Traineeship Report at the European Banking Authority – A critical assessment of the EBA’s stance on its 10 years of activity

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Jéssica Andreia Costa Serrano

Traineeship Report at the European Banking Authority – A critical assessment of the EBA’s stance on its 10 years of

activity

Supervisor:

Professor Fabrizio Esposito, Assistant Professor at NOVA School of Law

September, 2022

Traineeship Report to obtain a Master’s Degree in Law, in the specialty of Law and Financial Markets

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«- Falhámos a vida, menino!

- Creio que sim... Mas todo o mundo mais ou menos a falha. Isto é falha-se sempre na realidade aquela vida que se planeou com a imaginação. Diz-se: «vou ser assim, porque a beleza está em ser assim». E nunca se é assim, é-se invariavelmente assado, como dizia o pobre marquês. Às vezes melhor, mas sempre diferente.»

(The Maias, p. 517)

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ANTI-PLAGIARISM DECLARATION

I, Jéssica Andreia Costa Serrano, hereby declare on my honour that the work presented in this Traineeship Report is original. Where information has been derived from other sources, I can confirm that this has been duly identified in the Report. I am aware that the use of unidentified third-party contributions and plagiarism constitute a serious ethical and disciplinary breach.

Lisbon, September 2022

Jéssica Andreia Costa Serrano

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ACKNOWLEDGEMENTS

My sincere gratitude goes to Professor Fabrizio for all his words of encouragement, patience, and for standing by to help me at all times.

I extend my appreciation to the European Banking Authority: to all colleagues who have kindly accepted the invitation to participate in the interviews and for all the valuable advice provided during the process. I would like to express a very special thanks to Anita, my mentor at the EBA, for her remarkable work ethic and for all her kindness and endurance.

I would also thank my family for trying their very best to maintain a quiet work environment, and most importantly, for being there. A special word goes to my friends, in particular Bia, who despite being on the same journey, was able to make it lighter with her unconditional support.

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QUOTING AND OTHER CONVENTIONS

I. In this Traineeship Report, other academic contributions will be quoted in the footnotes and in the References section, using APA Format (7th edition). The decision to not use the Norma Portuguesa 405 is due to the fact that it is not common to use that style in academic research. Thus, it would appear strange if we were to present the results of the present Report to a non-Portuguese target audience.

a. On the footnotes, a hyperlink is made available to the correct reference in the designated section. The quotation in the footnotes, in addition to the hyperlink to the full reference, will be displayed in the following manner:

author(s), (year), page(s) in case it refers to a direct quote.

b. In the References section, the full reference appears as follows: author(s), (publication date), title, source, editor, (page(s)) if applicable.

c. We have used single quotation marks for direct quotes and the technical terms are identified in italic.

II. Jurisprudence is identified in the footnotes with the case number and with a hyperlink to the complete reference, where we identify the case number, name, (year), and the European Case Law Identifier.

III. All EU legislation follows the following formula: Directive OR Council Regulation OR Commission Delegated/Implementing Regulation OR Regulation XYZ, name, OJ reference.

IV. All other EU documents are referenced as: author(s), (year), title, available here (with hyperlink).

V. The index was placed at the beginning of the Report to make it easier for the reader.

VI. The line spacing is 1.5 (single spacing in footnotes). The font used is Garamond, size 12, and the footnotes are size 10.

VII. The body of this Report has 199.247 characters, including spaces and footnotes.

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LIST OF FIGURES

Figure 1. Important moments for Banking Regulation and Supervision in the EU 19 Figure 2. EBA’s hierarchic structure 39

Figure 3. EBA’s voting modalities pre- and post-SSM 41 Figure 4. ECB-SSM v. EBA 82

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LIST OF ABBREVIATIONS

AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism ACPR Autorité de contrôle prudentiel et de résolution

BCBS Basel Committee on Banking Supervision BDIF Bulgarian Deposit Insurance Fund BIS Bank for International Settlements BNB Bulgarian National Bank

BoS Board of Supervisors

BRRD Bank Recovery and Resolution Directive BSG Banking Stakeholder Group

BUL Breach of Union Law CAs Competent Authorities

CEBS Committee of European Banking Supervisors

CEIOPS Committee of European Insurance and Occupational Pensions Supervisors CESR Committee of European Securities Regulators

CJEU Court of Justice of the European Union CRD Capital Requirements Directive

CRR Capital Requirements Regulation DGSD Deposit Guarantee Schemes Directive DMR Double-Majority Rule

EBA European Banking Authority EBU European Banking Union ECB European Central Bank ED Executive Director

EDIRA European Deposit Insurance and Resolution Authority EDIS European Deposit Insurance Scheme

EEA European Economic Area EFTA European Free Trade Area

EIOPA European Insurance and Occupational Pensions Authority ESAs European Supervisory Authorities

ESFS European System of Financial Supervisors ESG Environmental, Social and Governance ESMA European Securities and Markets Authority

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ESRB European Systemic Risk Board

EU European Union

FIUs Financial Intelligence Units GRPs Group Recovery Plans

ICT Information and Communication Technology IFRS9 International Financial Reporting Standard 9 IMF International Monetary Fund

