The Politics of Supranational Banking Supervision in Europe

David Howarth, Huw Macartney

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781351794602
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Europe's sovereign debt crisis and the accompanying national bank crises in the European Union brought bank regulation and supervision to the top of the EU policy agenda. In a few short years, we have witnessed a 'great leap forward' for European integration marked by over a dozen pieces of EU legislation shaping the operation of banks, rules on bank capital, reconfigured supervisory agencies, and Banking Union. The significance of these measures lies however, in the fact that they constitute the most dramatic transfer of policy-making powers to the European level since the start of Economic and Monetary Union in 1999.

This volume addresses the three main political battles behind the adoption of these new regulatory and supervisory policies. First, it examines divisions among states, both according to their domestic institutional structures, including distinct financial systems, as well as their creditor or debtor status in the crisis. Second, it studies the battle over national versus supranational jurisdiction. Third, it explores the conflictual process of policy learning and the activation of epistemic communities who claim competence to address the crisis.

This book was originally published as a special issue of the journal West European Politics.

The political dynamics behind Europe’s new banking union

Rachel A. Epstein and Martin Rhodes

ABSTRACT

This article examines the political dynamics behind Europe’s new banking union in two stages. First it examines the accretion of political power to two European institutions – the European Commission and the European Central Bank (ECB) – during the financial crisis, emphasising the ways in which the European Central Bank (especially under Mario Draghi) altered the relationship between principals and agents in the European institutional architecture. Second, it process-traces the policy conflicts and compromises that led to a Europeanisation and centralisation of bank supervision, recapitalisation, recovery and resolution in a remarkably short two years – a transfer in sovereignty to the supranational level equal to that involved in the creation of Economic and Monetary Union. The article argues, contrary to other analyses that stress the intergovernmental nature of the process and the bargains concluded, that the emergence of banking union reflected something of a neo-functionalist logic whereby supranational actors successfully interpreted the crisis as requiring supranational solutions, and shaped the outcomes in the face of sometimes fierce member state opposition.

The emergence of European banking union between 2012 and 2014 represented a significant transfer of national sovereignty from the Eurozone’s member states to the European Union’s supranational institutions, and particularly to the European Central Bank (ECB). In our reading of these developments, the European Commission, together with the ECB and crisis-stricken member states, finally concluded in the depths of the Eurozone crisis in 2012 that in order to support the common currency’s credibility and sustainability, it would be necessary to sever political bank‒state ties. While those bank‒state ties had long supported national institutional distinctiveness (see Deeg and Donnelly 2016), they had also resulted in a kind of banking nationalism, whereby the oversight of banks was geared more towards international competitiveness and creating national financial champions than to limiting risk (Bini Smaghi 2013; Epstein 2014a; Goyer and Valdivielso del Real 2014). In addition, bank‒state ties had led banks during the crisis to purchase disproportionate volumes of their own sovereign’s debt. Such bond purchases resulted in bank‒state ‘doom loops’ in which higher borrowing costs for states compromised the health of banks’ balance sheets (Gros 2013), thus concentrating risk during the crisis and imperilling the common currency still further. Contrary to a standard and dominant narrative, we argue that banking union did not see the triumph of intergovernmentalism or illustrate the power of Germany to veto policy developments of which it disapproved. We argue that the European advocates of ever-closer banking union achieved most of their objectives via a process of ‘venue-shopping’ and inter-institutional coalition making. In so doing, they made truly radical change to this most jealously guarded domain of national sovereignty – banking governance.¹

Explaining European banking union: supranational acceleration, not intergovernmental brake

Centralised EU (European Union) banking supervision was clearly set out in a European summit at the end of June 2012, then detailed in the Commission’s ‘Roadmap towards a Banking Union’ in September 2012. It was formally embraced by European governments in their mid-October 2012 summit agreement (European Commission 2012). At that summit, European leaders set out to move ahead with the first steps towards European banking union, specifically the creation of a ‘single supervisory mechanism’ (SSM) for the Eurozone’s approximately 6,000 banks under the auspices of the European Central Bank. Support from the €500 billion European Stability Mechanism (ESM) ‒ the permanent euro bailout fund ‒ for individual banks would be conditional on their supervision being removed from national jurisdiction, a huge incursion on national sovereignty.

This was a momentous set of commitments – and possibly harder for states to stomach than agreeing to monetary union. A functioning banking union in Europe would not only mean reducing government influence over national banking systems, but also accepting important elements of fiscal union (through cross-border liabilities and transfers) and therefore a partial move towards political union, as well (Véron 2012). Moreover, the loss of national political control over banks could well mean the introduction of new, foreign entrants into Eurozone banking markets with less bank responsiveness to national political goals (Epstein 2014a).²

There were, we acknowledge, apparent contradictions between the supranationalisation of bank governance alongside continuing national fragmentation. Preparation of a more centralised European supervisory and regulatory framework coincided with a greater segmentation of the European financial market. Banks with cross-border reach withdrew their lending into domestic markets during the crisis, putting the integration of the interbank market into retreat. This forced the ECB to replace private funding with central bank liquidity to banks, which supported those same banks’ investments in national debt, thus compounding the linked vulnerabilities between banks and sovereigns (their national states), and increasing the correlation between spreads on bank debt and sovereign debt (Speyer 2012). Member states also resisted the hardening of European ‘soft law’ in the form of MOUs (memoranda of understanding) in developing a common, cross-border system for the resolution of failed banks (Kudrna 2012). At the same time, discussions about mutualised deposit insurance were postponed.

