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The single market´s catch-22: supervisory centralisation in a fragmented banking landscape

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The topics addressed in this contribution are supranationalisation of microprudential supervision, the ideal ‘level playing field’ and existing national banking specificities as well as the use of national options and discretions. The key question tackled by the authors is whether increasingly centralised powers necessarily bring about better coordination and more financial integration.

FSC Research Workshop 2018
1 November 2018
Policy paper contribution
Source: Financial Risk and Stability Network

Cecilia del Barrio Arleo, PhD Candidate, University of Trento
Yuri Biondi, Senior Research Fellow, French National Center for Scientific Research – CNRS

PDF  >  The single market´s catch-22: supervisory centralisation in a fragmented banking landscape

The paper has been prepared as an accompanying contribution to the Financial Stability Conference 2018 held October 31 in Berlin and presented at the FSC Research Workshop the day after at TU Berlin. Researchers from various institutions and with different backgrounds had been invited to draft policy-oriented contributions on selected aspects of the conference to be presented at the workshop, published and enclosed in the conference report.

The key question that the present policy contribution addresses is whether increasingly centralised powers necessarily bring about better coordination and more financial integration. In fact, the post-crisis banking regulation scenario has been characterised by such centralisation efforts in the EU. From a regulatory viewpoint, this approach is epitomised by the Single Rulebook, whereas from an institutional one, this approach is characterised by the arrangements that shape the Banking Union, which comprise the Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM), and the European Deposit Insurance Scheme (the much debated EDIS that is yet to be finalised).

In this context, supranational authorities (in the present analysis the SSM from a supervisory perspective, and the EBA from a regulatory one) advocate for an increasing centralisation of regulatory and supervisory practices across Member States in order to “reduce regulatory fragmentation and contribute to establishing a level playing field in the banking union”.

The present contribution, instead, draws upon the idea that uniformity is not a realistic and perhaps not even a suitable goal. Thus, supervisory and regulatory efforts across Europe should aim at fairly and satisfyingly strike a balance between integration and an unavoidable level of fragmentation, which stems from long-standing traditions and layered structures of national banking systems. Careful design and management of such a systematic balance between National and EU levels seems, therefore, a more feasible and realistic objective.

With this theoretical mindset, our analysis focuses on the legal and institutional prudential frameworks, and their evolution before and after the crisis. This helps situating our contribution in the distinctive two time windows, namely between the Euro adoption and the global financial crisis (and its spill-over into the Member States debt crisis) and following the crisis. In particular, our analysis examines the large exposures case study, one of the crucial Options and National Discretions (ONDs) granted to Member States by the CRR, which is claimed to be a key obstacle to achieving and smoothly applicating the Single Rulebook. Methodologically speaking, to comparatively analyse the variety of banking systems, especially the German, Italian, and French national case studies will be considered, complemented by descriptive statistics of the various banking systems and their evolution over the time windows. Specific attention will be paid to bank balance sheets, bank corporate organisation, micro- and macro-prudential regulation and supervision, taking into account the transfer of competences from the national to the supranational sphere that took place in this realm of prudential oversight.

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