The global financial crisis, which started in 2007, revealed a clear need for more macroeconomic analysis and macro- and microeconomic monitoring. In response to this lacuna, central banks across the world have performed a key role in providing the necessary expertise and data analysis to policymakers; in parallel, fundamental institutional reforms have been introduced and new functions identified to improve financial stability for the future.
The quality of the advice that central banks provided during the crisis, and the competence and efficiency they have demonstrated since the onset of the crisis, earned them the respect of governments and citizens alike. High levels of independence and expertise were the key ingredients for the authoritativeness of their advice in difficult times. At least in Europe, the general public’s appreciation of the contribution made by central banks to tackling the consequences of the financial crisis is evidenced by the assignment to them by their legislators of new public tasks. This expression of trust was an acknowledgment of the success of central banks in pursuing their objectives and of the synergies between their classic monetary policy functions and certain other functions, relative to the control of the banking system. Inevitably, the assignment of new tasks entails challenges for the traditional central banking model and, in particular, for central bank independence.
This chapter explores these and other related issues. The first section addresses the interplay between the core objective1 of the European Central Bank (ECB)—maintaining price stability—with financial stability. The second section examines the potential synergies and tensions between the ECB’s tasks.2 Finally, the third section addresses the impact of the ECB’s newly conferred powers3 on its independence.
The ECB and Its Price and Financial Stability Tasks: Price Stability Must Prevail (Even in Crisis Times)
Since the establishment of monetary unions, the Treaty of Maastricht and today the Treaty on the Functioning of the European Union (TFEU), lay down a clear hierarchy for the objectives and tasks conferred on the ECB and the Eurosystem.4 On the one hand, Article 127(1) TFEU provides: “The primary objective of the European System of Central Banks (ESCB) . . . shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.”5
Primary law, which in the EU legal system corresponds to the constitutional level, assigns to the ECB and the Eurosystem, as a clear priority in the performance of their basic tasks, the responsibility for the maintenance of price stability. Secondary objectives are also assigned, but these may be pursued only as long as they do not jeopardize the achievement of the objective of price stability. Financial stability is not explicitly mentioned among the objectives in this article.
On the other hand, since the very beginning,6 the treaty has mentioned the role of the ECB and the Eurosystem in relation to financial stability. Article 127(5) TFEU provides that “the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.”7 Despite the fact that primary law does not define the concept of financial stability, and that financial stability does not fall under the umbrella of the “basic tasks to be carried out through the ESCB,”8 it is undisputed that the treaty assigns a (contributory) financial stability role to the ESCB, requesting it to cooperate with the national or European competent authorities whose primary mandate is to preserve financial stability.9
Given the wording and the systematic nature of the treaty, it is undisputed that the ESCB’s financial stability mandate is only ancillary (and, in that sense, subordinate and instrumental) to its core objective of maintaining price stability.10
Another aspect of the ECB’s contributory role in the field of financial stability lies in its advisory tasks. Article 127(4) TFEU provides that the ECB is to be consulted on draft national and EU legislative provisions, inter alia, on matters of financial stability.11 Through the opinions that it issues on legislation in the area of financial stability, the ECB contributes to the convergence of legislation and thereby to financial stability.
The origin and the position in the treaty of these legal bases show that, even precrisis, the importance of financial stability as a factor favoring the pursuit, by central banks, of their price stability mandate was universally acknowledged, albeit there was no intention to accord preeminence to this task. As is true of any central bank, the ECB has a legitimate interest in ensuring that financial stability is preserved, because financial stability is instrumental to, and can foster, price stabili-ty.12 In particular, whereas the pursuit of price stability does not automatically lead to the achievement of financial stability (in the sense that while prudent implementation of monetary policy through the management of interest rates may alleviate tensions in the financial system, it cannot guarantee financial stability), there is a consensus that financial stability can be achieved more readily under conditions of price stability. Furthermore, it is arguable that financial stability is a necessary, if insufficient, condition for the achievement of some of the ESCB’s other secondary tasks, as well as of an efficient allocation of resources. It follows that financial stability is valuable in helping a central bank foster price stability, as the orderly functioning of the monetary policy transmission mechanism can be better ensured in a financially stable environment. Moreover, even if there is no automatic two-way relationship between them, price stability and financial stability tend, in the long term, to mutually reinforce each other (Issing 2003).
