The single supervisory mechanism : an assessment

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The Single Supervisory Mechanism:

An Assessment

Graduate School of Social Sciences

Hilde Lindeman 10358943

Supervisor: Prof. Dr. J.A. Zeitlin Second reader: Dhr. B.J.P. Stellinga

Word count: 26325 23 June 2017

E-mail: hildeclindeman@gmail.com

This thesis is submitted for the degree of:

Master of Science (MSc) in Political Science: International Relations University of Amsterdam

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Acknowledgements

I would like to thank my supervisor, Prof. Jonathan Zeitlin, who helped me to

complete this thesis by providing expert knowledge and guidance in the development of my thesis and by always replying quickly to e-mails full of questions. It was a wonderful experience to have such an involved supervisor.

I would also like to thank Dhr. B.J.P. Stellinga for taking the time to be the second reader of this thesis.

A special thanks goes to my interviewees who took the time to talk to me, despite their busy schedules.

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List of Abbreviations

APS Asset Protection Scheme AMC Asset Management Company AQR Asset Quality Review

BCBS Basel Committee on Banking Supervision BIS Bank for International Settlements

BRRD Bank Recovery and Resolution Directive BTS Binding Technical Standards

CMU Capital Markets Union

CRR Capital Requirements Regulation EBA European Banking Authority

EBRD European Bank for Reconstruction and Development

EC European Commission

ECB European Central Bank

EDIS European Deposit Insurance Scheme EG Experimentalist Governance

EFSF European Financial Stability Facility EMU European Monetary Union

ESFS European System of Financial Supervision ESM European Stability Mechanism

ESMA European Securities and Markets Authority ESAs European Supervisory Authorities

EP European Parliament

EU European Union

GDP Gross Domestic Product

IPS Institutional Protection Scheme IMF International Monetary Fund

IRB International Ratings Based approach JST Joint Supervisory Team

LMIH Low- and Medium-Income Households LSI Less Significant Institution

NCA National Competent Authority

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SA Standard Approach NPL Non-Performing Loan SI Significant Institution

SREP Supervisory Review and Evaluation Process SRM Single Resolution Mechanism

SSM Single Supervisory Mechanism

UK United Kingdom

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Chapter 1 Introduction

1.1 The origins of the European financial crisis

The trigger of the financial and sovereign debt crisis in the European Union (EU) was the global financial crisis that originated in the United States. Several explanations are given for the set of events that occurred since the onset of the financial crisis. They can be seen as complementary and will be discussed in the following section.

Prior to the global financial crisis of 2008, the importance of finance in the European political economy increased tremendously. The ratio of financial assets to the gross domestic product (GDP) increased to 600 per cent in the EU (Overbeek 2012). In France and the UK, this was 700 per cent, and in Ireland, it was 900 per cent. The internationalisation of financial markets and the creation of a single market in the EU facilitated the penetration of the practices of financialisation in the euro area member states that had previously been insulated from this development (Ibid.). This is seen as a design flaw in the construction of the euro as a single currency, as it did not accompany a banking union to supervise the more internationalised

financial sector (Jones 2015).

The introduction of the euro is claimed to have caused wasteful government expenditure and excessive borrowing. The introduction of the common currency harmonised the credit ratings of the eurozone member states, which led certain member states to receive higher ratings than they should have based on their

individual situations. This was the case in Spain, Ireland, Italy, Portugal and Greece. The government expenditure increased in most of these countries because these European Monetary Union (EMU) members were now able to borrow at the same interest rate that the core EMU members could, including France, the Netherlands and Germany. The private debt also increased in the peripheral countries and especially in Spain and Ireland where the borrowed money was over-invested in home real estate. In these countries, the household debt increased, just as it did in most other EMU member countries. Moreover, in all EMU member countries, many purchases of over-valued asset-based securities took place abroad, but this affected the peripheral countries more in the end. When the true value of such assets

became clear this triggered the failing of several banks in the euro area. The

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the peripheral countries. Overall, the situation led those core banks to be heavily exposed to the peripheral countries.

Since early 2010, the crisis in the EU has changed from a banking crisis to a sovereign debt crisis threatening the credibility of the euro. The increase in sovereign debt stemmed from failing banks that had to be rescued in the euro area and from the increase in government spending in some peripheral countries in the hopes of compensating for the loss of the comparative advantage of devaluing their own currencies. This was no longer an option in the peripheral countries due to the introduction of the euro, which equalized the price and interest level throughout the euro area (Overbeek 2012). The changed financial climate triggered a loss of

confidence among market participants, such as financial institutions, which led them to liquidate their investments and to retreat within their national boundaries as much as possible.

These are the complementary and cumulative explanations for the current economic difficulty in which the EU has found itself. The issue with having different explanations is creating a policy for addressing the origins of the financial turmoil (Jones 2015). For each of these explanations, confirmatory data can be found. However, such data cannot be found for every explanation in each EMU member state. This shows that some explanations are more valid for one country than another. For this reason, the solutions offered are contradictory and often counterproductive.

The different explanations for the financial crisis have a certain causal depth. One can distinguish among different rules for causal depth, which have to do with necessity, sufficiency and priority. A necessary correlation occurs in all the possible cases, a sufficient correlation always results in the same effect but can arise

independently and a prior correlation can give rise to several symptoms that can have their own causal significance (Ibid.). On the basis of these correlations, one can categorise the correlations observed in the European crisis. The relevant factors in the crisis, or explanations for the crisis, are euro membership, government

borrowing, household balances and investor or market confidence, which were discussed earlier. One can check whether these factors were present in each of the countries that the crisis affected; this would be a necessary correlation. One can also check whether they were present when the crisis affected the countries, which would be sufficient correlation. Finally, one can check whether another factor could be

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responsible for both sides of the correlation, which is a case of priority correlation (Ibid.).

Necessary correlation is not mentioned in the EU because none of the

explanations for the European crisis was necessary for a country to get into trouble. For example the UK, Iceland, Hungary and Latvia did not introduce the euro yet still experienced the profound effects of the crisis. As mentioned before, Ireland and Spain did not have excessive public debt prior to the crisis; rather, they had more private debt. Portugal had a higher ratio of public debt prior to the crisis, but this was not very different from the situations of France and Germany. The household

explanation is not valid in the Italian and Greek cases, because the households in these countries were not highly indebted. Household debt increased in the years prior to the crisis in these countries, but it remained relatively low compared with other countries. The market confidence narrative is hard to check because whether the crisis occurred before the drop in market confidence or vice versa is not easy to determine.

