Abstract
With the establishment of the Banking Union, the European Central Bank has become the main banking supervisor within the framework of the Single Supervisory Mechanism. Unlike monetary policy tasks, which the European Central Bank performs in line with numerically set objectives, supervisory ones are more difficult to quantify. At the same time, supervisory decisions entail a margin of discretion, which opens the way for potential ‘political interferences’ within the supervisory process. Considering that in supervision the European Central Bank disposes with the same level of independence as in monetary matters, concerns emerge on how to secure the European Central Bank’s accountability in this domain. Indeed, recent reports by European Union actors have warned about a ‘transparency gap’ undermining the European Central Bank’s accountability within the Single Supervisory Mechanism. This contrasts the European Central Bank’s monetary policy practice where transparency has been consistently prioritized over time with positive outcomes. This article highlights the shortcomings in respect of European Central Bank’s supervisory transparency by reviewing standards and practices in the monetary and supervisory domain. Arguing that transparency is salient to the European Central Bank’s accountability within the mechanism’s multilevel governance framework, the paper suggests potential enhancements of existent information channels in line with the unique requirements of supervision.
1. Introduction
The Eurozone crisis and the establishment of the Banking Union have entailed a transformative effect on the European Central Bank (ECB), in terms of conferred powers. Besides being the Eurozone’s chief monetary authority, the ECB now executes a critical role in prudential policy as the main supervisory entity of the Banking Union, steering the work of the Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM). In 2014 the ECB began operating as banking supervisor for credit institutions in the Eurozone as well as in other Member States cooperating with the SSM. 1 The ECB’s supervisory competence comprises tasks that are ‘crucial to ensure a coherent and effective implementation of the Union’s policy relating to the prudential supervision of credit institutions’. 2 The key executive body within the SSM is the Supervisory Board (SB), although the ECB Governing Council remains responsible for the bank’s overall governance. 3 The ECB now practically controls banks’ business prospects in full; for instance, it ‘green lights’ precautionary recapitalization, opens the door to common financial backstops (for example Single Resolution Fund) or initiates national insolvency procedures. Therefore the stretching of policy powers has placed the ECB at the heart of the Banking Union’s multilevel governance system, making it one of the most (if not the most) powerful central banks of our times. 4
The incremental progress in ECB’s policy capacity has attracted more than scholarly attention. It has been met with a sort of ‘institutional anxiety’ 5 because the extension of the bank’s mandate to unspecific policy objectives (for example financial stability) coupled with the gradual decline in its public appreciation over the years strain the bank’s democratic legitimacy. 6 Furthermore, recent reports by the European Parliament and the European Court of Auditors (ECA) have cautioned that important ‘transparency gaps’ impede SSM stakeholders to effectively monitor the bank’s supervisory performance, thus weakening confidence in the mechanism overall. 7
Transparency is essential within the framework of the SSM where the shift of policy powers from Member States to the European Union (EU) level has to be complemented by appropriate accountability practices. 8 Indeed, by maintaining ‘communication and openness’ 9 with actors at different governance levels, the ECB builds legitimacy in this framework. Additionally, from a purely functional perspective, transparency is essential to the bank’s effective performance as the Banking Union’s single supervisor. 10 Against this background this paper sheds light on the internal (for example exchange of information between stakeholders) and the external aspects (for example public access to documents) of the ECB’s procedural transparency within the SSM, a salient – albeit often overlooked – component of the bank’s accountability as banking supervisor. Considering the ECB’s monetary policy provides a good example of how transparency and accountability can best be aligned, the paper correlates ECB’s transparency practices in supervision with those in the monetary domain, specifying existent shortcomings and suggesting potential advancements within current SSM arrangements. The article’s contribution is twofold: firstly, it develops the broader scholarship on ECB’s transparency, independence and accountability, 11 and secondly, it extends the rather limited strand of literature on supervisory governance of central banks 12 to the context of multi-level governance systems, such as the Banking Union’s SSM. It is important to consider ECB’s transparency standards in supervision, because openness and clarity contribute not only to the effectiveness of the SSM but also reinforce the bank’s legitimacy as single supervisor. 13
The discussion is organized as follows: after the introduction, Section 2 reflects on the ECB’s independence and accountability in light of its supervisory mandate. Section 3 introduces the concept of transparency. By referencing the ECB’s transparency rationale and robust accountability practices in monetary policy the section examines supervisory challenges to transparency, which could potentially undermine SSM effectiveness and legitimacy. Bringing the threads together, Section 4 maps the ‘gap’ in the ECB’s procedural transparency in supervision, from its internal and external aspect. Section 5 concludes.
