Administrative Organisation of Banking Regulation
© Springer International Publishing Switzerland 2015
Alexander WellerdtOrganisation of Banking RegulationSpringerBriefs in Law10.1007/978-3-319-17638-3_22. Administrative Organisation of Banking Regulation
Keywords
Administrative organisationElementsInstitutionsPrinciplesOrganisational relationshipsMarket accessMarket behaviourInformationUncertaintiesKnowledge creationThe conception of this chapter and the main reasoning is based on broader explanations in Chapter 2 in Wellerdt, Organisation der Regulierungsverwaltung, forthcoming.
2.1 The Concept of Administrative Organisation
Administrative Organisation and Administrative Organisation Law are mostly described at an abstract level in administrative science.1 This is because the dogmatic foundations, developed in earlier times, of the German Federal and Union Administration have not been adjusted in accordance with the ongoing developments and various phenomena of administrative reality. As a result, the administrative organisation is exhausted in a variety of exceptions in regard to a lack of consistent systematic rules.
An approach to the concept of administrative organisation should take place by means of a not only semantic separation of the concepts of administration and organisation in order to identify the elements of administrative organisation and their interplay (Sect. 2.1). Based on this, the functions of administrative organisation used for controlling administrative action can be understood (Sect. 2.2). Although the forms of administrative organisation differ at a national and European level, as well as in different areas of administration between state and society, administrative organisations have common elements (Sect. 2.3). They form the conceptual basis for the following analysis of banking regulation.
2.1.1 Organising Administration
A first approach to the concept of “administration” can be derived from the meaning of the word itself. “Administer” means as much as “to affect something”, “to manage something”, and “to direct the taking of something”.2 In addition, a holistic definition of the term “administration” has not been accepted until today.3 The reason lies in the nature of administration, as it is possible to describe but not define administration.4 Administration needs to be open for further developments to deal with new manifestations in economics and society. This means: administration is the sum of all state bodies involved in the performance of public services.5
In addition, administration has not only a substantive executive, but also a formally organising function.6 The concept of administration is understood and used ambiguously. Administration describes diverse, purposive performances of duties for the common good by trustees appointed for this purpose. Further, administration describes the entirety of bodies of the nation-state and supranational organisations, which administer social and economic areas. Administration is a system supporting the decision-making process.
It processes stimuli from the environment, in order to carry out administrative tasks and to fulfil administrative purposes.7 Hence, administration describes, on the one hand, a dynamic, multi-functional activity of administering different areas of life and economy. On the other hand, it is understood as a synonym for the static organisation of performing state activities.8 With that, administration is an organisational unit which organises state action.
2.1.2 Administering Organisation
A definition of the concept “Organisation” has already taken place in economics,9 social sciences10 and jurisprudence.11 Thus, the concept of organisation is ambiguous because of its different meanings. Its meanings range from the organising process over the internal order of an administrative unit up to the social structure as such.12
Organisations are complex social structures that work under the principle of job-sharing. From the outside they appear as an integrated whole.13 They rather combine interrelated actions and communications within or between administrative units.14 Organisations administer actions and communications by performing duties in a strict hierarchical or collegial15 order. These duties are assigned to specialised organisation members with the help of a detailed programming.16
Like the concept of administration, the concept of organisation is understood equivocal.17 An organisation describes not only institutionally a static unit of bodies. An organisation was created as a dynamic organising instrument for the fulfilment of tasks. It takes action to guide administrative actions in a certain direction.18 Thus, the organisation creates an institutional framework for the decision-making process and it further enriches it with administration decisions.19 In other words, organisation is the appearance and realisation of administration.20
2.1.3 Meaning of Administrative Organisation
The rules of the administrative organisation of national and European administrative bodies arise especially through laws, regulations or statutes and through frameworks of the German Basic Law21 or the Treaty on the Functioning of the European Union with its principles of democracy and rule of law.