The various explanations were also not fully sufficiently correlated. An

example of this is Luxembourg and Malta, which have euro membership but did not suffer massively as a consequence. In addition, the Netherlands and Denmark had the highest household debt ratios but still managed to escape the worst of the crisis (Ibid.). Examples for each narrative can be found. In the case of priority correlation, this is harder to assess. Priority correlation implies a more precise definition of the different concepts to be able to establish the sequence and influence of the

concepts. The crisis can thus be narrowed down to the concept of the balance of payments financing. This concept can also be seen as a combination of economic problems (Ibid.).

The financing of the balance of payments becomes critical once a sudden outflow of capital comes from a country’s banks and sovereign debt markets. This sudden stop affects the interest rates and the availability of credit. These two factors can then impact international competitiveness because they can raise costs and cut the supply of working capital. The outflow of capital delays the government’s debt servicing and welfare assistance while lowering the revenues from income for the government. For households, it becomes more difficult to pay down on existing debt, once there is an outflow. This sequencing shows that any causal account is

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sovereign debt markets. One can also claim that the US financial crisis prior to this has greater causal significance than the correlations of the previous discussed narratives. Moreover, for the ‘sudden stop’ narrative to become reality, only two contextual requirements are needed, which are the lost of confidence and the

liberalisation of capital markets. Due to the latter, foreigners can easily liquidate and repatriate assets once the confidence is lost. Consequently, the country in question will experience a crisis in the balance of payments. The very few requirements needed for the ‘sudden stop’ narrative are in contrast with the sector- and country-specific requirements of the other discussed narratives. These narratives do not have to be rejected because of this and might still be applicable in certain

circumstances. However, the existence of several anomalies inside the euro area makes it challenging to argue that these explanations are comparatively the most important manner of interpreting the European crisis (Ibid.).

Instead of these different explanations one can stress the importance of the sudden outflow from a country’s banks and sovereign debt markets, the sudden stop discussed earlier. This would be a financial interpretation. The weakness of a

financial interpretation of the crisis is that it requires a trigger to set off the movement of capital across borders. That trigger is different in each case and is difficult to discover. However, one could wonder whether the trigger requires more attention. The financial interpretation is quite mechanistic because it involves ‘market actors’ as an agency that loses confidence and moves assets (Ibid.). While comparing three country cases prior to and during the crisis, it becomes clear that predicting these market actors is difficult. In Greece market actors held different views towards the same set of government finances while often changing in counter-intuitive ways given the data. In Italy, market actors adopted a very negative view from one day to the next. The Belgian case shows how market actors can lose their confidence only to see it restored again quite quickly.

Assuming that the financial interpretation is the right explanation, two possible and quite contrary solutions exist for the problem at hand, both of which focus on different ends of the initial correlation. The first solution attempts to limit the impact of capital market liberalisation. The other solution attempts to diminish the possibility that international market actors will initiate a capital outflow. The first solution would entail a renationalisation by restoring domestic policy autonomy at the expense of sacrificing many of the benefits of financial market integration. The aim of the second

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solution would be to stabilize integrated financial practices, focusing on a wider range of measures for building investor confidence and to channelling possible flights to liquidity or quality in manners that do not drain resources from individual national economies (Ibid.).

According to Jones (2015), a European banking union would be appropriate for stabilising integrated financial practices. A resolution mechanism together with a pooled resolution fund would also assist with this when banks are failing. By now, these two institutions have been established under the concept of a banking union. A full renationalisation of finance, the first suggested solution, is difficult to achieve and is contrary to the policies that have been implemented over the past few decades in the EU. It would also restrain and reverse financial integration, including its many benefits. The second solution thus seems to be the most appropriate

The EU realises that the market is an arena in which actors have individual strategies and in which they respond to one another. Therefore, the agency of financial institutions that is active in the EU financial market has been reviewed. The financial institutions have played a key role in the European sovereign debt crisis, not only prior to the crisis but also during it. During the crisis, most banks were insulated from losses, because their governments took over their debts. The European populations thus paid for these losses. An important step in evading a new similar crisis would thus be to compose stricter regulations for financial institutions and to cut the ties between banks and states (Ibid.). Moreover, the supervision should become stricter because asymmetrical information was found between the supervision of the financial sector and euro area banks. Asymmetrical information was also found between the different national supervisors, with a significant share of the banks situated in the eurozone already operating

internationally. This makes research on the banking union’s supervision pillar, the Single Supervisory Mechanism (SSM), very relevant.

1.2 The banking union: The SSM, SRM and EDIS

A few years after the onset of the European sovereign debt crisis, the banking union was announced on 29 June 2012 after a meeting of European leaders (Véron 2015). The elements of the banking union are the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the European Deposit Insurance

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Scheme (EDIS). The SSM was established in November 2014 after a

comprehensive assessment of all euro area banks and now takes place each year (Europa Nu 2017a). This test is implemented in cooperation with national supervision and carries out financial health checks of the banks that the European Central Bank (ECB) supervises directly (ECB n.d. a). The financial health entails that the banks are adequately capitalised and can thus withstand possible financial shocks (Ibid.). These assessments occur regularly in the case of banks that the ECB supervises exclusively and they are ad hoc when deemed necessary. The comprehensive assessment involves an asset quality review (AQR) and a stress test. The aim of the AQR is to enhance the transparency of bank exposures. The stress test tests the resilience of banks’ balance sheets and is performed in cooperation with the European Banking Authority (EBA) (Ibid.). In October 2014 the results of the first comprehensive assessment were published: 25 of the 130 significant institutions (SIs) failed the test (Europa Nu 2017a). The SIs are the largest and most significant banks of the Eurozone, contrary to the less significant institutions (LSIs). After the comprehensive assessment, the SIs received tasks for improving their financial situations and if the SIs did not implement them correctly, the banks risked the withdrawal of their banking licenses by the ECB. The ECB thus has the authority to impose measures and fees on banks that fail the test. The supervision element of the ECB is independent of its monetary tasks.

Since November of 2014, the ECB has started to use the Supervisory Review and Evaluation Process (SREP) instead of the comprehensive assessment (Véron 2015). The SREP takes into account a fuller range of risk factors than the

comprehensive assessment. This is supposed to ensure that banks are not only sufficiently capitalised but also that they have business models that can support their operations in the long term. From 2015 on, the Joint Supervisory Teams (JSTs) implement the SREP, which will be discussed extensively later in this thesis. The teams are composed of national competent authorities (NCAs) and ECB supervisors. Because both national authorities and European authorities conduct the supervision, it is important to research how their different visions and distinct knowledge are used together to supervise the eurozone banks. Moreover, it is important to assess

whether this unique combination of governance has been able to overcome the asymmetrical information between the different national supervisors and between the euro area supervision as a whole and the euro area banks.

