The Single Supervisory Mechanism and explaining the Delegation
to the European Central Bank
A congruence analysis with Principal-Agent Framework and Historical Institutionalism
Master Thesis, 10 Augustus 2018
Leiden University, the Netherlands Faculty of Public Administration
Author: Mathijs Plukaard
Foreword
Before you lies the Master Thesis “The Single Supervisory Mechanism and explaining the Delegation to the European Central Bank: A congruence analysis with Principal-Agent
Framework and Historical Institutionalism.” It has been written to fulfil the Master Economics and Governance at Leiden University.
I would like to thank my supervisors Jelmer Schalk and Machiel van der Heijden for their
excellent guidance and support during this process. I also wish to thank the two respondents Janet Mak and Peter van Roosendaal.
I hope you enjoy your reading.
Mathijs Plukaard
The Hague, August 10, 2018
1. Introduction ... 4
2. Research Context ... 9
2.1 The European Banking Union ... 9
2.2 The new roles of the ECB and NCAs (SSM) ... 10
2.3 The structure and governance of the SSM ... 14
2.4 What makes the SSM remarkable? ... 18
3. Literature Review... 20
3.1 Delegation ... 21
3.2 Theoretical frameworks on delegation ... 21
3.2.1 European Integration Theories ... 21
3.2.2 Sociological Institutionalism ... 23
3.3 Arguments for the PA and HI frameworks ... 25
3.4 Principal-Agent (PA) models ... 28
3.4.1 Institutional design to reduce agency costs ... 34
3.5 Historical institutionalism ... 35
4. Theory... 42
4.1 Hypotheses ... 43
5. Research Design and Data Collection ... 52
5.1 Case study... 52 5.2 Congruence analysis... 52 5.3 Data collection ... 55 5.4 Content analysis ... 57 5.4.1 Operationalization ... 57 6. Analysis ... 58 6.1 Decision-making process ... 59 6.2 Content analysis ... 72 7. Discussion ... 81 8. Conclusion... 82 9. References ... 83 Appendix A ... 95
1. Introduction
On 4 November 2014 the first pillar of the European Banking Union was introduced. The European Banking Union is established in response to the last economic and financial crisis and applies for the countries of the euro area. According to the EU, one thing was very clear, deeper European economic integration was needed. This is basically the reply of the EU to every European Single Market (ESM) issue and the attempt to harmonise the ESM (Coen and Thatcher, 2008: 49-50). The main goals of the European Banking Union are to create more financial stability, deeper integration in the banking sector and a safer financial sector for the
single market.1 The European Banking Union contains of three pillars, namely the Single
Regulatory Mechanism (SRM), the European Deposit Insurance Scheme (EDIS) and the Single Supervisory Mechanism (SSM). The latter one, the SSM, is the pillar this thesis focuses on. The SSM makes the European Central Bank (ECB) directly responsible for prudential supervision of all ‘Significant Institutions’ in the euro area. The National Competent Authorities (NCAs) in the EU and the European Economic Area (EEA) are directly responsible for supervising the ‘Less Significant Institutions’ in the euro area, based on guidance of the
ECB.2 In other words, to establish the European Banking Union national actors, such as NCAs
and national governments, conferred severe supervisory tasks to the ECB. Thus, the national actors that participate in the European Banking Union gave up and lost severe authority and power. This event seems a logical outcome in the first place. This delegation of authority to the ECB is logical in the way of combatting future economic and financial crises by deeper European economic integration in the European banking sector and creates more financial stability and a safer financial sector for the single market. From a EU perspective, delegating power and resources towards European regulatory bodies is preferred due to the fact that power of the EU institutions will enlarge. Therefore, creating the European Banking Union seems the logical choice. EU institutions, such as the Commission and European Parliament, have consistently supported deeper European integration. Therefore, generally they prefer supranational institutional designs over intergovernmental solutions. However, this preference
1 The European Commission (2018). What is the banking union. Retrieved from
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/whatbanking-union_nl.
2 The European Central Bank (2018). Single Supervisory Mechanism. Retrieved from
only occurs when the created institution increases the power of the Commission and/or European Parliament. This preference is mainly in line with the establishment of the European Banking Union, which increased its power of the ECB, a EU institution. However, from a domestic point of view this delegation of authority, autonomy and power to the ECB is not so ‘logical’ as it seems to be. Though, it may seem logical from a domestic view that a European Banking Union is established in response to the last financial and economic crisis. This is because the euro area countries also want more financial stability and a safer financial sector for the single market. But, why would national actors give up and delegate authority, autonomy and power to the ECB? And why in particular delegate supervisory tasks to the ECB?
There are three reasons that make this delegation of tasks and responsibilities and shift in authority to the ECB in the form of the European Banking Union remarkable. First of all, earlier created European Regulatory Networks (ERNs), such as European Regulators Group (ERG) for telecommunications, the European Agency for the Cooperation of Energy Regulators (ACER) for energy, the Committee of European Securities Regulators (CESR) for securities and General Data Protection Regulation (GDPR) for data protection, the European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) have received exalted tasks, but only few power and resources and have therefore limited mandate (Coen & Thatcher, 2008: 51; Eberlein & Newman, 2007; Pollack, 2003; Majone, 1997, 2001, 2002). This delegation to the ECB goes further than the earlier delegations to these ERNs, because the difference is that the ECB did received many exalted tasks, powers and resources and do have mandate. Besides, the institutional design of the SSM that is chosen is different and goes further than other delegations. In earlier delegations new agencies were created, where in this case the ECB already existed and received more power.
The second reason that makes this delegation of tasks and shift of authority to the ECB remarkable is that next to the Commission, national actors, such as national governments and NCAs, maintained power and control over earlier delegated tasks and responsibilities to the ERNs (Coen and Thatcher, 2008: 67). The reason for this was not to lose autonomy and maintain control and power over the institutions. Therefore, since the beginning of the 1990s it has become clear that EU Member States are against any expansion of the Commission, because of losing autonomy and power. Instead, national governments were willing and preferring to create and delegate regulatory tasks and responsibilities to EU bodies outside the Commission. In this way national actors could maintain control and power over the institution and not the Commission (Kelemen and Tarrant, 2011: 928-929; Keleman, 2002). However, these EU
bodies were not that much independent. Compared to this case, it is remarkable that after the delegated authority to the independent ECB national governments and NCAs do not maintain control and power over the ECB. Therefore, this misguided ‘logical delegation’ raises questions. Why did elected officials gave up sovereignty and did not maintain power and control over the delegated supervisory tasks and responsibilities to the ECB? What are the consequences, such as democratic legitimacy and accountability, due to this delegation to a supranational institution?
