4. The Federal Reserve in:

Stanyo Dinov

Central Banks as a Bank Supervisor, page 47 - 88

A Comparison of the Function of the Bank of England, the Federal Reserve and the European Central Bank

1. Edition 2017, ISBN print: 978-3-8288-3993-9, ISBN online: 978-3-8288-6765-9,

Series: Wissenschaftliche Beiträge aus dem Tectum Verlag: Rechtswissenschaften, vol. 90

Tectum, Baden-Baden
Bibliographic information
The Federal Reserve Historical background The Fed was established as the result of the Federal Reserve Act (FRA) 1913 after the US financial crisis in 1907. It was created not to be a CB and to have a limited power between 12 banks of the most powerful US states.75 The Act enabled Congress to withhold or to restrict actions of the Fed. At the beginning, the Fed's main responsibilities were discounting of commercial paper and acceptances bills as well as promoting effective national payment system. The FRA also gave the Fed authority to "coin money and regulate the value thereof." Financial regulation was usually not a policy applied by the federal government for a long time.76 Thereby, the amendments V (state level) and XIV s 1 (federal level) of the US Constitution does not allow any regulation. The at- 4. 4.1. 75 Allan H. Meltzer, A History of the Federal Reserve 1951-1969, The University of Chicago Press, (Chicago and London 2009), 1 f. Despite the proponents yet some of the Founding Fathers were strongly opposite the formation of central banking system as possibility of Great Britain tried to place the colonies under the monetary colony control of the BoE. 76 In this regard, comparison here could be made with the UK, where in the financial system until 1970 s there was not public regulation. 47 tempts to create the Bank of the United States in 179177 and in 1816 were unsuccessful. The regulation in the financial sector began later through the case law,78 after many crises and the Great Depression in 1929. The regulation started 1930 s with the F. D. Roosevelt's legislation: Glass- Steagall Act 1933 strictly dividing commercial and investment banking in order to prevent bank depositors from additional exposure to risk associated with stock market volatilities.79 It followed the Securities Act 1933, Securities 77 Baker Colleen, Federal reserve as Last Resort, (2012) University of Michigan Journal of Law Reform, 69, 81. A conflict between national and states banking interests in the US Congress blocked the proposal for the first Bank of the US. The need after the war in 1812 caused the establishment of the second Bank of the US. The U.S. Subprime Court in Mcculloch v Maryland (1816) decided to settled it constitutionally, but the Congress did nor renewal the charter. 78 Munn v Illinois (1877) where the Subprime Court decided that in some industries the public interest can justify regulation. Later with the case Noble State Bank v Haskell (1911) the court defined that banking can be one of the industries which can be regulated and with the case Nebbia v New York (1934) the regulation in public interest can only be justified, if it is related to a specific area. 79 Ch. s 20 of the Act; Charles A. E. Goodhart and Dimitri P. Tsomocos (5), 124. The Glass-Steagall Act 1933 also created the Federal Deposit Insurance Corporation (FDIC) with authority to resolve failed banks, but left the authority to close banks with their respective regulations to the Fed. 4. The Federal Reserve 48 Exchange Act 1934,80 Banking Act 1933 and 1935,81 Commodity Exchange Act 1936 and the 1956 Bank Holding Company Act (BHCA).82 From 1970 s to 1990 s, there was a period of deregulation or the so called "Big Bang"83 characterised with the movement of the Chicago Law School for a "public choice" and avoiding "regulatory capture".84 The deregulatory measures culminated with the Gramm- Leach-Bliley (GLB) Act 1999 which abolished the Glass- 80 The SEA requires the Fed to regulate the extension of credit used in connection with the purchase of securities. 81 The BA 1935 shifted power from the Fed to the Board of Governors, eliminating the semiautonomous nature of the reserve banks. Created was the Federal Open Market Committee to clarified disagreements between the Board and regional Reserve Banks. 82 §§ 1841(a)2Aff BHCA 1956 increased the Bord's power to regulate, to approve or reject applications for new banks. This included imposing capital requirements, inspections and merger and acquisition approval. The Act assigned to the Fed primary responsibility for supervising and regulating the activities of bank holding companies. Through the Act, the Congress sought to achieve two basic objectives: (1) to avoid the creation of a monopoly or the restraint of trade in the banking industry through the acquisition of additional banks by bank holding companies and (2) to keep banking and commerce separate by restricting the nonbanking activities of bank holding companies. 83 The term is used as a big bang of the old strict regulation sets and proclamation to free market liberalism and self-regulation. 84 The proponents claimed that the regulators are captured, lobed from big industries and they do not act anymore in public interest. The rules were created for strong monopolies and not for small and middle-sized businesses, therefore, pleaded were for more commercial liberty. See George J. Stigler in 1971, The Theory of Economic Regulation, 3, ˂ arquivos/regulacao2/stigler-1971.pdf˃ accessed on 27th of June 2015. As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits. 4.1. Historical background 49 Steagall Act's prohibition of combined investment and commercial banking and the Commodity Futures Modernisation Act (CFMA) 2000, which replaced some parts of the Glass-Steagall Act and opened the American derivative market. The period from 2000 to 2010 was characterised with re-regulation measures in particular represented with the Emergency Economic Stabilisation Act (EESA) 2008 and the Dodd-Frank Act (DFA) 2010. The US financial system and the Federal Reserve Act From its creation, the US financial regulation has been dominated with the parallel split of dual Federal and State system with multiple agency autonomy and regulatory competition. The Federal Reserve System (FRS) or the Fed has both private and public components to serve the interests of the public and private banks. The primary motivation for creating the FRS was to address banking panics as well as " establish more effective supervision of banking in the US...".85 The Fed is headed by the Board of Governors of FRS (FRB),86 consisting of a Chairman and Vice Chairman which are appointed by the President and confirmed by the Senate. The Board's primary responsibility is the formulation of monetary policy. An important body inside the Fed is the Federal Open Market Committee 4.2. 85 FRA 1913, 1. 86 S 714 FRA. 4. The Federal Reserve 50 (FOMC),87 which conducts the money policy and oversees open market operations. The Fed through its Banking Supervision and Regulation Division oversees the US banking system. It has supervisory responsibilities for statechartered banks that are members of the FRS, bank holding companies and foreign banks. In addition other regulators of the US financial markets are: the US Security and Exchange Commission (SEC), the Federal Insurance Office as part of the Treasury and the financial authorities of the federal states. To promote consistency in the examination and supervision of banking organizations and for exchanging views on important regulatory issues between state and federal regulatory agencies in 1978, the Congress created the Federal Financial Institutions Examination Council (FFIEC). The FFIECs’ purpose is to prescribe uniform federal principles and standards amongst the federal agencies that regulate financial institutions. The FFIEC has to coordinate and harmonise the policy between the FRB, the FDIC,88 the Office of the 87 The FOMC is with seat in Washington. It is made up of the president of the Federal Reserve Bank of New York, and presidents of four other Fed Banks, who serve on a rotating basis and seven members of the Board of Governors appointed by the President and confirmed by the Senate. Only twelve of the nineteen people are able to vote. The seven members of the Board of Governors have a permanent vote plus the president of the Fed in New York and four members of rotation from the rest of the members. 