At the same time, there is also a consensus that, in a crisis situation, conflicting measures might be needed to achieve, respectively, price stability and financial stability. To address this potential conflict of interest, the treaty clearly establishes price stability as the ECB’s primary objective, whereas the bank’s role in fostering financial stability is a contributory and ancillary objective that must take second place in the event of conflict with the objective of price stability.
The tools that the ECB uses to contribute to the preservation of financial stability can be summarized as follows.
First, the ECB monitors financial system developments and publishes periodically in this field. In particular, it publishes its Financial Stability Review, the aim of which is to inform not only experts but also the wider public of potential risks in the financial system (ECB 2019).
The ECB’s advisory tasks in relation to draft laws concerning the financial system can also contribute to preserving financial stability. As already mentioned, national and EU legislators are under a primary law obligation to consult the ECB on draft legislation falling within its fields of competence, including draft financial sector legislation touching on financial stability.13 Through its opinions, the ECB can steer the legislative process in order to foster financial stability.14
Another avenue is the operation of TARGET215 and T2S16 and the exercise of oversight over financial market infrastructures. Whereas the Eurosystem’s main objective in operating these infrastructures is the exercise of monetary policy tasks, this also contributes to the preservation of financial stability. Unless they are legally and financially sound, these infrastructures could serve as channels for the propagation of systemic risks throughout the financial system.17
Furthermore, the Eurosystem also contributes to financial stability by participating in, and providing its expertise to, international for a, such as the IMF, the Financial Stability Board, the Bank for International Settlements, the European Systemic Risk Board (ESRB), and the European Banking Authority.
Finally, the ECB is involved in the provision by the national central banks of emergency liquidity assistance to domestic banks, in support of national financial stability.18 It is for the bank’s Governing Council to determine, on the basis of Article 14.4 of the statute of the ESCB, whether such assistance interferes with the monetary policy or other tasks of the Eurosystem (for instance, because its provision is not subject to limits and/or where its recipients appear unlikely to regain market access in the short to medium term).
Enhanced Focus in the European Union on Financial Stability
Awareness of the importance of financial stability has greatly increased since the start of the financial crisis in 2007, an event that demonstrated that even long periods of price stability, achieved in pursuit of a prudent and consistent monetary policy, are not sufficient to prevent financial instability.
In response to the financial crisis, the European Commission mandated a group chaired by Jacques de Larosière, a former IMF managing director, to make proposals to strengthen supervision within the European Union and to improve the European Union’s financial architecture. The resulting de Larosière Report identified several causes of the financial crisis, namely the lack of adequate macroprudential supervision, the lack of consistency in the application of supervisory powers across member-states, and the absence of adequate means for supervisors to take common decisions on shortcomings of common interest (The High-Level Group on Financial Supervision in the EU 2009).
To address these problems, the de Larosière Report recommended an important role in macroprudential supervision for the ECB, which, in the chairman’s view, was uniquely placed to perform macroprudential tasks, the geographical scope of which would cover the whole of the European Union.19 At the same time, the de Larosière Report opposed the idea of the ECB being empowered to carry out microprudential supervision tasks. The report gave two reasons. On the one hand, the ECB’s competences were limited by the treaties (as they excluded the supervision of insurance undertakings). On the other hand, implementing an ECB-centric model of microprudential supervision might prove too complex and prone to potential conflicts of interest with monetary policy.
At the same time, the de Larosière Report did not exclude the possibility of granting the ECB a leading oversight and coordination function in the microprudential supervision of cross-border banks, with a binding mediation role for the national competent authorities (NCAs) of member-states. This would comprise, first, the definition of supervisory practices; second, the promotion of supervisory convergence; and third, the assumption of regulatory responsibility for issues relevant to procyclicality, leverage, risk concentration, and liquidity mismatches. For microprudential supervision, the de Larosière Report proposed the establishment of the European System of Financial Supervision, included the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities Markets Authority.