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The SRM is the second pillar of the banking union. It is a resolution mechanism for banks that will face trouble in the future. It also became operational in 2014 and it is a single procedure on who decides the fate of a bank, what process will be followed and who will pay for it (Ibid.). The Single Resolution Board (SRB) is in charge of this procedure. The board is composed of the European Commission (EC), the ECB and representatives of the euro area member states. When the SRB decides to save a bank, it attempts to avoid a bailout, which the public or the government has to pay for. Instead, first a bail-in is implemented, which the bank’s shareholders, savers and obligation holders have to pay. If this is not enough, the Single Resolution Fund (SRF) is used. Banks in the euro area fill this fund until it reaches 55 billion euros. The fund will be completely full in 2025. The SRF became operational in January 2016 (Ibid.). In December 2016, the ECB demanded through the SRM that the troubled Italian bank Monte dei Paschi di Siena (MPS) increased its capital to 8.8 billion (NRC Next 2017). Similarly to many other Italian banks, MPS had a high stock of loans that were no longer repaid, so-called non-performing loans (NPLs). To be able to save this bank, the Italian government had to await the permission of the SRB because capital injections have to meet EU standards since the establishment of the SRM. In June 2017, the Italian government finally received permission to save the bank and the SRB imposed several measures on the bank that it has to

implement (Ibid.). This is an instance where state aid was used to rescue the bank although the aim of the SRM was to evade such a situation.

However, a recent case where the resolution of a bank worked out as

intended also exists. In June 2017, the Spanish bank Banco Popular was failing and had high NPL ratios. The SSM observed this and the SRB went into action. Banco Popular was sold to the bank Salander for zero euros. Salander agreed to take over the NPLs and debts of Banco Popular. The shareholders and investors lost their shares worth around three billion euros, but the resolution of Banco Popular did not affect the customers and taxpayers customers which was the intent of the SRM (Hekking & van Poll 2017).

The SRB operates in two sessions, executive and plenary (EUROPA 2017). The voting rules for each session are balanced between the need to take all

countries’ interest into account and the need to make sure that effective decisions are made at the EU level. The executive session is used to make the key

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the use of the SRF and the decisions addressed to NCAs for implementing the measures. The relevant NCAs have some influence but are not ultimately

responsible in the SRB. During the executive session the chair, the vice-chair, the four permanent members and the authorities of the country in which the troubled bank is based are present. The plenary session is used to decide on individual resolution cases in which the support of the SRF is required above the five billion euros threshold. Meanwhile, the executive session is used to decide on cases below this threshold. The SRB works in collaboration with the EBA (Ibid.).

The EDIS guarantees the savings of customers up to 100,000 euros when a bank fails. This is still arranged on a national level: each state is obliged to insure up to 100,000 euros of deposits per customer. The EDIS’s aim is to avoid a bank run and to relocate the responsibility to the EU level to reduce the possibility of a new sovereign debt crisis. However, the EDIS is still in negotiation, and in June 2016, it was decided by the involved actors to stop the negotiations temporarily. The proposal turned out to be too controversial, as many eurozone member states are not prepared to guarantee for depositors of other eurozone member states (Ibid.).

The SSM has been in operation for more than two years now. The SRM began to function around the same time, but it is more difficult to assess because it has not needed to operate often. The EDIS is not yet established. However, even in its current incomplete form the banking union represents a radical change that profoundly modifies the nature of European integration and the power balance between member states and European institutions (Véron 2015). Because the SSM has put into action radical changes in the supervision of eurozone banks, this thesis is focused on researching its performance. Whether the SSM addresses the causes of the European sovereign debt crisis related to the financial sector will also be researched.

One of those main origins of the sovereign debt crisis in the EU was the behaviour of banks and their relationships with governments. Long-standing political and financial ties between banks and governments shaped the financial crisis

(Epstein & Rhodes 2017). When the banking union was established, the EC in cooperation with the ECB and euro area member states concluded that it would be necessary to cut off the political bank-state ties. These ties had long supported national institutional distinctiveness, but had also resulted in a banking nationalism

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leading to lack of oversight of banks in the euro area (Epstein & Rhodes 2016). This is the issue of asymmetrical information that was mentioned earlier.

Moreover, the state-bank ties also led banks to purchase disproportionate volumes of their own sovereign debt during the crisis (Ibid.). These bond purchases resulted in so-called bank-state ‘doom loops’. In these loops, higher borrowing costs for states compromised the health of banks’ balance sheets, which concentrated risk during the crisis and jeopardised the common currencies even further (Ibid).

The long-term state-bank ties in the euro area resulted in states’ banking sector protectionism, and as a result, state-based bank guarantees originated (Epstein & Rhodes 2017). Due to the guarantees and protectionism, national

regulatory and supervisory forbearance also existed. These ties were combined with prior decennia of liberalising reforms in the financial sector, such as international capital mobility, cross-border lending and the new common currency in the EU (Ibid.).

In relation to the SSMs functioning and stated goals, three subjects will be researched. The first subject is the efficiency of the supervision of NPLs. This will be researched to assess whether the SSM has been able to break the doom loops between the banking supervision and banks in the euro area. The NPL issue will also help with assessing whether the issue of asymmetrical information between different supervisors in the euro area has been overcome. In 2014 the SSM introduced a harmonised definition of a NPL in cooperation with the EBA (DNB, 2016). This allowed for a better comparison between banks and a more balanced assessment of banks. However, criticism still exists regarding the identification and policy of NPLs. The issue of high NPL ratios has negative effects on the recovery of the European economy. In this thesis, the following topics will therefore be

researched: how the SSM has supervised banks with regards to NPLs and what room for improvement exists in this field.

The second case study that will be carried out in this thesis involves banks’ use of internal risk models, the goals of which are to make capital requirements more accurate and to reduce regulatory arbitrage (Colliard 2014). However, this freedom of choice may give banks incentives to choose their risk models strategically (Ibid.). The use of internal risk models is being researched because it can be an issue of asymmetrical information between SSM supervision and banks.

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Furthermore, what the SSM has done to diminish banks’ strategic use of internal risk models and whether this is sufficient will be researched in this thesis.