Administrative organisation is the best possible fulfilment of public services.22 They possess and link elementary functions.23 First, administrative organisations can reduce possible decision uncertainties by collecting and comparing the organisation’s own knowledge. Furthermore, they can flexibly combine resources of all organisation members, generate information, learn from practical experiences and gain new knowledge.24
The administrative organisation constitutes the ‘structural requirements of administering’25 in two respects: first, the structure of the administrative organisation determines the administrative action and second, structured administrative actions require an adequate administrative organisation. So, administrative organisations give static and structure to administration units and have a dynamic structuring effect on administrative action. Thus, administrative organisation gains not only formally, but also materially importance for the control of administrative decisions. This interdependency enables a special form of control. The concept of control is terminologically described as a structure management 26 or controlling organisation. 27 Behind these conceptualisations stands the realisation that the Administrative Organisation Law creates structures in which functions, relationships and decisions are organisationally and coherently controlled. In the following analysis, administrative organisation is seen as a medium that controls the decision-making process of the administration through a legal structuring of the organisation.
2.2 Functions of the Administrative Organisation
Administrative organisation has a double function.28 It determines structures and creates the structures of the administrative organisation.
2.2.1 Constitution and Control
The administrative organisation plays an institutional function by regulating the internal organisation and external relations of independent administrative units.29 On this institutional basis the administrative organisation develops its instrumental function. It allows the control of administrative decisions by assigning tasks and decision-making powers. Put simply, the constitution of the administrative organisation creates a framework for controlling administrative actions.
First, the administrative organisation processes dynamically stimuli from its environment. Then, the control is oriented towards the specific goals of the static administrative organisation, resulting from particular tasks that have to be performed.30 Main objective of the administrative organisation is always the realisation of the substantive law.31
2.2.2 Meaning of the Administrative Organisation Law
The administrative organisation is determined by the Administrative Organisation Law.32 It gives a normative basis to the administrative organisation. It establishes the constitution of an organisation and regulates the connection and the functioning of the bodies in the administrative apparatus. Thus, the regulatory effect of the Administrative Organisation Law has an “ambiguity” towards the inside and the outside.33 Special importance is gained by the Administrative Organisation Law by the involvement of national and unional administrations in the European Composite Administration.34 This serves the task-related control of the Union’s own administration, the national government administrations and the inter-national state administrative cooperation.35 In this framework, the Administrative Organisation Law structures the systemic forces and balances the interactions between actors. With that, organisations and proceedings become important control resources in an independent political and economic context.36 Central importance is attributed to the administrative organisation as a framework and resource for controlling the decision-making process.
2.3 Elements of the Administrative Organisation Design
Because public services, policies and institutional frameworks are too different, administration and administrative organisation do not form a uniformly structured entity.37 Hence, it is not possible to structure and standardise the entire administration. Nevertheless, depending on the administrative unit, there are elements of the administrative organisation that influence administrative actions. Administrative science brought out a number of administrative organisations features that are linked in this study and also used as basis for a concrete modelling. For this purpose, a first localisation of elements of organisation is done in the reference field of banking regulation.
2.3.1 Legal Form of the Organisation
The most important task of the administrative organisation is to find a legal form for the organisation. The legal form sets the outer frame of the organisation and influences its action. Its justification may lie in different acts of law for example from law to regulation to statutes up to concrete and general agreements. The legal form of the organisation determines which impetuses are picked up and which instruments are chosen to process the stimulus. It also characterises the meaning and the function of the administrative organisation in the Composite Administration. Furthermore, it lays down the legal status of the organisation as well as its legal capacity and its capacity to act. The legal capacity affects the relationship of the organisation and other organisations. The capacity to act affects the performance of public services and the legal quality of the organisational action.