88 See The Federal Reserve System, Purposes & Functions, Board of Governors of the Federal Reserve System, Washington D. C. 2005, 5. State banks that are not members of the FRS are supervised by the FDIC. 4.2. The US financial system and the Federal Reserve Act 51 Comptroller of the Currency (OCC),89 the National Credit Union Administration (NCUA),90 the State Liaison Committee (SLC)91 and the Consumer Financial Protection Bureau (CFPB).92 Therefore, along with the Fed in the US federal and state level there are a number of different agencies that supervise the financial system. The created in 1913 FRA and all subsequent legislation made the Fed independent but with never defined independence.93 Although the Fed is an independent authority, the US government has kept a strong influence on its monetary policy. During the financial crisis in 2007, the Fed acted as a financing arm of the Treasury.94 Currently the responsibilities of the Fed fall into four general areas: – Regarding the monetary policy the Fed has three key objectives: maximum employment, stable prices, and moderating long-term interest rates; 89 The OCC was created in 1863 as an independent agency within the Treasury. 90 Supervises not-for-profit, cooperative, tax-free organizations. 91 The SLC includes representatives from the Conference of State Bank Supervisors (CSBS), the American Council of State Savings Supervisors (ACSS), and the National Association of State Credit Union Supervisors (NASCUS). 92 The CFPB was created with the DFA in 2010. 93 Cf. Allan H. Meltzer, Book 2, 1970-1986, Who owns the Federal Reserve?, 1255 f. The Board of Governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the US banking system, but not complete responsibility. The Fed is described as "independent within the government" rather than "independent of government". 94 Allan H. Meltzer (93), 1255 f. 4. The Federal Reserve 52 – Since 2009 the Fed is responsible for supervision and regulation of banking institutions in order to ensure the safety and soundness of the financial system and to protect the credit rights of consumers; – It conducts macro-prudential oversight in order to maintain the stability of the financial system from systemic risk; – The Fed has also to provide financial services to depository institutions and to operate the national payments system.95 The Fed's function of banking supervision involves monitoring, inspecting, and examining of banking organizations in order to assess their condition and compliance with relevant laws and regulation. The Fed has primary supervisory authority for state banks. It shares supervisory and regulatory responsibilities for domestic banking institutions with the OCC and the FDIC at the federal level,96 and with the banking departments of the various states. This dual federal–state banking system has evolved partly out of the complexity of the US financial system, with its many kinds of depository institutions and numerous chartering authorities. It has also resulted from a wide variety of federal state laws and regulations designed to remedy problems that the US commercial banking system has faced over its history. 95 The Federal Reserve System (88), 1. 96 The Federal Reserve System (88), 12. 4.2. The US financial system and the Federal Reserve Act 53 Gramm-Leach-Bliley Act 1999 The GLB Act was one of the last pieces of legislation aiming to deregulate the US financial market. It allowed banks, securities firms, and insurance companies to affiliate with each other through financial holding company structure and therefore, abolished the previous Glass-Steagall and Bank Holding Company Acts. To be certificated, financial holding companies have to meet a higher standard.97 The regulation and supervision of financial holding companies (FHCs) differs from that of bank holding companies (BHCs). The law kept in place the existing regulators for financial subsidiaries of FHCs, but gave the Fed a role similar to that of the UK FSA of an “umbrella supervisor,” in order to bring a full financial services integration.98 Through this supervision, the financial institutions become involved in different financial activities. By the supervision, the Fed should relay and work closely with other regulated subsidiaries such as the OCC, FDIC, SEC, and the state insurance supervisors.99 The focus of the umbrella supervisory role of the Fed endorsed by GLB Act was on risks that could adversely affect the insured depository institution. FHCs, in turn, were subject to only limited Fed regulatory 4.3. 97 The institutions must be well capitalized and well managed in accordance with existing bank regulations, and they must have at least satisfactory ratings under the Community Reinvestment Act. 98 Mark W. Olson, Implementing the Gramm-Leach-Bliley Act: Two Years Later, ˂ 2002/20020208/˃, accessed 12 July 2015. 99 Joe Mahon, Financial Services Modernization Act of 1999, commonly called Gramm-Leach-Bliley. 4. The Federal Reserve 54 oversight.100 Fed supervision was focused on the FHC level, on those risks that could affect the depository subsidiaries.101 However, the consequences of the following financial crisis called into question the acts of the reform.102 Commodity Futures Modernisation Act 2000 The following CFMA deregulated the law of the most OTC-derivates transactions. Before the CFMA with the 1982 Shad/Johnson agreement, the regulatory jurisdiction over futures and options was divided between the CFTC and SEC.103 The Act significantly restricted the capacity of the CFTC and SEC directly to intervene in OTC-trading between sophisticated market participants for derivative contracts. It moved the regulation of futures markets away from a purely prescriptive rules-based approach towards a 4.4. 100 Joe Mahon (n 99). 101 Ibid. 102 Cf. Joe Mahon (n 100), The Act allowed distressed investment banks like Bear Stearns and Merrill Lynch to be acquired by financial holding companies rather than go bankrupt, and approved others like Goldman Sachs and Morgan Stanley reorganized as financial holding companies to improve their market reputations. See the speech of the John Dingell. By the passing of the Bill in the US Congress there was a caution, that the Act created group of institutions which are "too big to fail" and the Fed and the Treasury would have to bail them out. The liabilities of these institutions in one financial area will go to follow the liability at the next. Awareness was made also that the Bill limited privacy protections against the sale of private financial information. 103 Mark Jickling, CRS Report for Congress, The Commodity Futures Modernization Act (P.L. 106-554) 2003, 5. 4.4. Commodity Futures Modernisation Act 2000 55 system that relies more on compliance with principles.104 The CFMA considered the differences in products and market participants and created a structure that provided a specific intensity of regulatory oversight corresponding with the needs of the markets. The Fed prerogatives were to set margins for futures and stocks and it could delegate this authority to the CFTC and SEC. Furthermore, the Fed was the regulator with systemic responsibilities, the primus inter pares among financial regulators which had the power delegated by Congress with special responsibilities for mortgages and consumer protection.105 Emergency Economic Stabilisation Act 2008 In order to prevent the collapse of the US financial system during the subprime mortgage crisis, the US government published in 2008 the Emergency Economic Stabilisation Act (EESA). The EESA provided up to $700 billion to the Secretary of the Treasury to stabilise the economy. The Act authorised the Secretary of the Treasury to establish the Troubled Asset Relief Program (TARP) and to purchase troubled assets from any financial institution. The EESA created a oversight mechanism, setting up a Financial Stability Oversight Board (FSOB),106 and a Congressional Oversight Panel (COP). The FSOB had to review the acts of the Treasury regarding the TARP and makes recom- 4.5. 