2. Balancing independence and accountability in banking supervision
Although the majority of scholarship confirms that political and operational independence 14 are essential to central banks’ performance in the monetary domain, the assertion is more controversial when considering supervision. As a result, scholarship on ‘supervisory governance’ 15 and the ‘dynamics between independence and accountability’ of financial supervisors is yet to be fully established. 16 What the existing studies show is that successful supervisory performance is dependent on the independence of the financial supervisor, and independence in turn rests on accountability. 17 As a result, the independence and accountability of central banks with monetary and supervisory competencies have to be carefully calibrated to the specificities of supervisory tasks. 18 Although central banks’ monetary performance can be measured against numerical objectives (for example, the inflation rate), supervisory performance is more difficult to assess given the broadness of prudential objectives (from capital liquidity, leverage ratios and balance sheet interconnectedness to consumer protection). Coupled with the confidentiality of the supervisory process, the vagueness of supervision makes policy decisions ‘vulnerable to political interference’. 19 To offset this risk, central banks and banking supervisors have to be independent.
Political and operational independence are indeed one of ECB’s strongest prerogatives enshrined by EU Treaty provisions, 20 further consolidated by the bank’s reasonably successful performance during the Eurozone crisis when it managed to preserve price stability irrespective of severe financial disturbances and political pressures. However, because of the bank’s specific legal foundations and complex constitutional environment 21 ECB independence relates to numerically defined monetary policy objectives. As long as it manages to preserve price stability, the ECB will maintain legitimacy (understood as problem-solving capacity or output legitimacy). At the same time the ECB is less flexible to pursue broader economic policy objectives such as financial stability, 22 which coupled with supervision’s discretionary nature and the persistent critiques of ECB’s democratic representativeness (that is input legitimacy) makes the bank’s formidable independence ‘inappropriate for its new role as a bank supervisor’. 23 Namely, the single, numerically set monetary policy objective curbs the risk of politicization of ECB’s monetary performance. 24 In supervision, in contrast, the multiple and non-specified supervisory objectives ‘draw the ECB into a potential space of politicization’, 25 evidencing that a highly independent ECB requires strong accountability arrangements if it wishes to preserve legitimacy as baking supervisor. Put simply, in supervision accountability should take the lead. 26
Accountability can broadly be described as a process of explaining and justifying actions taken by those exercising public authority to an accountability forum, which can either be institutionally specific (for example, European Parliament) or more general (for example the public). 27 The aim is to mitigate risks of biased, discretionary performance of the ‘account giver’. To this end, accountability arrangements focus on: ‘setting standards, finding and interpreting information and (…) sanctioning the power wielder if it fails to live up to the relevant standards’. 28 If we consider this proposition in the context of the ECB, it becomes apparent that – because its strong independence and the fact that sanctioning is exclusive to the Court of Justice – accountability narrows down to ‘answerability’ in practice. 29 Answerability, understood as the process of explaining and justifying central bank performance, is indeed the conceptual basis of ECB’s accountability in monetary policy, 30 and is also mirrored by accountability arrangements within the supervisory domain (as detailed in the following sections). 31 What emerges against this background is, firstly, an ECB-specific concept of ‘accountable independence’ 32 appropriate to the bank’s unique legal and institutional profile. The concept is best described as the use of carefully designed accountability arrangements, which assure an effective use of ECB supervisory independence in the eyes of SSM stakeholders (for example banks, EU institutions) and the broader public. 33 Such arrangements underscore the bank’s responsiveness in respect of supervisory strategy, activity and reasoning. Secondly, what can also be discerned, is that the complexity of prudential policy-making requires the ECB to maintain a vibrant ‘debate and deliberation’ with involved actors, giving ‘nuanced explanations’ of its supervisory performance. 34 Arguably, transparency is crucial to facilitate ECB’s accountability ‘to a large number of stakeholders’, 35 which is particularly relevant in multi-level governance frameworks, such as the SSM.