The ESRB is discussed in more detail in the second section of this chapter. Not long after its establishment, in 2012 the European Commission and the European Council pushed for the establishment of a Single Supervisory Mechanism (SSM), with the ECB at its center despite the recommendations of the de Larosière group,20 and of a Single Resolution Mechanism (SRM).
Synergies and Tensions between the ECB’s Functions
There is a clear link between macro- and microprudential policy, both of which seek to achieve financial stability. In this regard, paragraph 148 of the de Larosière Report states that “[m]acroprudential supervision cannot be meaningful unless it can somehow impact on supervision at the micro-level; whilst microprudential supervision cannot effectively safeguard financial stability without adequately taking account of macro-level developments.”
Precrisis, the prevailing wisdom had been that if microprudential supervision could succeed in averting the failure of individual institutions, the cumulative effect would be a stable financial system. Indeed, supervisors had focused mostly on the health of individual financial institutions and paid much less attention to the stability of the financial system as a whole. The weak point of their reasoning was the failure to recognize that the system as a whole could be vulnerable to shocks liable to negatively affect financial stability, and that there could be vulnerabilities which, while negligible for some individual institutions, could have a substantial negative impact when viewed from a systemwide perspective (Athanassiou 2014).
The close link between macro- and microprudential policies became also visible in the public discussion on the “macroprudential toolkit.” Whereas the “capital requirements directive,” or CRD IV,21 and the “capital requirements regulation,” or CRR,22 provide for a limited number of dedicated macroprudential tools (such as the countercyclical capital buffer, the systemic risk buffer, and national competence to take stricter measures aimed at addressing macroprudential or systemic risks), most of the tools envisaged for macroprudential supervision derive from the microprudential toolkit. It could therefore be argued that macro-prudential supervision is largely dependent on the enforcement action taken by microprudential supervisors. For this reason, where the mandate of a central bank encompasses microprudential supervisory competences, its overall role in ensuring financial stability increases quite markedly, while it becomes more difficult to mark a sharp borderline between tools and competences.23
The ECB and Its Macroprudential Supervisory Role
The years since the crisis have seen greater emphasis being placed on the involvement of central banks in macroprudential supervision as a precondition for the achievement of financial stability.
The establishment of the ESRB may be regarded as one of the main indicators of this new emphasis on central bank involvement in macroprudential supervision postcrisis. The general mandate of the ESRB is to monitor financial sector developments throughout the European Union24 and to detect potential risks capable of affecting the financial system as a whole.25 Whenever such risks are detected, the ESRB may issue recommendations and warnings. However, the ESRB has no enforcement powers, and neither the member-states nor the EU bodies are under an obligation to act in accordance with its recommendations and warnings. The ECB plays a central role in the ESRB: first, the task of providing the analytical, statistical, logistical, and administrative support necessary for the fulfilment of the ESRB’s tasks was conferred on the ECB; and second, the ESRB is chaired by the president of the ECB.26 The ESRB is governed by a general board, in which the president and the vice president of the ECB have voting rights.
Concrete but limited macroprudential powers were granted to the ECB only later on, with the adoption of the SSM Regulation in 2013.27 Article 5 of the SSM Regulation (discussed in greater detail later) deserves particular mention here as it is of direct relevance to the assessment of the ECB’s competences in macroprudential supervision. It provides that the authority to apply macroprudential tools remains vested with the national supervisory authorities, rather than the ECB. However, where necessary, the ECB is granted the authority to apply higher requirements for capital buffers to credit institutions and to impose more stringent measures upon them, subject to close coordination with national authorities. The ECB’s macroprudential supervisory competences under Article 5 appear to go beyond those that the ESRB has assumed (as mentioned previously, the ESRB lacks the authority to make decisions that are binding on their addressees). Whereas the Article 5 competences are anchored in secondary law, it remains the case that their attribution to the ECB considerably reinforces the ECB’s mandate in the field of macroprudential supervision (and its role in financial stability). At the same time, because it is only a competence to “reinforce” a national measure, Article 5 confirms the “contributory nature” of the ECB’s tasks in the macroprudential field.
