Banking Union's accountability system in practice: A health check‐up to Europe's financial heart

• Published date: 01 July 2022
• Author: Marco Lamandini,David Ramos Muñoz
• Date: 01 July 2022
• DOI: http://doi.org/10.1111/eulj.12404

ORIGINAL ARTICLE

Banking Union's accountability system in practice:

A health check-up to Europe's financial heart

Marco Lamandini*| David Ramos Muñoz*

Abstract

The Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM) form the

Banking Union, which comprises EU authorities (ECB and SRB) and national authorities (NCAs

and NRAs) with vast powers. Although crucial for its legitimacy, the Banking Union’s accountabil-

ity is flawed, and not for the (stereo)typical reasons: accountability is a visible concept in SSM

and SRM regulations, and political, administrative and judicial bodies are knowledgeable, engaged

and thorough. Rather, this article posits that the SSM and SRM work very well because the legis-

lature focused on practical details such as information flows, planning and continuity and coordi-

nation, while there has been no comparable effort to ensure the functioning of accountability

tools. The result is a “system”characterised by limited access to crucial information, lack of conti-

nuity, and uncoordinated functioning. Changing this should not be hard but requires replacing

blanket criticism and stereotypical views with greater attention to detail.

1|BANKING UNION, THE EUROPEAN PROJECT …AND THE

SIGNIFICANCE OF BANKING UNION ACCOUNTABILITY

Finance has become the linchpin of European integration, for better or worse. For the better, the global

financial crisis (2007–08) and its uniquely European sovereign debt aftermath (2010–13) resulted in a reinforced

framework for prudential regulation through a comprehensive and harmonised set of European rules (the Single

* This paper reflects views presented by the authors to the ECON Committee of the European Parliament (www.europarl.europa.eu/RegData/etudes/

STUD/2020/645711/IPOL_STU(2020)645711_EN.pdf). Marco Lamandini is Professor of Law at the University of Bologna, and also Chair of the Board

of Appeal of the European Financial Supervisory Authorities and a member of the Appeal Panel of the SRB; David Ramos Muñoz is Professor of Law at

the University Carlos III of Madrid, and also an alternate member of the Appeal Panel of the SRB. However, the views presented here are entirely

personal and are expressed in their academic capacity only. They do not represent therefore, and cannot be construed as representing, views attributable

to the Board of Appeal or the Appeal Panel or tothe respective EU agencies. All usual disclaimers apply.

Received: 6 October 2020 Revised: 25 August 2021 Accepted: 30 August 2021

DOI: 10.1111/eulj.12404

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2022 The Authors. European Law Journal published by John Wiley & Sons Ltd.

Eur Law J. 2022;28:187–217. wileyonlinelibrary.com/journal/eulj 187

Rulebook),

1

a mechanism for bank supervision for the Eurozone and other Member States willing to join (the

Single Supervisory Mechanism, or SSM),

2

and a parallel mechanism for bank resolution (the Single Resolution

Mechanism, or SRM)

3

which together with the European Deposit Insurance Scheme (EDIS)

4

form the Banking

Union (BU). The EU Banking Union has been described as the most recent “grand bargain”of European integra-

tion consisting of such four elements. This project has been echoed by its projected sibling, the Capital Markets

Union (CMU), and has been accompanied by a framework for financial stability, including the European Stability

Mechanism (ESM).

For worse, though, the signs of compromises and half-baked solutions are visible across the whole architecture.

The SSM and SRM are only partly centralised systems as a matter of design, because the Treaty basis did not make it

possible, or prudent, to fully allocate supervisory or crisis-management powers to European supervisors.

5

None of

them are structures initially conceived for the EU, but for the Eurozone. And pooling resources is a sore spot for

some Member States, so much so that ESM, the key piece of the framework for financial stability, is outside the

formal confines of EU Law,

6

and EDIS, the piece that prompted the BU project in the first place, as the means to

sever the link between bank and sovereign insolvency remains (ironically) the only one not to have been adopted.

Reconciling the need to move forward as a block, while accommodating each Member's reservations, has required a

degree of legal brinkmanship that makes the framework fascinating for lawyers and academics, but often quite

incomprehensible for even the educated citizen.

The Banking Union's challenges have an impact far beyond its borders. For instance, the Commission's “Green

New Deal”

7

will be a Brussels sprout if it is limited to the niche market of “green”bonds without adjusting bank

prudential rules to account for climate-related risk across the board.

8

FinTech will fail to revolutionise EU finance if

the strategy is concentrated on the promising but small FinTech companies without an adjustment of rules on bank

supervision and crisis management to the roles of large financial institutions and giant BigTech companies.

9

The

measures to deal with the COVID-19 crisis include a public funding strategy, involving the Commission and the

European Investment Bank (EIB),

10

but the “muscle”of commercial banks must be enlisted for any strategy to

be credible, which, in turn, will pose pressing questions about those banks' solvency and the strategies to deal with

non-performing loans (NPLs), or to bolster banks' capital and liquidity in times of crisis (especially if they involve

1

See https://eba.europa.eu/regulation-and-policy/single-rulebook.

2

Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the

prudential supervision of credit institutions.

3

Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the

resolution of credit institutions and certain investment firms in the framework of a single resolution mechanism and a single resolution fund and amending

Regulation (EU) No 1093/2010.

4

For the whole Banking Union ensemble, as it was originally envisaged, see EC Communication, A Roadmap towards a Banking Union (2012); Jean-Claude

Juncker in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz, European Commission Completing Europe's Economic

and Monetary Union (Five Presidents Report, 2015).

5

Article 127 (6) TFEU, which was the basis for the SSM, states that: ‘The Council, acting by means of regulations in accordance with a special legislative

procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central

Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance

undertakings’.

6

ESM Treaty signed on 2 February 2012. T/ESM 2012-LT/en 1. The fact that the ESM is not subject to EU Law was stated in Judgment of 27 November

2012, case C-370/12 Pringle, EU:C:2012:756, and reiterated in Judgment of 20 September 2016, cases C-8/15 P to C-10/15 P Ledra Advertising

v. Commission and ECB, EU:C:2016:701. It remains also true, however, that Member States must in any event respect EU law when they exercise their

competences.

7

EC, The European Green Deal, Brussels (2019).

8

This is reflected in the EC, Action Plan: Financing Sustainable Growth Brussels (2018). See the recent ECB Guide on climate-related and environmental risks

Supervisory expectations relating to risk management and disclosure (1 November 2020).

9

Notably, in the EC, FinTech Action Plan: For a More Competitive and Innovative European Financial Sector (2018), there is not a single mention to the role of

Big Technology companies and there is one single mention to bank ‘prudential’rules, referred to the deductibility of software investment from bank

capital. The Report by the Expert Group on Regulatory Obstacles to Financial Innovation (ROFIEG), 30 Recommendations on Regulation, Innovation and

Finance (2019), was more explicit on acknowledging the diversity of actors to ensure a level playing field, and the more recent Consultation on a new digital

finance strategy for Europe / FinTech action plan 3 April 2020–26 June 2020 explicitly asks what is the expectation that non-financial companies will gain

significant market share in different financial services in the following years, while question 9 asks about areas where the principle ‘same activity creating

the same risks should be regulated in the same way’is not respected.

10

See ‘Recovery Plan for Europe’, available at: https://ec.europa.eu/info/strategy/recovery-plan-europe_en. See also https://www.consilium.europa.eu/

en/policies/eu-recovery-plan/.

188 LAMANDINI AND RAMOS MUÑOZ