Thirdly, due to these earlier stated questions the third reason why this delegation and shift of authority to the ECB is remarkable evolves. The third reason is a more theoretical argument why this delegation is remarkable. There are multiple different theoretical perspectives that provide different explanations for delegation of power. There is an on-going debate in understanding the development of the European integration. There are two European Integration theories, namely Neofunctionalism and Liberal Intergovernmentalism.
Whereas Neofunctionalism focuses on the ‘spillovers’ of integration and states that
supranational actors influences and explains the integration process. Liberal
Intergovernmentalism focuses on the preferences of national governments and states that these national preferences exceed supranational preferences and therefore international collaboration is limited. Liberal Intergovernmentalists argue that national governments conferred sovereignty in a way that EU Member States sometimes pool sovereignty in some policy areas, when it is in the EU Member States’ interests. In the case of the severe delegation to the ECB, a reason why members of the European Banking Union gave up some of their authority should and could be in the Member States’ interests. This could be the case, however, the question still arises why the Member States of the European Banking Union gave up the authority and did not maintain control over these delegated supervisory tasks and responsibilities. However, next to the European Integration theories, the Principal-Agent theory, the Historical Institutionalism theory and the Sociological Institutionalism theory also provide explanations for delegation of power.
So, as the three reasons have shown that this delegation of authority is remarkable and that this type of delegation has occurred before but not to this extent. This shift in authority from national actors to the ECB raises questions on why national actors of euro area and noneuro EU countries gave up some of their autonomy and power in the form of the European Banking Union and therefore needs to be explained. There are multiple theoretical frameworks and perspectives that provide multiple different explanations for delegating tasks and
responsibilities. For example, Sociological and Historical Institutionalism, multi-level governance theory, European Integration theories and the Principal-Agent (PA) framework
(Eberlein & Grande, 2005; Thatcher, 2002, 2005, Moravcsik, 1998; Pollack, 2003; Gilardi,
2002, 2007; Majone, 1997, 2001; Egan, 1998). These theoretical frameworks have provided political functional explanations and (historical) institutional design explanations. In this thesis I try to assess the way in which the theoretical frameworks complement each other and to balance which of these multiple different theoretical frameworks gives the best explanation for the severe delegation of authority to the ECB. By doing this study I contribute to the literature about explaining why national actors delegate authority in general, why to an independent European institution and why to this severe extent.
To find the best explanation or explanations for this case congruence analysis is applied with two competing theoretical frameworks, namely the PA framework and Historical Institutionalism framework. These two theoretical frameworks are chosen, because they are two dominant theoretical frameworks in the field of explaining delegation. Both theoretical frameworks have found and therefore provide multiple different competing explanations for delegating authority. The PA framework provides more explanations for delegation, such as shifting blame, power dependencies, to reduce costs, co-ordination problems, to enhance credible commitment or to increase efficiency especially in domains that are complex and
technical, such as the EU (Thatcher, 2002, 2005; Pollack, 2003; Gilardi, 2002, 2007; Majone,
1997, 2001, 2002; Egan, 1998; Epstein & O’Halloran, 1994). Historical Institutionalism focuses more on the past, such as critical junctures that occurred in the past and the path it has taken and its institutional design. Historical Institutionalism argues that current decisions on institutional design are heavily conditioned by institutional developments of the past, also referred as ‘path dependence’ (Christensen & Yesilkagit, 2006, 2010; Pierson, 2000; Levi, 1997; Streeck and Thelen, 2005; Mahoney and Thelen, 2010). This means those decisions made by legislators, such as politicians and/or institutions, which delegate authority to another supranational body are ‘locked in’. The locked-in problem occurs when an institutional design is on a path, but exiting this path is costly and therefore shifting towards another path is limited (Pierson, 2000: 253). In other words, due to step-by-step and incremental process of the institutional design and the path it is on, it is hard to adjust and there is no way back. Another reason found by HI is incomplete design. Studies have shown that EU institutions were lacking of supranational structure, thus institutional design, to combat the euro area financial crisis (Verdun, 2015; Keleman and Tarrant, 2011; Steinmo, 2008).
A congruence analysis is chosen to explain the severe delegation of authority to the ECB, because it seeks empirical evidence for the explanatory relevance or relative strength of one theoretical approach in comparison to other theoretical approaches (Blatter and Haverland, 2012: 144). By comparing the propositions and implications of the PA and HI frameworks with empirical observations, the best explanation for the delegation of authority to the ECB can be found. Reasons why these theoretical frameworks are suitable for explaining the delegation in this case will become clearer in the literature review section.
As stated earlier the PA and HI theoretical frameworks found and therefore provide multiple competing explanations for the decision of delegating authority towards supranational bodies and are suitable for explaining the severe delegation of authority to the ECB in the form of the European Banking Union. Therefore, this study seeks to contribute to such an explanation of the politics behind the delegation of severe authority from national level towards an independent European body. Therefore, the research questions of this paper are formulated as follows: How can we explain the severe delegation of authority by the Single Supervisory
Mechanism to the European Central Bank in the form of the European Banking Union? Does the ‘Principal-Agent theory’ or the ‘Historical Institutionalism theory’ provide the better framework for understanding and explaining the severe delegation and authority loss for national actors?
The structure of the paper is as follows. After the introduction the research context is described. In this section the European Banking Union and its three pillars and why it so remarkable is outlined. In the third section a review of studies and multiple theoretical frameworks that focused on explaining delegation to a supranational body is shown. Besides, this section makes clear why the Principal-Agent framework and the Historical Institutionalism framework are chosen. Further, the fourth section outlines the concepts and implications of the two theoretical frameworks. Section five shows the design of this research and describes what and how data is collected. The analysis of this research is shown in section six. The discussion of this research is explained in the seventh section and explains its limitations and recommendations. At last, the conclusion of this thesis is shown.
2. Research Context
This section is divided in four parts. At first, the European Banking Union is and the three pillars it is built on are outlined. Second, the form of the delegation towards the ECB is outlined. Here, the supervisory tasks and responsibilities the ECB have received due to the
SSM and at the expense of who is shown in the second part of this section. Third, how the European Banking Union is structured and governed with regard to supervision is explained. At last, this part clarifies why the conferred authority to the ECB is remarkable and needs to be explained.