IPU Intermediate EU Parent Undertaking IRRBB Interest rate risk in the banking book ITS Implementing Technical Standards JSTs Joint Supervisory Teams

KPIs Key Performance Indicators MB Management Board

MoUs Memoranda of Understanding

MREL Minimum Requirement for Own Funds and Eligible Liabilities MSs Member States

NCAs National Competent Authorities NCBs National Central Banks

OCR Overall Capital Requirement P2G Pillar 2 Guidance

P2R Pillar 2 Requirement QMV Qualified Majority Voting RTS Regulatory Technical Standards SEPs Supervisory Examination Programmes SGOS Sub-group on Ongoing Supervision SIs Significant Institutions

SMESs Small and Medium Enterprises SMV Simple Majority Voting

SNEs Seconded National Experts SRB Single Resolution Board

SREP Supervisory Review and Evaluation Process SRF Single Resolution Fund

SRM Single Resolution Mechanism SSM Single Supervisory Mechanism

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SSMR Single Supervisory Mechanism Regulation

SUPRISC Supervision, Risks and Innovation Standing Committee SuRRR Supervisory Review, Recovery and Resolution

TFEU Treaty for the Functioning of the European Union TSs Technical Standards

UK United Kingdom

WCCA Written Coordination and Cooperation Agreement

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ABSTRACT

From the outset of its edification, the European Banking Authority’s (EBA) governance arrangements, procedures, and structure have been called into question, in particular in the context of the establishment of the Banking Union (BU) and consequently the Single Supervisory Mechanism (SSM). The extant studies have been treating the EBA with open criticism of its powers, decision-making processes, and regulatory independence. Since the EBA just turned 10 years old, it is appropriate to consider the recent advances in the EU’s supervisory and regulatory landscape.

In the plea for a new fresh impetus on the EBA’s contribution to the Europeanisation of Banking Regulation and Supervision, this Report aims at shedding light on the academic research about the Agency, which was afforded by the unique opportunity of engaging in a traineeship at the EBA. Thus, we aim at answering the following research question by recuring to an interview process that collected the EBA’s staff viewpoints on the literature’s outstanding criticism points: Over the course of its 10 years of activity, has the EBA been meeting the expectations that were placed on it and rectified the shortcomings pointed out to its predecessor?

While touching upon the EBA’s role in building up a Single Rulebook, supporting national supervisors with the necessary technical expertise, and spreading good practices which are paramount to walking towards a ‘more’ European setting, this Report finds that the legislator’s expectations placed on the EBA of advancing micro-prudential supervision and mitigating its predecessor’s regulatory gaps are progressively being attained. Contrary to the academic literature’s scepticism, the EBA remains a valuable piece in ensuring regulatory convergence, and financial stability, and has proven to be properly equipped to adapt to the potential pitfalls that might arise within the EU banking supervisory and regulatory framework.

Keywords: European Banking Authority | Banking Union |Single Supervisory Mechanism

| Banking Regulation and Supervision | EBA’s staff viewpoints | Single Rulebook

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RESUMO

Desde os primórdios da sua edificação que os mecanismos, procedimentos e estrutura de governação da Autoridade Bancária Europeia (EBA) têm vindo a ser postos em causa, especialmente no contexto do estabelecimento da União Bancária e consequentemente do Mecanismo Único de Supervisão (MUS). Os estudos existentes têm criticado fortemente os poderes, o processo decisório e a independência regulatória da EBA. Uma vez que a EBA celebrou recentemente o seu 10º aniversário, é pertinente considerar os avanços recentes no campo regulatório e de supervisão europeu.

Perante a necessidade de abrir espaço para uma nova perspetiva a respeito do contributo da EBA para a europeização da Regulação e Supervisão Bancária, o presente Relatório pretende dar a conhecer a investigação académica que foca na Agência, cuja oportunidade foi proporcionada pela ocasião de realizar um estágio na EBA. Neste sentido, procuramos responder à seguinte pergunta de pesquisa, recorrendo a um processo de entrevistas que visou recolher os pontos de vista dos funcionários da EBA sobre as críticas tecidas pela literatura existente: Ao longo dos seus 10 anos de atividade, a EBA tem correspondido às expectativas que lhe foram depositadas e retificado as deficiências apontadas ao seu antecessor?

Ao abordar o papel da EBA na construção de um conjunto único de regras para toda a Europa, num esforço para providenciar a sua perícia técnica aos supervisores nacionais e difundir boas práticas que são primordiais para caminhar para um cenário 'mais' europeu, este Relatório considera que as expectativas do legislador depositadas na EBA de promover supervisão microprudencial e mitigar as lacunas regulatórias apontadas ao seu antecessor estão a ser progressivamente alcançadas. Contrariamente ao ceticismo manifestado pela literatura académica, a EBA permanece enquanto peça essencial para garantir a convergência regulatória e estabilidade financeira, e provou estar devidamente equipada para se adaptar aos possíveis entraves que podem surgir no quadro regulatório e de supervisão bancária da União Europeia.

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I. INTRODUCTION

The European Union (EU) banking supervisory and regulatory framework has been suffering successive reforms propelled in the context of recent cross-border banking issues.

In this respect, the European legislator has realized throughout the years that shared rules and practices should be coupled with strong financial supervision in order to achieve greater safety in an increasingly integrated market.

