Theses About the Organisation of Banking Regulations

The core task of the European Central Bank is to maintain price stability. Due to the reform of the financial regulation law, the European Central Bank has been commissioned by the Single Supervisory Mechanism with banking supervision. Price stability as the primary objective of monetary policy and financial stability as a central objective of banking supervision can compete with each other. In particular, interest rate reductions, loan programmes, the purchase of asset-backed securities or possibly even the purchase of government bonds can lead to the recapitalisation of credit institutes, which are classified to be in risk of default by the banking supervision.

Essential for the supervision by the European Central Bank is the significance of a bank. In accordance with Art 6 (4) second to fifth subparagraph of Regulation (EU) No 1024/2013 are all banks “significant” that exceed certain thresholds and that significantly act cross-border or receive financial assistance from the European Financial Stability Facility or the European Stability Mechanism, or in any event the three most significant credit institutions in each of the Member States.⁴⁶ In addition, of banks considered less significant the European Central Bank can, on Art 6 (5) lit. (b), (d), (e) of Regulation (EU) No 1023/2013, also request information, can after consulting with national competent authorities assume control over the supervision of credit institutions and can decide to exercise directly itself all the relevant powers for one or more credit institutions to ensure consistent application of high supervisory standards. National supervisory authorities remain only with the supervision of credit institutions which fall outside the scope of the Regulation.

The banking supervision by the European Central Bank influences the business behaviour of credit institutions and can lead to failures of monetary policy. Monetary policy failures can lead to an investment trap. An investment trap is when other factors such as the rate of the European Central Bank greatly affect the investment decisions of market participants so that a change of the rate of the European Central Bank has no or only a minor influence on the decisions of economic operators.⁴⁷ The money supply is controlled by a reduction or rise in price on refinancing at credit institutions over the base interest rate of the European Central Bank. The first transmission mechanism is the process through which monetary policy decisions of the Central Bank affect the refinancing cost of credit institutions. In addition, the credit institutes have administrative costs which include personnel, material and building costs as well as the costs for supervision. According to Art 51 (1) sentence 1 and 2 of the German Banking Act institutions shall refund to the Federal Government 90 per cent of the costs incurred by Federal Financial Supervisory Authority. The costs shall be apportioned among the individual institutions according to the scale of their business. However, the costs of credit institutions for banking supervision at the Federal Financial Supervisory Authority or the European Central Bank cannot be influenced by the financial institutes.

The result is that credit institutes regularly pass on the cost of banking supervision to businesses and households in determining their rates.⁴⁸ Consequently an increase in costs through banking supervision has an effect similar to the increased rate of the European Central Bank. Interest rates increase; thereby investment and consumption plans are less attractive. The result is an investment trap. Thus, the aggregate demand falls again. In the case of an expansionary monetary policy of the European Central Bank and a restrictive banking supervision by the Single Supervisory Mechanism conflicts may be caused. On the one hand, the monetary policy of the European Central Bank leads to an expansion of the volume of money due to the lowered base rates. Thus, the refinancing costs of the credit institutes are reduced. On the other hand, the banking supervisory can also increase the administrative costs of the credit institutes by imposing higher standards in terms of business organisation. An expansionary monetary policy is compensated in full or in part by a restrictive banking supervision.⁴⁹ Monetary policy and banking supervision are in a target conflict.