2.1 The European Banking Union
The European Banking Union is built on three pillars, namely the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the European Deposit Insurance Scheme (EDIS). Whereas the SSM is the first pillar, the SRM the second pillar and the EDIS the third pillar. These three pillars signify stronger prudential requirements for banks, improved protection for depositors and rules for managing failing banks. The European Banking Union applies to countries in the euro area and non-euro area countries that want to join.3
The SRM, the second pillar, is a mechanism that ensures when a bank is failing or is likely to fail it will be orderly restructured by the Single Resolution Board together with the National Resolution Authorities of the participating countries. This resolution applies to banks that are covered by the SSM. Due to the resolution a future bank failure will not harm the broader economy or cause financial instability. Even when a bank fails notwithstanding stronger supervision by the SSM, the SRM allows the Single Resolution Board and a Single Resolution Fund to manage the bank effectively. Thus, the SRM is the basis for the resolution for the banks participating in the European Banking Union. Notable, by the resolution the Single Resolution
3 The European Commission. (2018). A rule book for all financial actors in the EU. Retrieved
from https://ec.europa.eu/info/business-economy-euro/banking-and-finance/bankingunion/what-banking-union_en.
Board is a fully independent EU agency that acts as the central resolution within the European
Banking Union.4
The EDIS, the third pillar, is an insurance scheme for bank deposits in the euro area, which provides a stronger and more uniform insurance cover for all retail depositors in the Banking Union. The scheme builds on the system of national Deposit Guarantee Schemes (DGS) regulated by Directive 2014/49/EU. Large local shocks to national DGS are reduced by EDIS. Furthermore, by EDIS the confidence in a bank is not dependent on the bank’s location
anymore and the link between banks and their national sovereigns is weakened.5
Interestingly, while writing this research on May 24th the Commission presented a new
financial instrument, which could help reducing risk in the European Banking Union. The Commission presented a legislative proposal about enabling a market for Sovereign BondBacked Securities (SBBS). SBBS are securities backed by a diversified portfolio of euro area central government bonds. The goal of this proposal is to remove unjustified impediments and granting SBBS the same regulatory treatment as national euro-area sovereign bonds and in this way levelling the playing field. Hereby, the link between banks and their home governments
will be further weakened.6
2.2 The new roles of the ECB and NCAs (SSM)
Now the second and third pillars of the European Banking Union are outlined, the focus of this thesis is the first pillar, the SSM. The SSM, the first pillar, makes the ECB the central prudential supervisor of financial institutions of the euro area countries and non-euro EU countries that choose to join the SSM. Due to the SSM the ECB received supervisory tasks, responsibilities,
4 The European Commission. (2018). Single Resolution Mechanism. Retrieved from
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/singleresolution-mechanism_nl.
5 The European Commission (2018). European Deposit Insurance Scheme. Retrieved from
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/bankingunion/european-deposit-insurance-scheme_nl.
6 The European Commission (2018). Sovereign Bond-Backed Securities (SBBS). Retrieved
from https://ec.europa.eu/info/business-economy-euro/banking-and-finance/bankingunion/sovereign-bond-backed-securities-sbbs_en.
tools and so power which was laid down first at the national governments and NCAs.7 The main aims of the SSM are to ensure the safety and soundness of the European banking system, to increase financial integration and stability and to ensure consistent supervision. To achieve these goals of the SSM the role of the ECB is to establish a common approach to day-to-day supervision, taking harmonised supervisory actions and corrective measures and to ensure the
consistent application of regulations and supervisory policies.8
The conferred supervisory authority to the ECB can be distinguished in microprudential and macroprudential tools. The aim of conferring microprudential tools to the ECB is to contribute to a safe European banking system by challenging and testing the risks of individual European banks. By the conferred microprudential tools the ECB has the power to carry out supervisory reviews including stress tests, to conduct on-site inspections and investigations, to grant or withdraw banking licenses, to assess a bank’s acquisition and disposal of qualifying holdings, to ensure compliance with EU prudential rules, to set higher capital requirements (‘buffers’) to counter any financial risks and to impose sanctions for any breach of EU law on
credit institutions, financial holdings companies and mixed financial holding companies.9
The aim of the macroprudential supervision is to ensure the stability of Europe’s financial system by limiting the build-up of aggregate risk within the system. In other words, the two main tasks in the field of financial stability are to identify risks and to assess risks. With the entry into force of the SSM, the ECB was given two mandates to execute the macroprudential supervision. First of all, the ECB can apply higher requirements for banks and second, comment and object to measures by national authorities. Higher requirements for banks are counter-cyclical capital buffers, systemic risk buffers (if implemented in national law), capital surcharges of systemically important institutions, risk weights on real estate and intra financial sector exposures, limits on large exposures and additional disclosure requirements. The second mandate, comment and object to measures by national authorities, means that NCAs
7 The European Commission (2018). Single Supervisory Mechanism (SSM). Retrieved from
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/singlesupervisory-mechanism_nl.
8 The ECB (2018). Single Supervisory Mechanism. Retrieved from
https://www.bankingsupervision.europa.eu/about/thessm/html/index.en.html.
9 The ECB (2018). Tasks. Retrieved from
have to notify the ECB when they intend to implement or change a macroprudential measure. Furthermore, the ECB can object to these planned measures.
Therefore, NCAs have to consider the ECB’s comments before proceeding with the decision.10
However, when a credit institution is failing to comply with the imposed prudential requirements the ECB has supervisory measures, enforcement measures and sanctions. The aim of the supervisory measures are to ensure that supervised banks take the necessary action at an early stage to address problems related to the prudential requirements. When a ‘significant’ bank does not comply with prudential requirements, or there are problems with the bank’s management or its ability to cover risks, the ECB can require banks under the SSM to hold additional own funds, to submit a plan to restore compliance with supervisory requirements, to reinforce their arrangements, processes and strategies, to apply a specific provisioning policy or treatment of assets in terms of own funds requirements, to limit variable remuneration, to use their net profits to strengthen own funds and to restrict or prohibit to shareholders or holder of
AT1 instruments.11
The aim of enforcement measures is to force supervised banks to comply with prudential requirements laid down in supervisory decisions or regulations. Enforcement measures can only be imposed in the case of on-going breaches. One of the enforcement measures is a periodic penalty payment (PPP). A PPP means that the bank has to pay a daily amount, up to 5% of its average daily turnover, for every day the breach continues during a maximum of 6 months. Furthermore, imposing a PPP the ECB has the ability to apply enforcement measures available in the national implementing legislation in the relevant participating Member State. The ECB
also can force NCAs to adopt purely national enforcement measures.12
As stated in the microprudential tools earlier, the ECB has the power to impose sanctions for any breach of EU law on credit institutions. Therefore, the aim of imposing supervisory sanctions is to punish misbehaviour by a supervised bank is to be deterrent to the
10 The ECB (2018). Tasks. Retrieved from
https://www.ecb.europa.eu/ecb/tasks/stability/tasks/html/index.en.html.