In an earlier attempt, the Lamfalussy Report, in 2001, introduced a comitology approach to the regulation of financial services, to which the Committee of European Banking Supervisors (CEBS) was a key component for the banking sector.

In the realms of the financial crisis affecting the EU economic scene, the De Larosière Report, in 2009, brought forward a series of weaknesses in the former EU system of financial supervision and regulation, reinforcing the need to rely on an Agencification setting to provide a solid network of supervisory authorities that would ensure the soundness of the financial system and contribute to the improvement of prudential regulation and the strengthening of their enforcement.

In this Report, we focus on the European Banking Authority (EBA) which was born under the necessity of strengthening micro-prudential supervision of cross-border banks and filling the existing regulatory gaps. Thus, the EBA is considered one of the necessary steps in the Europeanisation of Banking Supervision.

The extant literature has been extensively dwelling on the EBA’s governance arrangements and regulatory capacity, also accounting for the amendments to the Agency’s Founding Regulation propelled by the establishment of the Single Supervisory Mechanism (SSM) under the European Central Bank’s (ECB) umbrella. In this light, we find room to tackle the literature gap in this regard.

We contend that the EBA’s 10-year anniversary milestone presents the perfect opportunity to re-assess the Agency’s role and relevance in fostering financial stability and contributing to a solid regulatory framework. In addition, the unique opportunity of conducting a traineeship at the EBA provided the ideal context to seek the EBA’s staff input on the most prominent critique points appointed by the academic literature.

Therefore, we have an opportunity for research, which this Report seeks to address by answering the question: Over the course of its 10 years of activity, has the EBA been meeting the expectations that were placed on it and rectified the shortcomings pointed out to its predecessor?

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In answering this question, we proceed with a thorough assessment of the literature’s contributions on the EBA, while making use of interview/focus group methods in order to grasp the EBA’s staff buy-ins. It is also our aim to clarify the distinction between regulation and supervision, which are important concepts often used interchangeably albeit entailing entirely different roles and duties.

Our ultimate goal is to bring to the scene a more complete assessment that, contrary to what has been done to date, includes a critical analysis taking into consideration the direct engagement with the EBA’s staff in an effort to accurately gauge the Agency’s performance and position within the EU banking supervisory and regulatory framework.

This Report is divided into six main Chapters, including this Introduction.

In Chapter II, we provide an overview of the EBA by framing the evolution of banking supervision in the EU and the use of an Agencification setting to attain effective banking regulation and supervision; we outline the EBA’s legal mandates, tasks and regulatory powers; and finally, we offer a glance at the traineeship experience at the Agency, within the Prudential Regulation and Supervisory Policy (PRSP) and more specifically, the Supervisory Review, Recovery and Resolution (SuRRR) Unit.

Chapter III lays down the theoretical framework of the EBA’s predecessor, the CEBS, and, by recurring to a comparative perspective, assesses the Agency’s governance structure, decision-making procedures, and voting modalities.

Chapter IV, in turn, concerns the Research Design chapter, which identifies the rationale for our study and our research opportunity and objectives, as well as the methodology carried out to fulfil our research problem.

Chapter V sets the critique points rooted in the literature dwelling on the EBA’s performance and its sister authorities, tackling important principles such as the considerations laid down by the Meroni ruling. In this chapter, we counter the literature’s stance with the EBA’s narrative retrieved from the EBA staff’s valuable input.

Finally, Chapter VI discusses the results obtained with the interview process implemented and answers the research question identified above.

The present Report contributes to the extant literature by concluding that the EBA is paramount in providing technical expertise to national supervisors and achieving a truly European setting. Our findings are based on the EBA’s staff input, who consider the academic literature’s critiques as quite harsh on the Agency and lacking a thorough knowledge of the EBA’s roles, mandates, and practices. Furthermore, this Report settles that in pursuing a myriad of necessary mandates and roles, the EBA has been progressively

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mitigating the CEBS’ regulatory gaps, ensuring regulatory convergence across the EU’s internal market, and ultimately financial stability.

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II. THE EUROPEAN BANKING AUTHORITY – AN OVERVIEW

1. State of play

The notion of supervision is alluded to in the EU Treaty framework¹, often referring to ‘the oversight of market interactions and the compliance of market actors with these rules’². In this context, it is important to clarify that the terms regulation and supervision are often used interchangeably, however, the terms should be distinguished. Regulation refers to set rules and guidelines to preserve a similar regulatory framework; supervision aims at ensuring that the market actors apply the rules laid down by the regulators, which implies day-to-day action³.

Traditionally, the day-to-day supervisory competencies were placed at the national level, thus resulting in a highly fragmented supervisory regime. Be that as it may, especially in the wake of the 2008 financial crisis⁴, the erosion of the national central banks’ (NCBs) role in banking supervision paved the way for a shift from a minimum level of harmonisation to an ever- increasing ‘Europeanisation’ of national supervisory structures, providing some supervisory powers to EU Agencies, the ECB⁵, and creating formal networks of national supervisory authorities. At a certain point, it was evident that cross-border banks would need a more uniform supervisory framework to expand and conduct their businesses internationally and mitigate the potential hazards associated with their risky activities and subsequent contagious effects⁶.