Within the banking regulation there are eleven representative administration units at national, European and international level that contribute to the regulation of credit institutions. The multitude of actors reflects also the variety of legal forms of organisations. In addition to legally constituted national authorities or the European agencies with certain competences and instruments, also influential committees and bodies have been formed. They especially act on the international scene and only have vaguely determinable capacity to act due to a lack of a concrete legal basis.
2.3.2 Institutions of the Organisation
Institutions of the organisation are an element of the organisational design, imported from the New Institutional Economics. The New Institutional Economics pursues two approaches that are usable for a jurisprudential analysis.
First, the New Institutional Economics examines the importance of institutions for a company’s economic behaviour. The results can be transferred to the administrative actions of administrative organisations. Moreover, the “transaction costs”38 resulting from seeking information, negotiations and enforcement of decisions can be projected on administrative units to control decision-making processes in administrative organisations.39 The medium to create an appropriate organisational structure and to control decision-making are so called institutions.40 Institutions describe a set of rules that determine the administrative structure and programme the administrative pattern to reduce transaction costs.41 Within these structures, individual decisions are developed and carried out depending on type and scope.42 Finally, the New Institutional Economics recognises a link between organisation and institution, after which the development of the organisation depends on the institutional framework. Organisations on the other hand affect the development of the institutional framework.43
The meaning of the terms institution and organisation, from the New Institutional Economics point of view, can be linked to the administrative scientific definition. Organisations are groups of individuals, sharing a common interest and trying to achieve a common goal.44 The organisation of the individuals is done by the appropriate configuration of institutions.45 Institutions are formal and informal rules that are defined in legal rules or in other regulations. They can also be passed down orally.46 Linked they form a normative system equipped with instruments that can purposefully control the behaviour of individuals.47 Institutional arrangements can particularly regulate that certain bodies find out and transmit information and that certain bodies are bound by instructions. Furthermore, certain bodies have to be consulted about relevant organisational wise issues and be involved; they have the opportunity to comment and to participate.
Transferred to banking regulation, organisations are all national regulatory authorities and European regulatory actors pursuing the regulation of markets. To order and coordinate them, institutions are necessary. The economic concept of institutions means the legal bases (including laws, regulations and statutes) of the players in the financial market regulation and in the banking regulation. They form a set of operating rules that determines, among other things, who is responsible for decisions in a particular area and what procedures must be followed.48 Institutions gained considerable importance in particular in terms of regulating information relations between different organisations.
2.3.3 Purpose of the Organisation
The constitutive legal basis of the organisation sets its legal form to the outside and structures the internal structure via its institutional arrangements. In addition, it sets special requirements or targets. They affect the organisational units both, from the inside and the outside: individual bodies can pursue internal aims; the organisation itself helps to purposefully fulfil the public service to the outside. The purposes of the organisation influence the administrative action. Having a set purpose, administrative decisions of individual organs and the whole organisation are directed in a particular direction. Purposes are defined by legal norms, government programmes and mere tradition; they can also be determined by administrative action.49 They serve as orientation and scale for administrative actions.50
In context of the banking regulation, the financial market regulation sets purposes which are formulated very vaguely due to the large number of actors. They range from the development, to promotion and implementation of effective regulatory and supervisory policies. They also strengthen the rules and procedures at an international level through the consistent and effective implementation of regulatory measures at a supranational level. They too reduce damages in the credit system and losses of obligees at a national level. A common aspect of the institutional purposes is the contribution to the cooperation with other regulatory actors in order to protect the stability of the financial system.
2.3.4 Principles of the Organisation
The internal design of formal structures of the organisation itself is relevant for the decision-making process.51 It can follow different principles of organisation: in earlier times hierarchically-monocratic organisational principles prevailed. Hierarchical organisations and its bodies result in a single head from which the organisation breaks down at different levels. They are ordered from top to bottom and are controlled—along with rights and obligations, in particular the right to information and the obligation to report.52 This allows to gain an overview over all processes very fast. Consequently, the coordination of the administrative organisation gets easier. In contrast, information and reports focus on a hierarchically privileged unit.53 With that, the intellectual potential of the organisation or its bodies is weakened.