11 The ECB (2018). Supervisory measures. Retrieved from
https://www.bankingsupervision.europa.eu/banking/tasks/measures/html/index.en.html.
12 The ECB (2018). Enforcement. Retrieved from
bank concerned and to the whole banking sector. Compared to the enforcement measures, supervisory sanctions can be started not only during on-going breaches but also after the misconduct has ended, as long as the limitation period is respected. Noteworthy, the supervisory sanctions are investigated and imposed by ECB’s independent Investigatory Unit (IU). However, the IU can exercise the powers granted to the ECB by the SSM Regulation. This means that the IU can request for documents, examination of books and records, request for explanations interviews and on-site inspections. Furthermore, the IU can also request information from the NCAs and instruct the NCAs to make use of their investigatory powers
under and in accordance with national law.13
The role of the NCAs is to prepare and implement the ECB’s adopted decisions. Furthermore, NCAs directly supervise ‘less significant banks’, also referred as ‘Less Significant Institutions’ (LSIs), whereas before the NCAs were directly responsible for the
‘Significant Institutions’ (SI). Deciding whether a bank is ‘significant’ or not is based on their size, their importance for the economy of the country in which they are located or the EU as a whole, the significance of their cross-border activities and whether they have requested or received financial assistance directly from the European Stability Mechanism or the European Financial Stability Facility. Due to the SSM the NCAs are now responsible for 3500 entities, which account for 18% of the total banking assets in the euro area. However, the ECB still has the oversight over these entities. When it is necessary to ensure the consistent application of high supervisory standards the ECB can also take on the direct supervision of a LSI. Contrary, the ECB now directly supervises 129 SIs, which are approximately 1200 supervised entities. The direct supervision of the 129 significant banks account for 82% of the total banking assets in the euro area (ECB, 2014: 9-13). At last, the NCAs are responsible for consumer protection, combatting money laundering, payment services and the supervision of branches of banks in EU countries that are not part of the SSM. These tasks and responsibilities do not belong in the
scope of the ECB’s supervisory responsibilities (see figure 1).14
13 The ECB (2018). Sanctions. Retrieved from
https://www.bankingsupervision.europa.eu/banking/tasks/sanctions/html/index.en.html.
14 The ECB (2018). Single Supervisory Mechanism. Retrieved from
Figure 1: The distribution of tasks within the SSM (ECB, 2014: 13).
These conferred supervisory tasks and responsibilities to the ECB are linked with other international supervisory bodies, namely the European Banking Authority (EBA) and the European Stability and Risk Board (ESRB), Basel Committee on Banking Supervision and Financial Stability Board (FSB). The EBA, which is composed by the banking supervisors of the 27 Member States, promotes the European Single Rule book and ensures effective and consistent prudential regulation, supervision across the European banking sector. Therefore, the EBA was a big contributor to the establishment of the SSM Regulation. The ESRB contributed in the process to the establishment of the SSM by shaping of macro-prudential policy of the
economy and financial systems of the 27 Member States.15
2.3 The structure and governance of the SSM
The European banking supervision is executed by more than 900 supervisory staff by the ECB
and more than 4700 supervisors by the NCAs. 16 Due to the conferred tasks and responsibilities
to the ECB, the ECB have built new organizational structures, which are integrated into the overall organization. Therefore the ECB developed internal procedures and recruited extra staff to carry out the new tasks and responsibilities. New internal actors are created, such as the Supervisory Board, the Steering Committee, the Joint Supervisory Teams (JSTs), new business area and shared services.
15 The ECB (2018). Regulatory environment. Retrieved from
https://www.bankingsupervision.europa.eu/legalframework/regulatory/html/index.en.html.
16 The ECB (2018). ECB Banking Supervision at a glance. Retrieved from
The Supervisory Board meets twice a month to discuss, plan and carry out the ECB’s supervisory tasks, supported by the Steering Committee. The Supervisory Board consists of a chair (appointed for a non-renewable term of five years), vice-chair (chosen from among the members of the ECB’s Executive Board), four ECB representatives and representatives of national supervisors. The Supervisory Board proposes draft decisions to the Governing Council under the non-objection procedure. This means that when the Governing Council, which is ECB’s main decision-making body, does not object to the draft decisions proposed by the
Supervisory Board, they are considered adopted (see figure 2).17
Figure 2: Non-objection procedure.18
The highest body within the supervisory cycle is the Governing Council, the main decisionmaking body of the ECB. The Governing Council consists of six members of the
17 The ECB (2018). Supervisory Board. Retrieved from
https://www.bankingsupervision.europa.eu/organisation/whoiswho/supervisoryboard/html/ind ex.en.html.
18 The ECB (2018). Decision-making. Retrieved from
Executive Board and the governors of the national central banks of the 19-euro area countries.
19
However, to implement these new supervisory tasks and responsibilities the ECB requisite some changes to the ECB’s existing organisational design. The ECB created new business areas that execute the micro-prudential function and is organised in four Directorates Generals (DGs) and a Secretariat to the Supervisory Board (see figure 3).
Figure 3: ECB’s organization structure on European banking supervision.20
These created business areas execute the micro-prudential supervision, directly on SIs and indirect supervision on LSIs. DGs Micro-Prudential Supervision I and II deal with the direct day-to-day supervision of significant banks. DG Micro-Prudential Supervision III is responsible for the oversight of less significant banks performed by national supervisors. DG Micro-Prudential Supervision IV performs horizontal and specialized tasks in respect of all banks under the ECB’s supervision and provides specialized expertise on specific aspects of supervision. The Secretariat to the Supervisory Board supports the Supervisory Board and
provides assistance for the drafting of supervisory decisions.21
19 The ECB (2018). Governing Council. Retrieved from
http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html.
