From Fragmentation to Financial Integration in Europe
Chapter

Chapter 10. Legal Underpinnings of an EU Banking Union

Author(s):
Charles Enoch, Luc Everaert, Thierry Tressel, and Jianping Zhou
Published Date:
December 2013
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Author(s)
Barend Jansen, Alessandro Gullo and Nikita Aggarwal 

As we have discussed in earlier chapters of this book, fast and sustained progress toward a banking union is needed to anchor financial stability in the euro area.1 The journey toward a banking union will be incremental and measures that have been taken to respond to the crisis in the short to medium term should be welcomed: crucial progress has been made to strengthen the framework for financial oversight. This chapter has a forward-looking approach, focusing, beyond the crisis and as the banking union will evolve over time, on the legal architecture that will be needed to support it.2

Crucial progress has been made to restore financial stability in the European Union (EU), including through establishing European Supervisory Authorities, setting up firewall mechanisms such as the European Stability Mechanism (ESM), and reaching an agreement in the EU Council to create a single supervisory mechanism (SSM), as well as on the EU bank recovery and resolution directive (BRRD). Other important contributions have been made, such as the EU Commission proposal for a Single Resolution Mechanism (SRM), that is envisaged to be established shortly after the SSM enters into force. This chapter seeks to look beyond the crisis and the necessary reforms that are being undertaken, by focusing on the legal underpinnings that would be needed in the longer term to support financial stability in the euro area and in those non-euro area members that would opt into the banking union, with positive spillovers to other EU member states.3

Thus, taking as a given that swift progress on the key elements of the banking union—in particular an SSM, an SRM, and a common backstop—is crucial for the resolution of the crisis, we describe the legal mechanisms and foundations that would strengthen the banking union over time and possible legal approaches that can be taken in its design. We discuss both what, in our view, can be achieved under the existing EU Treaties,4 as well as the components of this architecture that would likely require Treaty change to strengthen their basis over time. As the evolution of the banking union will entail further transfer of powers and possibly competences from member states to the EU level, the essential elements of the banking union should be solidly anchored in the Treaties. This would ensure that all aspects of the banking union are comprehensively enshrined in EU law, similarly to the approach followed for other EU exclusive competences such as monetary union, competition and fisheries.

To this end, we assume, for the purposes of our analysis in this chapter, that there would be no obstacles to Treaty change in the long term, where this may be needed to build a more robust banking union. It is important to note that the discussion of a possible Treaty change should be viewed in the context of broader, more fundamental changes in the design of the EU, encompassing deeper fiscal integration and enhanced governance to underpin fiscal risk sharing, which would necessarily take place over a longer time horizon.

In this respect, depending on the specific features of the relevant changes, amendments to the Treaties may be made according to one of the two legal procedures provided under Article 48 of the TEU. The “ordinary revision” procedure must be used for any amendment that would increase or decrease the EU’s competences and requires ratification by all member states “in accordance with their respective constitutional requirements.” The “simplified revision” procedure can only be used for revisions to Part 3 of the TFEU (inter alia, this includes the provisions on economic and monetary policy), and cannot be used to increase the EU’s competences; this requires approval by national parliaments in accordance with their respective constitutional requirements. Although the precise requirements of such “approval” are not specifically defined, some member states have elected to apply lighter approval requirements to amendments adopted under the simplified revision procedure.

This chapter is divided into sections on general legal considerations, as well as specific legal considerations relating to each of the components of the banking union.

General Legal Considerations

As discussed in Chapter 9, the essential elements of a banking union are: (1) an integrated supervisory framework, both from the standpoint of the underlying institutional arrangements (including the ECB as single supervisor) and of the substantive law applicable in supervision; (2) an integrated resolution framework, based on a strong, centralized resolution authority with powers and tools aligned with international best practices; (3) a single, centralized deposit insurance and resolution fund, funded ex ante by the industry with an effective common fiscal backstop; and (4) a centralized “lender-of-last-resort” function at the level of the ECB for euro area member states. Among other core objectives of the banking union outlined in earlier chapters, these features seek to enhance financial stability by breaking the adverse link between banks and sovereigns, ensuring a systemic approach to supervision in the euro area and, to the maximum extent possible, enhancing the functioning of the EU single market in financial services. The fulfillment of these objectives must be based on sound and clear legal grounds, informed by the following overarching legal considerations:

  • First, establishing an explicit, financial stability objective for the EU under the Treaties would underpin in the legal robustness of financial stability arrangements in the euro area, the member states that take part in the banking union, and in the EU as a whole. Such an objective could be inserted in Article 3 TEU. An explicit financial stability objective would further enhance the financial stability powers and tasks that are assigned to EU institutions and bodies, inform their actions in a crisis, and allow for coordination and conflict resolution mechanisms to be established among themselves and between the financial stability authorities of member states that are not part of the banking union, as well as third countries.5 For instance, in a crisis this would ensure that the objective of restoring financial stability can more adequately be balanced against the objective of the EU to enhance competition in the financial sector.

  • Second, as the banking union moves forward, there may be a greater centralization of competences and the further transfer of legal powers to the EU level. The Treaties set out an exhaustive list of the areas in which the EU has “exclusive competence” to legislate and adopt legally binding acts, which includes monetary policy.6 On the other hand, areas of “shared competence” between member states and the EU include the common market and the free movement of services such as financial services (Articles 3 and 4 TFEU). Under the legal principle of conferral enshrined in the Treaties, competences not conferred upon the EU under the Treaties remain with the member states, and the EU must pursue its objectives by means commensurate with such competences.7 Within areas of shared competences, both the EU and member states may legislate and adopt legally binding acts. The Treaties may set out the explicit powers of the EU, or provide for the further transfer of powers by member states to the EU—EU powers may also be implied from the explicit provisions of the Treaties. Indeed, under Article 127(6) TFEU, certain supervisory powers will be transferred by member states to the SSM.8 The use of powers in the areas of shared competences is governed by the legal principle of subsidiarity as a result of which the EU may only act “if and in so far as the objectives of the proposed action cannot be sufficiently achieved by EU member states, but can rather, by reason of the scale or effects of the proposed action, be better achieved at the EU level.”9 In the context of the evolution of the banking union over time, certain transfers of powers by member states to operationally autonomous EU-level bodies or EU institutions would need to be supported by an explicit Treaty basis, if such powers cannot be implied, for the latter to be able to take directly binding decisions with respect to entities within their scope. This includes, for example, the power to take final and directly binding decisions on third parties in the area of bank resolution. If, over time and as the banking union evolves, a decision were to be taken to give the EU exclusive competence for the banking sector for those member states participating in the banking union, so as to fully underpin in the Treaties the integrated framework of the banking union and similar to monetary policy, a Treaty change would be needed.

  • Third, the democratic legitimacy of this enhanced EU decision-making framework must continue to be supported by robust transparency and accountability mechanisms, enshrined in EU law, including active scrutiny by the EU Parliament and a coherent system of checks and balances that avoids excessive concentration of legal powers in any one body.

  • Fourth, a robust banking union requires a single, fully integrated legal framework encompassing all relevant areas of substantive law. Given the highly interconnected nature of EU financial markets, the legal framework for financial services can no longer operate effectively (and be backstopped financially) on a partially harmonized yet ultimately national basis. To create a level playing field and minimize the scope for divergence between member states participating in the banking union, the legal framework should be driven primarily by directly applicable EU regulations rather than directives.

  • Fifth, it is important that all agencies making up the banking union are integrated into a coherent and comprehensive legal framework. In addition to an explicit, Treaty-based objective to contribute to financial stability, as discussed above, this framework should include legal obligations for information exchange, cooperation, prior consultation, and conflict resolution mechanisms between all relevant players. Cross-representation in the respective governance structures of the relevant agencies should also continue to play a positive role in this respect. In turn, building upon an explicit financial stability objective under the Treaties, this framework will need to coordinate with the relevant agencies in member states that are not part of the banking union, yet remain part of the EU single market, as well as with the existing framework for coordination under the European System of Financial Supervisors.

An Integrated Supervisory Framework

Legal and Institutional Arrangements for Centralized Supervision

Following the decision of the Eurogroup in June 2012 and the legislative proposal from the Commission in September 2012, the EU Council agreed in December 2012 on the design of the SSM.10 This provides for the ECB to be tasked with carrying out certain supervisory tasks for the euro area and those EU members that opt into the SSM.11 The agreement on the SSM, vesting supervisory responsibilities in the ECB, is a critically important step in moving toward an integrated financial oversight framework for the euro area.