More recently, organisations were structured into chambers, departments or committees according to the collegial principle.54 Thus, decisions are made by the interaction of several actors by majority. The collegial principle is preferred to the hierarchical forms as basic organisational principle.55 This can be noticed on the basis of a two-staged decision-making process, which in turn connects the hierarchical with the collegial organisational principle. At first, the technical examinations take place at a horizontal level. This implies that size, responsibilities and procedures of the College are properly regulated.56 Otherwise collegial organisations run the risk to destabilise or to get blocked in details. Through the cooperation of collegial equals, technical specialisations and practical experiences can be integrated in the decision-making process. Information paths are shorter in a College than in established hierarchies and the contributions of the Colleges can be coordinated horizontally. This results in a pluralistic decision-making, which in turn affects the understanding and trust in collegial forms of organisation.
Between the traditional organisational forms of hierarchy and the College there is also a less sharply drawn organisational principle. It can be described as Forum.57 It is an organisational principle that emancipated itself from the hierarchical or collegial principle. It developed either from collegial relationships and organisational forms or distanced itself from a collegial organisational form with a strong hierarchical integration. A Forum breaks out from the prevailing relationships to organisational structures with hierarchical or collegial organisational principles. Outdated structures in connection with over-formalised methods caused this development. Forums are formed in areas of informal cooperation and usually have no superior and subordination relation. Organisations communicate and negotiate with each other in Forums. They cooperate when they have to carry out complex tasks where several parties with different information and resources work together. Then they divide responsibilities equally among each other.58 Again, this is based on institutions defined as the sum of rules shaping the interaction. In addition, Forums are mostly informal groups that come together for advisory services but they do not act decisively.
Although the banking regulation needs to make concrete regulatory decisions, they also turn away from strictly hierarchical organisational principles and turn towards open Colleges or Forums. At a national level, decisions are still predominantly made hierarchically in departments or committees. At a supranational level, collegial structures have increased. However, the European Central Bank may give the impression that hierarchical decision-making prevails in recent fiscal and monetary policy measures. At an international level only Forums exist as principles for regulatory decisions. There are two main reasons: Administration is already subject to actual uncertainties. Furthermore, especially in terms of regulation, great uncertainties rule over the economic development of markets and competition. There is a great need for knowledge and information, which is easier to satisfy by a discursive exchange during the decision-making process.
2.3.5 Tasks of the Organisation
Administrative organisations meet specific tasks. General tasks range from programming, to execution and to controlling measures. Administrative organisations are decision makers; either hierarchically through a person or collegially through a committee. Institutional arrangements assign the competence to select among decision alternatives. Decisions to program, to execute and to control are at the core tasks of an administrative organisation.59
In banking regulation the central tasks of administrative organisations are not exercised uniformly. Programming decisions are taken over by international administrative organisations, with participation of the national central banks and supervisory authorities. Implementing decisions move themselves from a national to a supranational level into the hands of the European Central Bank. As a consequence of the crisis control decisions grow in importance at European level, since they provide for sanctions.
2.3.6 Competences of the Organisation
The tasks of an administrative organisation are assigned to a relevant body that has the competence to fulfil the task.60 By distributing and coordinating the tasks within the organisation, a system is created that determines who has which authority to act. In this framework, the responsible units perform the decision-making of the organisation according to its competences to the outside. The competences extend from decisions of principle to individual decisions and counselling.61
In banking regulation, the competences between the national, the international and European organisations are asymmetrically distributed. International organisations are solely responsible for counselling, even if their recommendations and guidelines have a great factual effect. Essentially, decisions of principle and individual decisions are carried out increasingly at European level through the European Central Bank and the European Banking Authority in cooperation with the European Commission. In contrast, national organisations can only work on individual decisions that have no cross-border importance or on affairs without systematic relevance.