The harmonised supervision of the SSM can lead to problems when

institutions are very distinctive and were set up with different goals. However the aim of the SSM is to implement uniform rules while applying them in a differentiated way for each financial institution. The aim of the third case study of this thesis is to

assess the extent to which the SSM has achieved that goal. Financial institutions can have different business models, including cooperative banks, savings banks and investment banks. In some of the member states, these specific types of institutions have established diverse liability schemes (ECB 2015). These schemes establish mutual support arrangements aimed at ensuring their liquidity and solvency (Ibid.). Larger financial institutions also often participate in these schemes. This case study thus also explores whether the schemes are supervised in a fair manner.

1.3 Research Questions

The main question of this research is related to the causes of the financial crisis in the eurozone and the establishment of the SSM. The overarching main question is:

‘Is the SSM sufficient for dealing with the causes of the financial crisis in the eurozone that in the end led to its establishment?’

The particular combination of centralised supervision at a supranational level and specialised and local supervision at a national level raises the question of how these two levels of governance and supervision intertwine:

‘Is the SSM able to overcome asymmetrical information between national supervision and the centralised ECB supervision on the one hand and between the

banking supervision in the eurozone and its banks, on the other hand?’ Due to different practices and traditions in supervision, it is plausible that

asymmetrical information exists between NCAs and between the different NCAs and the centralised supervision of the ECB. The existence of asymmetrical information between the supervision of banks and banks in the eurozone was one of the causes of the financial crisis. In this research will thus be assessed whether the SSM

overcomes the two types of asymmetrical information and to what extent that is the case will be assessed. Looking into the supervision of the eurozone banks also makes it necessary to further address the effectiveness of the SSM.

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This will be done through three case studies of banking supervision, which were previously discussed in the introduction:

o ‘How has the SSM identified and addressed NPLs since its establishment?’ o ‘How has the SSM banks’ free choice of internal risk models?’

o ‘Is the SSM able to take sufficient account of the specific characteristics of banks, their business models and the schemes they are in (cooperative and

savings banks)?’ 1.4 Structure

Following this introduction, Chapter 2 will examine the theoretical framework of this thesis and provide a literature review. Chapter 3 will elaborate on the methods used for this research. Chapter 4 will provide an overview of the institutional framework for financial service regulation in the EU and the institutional framework for the banking governance in the EU. Chapter 5 will discuss the governance of the SSM and answer the question of whether the special type of governance overcomes the

asymmetrical information between the different entities involved in eurozone banking supervision. It will research the advantages and disadvantages of the cooperation and coordination between supranational and national supervisors. Chapter 6 will attempt to amplify the knowledge about SSM supervision and NPLs. In Chapter 7 the banks’ strategic use of internal risk models and the SSM’s supervision of this will be researched. Chapter 8 will explore the harmonised approach of SSM supervision while respecting differentiated methods. Chapter 9 will then conclude the paper and provide future directions.

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Chapter 2 Literature review and theoretical framework

2.1 Literature review

Prior to the financial crisis of 2008, the supervision of banks in the Eurozone was very different from what it is now. It appeared that financial integration in the years prior to the crisis were significant, especially since the introduction of the euro. However, the regulation and supervision of this new financial market had not increased to an adequate level. With the establishment of the EMU, its members now had a common monetary policy. The fiscal policy of member states has been supervised and overviewed since the establishment of the Stability and Growth Pact (SGP) before the introduction of the euro. However, the sovereignty has remained with member states (Lapavitsas 2012). Because the sovereign power of member states remains, the eurozone does not have a tax system or fiscal transfers between areas.

In 2008, liquidity for all banks became scarce, particularly after the rescue of the Bear Stearns bank and later the collapse of Lehman Brothers (Ibid.). To be able to rescue banks in the eurozone, the ECB started to provide liquidity to failing banks while accepting a large amount of datable types of paper as collateral for secure debt. These actions of the ECB allowed banks to adjust their balance sheets. In this manner, the ECB assisted the banks in deleveraging. By the end of 2008, banks were reducing their lending, including lending to the periphery. In addition, banks stopped buying long-term securities and preferred to buy short-term instruments in the hopes of improving liquidity. The result of this was credit shortage and

accelerated recession across the eurozone. The recession then caused a decline in public revenue, which lowered the tax intake for governments. Simultaneously, state expenditure rose in several countries, as the rescuing of banks was needed.

Moreover, governments increased expenditures to support the aggregate demand (Ibid).

The role that banks assumed in the onset and severity of the crisis is thus immense. The EMU created a common money market for European banks, with the oversight of the ECB. However, the banking market of Europe has never been homogenised. Banks have always retained a national outlook, while often operating internationally. Due to the sovereign debt crisis the interdependence between banks and governments increased even more. One can thus state that the former

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fragmented and nation-based supervision of banks in the EU was lacking. First and foremost, this was the case for the financial products that the banks traded and the loans that were given in excess. Moreover, since the introduction of the euro, the financial market had internationalised, but its supervision had not. In that manner, asymmetrical information existed between the supervision and banks. Asymmetrical information was also found between the different national supervisors themselves and between them and the institutions that were supposed to oversee the EU financial market. According to Saunders (1986) the potential for contagion in the inter-bank market results from asymmetric information among the involved parties. This is therefore an important issue while explicating the origins of the financial crisis.

According to Schoenmaker (2011) there is a financial trilemma in the EU. According to this trilemma only two out of the three following objectives can be in place: financial stability, financial integration and national financial policies. Prior to the crisis, intensive financial integration had taken place in the EU and mainly national financial policies and supervision remained. That is why the third objective, financial stability was not present and this might explain the emergence of a financial crisis. A solution for this would thus be to move powers for financial policies such as regulation, supervision and stability to the European level (Ibid.). This explains the choice for more centralised banking supervision in the EU, by establishing the SSM.

This thesis will thus delve into the functioning and governance of the SSM. The SSM is an independent element of the ECB and exclusively supervises the earlier-mentioned SIs of the eurozone. To assess whether a financial institution is significant, the ECB reviews its size, its economic performance in the nation in which it is based in and in the EU, its cross-border activities and its direct public financial assistance (ECB n.d. b). The size has to exceed 30 billion euros of assets and the institution has to have requested or received funding from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF) to be regarded as significant (Ibid.). When these criteria are not met, the financial institution is

defined as a LSI and the state in which it is located will supervise it.