20 The ECB (2018). Organisational Structure. Retrieved from
An important new actor within the ECB and in the field of European banking supervision is the Joint Supervisory Teams (JSTs). Most of the European supervisory staff works in the JSTs and conduct the day-to-day supervision of the SIs. The main tasks of the JSTs are to perform the Supervisory Review and Evaluation Process (SREP), to propose the supervisory examination programme, including a plan of on-site inspections, to implement the approved supervisory examination programme and any supervisory decisions and to ensure coordination with the on-site inspection teams and the interaction with the national supervisors. A JST is created for each SI and comprise staff from both the ECB and the NCAs of the countries in which the credit institutions, banking subsidiaries or the significant crossborder branches of a given banking group are established. The composition of each JST comprises a coordinator at the ECB, national sub-coordinators and a team of experts (see figure 4). The JST coordinator, who is appointed for a period of three to five years, leads the team and coordinates the supervisory activities. The sub-coordinators from the NCAs are responsible for clearly defined thematic or geographic areas. The size, overall composition and organization of a JST are
adjusted to the size, business model and risk profile of the bank it supervises.21
21 The ECB (2018). Joint Supervisory Teams. Retrieved from
Figure 4: The composition and function of the JSTs.22
2.4 What makes the SSM remarkable?
Now what supervisory tasks and responsibilities to the ECB are conferred and how the SSM is structured and governed, it gives more clarity on why this delegation of authority is remarkable and needs to be explained. There are several reasons why this severe delegation of authority to the ECB is remarkable.
First, probably the major reason why these conferred tasks and responsibilities is remarkable is because the national authorities lost severe authority. For example, now the ECB can grant or withdraw banking licenses and conduct supervisory reviews, on site inspections and investigations. The national authorities originally did these tasks and responsibilities. Furthermore, the NCAs directly supervises the less significant institutions, whereas before the NCAs also were directly responsible for the significant institutions. However, the ECB has the power at any moment to bring every European institution under its supervision, also a less significant institution. In other words, this means that even though the NCAs supervise the LSIs, the ECB has the power to supervise every single European institution. Remarkable is that in each participating country at least the three most significant banks are generally subject to direct
supervision by the ECB, irrespective of their absolute size. The significant banks that are being supervised by the ECB and not the NCAs, account for 85% of the total European banking assets.
Second, following from the first argument, this case is remarkable because the actor that lost authority, the NCAs, are represented in the body that received the authority, the ECB. The NCAs are represented in the JSTs and in the Supervisory Board. The question still remains, because for what reasons would an actor delegate authority to a higher body and represent itself in this higher body? Is it to have a clear view on these conferred tasks and responsibilities? Are NCAs represented because they gather more easily the information needed from the banks of the represented NCA? Do the NCAs have particular expertise? In the end, it makes it harder who is who in this case. Who are the principals and who are the agents in this case?
Third, even though the NCAs are represented in the Supervisory Board, the ECB acts as chair at all times. Furthermore, the NCAs do not always have the power to participate in decisions or voting procedures. NCAs do not participate in decisions and voting procedures when it concerns a ‘significant’ institution or an institution of a non-participating Member State or a country outside the EU. In those cases the NCAs are observers instead of members and participate only to execute college’s tasks and activities (ECB, 2014: 11-12). Thus, when a supervisory decision needs to made concerning a significant institution or an institution of a non-participating Member State or an institution outside the EU, the NCAs are considered as observers and therefore do not participate in decisions and voting procedures.
Fourth, when an institution or a NCA does not comply the high supervisory standards of the ECB, the ECB has the power to conduct supervisory measures, enforcement measures and sanctions. The NCAs can punish banks of the country the NCA is supervisor of. However, first of all the NCAs can only directly punish the less significant banks and not the significant banks. As stated before, the NCA representative in the Supervisory Board cannot participate in decisions or voting procedures when it concerns a significant bank. Even though, for each JST a NCA representative is included, this is only for supervising the significant bank and gathering information for the Supervisory Board. Second, when a NCA conducts a measure to a less significant bank the ECB has the mandate to comment and object to the measure by the national authorities. In the end, the ECB decides and has the power and the NCAs are subordinate to the ECB.
Concluding from these arguments this delegation of authority to the ECB is remarkable and needs to be explained. This case raises questions like why the NCAs did not maintain control
and power? Why delegate the authority to the ECB in particular? Why creating more distance between the NCAs, national legislators and the banks? Did national actors wanted to shift blame or future complex decisions? Are the goals of the multiple different actors more in line now? Does supervising banks from a European central point reduce supervisory costs? However, the big question of this thesis remains why the NCAs and national governments accepted the loss of authority to the ECB? This severe delegation of authority to the ECB contradicts with the conception of Liberal Governmentalism that assumes that the national preferences dominate the international interests and that therefore cooperation between countries is restricted. Therefore, this case needs to be explained with theoretical frameworks that can explain severe delegation to a higher body.
3. Literature Review
This section outlines the theoretical frameworks that are applied in earlier studies that focused on explaining the delegation of power to a supranational body. This literature review contains four parts, whereas the first part of the literature review defines the concept ‘delegation’. The second part describes a more general literature review about scholars that studied issues with regard to delegations. Furthermore, this part shows the content of multiple different theoretical perspectives and how they are adopted to explain issues regarding delegation. Whereas the third part shows the arguments why the Principal-Agent framework and the Historical Institutionalism framework are the best suitable theoretical frameworks for this study, the last
part shows earlier studies that applied the Principal-Agent framework and the Historical Institutionalism framework to explain delegation of power.
3.1 Delegation
Delegation can be defined differently with diverse meanings. Coen and Thatcher (2008) define ‘delegation’ as delegating co-ordinatory functions to another institution on a different level. As we can see in the vast studies about delegation, in general it all comes near on delegating powers to another institution. The definition by Thatcher and Stone Sweet (2002) is the best suitable definition within this case. Thathcher and Stone Sweet (2002) define delegation as follows:
Delegation is an authoritative decision, formalised as a matter of public law, that (a) transfers policy making authority away from established, representative organs (those that are directly elected, or are managed directly by elected politicians), to (b) a nonmajoritarian institution, whether public or private (Thatcher and Stone Sweet, 2002: 3).
This definition with two elements reflects the delegated authority to the ECB. First, national governments and NCAs conferred authority to the ECB, which are representative organs, and second, towards a non-majoritarian institution, the ECB. A non-majoritarian institution is “a governmental entity that (a) possess and exercise some grant of specialized public authority, separate from that of other institutions, but (b) neither directly elected by the people, nor directly managed by elected officials” (Thatcher and Stone Sweet, 2002: 2). The ECB is an organ that possesses and exercise specialized public authority, for example determining the interest rates
for the euro area.22
3.2 Theoretical frameworks on delegation
3.2.1 European Integration Theories
Neofunctionalism was a popular theory of European Integration in the 1950s and 1960s and was mainly developed by Haas in his book ‘The Uniting of Europe’ (1958). This most prominent Neofunctionalist writer focused on the ‘spillovers’ of integration, which can take
22 The ECB (2018). Key ECB interests rates. Retrieved from
https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/inde x.en.html.
two forms, namely functional and political spillovers. Whereas the first spillover explains the way in which integration in one policy area creates pressure for integration in other policy areas. The latter spillover explains the importance of supranational and subnational actors in the integration process. These actors, including pressure groups and political parties, create more pressure for integration to pursue their interests. Due to these spillovers in European integration, Neofunctionalists see European integration as a self-sustaining process, which will end up in the creation of new polity in Brussels (Haas, 1958; Hatton, 2011; Rosamond, 2000; Schimmelfennig & Rittberger, 2006).