3. The role of transparency
Although a salient component of ECB’s accountability in the context of its supervisory role, transparency is not extensively examined in literature, 36 often examined as a concept ‘sandwiched in-between (…) independence and (…) accountability’. 37 At the same time transparency is one of the ‘guiding principles’ in monetary policy well established in topical literature. Conceptually, transparency is often interpreted as directness or used interchangeably with ‘openness’ in communicating information on policy objectives, instruments and activities to relevant stakeholders (for instance, banks as main policy addressees or regulators). However, openness in policy communication can potentially evolve into a cacophony of different types and forms of information, in which the addressee is incapable of processing, structuring, and appraising what is being transmitted. 38 Policy information has to be meaningful, considering that ‘more is not always better; quality is what really counts’. 39 In this sense, openness covers only a narrower dimension of transparency, one that we can refer to as ‘policy transparency’. 40 This in turn has to be complemented with ‘clarity’ and consistency in transmitting information, because in that way policy addressees are able to interpret, understand and predict central bank strategies and activities within a particular policy field. 41 This is the concept’s broader dimension, which is typically referred to as ‘procedural transparency’. 42
In the monetary domain, the ECB prioritizes transparency, because ‘simplicity and transparency ensure that the intentions behind monetary policy operations are correctly understood’. 43 In this sense, transparency positively impacts the credibility and effectiveness of the ECB’s monetary policy, also contributing to the bank’s legitimacy as monetary authority. To this end, the ECB relies on three central information channels: the annual public hearings of the ECB’s President before the European Parliament, 44 on written exchanges with members of the Parliament and the ‘monetary dialogue’ practice. The ‘monetary dialogue’ in particular, which refers to the regular, quarterly exchange of information between the ECB President and the competent committee of the European Parliament (that is ECON), helped validate the ECB’s unconventional operations and measures during the sovereign debt crisis, fostering the bank’s problem-solving capacities. The ECB further relies on other ‘information channels’ to satisfy the increased scrutiny of its monetary performance. First of all, the bank elaborates on economic developments underpinning monetary policy decisions (that is the Economic Bulletin) and provides abridged versions of the Governing Council’s reasoning (that is accounts of monetary policy meetings). On top of that, the ECB elaborates on monetary policy operations (for instance, foreign exchange operations) in the form of Eurosystem’s weekly financial statements, therefore facilitating predictability of its monetary performance and consequently enhancing policy effectiveness. In addition, the ECB pioneered the practice of holding press conferences following the Governing Council meetings, additionally enhancing its publicity by intensifying public engagement of the ECB’s high-level officials (for example interviews, participation to public events, published articles). 45
Arguably, in monetary policy the quality and scope of ECB transparency practices has evolved together with market developments, allowing the bank to withstand financial duress and political pressures, confirming its reputation in respect of monetary policy transparency. 46 However, it seems that the recent extension of the bank’s powers to supervision challenged this reputation. Namely, the European Parliament and the ECA have warned about critical ‘transparency gaps’ emerging within supervision. Recalling the findings of previous annual reports on the Banking union, 47 the Parliament underscored that the ECB: ‘needs to ensure higher transparency on the full set of supervisory practices’ 48 toward all participants within the SSM. In the same spirit, the 2016 ECA report on the SSM pointed out that the ECB’s transparency in supervision is ‘potentially weakened by the lack of a proper mechanism for assessing and then reporting on supervisory effectiveness’. 49
In supervision, transparency standards and practices ensure the supervisor discloses information related to the supervisory process (for example objectives, strategy, procedures) to relevant stakeholders. 50 In the context of the SSM and the ECB as supervisor, transparency is supported by arguments similar to those in the monetary domain – supervisory transparency facilitates accountability, increases predictability and therefore effectiveness of prudential policies, as well as ‘forces supervisors to (…) be consistent’. 51 Consistency in implementing prudential policies is indeed one of the SSM’s guiding principles, which detaches supervisory decisions from various influences (either from Member States or the banking industry), safeguards neutrality in policy-making and ultimately, allows the ECB to validate its credibility as supervisor. To this end, transparency standards and practices ensure that information related to supervisory policy and processes is readily available to policy addressees, and that an open and informative exchange among SSM stakeholders (for example banks, European/national actors) is maintained.
