Between centralization and decentralization : supervision of Less Significant Institutions (LSIs) within the European Banking Union

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Between Centralization and Decentralization:

Supervision of Less Significant Institutions (LSIs) within

the European Banking Union

Laura Lefèvre / 12300128

Supervisor: prof. dr. Jonathan Zeitlin Second Reader: dr. Bart Stellinga

June 2019

Master Thesis Political Science: Specialisation Course

Political Economy

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1 Abstract

This thesis aims at providing an analysis of the governing structure of the SSM relative to its supervision of credit institutions by assessing the cooperation between the SSM’s two main actors, namely: the European Central Bank (ECB) and the National Competent Authorities (NCAs). As such, it seeks to add a complementary understanding to the SSM’s formal architectural design by underpinning the limitations to its commonly understood centralised hierarchical structure. It does so by arguing that a more nuanced approach is favourable to the interpretation of the relationship between the ECB/SSM and the NCAs in the context of their supervision of credit institutions, in particular Less Significant Institutions (LSIs). In order to substantiate this aim, this thesis introduces relevant governance theories, two of which are the principle-agent relation theory and experimentalism governance. Although in theory the SSM appears to follow a fully-fledge centralised structure of governance orchestrated around hierarchical links between its two main actors, in practice the existence of polyarchic and experimentalist features attest to the presence of more decentralised forms of cooperation within its formal hierarchical setting. This thesis demonstrates that the SSM leaves space for a striking mixture of supervisory practices and uniform rules by allowing for experimentalist processes to flourish under the SSM’s “hierarchical veneer” (Zeitlin 2016, p. 1082). At last, it addresses the dynamics between the ECB/SSM and the NCAs from a more evaluative angle by measuring the effectiveness of their supervisory practices through their ability to meet the wider range of EBU objectives and expectations.

Key Words: Banking Governance – SSM – Centralisation – Decentralisation – ECB –

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2 List of abbreviations EBA EBU EU ECJ ECB JSS JSTs LSIs NCAs SIs SSM SSMR SSMFR

European Banking Authority European Banking Union European Union

European Court of Justice European Central Bank Joint Supervisory Standards Joint Supervisory Teams

Less Significant Credit Institutions National Competent Authorities Significant Credit Institutions Single Supervisory Mechanism

Single Supervisory Mechanism Regulation

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Lessons learned from the 2008 global financial crisis and ensuing sovereign debt crises have demonstrated that the following consequences attached to a bank’s failure in the eurozone transcend the immediate threat initially posed on debtors and shareholders (Chiarella 2016, p. 34). In particular, the extent of the damage experienced across the Euro area as a result of wrongful misconduct in the banking sector, underlined the fragilities of the EU as a financial system (The European Central Bank 2017). At the same time, the crises also enabled to shed light on the undesirable ties between national banking sectors and their respective sovereign: the so-called “doom loop” (The European Central Bank 2017). Although Member States initially sought to rely on their own capacities and national tools, these proved to be insufficient to address the striking incompleteness of the EU financial framework, as well as to counteract the development of unviable financial policies (Véron 2012, p. 2). Given the interrelatedness of Member States’ policies and common currency, the need for a more integrated solution was therefore greatly underfelt (Chiarella 2016, p. 34).

The creation of the European Banking Union (EBU) was therein perceived as the most appropriate response to ensure coherent and consistent application of the Union’s policies relative to the supervision of credit institutions, and following the single approach to supervision provided by the Single Rulebook of prudential rules (The European Central Bank 2017). The Single Supervisory Mechanism (SSM) was thereafter established as the first pillar of the banking union with the purpose of centralising banking supervision in the Euro area into the hands of one supranational authority: the European Central Bank (ECB) (Véron, p. 4). In this view, the ECB was conferred extensive powers regarding the supervision of financial institutions on the basis of the Council Regulation (EU) No 1024/2013, hereafter referred to as the SSMR (The European Central Bank 2017).The apparent smooth functioning of the SSM is nevertheless also contingent on the contribution of the National Competent Authorities (NCAs) in each of the participating Member States i.e. “the Member States which are part of the Euro area, and any other Member State entering into a close cooperation with the SSM” (The European Central Bank 2017).

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Motivation

The SSM Statutory Framework, composed of the SSMR and the SSMFR, rendered the ECB formally responsible to carry out the exclusivity of the tasks entrusted by it by the regulations concerning the supervision of “all” credit institutions across the Euro-area (SSMR, Article 4 and 6). Under this centralised framework of supervision, the ECB retains the power and overall authority with regards to the planning and decision-making within the SSM. Prima

facie, this conferral of powers to the ECB instituted by the SSMR denotes a formal

hierarchical link between the ECB and the NCAs, wherein decisions are cascaded down to the NCAs whose role is to assist the ECB in discharging it from its supervisory functions when needed (SSMR, Article 6 (3)). However, a closer reading of the regulations provides a more detailed overview of the respective competences and responsibilities of both actors. On the one hand, the ECB is thereby granted with the authority to directly supervise more risky financial institutions qualifying as “Significant Credit Institutions” (SIs) (SSMR, On the other hand, the bear primary responsibility for the direct exercise of control of less risky or Less Significant Institutions (LSIs) (SSMR, Article 6 (4) (5) (6); SSMFR, ch 1 and 2). This thesis is motivated by the assumption that in practice the governance arrangements that underpin the relationship between the ECB/SSM and the NCAs appear to deviate from their assumed hierarchical character (Zeitlin 2016, p. 1082). Karagianni and Scholten (2018, p. 193) argue that the trend that has yet been emerging is one of a “‘mixed/shared/integrated administration of rule-making, supervision and enforcement”. Zeitlin (2016, p. 1083) identifies the existence of some polyarchic elements within the SSM decision-making structure, which are likely to serve as a “powerful mechanism for destabilising emergent tendencies towards regulatory

monoculture and bureaucratic routinisation”.

1. Research Problem 1.1 Threefold Objective

The overarching goal of this research is to assess the SSM governance structure and the different forms of governance arrangements that underpin the relationship between the ECB and the NCAs in their supervision of credit institutions, and particularly LSIs. In order to best answer this goal, this thesis is structured around three conductive threads:

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First, it seeks to understand the governance structure of the SSM i.e. what kind of governance model is it and what forms of governance underpin its functioning relative to the supervision of credit institutions, specifically LSIs.

Second, it aims at defining the sources and scope of powers of the ECB and the NCAs within the SSM supervisory framework i.e. by supplementing the reader with knowledge based on the SSM legal bases, the ECB’s enacted policies, as well as the ECB and the NCAs’ level of local knowledge.

