In a speech to the European Parliament this week, Nouy said the use of directives, which have to be transposed into national law by each EU state — and with the potential for lots of variation between jurisdictions — will hamper the ECB in its role as single supervisor.
The use of directives rather than regulations, which go uniformly into effect for all EU members, is a way to address the different legal frameworks of each country. Insolvency law is notoriously complicated in Europe, since every state is different.
So EU financial regulation must acknowledge each sovereign state’s laws while trying to ensure each state's rules achieve the same result.
But directives slow down implementation, open up avenues for regulatory arbitrage, and will impede the ECB's ability to act as single supervisor at the moment when it most needs to act predictably: when banks get into big trouble.
“As a result,” Nouy said, “the ECB is confronted with 19 different legislations to follow in the euro area” when it comes to the Bank Resolution and Recovery Directive.
“Consistent legislation in this field, ideally through EU regulations, is, in my view, not just desirable but necessary.”
And she is right.
There will have been little point in giving the ECB powers of early intervention — a key element of bank recovery and resolution — if the weekend they could have used to draft a swift plan for recovery or resolution is spent butting heads with different legal frameworks.
What’s more, there’s probably a decent chance that, someday, a few banks across a few jurisdictions are going to get into trouble at the same time.
That each nation must individually transpose BRRD into national law will also surely affect long term confidence in Europe’s banking sector — or, perhaps, more likely, distort the risks of the sector.
It’s all very well to have a single supervisor that gives Europe’s financial sector the nominal prestige of having a monolithic institution of the likes of the US Federal Reserve, but it won’t matter at all if it can’t act quickly and efficiently when it’s needed.
Investors that ignore national discrepancies, comfortable in the fact of the single supervisor alone, do so at their peril. Banks go down quickly, and the system needs a supervisor nimble enough to respond.
Otherwise, much of the last eight years in regulation may end up being window dressing.