Towards a new European Banking Supervisory Authority

25 April 2013

On 25 April Dr Elke König, President of the Federal Financial Supervisory Authority (BaFin), gave a speech on the future structure of banking supervision in the European Union. She discussed in particular the future role of BaFin and other national authorities once the single supervisory mechanism for the Eurozone is introduced. Her speech was part of the Colloquium Series “Political and Financial Impulses between Austerity and Growth: A Silver Bullet for Europe?” organised by the Center for Financial Studies.

According to König, the financial crisis had shown that national supervisory structures were no longer capable of meeting the challenges of globalisation. Large banks in particular operated increasingly across national borders. National authorities’ abilities to identify and avert possible risks could not keep pace. On a European level it would thus be essential to implement the planned single supervisory mechanism, given that the legal framework within the European Union allowed for such a strong mechanism. The new single supervisory mechanism could increase financial stability in the Eurozone. Further steps on the global level, on a probably weaker legal basis, would need to follow.

In this context, König pointed out that the supervisory structure in a given country would not always allow conclusions to be drawn about actual supervisory activities there. The legal and political environment had a huge influence on how a supervisory authority carried out its duties. There was always a risk that a national authority would feel committed to its home market and would apply home country bias in its decisions. This would impede the objective of EU-wide legislation of creating a level playing field in all countries.

The harmonisation of supervision was important because a single European market could only work if European legislation was uniformly implemented and applied in all countries, said König. During the crisis in particular confidence had suffered and led to a growing fragmentation of markets. The planned single supervisory mechanism, consisting of the European Central Bank (ECB) and national authorities like BaFin, could help to restore confidence.

König pointed out that the introduction of the single supervisory mechanism in the Eurozone still left an important role for the European Banking Authority (EBA), which is responsible for the European Union as a whole. It would be important to manage the respective roles to avoid overlap, duplication or unnecessary tensions, said König.

The single supervisory mechanism for the Eurozone will rely significantly on the contribution of national supervisory authorities, like BaFin, which will continue to play an important role in supervision. The single supervisory mechanism will require national expertise in the supervision of those large banks that will be directly supervised by the ECB. Here, the plan is to work with joint supervisory teams composed of staff from the ECB and competent national authorities in order to exploit the superior know-how of national authorities regarding the local market and related risks. National authorities will retain supervisory responsibility for smaller banks, albeit within an ECB framework. This means that within the single supervisory mechanism the ECB can set general guidelines for the supervision of smaller banks and will monitor national authorities’ compliance with supervisory standards.

König stressed that, even with the new single supervisory mechanism, banking union was still far from being complete. For example, a European framework for bank resolution was urgently needed. So far the idea had been to establish bank resolution authorities only at national levels and not for the entire Eurozone, like banking supervision. König welcomed this decision because a uniform bank resolution system in the Eurozone was not possible under existing law. In contrast to banking supervision law, which had been harmonised to a great extent, there were too many national differences in legislation relating to banking resolution. König therefore concluded that a single European bank resolution system would not be possible without a change in the European treaties.