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ISSUE 2013/06MARCH 2013
SHOULD NON-EUROAREA COUNTRIESJOIN THE SINGLESUPERVISORYMECHANISM?
ZSOLT DARVAS AND GUNTRAM B. WOLFF
Highlights
Irrespective of the euro crisis, a European banking union makes sense, including fornon-euro area countries, because of the extent of European Union financial integration.The Single Supervisory Mechanism (SSM) is the first element of the banking union.From the point of view of non-euro countries, the draft SSM regulation as amendedby the EU Council includes strong safeguards relating to decision-making, accoun-tability, attention to financial stability in small countries and the applicability of national macro-prudential measures. Non-euro countries will also have the rightto leave the SSM and thereby exempt themselves from a supervisory decision.The SSM by itself cannot bring the full benefits of the banking union, but wouldfoster financial integration, improve the supervision of cross-border banks, ensuregreater consistency of supervisory practices, increase the quality of supervision,avoid competitive distortions and provide ample supervisory information.While the decision to join the SSM is made difficult by the uncertainty about otherelements of the banking union, including the possible burden sharing, we concludethat non-euro EU members should stand ready to join the SSM and be prepared forthe negotiations of the other elements of the banking union.This Policy Contribution was prepared for a hearing on
The economic crisis and thedevelopment of the European Union
at the Danish Parliament on 26 February 2013.
Zsolt Darvas
(zsolt.darvas@bruegel.org) is a Research Fellow and
Guntram B. Wolff 
(guntram.wolff@bruegel.org) is Deputy Director of Bruegel. The authors are grateful tocolleagues both inside and outside Bruegel for comments and to Carlos de Sousa andGiuseppe Daluiso for excellent research assistance.
Telephone
+32 2 227 4210info@bruegel.org
www.bruegel.org
BRUEGEL
POLICY 
CONTRIBUTION
 
SHOULD NON-EURO AREA COUNTRIES JOIN THESINGLE SUPERVISORY MECHANISM?
ZSOLT DARVAS AND GUNTRAM B. WOLFF, MARCH 2013
02
BRUEGEL
POLICY 
CONTRIBUTION
1. http://www.consilium.europa.eu/uedocs/cms_data /docs/pressdata/en/ec/131359.pdf.2. So far only the UnitedKingdom has expressedvery clearly the intention tostay out of the Europeanbanking union.3. COM (2012) 511. Seehttp://ec.europa.eu/inter-nal_market/finances/bank-ing-union/index_en.htm,and an assessment of theCommission’s proposals inVéron (2012).
1INTRODUCTION
Following the euro-area summit of 29 June 2012,at which European Union leaders endorsedcommon supervisory oversight of banks, Europeis determined to move ahead with a bankingunion. The decision stemmed partly from therecognition of the discrepancy between the inte-grated European banking market and largelynational banking policies. But perhaps even moreimportantly, the decision was a response toincreasing market pressure on several interlinkedeuro-area banks and sovereigns, and increasingfinancial fragmentation, which entailed a risk of major negative impacts on the economy of theeuro-area and beyond. It is worth repeating thefirst sentence of the 29 June 2012 euro-areasummit statements:
“We affirm that it is impera-tive to break the vicious circle between banks andsovereigns” 
1
. The vicious circle has been high-lighted by different researchers (eg Gerlach,Schulz and Wolff, 2010; Véron, 2011; Darvas,2011; Merler and Pisani-Ferry, 2012; Angeloni andWolff, 2012). The European banking union initia-tive aims to address this vicious circle, to improvethe quality of banking oversight and thereby toreduce the probability of bank failures and theircost to taxpayers.The following elements are generally seen as cen-tral to completing the banking union: commonbanking supervision based on a single rulebook, asingle resolution mechanism, agreement on fiscalburden sharing and some degree of commondeposit insurance (Pisani-Ferry
et al
, 2012).Better banking oversight would reduce the likeli-hood of bank failures and their cost to taxpayerswhile resolution equally aims to reduce costs forthe taxpayer. Fiscal burden sharing is the logicalcomplement in order to escape the vicious circle.Most of the discussion in the second half of 2012focused on the supervisory mechanism, leadingto Council agreement on the legislative proposalfor the Single Supervisory Mechanism (SSM) on12 December 2012 (see Council, 2012, hereafter‘draft regulation’) and an accompanying agree-ment on modifying the regulation of the EuropeanBanking Authority (EBA). On the single resolutionmechanism, including its fiscal backstop, theEuropean Commission has announced its inten-tion to publish first proposals before summer2013 (see Véron and Wolff, 2013, for moredetails). The most contentious part of the discus-sion certainly relates to the fiscal burden-sharingarrangements (Pisani-Ferry and Wolff, 2012).The final design of the future banking union is stillunclear. While euro-area members will be includedin all elements of the banking union, the Decem-ber 2012 agreement allows non-euro area EUmembers to participate in the SSM. Presumably,further elements of the banking union will alsoallow the participation of non-euro area membersin certain forms
2
. For these countries, therefore,an important strategic question is if and when to join part or all of the emerging banking union.Oncethe SSM comes into being, these non-euro coun-tries will have to decide whether or not to partici-pate in it without knowing the design of the otherelements of banking union. While the SSM is just apart of the banking union and cannot deliver thefull benefits, it offers a number of benefits. In par-ticular the supervision of cross-border banksshould be improved and supervisory practicesshould be made more consistent, thereby foster-ing financial integration with associated benefits.On 12 September 2012, the Commission putforward its initial proposal for the SSM
3
. Theproposal was perceived by many non-euro areacountries as not catering sufficiently for theinterests of countries outside of the euro area. Thecore difficulty relates to the defined treaty baseand the resulting decision-making structure. Inline with the June 2012 European Councilconclusions, the Commission’s September 2012
SHOULD NON-EURO AREA COUNTRIES JOIN THE SSM?
Darvas and Wolff 
 