Against this backdrop, the project for European banking supervision integration first aimed at achieving regulatory convergence and standardising the instruments of supervision. The main objective was to create a level playing field for banking in the Eurozone and conclusively break the vicious circle between banks and sovereigns⁷. Ultimately, banking supervision seeks to safeguard the soundness of individual banks and guarantee that they have strong financial positions, in order to prevent negative externalities for the whole economy⁸.

1 See e.g. Articles 103 and 127(5)(6) TFUE.

2 Van Cleynenbreugel (2014a), p. 10. See also Ibáñez (1999).

3 Wymeersch (2011), p. 446.

4 It was perceived that banks are special because of their role as central players providing and re-distributing liquidity. As banks are inherently risky and prone to bank runs (prudential rationale), the better way to minimise the systemic risk and the wider costs imposed by bank failures, due to the interconnectedness of the financial system, is to seek the harmonisation of the European regulatory and supervisory regime. See Lastra (2019);

Carletti & Leonello (2016).

5 In 2014, the ECB was entrusted with the direct supervision of (significant) credit institutions in Eurozone Member States, acting as a home country supervisor, through the SSM.

6 See Van Cleynenbreugel (2014a); Montalbano (2021); Lasagni (2019).

7 Schoenmaker & Véron (2016).

8 Fandl (2018).

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1.1. The Europeanisation of Banking Supervision

Summary to Guide the Reader

Banking regulation and supervision have been at the heart of the work of the so-called Basel Committee on Banking Supervision⁹ (BCBS), which conveys a forum for cooperation in the domain of banking supervision while advancing global standards for the regulation and supervision of banks¹⁰.

Despite the limitations assigned to the BCBS¹¹, it has proven to successfully influence several jurisdictions in shaping banking supervisory and regulatory practices, in particular the bank’s capital requirements, where the Committee carries a key role in establishing a comprehensive approach to oversee and regulate the banking activity¹². Furthermore, the International Monetary Fund (IMF) and the World Bank clearly impose compliance with the Basel Committee Standards, which furthers the premise that the BCBS’s stances have progressed towards de facto binding rules¹³.

In a context where the regulatory and supervisory regimes are still fragmented and uneven, the Basel Committee’s shared rules and practices of banking supervision have been a decisive driver in what concerns banking regulation and supervision in the European context and

‘levelling the playing field in an integrated market’¹⁴.

In the EU, the Lamfalussy report on the Regulation of European Securities Market¹⁵, acknowledging that the existing regulatory framework was not properly fitted to a global financial market rapidly changing, introduced the streamlining process of the EU’s regulatory system. The Lamfalussy Report brought a new impetus towards achieving convergence, coordination, and consistency of supervisory practices, focusing on the securities sector as a starting point, expanding later to the banking and insurance sectors¹⁶.

The novelty of the Report was the introduction of a four-level regulation approach:

9 Under the custody of the Bank for International Settlements (BIS).

10 Lastra (2019).

11 The economic literature depicts that the BCBS’s decisions lack legal binding value as it only produces soft law instruments, i.e., their implementation is voluntary and subject to national and regional specificities.

Additionally, the BCBS is acknowledged as an obscure institution, whose organisation and working modalities are not disclosed and transparent. See Lasagni (2019); Dragomir (2010).

12 Lasagni (2019).

13 i.e., evolved from an informal club of supervisors to a global legislator for prudential standards applicable to banks. See Cooper (1984); Dragomir (2010).

14 See Heims (2018), p. 154.

15 See Lamfalussy Report (2001).

16 See Boccuzzi (2016).

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i. Level 1 rules focused on primary legislation, i.e., general regulatory principles to each Directive/Regulation decided by regular EU legislative procedures¹⁷; ii. Level 2 rules regarded secondary legislation needed for implementation of first-level legislation, i.e., technical implementing measures adopted by a decision of the Commission, in agreement with an EU Securities Committee and an EU Securities Regulators Committee¹⁸;

iii. Level 3 rules concerned enhanced cooperation among national regulators, i.e., technical committees composed of representatives of the supervisory authorities for banking, securities, and insurance sectors¹⁹. They agreed upon joint non-binding recommendations, guidelines, and common standards, and promoted convergence of supervisory practices;

iv. Level 4 rules required the Commission to ensure the enforcement of the EU rules, i.e., if the rules were consistently applied across the EU Member States.

Apart from unveiling the three committees for each sector of the financial system, at the operational level, the Lamfalussy Report also inaugurated a framework of Colleges of Supervisors aiming at advancing cooperation between the home and host authorities.

Notwithstanding, the 2008-2009 financial crisis brought the EU regulatory and supervisory landscape to a new revision with the purpose of reinforcing cooperation and inaugurating a new architecture for European supervision, as the EU supervisory structures were proven to be inadequate to achieve the objectives of financial market integration²⁰. This new phase was fuelled by the De Larosière Report²¹ which demanded a more refined and robust system of financial regulation and supervision, adequate to endure the banking crises’ nefarious effects.