The ECB and Its Microprudential Supervisory Powers
The financial crisis served as the catalyst for the activation of Article 127(6) of the EU treaty and for the adoption of the SSM Regulation, through which extensive microprudential supervisory powers were conferred on the ECB. By clearly demonstrating that fragmented microprudential supervision was liable to pose risks for the common currency and the internal market, the financial crisis paved the way for a transfer of prudential supervisory powers over credit institutions from national supervisors to the ECB, notwithstanding the de Larosière group’s recommendations to the contrary.28
The four essential aspects of the ECB’s involvement in microprudential supervision are summarized in the following.
First, whereas financial stability is not limited to the banking sector, the ECB’s supervision only covers credit institutions, as defined in Article 4(1)(1) of the CRR, and excludes insurance companies (pursuant to Article 127(6) TFEU), investment services firms (which are regulated by the Markets in Financial Instruments Directive),29, 30 and the various other institutions listed in Article 2(5) of the CRD IV on a country-by-country basis. Significantly, the SSM Regulation and the accompanying SSM Framework Regulation31 cover, as “supervised entities,” individual credit institutions established in the participating member-states and their prudentially consolidated parent undertakings, including financial holding companies and mixed financial holding companies (as part of a “supervised group”). Under Article 41 of the SSM Framework Regulation, branches established in participating member-states by credit institutions established in nonparticipating member-states also qualify as supervised entities, with all such branches opened in the same jurisdiction being treated as a single supervised entity.
Second, the ECB’s supervisory mandate covers the euro area member-states only, subject to the possibility for member-states whose currency is not the euro to enter into a “close cooperation agreement” with the SSM to be established by a decision adopted by the ECB.32 Close cooperation is a voluntary (opt-in) regime for non-euro area member-states. It allows all banks in the relevant non-euro area member-state to become part of the SSM, subject to the obligation to fully cooperate in the sharing of information with the SSM and to them being bound by all ECB regulations and decisions in supervisory matters.33 As of August 2019, two member-states have requested the ECB to enter into a close cooperation agreement.34
Third, whereas the ECB oversees all significant and less-significant banks in the participating member-states, direct supervision only covers significant credit institutions (typically, systemically relevant institutions at the national level). The significance of credit institutions is determined on the basis of certain criteria relating, inter alia, to the total value of their assets, the ratio of their assets to national GDP, and their relevance for the domestic economy.35 The responsibility for the supervision of less-significant credit institutions is assigned by the SSM Regulation to the national competent authorities,36,37 whereas the ECB is in charge of ensuring the effective and consistent functioning of the SSM.38 At the same time, the ECB is exclusively competent to authorize and to withdraw authorization in respect of all credit institutions within the euro area, as well as to assess all qualifying holdings.
Fourth, the ECB exercises in the euro area (and in the member-states that have entered close cooperation) the supervisory powers set out in the CRD IV and the CRR for national authorities and applies national implementing law.39 The application of national law by the ECB in the exercise of its microprudential supervisory powers and in the performance of its tasks (also on account of the existence, in the CRD IV, of options and discretions for the national authorities) is unprecedented in the institutional history of the European Union (Di Bucci 2018; Kornezov 2016).
Could the ECB’s New Functions Jeopardize Its Independence?
One of the fundamental reasons why micro- and macroprudential supervisory tasks were assigned to the ECB by the EU legislation was its expertise in macroeconomic and financial stability issues. Because the ECB is the central bank of the euro area, it has at its disposal much of the information necessary to assess matters that are relevant to financial stability and its preservation. At the same time, the involvement in financial sector supervision of a central bank, which also has monetary policy and price stability mandates, clearly offers certain synergies. For instance, subject to professional secrecy and confidentiality safeguards, the flow of necessary information within a single institution avoids double reporting and is generally more straightforward compared with its exchange across different institutions. Furthermore, the macroprudential function is bound to benefit from the central bank’s involvement in banking supervision, as the central bank can draw on its macroeconomic expertise when supervising credit institutions and make optimal use of its understanding of the particularities of individual institutions in defining the parameters of its monetary policy.
On the other hand, banking supervision and monetary policy can be perceived as pursuing conflicting objectives. Therefore, it is essential that there is clarity as to whether and when supervisory decisions may be influenced by monetary policy concerns and vice versa, even if it is not entirely clear that full separation between them is truly desirable.40
The exercise by the same central bank of monetary policy and supervisory policy functions entails two main sources of tension: conflict between the objectives of preserving price stability and of ensuring the soundness of credit institutions (and, through them, financial stability); and tension between the different intensities of democratic accountability specific to each of these functions. Linked to the latter is the question of whether, taking a holistic view, entrusting a central bank with these two different tasks has the potential to affect negatively the very high level of independence that the central bank enjoys.