At the same time, banking supervision presents unique challenges to transparency, linked to the nature of supervisory business, in which the ECB is required to take critical decisions on banks’ business prospects (later subject Member State scrutiny) based on confidential, market-sensitive information on supervised entities. Supervisory information is compiled within various administrative documents subject to different degrees of ‘professional secrecy’, depending on their potential to cause, for example, reputational risk (that is false perceptions on entities’ financial circumstances), distort market conditions or galvanize distrust in banking stability. Unlike monetary policy, then, in supervision the ECB is bound by legal restrictions in communicating relevant information, 52 which means that transparency practices established within the monetary domain have to adapt to supervisory specificities. The difference is perhaps most noticeable in respect of procedural transparency where gathered information essentially shapes supervisor’s policy approach tailored to the distinct financial circumstances of an entity. At the same time, the supervisor has to safeguard stakeholders’ perceptions of supervisory consistency and mitigate concerns on potential differentiated practices in the banking market. To this end the ECB should ‘provide information on the principles and kinds of indicators (…) it is generally using in developing acts and policy recommendations’ 53 avoiding the temptation of using supervisory complexities as a pretext for detached communication with actors within the SSM framework. With this in mind, the following sections unravel some of the more important shortcomings in the ECB’s procedural transparency (its internal and external aspects), examining examples from the bank’s recent supervisory activity.
4. Mapping the transparency gap
A. Internal aspect: The exchange of information with SSM stakeholders
As direct addressees of prudential policy, banks are interested in the ECB’s supervisory strategy, methodology and practices, which the ECB implements through the so-called Supervisory Review and Evaluation Process (SREP) – its core supervisory activity. 54 The ECB strives to provide relevant information related to the SREP by means of supervisory guidelines, abridged manuals and short ‘letters’ directed to the banking industry, hence mirroring transparency practices in monetary policy. Still, in the 2016 ECA report on the SSM, banks have criticized the ECB for its ‘selective approach’ in communicating information on SREP methodology, and reasoning of specific decisions. 55 Although banks agreed that the ECB adequately fulfils ‘policy transparency’ requirements meaning that SREP-related information is readily available, the report underscored that information related to core supervisory toolkit (for instance, capital-related terminology or adjudication of evaluation scores) is either unavailable or unclear, impeding genuine ‘procedural transparency’. At the same time, EU actors cautioned that the ECB’s inadequate transparency potentially hinders the ‘level playing field’ in banking. 56
The ECB’s supervisory activity from summer 2017 and its decision on the solvency of three Italian banks in particular (two from the Veneto region, the Veneto Banca and Banco Popolare di Vicenza, and the Tuscan Monte dei Paschi di Siena), illustrate how weaknesses in procedural transparency affect stakeholders’ confidence in the SSM. Namely, in June 2017 the ECB declared that due to substantive capital shortfalls the two Veneto banks were ‘failing or likely to fail’. 57 Both banks attempted to raise capital levels over the years and applied for a ‘precautionary recapitalization’ 58 in April 2017 without success. 59 The two Veneto banks were remitted to national insolvency procedures. Three months later, however, the ECB approved the ‘precautionary recapitalization’ of Monte dei Paschi, by then also under enhanced supervisory scrutiny for several years because of low capital levels and poor liquidity, and without success in recapitalization. In all three cases the approval of the European Commission on precautionary recapitalization was dependent on the ECB’s decision. 60 The ECB decides whether a bank is ‘failing or likely to fail’ on the basis of ambigouous SREP-related, technical issues. Considering the decision is taken in Supervisory Board meetings with strict confidential status, 61 doubts can emerge of whether ‘in critical situations, technocratic policy issues invariably become political’, 62 thus burdening transparency of the ECB’s supervisory performance. In this case, concerns did emerge on whether the ECB based its decisions on the ‘too big to fail’ logic, 63 with some Member States, such as Germany, criticizing the ECB’s lenient approach to Monte dei Paschi at the expense of the mechanism’s overall objectives. 64 Criticism also pointed to the vagueness of the ECB’s methodology, particularly the ‘lack of transparency’ in calculating capital shortfalls, 65 which was indicated as the main culprit for the ‘confusion and friction’ 66 on the (potentially) contrasting outcomes of re-capitalization requests of bank entities in comparable circumstances. However, the two Veneto banks did not bear systemic implications to Italy’s financial system although they lent heavily to regional SMEs. They also had a limited network of foreign subsidiaries, which limited the impact of their insolvency. By contrast, the Monte dei Paschi – the world’s oldest and Italy’s third largest bank, had undisputable systemic relevance.