Under the SSM regulation, the SSM has sole authority over the ownership changes and new management of financial institutions (Schoenmaker & Véron 2016). The SSM is also exclusively entitled to issue and withdraw banking licences in the eurozone. In total, the SSM supervises 129 SIs, whereas NCAs exclusively

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supervise the 3000 LSIs under the oversight of the ECB. The supervision of the SIs is conducted through JSTs, each of which is composed of a coordinator from the ECB (a national from outside of the supervised bank’s home country), a coordinator from the NCA of the bank’s home country and possible additional sub-coordinators from other relevant NCAs, with a maximum of 80 members of whom a dozen ECB supervisory staff and the rest of the members from the participating NCA (Ibid.). The coordinator of a JST has the final say in making proposals for decisions to the supervisory board, which is the board of the SSM. However, deviant opinions from national supervisors are reported (Zeitlin 2016). The supervisory board is

composed of the supervisory directors of each participating member state. The JSTs are supported in carrying out their tasks via the SSM’s horizontal services, which compare individual banks against common standards. The horizontal services also monitor and review NCA supervisory practices and develop methodologies for the identification of LSIs requiring more intensive supervision (Ibid.).

The SSM was rapidly built up and employed about 1,000 staff, who were mostly recruited from national supervisors and the ECB (Ibid.). The SSM aims to implement the Single Rulebook in an assertive manner through intrusive supervision of SIs. The order of the European Council first proposed the Single Rulebook in 2009 (EBA, n.d. a). The aim of the creation of the Single Rulebook was to provide a single set of harmonised prudential rules that all institutions throughout the EU must

respect. The goal was to ensure the uniform application of Basel III in all member states. The Basel accords are international banking supervision accords that will be discussed extensively in Chapter 4 of this research. The Single Rulebook was set up to address certain shortcomings of financial integration in the EU, by establishing a more resilient, transparent and efficient European banking sector (Ibid.). The SSM thus implements the Single Rulebook in its supervision. The EBA has an important role in composing the Single Rulebook. In addition, the EBA has a mandate to produce binding technical standards (BTS), which are legal acts that specify

particular aspects of an EU legislative text and are aimed at harmonisation in specific sections. Once the EC has adopted the BTS, they become legally binding and

directly applicable in all member states (Ibid.). The EBA is thus an important

authority in banking regulation and will be discussed more extensively in Chapter 4. In addition to the Single Rulebook the SSM Supervisory Manual was

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methodology for SSM supervision and for the cooperation between the SSM and the national supervisors. The ECB and the national supervisors initially wrote it based on their ‘best practices’ of supervision (Zeitlin 2016). Moreover, it is a living document that is always under construction; it will be reviewed and improved when this is deemed necessary.

Another aim of the SSM is to further harmonise EU regulations and supervisory approaches in the EU. An example of this is reducing the numerous options and discretions available to NCAs under EU capital adequacy requirement legislation (Ibid.). In spite of the SSM’s aim to harmonise, the SSM does not want to impose a single ‘one-size-fits-all’ approach on the supervision of banks across the eurozone or to homogenise the business models of financial institutions. Instead of this, the SSM aims to consistently supervise institutions that are similar in their characteristics. That is why the SSM oversight model is designed to combine the specific knowledge of NCAs with common methodologies and the broad-ranging experience of the ECB (Ibid.). According to earlier research, the formation of JSTs was preceded by an intensive process of mutual learning between different sorts of supervisors and profiting from bottom-up information from local knowledge about each institutions specific risk model (Ibid.).

The JSTs are exemplary of polyarchic governance due to the mixture of the ECB’s centralised supervision and the NCAs’ local and network supervision and expertise (Ibid.). A polyarchy is a form of governance in which the power is

distributed among multiple actors. Because the power is spread among national and hierarchical governance entities, the JSTs of the SSM can thus be described as polyarchic. Of course the hierarchical and centralised governance of the SSM is exactly what policymakers deemed necessary for being able to break up the ‘cosy relationship’ between banks and national supervisors, which had contributed to the financial crisis through lax oversight (Ibid.). The theory of the financial trilemma is also in accordance with the need for centralised financial policies in the EU. In establishing authoritative and supranational supervision for eurozone banks, the intent was to cut the ‘doom loop’ between banks and sovereign debt (Ibid.). This loop was, as discussed earlier, one of the main causes for negative contagion during the eurozone crisis (Ibid.). However, advocates of national supervision were also fearful of too much uniformity. In the subsequent theoretical framework in this chapter, the

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two theoretical aspects of these types of governance will be discussed more extensively.

The JSTs conduct supervision through the SREP since 2015. The SREP summarises all of the supervisor’s findings of a given year and gives the bank ‘homework’ as mentioned earlier (ECB 2016a). The SREP reviews where a bank stands in terms of capital requirements and the manner in which it deals with risks (Ibid.). Based on EBA guidelines, the ECB developed a common methodology and database for ensuring a consistent process of determining the eventual SREP scores (Schoenmaker & Véron 2016). In the SREP decision, which the supervisor sends to the bank at the end of the process, key objectives are established to

address the issues identified through the process (ECB 2016a). The bank must then ‘correct’ these within a specific time period (Ibid.). The bank is examined in various areas, including the following: business model, governance and risk management, risk to capital, risk to liquidity and funding (Ibid.). The approach of the SREP and the extent to which it is harmonised or specified will be discussed in Chapter 5.

2.1.2. Different visions on the functioning of the SSM since its establishment According to Schoenmaker and Véron (2016) the ECB did not have the legal and operational capacity to apply a consistent definition of capital to all of the banks it supervised before the introduction of the SREP. Moreover, through the

implementation of the SREP, the ECB is now capable of acquiring a more accurate understanding of certain complex assets and liabilities to a larger extent than it could in the context of the comprehensive assessment. Moreover, it can be indicated that the SREP is stricter than the previous comprehensive assessment and the previous supervision on a national basis for the SIs. It does not feature country- or institution-specific distortions, or so-called special treatment (Ibid.) However, Schoenmaker and Véron (2016) raised the question of whether sufficient distinction exists in the SREP requirements given the differences in the quality of the banks in general, the

problems that some banks face and the different business models that banks use (Ibid.). Another related issue is the asymmetry between LSIs and SIs because LSIs are subject to the supervision of NCAs, which could create unequal treatment for financial institutions in the eurozone. This thesis will further look into this in the third case study.

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The research of Schoenmaker and Véron (2016) showed further that the SREP is insufficiently transparent according to numerous stakeholders, such as investors and banks. A different finding was that the supervision of the SSM is effective, which is in contrast to the previous fragmented supervision. SSM

supervision is also tough for the SIs, due to the more in-depth investigations and on-site visits. In this way, the SSM leaves less room for regulatory capture or national political intervention. Consequently, SSM supervision appears to be broadly fair for SIs according to Schoenmaker and Véron. This might be different for LSIs because they are still subject to different NCAs that have different supervision practices. Another finding was that the banking supervision could be more efficient, because the cooperation within the SSM between the ECB and NCAs can be bureaucratic. The main origin of the crisis, the vicious circle between banks and sovereigns is not yet fully broken, according to their research. This is, however, mainly due to a lack of political will.