The SSM is designed as a “hub and spoke” model under which the ECB and member states continue to share competences for financial supervision and regulation, on the basis of Article 127(6) TFEU under which the ECB can assume “specific tasks” relating to prudential supervision. The SSM, while centralizing a significant number of powers at the ECB level, hinges on a delicate division of responsibilities and shared competences between the ECB and national supervisors—hence the set-up of a “mechanism” which does not amount to the creation of a single supervisory authority and legally differs from the European System of Central Banks (ESCB) that is based upon the EU’s exclusive competence in the area of monetary policy. For instance, national supervisors retain powers for a number of supervisory activities and will be formally in charge of taking supervisory decisions for “nonsignificant banks” (albeit upon ECB instructions).12

Over time, the legal design of the ECB supervisory framework could be further tailored to the requirements of common supervision and could address asymmetries between euro area and other EU member states. Under Article 14.3 of the ECB Statute, national central banks are an integral part of the ESCB, acting in accordance with the guidelines and instructions of the ECB. The SSM draws, and benefits, from such set-up, and the associated powers conferred to the ECB. However, the existing design of the ESCB may not permit the diversity of financial supervisory arrangements in EU member states to be fully reflected. Specifically, in countries with a “twin peaks” model of financial supervision, the heads of the national banking supervisors, not being central bank governors, cannot sit in the ECB Governing Council even where supervisory decisions alone are concerned.

In the medium term, a revision of the ECB’s mandate through Treaty change may be warranted to reflect the specificities of its supervisory tasks, by inserting a chapter on supervision in the TFEU, alongside monetary policy, and including supervisory provisions in the ECB Statute. These provisions could also allow autonomous governance arrangements for supervision to be enshrined in the Treaties, with final and binding decision-making powers in the area of supervision that do not rely upon the ECB’s Governing Council as the ultimate decision-making body. In this context, clarity could also be provided with respect to the interaction between the ECB’s monetary mandate in the monetary union and its supervisory mandate in the banking union, while preserving robust mechanisms to exploit synergies and reconcile possible conflicts between the two mandates.13

A possible ultimate step may be the transfer of exclusive responsibilities for supervision to the EU level, with the ECB delegating certain powers and tasks to national supervisory authorities for the purposes of implementing supervisory measures, similar to the division of responsibilities in the area of monetary policy. This would be in line with the creation of a single resolution authority, discussed below.

Additional legal considerations are relevant for the design of the ECB’s supervisory mandate. In particular, while certain features proposed by Fund staff may not require Treaty change (for example, having a stronger representation of independent experts or executives in the governing bodies), the implementation of certain other measures would appear to require a revision to the Treaties. This applies to the possible full representation of opt-in member states in the ECB and to possible leaner governance arrangements involving a higher degree of delegated responsibilities to internal decision-making bodies (see Chapter 11).

Single Supervisory Legal Regime

Under the SSM, the ECB will continue to rely on the existing supervisory legal frameworks and enforcement regimes, which are either unharmonized or, even when they are harmonized, are still subject to a significant degree of national discretion. This is the case, for instance, for nonpecuniary administrative sanctions, which are issued, upon ECB instruction, under national laws. As a result, while supervision will be more centralized, the substantive laws will still be subject to significant variation, depending on different national legal traditions, interpretations, and scope of discretion (see Ferran and Babis, 2013).

Achieving a more robust banking union calls at a minimum for continued progress in the efforts to harmonize financial legislation, including banking laws, across all EU member states, not only within the banking union, through the transposition of relevant legal instruments into national laws based on Article 114 of the TFEU. One approach to achieving greater harmonization, which would not require a Treaty change, would be based on adopting directly applicable EU regulations rather than directives, possibly complemented by the use of Article 127(6) TFEU in conjunction with Article 34 of the ESCB Statute to issue ECB Regulations that would further harmonize banking rules.14 This would lead to the creation of an all-encompassing “Single Rulebook” that includes but is broader than the harmonization of certain prudential standards currently envisaged under CRR/CRDIV.