104 The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure 2008, 49. 105 Alan S. Blinder, Across the Great Divide: New Perspectives on the Financial Crisis (Hoover Institution 2014), 90. 106 S 104 EESA 2008. 4. The Federal Reserve 56 mendations to it. The second body, the COP was expected to review the state of the financial markets and the regulatory system and to submit reports to the US Congress. The EESA gave the Fed increased power over short-term interest rates and obligated the FRB to disclose certain material information, regarding certain extensions of credit. In addition, the FRB had to provide periodic updates at least once every 60 days describing the status of the loan, the value of the collateral, and the cost to taxpayers.107 White Paper on Financial Regulatory Reform 2009 In 2009, the US-government adopted the White Paper Reform Part in order to strengthen the regulation of the financial market. While part of blame of the global financial crisis was thrown on the existing US liberal approach of regulation, the Act brought many proposals for changes. It created a new Financial Services Oversight Council (FSOC) insight the Treasury with members consisting of the chairmen and directors of the Fed, and other national supervisory agencies. The FSOC has to oversee the activities of systemically important firms (referred as tier 1 FHCs), and to coordinate interagency cooperation between the national agencies. All systemic important firms have to be required to register as FHCs must be subject to consolidated supervision and regulation by the FRB. In this regard, the Act repealed certain limits on the Fed's authority over functionally regulated subsidiaries imposed by the GLB 4.6. 107 Davis Polk & Wardwell, Emergency Economic Stabilisation Act 2008, 2008, 25. 4.6. White Paper on Financial Regulatory Reform 2009 57 Act. The White Paper proposes to amend Section 13(3) FRA in order to allow the Fed to provide liquidity to nonbanks after the approval of the Secretary of the Treasury. Moreover, the Act suggested a new regime for the resolution of failing BHCs and FHCs, which would have serious adverse effects on the financial system. Through initiative by the Fed, Treasury, SEC or FDIC financial firms could be put into special resolution process. Ultimately, the Treasury in consultation with other agencies will decide whether to put any firm into resolution.108 The Fed had been given a responsibility for the oversight of systemically important payment, clearing and settlement systems including through provision of access to its discount window. The Fed had used this power on a number of occasions during the crisis, but it had in each case to wait prior Treasury approval. The amendment simply formalises this relationship. In this regard, the Reform Act simplified the complexity of the US financial system.109 Dodd-Frank Act 2010 In 2010, the US legislature passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). The Act increased the powers of the Fed as a banking supervi- 4.7. 108 Allen & Overy, ʻThe Obama Administration today published Financial Regulatory Reform’ 2009. 109 “Complexity has led to cracks in system” Financial Times (12 June 2009) 6. 4. The Federal Reserve 58 sor.110 The DFA gave the Fed primary responsibilities for supervising all firms that could create a threat to financial stability in addition to its responsibilities for monitoring financial institutions and protecting consumers.111 The main task of the Act was to create a body responsible for macroprudential supervision. Therefore, accordingly the White Paper Reform proposal created by the Treasury was the Financial Stability Oversight Council (FSOC)112 in order to identify, monitor and manage systemic risk.113 The FSOC brought together under the Treasury several financial market agencies. The Fed becomes a member of the Council performing the task of regulatory coordination.114 The FSOC has to decide if large complex systemically financial institutions (SIFIs) are adequately regulated or financial market utilities (FMUs) like stock exchanges will come under the supervision of the Fed.115 The Fed must conduct macro-prudential oversight over large SIFIs with consolidated assets of $ 50 billion or more whereas other institutions will be supervised by the FSOC.116 However, through 110 Lucia Dalla Pellegrina, et al., ‘New Advantages of tying One's Hands: Banking Supervision, Monetary Policy and Central Bank Independenceʼ, 208. 111 Pierre C. Boyer and Jorge Ponce, ‘Central Banks and Banking Supervision Reformʼ, (2010) SSRN 158. 112 S 111 DFA 2010. 113 As the White Paper Reform Act called the body Financial Services Oversight Council in the DFA it is renamed as a Financial Stability Oversight Council. 114 Ben S. Bernanke (7), 118 f. 115 Ibid. 119. The SIFIs and FMUs are tasked with submitting resolution plans to the Fed and the FDIC. 116 Consolidated Supervision Framework for Large Financial Institutions, Board of Governors of FRS. 4.7. Dodd-Frank Act 2010 59 the Council as part of the Treasury, the Fed becomes not the only responsible financial regulator. The DFA created a "last resort" role for the Fed. By providing a liquidity assistance, according s 13(3) FRA, the Fed should consult with the Treasury finding that the financial market utility is not able to secure adequate credit accommodation and in particular circumstances the Fed can act as LLR-authority. The Act gave the FDIC the right in short procedure to shut down failed banks and protect depositors. Nevertheless, apart from using the instrument of higher capital requirements there was a failure in mitigating systemic risk ex-ante.117 Created inside the Fed was a Consumer Financial Protection Bureau (CFPB). However, similar to the UK-FCA, the CFPB-functions overlap with the Commodity Futures Trading Commission (CFTC) and SEC.118 With the creation of the three new bodies: the FSOC, CFPB and the Office of National Insurance, the legislative failure to adopt any structural reform reducing the various regulation bodies.119 The merger of the Office of Thrift Supervision (OTC)120 into the Office of the Comptroller of the Currency (OCC) was a welcome but minor reform.121 Nonetheless, the Act implemented significant changes affecting the oversight and supervision of financial institutions and systemically important financial companies. It 117 Hal S. Scott, ʻA general evaluation of the Dodd-Frank US financial reform legislationʼ, 2010 Journal of International Banking Law and Regulation, 478. 118 Ibid. 119 Hal S. Scott, (n 118), 479. 120 Was chartered to oversee all federally state-chartered savings banks. 121 Hal S. Scott, (n 118), 479. 4. The Federal Reserve 60 introduced more stringent regulatory capital requirements, and set forth significant changes in the regulation of the securitization market. Assessment The US financial regulation involves a large number of agencies at a federal and state level with distinct roles and very functions. An advantage of this system is that the financial and credit institutions are oversight from many bodies under different angle. However, disadvantages are: compliance with different requirements for the financial institutions; conflicts of interest and power between the authorities as well as "failure to act in a timely fashion."122 The complexity of the system results in collision of laws and regulations making the Fed's dual responsibility to 4.8. 