Investigative and Sanctioning Powers of the ECB in the Framework of the Single Supervisory Mechanism

• Date: 01 December 2015
• Year: 2015
• Author: Prof. Dr. Silvia Allegrezza,Olivier Voordeckers
• Pages: 25

In most publications that deal with the Banking Union, the global financial crisis of 2008 is mentioned in the introductory paragraph. It is also the unavoidable starting point of this contribution, as it is the collapse of the banking sector that has shown the necessity to rethink the mechanism of banking supervision.

Economic growth and financial stability have been seriously damaged by the global crisis that has plagued the world since 2007. The financial and banking crisis shed some light on the need for stronger and more efficient supervision but also on the need for a more effective system of sanctions and penalties to be applied. In particular, the Eurozone proved to be particularly exposed to the waves of the market because of the differences in supervision policies among the Member States which adopted the Euro as a single currency.

Whether more effective banking supervision could have prevented the crisis is not sure, but at least the crisis uncovered one of its most fundamental flaws, namely that banking supervision based on the Westphalian model of the nation-state, is not capable to grasp the risks inherent to the banking sector. The banking system has played a key role in the financial crisis: major bank groups suffered deficits and debt positions, leading a number of them to seek State aid. In Eurozone countries, the banking and sovereign debt crises highlighted the flaws of a common monetary and currency Union without consistency of banking supervision. Indeed, when the bankruptcy of Lehman Brothers dragged major European banks into the crisis, it became clear that if risk knows no borders, neither should supervision. National regulators were faced with their insufficiency to face global problems and Eurozone Member States were particularly subject to spill-over effects from each other's budgetary policies.

This insight nourished the desire to achieve deep supervisory integration, a desire which eventually gave birth to a centralised structure, baptised the “European Banking Union”¹. Since 2010, the EU Commission has therefore taken an inclusive approach supporting the swift progress towards an integrated financial framework as a vital part of the policy measures to put Europe back on the path of financial stability, economic recovery and growth.² In September 2012 the Commission presented a communication entitled “A Roadmap towards a Banking Union” in order “to break the link between sovereign debt and bank debt and the vicious circle which has led to over €4,5 trillion of taxpayers money being used to rescue banks in the EU”.³

The European Banking Union places the European Central Bank (ECB) at the heart of banking supervision in Europe and in particular in the Eurozone. It represents a product of a recent tendency to transfer “decisive regulatory powers as well as powers concerning enforcement – investigations, measures and penalties – to the EU level”.⁴

This article offers an account on the Single Supervisory Mechanism, its functioning and its articulated sanctioning system, composed of administrative measures and penalties. Part I analyses the institutional design and the complex legal framework composed of both directly applicable European rules and national law implementing the Capital Requirements Regulation (CRR)⁵ and the Capital Requirements Directive (CRD IV).⁶ We will try to shed some light on the division of tasks between the ECB and the national competent authorities (NCAs) operating at national level. Part II explores the investigatory powers the measures and penalties applicable in the framework of banking supervision and the proceedings for their enforcement. It will also discuss their controversial nature: administrative, punitive or quasi-criminal? Part III examines judicial protection for the supervised entities. Specific attention will be given to judicial review. Part IV will outline some conclusions.

I. The SSM: a Mechanism of Single Supervision

The Single Supervisory Mechanism is part of a broader architecture that aims to consolidate the banking sector of the European Union. This project is named the European Banking Union, and is built on three pillars: The Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM),⁷ and a uniform deposit guarantee scheme.⁸ This entire construction rests upon the foundations of the so-called Single Rulebook, which is composed of the CRR and the CRD IV. It contains a harmonised set of rules that aim to safeguard the soundness, stability and integrity of the banking system, also referred to as “prudential regulation”. Such regulation consists in requirements such as capital buffers, liquidity ratios, or large exposure limits on banks. Far from being an example of “rule making by principles”, the CRR and CRD IV provide detailed and precise enforceable rules.⁹ The two legal instruments represent the substantive law on prudential and capital requirements for credit institutions in the European Union based on the international agreement called ‘Basel III’¹⁰ and they are applicable in both Eurozone and non-Eurozone Member States. It is relevant to highlight that the different pillars of the banking union do not have the same territorial scope. While the SSM is limited to the Eurozone, all other pillars are applicable in the whole European Union. Within the Banking Union, the role of the SSM is to ensure that Eurozone banks respect the prudential requirements that are imposed on them.