Third, it endeavours to evaluate the appropriateness of the ECB/SSM to meet the objectives set by the EBU by carrying out effective supervision of credit institutions, including LSIs.

1.2 Research Question

The decision best known as the SSM was hailed as a landmark in banking supervision (The National Bank of Belgium 2014, p. 2). Its rapid establishment emerged as a result of the European Commission’s proposal on the 12th September 2012, in cooperation with the European Council, whose choice to create an integrated framework of supervision came under the ever growing pressure of the EU financial system (The National Bank of Belgium 2014, p. 2). Since the entry into force of the ensuing Council Regulation EU/1024/2013, introducing the SSM, prudential supervision in the eurozone has thus undergone significant changes. This sparked an array of discussions and questionings on the SSM’s newly founded organisational structure under the hat of one single supervisor seemingly standing above national level (Karagianni and Scholten 2018, p. 190). Given the inherent interdependencies in banking policies, as well as the legal and cultural specificities of the national banking sector, one can therefore wonder to what extent does the SSM governance arrangements achieve centralisation in their supervision of financial institutions (Véron 2012 p. 3). As such, centralisation formally imply hierarchical forms of decision-making in the organisational structure and governance arrangements between the relevant actors involved (Wypolz 2015, p. 5). In a fully-fledged centralised system, the risk of neglecting the intrinsic differences and diversity specific to national banking sectors exist (Véron 2012, p. 3). It appears therefore hardly imaginable that the SSM entirely prescribed to a centralised model of governance (Véron 2012, p. 3). This appears to be particularly acute in the context of LSIs supervision where the level of local knowledge at national level is oftentimes superior to the one at EU level (The European Central Bank 2017). Additionally, a wide range of scholars such as

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Zeitlin (2016), Gren (2018) and attests to presence of other forms of governance within the SSM governance architecture.

It is therefore of interest to investigate where do the ECB and the NCAs stand along the wide spectrum of theories that elaborate, challenge and categorise, in governance terms, their relationship in the context of their supervision of credit institutions, including LSIs.

Therefore, the main research question that this thesis poses goes as follows:

 What balance does the Single Supervisory Mechanism strike between centralization

and decentralization in the supervision of less significant credit institutions?

The subsequent set of sub-questions that unfold from the later are the following:

Theoretical Sub-Questions:

1. What powers does the ECB have over the NCAs in the supervision of LSIs? 2. To whom and how is the ECB accountable for this power?

Empirical Sub-Questions:

1. How does the ECB use its powers over the NCAs in the supervision of LSIs in practice?

2. Is the aforementioned balance appropriate, i.e. effective, to meet the objective of the European Banking Union?

1.3 Relevance

This thesis gains in relevance by assessing the relationship between the ECB/SSM and the NCAs through the lens of specific governance theories. Most notably, it places great emphasis on the use and assumptions of the following governance models: hierarchical, experimentalist and networking governance models, as well as the principle-agent theory. At last, its narrow focus on the supervision of LSIs adds to the peculiarity of this research. It therefore ambitions to bring an additional perspective on the existing scholarly work on the governance structures that underline the SSM’s formal institutional design.

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9 1.4 Structure of the Thesis

This thesis is structured along three main chapters. As a starting point, it first provides an analysis, in governance terms, of the relationship between the ECB and the NCAs in their supervision of LSIs on paper (de jure). For this purpose, it builds its findings on the basis of the SSM Manual, the SSM’s main rules and regulations as listed under its statutory framework and as found within official documents Second, it moves on to understanding of the forms of governance and dynamics between the ECB and the NCAs in practice. Third, it seeks to add an evaluative understanding to the SSM and the interactions between its main actors by analysing the extent to which the latter fulfil the objectives set by the EBU in achieving effective banking supervision.

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This chapter sets out the theoretical foundations for this thesis and provides justification for the choice of theories that will hereafter be applied as an integral part of this research analytical framework. For the purpose of answering the main research questions and the ensuing set of sub-questions that this thesis poses, it departs from the assumption that three contrasting forms of governance need to be identify in order to understand the innerworkings of the SSM as a governance model of prudential supervision. Placed in the context of LSIs supervision, these three modes of governance subsequently serve as the theoretical backbone for assessing the relationship and interchanges between the ECB and the NCAs within the SSM supervisory framework.

2.1 The Problem of EU Governance

Over the past two decades, the scope and the density of EU rules and regulations have significantly expanded, while its institutions have undergone a series of substantive reforms (Kohler-Koch & Eising 1999, p. 3). This notably came as a result of the series of consecutive financial crises, global and sovereign, that spread amongst countries of the eurozone leading to a major revision of the EU institutional design (Kohler-Koch & Eising 1999, p. 3). This sparked the start of a new understanding of the now former European Community from the outset of scholars, such as Keohane and Hoffmann (1991), where the EU starts to be conceived as a ‘new’ institution in itself (Kohler-Koch & Eising 1999, p. 3). Thus far, general consensus today has been reached on the way of conceiving the EU as a generic platform for the promotion of common interests and the safeguard of a range of shared fundamental values (Jachtenfuchs 2001, p. 245). However, the variation of policies and cases of policy implementation across Europe regularly call into question the EU’s capacity to govern effectively and democratically (Lavenex & Schimmelfennig 2009, p. 792). Does the EU provide, de facto, an effective response to the problems modern political systems still face? Is the EU recently established institutional architecture at height with citizens’ expectations or is the possibility for a democratic gap at EU level overhanging public opinion? Applied to the context of EU banking regulation, are the advanced objectives of safety and soundness, but also of consistency in supervisory results achieved? (Arleo 2019, p. 1). Thus, the challenge is now less to analyse the socio-political context of the EU integration process, but more to understand the new framework of references that explain the underlying mechanisms of the

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EU decision-making system (Kohler-Koch & Eising 1999, p. 13). This chapter starts with the assumption that the EU can neither be associated to a state, as it lacks legal sovereignty, nor can it be reduced to an international organisation, as its rules supersede national legislation (Bogdandy 2012, as cited in Jones et. al 2012, p. 761). Rather, it assumes that the EU’s contrasting institutional design serve as a testament to its institutional sui generis character (Kohler-Koch & Rittberger 2006, p. 33). In analysing therein, the performance of the EU as a

sui generis institutional system, a wide body of literature on new processes of EU governing

has gradually come to light. Before proceeding further with these considerations, prior clarification is needed on the concept of governance as find in the realms of political science and international relations.

