Supranational Banking Supervision in Europe: The Construction of a Credible Watchdog

Does the institutional design of the European Single Supervisory Mechanism (SSM) and its first assessment of systemically important bank stability bolster the credibility of supranational banking supervision in Europe? One crucial measure of credibility with regard to the SSM and NCA supervision of less significant banks — the large majority of euro area headquartered bank not subject to direct ECB supervision — is the assurance of consistent supervision in the euro area. This involves some degree of convergence of NCA supervision in order to prevent national supervisory forebearance of struggling banks. This contribution thus examines whether or not the design of the SSM provides the foundation to build convergence in euro area supervision of less significant banks, despite very different national supervisory practices and institutional frameworks. The Principal-Agent approach is used to assess the credibility of the SSM design in terms of providing the foundation for consistent supervision. This contribution also examines the credibility of the ECB’s direct supervision of significant banks. The management of the ECB’s Comprehensive Assessment of signficant banks can be seen as the first step in demonstrating the capacity of the ECB to make difficult decisions with regard to the stability of the euro area’s banks.