The SSM is shaped by 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 (hereinafter the SSMR). As its title suggests, the SSMR entrusts the ECB with the enforcement of prudential regulation. To that aim, the SSMR provides the ECB with a supervisory toolbox composed of investigative measures, administrative measures as well as administrative penalties. Nevertheless, the SSM does not put the task of banking supervision exclusively on the shoulders of the ECB as the only supervisor. As revealed by its name, the SSM is a mechanism. It is a mechanism that, while relying on the assistance, cooperation and expertise of multiple national supervisory authorities, achieves single supervision of the Eurozone banking sector.

Within the SSM, the ECB has been given the exclusive competence to carry out specific supervisory tasks, based on a cooperative framework that involves the national competent authorities (hereinafter NCAs). In order to determine the allocation of enforcement powers between the ECB and the NCAs, the SSMR has adopted a distinction between significant and less significant credit institutions.¹¹ While the significant institutions are under direct supervision by the ECB, less significant institutions remain under direct NCA supervision. This implies that the ECB can only directly exercise the supervisory powers attributed to it by the SSMR over significant banks.

By no means does the distinction between significant and less significant banks aim at excluding less significant banks from the SSM or from ECB supervision. Several features of the SSM establish the contrary. While the NCAs retain their power to adopt the supervisory decisions concerning less significant banks, they must execute their mission in accordance with the regulations, guidelines or general instructions issued by the ECB, and are subject to a duty of cooperation in good faith as well as an obligation to exchange information with the ECB. Moreover, the supervision of less significant institutions remains subject to oversight by a specific Directorate General of the ECB entrusted with the indirect supervision of less significant institutions. In addition, the ECB may decide at any time to take over direct supervision over one or more less significant banks when this is considered to be necessary for the consistent application of high supervisory standards. Furthermore, where the SSMR does not confer certain powers of the ECB, for instance in the case of supervision of less significant institutions, the ECB may require the NCAs by way of instructions to make use of their powers under and in accordance with the conditions set out in national law. The NCAs must follow such instructions,¹² even while the nature of their acts remains national.¹³

While the ECB stays involved in the supervision of less significant institutions, the NCAs are also involved in the supervision of significant institutions that are under direct ECB supervision. This involvement intervenes both during the investigations and during the execution of specific measures or penalties. This reflects again the fact that the SSM is conceived rather as a mechanism, than as a single supervisory entity.¹⁴ The cooperation between the ECB and NCAs will play a crucial role in the effectiveness of the SSM.¹⁵

The supervision of significant institutions is organised through the establishment of Joint Supervisory Teams (hereinafter “JSTs”). For each significant institution, a JST has been created, composed of staff of the ECB as well as the NCAs. Every JST will be coordinated by a designated ECB staff member (the JST coordinator) and one or more NCA subcoordinators. The ECB is in charge of the establishment and composition of JSTs, but the appointment of staff members from the NCAs to JSTs is made by the respective NCAs. A JST is the main tool within which the NCA assist the ECB in the supervision of significant institutions and is a far-reaching example of a mixed administration. The JSTs are considered to be a cornerstone and a symbol of the SSM,¹⁶ since the strength of this organisational structure lies in the fact that it relies on the NCAs’ experience and expertise to execute a policy that is decided on the European level. The JSTs should perform the supervisory review and evaluation, participate in the preparation of a supervisory examination programme...