Common Financial Safety Nets

Single Resolution Authority

As of July 2013, the Commission has issued a proposal for an SRM for the banking union. This would establish a “resolution board,” comprised of representatives from national resolution authorities, the ECB, and the Commission, that would make a recommendation to the Commission to decide on a bank resolution. The recent Commission proposal on the establishment of an SRM, based on Article 114 of the TFEU, gives directly binding powers to the Commission, while the resolution board is in charge of a number of preparatory and implementation tasks. In the memo accompanying the proposal, the Commission explains that only an EU institution (such as the Commission) and not an agency (such as, for instance, the European Banking Authority) can assume these powers. The Council legal services issued an opinion (14547/13 of October 7, 2013) stating that powers can be delegated to the resolution board as long as it will not have a wide margin of discretion within the meaning of the so-called Meroni case law. The draft BRRD, which would harmonize resolution laws in EU member states, was proposed by the Commission in June 2012 and is currently passing through the EU legislative process: the EU Council has agreed on a general approach and has called on the Council Presidency to start negotiations with the European Parliament with the aim of adopting the BRRD before the end of 2013. A draft EU directive that would further harmonize deposit insurance schemes is also under consideration. These measures are welcome progress in the journey toward establishing the banking union.

In principle, elements of an effective safety net can be designed on the basis of the current Treaties, notably Article 114 TFEU. This may include a harmonized legal framework for resolution, and measures to further coordinate national resolution authorities. Article 114 permits the EU to take measures for the harmonization of national laws, regulations or administrative actions which have as their object the establishment and functioning of the internal market. Measures taken pursuant to Article 114 must aim therefore to remove obstacles for the functioning of the internal market due to divergence of national rules and practices. Article 114 TFEU has been used to establish agencies, including EU supervisory agencies such as the European Banking Authority, as well as directly applicable EU financial services rules. Indeed, the proposed BRRD is based on Article 114.15

Other legal approaches may also be examined to set up an effective safety net under the current Treaties. One possibility would be to consider the application of Article 352 TFEU, which permits action by the EU to attain the objectives of the Treaties where the latter have not provided the necessary powers. Although broadly worded, the scope of action under Article 352 is carefully circumscribed by the Treaties and jurisprudence of the Court of Justice of the European Union (CJEU). Another option arises under Article 20 TEU, by which nine or more EU member states may establish enhanced cooperation between themselves in areas of shared competence of the EU to further the objectives of the Union, protect its interests, and reinforce its integration process. The feasibility of this legal avenue would depend on the extent to which enhanced cooperation does not undermine the internal market or economic, social, and territorial cohesion of the EU.

In the longer term, a Single Resolution Authority (SRA) for the banking union could be established as a supranational EU institution, which, unlike the proposed resolution board, would be operationally independent from the executive arm of the EU. Such an institution would also need adequate accountability and a strong central governance structure (see Chapter 12). As envisaged for the ECB’s supervisory mandate, legal mechanisms, enshrined in the Treaty, for coordination with EU member states not participating in the banking union and therefore not joining the SRA could be established. The SRA would be subject to checks and balances, as well as adequate mechanisms for coordination and information sharing with the ECB qua supervisor, enshrined in the EU legal framework. The resolution framework would need to be administrative instead of court driven, with the possibility for ex post judicial review by the CJEU on the legality of the SRA’s decisions.

A strong and autonomous SRA along these lines would need to exercise broad and discretionary powers directly binding on third parties, with ultimate decision-making authority on the distribution of costs in a bank failure. To the extent that such powers cannot be exercised by the SRA on the basis of Article 114, or other existing provisions of the Treaties, they may require an explicit basis to be established in the Treaties. Whether the existing Treaties provide such a basis is a matter for determination by the CJEU. However, it is important for the legitimacy of such binding powers that they are underpinned by a sound legal basis under the Treaties, as well as in order to mitigate litigation risks; moreover, this would ensure a consistent legal approach toward supervisory, monetary and resolution powers under the Treaties.

The tasks of the SRA would also have to be coherently integrated into the overall EU institutional architecture; in particular, the interaction with the Commission as guardian of state aid rules merits careful consideration.16 In principle, the SRA should be able to take resolution decisions that affect financial stability, while the Commission’s remit, focused on the longer-term goal of competition, would concern single market issues when state aid is involved. In any event, clear roles and responsibilities, and conflict resolution mechanisms to speedily resolve any possible divergences, would be essential.