122 Cf. Charles Goodhart, (n 2) 74, J. H. Kareken, Deregulation Commercial Banks: The Watchword Should Be Caution, 1981 Federal Reserve bank of Minneapolis Quarterly Review, 4. See also C. J. Benston, Deposit Insurance and Bank Failures, 1983 Federal Reserve Bank of Atlanta Economic Review 14ff. Also J. R. S. Revell, Solvency and Regulation of Banks, 1975 Bangor Occasional papers in Economics No. 5, 37. The main criticisms of the American system of prudential regulation is the multiplicity of supervisory agencies, everyone with its own methods. The only way to avoid multiple agency is they amalgamation. The conflict between FCC Commodity Futures Trading Commission (CFTC) and the Options Clearing Corporation (OCC) about who is going to regulate the derivative market is an example, where the agencies finally, came to the agreement, that futures contract will be regulated by the CFTC and the options through the OCC. 4.8. Assessment 61 protect public as well as private bank's interest more difficult. The GLB Act authorised the Fed with umbrella supervision via CFTC and SEC similar to the BoE for the whole financial sector. Nevertheless, the Fed should relay on the oversight of other regulators such as the OCC, FDIC and SEC and after DFA it share its macro-prudential function with the FSOC. In addition, the acts of the Fed could be reviewed by the Treasury and Congress. In this regard, although the Fed is an independent authority, the US government through the Treasury still has a strong influence on its monetary policy, comparable with the position of the BoE. The specificity of the US financial regulation, particularly its duality on federal and state level, its multitudinous from agencies and the Fed's obligation to share its supervisory and regulatory functions with other authorities. Another distinctive feature of the system is that, the Fed oversights' functions are transferred to other regulatory bodies. For instance, the FFIEC, has to prescribe uniform principles and standards among the financial institutions; the FSOC inside the Treasury, has to oversee the activities of SIFIs, to coordinate the interagency between state authorities and to monitor and manage potential threats of systemic risk activities. A disadvantage is that the supervision is fragmented between many agencies which do not have the option institutionally to be coordinated under the head one authority. In comparison with the UK regulatory system, where the macro-prudential oversight is by the FPC, inside the BoE, in the US, after the DFA, this function is performed 4. The Federal Reserve 62 by the FSOC as a department of the Treasury, which undermines the Fed's role as a primary supervisor.123 Therefore, despite the placard US functional approach of financial regulation there is still need for some kind institutional consolidations in the US supervisory system.124 123 Hal S. Scott, (n 118), 479. 124 Cf. Charles Goodhart, (2) 74; C. J. Benston (n 122) 37; Hal S. Scott, ibid. 4.8. Assessment 63 The European Central Bank Historical background and responsibilities The ECB was created in 1998 by virtue the Treaty of Maastricht or TEU in 1992 on the place of the existing European Monetary Institute (EMI).125 One of the provisions of the Treaty was the establishment of the euro currency. The institutional architecture of the euro includes two parts: the unitary institution ECB itself and the national central banks (NCBs) of the EU-MSs, who collectively represent the ESCB.126 Therefore, the ECB become a CB of the EU- MSs which have their own CBs, and all they are part of the European System of Central Banks (ESCB).127 According to Article 130 TFEU and Article 19 SSM-Regulation, the ECB is an independent authority and shall enjoy privileges and immunities of the territories of the EU-MSs by performing its tasks.128 5. 5.1. 125 EMI was created in 1994 on the second stage of the European Monetary Union (EMU) replacing the existed to then European Monetary Cooperation Fund (EMCF) which from its side was established in 1973 from the members of the European Exchange Rate Mechanism (ERM), a system introduced by the European Economic Community (EEC). 126 Howard Davies and David Green, (21), 186. 127 Ben S. Bernanke (7), 2. 128 Article 40 ESCB-Statue. 65 The ECB carries out its tasks in accordance with the TFEU and ESCB-Statue,129 as its primary objective is to maintain price stability.130 In this regard, the ECB is a exception of the standard model of CB. Unlike the Fed131 or the BoE,132 the ECB has only one primary objective: the "price stability" regarding Articles 127(1) and 282(2) TFEU, or to maintain the inflation rate up to 2%.133 Carrying out its basic monetary task according to Article 127(2) TFEU, the ECB should conduct foreign-exchange operations; manage foreign reserves of the MSs and operate payment systems. The ECB has also exclusive right to issue euro-banknotes.134 Near its "basic task" to define and maintain the monetary policy regarding to Article 127(2) par. 1 TFEU and Article 3.1. ESCB-Statue, the ECB "shall contribute to ...the prudential supervision of credit institutions and the stability of the financial system".135 According to Article 127(6) TFEU, Article 25.2. ESCB-Statue and SSM-Regulation, the ECB can be conferred "specific tasks" related to the prudential supervision of credit institutions and other finan- 129 Article 132(1) TFEU. 130 Article 127(1) TFEU and Article 2 ESCB-Statue. 131 According to s 2A FRA, the Fed must pursued monetary policy with the goals of maximum employment, stable prices, longterm interest rates, growth and price stability. 132 See s 11 BA 1998. 133 Cf. Clarified by the Governing Council in 2003. See also Kathryn C. Lavelle, Kathryn C. Lavelle, ʻThe Foundation of regulatory convergence and divergence between the Federal Reserve and the European Central Bankʼ, 2014 Georgetown Journal of International Law, 1153, 1164. 134 Article 128 TFEU and 16 ESCB-Statue. 135 Article 127(5) TFEU and Article 3.3. ESCB-Statue. 5. The European Central Bank 66 cial institutions. It seems that, at the beginning, there is a conflict, if these two policy are equal balanced, or the ECB specific supervisory tasks have to support the function of its primary monetary objective. By performing its task according to the TFEU and ES- CB-Statue, the Bank can make regulations, take decisions, make recommendations and deliver opinions and it can impose fines or periodic penalty payments.136 It shall be consulted by all acts-proposals in its fields on union and national level.137 Furthermore, it can consult the Council, the Commission and the MSs-authorities on the scope the implemented legislation to the prudential supervision of credit institutions and to the stability of the financial system.138 The new European System of Financial Supervision The need to reform the existed supervisory model as well as the results of the global financial crisis and the European debt crisis forced the EU-MSs to reform their system. In this regard, the European Commission made a proposal, based on the recommendations of Jacque de Larosiere’s 5.2. 136 Cf. Article 132 TFEU, Article 18 Regulation 1024/2013, hereinafter SSM-Regulation . 137 Article 127(4) and Article 285(2) TFEU as well as Article 4 ES- CB-Statue. 138 Article 25.1. ESCB-Statue. 5.2. The new European System of Financial Supervision 67 group,139 and since September 2011 in the EU there is a new System of Financial Supervision. The system consist of two legs: a System Risk Board (ESRB)140 conducting macro-prudential oversight and a European System of Financial Supervision (ESFS) responsible for the micro-prudential supervision. The ESRB does not have any binding decision-making powers as regards implementation of recommendations. It is hosted by the ECB, where the CB provides the ESRB- Secretariat. Consequently, the ECB has be involved in macro-prudential oversight. The second pillar of the system, the ESFS in comparison with the ESRB, has legal competence in respect of the national authorities. The ESFS is an alliance of supervisory authorities, from European level: the three committees of the ESAs141 and national level: the EU-MSs-authorities, comparable with the US-FFIEC. The system works in a way, that the ESRB earlier identifies potential risks and issues necessary recommendations to the ESFS. Then, the ESFS collaborate the imple- 139 Jacque de Larosière Group Report. The Report found that the European financial market need strong, integrated regulation and supervision. In the view of the Group, there is a lack of appropriate and effective supervision at the macro level, which should encompass all areas of finance and not just the banks. According to the Report, the ECB can effectively exercise its proposed functions within the scope of the ESCB. 140 Parliament and Council Regulation 1092/2010. 