To mitigate arbitrary decision-making in supervision, the ECB and the European Parliament have concluded an inter-institutional agreement setting an obligation for the ECB to provide the Parliament ‘at least with a comprehensive and meaningful record’ of the Board’s proceedings. 67 However, the possibility of ‘closed-door consultations’ between the Parliament and the Supervisory Board prompt further concerns. As an additional information channel in supervisory policy-making, confidential consultations cover information-sensitive tasks on the supervisory process, 68 and are open exclusively to the Board’s Chair and the Chair and Vice-Chair of the Parliament’s ECON committee. 69 Still, in terms of expertise and professional experience the ECON committee is no ‘peer’ to the Supervisory Board, which limits its capacity for an effective ‘checks and balances’. 70 Moreover, by removing some of the SSM’s key actors (primarily national competent authorities) confidential meetings prevent full ‘information and deliberation’ 71 among stakeholders essential to genuine transparency within the framework, at the expense of ECB’s accountability. 72
B. External aspect: Public access to documents
Public access to documents is important for ECB’s accountability in the context of the SSM 73 and for its legitimacy as banking supervisor since it allows the public to better understand the bank’s role and performance in supervision. Since the mechanism’s inception, the ECB has revamped levels of publicity, 74 to increase public appreciation of its performance. But high levels of publicity do not imply a high degree of transparency. Besides being publicly prominent, communication on supervisory activities has to be responsive and meaningful, allowing the public to appraise information. Indeed, recent reports show that the number of ‘access to documents’ requests has increased since the Eurozone crisis, with roughly a quarter of requests submitted by private citizens in relation to supervisory data. 75
The ECB manages ‘access to documents’ requests in line with general EU law, 76 Treaty provisions 77 and the 2004 ECB decision on public access to documents, 78 having regard to the EU principle of openness of administration. The 2004 decision determines exceptions to this principle and lays the grounds for access refusal. The decision was amended twice, 79 resulting with a recent application to the Court of Justice of the EU claiming that the first set of amendments ‘materially extended the scope of refusal grounds’. This gave way to the notion that ‘demand-driven’ transparency is not ECB’s approach, 80 which paired with the fact that the ECB does not elaborate the reasons for refusing access to documents, 81 explains why the bank is often described as ‘opaque and secretive’. 82 Unlike monetary policy, in banking supervision the ECB is not compelled to disclose substantive information on the supervisory process (for example, consultations, decision-making). Namely, considering that its primary scope is to protect EU-wide financial stability the disclosure of full data on banks’ capital/liquidity position or supervisory measures discussed and imposed by the Supervisory Board, could potentially raise reputational risk, distort market conditions and fuel public distrust in wider system stability. 83 Therefore, the sheer technical complexity of supervisory information mandates a specific approach to information quality, which makes supervisory transparency somewhat different from transparency in monetary policy. In supervision ‘too much “raw” information’ could adversely impact market conditions. At the same time ‘supervisory transparency (…) is an essential tool to ensure market discipline’ 84 and to boost public confidence in the banking sector. To this end the ECB publishes and regularly updates the list of supervised banks, also releasing data related to supervisory exercises and consolidated banking data for EU Member States. However, the fact is that the released information does not disclose quantitative data at bank level, crucial to make proper assessments on entities’ soundness and the appropriateness of the supervisor’s approach. This creates an important ‘information gap’, considering that the ECB’s decision on a bank ‘failing or being likely to fail’ determines its future business prospects (for example whether it may access the common resolution framework), and those of its clients and shareholders. The shortcoming has not gone unnoticed, with two pending cases brought before the Court of Justice of the EU by legal entities, requesting the annulment of ECB’S refusal of ‘access to documents’ in the SSM framework. 85
Recently, however, the ECB has been exploring new possibilities to enhance supervisory transparency and disclose new banking data. In this respect, a welcomed advancement is the annual supervisory reporting conference, in which ECB officials elaborate on banking statistics, data quality and evaluation methods. As a continuation of this proactive approach the ECB should address two issues. Namely, unlike other EU institutions, the ECB does not cover its disclosure regime in an accessible and coherent manner. 86 The coverage of disclosure practice within a comprehensive document is relevant not only for information accessibility but also for allowing the public to keep track of developments, particularly in response to pending judicial reviews. Furthermore, the bank recently rejected to join the so-called EU transparency register, 87 which would disclose contacts between the ECB high-level officials and ‘advisory groups’ from the private and public sector during the policy-making process. This is a missed opportunity to finally tackle criticism of the ECB’s secretive culture as well as mitigate disadvantages of the bank’s technocratic nature.
