The Single Supervisory Mechanism, or SSM, is entering into force today. The SSM is the mechanism by which the European Central Bank takes now responsibility to monitor the participating banks, mostly from Eurozone members.
This represents a major change in the EU financial landscape. The larger banking union project may even be considered, as Nicolas Véron recently argued, as the most important reason why financial markets calmed down from mid-2012.
Historians often like to stress continuities over change. On various occasions in this blog, I have myself traced the long-term origins of many recent policy evolutions. The Excessive Imbalance Procedure is thus an old story dating back from the 1970s; the Excessive Deficit Procedure reflects a long-standing concern about EU macroeconomic coordination; and even some endeavours of the European Commission in the 1960s indicate the tentative start of the overall project of creating a banking union in the Eurozone. Far from emerging out of the blue, they were instead the end of a long story of protracted and continuous negotiations on the topic.
But this time, the SSM turns this narrative on its head. The SSM represents a genuine novelty: the move of the Eurozone banks’ supervision (plus those willing to participate in the scheme) to the supranational level. This move is not just the boldest since the creation of the euro about 15 years ago. Such a move had simply never been really suggested in the past, even in the wildest dreams of the European Commission back in the 1960s. At the time of the first discussions on the topic, the Commission proposed the harmonisation of banking regulatory and supervisory frameworks across the European Economic Community (EEC). But mostly for political reasons, the Commission always fell short of suggesting their communautarisation – that is, moving them to the supranational level.
The 1960s and 1970s instead chiefly witnessed the emergence of committee structures designed to improve coordination among supervisory authorities. The “Groupe de Contact” was thus created in 1972 and gathered officials from banking supervisory authorities of the then six members of the European Economic Community (EEC) – but this initiative was largely informal. Later on in 1979 the Banking Advisory Committee was established, composed of senior officials from ministries, central banks and banking commissions. All of these initiatives certainly represented improved cooperative structures, but they always rejected a genuinely supranational approach to banking supervision. Banking nationalism, sovereignty issues and a different degree of financial integration prevented supervisory problems from being dealt with outside the remit of the nation-state.
Even in the 1990s, during the Maastricht Treaty negotiations, regulatory and supervisory issues were sidestepped. Yet the 1990s also uncovers a second important dimension of today’s SSM: the fact that it is under the ECB’s remit. Of course having the supervisory authority located in a central bank is far from being a historical novelty. But that this happens in an EU context is. During the (limited) discussions about supervisory issues in the 1990s, the Bundesbank was strongly opposed to seeing the ECB taking on supervisory tasks, as it feared this would create moral hazard.
The start of the SSM thus represents a major breakthrough, like the euro in 1999. And as much as for the creation of the euro, it will be interesting to see how European policymakers and private actors adapt, or fail to adapt, to this major change in European economic integration.
(Picture: (c) E. Mourlon-Druol)