2.3.7 Organisational Relationships
Organisational elements such as legal forms and institutions, duties and responsibilities, and particularly principles of the organisation relate to individual administrative organisation. Due to the continual convergence of life and business areas and its administrative units, administrative organisations can no longer be considered in isolation. Administrative units are interlinked through different information relationships and communication channels. Such compounds determine the influence of administrative organisations. In the following, “Organisational Relationships” are described as an essential element of the organisation, as they take account for the changed role of the administration.
Administrative organisations contact other administrative organisations. Communication structures are created that evolve.62 Communication between administrative organisations often starts simultaneously. Structures built up in which the communication takes place. Subsequently a communicative exchange is created for one another. The development of these communication structures63 takes place as follows: Some actors can initiate communication, while others can only receive communication. Hence, different communication paths are formed. These communication paths transport information. Information can be experiences or data (e.g., commercial practices or financial instruments of individual financial institutes, equity ratios, liquidity ratios). Information is essential for organisations to maintain and develop the administrative organisations. Furthermore, information is a requirement for rational decision-making.64 Therefore, all administrative organisations have a special interest in a shared communication for obtaining information. Therewith, organisational relationships between administrative organisations are created. Organisational relationships describe information relations.65 Information relations are characterised by collecting and exchanging information. Further, institutional arrangements indirectly determine in which way information is processed to knowledge within the organisation. Information decides on the role of administrative organisation and serves the coordination of decisions in the European Composite Administration.66
Information relations are an important element of administrative organisations. This has two main reasons: national administrative units grow together within the framework of the European Composite Administration. In addition, the administration of economic sectors is getting more and more complex, meaning that an adequate administration of cross-border cases has an increased information and exchange requirement. Administrations learn and renew themselves, change their structures and adjust their relations to changes in their environment.67 This development takes place in and through the administrative organisation, and is controlled by the Administrative Organisation Law.
In the context of organisational relationships, specialisations through divisions of labour occur. So, not every administrative organisation needs to collect, process and save every single information. Instead, they can concentrate on selecting, processing, transmitting and saving information.68 Sometimes this may require a unilateral or bilateral cooperative exchange of information. Therewith, even in sectors with a large number of actors several loose and function-related communication and action relations are created.
These cooperative relationships are interdisciplinary operated under the name network.69 It is a multi-level system of governments or administrations (e.g. central banks, financial authorities) of states. They are flexible, hybrid forms of organisation with a cross-border character.70 Networks arise between a static, state hierarchy on the one hand, and a dynamic development of the market, on the other hand. Networks can do what hierarchies and markets cannot do. Through a cooperative work and information management, they ensure flexibility, reduce uncertainties by means of a mutual exchange of information and create knowledge through learning.71 This points out the importance of organisational relationships.
This analysis sees organisational relationships as vertical and horizontal relationships between regulatory actors at a national and supranational level.72 Vertical organisational relationships can be divided into unilateral and bilateral cooperative relations. Non-binding rights to consultation and statements are occasionally granted to perceive national interests and to maintain the work order of supranational actors. More common are binding duties of disclosure, which may range from exclusive obligations to provide information and duties to inform, up to durable obligations to create report and collect information. In contrast, horizontal organisational relationships show mutual forms of cooperation while programming an abstract decision framework or concrete decisions. Therewith, existing information is merged, empirical values are used efficiently and measures are coordinated.73 In any case, Organisational Relationships are an essential element in areas that need much information and knowledge like the administration of regulation. Organisational relationships are particularly important for the regulation of the financial industry with a variety of different financial institutions.
2.3.8 A Summary of the Elements of Administrative Organisation
Administrative organisations are characterised by different elements that are connected and influence each other. The comparison of certain elements in different organisations enables to systematically determine similarities and differences. It becomes apparent that elements of an administrative organisation interact. The synopses of individual organisations show systematic principles of administrative organisation. Those principles, in turn, help to classify individual organisations. In the following analysis, specific organisations are analysed in the field of banking regulation to create general models of administrative organisation out of particular phenomena.