It is precisely to guard against the risks arising from these tensions that the ECB is required to uphold a principle of strict separation between its supervisory and its monetary policy tasks (see the following). One of the challenges for the ECB is how to maintain the synergies and advantages of combining monetary policy with banking supervision under the same roof, while at the same time fully respecting the principle of separation. Another challenge is to ensure that the full measure of independence needed in order to conduct monetary policy is not diluted on account of the perception that a “lighter” version of independence is acceptable in the context of the exercise of supervisory functions (Zilioli and Riso 2018).
The principle of separation and its practical implementation in the context of the SSM is examined in the following.
The Separation Principle41
In its recitals, the SSM Regulation explicitly refers to the potential conflict of interest between maintaining price stability and the objectives of supervision (which are to protect the safety and soundness of credit institutions and the stability of the financial system as a whole).42
The obligation for the ECB to keep its supervisory tasks separate from its monetary policy tasks and to prevent them from interfering with each other is clearly stated in Article 25 of the SSM Regulation. To ensure sufficient separation between the ECB’s monetary and supervisory roles and lessen the role of the Governing Council in the adoption of supervisory decisions, the SSM Regulation provides for the establishment of a separate preparatory body, the Supervisory Board, and for a nonobjection (or positive silence) procedure: the draft decisions prepared by the Supervisory Board are deemed to have been approved unless the Governing Council explicitly rejects them within a defined (short) period, subject to the provision of reasons.43 To further ensure functional separation in respect of decision-making, the Governing Council is to hold separate meetings (with separate agendas) for monetary and supervisory decisions.44 Furthermore, this functional separation extends to, and is reinforced by, the separation of staff involved in the different tasks and their reporting lines. The establishment of the Mediation Panel under Article 25(5) of the SSM Regulation is yet another means to ensure the separation of monetary policy from banking supervision, thereby guaranteeing the ECB’s independence. The Mediation Panel is to consider appeals by member-state national competent authorities against rejections by the Governing Council of decisions drafted by the Supervisory Board.45 The Mediation Panel will be called upon to adopt an opinion when the NCA of a participating member-state expresses a difference of views regarding the objections of the Governing Council of the ECB to a draft decision of the Supervisory Board. Opinions adopted by the Mediation Panel are not, however, binding on the Governing Council, which remains the supreme decision-making body under the SSM. Moreover, the SSM Regulation emphasizes the principle of independence, not only for the ECB itself but also for the NCAs, and even more for the members of the Supervisory Board and of the Steering Committee.46
Concerning the higher level of the democratic accountability required for the exercise of supervisory tasks, Recital 55 of the SSM Regulation states: “The con-ferral of supervisory tasks implies a significant responsibility for the ECB to safeguard financial stability in the Union, and to use its supervisory powers in the most effective and proportionate way. Any shift of supervisory powers from the Member State to the Union level should be balanced by appropriate transparency and accountability requirements.” In this regard, as an expression of proportionality (Zilioli 2019), the SSM Regulation provides that the ECB is accountable for its supervisory tasks to the European Parliament and to the European Council as democratically legitimized institutions, including regular reporting, and responding to questions by the European Parliament in accordance with its Rules of Procedure, and by the Eurogroup in accordance with its procedures. Furthermore, the ECB is required to forward the same reports to the national parliaments of the participating member-states, which may also invite the chair or a representative of the Supervisory Board to participate in an exchange of views. This level of accountability is higher than that required for the exercise of the ECB’s monetary policy competences. Nevertheless, because the two competences are exercised under the separation principle, the aforementioned accountability requirements do not affect the ECB’s independence in the exercise of its supervisory tasks.47 Accountability does not mean to take instructions, it’s rather to “rendre compte,” explain and justify, decisions independently taken.
