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Summary of "Should Non-Euro Area Countries Join the Single Supervisory Mechanism?"

Core Content

This document, authored by Zsolt Darvas and Guntram B. Wolff in March 2013, discusses the implications of non-euro area EU countries joining the Single Supervisory Mechanism (SSM) as part of the broader European banking union initiative. It evaluates the legal framework, safeguards, and arguments for and against participation, emphasizing the strategic importance of the SSM for non-euro area members.

Main Points

1. The Case for a Banking Union

• Rationale: A European banking union is necessary due to the deep financial integration within the EU, despite the euro crisis.
• SSM's Role: The SSM is the first element of the banking union and is expected to improve cross-border bank supervision, ensure consistency in practices, and foster financial integration.
• Benefits: Even though the SSM alone does not deliver the full benefits of a banking union, it offers significant advantages such as enhanced supervision, reduced competitive distortions, and increased transparency.

2. Legal Framework and Decision-Making

• Treaty Basis: The SSM is based on Article 127(6) of the Treaty on the Functioning of the European Union (TFEU), which places the ECB at the center of the supervisory mechanism.
• Decision-Making Body: The SSM's supervisory board makes draft decisions, which require approval by the ECB Governing Council (with a maximum of 10 days for objection).
• Non-Euro Area Influence: The supervisory board includes one representative from each non-euro area participating member state, with voting rights, thereby increasing their influence.
• Compromise: The legal framework allows for non-euro area countries to participate in the SSM under the "close cooperation" model, which was a compromise to address their concerns.

3. Safeguards for Non-Euro Area Countries

• Right to Exit: Non-euro area countries can exit the SSM under three scenarios:
  • After three years without qualification.
  • If the ECB excludes them due to major non-compliance.
  • If they request an expedited exit due to a major disagreement with a supervisory decision.
• Re-entry: Re-entry is only possible after three years.
• Accountability: The ECB is accountable to the European Parliament and the Council of Ministers. National parliaments can request meetings with the supervisory board chair and have the right to raise written questions.

4. Supervisory Convergence and Coverage

• Harmonized Rules: The SSM will implement a harmonized rulebook based on Basel III, replacing current national regulations.
• Coverage Criteria: Only "significant" financial institutions and their subsidiaries/branches are directly supervised by the ECB. However, the ECB may supervise any institution if it is suspected of posing a significant risk to financial stability.
• Geographical Impact:
  • In Central and Eastern Europe, the SSM coverage will mainly affect subsidiaries and branches of euro-area banks.
  • In Denmark, the SSM will cover its major subsidiary in Finland and possibly its branches in other countries.
  • In Hungary, the SSM will cover a large portion of OTP's activities, but some operations outside the EU will not be included.

5. Arguments for and Against Joining the SSM

Arguments in Favor

• Improved Supervision: The SSM enhances cross-border bank supervision and ensures consistency in practices.
• Financial Integration: It fosters financial integration and reduces the risk of fragmentation.
• Accountability and Safeguards: Non-euro area countries are given equal standing in decision-making and have clear exit mechanisms.

Arguments Against

• Decision-Making Power: Non-euro area countries have limited influence in the ECB Governing Council, which does not include their representatives.
• Macro-Prudential Concerns: There were fears that the centralization of macro-prudential tools at the ECB would limit national regulatory autonomy.
• Uncertainty: The design of the SSM is not fully aligned with the other elements of the banking union, which may affect the overall benefits of participation.

Key Information

• The SSM was proposed in December 2012 and is expected to be enacted in the coming months.
• The legal framework allows non-euro area countries to participate in the SSM, but with limited voting rights.
• The ECB has the authority to supervise any institution that poses a risk to financial stability, regardless of the country's participation in the SSM.
• The right to exit is a crucial safeguard for non-euro area countries.
• The opt-out clause allows non-euro area countries to avoid being bound by certain supervisory decisions, but it comes with a three-year re-entry restriction.
• The European Banking Authority (EBA) is responsible for ensuring supervisory convergence, and its decisions require a double majority, giving non-participating countries more influence.
• The coverage of assets under the SSM varies by country, with some non-euro area countries having a large share of their financial assets under ECB supervision.

Conclusion

Non-euro area EU countries should consider joining the SSM, as it offers significant benefits in terms of financial integration and supervision, despite the uncertainty surrounding the full banking union. The draft regulation includes important safeguards to protect the interests of non-euro area members, and the authors argue that these countries should be prepared to join the SSM and engage in the negotiations for the other elements of the banking union.