According to Epstein and Rhodes (2017), with the new banking supervision and resolution, some relatively significant risks for the EU banking sector remain. The banking union is moving a step forward, but innovations are still needed to complete the project. The first one is the establishment of the EDIS to be able to spread the deposit insurance across the eurozone, for this political action and will is required. The second required innovation is a clarification of the authority and hierarchy involved in the bank insolvency and resolution. Because this is currently not clear, the resolution of financial institutions can still take a long time. The

resolution mechanism is still caught between national and supranational authorities, because the SRB and SRF co-exist with national arrangements for decision-making and resolution funding (Ibid.). The ECB suggests having NCAs implement the resolution under the supranational guidance of the ECB. In implementing the supervision, the ECB itself might also need more in power in the resolution of troubled banks (Kern 2014). Both of these innovations require political action to be implemented. Another required mechanism is one that restricts a bank’s

disproportionate lending to its sovereigns (Epstein & Rhodes 2017).

Gandrud and Hallerberg (2015) felt that the SSM should offer greater supervisory transparency. This will facilitate a better distribution of capital and will increase market discipline. In addition, more transparency is expected to decrease the fragmentation of the European market for financial services. The public will attain

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more understanding of the supervision’s tasks. This will in the end increase the legitimacy of the supervision. Currently, the SSM is even further removed from citizens than the previous supervision was (Ibid.). This is due to a lack of the transparency of supervisory data that if shared publicly would give observers the chance to evaluate whether the supervisor is acting in the best interest of the citizens.

The European Court of Auditors (2016) published its feedback for the SSM in 2016. It researched the operational efficiency of the ECB regarding the SSM.

According to the ECA, the SSM has depended too much on NCAs. During the establishment of the SSM, the ECB miscalculated the number of staff that would be needed for the SSM, resulting in a personnel shortage. ECB staff led only 12 per cent of the on-site inspections and in general, NCAs mainly staff these on-site divisions. The issue with this, according to the ECA, is that the ECB is not in control of the compositions and skills of the JSTs. Based on its efficiency research the ECA made several recommendations. First, it advises to increasing the presence of ECB staff during on-site visits. The second recommendation was to establish a system that keeps track of the number and skills of personnel. The third recommendation was for the ECB to be more transparent because during the research of the ECA, many documents were not disclosed. The ECB has to be accountable and cooperate with these kinds of research studies. In addition, the ECB should increase its

external accountability, a point of critique that came to surface earlier in this section. The last recommendation was related to the governance. The decision-making process should be simplified, and the risks of the diverse tasks of the ECB should be researched. The latter refers to the ECB that implements monetary policy and the ECB that implements supervision.

These previous results of research on the SSMs functioning will be taken into account in this research. This thesis will research the extent to which the criticism is valid and what can be done to improve the SSM’s functioning.

2.2 Theoretical framework

2.2.1. The governance of EU banking supervision

The former banking supervision was organised on a national level. The

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its functioning, three types of governance are important to identify. However, the EU cannot be characterised by one particular form of governance, although all of the discussed forms of governance are present in the EU, they are hardly ever found in isolation (Börzel 2012). In other words, the EU features different combinations of governance forms. Subsequently, the three types of governance will be addressed in this section in three paragraphs.

2.2.2. Hierarchical governance theory

Hierarchical governance is a type of governance that is top down (Craig & De Búrca 2011). This type of governance is characterised by relatively complete policies: not much room exists for participation in the creation of the policy for those to whom it applies, and the policies are often obligatory or legally binding. The enforcement is thus legally compulsory. Furthermore, central governmental actors are typically involved, detailed and prescriptive instruments are used and in general terms, the product of hierarchical governance is a command-and-control-type-regulation (Ibid.).

Hierarchical coordination thus normally takes the form of authoritative decisions such as administrative ordinances and court decisions (Börzel 2012). It can hence force certain actors to act against their self-interest. Even majority voting can be seen as containing an element of hierarchical coordination because it

imposes the will of the majority on the minority (Ibid.). Hierarchy can be envisaged as a ladder because it is a vertical type of governance (Bevir 2008) Power and authority flow up and down this chain. Entities in higher tiers have the power to delegate tasks to those below them. Even if they do have some discretion in performing their tasks, they are always accountable to their superiors (Ibid.).

According to Craig and De Búrca (2011) a shift away from hierarchical governance has taken place in EU governance. This does not mean it has

completely disappeared; the ordinary legislative procedure is still very much relied upon. However, a shift away from a hierarchy means less reliance upon it and more reliance on new and more flexible forms of governance. However, hierarchical governance used to be the preferred mode of governance. Although hierarchical governance used to be the preferred mode of governance, it has never been the only type of governance used in the EU. What is striking about the new types of

governance is that they are usually no longer top down, but instead involve those to whom the new policy may be applied. Furthermore, these new types of governance

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are no longer always legally binding, sometimes voluntary, and at least open for adaptation, new input and revision (Ibid.).

Some authors argue however that in the modern state, public as well as private actors almost always negotiate under a so-called shadow of hierarchy, even when these new types of governance are used (Börzel 2012).

Importantly, hierarchical governance is still dominant within the public sector, even if it is as a shadow. This is the case because it offers important practical and democratic advantages (Bevir 2008). Hierarchical governance is most likely to be used in tasks that have uncertain outcomes and that occur frequently. Thus, the more debated an issue is, the more likely that hierarchical governance is used. It also has the advantage of clear accountability due to the vertical chain system. This helps in preventing corruption. However, when the system features too many layers, accountability could be stifled. Another disadvantage of hierarchical governance is that actors in the lower layers of the system could feel distanced from their superiors. In this case, these actors could become less likely to comply with directives. In this manner, excessive layering leads to a hierarchical system that is unresponsive and ineffective. This is what in the end resulted in the creation of new types of

governance (Ibid.).

2.2.3. New governance theory

Governance is an overarching term for the coordination of action. New governance (NG) is a concept that has increased in popularity during the past few decades. NG is used in all sorts of fields (Bartolini 2011). It stands against the old use of the term ‘governance’, which refers to the process aspect of government. NG is also in opposition to the traditional activities of public authorities. These were aimed at modelling and directing macro-socio-economic processes (Ibid.). Meanwhile, NG is related to European integration because this created new manners of decision-making. NG thus also stands for the internationalisation of many decisional areas and problem-solving issues.