While governance remains a popular field of research, there is still a lack of agreement among social scientists and practitioners on a baseline definition of the term itself (Kohler-Koch & Rittberger 2006, p. 28). In short, the conceptual vagueness of governance appears to result from the wide variety of meanings and different purposes for which it is used across traditional disciplines (Kohler-Koch & Rittberger 2006, p. 28). In this respect, Rhodes (1996) informs of at least six different uses of the concept, three of which refer to: “the minimal state”, “good governance” and “self-organizing networks” (p. 652). Cutting through the confusion, he first describes governance as “self-organizing, interorganizational networks [that] complement markets and hierarchies as governing structures” (Rhodes 1996, p. 652). Second to that, Rhodes (1996, pp. 652-653) articulates the importance of differentiating

governance from government in arguing that the former is not synonymous with the latter.

According to the author, governance rather entails “a change in the meaning of government, referring to new process of governing; or a changed condition of ordered rule; or the new method by which society is governed”. Similarly, Jon Pierre (2000) couples governance with: “the empirical manifestation of state adaptation to its external environment as it emerges in [the] late twentieth century” (Kohler-Koch & Rittberger 2006, p. 28). Of course, these definitions provide a rather simplistic approach to the definition of governance. In reality, the term itself can be approached through a range of different spectacles, depending on the contextualisation and purpose of study at hand. Either way, most definitions tend to dissociate

governance from government insofar as the former simply entails “the process of governing”

or the system of rules and the latter rather refers to the authority behind who makes and implement the rules (Roseneau & Czempiel 1992, p. 1). At any time, government can be a part of the act of governing. The general idea that transpires from the notion of governance, as

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interpreted by Rhodes (1997, p. 4) however, is that of one that is closely linked to “network governance” in involving a range of continuing interactions and interdependencies between organisations.

New theoretical accounts on the conception of the EU as a system of governance seems to characterise it as “a unique set of multi-level non-hierarchical and regulatory institutions, and a hybrid mix of state and non-state actors” (Hix, 1998, p. 39 as cited in Kohler-Koch and Rittberger 2006, p. 33). Against this backdrop, new modes of governance based on co-ordinated participatory rulemaking and interoperability, rather than standardisation of rules, have gained prominence in debates on EU governance reforms (Eberlein and Kerwer 2004, p. 121). The theoretical considerations presented by a growing body of empirical research on new modes of governance provide a starting point for capturing the patterns of interactions between “old” and “new governance” (Eberlein and Kerwer 2004, p. 136). In this way, the “governance turn in EU studies” as identified by Kohler-Koch and Rittberger (2006, p. 30) underlines a shift in research on governance in the EU from the functionalist approach to an actor-centred conception of “steering”. This gains in relevance for this thesis as a blurred distinction between steering objects and subjects themselves ultimately impact rule structure and decision-making processes in “co-operative” states (Kohler-Koch and Rittberger 2006, p. 30). Specifically, the growing fragmentation of the “steering” object in the context of international decision-making settings stresses the need to understand the change in the meaning of governance (Kohler-Koch 2006, p. 31).

In fine, the difficulty in defining the concept of governance really arises when attempting to

specify these new forms of governance. Analysing the latter will thereby serve as a first informative way to understand not only the extent to which these new forms of EU governance influence day-to-day decisions, but also to evaluate the effectiveness of their undertakings.

With respect to European banking supervision, the implications of the changes in governance arrangements within the EBU, and specifically in light of the SSM, has drawn attention to the importance of the rules of the games, differences in discretionary space and power interactions between actors (Rhodes 1997, p. 3). This notably gives reason to question the EU’s capacity to establish a trade-off between effectiveness and democratic legitimacy (Börzel & Risse 2002 p. 1). What kinds of governance structure prevail, and which ones of them are best appropriate to face the challenges inherent to the banking world? (Chondrogiannis 2013). As we will see, it appears that the prudential supervision of credit

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institutions within the BU is intermingled with a combination of different governance arrangements, stretching from hierarchical features to principle-agent and experimentalist governance. In order to clarify the governance structure of the SSM, it appears wise to first define the handset of governance concepts and theories that will hereafter serve to form a better opinion of the dynamics behind this remarkable and singular system of supervision. 2.2 Hierarchical Governance, the Shadow of Hierarchy & Principle Agent-Theory

When it comes to determine what differentiate certain modes of EU governance from others, a central role in public debate has been given to the shift away from traditional hierarchical forms of governance to new methods of governing (Craig & de Búrca 2015, p. 163). As a first step towards the clarification of these variations in modes of governance, Bartolini, Héritier and Rhodes (2011, p.2) enlighten on the important dichotomy coexisting between soft versus hard modes of governance. As such, these dichotomies can be traced back to the 1990s’ shift in rules-based governance leading to a “new regulatory area”, whereby legally non-binding, soft instruments, such as guidelines and code of conduct, gradually came to supplement legally binding, hard instruments, such as regulations and directives (Bartolini, Héritier & Rhodes 2011, p. 2). In short, when it comes to the specific question of what distinguishes one form of EU governance from another, one may envisage new governing processes as soft, whilst considering expressions of old forms of governance as hard (Bartolini, Héritier & Rhodes 2011, p. 3). Furthermore, Craig and de Búrca (2015, p. 163) stresses the importance in the divergence of approaches to implementation of rules between both modes i.e. flexible versus rigid. While the shift towards new modes of governance involve more flexible, less prescriptive and less top-down policies, old forms governance rest on inflexible, uniform rules based on hierarchy (Craig and de Búrca 2015, p. 164). Such differences in rulemaking and implementation further suggest, inter alia, the involvement of different actor constellations and institutional arrangements (Héritier & Lehmkuhl 2008, p. 14).

Within the concept of hierarchical governance, as introduced by Craig and de Búrca (2015, p. 164) many of the features that have just been listed are inclusive to the author’s definition. Of particular importance is notably the elements of top-down forms of governing by central governmental actors leading to defined policies and rules, the prescriptive nature of instruments, as well as the application of binding measures drawing on legal enforcement (Craig & de Búrca 2015, p. 165). This description come to overlap with Treib, Bahr and

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Falkner (2007, p. 12) categorization of modes of governance on the basis of actors’ degree of discretion and obligation. It becomes apparent from such categorization that hierarchical modes of governance grants less discretionary space to its actors in requiring a high degree of obligation e.g. by relying increasingly on procedural instruments to ensure compliance to regulatory standards (Treib, Bahr and Falkner 2007, p. 12). That is the reason why Lavenex (2008, p. 141) describes hierarchy as a “a relationship of superiority and subordination in which one party unilaterally expands predetermined parts of its regulative boundary to the other without, however, allowing for the latter’s participation in the determination of these obligations”.

