Governance of the Single Supervisory Mechanism: Some Reflections

Abstract

Since the inception of the Euro, European policy makers have been increasingly recognizing the ‘efficiency’ gaps in EU financial supervision against a background of a decentralized institutional architecture for re gulation, supervision and financial stability. Recognition of this gap had led to tangible efforts to capture some of the potential efficiency gains through legally binding mechanisms and policy coordination mechanisms (i.e. European System of Financial Supervisors –ESFS-). That ongoing iterative process of cooperation and coordination can be interpreted as having already internalized some of the EU´s potential negative externalities of cross border banking (Nieto and Schinasi, 2007). Nonetheless, the first global financial crisis since the Euro´s inception has highlighted the limitations of the decentralized approach not only for prudential supervision but also for bank resolution and its financing. In the face of the twin banking and sovereign crisis in some Euro area countries, heads of state government representatives agreed on the Single Supervisory Mechanism (SSM) involving the European Central Bank (ECB) for banks in