanism (SSM) in the academic world. It represents a network of
universities that extends across national borders, and we hope that it will eventually
encompass the entire euro area. It should provide a good opportunity for academics and
practitioners to meet regularly to exchange views on issues around supervisory and banking
law.
Will it be difficult for us to find topics for these in-depth discussions? I don't think so! After
one year of "living the SSM", I can assure you that we have more than enough legal topics to
discuss and enough difficult questions to answer!
The advent of banking union has brought with it a myriad of legal questions with a unique
European perspective. I would therefore like to open the discussion by raising a legal issue in
my speech today.
The crisis in the euro area has taught us many lessons. And among these, a fundamental
one might be this: a single European currency requires a European banking supervisor. In
the euro area, we cannot have 19 different national banking supervisors; we need a single
supervisor that transcends national borders. Only then can we avoid national bias in the
regulatory and supervisory treatment of banks; only then can we improve risk-sharing in the
euro area; only then can we ensure a level playing field where the general principle of "same
business, same risks, same rules" applies; and only then can we guarantee a proper
transmission of monetary policy.
Establishing European banking supervision has been a significant step towards a more
integrated European banking system. Throughout the entire euro area, the SSM provides
tough and fair-handed banking supervision by using the entire range of supervisory
discretion to establish a harmonised, risk-orientated and proportionate supervisory approach.
At the same time, it contributes to the Single Market by levelling the supervisory playing field
for all banks, while acknowledging the boundaries of national law.
Nevertheless, banking supervision is just one side of the coin; the other is banking
regulation. A truly single supervisor requires a truly unified regulatory framework. Banking
supervision can only be as harmonised as the rules and regulations that govern it. And
against that backdrop, the regulatory playing field in Europe is not as level as it should be.
Out of kilter - supervisory and regulatory harmonisation in Europe
Now you may ask: "hasn't much been done already to harmonise the regulatory framework?"
And the answer, most certainly, is "yes". Much has indeed been done to harmonise
regulation, both in Europe and worldwide. Just think of Basel III and the single European
rulebook. Particularly in Europe, the European Commission and the European Banking
Authority (EBA) have also contributed to a harmonised regulatory framework by adopting
Regulatory Technical Standards and by issuing guidelines and opinions. However, these
attempts have not been sufficient to fully erase national differences.
Take the Capital Requirements Directive (CRD IV) for example. As this is a directive,
Member States are free to choose the form and method of implementation. Consequently,
not all Member States opted for a word-for-word transposition of the relevant norms. Several
provisions of CRD IV have been transposed differently across the euro area. This is certainly
not a problem in itself as long as the differences are rooted in country-specific risks.
But then there are many unjustified differences. Let me give you an example: as you know,
members of banks' management bodies have to fulfil "fit and proper" requirements. And
here, we see very diverse rules across Europe. In some countries, for instance, the
supervisor assesses not only appointments of members of management bodies, but also
appointments of "key function holders". As regards the fit and proper assessment itself, there
are further differences: some national authorities make use of questionnaires to be answered
by the candidates, others do not. Some national authorities conduct face-to-face interviews
with new members of the board, others do not. In some countries, there are timelines for
conducting the fit and proper assessment with specific, rather short deadlines, whereas in
others there are no such timelines. Even the criteria for assessing the suitability of
candidates are implemented and interpreted differently across the various euro area
countries.
Another source of regulatory fragmentation is the supervisory powers under national law that
are not explicitly mentioned in CRD IV. This concerns, for instance, major transactions which
can be very relevant for the risk profile of a bank: for example, a bank acquiring a non-bank,
or mergers and de-mergers involving a bank or transfers of assets. In some Member States,
these transactions need to be approved by the competent authority (and rightly so), in others
they do not.
And such regulatory fragmentation is not just a legacy we inherited from former times. Even
today, there are cases where fragmentation is actually being increased. In some countries,
national legislators are converting non-binding supervisory practices into binding legal acts,
thereby making it harder for the ECB to harmonise these practices. A recent example is the
German law on bank resolution. This law delegates to the Ministry of Finance the power to
issue regulations in areas such as internal governance and risk management.
Consequences of an imbalance between supervisory and regulatory harmonisation
The regulatory landscape in Europe is still fragmented. And from my point of view, many
variations in national legislation can no longer be justified now that we have European
banking supervision.
Imagine being a referee in a football match; your main task is to administer the rules of the
game. But what if the individual players adhere to different rules? In such a game, you as the
referee would be forced to apply different rules depending on the player in question. You
would have to judge similar situations in a dissimilar way - a foul by one player might warrant
a penalty kick; a foul by another player might not.