Analysed as a part of the EU legal and institutional environment, hierarchical forms of governance are often associated with the former ‘Community method’ of policymaking (Jachtenfuchs 2010, p. 203). The Community method of governance continues to serve as a basis for the EU policymaking framework in placing emphasis on the actions of supranational institutions and their issuance of “strongly legalized supranational law” that can hereafter be reinforce or brought into question in front of the EU Court of Justice (Lavenex & Schimmelfennig 2009, p. 797). In this respect, Lavenex (2008, p. 941) associates hierarchical governance in the EU to a vertical relationship of command and control i.e. “where the EU transfers predetermined, non-negotiable rules” - but also - “where the EU ensures compliance through regular monitoring mechanisms”. In a similar manner, Craig and de Búrca (2015, p. 164) term this overall style of governance as: “command-and-control-type-regulation”. As a result of the power asymmetries that mark the relationship between the different set of actors within a hierarchical system, decision-making arrangements can thus be expected to be pattern on a centralized structure of organisation (Scheller 2004, p. 49).The concept of centralisation in itself is best defined in concomitance with the level of hierarchy that can be expected within a decision-making body (Scheller 2004, p. 49). The more hierarchical the level of decision-making is within an organisation, the higher one may suspect the degree of centralisation to be (Scheller 2004). Conversely, when decision-making is delegated to lower-level units then the system of governance itself may be regarded as decentralised (Scheller 2004, p. 49).

Although scholars have identified a transition in modes of governance, this shift remains nonetheless “relative” (Zeitlin 2016). If new modes of governance are characterised by flexibility and soft implementation techniques, then the question that arises is whether such proceedings are effective in the advent of non-compliance with EU requirements (Wissink

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2017, p. 435). This notably suggests that the trade-off between EU rule-making and local implementation should be evaluated closely. The model of the shadow of hierarchy, as brought forward by Héritier & Rhodes (2011, p. 59), provides a potential answer to this question in encompassing both elements of old and new governance. As we will later observe, in many areas the EU continues to work through a hierarchical command-and-control decision making system or through what Héritier and Rhodes (2011, p. 59) terms the shadow of hierarchy. As such, outcomes of EU policymaking can be shaped by the hierarchical intervention or threat imposed by supranational actors on lower-level units in order to steer the latter to improve their practices and self-regulatory performance (Héritier and Lehmkuhl (2008, p. 3).

Finally, the concept of the shadow of the hierarchy allows us to derive similar assumptions from contractual governance theory, specifically from the principle-agent theory of delegation (Héritier & Lehmkuhl 2008, p. 4). Contractual governance on its own refers to: “the extent to which binding contractual agreements are used to enforce the realization of specified promises or project deliverables by the contracting parties” (Banihashemi, 2014, p. 2467). Stocker (1998 p. 22) informs that governance may take many forms of partnerships, such as inter-organization negotiation, systemic co-ordination and principle-agent, amongst others. In this respect, the principle-agent relation is conceived as a contract between one party (the principal) and another hired/contracted one (the agent), which establishes, given bounded rationality, an informal agreement between both sides (Héritier & Lehmkuhl 2008, p. 4). As Stocker argues (1998, p. 19), the principle-agent theory comes in as particularly useful to identify the power dependencies that coexists within the relationship between supranational and national, local or regional actors. Generally speaking, principals delegate their power of decision of making to agents vested with the expertise to achieve goals set by the principals. However, agents’ actions remain ultimately accountable to the principals at the risk of being sanctioned (Gren 2018, p. 2). This informal mode of co-operation requires tolerance of private actions and flexibility from the part of public actors (Héritier and Lehmkuhl 2008, p. 5). Even in the case of incentivised private actions, governmental actors preserve a different role in the overall governance structure as the shadow of hierarchy oftentimes continue to loom ahead of the relationship (Héritier and Lehmkuhl 2008, p. 5). Ultimately, this comes to raise puzzling questions closely related to the scope of regulatory actions and self-regulation (Héritier and Lehmkuhl 2008, p. 5).

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Multiple principle-agent relationships thus matter most when assessing the ways in which control can be yielded and when determining whether hierarchy, or more specifically its shadow, underpin the power relation between the government and governmental actors (Héritier & Lehmkuhl 2008, p. 14). In sum, the principle-agent theory suggests a range of answers to the question of whether the shadow of hierarchy leads to better policy performance and is thus of relevance when assessing the dynamics that pertains to EU banking regulation (Gren 2018, p. 2).

2.3 Network Governance

Drawing on similarities between different ideal-types of governance structures, Lavenex et.al (2007, as cited in Kohler-Koch 2006, p. 796) singles out three fundamental institutional forms: hierarchy, networks and markets. According to Lavenex et.al (2007): “these institutional forms act as opportunities and constraints on actors’ modes of interaction and hence have repercussions on the mechanisms of rule expansion”. Applied to the EU context, a network constellation differentiates itself from hierarchical governance systems and forms of interactions in outlining a relationship, whereby the main actors are ‘formally’ equal (Kohler-Koch 2006, p. 797). Broadly speaking, this provides that no participatory party can enforce its will upon the other party without the latter’s consent. In contrast to hierarchical governing that makes use of legally enforceable rules, networks count on more flexible instruments now largely reliant on the principle of mutual agreement (Koch 2006, p. 798). Kohler-Koch (2006, p. 798) specifies that this form of “policy-making without legislating” has come to challenge the more statist EU-level governing style. According to Andrea Lenschow (as cited in Kohler-Koch & Eising 1999, p. 7), network governance emerged as a “new, systemic understanding” of governance, which was “rooted in a new awareness of insufficient problem-solving capacity” and resulted in a break from traditional modes of governance. Lenschow (as cited in Kohler-Koch & Eising 1999, p. 7) then informs on recent “institutional and procedural innovations”, which disaggregated horizontal boundaries and created networks between private and public actors.

