The Single Supervisory Mechanism ('SSM') puts the European Central Bank (‘ECB’) in charge of supervising the significant banks in the Eurozone. This mechanism however has serious structural deficiencies. It provides for a transfer of powers to the ECB and its Supervisory Board, but there is no unified regulatory framework that the ECB could apply. The Fourth Capital Requirements Directive ('CRD IV') and the Capital Requirements Regulation ('CRR') are not comprehensive and therefore the ECB must follow national standards along with EU law. There is thus a division between supervisory and regulatory powers. While the former is exercised for the biggest credit institutions at the EU level, the latter is largely left to the Member States. The situation is ‘highly toxic’ as institution building has outpaced regulatory harmonisation.

Differing from the EU, in the US all national banks and members of the Federal Reserve System are subject to regulation by federal authorities. Regulatory power and supervisory power are at the same level. This can serve as a useful model for the EU. Appropriate institutional design requires that the higher level, which must ensure viability of banks, must also be in a position to make the rules rather than being at the mercy of the lower level.

Although the CRR and CRD IV seek to provide a uniform framework, their effectiveness is limited by national options and discretions ('NODs') which enable member state legislatures and the ‘competent authority’ (the 'ECB') to enact individual provisions. NODs can ensure tailor-made provisions for member states. However, there is divergence between the NODs exercisable by legislatures and those exercisable at the European level. This system has numerous drawbacks. Diverging rules can distort competition, as banks would not have a level playing field in all member states. States could legislate to protect their national banks. This can lead to regulatory arbitrage.

Enforcement of EU standards for signification credit institutions is coordinated through a Joint Supervisory Team ('JST') consisting of ECB members and representatives of the national supervisor. Nevertheless, even such joint enforcement may present difficulties. As it is required that the JST’s head is not a national of the Member State in which the bank is established, he may face obstacles when trying to interpret national regulations authoritatively. Furthermore, massive inefficiencies are caused by the need to apply national rules at the European supervisory level. In addition, parties aggrieved by decisions of the JST do not know whether to sue the ECB or the JST and which court to bring the suit in.

The difficulties become especially acute in the case of gold-plated provisions of national law. Although they are based on EU law, they are not limited to a mere transposition, but go beyond. It is therefore open to question whether they can be enforced by the ECB. In addition, there are also numerous idiosyncratic national requirements banks have to fulfil and which are completely independent of EU law. These laws can only be enforced by member state authorities. Such split supervision creates serious inefficiencies.

Another problem is that the EU uses a 'one size fits all approach' to supervision by imposing the same rules on systematically important banks and other lenders. This approach raises serious concerns regarding its compatibility with the proportionality principle and leads to enormous costs for small banks, which crack under the regulatory burden. It also spurs a run for size in order to cope with the costs, turns away regulatory and supervisory resources from important risks, and thereby paradoxically increases the danger of financial instability.

In a recent article, I therefore argue for comprehensive reform of the regulatory framework in the form of a 'European Banking Act'. This would be a horizontal regulation which integrates the CRR, CRD IV and the SSM Regulation into one single set of rules. Such an Act would ensure transparency, coherence and a level playing field in the EU.

The European Banking Act would not cover all areas of banking but focus on prudential regulation and be limited to the Eurozone. The Act would also introduce a simple and less costly regime, provisionally called ‘CRR Light’, for non-significant banks and leave the full breadth of regulation to significant banks. It would thereby avoid overregulation and ensure compatibility with proportionality requirements.

Matthias Lehmann is a Professor and the Director of the Institute for International Private and Comparative Law at the University of Bonn, Germany.