Conclusion
This chapter describes the new roles and functions conferred upon the ECB since the onset of the global financial crisis. It highlights the fact that these new functions have placed the ECB in a delicate position, with the pursuit of potentially conflicting objectives, raising the concern that its efficient operation could be impeded and its independence jeopardized.
Despite the inevitable tensions among these roles and functions, and in particular between the monetary policy and the supervisory functions, the ECB has proven able to reconcile them. This success is in large part due to three factors: a clear hierarchy of objectives provided by the treaty drafters—despite the enlargement of the ECB’s mandate, price stability continues to be its primary objective, with the achievement of financial stability remaining an ancillary or instrumental task; the introduction of the principle of separation between the monetary policy and supervisory functions; and the constitutional protection of the ECB’s independence as an institution, as enshrined in the treaty and the statute of the ESCB.
It is possible to conclude, therefore, that through these safeguards, the ECB has been able to fulfill the new functions assigned to it and to combine its monetary policy with its supervisory and financial stability tasks. In doing so, it has reaped the benefit of the synergies between these competences without compromising its independence, which is an essential component of monetary policy decision-making.
References
Athanassiou, Phoebus. 2014. “The Evolving Role of Central Banks in Banking Supervision.” Finanzmarktregulierung in der Krise, 71–81.
Blanchard, Olivier J., David Romer, A. Michael Spence, and Joseph E. Stiglitz (eds.). 2012. In the Wake of the Crisis: Leading Economists Reassess Economic Policy. Cambridge, MA: MIT Press.
Cassola, Nuno, Christoffer Kok, and Francesco Paolo Mongelli. 2019. “After the Crisis: Synergies between the Three ECB’s Responsibilities.” ECB Occasional Paper.
Di Bucci, Vittorio. 2018. “Quelques questions concernant le contrôle juridictionnel sur le mécanisme de surveillance unique, in Liber amicorum Antonio Tizzano - De la Cour CECA à la Cour de l’Union: le long parcours de la justice européenne, Torino (Giappichelli).” http://europa.eu/pub/pdf/other/escblegalconference2016_201702.en.pdf.
European Central Bank (ECB). 2019. Financial Stability Review. https://www.ecb.europa.eu/pub/pdf/fsr/ecb.fsr201905~266e856634.en.pdf?613f7cd049b8715ed75ba22c21fab16f.
High-Level Group on Financial Supervision in the EU. 2009. https://ec.europa.eu/economy_finance/publications/pages/publication14527_en.pdf.
Issing, Otmar. 2003. “Monetary and Financial Stability: Is There a Trade-off?” Paper presented at the ECB Conference on Monetary Stability, Financial Stability and the Business Cycle at the Bank for International Settlements, Basel, March 29. http://www.ecb.europa.eu/press/key/date/2003/html/sp030329.en.html.
Kornezov, Alexander. 2016. “The Application of National Law by the ECB—A Maze of (Un) answered Questions.” ESCB Legal Conference 2016. https://www.ecb.europa.eu/pub/pdf/other/escblegalconference2016_201702.en.pdf.
Van Rompuy Report. 2012. “Towards a Genuine Economic and Monetary Union.” Brussels.
Zilioli, Chiara. 2016. “The Independence of the European Central Bank and its New Banking Supervisory Competences.” In Independence and Legitimacy in the Institutional System of the European Union, edited by Dominique Ritleng, 125-79. New York: Oxford University Press.
Zilioli, Chiara. 2019. “Proportionality as the Organizing Principle of European Banking Regulation.” https://ssrn.com/abstract=3415468.
Zilioli, Chiara, and Antonio Riso. 2018. “New Tasks and Challenges to Central Bank Independence: The ECB and the Eurosystem Experience.” In Research Handbook on Central Banking, edited by Conti-Brown Lastra. Cheltenham: Edward Elgar.
Chiara Zilioli is Director General of Legal Services at the European Central Bank (ECB) and Professor of Law at Goethe University, Frankfurt. The views expressed here are purely personal and do not necessarily reflect the position of the ECB. The author acknowledges the help of Andra Florian in reviewing an earlier draft of this chapter.
Article 127.1 Treaty on the Functioning of the European Union (TFEU).
Article 127.2 TFEU.
Council Regulation (EU) No. 1024/2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013), p. 63 (SSM Regulation).