In furtherance of the above, the De Larosière Report focused on strengthening macro- and micro-prudential supervision of cross-border banks and filling the regulatory gaps that had been identified in the context of the crisis, whilst still entrusting national authorities with a supervisory role²². More precisely, the De Larosière Report recommended establishing a European System of Financial Supervisors (ESFS)²³ in 2010 and the European Systemic Risk Board

17 As per Article 294 TFEU, the development of legislative proposals is entrusted to the Commission. The approval process involves the Council and the European Parliament.

18 This allows the Council and Parliament to focus on the key political decisions.

19 Committee of European Banking Supervisors (CEBS) for banking, Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) for insurance and the Committee of European Securities Regulators (CESR) for securities.

20 See Boccuzzi (2016).

21 Also known as the High-Level Group of experts on Financial Supervision in the EU chaired by France’s former central banker, Jacques de Larosière.

22 See Gortsos (2020).

23 The ESFS has its legal basis on the Articles 114 and 127(6) of the TFUE and comprises the ESAs, as well as the ESRB, the Joint Committee of the ESAs, the ECB and the MSs’ competent supervisory authorities.

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(ESRB)²⁴ tasked with the micro- and macro-prudential oversight of the EU financial system, respectively. Figure 1 depicts the timeline for the implementation of these recommendations.

The ESFS consists of the three European Supervisory Authorities (ESAs)²⁵ designed for the supervision of each of the financial sectors (banking, insurance, and securities). This new supervisory architecture denoted an important reform impulse as it indicated the allocation of supervisory powers at the European level for the first time. Accordingly, the newly established EU agencies took over the tasks of its ancestors²⁶, hence, the EBA replaced CEBS with accrued tasks and powers, envisioning reducing national discretions and establishing a Single Rulebook.

It is rooted in the literature²⁷ that the recommendations under the scope of the De Larosière Report were ground-breaking and were at the heart of the integration of EU financial regulation and supervision. However, this would be just the preliminary step to completing the EU's supervisory integration.

In the realms of the Euro area crisis, the so-called Van Rompuy Report manifestly expressed the initiative to create the (European) Banking Union (BU)²⁸. It became evident that it was necessary to take action to ‘break the vicious circle between banks and sovereigns’²⁹. The Euro crisis depicted that establishing a BU was of utmost importance to i. deal with the banks’

weaknesses, ii. reinstate the effectiveness of the ECB’s monetary policy, iii. restore the European banking system and diminish the fragmentation of the banking market in Europe, and iv. repair the issues deep-rooted in the EU single market and foster convergence of banking supervisory practices³⁰.

The BU consists of three fundamental pillars which should be coupled with a Single Rulebook: i. a Single Supervisory Mechanism (SSM)³¹ conferring bank supervisory powers to the ECB and targeting the Euro area Member States’ credit institutions; ii. a Single Resolution Mechanism (SRM)³² for non-viable credit institutions, and iii. a single deposit guarantee

24 The ESRB is composed of a General Board and a Steering Committee. It has scientific and technical advisory committees, in which national central banks, supervisory authorities and Community institutions may participate. The ECB provides logistical and technical support. For discussion, see Boccuzzi (2016).

25 The EBA; European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA).

26 i.e., the committees conceived under the Lamfalussy Project. The EBA replaces the CEBS; EIOPA replaces CEIOPS, and ESMA replaces the CESR.

27 See e.g., Boccuzzi (2016); Haentjens & de Gioia Carabellese (2020).

28 The creation of the BU was tabled at the Euro Area Summit of 29 June 2012 and entered into force on 4 November 2014. For discussion, see Gortsos (2019).

29 Barroso, (2012).

30 Elliot (2012), p. 6.

31 i.e., Banking Union’s first pillar. The SSM — Regulation no. 1024/2013 of 15 October 2013 — sets the transition from the traditional principles of coordination between national authorities to a centralisation of supervisory functions for the Eurozone. For discussion, see Boccuzzi (2016).

32 i.e., Banking Union’s second pillar, comprising the Single Resolution Fund (SRF).

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scheme which should lead to a European Deposit Insurance and Resolution Authority (EDIRA)³³. Its participation is compulsory to the SSM Member States³⁴, i.e., the jurisdictions that use the Euro currency; moreover, the BU also aims at adopting cooperation arrangements with the non-Euro area countries by establishing Memoranda of Understandings (MoUs)³⁵ setting out how they will cooperate on supervisory matters.

In front of such a drastic reform, it is evident that the new European banking supervisory landscape resulted in a readjustment in particular of the EBA. At any rate, the European Commission clarified that the EBA’s role would be preserved as the supervisory tasks acquired by the SSM/ECB would stem from the national level³⁶.

Figure 1. Important moments for Banking Regulation and Supervision in the EU

Source: Original

33 i.e., Banking Union’s third pillar still not achieved.

34 Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain.

35 ECB/2014/5.

36 Heims (2018).

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1.2. EU Agencification process – Is there an EBA case?

Summary

The Agencification phenomenon dates to the 1970s. In line with the extant literature, three waves of agency foundation are recognised at the EU level – from 1975 onwards, between 1990 and 1999, and the third one from 2000 to the present day.

Albeit not recently deployed, the Agencification process within the EU stage has only recently proliferated³⁷. The EU’s recent stance towards this old phenomenon is indulged under the guises of the Member States’ reluctance to transfer executive competencies to the Commission and the need to ramp up the EU’s regulatory capacity.