NG is applied to any field where a mix of competences and functions creates complex decision structures, whenever a mix of private and public actors is present and where decisions depend on the complex network of different levels of

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(Ibid.). The NG theory reflects the erosion of the role played by central governmental institutions and the decline in confidence in them by the public. This is what one can see as hierarchical governance. An increased search has taken place for more participatory mechanisms and institutions. NG practices and theory point to the emergence of new actors, new forms of involvement and new innovative forms of decision-making. These new practices have been complementary to the hierarchical type of governance that still exists. The rule production of NG makes use of

functional specialisation, crosses national borders without acquiring the status of international law and avoids a clear definition of actors and stakeholders. NG has been most present in the EU, as more innovative types of decision-making have been necessary in the EU due to European integration. What is different about NG theory is that it does not merely rely on coercion (Ibid.). NG can achieve

implementation and compliance in a flexible way, while allowing for some degree of negotiation in the compliance itself. Moreover, NG reduces the chance of poor coordination, which was a growing problem of the more traditional hierarchical governance. Subsequently, governance also fosters policy-learning results due to the involvement of more actors in the policy process.

The NG theory entails an increase of more consensual decision-making and an evolution from binding decisions towards other sets of mechanisms and controls. In this perspective, governance can be seen as resulting from and contributing to the decline of the nation-state (Ibid.). NG is a ‘frame concept’, which thus covers several meanings. NG it is not command-and-control, characterised by central public

institutions, hierarchical relationships, hard-legal instruments and binding decisions. On the other hand, NG is also does not concern private dealings and coordination among individual actors that do not extend any obligations beyond them without the intervention of public authorities. NG is thus a space for norm production that is in between the legal rules produced following electoral, legislative, executive or bureaucratic channels according to constitutional procedures and private dealing traditional norms and social routines. At the same time, NG can also be defined as a specific mode of the production of norms that can be called co-production. NG is therefore a system of the production of norms and public goods where the co-producers are different kinds of actors.

The general definition of NG as the ‘co-production’ of norms leaves open the question of the possible identity of the co-producers. In NG different kinds of actors

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are cooperate, neither merely in private agreement nor public decisions. Actors can thus be public or private national, international or transnational actors. They can also be actors at different levels: local, regional state, community or international

institutions or a combination of the former (Ibid.). The level of involvement of public authorities also varies. In general, NG always operates in the shadow of a hierarchy, with public actors involved to a certain extent. These public authorities, then, are always in the position to regain control of forms of co-production governance when they deem this to be necessary. The level of involvement of partners in NG

co-production can also vary. Participation in NG is voluntary. Co-co-production may deliver different products, such as binding decisions of the partners, general norms, goal definition, softer texts with recommendations, standards, guidelines, benchmarks and best practices. The manners of achieving this co-production can also vary. Actors have a degree of independence, but they do have to be interdependent. This makes actors unable to produce their own preferred solutions and to understand the costs of non-solution. Decisions will be reached by negotiation and deliberation. The nature and role of possible sanctions also vary, such as ‘naming and shaming’ or enforceability that rests on voluntary adhesion (Ibid.). Logically, the institutional context of NG co-production is less institutionalised than for example hierarchical governance. The mode of implementation of NG is also more flexible. NG provides more freedom to the actors to implement NG as they see fit.

2.2.4. Experimentalist governance theory

The theory of experimentalist governance (EG) is essential in explaining the

governance of the SSM. According to Sabel and Zeitlin (2008) EG is characterised by four aspects, which are as follows:

1 The establishment of framework goals and measures for their achievement; 2 Autonomy of lower-level units in the implementation of framework goals; 3 Regularly reporting on performance and participation in peer review; and 4 Periodical revision of framework goals, measures and procedures.

For the first aspect, this means that some combination of ‘central’ and ‘local’ units, possibly in combination with relevant society stakeholders, establishes the

framework goals and measures (Sabel & Zeitlin 2012).

The second aspect means the involvement of lower-level units in the

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the actors with whom they cooperate (Sabel & Zeitlin 2008). In this entire process, the lower-level units are given substantial freedom to advance the ends as they see fit (Ibid.). To assess the quality of the lower-level units’ implementation of EG, peer review is used, the third characteristic of EG. During the peer review, the

measurements and implementation are reviewed and if needed adapted, which is the fourth characteristic of EG.

EG was increasingly common in the EU before the crisis. After the crisis, EU governance appeared to have become more centralised and hierarchical again. This was also partly due to how rapidly decisions had to be made during the crisis. The European Council, the Eurogroup and the ECB, among others, made many crucial decisions on an emergency basis (Zeitlin 2016). The powers of these institutions were enforced, and these institutions created new bodies outside of their formal frameworks, such as for example the Troika and the ESM. In general, financial regulation in the EU has become more centralised, through the creation of the SSM and of the new European supervisory authorities (ESAs) (Ibid.). The centralised and hierarchical character of EU economic governance was also strengthened via crisis-inspired measures, such as the Six-Pack, Fiscal Treaty and Two-Pack. These measures were used to provide a more centralised fiscal, budgetary and

macroeconomic policy in the EU and euro area. Apart from the revived hierarchical and centralised governance in the EU, the concept of EG remains present in the EU. The economic and financial policy fields that the crisis most affected do not always mark an exclusive shift towards hierarchical centralisation but often remain

polyarchic and foster the emergence and elaboration of approaches that are experimentalist. Consequently, according to Zeitlin (2016) the governance of the SSM is characterised by EG.

Of course, each aspect of EG can be present in governance in varying degrees. Overall, the EU in general makes use of multi-level decision-making in which private and public actors at the supranational, national and subnational levels interact within highly complex networks to produce policy outcomes, which is

exemplary for EG (Börzel 2012).

Recent research of Zeitlin (2016) thus showed that even though the SSM is quite centralised and hierarchical in essence, it has a many EG practices in it. Of course, the hierarchical and centralised characteristics of the SSM were exactly what policymakers deemed necessary for breaking up the ‘cosy relationships’ between

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banks and national supervisors that had contributed to the financial crisis through lax oversight (Ibid.). By establishing the authoritative and supranational supervision for eurozone banks it was also possible to address the cause of the financial crisis: the infamous ‘doom loop’ between banks and sovereign debt (Ibid.).