On the contrary, Liberal Governmentalism was the dominant theory of European integration in the 1990s and is established by Moravcsik (1998) in his book ‘The Choice for Europe’. In contrast to Neofunctionalism, (Liberal) Intergovernmentalism focuses on the role of the national governments and their attached preferences. Intergovernmentalists argue that the national governments of the EU Member States were the main factors in the process of European integration. Due to the conferred sovereignty to the EU, the integration process strengthened the national governments of the EU Member States. This can be explained in a way that EU Member States sometimes pool sovereignty in some policy areas when it is in the EU Member States’ interests. When the shared goals of the EU Member States converge, faster radical change in the EU can be explained. This could be an explanation why the national actors delegated supervisory tasks and responsibilities to the ECB. Before the European Banking Union was established, the goals of the national actors and those of the
European actors could have been more diverged. Furthermore, Liberal Intergovernmentalists look at the bargaining power of Member States and the process towards further integration. Liberal Intergovernmentalists state that the reason that institutions are created as a means of enhancing credible commitment for member governments and therefore making sure that other governments will stick to their side of the bargain, whom they make deals with. This could also be an explanation for this case. EU member governments, national authorities or banks may be weren’t that committed to supervise banks and/or to create a stabile banking sector. In contrast to Neofunctionalists, Liberal Intergovernmentalists sees supranational institutions not as a key factor in the integration process (Moravcsik, 1998; Hatton, 2011; Schimmelfennig and Rittberger, 2006;)
Liberal Intergovernmentalism assumes that the national interests dominate the international interests, and therefore international collaboration would be limited. Looking at the establishment of the European Banking Union, in particular the severe delegation of authority from the national actors to the ECB, this intensively contradicts with (Liberal)
Intergovernmentalists. Therefore, the delegation of authority to the ECB and losing autonomy for the national actors is not as logical as it seems to be and needs to be explained.
A new emerging European Integration Theory called Multi-Level Governance (MLG), that focuses on the dispersion of autonomy across multiple political levels of governance in the EU, is nowadays possibly a more suitable theory and perspective on understanding the development of European Integration, and therefore the severe delegation of authority to the ECB (see Hooghe and Marks, 2001). However, this theory is too broad and cannot explain delegations. To my knowledge European Integration theories are hardly ever used to explain delegations. The European Integration theories cause more a debate about European Integration and therefore are more suitable for explaining issues regarding (European) Integration. Other more specific theoretical frameworks and perspectives are necessary to explain delegation issues.
3.2.2 Sociological Institutionalism
A well-known theoretical framework is Sociological Institutionalism. Sociological
Institutionalism focuses on the institutional design of organizations. An important concept in this theoretical framework is ‘sociological isomorphism’, which means that in designing
organizations decision-makers ensure consistency with norms and trends. Policy-makers can observe and follow emerging trends for the design of administrative institutions and can therefore create legitimacy. Policy-makers set up organizations within a particular field whose formal structures are very similar to other organizations in the field. For this reason, the governance structures of organizations in a particular field will have limited variation
(DiMaggio and Powell, 1983). Sociological Institutionalism has been applied in multiple studies regarding issues of delegation. This theory has been applied before in the study of regulatory reform where a large number of regulatory agencies have been created in many countries in recent years (Gilardi, 2009; Jordana & Levi-Faur, 2005).
Jordana and Levi-Faur (2005) observe the growth of autonomous regulatory agencies in Latin American countries and twelve economic and social sectors. The authors try to find an answer to the question on what explains the dramatic growth in the number of regulatory authorities in Latin America. Jordana and Levi-Faur (2005) make use of the diffusion perspective and the results provide empirical support for four claims. A general conclusion from these claims is that the decision to establish a regulatory authority is influenced by prior decisions made within and outside the sectors. Actors closely watch and monitor each other’s behaviour (Jordana & Levi-Faur, 2005: 105-106).
Christensen and Nielsen (2010) study the design, tasks and institutional setting of 25 created EU agencies with the focus on formal agency autonomy. The authors applied three theories, namely the credible commitment hypothesis, structural choice theory and
isomorphism. Christensen and Nielsen (2010) applied an empirical analysis, which involves a qualitative analysis, documentary and secondary sources, of the political and historical setting in which the independent agencies are established and a quantitative analysis of the 25 existing agencies at the beginning of 2007. Christensen and Nielsen (2010) argue that the institutional structure of the independent agencies has not changed the allocation of authority between the Commission and the EU member governments. More importantly, the authors state that the more and more created agencies are a result of isomorphism. In other words, EU lawmakers followed a general trend at the national level, but spread to the supranational level
(Christensen & Nielsen, 2010: 183-184). The structural choice theory and the credible
commitment hypothesis do explain the delegation, where isomorphism does not. In this study the isomorphism theory only indicates that the variation between the EU agencies is limited. In the study by McNamara (2002), who focuses on central bank independence, questions the functional argument in favour of delegating extensive discretion to central banks. McNamara (2002) suggests that the diffusion of central bank independence as an organizational form is an example of a broader phenomenon called ‘institutional isomorphism’. This means that
particular institutions are adopted and spread because these institutions come to be seen as legitimate or appropriate in public discourse.
Concluding from this, sociological institutionalists are competing and reject the rationalist conception of actors that want to maximize utility and act according to a ‘logic of consequentiality’ (March & Olsen, 1989: 23-24, 160-162). Sociological institutionalists state that actors act according to a ‘logic of appropriateness’ and look to socially constructed roles and institutional rules and ask what sort of behaviour is appropriate in that situation (Pollack, 2003: 57). Even though, Sociological Institutionalism is an approach that competes with the rational choice theory and offers alternative hypotheses, none of the scholars mentioned above has offered a comprehensive theory of delegation (Pollack, 2003: 59). Furthermore, this theoretical framework has not been applied that much to explain delegation and therefore does not provide strong explanations to delegate to agents. Sociological Institutionalism is also not suitable for explaining the delegation in this case, because it has been applied mostly on regulatory agencies and not more similar institutions as the ECB. For this reason, this theoretical framework is not suitable for explaining the delegation of authority to the ECB.
