Controlling the controllers: the institutional design of Europe’s new Single Supervisory Mechanism

This paper examines the institutional design of the Single Supervisory Mechanism and views the relation between the European Central Bank (ECB) and the National Competent Authorities (NCAs) as a principal-agent relation in which the NCAs are carrying out supervision of the less significant banks on behalf of the ECB. From a principal-agent perspective, the institutional design is understood as the art of choosing proper ex ante and ex post mechanisms of control by the ECB over the activities of the NCAs. Therefore, the focus of the paper directed on (1) identifying the proper control mechanisms consisting of the ‘ex-ante’ and the ‘ex-post’ controls, as suggested by the principal-agent model, which the ECB’s may use to ensure that its policy preferences are enforced by the NCAs within the SSM and (2) assess whether they may possibly cover all of the NCAs ‘zone of discretion’ relating to supervision of less significant banks on the ECB’s behalf. The working hypothesis is that the NCAs zone of discretion may not be fully controlled by the ECB. It is argued that existence of such ‘black holes’ constitute challenges for the ECB to ensure its policy preferences are enforced in a full extent by the NCAs.