In a sense, the SSM is that referee. Article 1 of the SSM Regulation requires the ECB to
carry out prudential supervision "with full regard and duty of care for the unity and integrity of
the internal market". The Article also refers to the "equal treatment of credit institutions with a
view to preventing regulatory arbitrage". A fragmented regulatory framework makes it difficult
for the ECB to meet these requirements.
In extreme cases, we are faced with 19 different legislations. And in many cases, we indeed
have to judge similar situations in a dissimilar way. Taking decisions under such
circumstances is complicated and time-consuming. It requires substantial resources and is at
odds with the idea of having a single European supervisor and a Single Market in banking.
In cases where national legislation goes beyond CRD IV, regulatory fragmentation also
raises complicated legal questions: what powers does the SSM have in applying national law
that goes beyond European norms?
Under Article 4(3) of the SSM Regulation, the ECB must apply all relevant EU law. And
where EU law is composed of directives, the ECB has to apply the national legislation
transposing those directives. The question is therefore: what does "transposition" mean?
Does it just cover national provisions that strictly implement CRD IV word for word? Or does
it cover any national provisions that are rooted in CRD IV?
In the context of our football match, these two cases might be compared to the following
situation. The general rule - i.e. "CRD IV" - would be that a foul in the penalty box would
require a penalty kick. Now there might be some players for whom an additional rule would
apply: if they were to commit a foul in the penalty box, they would also immediately be
handed a red card. That rule would go beyond a strict implementation of CRD IV; but it would
still be rooted in it, in the sense that a foul in the penalty box requires sanctions.
So, depending on the interpretation of "transposition", two supervisory approaches might
emerge. The first approach would render the ECB directly competent to apply national
legislation. The second approach would require it to apply national legislation indirectly by
issuing instructions to national authorities - which, of course, then raises the question of who
would be held responsible if such an instruction were to lead to a legal decision by the
national competent authority?
In my view, the first approach - the direct competence of the ECB - might be warranted
when two conditions are met. First, when the power in question falls within the tasks
conferred on the ECB under Articles 4 and 5 of the SSM Regulation. Second, when the
power in question is linked to relevant EU law: that is, the supervisory framework as defined,
in particular, by relevant EU directives and regulations, such as CRD IV, the Capital
Requirements Regulation, and the Bank Recovery and Resolution Directive. In any case, we
need a consistent approach towards applying national legislation that goes beyond European
norms.
Returning to our football match, fragmented rules clearly pose a problem for the referee. But
they are also a problem for the players and for the game itself. Banks in the euro area still do
not compete on an entirely level playing field. They might have to implement different
regulatory regimes for group entities in Member States with different national legislation. This
is certainly at odds with the idea of having a banking union.
Certainly, much has been done to harmonise regulation - through the single rulebook,
through the work of the European Commission and the EBA, and through the ECB's work on
options and national discretions, for instance. Nevertheless, the Single Market for banking is
still divided by differences in national legislation.
And as I mentioned before, in some cases, new differences are being created right now. With
regard to newly minted national laws, I would therefore like to state this: national banking
legislation adopted after the establishment of the SSM should facilitate the exercise of the
SSM's responsibilities - and that includes the ECB's capacity to enhance the consistency of
banking supervision across the SSM. In any case, Member States should balance the
alleged benefits resulting from converting non-binding guidelines into binding legal acts
against the objectives of the banking union.
Conclusion
Ladies and gentlemen, I have made the point that the regulatory playing field in Europe is not
as level as it should be. And I have argued that this state of affairs hampers the work of
European banking supervision, that it is at odds with the objectives of banking union, and
that it inhibits the establishment of the Single Market.
To me it is obvious that we have to level the regulatory playing field. Nevertheless, this is
certainly an issue for legislators and not for supervisors. And national laws are the
prerogative of national law-makers.
But still, we have to acknowledge that circumstances changed when the SSM came into
play. There is now an imbalance between the harmonisation of banking supervision and
banking regulation. In order to fully exploit the potential of the banking union, and to reap its
benefits, we should restore that balance.
The De Larosière report, published in 2009, provided a blueprint for harmonised banking
regulation and supervision in Europe. On Page 49 of that report, the authors state that "there
is no point in converging supervisory practices, if the basic financial regulations remain
fragmented". I fully share that view and I urge legislators to reassess the necessary degree
of regulatory harmonisation against the backdrop of the European banking union.
Thank you for your attention.