3.3 Arguments for the PA and HI frameworks
It is important to explain why the Principal-Agent framework and the Historical Institutionalism framework are the best suitable theories to explain the severe delegation of authority to the ECB in the form of the European Banking Union. However, the question still remains why theoretical frameworks, such as Sociological Institutionalism or Liberal Intergovermentalism, are not applied in this thesis. Even though, Sociological Institutionalism provides explanations for delegation to supranational bodies and is strongly linked to Historical Institutionalism, the framework is not suitable for explaining the delegation in this case. As stated before, Historical Institutionalism can be seen as a mix of the rational choice institutionalism and Sociological Institutionalism. Thus, there is to say that Sociological Institutionalism is part of Historical Institutionalism, which gives a reason why Historical Institutionalism is suitable in this case. Sociological Institutionalism is not suitable in this because it is hard to compare this severe delegation of authority to the ECB with other delegations and other organizations. As described earlier in this thesis, the severe delegation of authority to the ECB is different than other delegations to supranational bodies. Sociological Institutionalism focuses more on the design of organizations within a particular field. However, the ECB is hard to compare with other organizations within that particular field. Sociological Institutionalism would be more suitable if multiple delegations and/or multiple organizations would be compared and analysed. Furthermore, Sociological Institutionalism would neglect the history of the SSM, which could be an important aspect in this case.
European Integration theories are not chosen, because it does not provide propositions and strong explanations for issues regarding delegation. These theories are more suitable to explain European integration and are therefore little applied in studies that focused on delegation to supranational bodies.
As shown in the previous sector the Principal-Agent framework and the Historical Institutionalism framework are two dominant theoretical frameworks in the field of explaining delegation. There are four arguments why the Principal-Agent framework is a dominant framework and needs to be applied in this case. Coen and Tatcher’s (2008) already give a good outline of reasons why the PA framework must be used to explain delegation (Coen & Tatcher, 2008: 52-53).
First, as will be shown later in this section the PA framework has been applied earlier to explain delegations and provides functional explanations. For example, namely shifting blame
or hard future decisions, power dependencies, to solve co-ordination problems, to enhance credible commitment, gathering technical and complex information from experts or in case of political uncertainty.
Secondly, the Principal-Agent framework requires and identifies the principals and
agents. Hence, in a complex polity, such as the EU, it is necessary to examine who delegated the authority and who lost authority (Coen & Tatcher, 2008: 52-53). Furthermore, the PA framework identifies the ‘problem of multiple principals’. This problem is the case when multiple principals supervise the same agents, who may not share identical policy preferences (Pollack, 2003: 43; McCubbins, Noll and Weingast, 1987, 1989).
Thirdly, the EU’s legalizednature means that delegation of powers requires a legal basis. For the Commission this legal basis is the last financial crisis. However, in this study the focus is to examine other legal bases for the delegation of authority to the ECB. A principal-agent analysis examines and set out the formal positions of the principals and agents, including their powers and the controls over them (Coen & Tatcher, 2008: 52-53).By setting out these positions in the case of the European Banking Union it provides a clear view of which actors are principals and which are agents. Furthermore, it clarifies which actors gained and which actors lost authority. This is important, because it is sometimes hard to determine who is the principal and who is the agent in a case.
Finally, the Principal-Agent framework points ‘delegation’ out as a variable. This means that principals choose the extent of delegation and which specific powers are given to their
agents. More importantly, principals maintain controls over agents and therefore principals seek
to design institutions that minimize ‘agency losses’, such as ‘shirking’ and ‘slippage’. For this reason,the Principal-Agent framework underlines the importance of institutional design, since principals will be highly concerned with post-delegation events and are expected to mould their initial choices accordingly (Coen and Tatcher, 2008: 52).
The Historical Institutionalism framework is harder to explain on why this theory is suitable for explaining the severe delegation of authority to the ECB in the form of the European Banking Union. Pierson and Skocpol (2002) present in their study advantages of Historical Institutionalism. The authors argue three major advantages for Historical Institutionalism. First, Historical Institutionalism seeks to understand how complex political puzzles are resolved by the setting in which they take place. Historical Institutionalism creates a lens that looks at the process of how and why institutions took the form they are now. In the case of the European
Banking Union, Historical Institutionalism contributes to the understanding of how and why national governments delegate authority to the ECB in the form of the Banking Union. It could be the case that the delegation took place to form an institution in a particular way or form. This gives a political puzzle to start with, like most political scholars begins their research with a big question or puzzle that is linked with an event happened in the past, also referred as ‘critical junctures’ (Capoccia and Kelemen, 2007; Pierson, 2000; Mahoney, 2000). Next, a Historical Institutionalist begins his research by asking about varied historically outcomes and why this particular event happened, or did not happen, or why certain structures and patterns take shape in some times and places but not others (Pierson and Skocpol, 2002: 3 and 4).
Second, Historical institutionalism examines multiple institutions in interaction and examines the context in which these institutions operate. Institutions in this context are often examined as formal institutions, such as the Council or the ECB, or formal rules such as the Two-Pack or Six-Pack (Steinmo, 2008: 125). This means that Historical Institutionalsim pays attention to the broader context in which policy changes, such as the SSM, take place. This means that it takes history seriously, examines how processes unfold over time and the order of events matter. In particular interest to social scientists is that there are processes in which sequencing is critical. This means that events happened in the past can matter more than events later on. Therefore, different sequences may produce different outcomes (Pierson and Skocpol, 2002: 5-6; Pierson, 2000: 253). The benefit of this is that the history, before the establishment of the SSM, is taken seriously and that it pays attention to the broader context of the SSM.
Third, next to the fact that Historical Institutionalism pays attention for the events happened in the broader context, it also understands the events in their ‘natural context’ instead of ‘out of context’ as in experiments (Pierson and Skocpol, 2002: 3). Historical Institutionalism examines the power and resources of actors and sees institutions as the developing products of unequal actors. This is a great and important advantage of this theoretical framework, because it gives us specific propositions. It gives us better insight in framework and reason for the severe delegation to the ECB. The advantage of examining the events in its natural context is that the institutional context affects the costs and benefits of the delegation for the principals. The capacities to pass legislation, the bargaining power of the actors or the availability of non-statutory forms of control over the agent are examples of this (Pierson and Skocpol, 2002: 3 and 12).