03
BRUEGEL
POLICY 
CONTRIBUTION
Darvas and Wolff 
SHOULD NON-EURO AREA COUNTRIES JOIN THE SSM?
4. The alternative treatybase, Article 352, was notpursued and the Councilhad to find a compromisesolution based on Article127(6) which refers to theECB. Article 127(6) says thefollowing:
“The Council,acting by means of regula-tions in accordance with aspecial legislative proce-dure, may unanimously,and after consulting theEuropean Parliament andthe European Central Bank,confer specific tasks uponthe European Central Bankconcerning policies relatingto the prudential supervi-sion of credit institutionsand other financial institu-tions with the exception of insurance undertakings.” 
5. Similarly, the title of Arti-cle 6 dealing with non-eurocountries was changedfrom
“close cooperationwith the competent authori-ties of non participatingMember States” 
in the Sep-tember 2012 proposal of the Commission to
“closecooperation with the com- petent authorities of partici- pating Member Stateswhose currency is not theeuro” 
in the December 2012draft regulation.6. When the national super-visor is not the centralbank, then a representativeof the central bank can alsoparticipate in the supervi-sory board. But for votingthey will have only one vote(Article 19(1)).
proposal for a regulation (COM (2012) 511)employs as a Treaty base Article 127(6) of theTreaty on the Functioning of the EU (TFEU). Thisarticle puts the European Central Bank at thecentre of the mechanism. The ultimate decision-making body of the ECB is its Governing Council(Art. 129(1), TFEU), in which the non-euro areacountries do not have a vote. The use of this Treatybase was seen by many non-euro area countriesas essentially preventing them from participatingin the mechanism
4
. In the subsequentnegotiations, significant modifications were made,partly with the aim of addressing the concerns of non-euro area members. The significance of thechanges is also highlighted by a change in thevocabulary. Article 2(1) of the Commission’sSeptember 2012 proposal put forward thefollowing definition:
“‘participating Member State’ means a Member State whose currency is theeuro” 
, while the December 2012 draft regulationchanged this definition to
“‘participating Member  State’ means a Member State whose currency isthe euro or a Member State whose currency is notthe euro which has established a closecooperation in accordance with Article 6” 
5
.At the time of writing, Council negotiations with theEuropean Parliament are taking place, and a ple-nary vote is expected in April 2013, which wouldlead to the enactment of the draft regulation a fewmonths later.In this Policy Contribution we assess the Decem-ber 2012 draft regulation (Council, 2012) from theperspective of EU states outside the euro area,and we evaluate arguments against, and in favourof, joining the SSM. The next section analyses thelegal text, while section 3 discusses the argu-ments for and against. The last section concludes.
2THE DRAFT SSM REGULATION: KEY ASPECTSFOR NON-EURO AREA COUNTRIES
In this section, we briefly discuss some of the keyaspects of the December 2012 draft SSM regula-tion, which are most relevant to non-euro area par-
‘The SSM is just a part of the banking union and as such cannot deliver the full benefits, but itoffers a number of advantages. In particular the supervision of cross-border banks should beimproved and supervisory practices should be made more consistent.’ 
ticipating member states. We also review the safe-guards for non-participating EU member states.
Legal framework
Article 6 of the draft regulation defines the terms of cooperation of participating member states thathave a currency other than the euro. The SSM isopen to non-euro EU countries on the basis of 
“close cooperation” 
. Close cooperation essentiallyrequires non-euro member states that wish to jointhe SSM to adopt the necessary legal frameworkand cooperate with the ECB along the lines codi-fied in the draft regulation. This means, in particu-lar, that the national authorities, like thoseauthorities within the euro area, will be bound toabide by guidelines and requests issued by theECB and will be responsible for providing the ade-quate information.
Right to exit
The draft regulation’s Article 6 allows for the exit of non-euro area participating member states inthree scenarios: 1) after three years without qual-ification (Article 6(6a)); 2) exclusion by the ECBin the event of a major non-compliance by theauthorities of the non-euro area country (Article6(6)); and 3) expedited exit procedure at therequest of the non-euro area country in case of amajor disagreement with a supervisory decisionimpacting the country (Article 6(6aab)). Followingan exit, re-entering the SSM is possible only afterthree years.
Decision making
SSM draft decisions will be taken by a supervisoryboard created by the draft regulation. Draft deci-sions will be deemed adopted unless the ECB Gov-erning Council objects within a period to bedefined but less than 10 days (Article 19(3)). Thesupervisory board will consist of the chair, the vicechair (an ECB executive board member), four rep-resentatives from the ECB and one representativefrom the supervisory authority of each member

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