Despite the obvious utility of the centralised aspect of the SSM, the network governance elements of the SSM aim to make sure that one single manner of

supervision will not be imposed on all banks across the eurozone (Ibid.). In this case, these are the national supervisors who exclusively supervise the LSIs. In the JSTs the network governance is present because the national supervision and the ECB supervise the SIs. The supervision of SIs as well as LSIs is executed based on framework goals and measures, such as supervision procedures and manuals, which is typical for EG. This is the aspect of EG in which lower-level units are given autonomy to implement the framework goals of supervision as they see fit, with the oversight and control of the ECB. On the supervisory board, then, the results of supervision are discussed, and the performance of the supervision is assessed. This is the peer-review aspect of EG. Once it is determined that aspects of the

supervision need to be improved, the framework goals, measures and procedures will be revised, which is also typical for EG. The governance of the SSM can thus be envisaged as experimentalist due to the unique combination of uniform rules and processes, which are contextually adapted to banks’ individual characteristics and which mixed teams of European and national supervisors implement. The national supervision establishes the contexts of banks, as it knows the specific framework and environment in which a bank is situated (Ibid).

In addition, the processes of the SSM, such as the SREP, are regularly revised based on benchmarking and comparative reviews. This leaves room for learning from difference and for the comparison of approaches, and it ultimately defines the SSM as a type of EG. Moreover, due to the polyarchic structure of the SSM, the ECB is obliged to take into account the views of a wide range of actors (Ibid.).

This thesis will use the different governance theories to be able to assess the governance of the SSM and the SSM’s functioning since its establishment.

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3. Methodology

The methodology of this research will make use of case study research. This

research method is of a qualitative nature. The data for this research will be acquired through elite interviews and document analysis.

3.1 Research methods

3.1.1. Single case study (within case)

For this thesis a single case study will be carried out. A case study is defined as an intensive study of a single unit for the purpose of understanding a larger class of (similar) units (Gerring 2004). The case study is compatible with a variety of other research methods. As stated, this research is focused on one specific case, which is the SSM in the eurozone. Within this case, its governance and efficiency is

assessed. Moreover, three within-case studies are implemented that are related to the SSM. These case studies are the supervision of NPLs, the supervision of banks’ use of internal risk models and the supervision of distinct banks.

The cases were selected on an information-oriented basis, which means that the selection was meant to maximise the utility of information from small samples and single cases (Flyvberg 2011). The cases were selected on the basis of

expectations about the information content of the cases (Ibid.). In addition, the case studies were carried out from within (Gerring 2004). The case studies were chosen with the interpretivist research tradition in mind, meaning that the aim of the research was to understand the case and theorise. Moreover, the case study research design was chosen because it would make the research in-depth. On the basis of case study research, a better understanding of case specific developments would be made possible, placed within its institutional context (Ibid.). What should be kept in mind is that case study research has less external validity and generalisability (Ibid.).

According to Yin (2013) case study research is especially appropriate when the main research questions are ‘how’ or ‘why’ questions, which was the case with several questions of this research. A second is criterion for performing case study research, is when a researcher has little or no control over behavioural events, which is the case here and the third criterion is whether the focus of the case study is a contemporary phenomenon, which was also the case (Ibid.). The unit of analysis of this case study was an ‘organisation’, the SSM (Ibid.). Excellence in organisational

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performance was researched (Ibid.). The single case study of this research had an embedded design because different units of analysis were present within the overarching one. Within the SSM, the national supervision, the centralised supervision and the supervised banks were separate units of analysis (Ibid.). Moreover, connected to the main case study were the three within case studies implemented.

3.2 Data

3.2.1 Document analysis

Document analysis is a systemic procedure for reviewing or evaluating documents, which can be electronic or material (Bowen 2009, p. 27). In a document analysis the data are examined and interpreted in order to extract meaning, gain understanding and develop empirical knowledge (Ibid.). Documents that can be analysed exist in various forms, for example, background papers, books, journals, press releases, summaries, organisational or institutional reports, or public records (Ibid.).

The analytic procedure entails finding, selecting, “making sense of” and synthesising data contained in documents (Ibid, p. 28). Document analysis is often used in combination with other qualitative research methods, which was also the case in this research. By triangulating different research methods the researcher can affirm findings across different data sets and thus reduce potential biases that can exist in a single study (Ibid.). Data that were used in this study will be mainly

emanated from institutions such as the ECB, the Dutch supervisory authority and the EC. In addition, academic articles and books were used.

3.2.2. Elite interviews

For this research, important inside knowledge was acquired through elite interviews. These were conducted with two persons working for the Dutch national supervisor, De Nederlandse Bank, and a person responsible for the supervision of the ECB. Qualitative interviews are especially useful for obtaining in-depth information.

Through such interviews, one can understand experiences and reconstruct events in which one did not participate (Rubin & Rubin 2011). Through interviews, theories can be developed and tested, general principles can be discovered and complex

situations can be understood (Ibid.). Especially, the last aspect was required for this research. The research used the concept of semi-structured interviews.

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Chapter 4 The institutional framework of banking

governance in the EU

4.1 Chapter overview

This aims of this chapter is to provide an overview of the relevant institutions and decision-making processes for EU financial regulation. The overview this chapter provides will enable to research of the governance of the SSM and facilitate an understanding of the causes of the financial crisis of 2008.

4.2 Lamfalussy Process

The Lamfalussy Process is a decision-making procedure that is used to compose new legislation deduced from existing legislation (Europa Nu 2017b). It was developed in 2001. The Lamfalussy Process is reserved for use in the financial sector. The financial sector is a sensitive area in the EU due to the different interests of banks and member states. This explains why the Lamfalussy Process makes use of local and sectorial expertise (Ibid.). This expertise is gathered in so-called sectoral comitology committees (Sabel & Zeitlin 2008). In an adopted law, it is stated what detailed measures the EC is supposed to adopt. In practice, the European

supervisors of the varying financial sectors in the EU compose these detailed

measures. The EC, the member states and the national supervisors then make sure that the measures are implemented in the correct manner (Europa Nu 2017b).

The aim of the Lamfalussy Process was to establish a new and

comprehensive structure of financial supervision due to the introduction of the euro (Sabel & Zeitlin 2008). Establishing a common currency increased the need for better and centralised financial supervision in the euro countries. According to critics, the ECB’s powers were too limited for supervising the financial service market in the eurozone. As stated earlier, during the Lamfalussy Process, cooperation takes place between the EC, the council and the EP. This is combined with wide consultations, which results in the agreement of framework principles for financial legislation at the EU level. The EC, member states and the sectoral comitology committees

mentioned earlier, then, compose the measures for the implementation of the framework principles. To examine whether the implementation takes place as it is supposed to, so-called ‘level-3’ committees, supervise this process (Ibid). These committees compose guidelines for national implementation, conduct peer reviews

The single supervisory mechanism : an assessment