Institutional aspects of the new rules on economic governance and the role of the eurogroup

Mr President, Honorable members of the Parliament, It is a pleasure for me to accept your invitation and to have the opportunity to debate the following hot issue in the European agenda: whether or not the structure of the Economic Union that we are building is compliant with the principle of multilateral governance and, to some extent, of democratic accountability . The Economic Union is undergoing dramatic changes due to the recent financial crisis; in particular, the answer to the instability of the financial markets and to the credit rationing operated by banks is reflected in the new framework of the Banking Union and in the forthcoming Capital Markets Union. It is of utmost importance to assess whether this new step towards economic integration is consistent with the criteria of multilateral governance. My intervention will focus specifically on the Banking Union, in force since November 2014, but the analysis could apply, to a large extent, also to the Capital Markets Union process. I will firstly recall the rationality behind the structure of the Banking Union and the logical link with the principle of multilateral governance; I will subsequently address the issue of how we can establish the degree of democracy of this new architecture; I will then identify some possible impasse and critical areas, ending up my intervention with final conclusions and some strategic suggestions for policy makers and supervisors. Nature and rationality of the Banking Union and the link with the principle of multilateral governance The goal of the recent revolution in the governance of the EU Banking market stems from the need of ensuring a more stable and efficient banking system. This objective has been achieved by finalizing the revision of prudential regulation rules applied to EU banks – Basel III and CRD4 Directive – and by introducing a super-national governance of banking supervision in Europe. The new picture is based on two dichotomic principles: the need of adopting standardized rules on one hand, and, on the other hand, the need to adapt these rules to different intermediaries across Europe, in order to ensure a level playing field among banks and national banking systems. Therein lies the issue of multitier governance: the criteria “one size fits all” can only be applied thanks to a mediation process which is strictly connected with a democratic involvement of all member States in the supervisory decisions. When standardized rules have to be applied to different entities, who takes the decision is also the one in charge of fine tuning the rules through a mediation process. For this reason it becomes fundamental that the decisions taken come from a democratic and transparent mediation process. How to assess the degree of multilateralism of the SSM governance Banking Union is an interesting test for the principles of multilateral governance and democratic accountability. The Banking Union is based on a building block approach: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), the Deposit Guarantee Scheme. The following analysis is focused on the functioning of the SSM, which is already in force and is by now producing concrete effects on the European banking market. As stated in the Resolution of the EU Parliament of 2013, “…Banking Union must be based on an enforced and diversified governance …” . It is then worth exploring whether the governance provided by the European legislator ensures a sufficient degree of multilateralism within the decision making process. The governance of the authorities in charge is likely to affect the democratic degree of this mediation process. The answer to our question is in the governance of the new SSM and in the governance of the European System of Financial Supervision (ESFS) as a whole. In the light of the above, two levels of analysis matter: a) the governance affecting the interaction between the SSM and the European Supervisory Authorities (ESAs) – in particular the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB); b) the governance affecting the interaction – within the SSM – between the Joint Supervisory Teams (JST), the National Competent Authorities (NCA) and the Supervisory Board (SB). SSM vs ESRB To understand how the SSM governance works in terms of multilateralism within the ESFS, let’s have a closer look on the example of the anticyclical capital buffer that banks have to retain to protect themselves from macroeconomic risks: NCA are in charge of establishing the amount of capital buffer autonomously according to ESRB indication; the ECB can ask for an additional buffer if it considers the macroeconomic risk higher than what estimated by NCA; the ESRB has to ensure monitoring and harmonization between Member States. Theoretically, a democratic decision process, with different stakeholders involved. But, looking at the governance of ESRB, a certain degree of concentration of the decision making in the hands of the ECB is likely to be observed, due to a strong presence of ECB representatives in the ESRB: the President of the ECB holds the position of Chair of the ESRB, the First Vice-Chair of the ESRB is elected from among the members of the General Council of the ECB; President and Vice-President of the ECB are members of the General Board of the ESRB; Vice-President of the ECB and four members of the General Council of the ECB are part of the Steering Committee of the ESRB. In addition, there may be the case that the President of the Scientific Advisory sitting in the General Board of the ESRB is an ECB member of the Advisory Technical Committee of the ESRB. JST vs NCA and SB To understand possible criticism of the multitier governance in the mediation process of the SSM it is useful to look at the structure of the JST and at the functioning of the decision making process. Any JST is composed by a number of supervisors, both representing the ECB and the NCA, in charge of supervising a single bank of a systemic relevance; the composition of the JST is established by the ECB and it is likely to affect the decision making at two levels: on a day-to-day basis, the decisions taken by the JST are immediately effective. Long term and more structural decisions have to be valued by the Supervisory Board which operates with a Steering Committee composed by ten members among ECB and NCA representatives. It is clear that if NCA are strongly represented both in the JST and in the Steering Committee, even if the Steering Committee does not have any formal decision making power, there is a concrete risk that the decision making could be the result of a negotiation between ECB and these few NCA. Multilateral Governance and Cost of Financial Supervision Finally, let me address an issue which only apparently is distant from the analyzed topic: the cost of financial supervision. The emerging idea of implementing a funding model of the ESAa and the SSM costs based on the bail-in principle is likely to affect the multilateral governance in the medium term. The costs of supervising the EU banking system can be totally covered by the industry only if the SSM is likely to minimize double costs and overlapping of functions among the different authorities. If this is not the case, additional and overhead costs will be translated by banks to customers; moreover, this phenomenon will create disparity among clients of different banks and banking system of different Member States, according to the different risk stored in the banks balance sheet. An industry-based funding model is likely to be combined with a process of concentration of the competent Authorities, affecting the governance of the overall ESFS. Conclusions The road towards an efficient Banking Union and Capital Markets Union is not only useful but also unavoidable. Nevertheless, it is evident that the new system of financial supervision is still dealing with it a certain degree of unsolved issues: the standardized regulation, overlapping functions among the different authorities, the governance and the interactions among them, the costs of the entire system are likely to affect the level playing field among banks and financial intermediaries. It is in the hand of policy makers and supervisors to make it suitable to all EU Members States in a timely manner. Policy makers have to rethink the rationality behind regulation and asses to what extent standardized rules can fit all: the first appropriate mediation action is likely to be a revision of the regulatory framework. At a second level, policy makers have to monitor with great attention, since the very beginning, the functioning of the new SSM in order to identify critical areas and asses if a clearer and more rational governance of the decision making is needed. For this purpose, democratic accountability mechanisms assume an essential function and have to be used and reinforced. Finally, supervisors have to take advantage of all their financial and cultural sensitivity to ensure a fair mediation process on a daily basis; in the short period, this is the only way to minimize potential distortions: until we won’t share a common culture, it will be the culture of any single supervisor to determine the success of the new architecture of the EU banking market.