141 The European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pension Authority (EIOPA), collectively known as the three Supervisory Authorities (ESAs). See Joint Committee of ESAs, Article 54 EBA-Regulation. 5. The European Central Bank 68 mentation of the recommendations with the national competent authorities (NCAs). Thus a substantive supervision standard will be harmonized by the MSs through the ECBadministration. The Role of the European Central Bank The ECB become an important role at an macro and micro level in the new system of supervision. At the macro level, the CB has to analyze the stability of the financial system and develop an early warning systems for a potential risks. The ECB has to provide the ESRB with all the necessary logistical support and to give evaluation and recommendations in respect of macro-prudential supervision. At the micro level, the CB assumes direct control over trans-border EU-credit institutions. In the event of a conflict between MSs supervisory authorities, the ECB plays the role of a binding mediator. Within the framework of the financial system, the ECB has a consultative role on matters concerning bank law regarding Article 127(6) TFEU and Article 4(a) ESCB-Statue. In order to perform its duties assigned to the ESCB, the ECB can exert influence on the MSs by means of regulations, decisions, recommendations and opinions.142 5.2.1. 142 Article 132(1) TFEU. 5.2. The new European System of Financial Supervision 69 Evaluation The new European system of financial supervision seeks to consolidate the fractured elements of the existed European financial supervision model. Nonetheless, the fact that responsibility for the financial supervision is divided over different bodies at the European and at the MSs-level143 demonstrates that the concept is not a centralised supervisory model. In addition to the ESFS and ESRB at supranational level there are other bodies which are involved in the financial supervision, what has the disadvantage that some of their function overlapped each other.144 In terms of the institutional structure, the system lacks one body, which can cover all financial supervision matters. The system leaves the impression that, instead of a reduction of the large financial regime, the reform was focused rather on restructuring the financial supervisory authorities at the supra-national level. 5.2.2. 143 The European system of supervision, which is based on the concept of minimum harmonisation, mutual recognition and the country of origin principle, has certain disadvantages. The crossborder supervision depends on the cooperation between the home- and host-MSs-authorities. The financial control procedures at state level differ from one to another and refer to different institutions and criteria. Even harmonised rules are implemented in different ways by the supervisory bodies of each MS, as their authority, jurisdiction and legal praxis vary. 144 Under Article 134 TFEU, the Council, Commission, Parliament, ECB, and the Economic and Financial Committee (ECOFIN) are all involved in the European financial system matters. Regarding to certain tasks such as the prevention, management and resolution of crises, as well as developing of strategies and securing financial stability, ECOFIN and ESRB display similar functions. 5. The European Central Bank 70 European Banking Union In order to strengthen the financial regime in the Eurozone and to further stimulate the European integration, the EU- MSs created a Banking Union in 2012. The institutional framework of the Banking Union is based on three legs: Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM), and Single Rulebook. Introducing of the SSM and the Proposals of the European Commission for conferring supervision tasks on the ECB and the new EBA In 2012, the heads of Eurozone decided at a high-level meeting, based on Article 127(6) TFEU to introduce a SSM under the control of the ECB. Thus, created was the first step at the Banking Union, which purpose is to harmonise the substantive regulation and to implement a single supervision within the ESFS. On the basis of the resolution from the meeting and the recommendations of the de Larosiere Report, the Commission issued in September 2012 two proposals for regulations – one conferring specific tasks on the ECB145 and another concerning the amend- 5.3. 5.3.1. 145 Commission, ‘Proposal for a Council Regulation conferring specific tasks on the ECB 5.3. European Banking Union 71 ment of the EBA-Regulation,146 as well as a schedule for the establishment of Banking union.147 The first proposal granted the ECB with the competence to take final decisions regarding bank supervision issues. The ECB should take over the role of the national supervision authorities. It gained unlimited powers of intervention in respect of all credit institutions, requesting information, carrying out investigations or inspections, or imposing sanctions.148 The national supervision authorities retained competence over all tasks that have not been conferred on the ECB, regarding to the consumer protection, fighting money laundering, and the supervision of banking institutions from third party states.149 The imposition of sanctions was divided amongst the ECB and national authorities. Initially, the ECB has to supervise systemically important credit institutions, and after the one-year transitional term it shall take over the supervision of other institutions. In order to separate the supervision from the monetary policy, inside the ECB was created, a Supervisory Board responsible for planning and executing bank supervision tasks, according to Article 18(2) and 19(1) of the ECB- Regulation. The members of the ECB-Governing Council have to elect a chairperson of the Supervisory Board150 146 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation 1093/2010 147 Commission, ‘Communication from the Commission to the European Parliament and the Council: A Roadmap towards a Banking Union’ 148 Article 19-12, 15 ECB-Regulation. 149 Article 4(4) ECB-Regulation. 150 Article 26(1)(3) SSM-Regulation. 5. The European Central Bank 72 from the ECB Directorate, and a vice-chairperson from the members of the Executive Board.151 However, this raised the question whether there was sufficient division between the banking supervision and the monetary policy, when a member of the Governing Council (which determines the monetary policy of the EU)152 was able to influence the decisions of the Supervisory Board. The EU-MSs outside the Eurozone were given the option to join the SSM, if they meeting the necessary requirements. The Commission also made a proposal for amending the EBA-Regulation. The Regulation seeks to adapt the procedure modalities and tasks of the EBA to the newly formed supervision structures, including the ECB as a banking supervisory authority. 151 Article 19(2) ECB-Regulation. 152 According to Article 12.1. ESCB. 5.3. European Banking Union 73 Requirements of the European Parliament The proposals of the Commission have met criticism from some quarters.153 The European Parliament objected in October 2012 to certain suggestions, regarding the strict division between monetary, political and supervisory functions of the ECB, and the equitable treatment and representation of the euro and non-euro area-MSs participating in the SSM.154 The Parliament demanded amendments regarding the types of supervised credit institutions and the collaboration between the ECB and national supervisory authorities. Moreover, the Parliament insisted that a Board of Appeal from the decisions of the ECB should be created. Furthermore, in order to protect the interests of the MSs which are not part of the SSM, the qualified majority for decisions taken by the Board of Supervisors of the EBA must include at least half of the SSM-MSs and half of the MSs not taking part in it.155 5.3.2. 