A crucial aspect of Lenschow’s definition of networks relates to the functional interdependency between private and public actors”. As Börzel and Heard-Lauréote (2009, p. 137) note, growing alertness of inefficient problem-solving capacities in modern societies has brought governments to become: “… increasingly dependent upon the co-operation and joint resource mobilization of policy actors outside their hierarchical control” (Börzel &

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Lauréote 2009, p. 137). In such cases, network governance gave way to an informal negotiation system, whereby both public and private actors interact and co-ordinate their actions as a result of mutual resources dependencies and voluntary agreements (Börzel & Heard-Lauréote 2009, p. 138). Networks are thus distinct from other forms of governance in restoring a level-playing field between private and public actors in policy decision-making. This distinction is additionally felt when examining the role of the state. Kohler-Koch and Rittberger (2006, p. 34) signals that in a system of network governance: “the state is vertically and horizontally segmented and its role has changed from authoritative allocation “from the above” to the role of an “activator”. Finally, governance networks give free rein to institutional ambiguity in the absence of “tacit understanding” on the type of rules to be applied or legal “constitution” that would legitimise the ways in which decisions should be issued and implemented (Hajer & Versteeg 2005, p. 341).

Overall, the distinctive characteristics of network governance render its classification as a new form of internal governance possible. Specifically, the interdependencies between actors occurring at different territorial levels, whether national, local or supranational, as well as the multi-level character of its decision-making system based on collaboration, constitute defining aspects of networks and new methods of governing (Kohler-Koch & Rittberger 2006, p. 34). Contextualised and related to the functioning of the SSM de facto, network governance allows to understand the structural relationship and interchanges between public and private actors, as well as the benefits reaped from cooperation and informational exchanges (Börzel & Heard-Lauréote 2009, p. 136).

2.4 Experimentalist Governance

The particularities associated with network deliberative decision-making that have hitherto been mentioned partially omit, according to Sabel and Zeitlin (2008, p. 273), the underlying architecture of public rule-making in the EU, namely “the fundamental design for law making, and the way this design transforms the distinct elements of EU governance by connecting them into a novel whole”. Sabel and Zeitlin (2008, pp. 271-273) argue that, although this architecture cannot be epitomized by the EU Treaties and official documents, its emergence across several policy domains including, state aid, financial services and environmental protection, amongst others, has been paramount to the shaping of EU governance today. Furthermore, this new governance architecture arises as a response to the

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volatility and strategic uncertainty that faced by decision-makers under traditional forms of governance (Zeitlin 2016, p. 3). Sabel and Zeitlin (2008) qualify it as experimentalist insofar as it involves: “a recursive process of provisional goal-setting and revision based on learning from the comparison of alternative approaches to advancing them in different contexts”. In short, this definition translates into four key interdependent elements that form an integral part of an iterative, multi-level cycle of EU governance, the latter of which is described hereunder for the sake of greater clarification (Zeitlin 2016, p. 2).

The classical four steps of the EU experimentalist governance as an iterative, multi-level cycle hence begin with the joint actions of Member States and EU institutions in the setting of framework goals and measures for evaluating their performance (Zeitlin 2016, p. 2). Specifically, increased emphasis is placed on lower-level units i.e. national/regulatory authorities, which are being vested with more freedom of interpretation and power of decision in the implementation of goals (Zeitlin 2016, p. 2). This autonomy is however conditioned, as Zeitlin (2016, p. 2) inform, by the obligation of units to regularly report on their activities and their participation in peer review processes that facilitate comparative performance assessments (Zeitlin 2016, p. 2). At last, the notion of experimentalist governance itself involves a shift of focus from instrumental generalizations to wide-ranging, rectifiable assumptions based on comparative experience and diversified knowledge (Zeitlin 2016, pp. 2-3). This can however lead to uncertain conditions and doubt on the different approaches used towards the achievement of common ends.

Illustration 1: ‘EU experimentalist governance as an iterative, multi-level architecture’.

Source: Zeitlin 2015, p. 2.

EU institutions & member states jointly establish

framework goals & metrics

Discretionary implementation by

lower-level units (ministries, regulators, & civil society)

Regular reporting by lower-level units, peer

review, improvement plans Periodic revision of goals,

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Taking these observations as a point of departure, we shall then approach the concept of experimentalist governance through the lens of a more “functional” rather than “structural” or “institutional” perspective (Sabel & Zeitlin 2008, p. 274). In sum, all abovementioned aspects shall be viewed as functions, which hinge on a multitude of possible institutional arrangements. As Sabel and Zeitlin (2008, p. 274) state: “there is in such an experimentalist architecture no one-to-one mapping of governance functions to specific institutional mechanisms or policy instruments, and vice versa”. In this respect, Zeitlin (2016) further adds that the distinctiveness of EU experimentalist form of organizations is marked by its “multi-polar”, “polyarchic” distribution of powers. Cohen et. al state that in the absence of a central, final decider, experimentalist processes are polyarchic and their actors must practice self-discipline, as well as cooperate with one another through mutual learning arrangements (as cited in Sabel & Zeitlin 2012). In contrast to hierarchical or network governance, the experimentalist architecture rests on directly deliberative processes on the basis of its actors’ own experiences and reactions to ongoing problems (Sabel & Zeitlin 2008, p. 276). According to some scholars, this form of cooperation provides well-suited responses to the EU heterogenous system and sometimes intangible problems (Sabel & Zeitlin 2008, p. 276). With regards to accountability issues within experimentalist governance, Sabel and Zeitlin argue that one way of regaining control over undisciplined parties is to threaten to impose a

penalty default on their part (Sabel & Zeitlin 2008, p. 283). Penalty default may qualify as

“destabilization mechanisms” that challenge the discretion of parties involved by pressuring them to co-operate at the cost of lowering their authority over outcomes (Zeitlin 2016, p.4). At the EU-level, penalty default can typically be associated with judgments by the ECJ. As such, these require compliance from Member States to the general principles of EU law without resorting to more hierarchical methods of enforcement (Zeitlin 2016, p. 4).

By way of conclusion, experimentalist governance can thus neither be categorized as a soft or hard law (Bartolini, Héritier & Rhodes 2011, p. 2). Rather, its rule-making framework lies somewhere between decentralised and centralised decision-making (Scheller 2004, p. 49). By uncovering alternative approaches to adversity and EU issue-areas, this type of governance produces innovative solutions to advance goals that cannot always be determined ex ante (Zeitlin 2016, p. 165). In the context of the SSM’s supervision of credit institutions, Zeitlin

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(2016, p. 1082) argues that “the SSM leadership remains ambivalent about the diversity of approaches among national supervisors, even when the outcomes they produce are very similar”. As such, in cases where it appears to be important to preserve a single set of uniform rules, i.e. to prevent situations of regulatory arbitrage, the SSM can give way to a simplified version of the classical experimentalist governance iterative. This version implies a two-step feedback loop whereby the SSM is enabled to build a bridge between the formulation of centralised rules back in Frankfurt and the possibility to gain advantage of the knowledge or issues encountered at national level through the application of this simplified model of experimentalism (Zeitlin 2016). This acknowledgement will hereafter come in as very useful when analysing the governance structure of the SSM as a whole.