Single Resolution Legal Regime

As noted at the outset, a fully harmonized legal framework for resolution in the EU should be primarily regulation-based in order to minimize variations between member states. This framework may be achieved within the scope of Article 114 TFEU, on the grounds that diverging national bank resolution rules are deemed to constitute an obstacle to the internal market. As noted, Article 114 is the legal basis for the proposed BRRD.17 However, a regulation-driven framework would entail going beyond the BRRD. The envisaged resolution framework in a more robust banking union would best be supported by an explicit basis in the Treaties, to provide a strong financial stability objective for the EU and to establish an autonomous SRA.

In the implementation of the resolution framework in a more robust banking union, possible asymmetries may still result from the decision of certain EU member states not to join the banking union. These may be mitigated through legally binding ex ante burden-sharing agreements to allocate the net costs of resolution among EU member states. Forms of cooperation may be enhanced through progress on resolution planning and resolvability assessments, governing orderly resolution in a manner that can preserve, to the maximum extent possible, financial stability in the EU. Lastly, a financial stability objective under the Treaties would inform the action of key players, including central banks, the SRA, and national resolution authorities, in response to a crisis.

Single Deposit Insurance Scheme and Resolution Fund

In order to effectively break the bank—sovereign nexus, and to level the playing field between member states, the existing arrangements for resolution and deposit insurance funding, which continue to be predominantly nationally based, would in a more robust banking union be replaced by a supranational EU deposit insurance and resolution fund, with a common fiscal backstop.18 The deposit insurance fund could be combined with the resolution fund, as a “European Deposit Insurance and Resolution Fund” (EDIRF), and managed by the SRA, acting as both the deposit insurance and resolution authority.

A framework combining such privately financed arrangements with certain forms of common fiscal backstop discussed below will likely require an explicit legal basis in the Treaties. The framework for privately financed resolution should be developed through regulations rather than directives in order to minimize the scope for variation between member states. The legal framework should also set out a clear legal mandate for the SRA to act as deposit insurance agency, which should be clearly distinguished from its function as resolution authority and subject to tailored legal constraints.19

Crucial legal issues arise in relation to the design of the funding mechanism for a common safety net, in particular: (1) mechanisms for raising funds ex ante and ex post; and (2) the common fiscal backstop to provide funding in a systemic crisis.

Ex Ante and Ex Post Funding

The traditional mechanisms for funding deposit insurance at the national level give rise to new legal considerations when applied at the EU level. In particular, in order to apply a levy on scheme members for the purposes of both ex ante and ex post funding, the EDIRF would need to be empowered with fund-raising powers vis-à-vis financial institutions, either directly or indirectly.

The EU does not appear to have direct taxation authority. It could however harmonize national turnover taxes, excise duties, and other forms of indirect taxation of the industry pursuant to Article 113 TFEU, and channel some of the revenue to the EU budget pursuant to Article 311 TFEU, as the EU did with VAT and as it intends to do with the financial transactions tax. A similar mechanism could be designed to fund the EDIRF. The question arises as to whether, under the current Treaty, Article 114 provides a sound legal basis for the enactment of a directly applicable EU regulation, under which national deposit guarantee schemes would be required to channel premiums paid by the industry to the EDIRF. Premiums would in turn be pooled and used to finance the resolution of EU banks, in the interest of financial stability. The argument in favor of using Article 114 hinges on the goal of harmonizing national resolution and deposit insurance regimes, in view of preserving the cohesion of the single market, of which financial stability is viewed as a precondition.

Common Fiscal Backstop

In order to break the sovereign—bank nexus and in view of the objectives of banking union, the EDIRF should be supported by a common government backstop that is not reliant upon the fiscal capacity of individual member states, subject to adequate safeguards to mitigate moral hazard.20 As discussed in Chapter 12, the most feasible legal design for a common backstop appears to be an ECB liquidity line to the SRA, backed by fiscal resources (which could be provided through the ESM or a form of tax levied at the euro area level); this could be combined with the issuance of SRA bonds. The SRA would ultimately be guaranteed by a fiscal backstop from member states.