The Eurosystem is composed of the ECB and the national central banks of the EU member-states that have adopted the euro.
Article 2 of the Statute of the ESCB uses identical wording when stating the ESCB’s objectives.
In the Maastricht Treaty this article was numbered 105(5); the numbering has changed but its contents have not been revised.
Article 3.3 of the Statute of the ESCB uses identical wording when enumerating the ESCB tasks.
Article 3.1 of the Statute of the ESCB.
Financial stability still falls primarily within the responsibility of other competent authorities in the European Union and in the member-states.
Article 127(1) TFEU.
Article 2 of Council Decision 98/415/EC of June 29, 1998, on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42) provides: “The authorities of the Member States shall consult the ECB on any draft legislative provision within its field of competence pursuant to the Treaty and in particular on . . . rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets.”
Indeed, some scholars have expressed the view that the preservation of financial stability is more important for social welfare than the preservation of price stability (Blanchard and others 2012, 35).
The ECB may also issue “own initiative opinions” on topics in its fields of competence.
This is the case even though ECB opinions are not legally binding, because national legislators have generally agreed to amend their legislative proposals rather than adopting legislation that conflicts with the ECB’s views.
Eurosystem oversight covers different types of financial market infrastructures, instruments, and entities: (1) payment systems (systemically important payment systems and non-systemically important payment systems); (2) securities settlement systems and central counterparties; (3) payment instruments; and (4) other infrastructures and service providers. More information is on the ECB’s website at http://www.ecb.europa.eu.
Emergency liquidity assistance is, in essence, exceptional liquidity support (of a lender of last resort type) extended by a national central bank to temporarily illiquid but solvent credit institutions. The provision of such assistance is not regulated either in the treaties or in the statute of the ESCB.
Lying at the heart of the ESCB, the ECB is uniquely placed to collect the necessary information and data from member-states.
See the report by the president of the European Council, Herman van Rompuy, “Towards a Genuine Economic and Monetary Union,” Brussels (2012); and the Communication from the Commission, “A Blueprint for a Deep and Genuine Economic and Monetary Union,” COM/2012/0777 final.
Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).
Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).
This also explains why many member-states have involved their national central banks in banking supervision.
As explained in the following, the ECB’s mandate in respect of microprudential supervision has a more limited geographical scope, being restricted to member-states participating in the SSM.
Article 3 of Regulation 1092/2010 on European Union macroprudential oversight of the financial system and establishing an ESRB (OJ L 331, 15.12.2010, p. 1): “The ESRB shall be responsible for the macroprudential oversight of the financial system within the Union in order to contribute to the prevention or mitigation of systemic risks to financial stability in the Union that arise from developments within the financial system and taking into account macroeconomic developments, so as to avoid periods of widespread financial distress.”
An amendment to the ESRB regulation was agreed in April 2019 (Letter from the Chair of COREPER II to the Chair of the ECON Committee, 1 April 2019, confirming agreement on the text of the ESFS review http://www.europarl.europa.eu/RegData/commissions/econ/lcag/2019/04-01/ECON_LA(2019)003029_EN.pdf). Formal adoption and publication is expected in October or November 2019. Under the amendment, the ECB president will become the permanent chair of the ESRB, while originally this was envisaged for a period of five years.
SSM Regulation, see footnote 3.
Even prior to the entry into force of the SSM Regulation, which directly conferred on the ECB the powers to perform prudential supervision, the ECB was already equipped with legal tools to ensure the proper implementation of the newly attributed tasks. These tools included the competence to issue a regulation pertaining to prudential supervision and the competence to take the decisions necessary for carrying out the tasks entrusted to the ESCB under the treaties and under the statute of the ESCB, both of which are provided for under Article 132(1) TFEU.
Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014), p. 349.
However, the draft “Regulation (EU) 2019/… of the European Parliament and of the Council on the prudential requirements of investment firms and amending Regulations (EU) No 575/2013, (EU) No 600/2014 and (EU) No 1093/2010,” adopted on a preliminary basis by the EU Parliament (see http://www.europarl.europa.eu/RegData/commissions/econ/lcag/2019/03-20/ECON_LA(2019)002699_EN.pdf) to be formally adopted and published in October or November 2019, amends (at its article Article 63.3) the definition of “credit institution” under Article 4 of Regulation (EU) No 575/2013 (the CRR), bringing certain investment firms within the supervision of the ECB.