Given these apparently contradictory developments in the crisis – an agreement among member states to initiate banking union alongside moves to preserve the national fragmentation and control of banking markets – how can we ascertain the nature and outcome of the interplay between the two? We argue that, overall, the pressure of crisis and its spillover effects disempowered national actors and diminished their will to resist, which simultaneously strengthened supranational officials and ultimately allowed the removal of sovereigns’ control from their banks We depict the power game in which the European institutions deployed a series of tactics to apply pressure on national governments. Germany failed to veto banking union and in fact made significant concessions under pressure from the ECB and the European Commission, allowing radical change to occur (Epstein and Rhodes 2016a). To be more precise, we are making a causal argument based less in the macro-theories of standard intergovernmental and neo-functionalist approaches, but in what Falkner (2011, 2012) has described as the ‘individual micro-level processes’ that are observable in the practical day-to-day policy-making at the European level (with its conjoint supranational and intergovernmental components). Although ‘micro’ in nature, these processes have major implications for the outcome of power games between national and supranational authorities for European integration – and may create theoretical bridges (or ‘passerelles’ to use Falkner’s term) between the competing ‘grand theories’ of the integration process. The literature we draw upon focuses on the power of the European Commission as a supranational ‘agent’ to create ‘slack’ to empower itself vis-à-vis its national government ‘principals’. In doing do it uses not only its traditional tools of presenting proposals, and tactics as a broker between different country preferences in the Council of Ministers, but also less well-studied manoeuvres, including: ‘venue shopping’ (seeking supranational forums more conducive to securing the Commission’s aims); ‘sidelining’ or ‘divide-and-conquer’ strategies (in which the preferences of certain country delegations in the Council of Ministers are shaped by the Commission and promoted over others) (Schmidt 2000); and the ‘treaty base game’ (Rhodes 1995) in which the Commission uses European treaty articles as a weapon to disarm constitutional objections to the legality of its proposals. Although not in tight agreement on all issues (Chang 2015), the emergence of the ECB as a powerful actor in the crisis has created an important ally for the European Commission in promoting supranational, integrative solutions against national governmental opposition.

In making these arguments, our contribution is distinctive in numerous respects, which we elaborate upon in the fifth section. First, we depart strongly from those who see in banking union, as in other Eurozone crisis-driven policy reforms, the strong hand of a quasi-hegemonic Germany. Not only was there no internal ‘German consensus’ on this question (see Henning 2016; cf. Bronk and Jacoby 2013) but, as we demonstrate, Germany was unable to dictate the terms of a ‘consensus’ to other Eurozone member countries. Second, and relatedly, we take issue with analyses of the processes behind banking union that argue that Germany engaged in bargaining in which it exaggerated its own position in order to bring the preferences of other countries and actors closer to its own. Our account is fully compatible, however, with an explanation that combines neo-functionalism with a game-theoretic account and recognises the inability of Germany to play ‘chicken’ in such a way that allowed its preferences to prevail (Henning 2016; Schimmelfennig 2014).

Third, and most importantly, our analysis contrasts with those who argue that banking union has been shaped (and in some interpretations severely weakened) by the primacy of intergovernmental bargaining and the persistence of banking nationalism (e.g. Donnelly 2014; Howarth and Quaglia 2015), or with those who downplay more generally the role of supranational actors in responding to the Eurozone crisis in favour of a purely intergovernmental account (e.g. Maris and Sklias 2016). On the contrary, we argue that in the regular tussle in EU policy-making between supranationalism and intergovernmentalism, agenda setting by the European Commission and political pressure from the ECB drove the formation of banking union forward, regardless of the inevitable imprint left on the institutional outcomes by certain national government preferences. This is a more parsimonious argument than one in which elements of all theories of integration are combined to create an eclectic analytical account (cf. Chang 2015). A more sophisticated deployment of liberal intergovernmentalism that acknowledges the importance of supranational actors and processes in critical phases of the policy-making process (Schimmelfennig 2014, 2015) is more compatible with our own approach.