The design of the fiscal backstop may take various legal forms and would need to be carefully assessed in light of Article 125 TFEU, the “no bailout” rule. Based on the ECJ’s judgment in Pringle v Ireland,21 Article 125 would currently prevent member states from assuming the obligations of other member states in the sense of a “joint and several” guarantee;22 however, it would not be breached by a “multiple and several” guarantee from member states (for example, under the ESM). Thus, it is possible to imagine a guarantee for the purposes of the common fiscal backstop that operates in a manner similar to the ESM, whereby the commitments of each member state are limited by a pre-agreed contribution key. Under this arrangement, the backstop would function as a loan from member states, to be repaid ex post by the beneficiary member state including through levies on the industry.

Centralized Lender-of-Last-Resort

The logic of an optimal banking union necessarily entails centralized lender-of-last-resort responsibilities at the euro area level. Under the current approach, member states are exposed to potential losses arising through the provision of emergency liquidity assistance by national central banks. In order to sever the sovereign-bank nexus, emergency liquidity assistance lending within the euro area should shift from national central banks to the ECB, in order to transfer emergency liquidity assistance risk to the euro system as a whole. This raises various legal issues:

  • From a strictly legal perspective, it could be argued that the ECB could provide emergency liquidity assistance under the current Treaty based on Article 18 of the ESCB Statute in case this is required to safeguard monetary stability within the euro area. A special emergency liquidity assistance collateral regime would probably also have to be put in place as the relevant banks under such circumstances are not likely to be in a position to borrow on regular terms from the ECB.

  • However, under the current Treaties the ECB cannot provide emergency liquidity assistance on financial stability grounds only. Also for that reason a financial stability anchor in the Treaties, and possibly in the ESCB Statute, is recommended.

  • Still, the question arises as to the possible losses for the emergency liquidity assistance provided by the ECB. The current arrangements for loss-sharing within the ESCB are strictly designed for monetary purposes and losses of the ECB are finally allocated to the national central banks of the euro area in proportion to their paid-up shares in the capital of the ECB. Alternative legal mechanisms, such as an additional, precommitted fiscal backstop, would need to be established in the ESCB Statute.

Conclusions

Taking as a given that swift progress on the core elements of the banking union is crucial for the resolution of the crisis, this chapter has adopted a forward-looking approach, focusing, beyond the crisis, on the legal mechanisms and foundations that would strengthen the banking union over time and possible legal approaches that can be taken in its design.

We have identified certain overarching legal considerations that should inform the journey toward a more robust banking union, namely: an explicit, financial stability objective for the EU under the Treaties; greater centralization of legal powers and possibly competences at the EU level; a single, fully integrated legal framework encompassing all relevant areas of substantive law; and integration of all agencies making up the banking union into a coherent and comprehensive legal framework.

Acknowledging the significant progress made by current legislative proposals, we have also identified specific legal considerations relating to each component of the banking union in the longer term. Over time, the ECB supervisory mandate could be more specifically tailored to the requirements of common supervision, with corresponding governance arrangements legally separate from its monetary function. Resolution powers would be centralized in a supranational and autonomous EU institution acting as a single resolution authority. Banking legislation, including resolution laws, would be further harmonized through the adoption of directly applicable regulations under an all-encompassing Single Rulebook. Deposit insurance and resolution could be funded through fees on the industry at the EU level, and in a systemic crisis, a fiscal backstop from member states, possibly structured along the lines of the ESM. The centralization of lender-of-last-resort functions at the ECB would require a clear EU financial stability objective.

In some cases, these considerations entail the transfer of powers and possibly competences from member states to the EU. Although the full spectrum of this transfer would likely require Treaty change in the longer term, such changes would necessarily take place as part of a broader, more fundamental shift in the design of the EU over time, involving deeper fiscal and political integration between member states.

References

    DewatripontMathiasGregoryNguyenPeterPraet and AndréSapir2010The Role of State Aid Control in Improving Bank Resolution in EuropeBruegel Policy Contribution 2010/04 (Brussels).

    FerranE. and V.Babis2013The European Single Supervisory MechanismUniversity of Cambridge Faculty of Law Legal Studies (March).

    FonteyneWimWouterBossuLuisCortavarriaAlessandroGiustinianiAlessandroGulloDaniel C. L.Hardy and SeanKerr2010Crisis Management and Resolution for a European Banking SystemIMF Working Paper 10/70 (Washington: International Monetary Fund).