In recent years, we have been witnessing EU specialised agencies becoming the desired structure to alleviate the gap in the EU’s regulatory framework and, in fact, the Commission, Council, and European Parliament have entrusted supranational agencies with more extensive market supervision powers³⁸. Additionally, national regulators appear to support the EU Agencification process and appreciate the benefits attached to it.

There is growing consensus that EU agencies strive to create a level playing field among all concerned parties in order to assuage any form of political influence in the decision-making process³⁹ and achieve a ‘fair and symmetric distribution of the costs and benefits of deregulation for the participating national systems⁴⁰’. For this purpose, agencies play an indispensable role in negotiating and balancing conflicting preferences, which is complemented by the expertise provided by these (quasi-)autonomous decentralised bodies endowed with legal personality⁴¹ in preparing and adopting technical decisions to enhance market supervision. Thus, some schools of thought contend that one of the objectives of EU agencies is of achieving the ‘de- politicisation’⁴² of European policies.

The advent of the ESAs in 2010 is perceived as the preliminary step in the Agencification of the financial sector⁴³, and some scholars believe that these Agencies have enhanced features and bear superior systemic importance as a by-product of a real crisis⁴⁴.

37 See Egeberg & Trondal (2017); Busuioc et al. (2012).

38 Van Cleynenbreugel (2014a); Heims (2018).

39 Beroš (2018), p. 4.

40 Dragomir (2010), p. 33.

41 Articles 1 and 5 of Regulation (EU) No 1093/2010. See Beroš (2018); Busuioc (2013). According to Busuioc (2010), p. 88, ‘regardless of which perspective one adheres to, the fact is that these bodies have real power, and their opinions and decisions can have a direct impact on individuals, regulators, and member states’.

42 i.e., tasks that previously were within MSs sovereignty are now delegated to independent agencies. See Ruffing (2015).

43 Beroš (2018

44 See Botopoulos (2020). According to the author, the ESAs integrate a fourth wave of the EU’s Agencification phenomenon.

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Whereas its predecessors have proven to be inefficient in coping with times of economic turmoil, the newly established agencies had the occasion to prove to be better suited to the needs of the single market in terms of financial services and the development of regulatory centralised policies⁴⁵. European agencies are therefore a superior arrangement⁴⁶ to comitology because they reconcile horizontal networking of national actors with a greater vertical centralisation⁴⁷ laid down by their founding regulations. Although the EU Treaty framework does not provide an explicit base for EU agencies, it does set out minimum guarantees of legal protection against their acts⁴⁸.

Nevertheless, although the ESAs are regarded by the state of the art, some scholars put into question the abovementioned considerations, on the basis that the ESAs operate within a rather complex legal framework and there are some institutional limitations, such as the Meroni Doctrine that thwarts the delegation of discretionary powers to agencies. Moreover, the agencies’ interaction with high-level officials of National Competent Authorities (NCAs) makes them vulnerable to potential political bias. In chapter V, Section 1, we provide a clearer picture of the EBA’s shortcomings addressed in the extant literature.

2. EBA’s Edification

2.1. EBA’s legal mandate

The EBA is a specialised EU agency established to achieve a more comprehensive approach to banking supervision across the European Union. Furthermore, the EBA acts as the backbone of a solid and transparent single market for EU banking, as it renders the ‘regulatory framework for the integrity and efficiency of banking in the EU’ while contributing to financial stability across the Union⁴⁹.

45 Chamon (2016). We also draw attention to the European Commission’s clarification regarding EU agencies:

‘they were created by regulation in order to perform tasks clearly specified in their constituent Acts, all have legal personality and all have a certain degree of organisational and financial autonomy.’ In the same document, one can read the distinction made between executive and regulatory agencies. See also European Commission (2002), pp. 3-4.

46 We read in Boyer & Ponce (2011), p. 162.: ‘We find that the separation of supervisory powers into different agencies is the superior arrangement.’

47 Which entails a more formal administrative nature and better perception of the agencies’ mandate, objective and tasks, and organisational structure. See Groenleer (2009).

48 Note that Article 298(1) TFUE states that ‘in carrying out their mission the institutions, bodies, offices and agencies of the Union shall have the support of an open, efficient and independent European administration’. Under Article 263 TFEU, the acts issued by EU agencies intended to produce legal effects vis-à-vis third parties are subject to review by the Court of Justice of the European Union (the ‘CJEU’) in terms of their legality. See Gortsos & Lagaria (2020).

49 EBA (2016), p. 3.

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The absence of consistent banking regulation lato sensu in the EU was one of the main issues⁵⁰ that prompted the EU legislator to introduce the EBA as a new actor in the EU banking sector. As a proper EU agency with its own legal personality, the EBA’s underlying legal basis is provided by Article 114 of the Treaty on the Functioning of the EU (TFEU)⁵¹, building upon the grounds of its institutional predecessor, the CEBS.