The administrative organisation of the Single Supervisory Mechanism in the European Central Bank is supposed to avoid such failure of monetary policy. Art 19 (1) and (2) of Regulation (EU) No 1024/2013 determines that the banking supervision shall act independently from all bodies of the European Union through the Single Supervisory Mechanism. Art 25 (2) of Regulation No 1024/2013 underlines that the banking supervision to be exercised personally and organisationally separated from monetary policy.⁵⁰ This could be followed by the Single Supervisory Mechanism’s independence of the European Central Bank. In this sense Art 26 of Regulation (EU) No 1024/2013 establishes an independent supervisory board for decisions of the banking supervision.⁵¹ According to Art 26 (1) of Regulation No 1024/2013, the supervisory board is composed of four representatives of the European Central Bank. Due to the composition of the supervisory board with members of the European Central Bank, the separation within the meaning of Art 25 (2) of Regulation (EU) No 1024/2013 appears rather like a folding screen as the Great Wall of China.⁵² The separation may take place within the organisation, but formally the bodies of the European Central Bank direct the banking supervision with their expertise. The European Central Bank cannot be “separated” materially, without creating an entirely new European Union authority. ⁵³ Moreover, under Art 26 (3) of Regulation (EU) No 1024/2013, the Chair and the Vice-Chair are determined by the European Parliament and European Council due to a proposal of the Governing Council of the European Central Bank. The Vice-Chair is again filled by a member of the Executive Board of the European Central Bank. This construction gives less to believe of independence than a mixing of banking supervision and maintenance of price stability. An influence of monetary policy decisions by the Banking supervision cannot be excluded. Furthermore, the supervisory board meets first decisions with reservation; under Art 26 (8) of Regulation (EU) No 1024/2013 they have to be presented to the Council of the European Central Bank. Unless the Council of the European Central Bank does not object, the decision shall be deemed adopted.

However, Art 25 (5) of Regulation (EU) No 1024/2013 opens the possibility to call a mediation panel as arbitration body to resolve differences of views expressed by the competent authorities of participating Member States concerned regarding an objection of the Governing Council to a draft decision by the Supervisory Board. A complete separation of the decisions of the Single Supervisory Mechanism from the Council of the European Central Bank is not possible, since the Council of the European Central Bank is determined as central decision-making body by primary law under Art 129 (1) TFEU and Art (9)–(12) Statute of the European System of Central Banks and the European Central Bank.⁵⁴, ⁵⁵

As a result, there is a dilemma between monetary policy and banking supervision. On the one hand, a concentration of banking supervision and monetary policy at the central bank could lead to synergies. The European Central Bank may—in addition to the national central banks—as “lender of last resort” gain important knowledge about the financial situation of the financial institutions under its supervisions by a continuous supervision.⁵⁶ From this, a monetary policy conclusion can be drawn about determination of interest rates for commercial banks refinancing that have an impact on the money supply and the economic price level. On the other hand, a conflict may rise by combining both mandates.⁵⁷ There is a risk that the primary orientation of the European Central Bank is softened once reaching the goal of price stability to support the banking sector. In crisis situations that could lead to the situation that the European Central Bank refrains from possible interest rate increases if therewith the financial situation of banks would worsen or the European Central Bank could (as previously announced⁵⁸) acquire toxic balance sheet assets to improve the financial situation of the banks.

The resolution of banks within the meaning of Directive 2014/59/EC aims to prevent a socialisation of risks from bank transactions and losses arising upon their realisation. Therewith, market principles are restored. Investors have to bear the risks resulting from their decision themselves and a “moral hazard” is avoided. This principle is, however, again broken by exceptions provided for by law or the granting of discretion for the Single Resolution Board. The Single Resolution Board is supplemented by a Single Bank Resolution Fund, which replaces the national resolution mechanisms of the participating Member States in accordance with Art 67, 68 of Regulation (EU) No 806/2014. To coordinate the Europeanisation of liability and the Europeanisation of control by the Single Resolution Mechanism at the European Central Bank, there is a gradual transition from an independent, national to a comprehensive financing of resolutions at European level.⁵⁹ The process of the unification of Banking at European level is not regulated on the basis of the already weak authority of Art 114 TFEU, but due to an intergovernmental agreement, which sets out the legal basis for the communitarisation of the liability after a ratification by the Member States. The Single Bank Resolution establishes a communitarisation of liability for bank imbalances in the Euro Member States and other participating countries. In particular, a joint liability of banks or States for the costs of a bank resolution can induce a risky economic and financial policy. The benefits of a joint bank resolution occur alone at a national level, while the potential costs are carried by all Member States of the Single Resolution Mechanism. The foundations for a community of solidarity in the sense of a transfer union in Europe were laid tacitly. Adjusting the bank resolution to the banking supervision at a European level sets immense disincentives for a moral hazard of credit institutes and states which have just triggered the previous crisis and have provided the impetus for a comprehensive reform of the financial regulation law.