    GoyalRishi and others2013A Banking Union for the Euro AreaIMF Staff Discussion Note No. 13/1 (Washington: International Monetary Fund).

    International Monetary Fund2013European Union: Financial System Stability AssessmentIMF Staff Country Report No. 13/75 (Washington).

    VeronN2012Europe’s Single Supervisory Mechanism and the Long Journey towards Banking Union (Washington: Peterson Institute for International Economics.

The authors are grateful to Wouter Bossu, Atilla Arda, and Christophe Waerzeggers for their contributions to this chapter. Information provided in this chapter is as of July 3, 2013.

See also IMF (2013); Goyal and others (2013); the 2012 and 2013 Staff Reports for the Article IV Consultation with the Euro Area; and Fonteyne and others (2010). See also related speeches by Fund management: “Completing the Task: Financial Sector Reform for Stability and Growth,” address to the Annual Leaders’ Dialogue Hosted by Süddeutsche Zeitung, by Christine Lagarde, June 8, 2012, http://www.imf.org/external/np/speeches/2012/060812a.htm; “Reviving Growth in Europe,” by Nemat Shafik, Brussels Economic Forum, Brussels, May 31, 2012, http://www.imf.org/external/np/speeches/2012/053112.htm.

Useful reference can be made to the SSM draft regulation, which includes a mechanism for opt-in through close cooperation with non-euro area member states. An alternative legal mechanism for joining the banking union could envisage the automatic buy-in of EU member states, save for those that wish to opt out when the fundamental features of the banking union are defined.

The principal treaties governing the EU are the Treaty on European Union (TEU or the “Maastricht Treaty”) and the Treaty on the Functioning of the European Union (TFEU) (and together with the TEU, “Treaties”).

For a related discussion on these aspects, see “Implementing Macroprudential Policy – Selected Legal Issues,” IMF Board Paper, 2013.

The EU has exclusive competences in the following areas only: (1) customs union; (2) competition rules for the functioning of the internal market; (3) euro area monetary policy; (4) conservation of marine biological resources under the common fisheries policy; and (5) common commercial policy (Article 3, TFEU).

See Articles 3, 4, and 5 TEU.

The SSM draft regulation is based on the premise that EU and member states will continue to share competences for financial services—however, with enhanced powers for the EU institutions (in this specific case, the ECB). EU institutions include the European Parliament; the European Council; the Council; the Commission; the European Court of Justice, the ECB; and the European Court of Auditors.

See Article 5 TEU.

Since the date of writing this chapter, the legislative package to set up the SSM has come into force, on October 29, 2013, following publication in the Official Journal (Council Regulation No. 1024/2013 of October 15, 2013 and Regulation of the Council and Parliament No. 1022/2013 of October 22, 2013).

For a full description of the SSM, see Chapter 11.

It should be noted that the existing European System of Financial Supervisors is based on a soft federal model; it facilitates the coordination of national supervisors and provides for certain dispute resolution mechanisms to eliminate national divergences in the application of EU law. However, there is no centralization of supervisory powers, which remain at the national level.

See further Chapter 11 and Veron (2012).

The latter would need to be coordinated with the role of the European Banking Authority as an EU-wide standard setter.

Since the date of writing this chapter, two legal opinions have been issued by the Council legal services and the ECJ Advocate General, respectively, relating to the interpretation of Article 114 TFEU. The Council opinion, relating to the SRM (14547/13 of October 7, 2013) is broadly supportive of the use of Article 114 as the legal basis for the SRM and a resolution fund, provided that adequate safeguards for national budgetary sovereignty are introduced. The AG opinion, relating to EU shortselling rates (Case 270/12, September 12, 2013), casts doubt on the use of Article 114 to replace national decision making with EU-level decision making.

For a discussion on the role of the Commission in resolution, see also Dewatripont and others (2010).

See Chapter 12 for further discussion of the existing proposal, and the requirements for an effective resolution regime reflecting emerging international best practice.

See Chapter 12 for additional discussion.

See further Chapter 12.

See further Chapter 12.

Thomas Pringle v Government of Ireland Case C-370/12 [2012] ECR I-000.

Under a “joint and several,” or unlimited, guarantee, each member state would be individually liable for the total guaranteed amount. By contrast, under a “multiple and several,” or limited, guarantee, each member state would be liable only for its share of the total guarantee commitments, as specified.

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