However, it is notable that this theoretical framework does lack of theoretical positions and has its limitations. This framework relies more instead of basing conclusions on empirical
grounded generalizations. Moreover, some scholars think that this approach cannot be seen as a separate approach and is a mix of both rational choice institutionalism and Sociological Institutionalism. However, Stacey and Rittberger (2003) argue that to study EU decisionmaking, a combination of Historical Institutionalism and rational choice is the best strategy. In this thesis this is not a limitation, because applying two competing gives more insight and provide more explanations. Furthermore, when only using the Principal-Agent framework, the history of the SSM would be neglected. I choose these two theoretical frameworks, because it provides competing explanations that strengthen the research. As is shown in earlier studies, Historical Institutionalism mediates the functional explanations found by the Principal-Agent framework. As Yesilkagit and Christensen (2010) study shows that to reduce political uncertainty, a functional explanation, politicians grab blue prints of existing designs of institutions, a historical-institutionalist explanation. Thatcher (2002) found that functional pressures do play a role in explaining delegation, however, contextual factors strongly mediated these functional pressures.
Thus, the Historical Institutionalism framework and the Principal-Agent framework are the two dominant theoretical frameworks in the field of explaining delegation to supranational bodies. Furthermore, these two theoretical frameworks provide competing explanations for delegation. Whereas the Principal-Agent framework focuses on functional explanations, the Historical Institutionalism focuses more on historical explanations. Following from this, the main question is what would be the predictions of the two competing theoretical frameworks when applying them on this case? What if there are functional explanations for the severe delegation of authority to the ECB, how would this look like? And in the case for historical explanations? Therefore the propositions set up and their causal mechanisms in this case are shown in the section.
3.4 Principal-Agent (PA) models
The PA framework has been applied in multiple studies that focused on explaining the delegation to supranational organizations. All these studies focused on the delegation of powers by a group of principals, such as member governments, to an agent, such as a regulatory agency or a supranational organization, and the general problem of institutional choice or institutional design. As Pollack (2003) states, all the studies focused on the main question why do a group of actors collectively decide upon one specific set of institutions rather than another to govern their subsequent interactions? The functionalist approach has been used to explain this question.
As Keohane (1984) argue: “In general, functional explanations account for causes in terms of their effect” (Keohane, 1984: 80). These functional explanations are made clearer below. Several scholars have embraced this functionalist approach to institutional design and to the delegation of powers to an agent by principals. One of the implemented literatures of the functionalist approach within American politics is the transaction cost approach. The transaction cost approach has been applied in studies to find an explanation or explanations for the delegation of powers to an agent by principals. Principals calculate the costs and benefits on whether to decide to delegate powers to an agent. Two important reasons have been found by the transaction costs approach, namely to reduce informational costs and to enhance credible commitment. Some of the transaction costs are informational costs, which means that principals are confronted complex information and therefore require technical information and expert advice in order to reduce these informational costs. For this reason, in order to gather the technical information principals design political institutions with experts and create incentives for those experts to provide technical information for the principals. Delegating powers to a supranational organizations or bureaucratic agents can reduce informational costs or legislatures design political institutions that employ policy experts. For this reason, information costs that are reduced happen the most in complex policy environments (Pollack, 2003: 20-21).
There are multiple studies that support the explanation of reducing informational costs. A study by Thatcher (2002) who examines IRAs in Britain, France, Germany and Italy and applies a functionalist analysis of the pressures on elected officials and the functions that IRAs perform. Thatcher (2002) discusses principal-agent models that are based on the functional logic of delegation as its starting point. Thatcher (2002) argues that delegation to the IRAs supported elected officials to face new or increased pressures, such as unpopular policies and decisions, increased technical knowledge requirements, a lack of confidence and the increased supranational regulation. In other words, elected officials designed political institutions with experts, the IRAs, to gather the complex and technical information to reduce informational costs. The elected officials delegated the tasks and responsibilities to the IRAs, because these political institutions can be more easily isolated from the political arena. This gives advantages to their ability to perform the functions in line with the goals of the elected politicians (Thatcher, 2002: 129-131). Yet, Thatcher (2002) argues that purely a functionalist approach is inadequate. Despite facing the same pressures, countries made diverse choices over delegation to IRAs and do not determine a single institutional response. Contextual factors explain the diverse choices made over delegation to the IRAs. Policy learning, state traditions and structures encourage
policy makers to respond to functional pressures and problems by delegating to IRAs. However, other contextual factors can also prevent delegation to IRAs. Weak political leadership, numerous veto points and constitutional obstacles can make delegation to IRAs hard and slow.
In the book by Epstein and O’Halloran (1999) the authors focus on the conditions under which the legislature narrowly constrains executive discretion and when it delegates authority to the bureaucracy. This book presents the first unified theory of national policy making. Epstein and O’Halloran (1999) apply a transaction costs analysis and argue that delegation is a choice between congressional policymaking and policy made through executive branch agencies. This means that legislators face a trade off between the internal policy production costs against the external costs of delegation. Epstein and O’Halloran state that to obtain all the necessary information needed for making well-formed policy is sometimes too costly. Therefore legislators confer power to agents when the costs of obtaining technical complex information are too high. Furthermore, legislators will make policy by themselves when the political benefits and advantages outweigh the political costs, otherwise they will delegate powers to the executive (Epstein and O’Halloran, 1999: 7-8).
However, not all transactional costs are informational. Another well-know concern is the problem of ‘credible commitment’, also referred as the credible commitment hypothesis. Majone (1997) discussed this hypothesis explicitly and states the hypothesis as follow:
‘political sovereigns are willing to delegate important powers to independent experts in order to increase the credibility of their policy commitments’ (Majone, 1997: 139-140). This means that the need for credibility explains delegation, in particular policy-makers. They need to be credible when they cannot rely on coercion to implement their policies and is the case when policy-makers need to deal with two different kinds of phenomenon. The first phenomenon is that governments may face a high degree of international interdependence. The problem of this phenomenon for governments is that it weakens the impact of policy on the home country and strengthens their impact on other countries. Second, the degree of complexity is the second phenomenon the policy-makers may need to deal with. This occurs when next to material resource that can be mobilized also the successful modification of individual behaviour determine the effectiveness of a policy (Majone, 1997). A solution for these two phenomenons is to delegate powers to independent agencies, which have not to deal with short time-horizons and have other incentives.
Also Majone (2001) goes further and argues that there is not one but in fact ‘two logics of delegation’. One logic is the demand for taking advantage of executive branch expertise, in
