Banking supervision in the European Union has failed. The main institutional reforms currently being proposed are also likely to fail. In a new paper, “Empowering the ECB to Supervise Banks: A Choice-Based Approach”, Hertig, Lee & McCahery propose a novel choice-oriented approach. It would allow Member states the option to delegate prudential supervision of their largest banks to the European Central Bank, while still retaining the right to re-assume such a role for themselves at a later date. While the proposal is not perfect, it is superior to both existing supervisory arrangements and the main proposed alternatives, and also the best feasible choice in the current circumstances.
The financial crisis has highlighted a range of flaws in the current structure for supervising banks in the EU. The many Memoranda of Understanding between supervisors supposed to establish regular exchanges of information have not worked. Banking supervisors have understated financial difficulties faced by banks operating in their jurisdictions. Colleges of supervisors set up by Member states to monitor cross-border banks have failed both to coordinate their actions and to cooperate.
EU finance ministers have thus called for improvement in EU financial supervision. Four main solutions have been proposed by various public officials and private parties: i) the establishment of a ‘global’ regulatory body, ii) more formal ’European’ supervisory colleges, iii) the creation of a European System of Financial Regulators similar to the European System of Central Banks; and iv) mandatory supervision by the European Central Bank. All these proposals have significant flaws.
Instead, Hertig, Lee & McCahery propose that Member states be given the option to subject their largest banks to supervision by the ECB, while retaining the right to re-assume this role at a later date. Responsibilities and costs would be allocated by means of an agreement between a Member state and the ECB, that could be tailored to the Member state’s specific circumstances, to the extent permitted by supervisory coherence and equal treatment.
Although this choice-oriented proposal has disadvantages, it is superior to both the status quo and the other reform proposals, and also the best feasible choice in the current circumstances. The proposal will ensure speedy implementation, flexibility, enhanced financial stability and crisis management, and be politically acceptable.
Gerard Hertig is Professor of Law at ETH Zurich. Ruben Lee is CEO of the Oxford Finance Group, a private research and consulting firm. Joe McCahery is Professor of Corporate Governance and Innovation at the University of Amsterdam Faculty of Economics and Business and Professor of Financial Market Regulation at Tilburg University Faculty of Law and TILEC.
The paper will be available soon at: www.ssrn.acle.nl
Empowering the ECB to Supervise Banks: A Choice?Based Approach - Preliminary draft