153 Cf. Andrea Eriksson, ‘Einheitlicher Europäischer Bankenaufsichtsmechanismus’ 6, 19; ‘Weidmann macht Front gegen Bankenaufsicht unter Dach der EZB’ FAZ (Frankfurt/Main 27 September 2012). See also submission of Deputy Meister and others and the CDU/CSU party as well as Deputy Wissing and others and the FDP party on (2012), BT-Drs. 17/10781; discussions at the session of the German Bundesrat (19 October 2012) BR-Drs. 546/12 and the protocol of the meeting of 19 October 2012 (631 EС) 11 et seq. A matter of discussion was the supervision of small credit institutions, which lacking systemic relevance, although such institutions may create systemic risks for the Eurozone. 154 Council, Cover Note EUCO 156/12 Conclusions [2012] CO EUR 15 CONCL 3. 155 Parliament Report, in relation to Art. 44 of the EBA-Regulation. 5. The European Central Bank 74 Political Agreement in the European Council A political agreement on the establishment of the SSM was reached in December 2012 in the ECOFIN.According to the agreement, the ECB has to undertake the supervision only of significant credit institutes.156 The supervision of significant institutes or direct supervision will be conducted via joined supervisory teams JSTs.157 For financial conglomerates supervisory colleges (SCs) were created.158 In addition to the JSTs and SCs159 there are crisis management groups (CMGs) and Cross-Border Stability Groups (CBSGs), responsible for the management and resolution of global systemically important financial institutions (G- 5.3.3 156 Article 5(4)(a) ECB-Regulation, or Article 6(4) SSM-Regulation, Article 39 Regulation 468/2014. Some of the requirements such institutions are: to have revenue 30 billion Euro or 20% of national GDP (unless the total value its assets is below 5 billion) or with significant relevance to the domestic economy or have required or received public assistance from European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM). 157 JSTs include experts from the ECB and the NCAs. The JSTs have to perform supervisory review and evaluation, measuring the risk exposure, systemic risk and risk revealed by stress test (Article 290 CRR) according to Article 3 Regulation 468/2014. 158 SCs include experts from the ECB and NCAs where these significant entities have brunches. See Article 9 Regulation 468/2014 and Article 97 CRD. Covered are also brunches in the non Eurozone-MSs, as well as credit institutes from non Eurozone-MSs with brunches in the Eurozone (Article 4 SSM-Regulation). For the last cases the ECB shall exercise the power of home authority according to Article 17 Regulation 468/2014. 159 The chairmen of the JSTs and the SCs are from the ECB. Cf. Article 9 Regulation 468/2014 and Article 116 CRD. 5.3. European Banking Union 75 SIFIs) and financial groups.160 The supervision of not significant credit institutes or indirect supervision remains subject to the NCAs. However, the ECB can itself directly exercise the supervision of other institutes at any time.161 For this purpose created inside the ECB were divisions responsible for: significant, less-significant as well as horizontal supervision (teams linking JSTs and NCAs) und for all credit institutes under the SSM-supervision.162 The ECB is responsible for the effective and harmonious functioning of the SSM and has to issue guidelines and instructions for the supervision of the credit institutions to the NCAs.163 Changed was also the supervisory decision-making process of the ECB. Near the existing Governing Council, Executive Board and General Council, added had been three new bodies: Supervisory Board, Mediation Panel and Administrative Board of Review. The Supervisory Board has to plan and execute the supervisory tasks conferred upon the ECB.164 It has to provide full draft resolutions to the Governing Council. Thus, the Governing Council continues to have decision-making 160 Guide to Banking Supervision 2014. 161 Cf. Article 6(4) SSM-Regulation. Thomas Gstädtner, EU-Bankenunion - Qualität wichtiger als das Zeitplan!, in: Wie ist das Konzept der EU-Bankenunion zu bewerten? (2013), 1, (8). However, for some this is a breach of Article 5(3) TEU, the principle of subsidiarity. 162 ECB, Guide to Banking Supervision, 13. 163 Article 6(5)(b) 2024/201. 164 Article 19(1) ECB-Regulation. To guarantee its independence from ECB monetary policy, its members have to confirm the ECB-Code of Conduct, See Code of Cunduct. 5. The European Central Bank 76 powers in respect not only of monetary policy but of the supervision. The Mediation Panel has to resolve differences of views expressed by the MSs, regarding the objection of the Governing Council to a draft decision by the Supervisory Board.165 Through the Administrative Board of Review Panel, any legal or natural person can object the decision of the Supervisory Board.166 The EU-MSs also agreed on the amendment to the EBA-Regulation. The MSs-authorities still in control of market and solvency supervision, whereas the EBA-task become to execute the coordination procedure for the SSM. Problematic issues Despite the attained agreement in the ECOFIN, the introduced SSM raises some problematic questions. Article 127(6) TFEU The question of whether supervision should be subject to the control of the ECB and more specifically whether Article 127(6) TFEU is a suitable basis for conferring supervisory ʻspecific tasksʼ on the ECB remains a matter of de- 5.3.4. 165 Article 24(5) SSM-Regulation. 166 Article 25 SSM-Regulation. The Supervisory Board shall take into account the consideration and make new draft to the Governing Council. However, the request of review does not have suspensory effect according to Article 25(8) SSM-Regulation. 5.3. European Banking Union 77 bate.167 The provision of Article 127(6) TFEU deals with the monetary policy of the EU, and it should be considered as granting limited competence to the ECB with the right of veto in respect of bank supervision.168 Thus, Article 127(6) TFEU is not a sufficient basis for transferring all banking supervision to the ECB. Based on a grammatical interpretation of Article 127(6) TFEU, it refers to ‘specific’ and not to ‘the’ or to ‘all’ supervisory functions. In accordance with a historical interpretation, the MSs at the treaty negotiations of Maastricht, rejected the demand of the governors of the CBs for participation of the ECB in banking supervision, and as a compromise the possibility of participation was adopted in Article 127(6) TFEU, provided the Council unanimously agrees to such participation.169 Moreover, regarding the teleological interpretation of Article 127(6) TFEU, it can be concluded that the provision seeks to rule out the entire transfer of banking supervision to the ECB.170 The ECB was granted direct powers of supervision, investigation and sanctions under Article 8 of the proposed ECB-Regulation. The wording ‘one or more’ does not include all such institutions, therefore it cannot be considered to be full banking supervision by the ECB. In 167 Thomas Berschens and Ruth Sigmund, ‘Juristische Bedenken gegen Euro-Bankenaufsicht wachsen’ Handelsbatt (Düsseldorf, 20 October 2012) 15. According to the opinion of the legal service of the European Council, the ECB ‘oversteps’ the possibilities under the EU Treaties. Therefore, the EBA must be subject to the ECB. 168 Stefan Glatzl, Geldpolitik und Bankenaufsicht im Konflikt, (Nomos 2009), 257. 169 Stefan Glatzl (n 168), 257. 170 Andrea Eriksson (n 153), 29. 