The European Central Bank and Banking Supervision: The Regulatory Limits of the Single Supervisory Mechanism

The article analyses the European Central Bank’s supervisory role for banking institutions in the Single Supervisory Mechanism. The article assesses the nature and scope of the ECB’s supervisory powers under the Single Supervisory Mechanism Regulation (SSM Regulation) and questions whether it has adequate institutional capacity and legal competence to carry out effective banking supervision. The international regulatory reforms adopted by the G20 and the Financial Stability Board following the global financial crisis of 2007–2009 have emphasised the importance of macro-prudential supervision that is, monitoring financial stability risks across the financial system, rather than just supervising individual institutions. This has led many countries to adopt macroprudential regulatory reforms that link-up macroprudential supervision and monetary policy with microprudential supervision of individual institutions. This three pillar approach to financial regulation – involving macro-prudential supervision, micro-prudential supervision and monetary policy – has become an important feature in regulatory reforms of many countries and represents a more holistic and complementary approach to financial regulation. The article argues that the ECB under the EU Treaty and SSM Regulation does not have adequate competence and institutional capacity to conduct macroprudential supervision and the Regulation’s separation of ECB monetary policy operations from banking supervision limits its effectiveness as a banking supervisor as well as its conduct of monetary policy. Moreover, the article suggests that the ECB’s strong form of independence as set forth in the EU Treaty (though appropriate for monetary policy) is not suitable for its role as a bank supervisor and therefore amendments to the Treaty may be necessary to enhance its accountability to Council, Parliament and Member States. The article concludes that further institutional and legal changes are necessary for the ECB to have the necessary institutional and legal capacity to be an effective bank supervisor.