2.4 The Concept of Regulation
The concept of regulation is a very young concept in the German and European science of administrative law. Its origin lies in the American Law of the 19th century. In the 20th century it was partly integrated or increasingly appreciated individually in the European Law. Meanwhile regulation stands in general for any state control of market activities in the public interest. Regulation can be characterised as an interdisciplinary cross-sectional task that involves the knowledge of economics and business administration.74 An approach to the concept of regulation is based on wording and history, systematic and telos of banking regulation. On this basis, the functions of banking regulation are worked out (Sect. 2.5).
2.4.1 Regulation
Regulation is a common term, both in science and in politico-media everyday life.75 In addition to political science, economic and jurisprudence, also the daily news deal with reports on the regulation of financial markets. Is regulation merely a synonym for a trend or an instrument of economic management? In a context of a social momentum and differentiation regulation becomes particularly important for government and administration. Where does this term originate and what does it mean in general? A uniform definition of the word regulation does not exist.76 The understanding of the term was traditionally based on the wording and grew in importance by transnational and interdisciplinary developments. It is noteworthy, that regulation is usually used in the context of interfaces of economic and legal systems.
As a result, regulation is a variable instrument, since it cannot be tied on a single model or a single goal, which explains why regulation is highly attractive for the state.
2.4.1.1 Wording
The interpretation of the written wording in everyday language and in science is an approach on how to use the term. The English usage of “to regulate” and “regulation” is understood in a widely sense in legal, economic or technical matters. The Oxford Dictionary of English defines “to regulate” in the sense of “Control or maintain the rate or speed of a machine or process”, “Set (a clock or other apparatus) according to an external standard”, or “Control (something, especially a business activity) by means of rules and regulations”.77 In legal parlance, “to regulate” is defined as “rules and administrative codes issued by governmental agencies at all levels, municipal, county, state and federal. Although they are not laws, regulations have the force of law, since they are adopted under authority granted by statutes, and often include penalties for violations […]” and “to control or direct according to rule, principle, or law.”78
According to the wording, “regulation” means any state influence on business conditions and behaviour patterns of financial institutes on the financial market. In this work, “banking regulation” is understood both, in the sense of banking supervision and banking resolution. Banking supervision is interpreted differently in jurisprudence and economics. In a broader sense, the concept of banking supervision institutionally comprises all state bodies that are in charge of banking supervision.79 In a narrower sense, supervision functionally means the compliance with all legal standards from the approval of the management to the termination of banking operations.80 These opinions can be transferred to even younger and less discussed banking resolutions. As a result, in other reports the concept of banking regulation means all legal rules that control the formal organisation or the material execution of supervision and resolution for credit institutions.81
2.4.1.2 Development of Banking Regulation
The law of banking regulation always developed in response to major financial crises or undesirable developments of individual financial institutions. In Germany banks were only liable to the Gewerbeaufsicht until 1931.82 The Law of Banking Regulation developed as a special form of the Gewerbeordnungsrecht. 83 The world economic crisis of 1929 and the collapse of the Darmstädter und Nationalbank in 1931 led to the first legislative regulations by the German banking law of the German Reich,84 which established a banking supervision. In response to the collapse of the Herstatt Bank in Cologne in 1974, the Basel Committee on Banking Supervision was established to coordinate banking supervision for cross-border institutions at an international level. In parallel, the international regulatory impulses were harmonised and implemented through directives and regulations within the European internal market. Increasing cross-border competition and the global digitisation of financial markets increased the business risk of the financial sector at the beginning of the 21st century. Through international banking, mergers of banks and the linking of the financial markets, crises are no longer restricted to individual credit institutes or markets.