This new Agency promised to transform the governance of the internal market for banking and prove to be a core element in European prudential policymaking, while ensuring a thorough implementation of prudential rules by NCAs. In this light, the EBA plays a key role in contributing to the creation of the Single Rulebook⁵² in banking whose objective is to provide a single set of harmonised prudential rules (i.e. a common regulatory framework) for financial institutions to be applied in all Member States (MSs), allowing to move towards a

‘more Europe’ setting. Thus, the EBA carries out an emphasised supervisory convergence mandate across the internal market laid down in Articles 1(5)(g) of EBA’s Founding Regulation⁵³ and 107 of the Capital Requirements Directive (CRD)⁵⁴. It is extremely important to stress that while the Authority acts in the interest of the Union as a whole, it also takes into account the multiple interests of the MSs, as well as the heterogeneousness of their financial structures⁵⁵, which is vital in assessing risks and vulnerabilities in the EU banking sector.

The ESAs Founding Regulations clarify that strengthening the financial integration project is not their sole objective, thus the EBA’s tasks are not limited solely to the creation of the Single Rulebook. Despite being a relatively small EU agency, with around 222 staff members⁵⁶, the EBA’s duties are of utmost importance to meet the recommendations

50 The main problems identified were the lack of a consistent set of rules and supervisory practices among national authorities. See Ortino (2017).

51 Recital 17 of the EBA’s Founding Regulations provides that the Authority should be established on the basis of Article 114 TFEU.

52 Introduced by the De Larosière Report which advocated for central regulation – local supervision. The Single Rulebook is often described as maximum harmonisation, so national law would not exceed the terms of the legislation. The Single Rulebook dwells on prudential requirements (CRD, CRR), banking resolution (BRRD), deposit guarantee schemes (DGSD). The EBA plays a core role in building the Single Rulebook by issuing binding Technical Standards in view of completing the implementation of the abovementioned legislative diplomas. Babis (2019); Conac (2021); Boccuzzi (2016). According to Levi (2013), one of the reasons to favour a Single Rulebook relates to the ‘financial trilemma’, concerning the impossibility of coordinating financial stability, financial integration, and independent financial supervision. As financial stability is a public good and financial integration is paramount in a globalised era, placing financial policies in the EU’s umbrella is the option chosen in order to preserve the other two principles. To do so, it is extremely important to guarantee the convergence of financial policies and the existence of a Single Rulebook helps in achieving the aforementioned by removing a large number of national options and discretions.

53 Regulation (EU) No 1093/2010.

54 Directive 2013/36/EU.

55 See Recital 11, EBA’s Founding Regulation.

56 EBA (2022a).

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advanced by the BCBS and transpose those into EU legislation, as well as attaining its ultimate goal - maintain the safety and soundness of the banking system and its financial stability throughout the EU, while ensuring effective and consistent prudential regulation and supervision in the internal market.

In pursuit of this goal, the EBA has been subjected to an enlargement in its remit of tasks⁵⁷. Whereas its main sphere of action is prudential regulation and supervision, the EBA has outstripped its capacity to cover other areas such as recovery and resolution plans⁵⁸. In general, the EBA performs essentially within two main dimensions: i. production of regulatory instruments (technical standards, guidelines, and recommendations)⁵⁹, and ii.

oversight (interpretation of the Single Rulebook, coordination of stress tests, participation in supervisory/resolution colleges, investigation of areas of possible supervisory non- compliance⁶⁰, mediation of cross-border supervisory disputes, and formal intervention⁶¹).

2.2. EBA’s tasks and powers

A specialised body such as the EBA has been entrusted with extraordinary tasks and powers⁶² that were not granted to its ancestor⁶³, in order to reach the best possible supervisory decisions for cross-border financial institutions and ensure that the remedy to problems at the EU level is not addressed through national solutions⁶⁴. According to Article 8 of its Founding Regulation, the EBA has to contribute to the ‘establishment of high-quality common regulatory and supervisory standards and practices’⁶⁵, that is, advancing the Single Rulebook⁶⁶, while developing important work on other fronts.

Albeit the day-to-day supervision of banks remains under the auspices of the national supervisors, the EBA has been assigned a myriad of functions and tasks in banking supervision. It should be noted, however, that the EBA’s role has suffered a slight shift at

57 Mügge (2014).

58 Articles 25, 26, and 27, EBA’s Founding Regulation.

59 For discussion, see Ferran & Babis (2013). See Recitals 11 and 42, EBA’s Founding Regulation. The EBA provides its views on supervisory and regulatory matters to EU institutions and national authorities. This includes technical advice which the EBA provides to the Commission on level 1 legislation, via legally binding regulatory/implementing TSs (level 2 legislation). These delegated acts provide additional detail on certain legislative aspects and ensure that the work of EU policymakers is informed by expert technical advice.

60 Article 17(2), EBA’s Founding Regulation. See also Recital 28, EBA’s Founding Regulation.

61 Articles 19(3), 21(4) EBA’s Founding Regulation. See also EBA/DC/2020/313.

62 See Articles 8 to 39, EBA’s Founding Regulation.

63 According to Gortsos & Lagaria (2020), CEBS were merely advisory bodies (a network of national authorities). See also Gortsos (2016).