Regulation (EU) No. 468/2014 of the ECB establishing the framework for cooperation within the SSM between the ECB and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17) (OJ L 141, 14.5.2014), p. 1.
See Article 7 of the SSM Regulation and Decision 2014/434/EU of the ECB on the close cooperation with the national competent authorities of participating member-states whose currency is not the euro (ECB/2014/5) (OJ L 198, 5.7.2014), p. 7.
One significant difference between supervision in a euro area and a non-euro area member-state is that the ECB is not allowed to adopt legally binding legal acts that are directly applicable to (significant) banks in the relevant non-euro area member-state. In this situation, the Supervisory Board of the ECB is to address its instructions to the national competent authority, which will then need to ensure that the supervised bank applies those decisions by virtue of binding legal acts they adopt (see the second subparagraph of Article 7(1) of the SSM Regulation).
They are Bulgaria (https://seenews.com/news/bulgaria-sends-request-for-close-cooperation-on-banking-supervision-with-ecb-628829) and Croatia (https://seenews.com/news/croatia-asks-to-enter-close-cooperation-with-ecb-on-road-to-euro-area-655626).
See the second subparagraph of Article 6(4) of the SSM Regulation.
National authorities have a mandate that is restricted to their jurisdiction and may have different mandates and powers regarding banks, investment firms, and insurance undertakings, as well as with regard to macroprudential oversight and supervision.
It is interesting that even if an institution or group fulfills the criteria for classification as significant, Article 6(4) of the SSM Regulation provides that it may, owing to “particular circumstances,” be considered as less significant. Under Article 70 of the SSM Framework Regulation, “particular circumstances” exist “where there are specific and factual circumstances that make the classification of a supervised entity as significant inappropriate, taking into account the SSM’s objectives and, in particular, the need to ensure the consistent application of high supervisory standards.” Under Article 71 of the SSM Framework Regulation, the existence of such circumstances is to be assessed on a case-by-case basis. Finally, under Article 72 of the Framework Regulation, the ECB shall review, at least once a year, whether those “particular circumstances” continue to apply, and, if they do not, adopt and notify its decision to the relevant institution.
See Article 6 of the SSM Regulation; see footnote 4. See also the ECJ judgment in the L-Bank case, stating that the ECB has the exclusive competence on the supervision of the banks, while the national competent authorities cooperate with it (http://curia.europa.eu/juris/document/document.jsf?text=&docid=213858&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=8666721), paragraphs 38 and 41.
Article 4.3 of the SSM Regulation; see footnote 4.
Indeed, one of the main weaknesses of the ECB’s monetary policy during the financial crisis was the lack of detailed information on the financial health of the banking system. It is also interesting to note the trend resulting from the financial crisis of restoring microprudential supervisory tasks to central banks: see, for example, the developments that took place in the United Kingdom following the financial crisis.
Article 25 of the SSM Regulation.
Recital 65 of the SSM Regulation states: “The ECB is responsible for carrying out monetary policy functions with a view to maintaining price stability in accordance with Article 127(1) TFEU. The exercise of supervisory tasks has the objective to protect the safety and soundness of credit institutions and the stability of the financial system. They should therefore be carried out in full separation, in order to avoid conflicts of interests and to ensure that each function is exercised in accordance with the applicable objectives.”
The positive silence procedure also seeks to address non-euro area member-states’ concerns about their lack of representation on the Governing Council.
The ECB has also adopted Decision 2014/723/EU on the implementation of separation between the monetary policy and supervision functions of the ECB (ECB/2014/39) (OJ L 300, 18.10.2014), p. 57.
The Mediation Panel comprises one member per participating member-state, chosen from among the members of the Governing Council of the ECB and the Supervisory Board. The vice-chair of the Supervisory Board will initially chair the meetings of the Mediation Panel, but without having voting rights.
Article 19 of the SSM Regulation.
For an extensive analysis of the independence and accountability of the ECB when performing its monetary policy and its supervisory tasks, see Zilioli 2016.