Ensuring financial stability is an elementary responsibility of the state. Financial stability is geared towards protecting the financial market as a whole, transparency of the financial sector, as well as investors’ confidence. To accomplish this task, the state is responsible for the regulation of banks and financial services providers. Initially, the state provides via central bank an infrastructure that co-founds, supervises, controls and intervenes in the financial markets.85 In addition, the state ensures conditions for a competition in the public interest in the financial market.86 In detail, this means that the state gives a normative framework. This framework is filled by financial institutions and is in turn supervised by the state and optionally enforced by the state.87
2.4.1.3 Classification of Banking Regulation
In scientific papers, regulation is often equated with the regulation or the standardisation of a certain business matter. In particular, economics has a special influence on the determination of the regulatory concept. Regulation is in the public interest and serves to prevent exploitations and welfare losses. On the basis of this economically shaped term, the differentiation of the regulatory concept took place in jurisprudence.88 Thus, legal statements in terms of regulation mostly relate to economic market issues. Regulation is regularly distinguished systematically between two dimensions: regulation in the narrower and in the broader sense.89 Regulation in the narrower sense includes selected instruments of state economic law to create and safe competition on imperfect and non-existing markets.90 Such markets are usually characterised by a particular structure. They are called networks. Networks are natural monopolies.91 Through regulation, markets become contestable and prices are set. Regulation in the broader sense, however, describes any form of governmental influence on the economy and competition on the market.92 Both, a legislative and an administrative intervention are possible. Common to both forms of regulation is that the state organises the competition by setting the necessary framework and guaranteeing a certain social level.93 The area of banking regulation is a form of regulation in the broader sense. In particular, by statutory capital and liquidity requirements, organisational requirements as well as an administrative supervision and resolution, the State may both indirectly and directly influence the financial market and the financial sector.
2.4.1.4 Sense and Purpose of Banking Regulation
Finally, sense and purpose of banking regulation are very important. Regulation is an instrument used by the Administration Organisation Law. It serves as a legal correction of market mechanisms in cases of market failure.94 When a market fails, no competition takes place. Regulation in turn creates and promotes competition on the market. Basically, competition is a process of discovery.95 Therefore, the Regulation Law cannot permanently stimulate a market but can only provide an arranging frame. Sense and purpose are basically determined by the circumstances of the objects of regulation and the resulting basic tasks. Banking regulation is a classic Gewerbeaufsicht.96 The state monitors the risks of credit institutes to avert danger for other credit institutes, private investors97 , 98 and depositors.99
Purposes of banking regulation are the protection of the financial services sector as a whole100 and securing the market functions. The protection of the financial services sector as a whole focuses on the supervision of solvency and liquidity, to ensure the ability and the willingness to pay of banks.101 In addition, regulation aims to repel systemic risk in the financial services sector.102 Systemic risks are a danger for the business activities of banks, which are not confined to a single institution, but have negative repercussions on the overall economy through so called domino effects.103 Banking regulation, therefore, focuses on so-called system-relevant banks, whose collapse cannot be compensated easily and could trigger other dangerous chain reactions.104 By ensuring a workable, stable financial services sector with integrity also the confidence of bank customers of the financial services system is protected.105 The protection of market functions takes up on that. The protection of market functions is used to enforce standards of conduct for the business of credit institutions. Aim is to combat illicit financial operations and to protect the confidence of investors and depositors.106 Therewith, investors as lender of capital are protected against taking high risks and against suffering high losses through the financial institutions as capital acquirers. The protection of the market function itself stabilises the financial services system as a whole.107
Sense and purpose of banking regulation focus on the key functions of business finances in terms of lending capital to companies and privates as well as in terms of influencing the economic policies via the central banks. States and central banks have not only a politically, but also a macroeconomical positive interest in ensuring the overall functionality of business finance to preserve jobs and to secure the financing of government task and to allow private pension schemes. In no other economic area the potential effects of a collapse of a single firm are so serious. This is because of the global interdependence and the special trust dependence of the whole system.108 As a result, banking regulation promotes positive welfare effects and prevents negative welfare losses. Furthermore, the banking regulation creates a regulatory framework for the trust in transactions in financial markets and reduces information asymmetries between banks as providers and private persons as demanders.109 Banking regulation is a versatile state instrument to influence the development of a major economic sector.