5. The European Central Bank 78 any case, certain supervisory powers remain with the supervisory authorities of the MSs, while the ECB is mainly focused on the systematically important credit institutions, whereas the other remains under the supervision of MSsauthorities. Therefore, the proposed Regulation can be based upon Article 127(6) TFEU in the sense of ‘effet utile’. Furthermore, it is debatable, whether the Supervisory Board can be established along with the Governing Council, and the Executive Board. Concerning the division of monetary policy from supervision, the provision raises doubt in respect of the primary objective of price stability of the ECB according to Article 127(1) sentence 1 TFEU, and the decision-making power of the Governing Council. During the negotiation process in the ECOFIN, it was found that the establishment of a supervisory body was in breach of Article 13(2) TEU.171 The decision-making bodies of the ECB, in accordance with Article 129(1) TFEU and Article 9.3 ECB-Statutes, are the Governing Council and the Executive Board.172 As there is no provision for an amendment of these bodies, and their procedures or voting rules, the Commission’s proposal exceeds the powers held by the Council pursuant to Article 127(6) TFEU. On the other hand, a conflict of objectives between the monetary policy and supervisory functions should be avoided. Under the two current bodies this cannot be guaranteed. In this regard, Article 127(6) TFEU can be understood in the sense that the transfer of ‘specific tasks’ of 171 Andrea Eriksson (n 153), 29, Opinion of the legal service of the European Council dated 9 October 2012. 172 According Article 45.1. ESCB-Statue, the General Council is the third ECB decision making body. 5.3. European Banking Union 79 banking supervision to the ECB provides the Council with an opportunity to introduce such a body for this purpose. Thus, the Supervisory Board will not have the power to take decisions itself, but rather it will prepare decisions which are reserved for the Governing Council. In addition, by authorising the ECB as a banking supervisory authority, some counter-arguments should be considered: the hierarchical relationship with the EBA; the differences between euro and non-euro EU-MSs, as well as EFTA-MSs; the priority of the task under Article 127(1) sentence 1 TFEU; the lack of democratic legitimatisation in the event of interventions and the formation of a superauthority.173 Competences of the ECB, the ESRB and the EBA A further issue of the Commissionʼs proposals is related to the competencies of the ECB, the ESRB and the EBA. When making a comparison between the ESRB and the ECB, it is apparent that both institutions have similar functions concerning the macro-prudential supervision of the Eurozone-MSs, and the associated information-gathering. Nevertheless, according to Article 5.1 and 5.2 ESCB-Statue 173 The issue related to the ECB as a super-authority can be seen as a two sides of the coin. On one hand, a super-authority will produce bureaucracy with related risk of misconduct. See in this regard Donato Masciandaro, Back to the Future? Central Banks as Prudential Supervisors in the Aftermath of the Crisis, ECFR, 114, 117. On the other hand, this functional facilitation will enable the role of the ECB bodies and panels to cooperate inside, exchanging views and information. ECB is a central European supervisory authority and beside this function it is involve as a resolution authority. 5. The European Central Bank 80 unlike the ESRB, the ECB can directly collect the statistical data required to exercise its functions from the national authorities, with the support of the national CBs. The ECB in comparison with ESRB has greater access to information, without being involved in the procedure of information acquisition, as Article 15 ESRB-Regulation envisages for the ESRB. In contrast to the ECB, the ESRB does not have legal personality, which means that the ESRB is capable of taking action only through the ECB. The ECB is hierarchically subordinate to the ESRB, whereas according to the proposal of the Commission and in practice the ECB is more in the public eye. This could lead to the possibility of ESRB becoming a forum for dialog led by the ECB and the ESRB-leadership, and decision-making could be dominated by the ECB and Banking Union concerns.174 In addition for the first five years of its creation the ESRB is chaired by the President of the ESB.175 As far the EBA was introduced as a central European banking authority, a question arises about the ECB’s role in respect of supervision. The ECB replaces the EBA as a Eurozone banking supervisor.176 The de Larosiere Report envisaged only mediation functions of the ECB when dealing with conflicts between the NCAs,177 whereas according to Article 33(2) Banking 174 Eilis Ferran and Valia Balis (2013) ‘The European Single Supervisory Mechanism’, JCLS 255, 285. 175 Article 5 ESRB-Regulation. 176 Dooley Kristen et al., Developments in Banking and Finance Law, (2012) Review of Banking and Finance Law, 1, 16. The EBA has never be granted with investigating authority and relies entirely on the data its members. 177 De Larosiere Report (n 139), 49, para 170, 5.3. European Banking Union 81 Directive178 this power is granted to the Commission.179 The Commission likewise has the last word when it comes to drafts relating to the binding technical standards of the EBA180 and the RRP. According to the ECB-Regulation, the ECB only takes over the role of the national supervisory authorities within the Eurozone, whereas the harmonization of the banking sector in the EU and the introduction of a uniform supervisory practice will remain under the control of the EBA. Thus, on a European level, the ECB will have the same relationship towards the EBA as towards the national authorities of the non-Eurozone MSs. In terms of hierarchy, the ECB is under the EBA. In order to differentiate the functions of both authorities, a suggestion was raised to leave the operative supervision of credit institutions to the ECB, whereas decisions on the permission, dissolution or restructuring of institutes would be reserved for the EBA.181 A similar idea for the division of banking supervision between the ECB and the ESM.182 178 Currently Article 154(2) of the CRD IV. 179 CRD IV. 180 Article 10(1)(8), Article 15(1)(7) EBA-Regulation or Article 10 to 15 Regulation 1093/2010. 181 Matthias Herdegen ‘Europäische Bankenunion: Wege zu einer einheitlichen Bankenaufsicht’ (2012), WM 1889, 1897. 182 Matthias Herdegen (n 181), 1897ff. The ESM is an international organisation created in accordance with the international law that can assume such functions. If the ESM does not represent the national authorities of the MSs in the EBA, an amendment of secondary EU law will be required. An integration of the functions and powers currently held by the EBA with banking supervision by the ESM will require an amendment of the TFEU. 5. The European Central Bank 82 Democratic Legitimacy Another problem concerns the ECB democratic legitimacy by performing supervisory tasks. The independence of the ECB is guaranteed through Article 130 TFEU. A systematic interpretation of the TFEU permits the independence of the ECB in respect of its monetary functions. The granting of functions and powers that are not to be independently exercised should necessitate an amendment of the TFEU.183 Dispensing with political responsibility and reviews is at odds with the principle of democracy under Article 2(1) TEU. The functioning of the EU is founded on representative democracy according to Article 10(1) TEU. Any form of independent exercise of sovereign rights on the part of independent bodies of the EU requires special justification by the Parliament, the Council or the Commission. In respect of the monetary policy functions of the ECB, such a justification is based upon the independence of CBs and currency stability. However, despite Article 19 SSM-Regulation, there is no such justification for the independence of the ECB, where supervisory functions and the stability of the banking system are concerned.184 Particularly in respect of bank supervision, there is no tension between the interests of stability and the monetary functions of the ECB. Consequently, a transfer of banking supervision to 183 Matthias Herdegen (n 181), 1894. 