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21 3. Literature Review

The European Council’s conclusions adopted on the 18 October 2012 on completing the EBU with a view of “[taking] resolute action to address financial market tensions, restore confidence and stimulate growth and jobs”, has brought about an upsurge of reactions relative to the idea of a new integrated framework of financial regulation (The European Council 2012). In the first years following its entry into force, the setting of the SSM as a first building block of the EBU, has come to raise a range of questions on the defining aspects of its governance structure.

This chapter thus aims at presenting a literature review of the numerous interpretations found in the existing literature on the different forms of governance that shape the innerworkings of the SSM. Applied to the context of LSIs supervision, it seeks to provide a broader overview of the diverse qualifications – in governance theoretic terms – of the relationship between the ECB and the NCAs within this unique mechanism.

The SSM Governance Structure Explained

Recent studies on the framing the SSM governance processes include work of authors such as, Karagianni & Scholten (2018), Gren (2018), Shiavo (2014) and Zeitlin (2016). Gren (2018) provides a detailed assessment of the dynamics of LSIs supervision between the ECB and the NCAs through the lens of the principle-agent theory of delegation. Insights from the principle agent relation enable to position both actors along the lines of an agency contract where the ECB (the principal) delegates parts of its competences to the NCAs (its agents) (Gren 2018, p. 1). Along with that, Gren (2018) further identifies the existence of ex-ante and ex-post mechanisms within the ECB system of indirect supervision (p. 8). This comes in as particularly useful to understand the dynamics and determine the scope of powers of the ECB and the NCAs in their supervision of LSIs. From its part, Shiavo (2014) argues that the newly established SSM design grants the tools for ensuring the stability of the EBU on the basis of

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four elements: institutionalisation, centralisation, integration and top-down supervision (p. 1). At last, Zeitlin (2016) points at the existence of new forms of experimentalist governance within the realm of financial regulation (p. 5). Although the SSM initially appears to be explicitly centralised, Zeitlin’s (2016) theoretical accounts of the developments in European financial supervision attest to the presence of experimentalism and polyarchic features within the SSM (p. 10). All in all, these contrasting perspectives relative to the SSM’s newly established framework of supervision open the door for a broader understanding of the relationship between the ECB and the NCAs through the prism of governance assumptions and theories.

Accountability Questions

Some authors have endeavoured to address the accountability relationship between the ECB and the NCAs in their supervision of credit institutions, including LSIs. In light of the EU General Court’s first judgement1

on the SSM, Karagianni and Scholten (2018) signal important accountability issues pertaining to the relationship between the ECB and the NCAs. As such, the authors identify “weak” accountability arrangements resulting from a reverse transfer of competences from the ECB banking supervision to the Member States’ national supervisory expertise (Karagianni and Scholten 2018, p. 193). Second to that, Karagianni and Scholten (2018) further note a lack of clarity in the EU governance architecture ensuing from the absence of a clear demarcation of powers between the ECB and the NCAs (p. 193). The shortcomings of the ECB supervisory powers have similarly been underlined by Beros (2018, p. 1) who underline a “transparency gap” in the ECB’s supervisory functions associated with the unavoidable multi-level character of the SSM governance system.

What comes across very clearly from these standpoints is that the scope and source of powers of the ECB and the NCAs still require further clarification. Finally, other accounts of the relationship between the ECB and the NCAs remind of the complex issues linked with the implementation of supranational decisions into national law and vice versa. In this respect, authors such as Coman-Kund and Amtenbrink (2018) analyse “the scope and limits of the application of national law by the ECB” within the framework of the latter’s supervisory tasks.. From its part, Wissink (2017) demonstrate the existence of remaining pitfalls and persisting regulatory loopholes in the harmonisation of rules, notably with regards to the Single Rule Book (p. 437). Wissink and Chondrogiannis (2013) further outline the remaining

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inconsistencies in the application of EU law by the ECB, the latter of which has to take due account of the national options and discretions of the participating Member States when applying “all” Union law.

Reflective Assessments

The last strand of literature on the SSM governance framework provides a reflection on the remaining challenges ahead of a centralised system of banking supervision. Wissink (2017) list the range of obstacles and steps that need to be taken in order to strengthen the effectiveness of the SSM decision-making framework (p. 431). Alexander (2014) questions whether the SSM is vested with the “adequate institutional capacity”, as well as the appropriate legal powers to run supervision effectively (p. 467). In this respect, effectiveness of micro/macro prudential is directly linked with the “soundness” and reliability of the ECB’s legal framework (Alexander 2014, p. 492). Fallesen (2015) addresses the inadequacy of the ECB’s extensive range of powers in regards to the tasks conferred upon it by the SSM.

This thesis seeks to contribute to the range of academic literature assessing the governance structure of the SSM by providing a cross-cutting perspective on the functioning of its innerworkings. It does so by relying on a wide range of contrasting governance theories and in applying them to the specific context of LSIs supervision. Therefore, this thesis believes to fill a gap in the existing scholarly work by presenting an analysis of the supervision of LSIs through the lens of governance theories and comparative assessments.

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24 4. Research Design

This chapter provides the reader with a brief overview of the research design applied within the framework of this thesis. It first begin with an outline of the different research methods relied upon within the context of this thesis, before moving on to the explanation of the selection of a single case study analysis.

4.1 Research Methods

This thesis main research question and ensuing set of sub-questions will first and foremost be answered following a descriptive-analytic approach characterised by the assessment of facts, definitions, opinions and understanding of difference in comparative studies. The analysis chapters of this research are therefore supported by the use of qualitative research methods and data analysis.

The data collection method applied within this research proceeds to the gathering and measuring of information retrieved from primary and secondary sources. The primary sources mainly consist of official documents and official speeches issued by the EU institutions. In this way, extensive use has been made of the SSM Supervisory Manual (2018) published by the ECB and drafted in cooperation with the NCAs, as well as the ECB’s Guide to Banking Supervision (2014) following the Interinstitutional Agreement between the ECB and the European Parliament. Other relevant sources include press releases, working papers, reports and staff working documents from the EU institutions, as well as the ECB’s official instructions on LSIs supervision within the SSM (2017) and SREPs methodology booklet

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(2019). Furthermore, official speeches published by members of the ECB and found on the institution’s main website also come to supplement knowledge retrieved from the above-mentioned documents. Of relevance are also important EU websites such as the EUROPA/EU Commission and ECB’s official pages. Most important of all, this thesis pays due regard to the provisions of the SSM’s two main legal basis: the SSM Regulation and the SSM

Framework Regulation.