2.4.2 Administration of Regulation
Banking regulation is carried out by administrative units that are subjected to a differentiation, pluralisation and Europeanisation due to the development of financial markets.110 In consequence of a growing interdependence between state and society, administration is no longer a monolithic entity, but a central control point.111 Administration has opened itself for social influences. Administration also defines objectives in the best public interest for private actors.112 In this interface, administration of regulation starts to work.
The concept of the administration of regulation shall not follow the widespread trend of the creation of neologisms in economic administration law which increasingly complicate a dogmatic order of administration. Rather, the administration of regulation clearly defines a specific activity of administration. Regulation can be classified into the dogmatic basic patterns of economic governance and economic management in the economic law. Economic governance is any state-initiated control action regarding compliance with a legal provision. Economic management is the controlled influence on economic processes.113 It happens through target-oriented legal rules, whose implementation is monitored, appropriated and eventually corrected by the regulatory authorities.114 Regulation is considered as a subcategory of economic governance, since its object is to meet regulatory requirements. Nevertheless individual instruments of regulation—such as capital requirements and liquidity ratios—affect economic operations of banks. Strictly speaking, regulation can be clearly assigned either to economic governance or to economic management according to its concrete form of appearance.115
2.5 Functions of Administration of Regulation
The development of banking regulation has shown that a market failure can be a reason for regulation. Hence, the central function of the administration of regulation is to order an economic sector. In the financial sector, the administration of regulation has several instruments: from authorisation to market participation, to the supervision of market behaviour, to an intervention in the market as well as to the specification of market conditions.116 Regulation affects the economic behaviour of market participants who are active or those who want to be active on a market. With different instruments, the administration of regulation can influence market participation or market behaviour. The regulation of market participation determines whether and to what extent a market player may be or should be active in a market117 by assessing in particular the personal and professional suitability. Furthermore, the regulation of market behaviour regulates how a market player may or shall operate on the market118 and determines what information must be passed on to the authorities. There is also the possibility to influence the market behaviour via concrete power to intervene. To use all instruments the administration of regulation in the European Composite Administration needs a multi-stage process to collect information, to generate knowledge and to execute.119
2.5.1 Regulation of the Market Access
Credit institutes or financial service providers need government authorisation to be able to take action in the financial market business. Both the national and the European regulations contain a preventive ban with permit reservation. This means that banking transactions—on the understanding that special conditions are fulfilled—can only be allowed with an authorisation. This is to ensure that only personally and professionally suitable persons carry on a banking business or provide financial services.
The competence for the authorisation of business activities or for the withdrawal of the authorisation of systemically relevant banks, according to Art 6 (4) of Regulation (EU) No 1024/2013, is divided.120 The decision to grant authorisation is a two-stage procedure: if the Member States comply with the authorisation requirements, the national supervisory authority proposes the authorisation to the European Central Bank (Art 14 (1)), which then gives a recommendation for a decision to the national authorities (Art 14 (2) of Regulation (EU) No 1024/2013).121 Finally, it comes to a national decision of authorisation by the national supervisory authority according to national law. However, the withdrawal of authorisation can be done at a European level for all Member States whose currency is the euro according to the European Central Bank via the Single Supervisory Mechanism Art 4 (1) lit. a) of Regulation (EU) No 1024/2013 in conjunction with Art 14 of Regulation (EU) No 1024/2013. The withdrawal of authorisation appears as a direct administrative act of the European Central Bank.122 In fact, the European Central Bank, as a European Union institution, applies national German administrative law.