184 Matthias Herdegen (n 181), 1894. 5.3. European Banking Union 83 the ECB is, in light of its independence, contrary to the principle of democracy.185 Scope of Supervision A further issue arises to the ECB's scope of supervision. Under the new regulation, the supervisory powers of the ECB are restricted in principle to the Eurozone-MSs. Therefore, UK institutions are not included, despite the fact that the head offices of some of the largest institutions are located there. MSs outside of the Eurozone can establish close cooperation between their supervisory authorities and the ECB under Article 7 of the SSM-Regulation. Nevertheless, they do not have as great influence on the decisions in the Supervisory Board as the Eurozone-MSs. Such a divided Supervisory Board would result in system failure to a certain extent. The reason is that in a mainly harmonised financial sector, companies would be subject to differing supervisory mechanisms side-by-side.186 Proposal of the European Commission for a SRM In May 2013, at a meeting of the ministers of finance of the Eurozone it was discussed whether, a new structure supported by the ESM, can take over bank resolution in the Eurozone. In light of the discussion, in July 2013, the Commission proposed a Single Resolution Mechanism (SRM) for the 5.3.2. 185 Cf. Matthias Herdegen (n 181), 1894, see also Hugo Hahn and Ulrich Häde, Währungsrecht, (2nd edn, Beck 2010), 112. 186 Matthias Herdegen (n 181), 1894. 5. The European Central Bank 84 Banking Union. The system has to recapitalize credit institutions, which have difficulties, via a resolution fund. The SRM works in such a way that the ECB, as a bank supervisor, would first signal when a bank has severe financial difficulties and needs to be resolved.187 As a second step, a Single Resolution Board (SRB) consisting of representatives of the ECB, the Commission and the national authorities where the bank has its headquarters would prepare the resolution of the bank. On the basis of the SRB’s recommendation, or on its own initiative, the Commission has to decide whether to place a bank into resolution. Thus, the final say would be with the Commission. The legally binding discretionary decision will be with a democratically legitimate body.188 If the Commission decides to place a bank into resolution, the national resolution authorities would be in charge of the execution the resolution plan. The EU-MSs reached an agreement in April 2014 for the establishment of a SRM. 187 This assessment will be conducted by the ECB Supervisory Board for the banks subject to the SSM and by the national resolution authorities for banks not member of the SSM. See Stefano Micossi, Ginevra Bruzzone and Miriam Carmassi ‘The New European Framework for managing Bank Crises’ (2013) CEPS 21, 29. 188 René Höltsch ‘Brüssel forder Berlin heraus. Die EU-Kommission hat einen Gesetzesvorschlag zur Europäisierung der Bankenabwicklung vorgelegt’ (Brussels 11 July 2013) NZZ. 5.3. European Banking Union 85 Proposal for a Single Rulebook Besides SSM and SRM, the third pillar of the European banking union is the single rulebook implemented in 2014. The book consists of legal rules ensuring security for the bank market and guarantees for the depositors. An important role in the operation of the rulebook is given to the EBA, which will be responsible for specifying technical aspects of the book, the supervisory convergence, and guaranteeing its uniform implementation across the EU. The rulebook includes a core set of standards, applied in a harmonised manner throughout the EU by all supervisors.189 Nevertheless, it raises the question of when and where harmonised EU financial regulation reaches its limit, and if ʻstringencyʼ prevails over ʻefficiencyʼ?190 Assessment The reforms in the European banking sector gave the ECB additional central supervisory function, besides its primary monetary responsibility. Despite the advantages of the reform such as: centralisation of the supervision on union level, institutional integration and unification of the law, there are also some drawbacks. It is questionable, if the ECB equally can combine its primary objective of price stability with its role as a bank supervisor. 5.3.3. 5.6. 189 See Jonathan Faull, Director General, European Commission, Some Legal Challenges in Eilis Ferran (n 174), 25. 190 Eilis Ferran, ʻCrisis-Driven EU Financial Regulatory Reformʼ, (2012) SSRN, 1. 5. The European Central Bank 86 Furthermore, regarding the monetary policy, it is questionable, how well the ECB can protect its primly task: price stability and at the same time supporting deficit problems of some euro-MSs?191 The ECB has to take care and not discriminate the currency interest of other EU- MSs.192 The creation of a super-authority is another controversial issue which leads to a further problem related to the lack of democratic legitimatisation by the ECB supervisory intervention. Controversial was, how far the Article 127(6) TFEU gives the ECB such legitimating. The supervisory role of the ECB is restricted to the Eurozone-MSs. The ESRB is responsible for the macro-prudential supervision of EU-MSs. The Board does not have any decision binding power and can take action through the ECB. In this regard, there is a tension that the supervision in the European banking sector still with different intensity. In comparison with the UK, where the BoE covers the whole financial sector, the ECB macro-prudential supervision comprises the banking sector. The de Larosiere Report, recommended that the supervision at the EU level should be through regulator which encompasses all areas of the financial market, and not to be restricted to the banking sector.193 The authorisation of the ECB as a central supervisor replaced the model of one financial authority. Another issue is that, despite the new attempt for harmonisation in unification, the EU financial system remains 191 As a legal basis for such funding created was the new Article 136(3) TFEU. 192 Article 1 par. 4 SSM-Regulation. 193 De Larosiere Report (n 139) 45, para 153. 5.6. Assessment 87 quite fragmental, with central supervision at supra-national level to some extent, and decentralised supervision through the principle of country of origin and mutual recognition on the MSs level.194 In addition, whereas EU monetary policy is conferred on the supra-national level by the ESCB, responsibility in terms of economic policy remains with the MSs, which causes further imbalance to the EU integrity. 194 Problems with application both principle result in supervisory gaps, double control and overlapping competences, regulatory arbitrage and distortion of competition. 5. The European Central Bank 88

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As a result of the Global Financial Crisis in 2007, the financial and bank supervision in many countries was reformed. Stanyo Dinov investigates the Central Banks of the three advanced financial systems – the UK, the USA and the EU – and the questions related to their supervisory role. All three banks historically and symbolically represent different legal systems, influenced by each other and comparable to one another. They all represent the model of free market economy, whose roots began with the idea of economic liberalism and wellbeing from Adam Smith. The legislators in the UK, the USA and the EU have chosen solutions that are in some ways similar though in other ways different to reform these financial systems. Therefore, on the basis of their historical development, the author presents and compares the post-crisis reforms by these three systems, with the main focus on the CBs’ role as banking supervisor. Existing problems are discussed and some alternative solutions are presented.