At last, other primary sources that include semi-structured interviews are also made use of in providing first-hand information relative to the supervision of LSIs at local level.

With regards to secondary sources, this thesis operates on the basis of a cross-analysis of information retrieved from academic literature and research by scholars on the functioning of the SSM, but also, most notably, on the variety of governance theories that tentatively frame the SSM’s architectural design.

The importance of the use of triangulation in research i.e. the use of more than one approach to answering the research question, is crucial to gain a more comprehensive understanding of findings and results (Heale & Forbes 2019, p. 98). By combining a set of primary official documents, secondary academic sources, but also of semi-structures interviews, this thesis provides a more in-depth approach to evaluating the structure of the SSM by requesting information from a wide range of sources. In this way, results are enriched by the complementarity of interpretations and findings of the same research question.

4.2 The Case Study of the National Bank of Belgium (NBB)

As its main case study, this thesis has chosen to concentrate on the innerworkings of Belgian prudential supervision, specifically on the supervisory practices of the National Bank of Belgium (NBB) in their supervision of LSIs. The choice for the NBB stems out of convenience due to language advantages and given the location of meetings that took place in Brussels. In this way, the complete set of interviews have been performed in French at the official headquarters of the NBB. The first interview took place with Mr. Thomas Bodequin, Policy Expert in Prudential Policy and Financial Stability at the NBB. The second interview was conducted jointly with Mr. Arnaud Lauwers, Head of Banking Inspection and Mr. Marc Verleye, Head of Mission of On-Site banking inspections at the NBB. Both interviews were particularly insightful in order to gain a first-hand knowledge on the workings of the SSM in practice. In addition, they provide a transversal understanding of LSIs supervision by

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supplementing my analysis with results shaped by personal views, opinions and experience on the ground. Due to the fact that the harmonisation of LSIs standards is not yet fully achieved, some of the findings are based on the following methodology and procedures used for SIs. Above all, the experience of performing interviews was enhanced by the convergence of opinions between the three interviewees regarding the NBB’s exercise of control over LSIs in Belgium. Most importantly, these semi-structured interviews were useful to broaden the scope and understanding of the cooperation between the ECB and the NCAs by reflecting the realities of the functioning of the SSM on the ground.

Having set the research framework applied throughout the course of this paper, the next set of chapters will be focused on the analysis of supervision of LSIs within the Banking Union, both in theory and in practice, before closing with an evaluative assessment of the ECB and the NCAs’ supervisory activities in the context of LSIs.

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5. Analysis of Supervision of Less Significant Institutions within the Banking Union: In Theory

5.1 The SSM “Raison d’être”

Recent global and sovereign economic crises uncovered important shortcomings that triggered the need for a revision of the institutional architecture and governing processes of the EBU (Jachtenfuchs 2010 p. 2013). Specifically, the impact on sovereign debt markets in the euro area not only called for stronger coordination of the monetary union fiscal and economic policies, but also underlined the pressing nature for an integrated framework of financial supervision (The National Bank of Belgium 2019). As such, the inherent diversity that characterises the banking sector, as well as the differences in national policymaking gave way to major discrepancies in rule interpretation enabling institutions to leverage the opportunities created under such conditions of legal uncertainty (Wissink 2017, p. 431). For the purpose of closing this regulatory loophole, the Single Supervisory Mechanism (SSM) emerged in November 2014, as a first step towards greater rule harmonization and minimization of rent-seeking activities across the eurozone (The European Central Bank 2014, p. 6). Based on the Single Rule Book approach to prudential supervision, the SSM now constitutes one of the three pillars of the EBU, together with the Single Resolution Mechanism (SRM) and the European Deposit Insurance Scheme (EDIS) (The European Central Bank 2018, p. 3). As it will be observed, supervisory performance of credit institutions within the SSM is gauged by the combining efforts of, respectively, the ECB and the NCAs of participating Member States.

The purpose of the SSM, however, is not directed towards “reinventing the wheel” of supervision amongst countries (The European Central Bank 2014, p. 1). Rather, the grand

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narrative behind the creation of the SSM seems to be the promotion of best supervisory practices by levelling the playing field for banks and ensuring consistency in the application of high supervisory standards across the euro-area (The European Central Bank 2014, p. 1). In this respect, Arleo (2019, p. 2) argues that the SSM puts an end to the EU’s long-lasting efforts to supranationalise banking supervision by striking a balance between “single market/level playing fields concerns” and the “existent legal and institutional diversity” (Arleo 2019, p. 2). In order to understand the extent to which the SSM shape the ways in which credit institutions are supervised, an assessment of its internal layout and functioning

de jure seems wise in the first instance. In this respect, the SSM founding texts provides an

appropriate first theoretical account of the power dynamics that surround the relationship between the SSM’s two main set of actors: the ECB and the NCAs.

5.2 The SSM Legislative Framework

5.2.1 General Principles & Regulatory Powers

Lessons learned after three consecutive years of financial upheavals emphasised the demand for the effective exercise of control over financial markets, and the creation of an EU-wide system of centralised banking supervision (Shiavo 2014, p. 117). In June 2012, this brought EU heads of state and government to reach a final agreement over the creation of a single mechanism of supervision for all banks in the eurozone (The Federal Ministry of Finance 2018, p. 1). The process for the adoption of the SSM was thus launched shortly after and following the Commission’s two legislative proposals for Regulations on 12 September 2012 (Shiavo 2013, p. 118).

The common denominator behind these proposals was, as President José Manuel Barroso put out, a “new system, with the European Central Bank at the core and involving national supervisors [to] restore confidence in the supervision of all banks in the euro-area” (The European Commission 2012). After the European Council’s few content-wise modifications regarding the delineation of the ECB’s supervisory tasks, the adoption of the two SSM Regulations was finalised in October 2013 (Shiavo 2014, p. 119).

The Council Regulation (EU) No 1024/2013 (SSM Regulation) “conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions” is the main legal source of the SSM. Second to it, Regulation (EU) No 1022/2013 complements the SSMR in amending the EBA’s founding text as regards to the

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conferral of specific tasks on the ECB. Of relevance is also Regulation (EU) No 468/2014 (SSM Framework Regulation) issued by the ECB in April 2014, which establishes the framework of cooperation between the ECB and NCA and national designated authorities. Together, these regulations should be implemented in conformity with the general principles of Union law, inter alia, the principle of sincere cooperation, the principle of cooperation in good faith and the obligation to exchange information as cited in Article 6 of Regulation (EU) 1024/2013 (European Central Bank 2014, p. 39). Of relative importance is also Article 127 of the Treaty of the Functioning of the European Union (TFEU), which provides the legal basis for the SSM Regulation.