5. Conclusion
The incremental progress in ECB policy powers within the Banking Union presents complex challenges to the bank’s accountability and legitimacy. Although having the analytical competence to operatively manage both monetary and supervisory policy, 88 it is debatable whether current accountability arrangements adequately frame the bank’s pursuit of supervisory objectives. Unlike monetary policy where the ECB’s single, numerically set objective benchmarks the bank’s performance, the multiple objectives set in supervisory policy cannot be appraised against a ‘quantifiable yardstick’. 89
Considering that the ECB retains a margin of discretion in decision-making, and that at the same time the bank’s strong form of independence (as established in monetary policy) extends to supervision, concerns emerge on whether political interferences can thwart supervisory outcomes. In other words, how can we assure that the ECB uses its prerogatives effectively in the supervisory domain? In this respect, robust accountability arrangements foster exchanges between stakeholders within the SSM framework while also offsetting risks of potential politicization. This makes the ECB’s accountability critically dependent on transparency standards and practices, which ensure fluent, structured communication of policy-relevant information to involved stakeholders.
However, the confidentiality of supervisory information presents unique challenges to this principle, requiring a careful redesign of practices established within the monetary domain. This is particularly relevant in procedural transparency, where ECB adapts its policy approach to the distinct financial circumstances of each bank, which can then potentially undermine the perception of supervisory consistency or even trigger concerns on differentiated practices in the banking market. Indeed, the 2017 set of ECB supervisory decisions on the business prospects of three Italian banks confirms that further fine-tuning is required in this respect.
At present, banks are dissatisfied with the quality of communication within the SSM, particularly in respect of SREP – the core supervisory activity, and its toolkit and methodology. Moreover, because the ECB decides whether a bank is ‘failing or likely to fail’ in confidential Supervisory Board meetings, doubts about potential ‘interferences’ are not completely dispelled. Granted, the Board does provide summarized records of meetings to the Parliament; however, the possibility of ‘closed-door consultations’ between the Board and the Parliament’s ECON committee again fuel similar concerns. In addition, ECON’s generalist character limits exchanges with the Supervisory Board because members of the committee largely lack specialist, prudential expertise, an issue already confirmed in the monetary domain. Two suggestions come to mind to improve existent shortcomings. First, including national and EU actors (that is central banks or other national competent authorities, representatives from European Banking Authority or the Commission) in confidential meetings, as observers. Second, the ECON could form sub-committees staffed by specialists in supervisory matters, or establish regular exchanges with these experts similar to the practice in monetary policy. Arguably, there is still something to be learned from the incremental evolution of transparency’s scope and practices in monetary matters, which can help open new information channels in supervision.
As for the external aspect of procedural transparency, one of the major issues is the ECB’s reluctance to elaborate on refusals of access to documents as well as the non-availability of bank-level data. Although striving to raise levels of publicity as well as to make general data available on its webpage, it is difficult for the ECB to be fully transparent on the outside. This is partly because the public lacks specialist knowledge to properly assess supervisory information, with too much supervisory data potentially propelling reputational risk rather than validating the ECB’s concrete supervisory approach in the eyes of the public. In this respect the establishment of the supervisory reporting conferences with its explanatory mandate is a welcome progress in transparency practices. Lastly, the ECB should not miss opportunities to dispel its overall ‘technocratic image’ and should begin to cover disclosure issues in supervisory policy within a comprehensive document (for example, annual report on supervisory activities), perhaps even delivering a more earnest response to the public demands to join the EU transparency register.