Restoring Trust and Confidence at the Institutional Level by Higher Order Control The Case of the Formation of the European Banking Union

Abstract

In 2008, the American subprime mortgage crisis turned into a financial fiasco that put the stability of the global financial system to the most severe test in decades. It was accompanied by an erosion of institutional trust and financial confidence both by private households and among financial intermediaries. In the light of the new regulations for stabilizing the European banking system the article works out the meaning and the importance of institutional trust and confidence and a need for institutionalized guardians of impersonal trust. It examines the introduction of these new measures of institutional control from a theoretical point of view and evaluates the results by an analysis of the regulations of the newly established European Banking Union. Referring to the long-standing history of financial market regulation it is shown that after the dramatic experiences of the recent trust meltdown a new and more extensive second-order control is needed to re-establish and maintain institutional orders of trust. The recent institutionalization of a new supervision in Europe’s financial system constitutes an implementation of stronger macro-prudential surveillance and a means of reflexive second order control.