There is another cluster of analyses that cleaves much closer to our own explanation and account, including those which outline the ways in which the crisis has strengthened the European Commission (rather than weakening it as intergovernmental arguments maintain ‒ e.g. Bauer and Becker 2014); those which identify the equally important boost given by the crisis to the ECB and its entrepreneurial role under Mario Draghi in seeking to overcome intergovernmental stasis (e.g. De Rynck 2014; Krampf 2014; Torres 2013; Yiangou et al. 2013); and those which focus on the ability of the pro-banking union coalition of southern member states to trap Germany into making concessions at critical points in the banking union negotiations (Schäfer 2015). We will return to these different arguments at the end of this article.

The crisis and the new power dynamics of the Eurozone

We argue that the European Commission and the ECB have exploited the costs of the European debt and currency crisis to maintain the Euro’s credibility, with the further consequence of consolidating their power. The European Commission not only saw its powers increase in general in the crisis (in the surveillance of national economic policies, for example, see Mabbett and Schelkle 2016; and across a broader range policies, see Bauer and Becker 2014), but since 2012, the Commission has also enjoyed, as revealed by the battle over banking union, the support of peripheral countries (Ireland, Italy, Greece, Spain and Portugal), led by France. This group of countries strongly favoured, for reasons of national solvency, as rapid and complete a move towards an expansion of bank rescue funds at the European level as possible, and were willing to accept the transfer of sovereignty implied. A northern camp, led by Germany, but also including the Danes, the Dutch and the Finns, attempted to block both the transfer of sovereignty and the potential transfer of more funds from creditors to debtors that banking supervision and resolution threatened.

The crisis rapidly reconfigured member state preferences with regard to banking union and the strengthening of EU economic intervention and regulatory policy-making. In 2010, Buckley and Howarth could accurately conclude from their analysis of the EU’s response to the financial crisis ‘that the British, French and German governments do not want EU-level regulatory change that will have a significant impact on domestic regulatory and supervisory frameworks, domestic financial sectors and the activities of financial institutions’ (Buckley and Howarth 2010: 137). The key change shortly thereafter was in France, where the government and its banks quickly shifted their perceptions and redefined their interests as the extent of French banks’ exposure to southern debt became clear: in the first quarter of 2012, the exposure of French banks to Spanish and Italian bank debt amounted to 16 per cent of their foreign assets, compared to only 3 per cent for Irish, Greek and Portuguese banks (Hennessy 2014; Krampf 2014: 313). That shift in French preferences made France a natural leader of a southern coalition of member states which, though driven together as the financial markets demanded higher returns on their sovereign debt, had a much longer history – and one that has trumped the much vaunted Franco-German axis in the Council of Ministers since the early 2000s (Kaeding and Selck 2005).The second source of Commission influence derived from a combination of its traditional constitutional powers of legislative preparation and proposition, and expertise in a complex field of policy, with other strategies. The latter are less the result of its conventional practices, but more the consequence of decades of developing a certain mastery in dealing with governmental opposition in the Council of Ministers ‒ including an ability to engage in venue shopping and other tactics in order to bypass or weaken potential vetoes.

The more conventional influence of the Commission in the policy process played a critical role in setting the agenda for banking union. Banking, after all, is a highly technical area, and the Commission has been ambitious in launching detailed initiatives and legislative proposals, coupled with an integrationist ‘spillover’ rhetoric of ‘completing the unfinished project’ of establishing the single market and single currency (Vilpišauskas 2013). This rhetoric was coupled with a ‘TINA’ (there is no alternative) discourse, reinforced by both the ECB and the economic and finance committees of the European Parliament. European Commission President Jose Manuel Barroso also stepped into the limelight, shedding an earlier timidity and publicly arguing with German politicians – including Chancellor Merkel, who had helped ensure his appointment – for the centrality of the Commission’s role. At the critical June 2012 summit, Barroso, alongside Draghi, European Council President Van Rompuy and Euro-group President Jean-Claude Juncker, submitted a plan to supplement monetary union with a ‘political union’, in which the Commission would be awarded significant powers of intervention (Schult 2012). And yet, as that event also showed, the increasing powers of the Commission since 2011–2012 have been very closely linked – especially regarding banking union ‒ to the growing role of the ECB.

The ECB has undeniably accrued new and significant powers during the crisis, elevating the Central Bank to a level that some describe as quasi-hegemonic, and others consider likely to be permanent (McPhilemy 2016). There was a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Citation Information
• Notes on Contributors
• 1 The political dynamics behind Europe’s new banking union
• 2 Internationalised banking, alternative banks and the Single Supervisory Mechanism
• 3 Domestic preferences and European banking supervision: Germany, Italy and the Single Supervisory Mechanism
• 4 A differentiated leap forward: spillover, path-dependency, and graded membership in European banking regulation
• 5 EU ring-fencing and the defence of too-big-to-fail banks
• 6 Integrating macro-prudential policy: central banks as the ‘third force’ in EU financial reform
• 7 Statistical agencies and responses to financial crises: Eurostat, bad banks, and the ESM
• 8 Banking union through the back door? How European banking union affects Sweden and the Baltic States
• 9 Banking union and the future of alternative banks: revival, stagnation or decline?
• Index