The banking supervision by the European Central Bank in the form of the Single Supervisory Mechanism used national—in Germany the provisions of the Banking Act are used—law while the grant of authority or the withdrawal of authority. It is an application of national law by a body of the European Union. Such an administrative enforcement is a novelty that does not fit in the primary law scheme of administrative enforcement in the European Union. Union law is enforced either by institutions of the Union or by Member State authorities. The responsibilities within the enforcement are shared between the Union and the Member States. The administrative enforcement in the European Union is based on rules and exceptions.⁶⁰ On the basis of Art 197 (1), 291 (1) TFEU, directly applicable primary law or national implementations of EU legislations of secondary legislations of the European Union are usually enforced by the administration of Member States (indirect enforcement). This form of administrative enforcement also complies with the general principles of conferral Art 5 (2) TEU and subsidiary Art 5 (3) sentence 1 TEU. In contrast, the enforcement of Union law by institutions of the Union (direct enforcement) is the exception, which are anchored in primary legislation of Art 298 (1) TFEU. This penalty can be applied in affairs only concerning the Union—possibly in the European Union budget—or in direct administrative relation with the Member States or individuals.

Under the principle of conferral, Art 5 (2) TEU, the Union shall act only within the limits of the competences. For the legislation Art 3 and 4 TFEU settle regulation of exclusive and shared competences of the European Union. Exclusive competences of the European Union exist within the monetary policy. Banking regulation, hence banking supervision and bank resolution are not subject to monetary policy. According to Art 5 (3) TFEU in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level. As a result, the European Union cannot claim any administrative competencies without corresponding legislative powers.⁶¹ The Banking Supervision of the European Central Bank is not compatible with the Union law principle of subsidiarity.

Such a strict dichotomous separation, however, is difficult to obtain during times of pluralisation and diversification of administrative actions. Increasing obligations to inform, assist and coordinate as well as consultation and participation rights lead to complex interdependence of national administrations during the administrative enforcement. The European Composite Administration developed.⁶² Guiding principle of this Composite Administration is a coherent enforcement of European Union law, whereby the strict separation of indirect and direct enforcement is softened.⁶³ The Banking Supervision of the European Central Bank through the Single Supervisory Mechanism breaks the rule of indirect Member State enforcement and represents a direct enforcement by the Union. Special quality is that the European Central Bank enforces no substantive European Union law, but national law.⁶⁴ The reason for this lies in the fragmentation of the substantive Banking Supervision Law in the Member States whose currency is the euro. There are a large number of different codifications in directives and regulations, but a unified Regulatory Law through technical regulatory and implementing standards and a single rule book of the European Banking Authority do not yet exist. Due to a lack of uniform European rules no consistent enforcement of European Union law takes place, but instead an individual enforcement of national law is taking place. A possible different application and interpretation of national provisions at national and European level could lead to a fragmentation of banking supervision.⁶⁵ That would be exactly the opposite of a coherent administrative enforcement, which is the aim of the European Composite Administration. As result, constitutionally problems of judicial protection would emerge. The application of national rules by the European Central Bank is not compatible with the constitutional requirement of effective legal protection of Art 19 (4) of the German Basic Law. First, in the context of actions for annulment or for failure and the preliminary ruling procedure, Union courts are responsible for the control of the actions of institutions of the Union. However, the European Central Bank as an institution of the European Union only applies national rules pursuant to Art 13 (1) TEU. The application and interpretation of national provisions by Union institutions are not checked by Union courts.⁶⁶ Effective legal protection by national courts is also ruled out. Union institutions are not subject to German jurisdiction.⁶⁷ As a result, no judicial review of the enforcement of national rules by Unions institutions is possible. Countermeasures of the European Central Bank through banking supervision are no effective legal protection within the meaning of Art 19 (4) of German Basic Law. The banking supervision by the European Central Bank is not compatible with the principle of subsidiarity of Art 5 (3) TEU nor with the national rule of law and its principle of effective legal protection.

Democratically banking regulation in the European Union is only poorly legitimised in terms of European and German standards. An independent banking supervision by the European Central Bank, a banking regulation by the European Banking Authority and a bank resolution by the Single Supervisory Mechanism constitute a far-reaching transfer of sovereignty to the European level, which generally requires a direct, democratic legitimacy.