This paper aims to analyze the institutional design of the EU common banking supervision (the Single Supervisory Mechanism) from the principal-agent approach.
The common banking supervision (Single Supervisory Mechanism) consists of the ECB and the National Supervisory Authorities (NSAs), which are domestically responsible for the banking sector oversight. The ECB will exercise direct prudential supervision of “significant” banks while the NSAs of the “less significant” ones on behalf of the ECB (the SSM regulation provides 5 criteria to determine a bank’s “significance”). The non-prudential supervisory tasks will remain at the national level. In general, 150 banks covering around 80% of all bank assets in the EU will be supervised by the ECB and NSAs will continue to supervise approximately more than 5 800 of EU banks.
Therefore, it follows that common banking supervision takes the form of sectorial (only banking sector), functional (only prudential tasks) and decentralized (majority of supervisory functions executed at the national levels) model with a high involvement of central bank (the ECB). Such an institutional design raises two initial concerns: how to arrange the governance within the SSM (relations between the ECB and the NSAs) to produce the most efficient outcomes (vertical dimension) and how to arrange the governance between monetary stability and financial stability mandate of the ECB (horizontal dimension) in a way which allows enhancing synergies between monetary policy and banking supervision.
A principal-agent insight highlights that the lack of adequate governance arrangements may result in perverse incentives for SSM’s supervisory agents (behavior in self-interest or inconsistent with principals’ initial preferences due to asymmetry information which favors an agent) leading ultimately to suboptimal institutional design of the banking supervision architecture in the EU and moral hazard problem (agency “shirking”/agency “slippage”).
