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Legal Prudential Obstacles to the Integration of the Banking Sector in the Euroarea

Core Content

The document discusses the legal and prudential challenges associated with the integration of the banking sector within the Euroarea, particularly in the context of the Single Supervisory Mechanism (SSM) and the Capital Requirements Regulation (CRR). It highlights the complexity of applying Union Law in a harmonized manner across different jurisdictions and the implications of national discretion and options in prudential regulation.

Main Viewpoints

• Rationale for Integration: The integration of the banking sector in the Euroarea is seen as essential for completing the Banking Union. This includes the fungibility of banking money and the need for risk-sharing mechanisms at the European level.

• Legal Framework: The SSM Regulation and CRR define the legal basis for prudential supervision. The ECB is required to apply Union Law, including Directives and Regulations, and in cases where Regulations grant options, it must also consider national legislation exercising those options.

• Options and Discretions (O&Ds): There are multiple types of O&Ds in Union Law, which can be granted to either Member States or competent authorities. These include:

  • CRDIV O&Ds: For example, Article 94(1)(g) and Article 40.
  • CRR O&Ds: For example, Article 412.5, Article 49.1, and Article 400.2.c.
  • Symmetric Options: These allow national legislation to override European legislation in certain areas, such as the definition of default and capital.

• Prudential Waivers:

  • Article 7 CRR: Waives solo prudential requirements (capital, large exposures, leverage, etc.) for subsidiaries and parent companies within the same Member State.
  • Article 8 CRR: Provides liquidity waivers, which are limited to 25% of High-Quality Liquid Assets (HQLAs) for cross-border subsidiaries and sub-groups.
  • Cross-border Limitations: The current legal framework does not allow for full cross-border liquidity waivers, as it is based on national legislation. The ECB has introduced a floor for liquidity coverage ratios for significant subsidiaries to ensure national-level liquidity resilience.

• Intra-group Large Exposure Exemptions:

  • Article 400.2.c CRR: Exempts intra-group large exposures, allowing credit institutions to self-assess and be verified ex-post by the ECB.
  • Article 493.3.c CRR: Provides national discretion for intra-group exposure limits, with examples from Germany and Belgium showing different levels of exemption (up to 75% or 100% of own funds).

Key Information

• The ECB Regulation (EU) 2016/445 and the ECB Guide (Consolidated version 3 November 2016) govern the exercise of O&Ds.
• The ECB Regulation is directly applicable and creates obligations for supervised entities, while the Guide is not legally binding but influences the ECB's supervisory approach.
• The application of O&Ds is constrained by principles of legal certainty, equal treatment, and legitimate expectations as per ECJ case law.
• The German and Belgian approaches to intra-group large exposure exemptions demonstrate the variability in national implementation of Union Law.
• The asymmetric nature of the current banking union remains due to the lack of a common fiscal backstop and the presence of national risk-sharing mechanisms.

Regulatory Complexity and Challenges

• The decision-making process is complicated by the interaction between national and European regulations.
• Regulatory ring-fencing is a key feature of the current framework, reflecting the absence of a unified fiscal backstop.
• The centralization of prudential supervision is a legislative objective, but the existing Level 1 text imposes significant constraints, preventing a fully integrated prudential jurisdiction.

Conclusion

• The ECB is responsible for supervising the largest banking sector in the world under the SSM.
• Despite the goal of a single prudential supervisory jurisdiction, the legal and regulatory framework remains fragmented due to the presence of national options and discretions.
• The integration of the banking sector in the Euroarea is constrained by the asymmetry in risk-sharing mechanisms and the limited scope of cross-border prudential waivers.