This paper examines the negotiations on the Single Supervisory Mechanism, where the three main issues were: whether the ECB should directly supervise all banks in the euro area or only the main (cross-border) banks, the nature of indirect supervision, and the relationship with non-euro area member states. It is argued that political economy considerations, first and foremost the configuration of national banking systems account for member state preferences on the SSM. While we present an overview of country preferences on Banking Union, we focus specifically on German and French preferences. The Germans opposed a broad scope for ECB supervision, in particular they resisted the ECB’s direct supervision of the country’s public Landesbanks and savings banks. These banks were seen as having a ‘public’ function in Germany with strong ties to local and regional governments and traditionally reliant on Land governments for financial backing. The French government expressed concern over the unequal treatment of Member States given that France’s banking system was dominated by five very large institutions which would all end up being directly supervised by the ECB. We also argue that the diverse preferences of non euro area countries on both SSM participation and the reach of ECB direct supervision stems directly from their national banking systems. Non euro area countries with banking systems more heavily dominated by foreign banks with headquarters based in the euro area had a greater interest in participating in the SSM. The agreement reached at the December 2012 European Council foresaw that the ECB would be ‘responsible for the overall effective functioning of the SSM’ and would have ‘direct oversight of the euro area banks’. This supervision however would be ‘differentiated’ and the ECB would carry it out in ‘close cooperation with national supervisory authorities’. Non euro area countries could be admitted entry.