5.2.2 A Truly Single Mechanism of Supervision?

As mentioned above, the establishment of a new institutional regime through the entry into force of the SSM came as response to the growing need for centralisation of prudential supervision in the face of increasing diversity and major financial overhaul caused by the succession of economic crisis (Arleo 2019, p. 2). The adoption of the SSMR provisions thus aimed at channelling the conduct of supervision into the hands of one authority that would ensure impartial and consistent application of rules to all cases (The European Central Bank 2014, p. 39). This decision was hailed as a landmark for the future of European banking supervision in delineating important aspects relative to the sharing of competences between the ECB and the NCAs. (National Bank of Belgium 2014, p. 2). Within the framework of Article 6 of the SSMR, the ECB was thus rendered “exclusively competent” to carry out the tasks entrusted to it by Article 4 relative to the supervision of all credit institutions. Within this relationship, the primary role of the NCAs is thus to assist the ECB by merely discharging it from its supervisory tasks (SSM Regulation, Article 6 (3)). As Gortsos (2015, p. 406) contends, this “vertical transfer”, from the Member States to the EU level, of specific powers concerning policies relative to the prudential supervision of “all “ credit institutions provides a first line of argument to the hierarchical nature of the relationship between the ECB and the NCAs (Gortsos 2015, p. 406). Along with that, Article 6 (1) of the SSMR also holds the ECB responsible for the “effective” and “consistent” functioning of the entire SSM. It follows thereof from this understanding that the NCAs are bound to conform with the ECB’s instructions, which further heightens a hierarchy between both actors.

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At first glance, these observations provide justification for relating the SSM governance system to the concept of hierarchical governance, as brought forward by Craig and De Bùrca. According to Karagianni and Sholten (2018, p. 186), the distribution of powers between the ECB and the NCAs as outlined by the SSMR on the basis of Article 127(6) indicate, prima

facie, a clear transfer of powers and sovereignty from the NCAs to the ECB. Specifically, this

reallocation of powers passed on from national to supranational legislation seemingly marks the existence of a delegation line between the NCAs to the ECB (Karagianni & Sholten 2018, p 186). Under this framework, it is safe to assume that the SSMR implicitly qualifies the SSM’s governance structure as a “top-down” system wherein overarching goals are defined at the apex of the hierarchy by a “central institutional actor”: the ECB (Craig & De Burca 2015, p. 164). De jure, the SSM can therefore truly be considered as a ‘single’ mechanism of supervision to the extent that prudential control of institutions appears to be orchestrated by one single supervisor who stands above national level (Shiavo 2014, p. 126).

Looking forward, the distribution of powers between the ECB and the NCAs appears to be much more complex. In particular, the scope of the ECB’s mandate has come to raise eyebrows with regards to the true connotation of the terms “all credit institutions” (SSM Regulation 2013, Article 6; The National Bank of Belgium 2014, p. 28). Let alone, allocating a large share of supervisory powers into the hands of one supranational authority would come to undermine the democratic legitimacy of the authority itself. The rationale behind restricting parts of the ECB’s competences arose as a reaction to the number of institutions that needed to be supervised (The National Bank of Belgium 2014, p. 28). As such, it was reported that around 5000 to 6000 credit institutions did not have a significant impact on the stability of the European financial system and could hence easily fall under the remit of national jurisdictions (The National Bank of Belgium 2014, p. 28). However, the backlash of the financial crisis highlighted the risk and unfolding “knock-on effect” that the bankruptcy of smaller institutions could pose on the EU’s financial position (The National Bank of Belgium 2014, p. 28). From a political point of view, this opinion received great support in Germany as the country remains scattered with the activity of many small local banks (The National Bank of Belgium 2014, p. 29). On the one hand, it appeared evident that these 5000 to 6000 banks could not solely be supervised by a one-site supervisor as this would not be reflective of national cultural differences and specificities in addition to be extremely costly-inefficient (The National Bank of Belgium 2014, p. 29). On the other hand, enabling local supervisors to supervise financial institutions on their own initiative – ant that only - would come at the risk

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of fostering regulatory arbitrage and national political bias (The National Bank of Belgium 2014, p. 29). The need for a comprehensive supervisory system of all banks, whether small or large, was thus very much underfelt.

As a middle ground solution, the SSM is therefore further established upon the premise of a double-layered system of supervision of credit institutions on the basis of collaboration (The National Bank of Belgium 2014, p. 12) According to pre-established significance criteria, set under the SSM Statutory Framework, the ECB is rendered directly responsible for the supervision of large or more risky institutions qualifying as “significant” i.e. about 120 significant banks (Karagianni & Scholten 2018, p. 185). In addition to continuing to assist the ECB when needed with regards to SIs, the NCAs is required to directly supervise smaller or less risky institutions classifying as “less significant” (Karagianni & Scholten 2018, p. 187). Therefore, one needs to be careful when categorizing the relationship between the ECB and the NCAs in governance theoretic terms. For the purpose of shedding some further clarification, the EU General Court provides additional legal ground to the source and scope of the ECB and the NCAs, useful to form a more nuanced opinion on the forms of governance that govern the relationship between both actors.

5.2.3 The L-Bank Case2

The L-Bank Case is articulated around the Landeskreditbank Baden-Württemberg and its action before the General Court against its classification as a “significant entity” by the ECB (Europa.eu 2017). As such, the Landeskreditbank, considered its financial profile to be low in risk, which would thus grant it with the right to fall under the remit of German national authorities in being classified as a LSI. This action was further rejected by the General Court in accordance with who: “the supervision of institutions classified as “less significant by the national authorities under the SSM is not the exercise of autonomous competence, but rather a decentralised implementation of an exclusive competence of the ECB” (Europa.eu 2017). In short, in the General Court’s view a combined interpretation of Article 4 and 6 of the SSMR does not inevitably lead to a distribution of competences between the ECB and NCAs per se (Karagianni & Scholten 2018, p. 188). Rather, it “simply” presents a “decentralised framework” for the implementation of the ECB’s supervisory tasks (Karagianni & Scholten

2018, p. 188).

On the whole, the General Court categorizes the relationship between the ECB and the NCAs

Between centralization and decentralization : supervision of Less Significant Institutions (LSIs) within the European Banking Union