64 Masciandaro et al. (2011).

65 Article 8(1)(a), EBA’s Founding Regulation. See also Articles 10–16 and 34, EBA’s Founding Regulation.

66 Articles 10–16, EBA’s Founding Regulation.

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the establishment of the SSM by means of Council Regulation (EU) No 1024/2013 of 15 October 2013 (the ‘SSMR’), which conferred specific supervisory tasks over credit institutions upon the ECB by activating the provision of Article 127(6) TFEU⁶⁷. In this respect, the EBA’s regulation suffered some amendments⁶⁸ in order to bring the EBA’s functions in line with the ECB’s exclusive competence as supervisory authority over (systemically) significant credit institutions⁶⁹. Notwithstanding the amendment of some of the EBA’s tasks, the Agency did not lose momentum⁷⁰ and was equally tasked with new attributes, namely powers to promote convergence of the Supervisory Review and Evaluation Process (SREP)⁷¹.

As previously remarked, when advancing its mission of building a Single Rulebook and ensuring its smooth application, the EBA carries out important regulatory powers⁷². Articles 10 and 15 of its Founding Regulation specifically state its mandate in working on (binding) technical standards⁷³ — Regulatory Technical Standards (RTS)⁷⁴ and Implementing Technical Standards (ITS)⁷⁵ — in specific areas defined in EU law⁷⁶. By the same token, Article 16 concedes to the EBA the power to issue guidelines and recommendations to be applied by NCAs when adopting individual decisions.

Additionally, the EBA, in pursuit of its mandate of strengthening the supervision of cross- border groups, undertakes a key role in the Colleges of Supervisors⁷⁷, in particular promoting convergence between the Colleges in applying the European rules and ensuring the consistent application of EU law. Colleges are paramount to provide a framework where all interested supervisory parties are able to participate in the decision-making of aspects that regard the group as a whole, through effective joint decision-making procedures⁷⁸ and exchange of supervisory good practices.

67 Gortsos & Lagaria (2020).

68 Regulation (EU) No 1022/2013 introduces minor amendments to the EBA Regulation.

69 The NCAs continue to conduct the direct supervision of less significant institutions subject to the oversight of the ECB within the SSM.

70 See Recital 7 of the SSM Regulation. The role of the EBA remains crucial especially towards those Member States outside the Eurozone.

71 Article 97 of the Directive 2013/36/EU.

72 Articles 10, 15 and 16, EBA’s Founding Regulation.

73 See EBA (2016), p. 14.

74 Article 290 TFEU and Article 10(1) of the EBA’s Founding Regulation.

75 Article 291 TFEU and Article 15(1) of the EBA’s Founding Regulation.

76 It is also noteworthy that the draft technical standards should be technical, strictly delimited by the legislative acts on which they are based and should not imply strategic decisions or policy choices.

77 See Articles 21, 22, and 24, EBA’s Founding Regulation. The EBA promotes the efficiency, effectiveness, and consistent functioning of colleges, although not taking supervisory decisions. The establishment of colleges of supervisors is mandatory under Article 116(1) CRD. Additionally, Article 116(1a) CRD introduced the obligation to establish colleges of supervisors where all the cross-border subsidiaries of an EU parent institution have their head offices in third countries.

78 See Article 113 CRD, Articles 10 and 11 Implementing Regulation (EU) No 710/2014.

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The EBA’s efforts within the Colleges of Supervisors⁷⁹ go way beyond bringing home and host supervisors together. It strives for approximating supervisory practices through its Single Rulebook and Guidelines in such a way that joint decisions come across⁸⁰. To that end, the EBA has compiled the so-called European Supervisory Handbook⁸¹ that appoints guidelines on the joint supervision of cross-border banks and sets out non-binding supervisory best practices for methodologies and processes intended to ensure convergence throughout the EU.

Although the current colleges’ framework has tasked the SSM/ECB with the direct supervision of the largest banks in the Eurozone and the smaller and less significant banking groups continue to be supervised by national supervisors under the general oversight of the ECB, the EBA remains instrumental in fostering cooperation and ensuring converging practices between the Eurozone and the non-Eurozone countries, especially in regard to the colleges’ legal deliverables laid down by CRD and BRRD⁸²:

i. written cooperation and coordination agreement (WCCA)⁸³, ii. group risk assessment⁸⁴,

iii. group liquidity assessment⁸⁵,

iv. joint decision on capital and liquidity⁸⁶, and

v. joint decision on the assessment of group recovery plans⁸⁷.

79 The EBA fosters the BCBS’s definition of Colleges of Supervisors as permanent, although flexible, coordination structures that bring together regulatory authorities involved in the supervision of a banking group. BIS (2014), p. 1. The EBA’s staff is tasked with participating in the colleges’ interactions with the colleges selected for close monitoring and keeping close contact with the indirectly monitored colleges. In the past, the EBA would focus on supervising the largest banking groups. According to the EBA’s Report on Convergence of Supervisory Practices in 2021 (EBA/REP/2022/10), the 2021-2023 college-monitoring approach introduced adjustments in the selection of closely monitored colleges in order to include a more diverse group of colleges (in terms of business model, origin, geographical spread and size) and maximise the benefits of the EBA’s presence in colleges. The exclusive focus on large, systemic banking groups shifted to accommodate smaller institutions with cross-border presence in the EU and potentially onboarding investment firms and IPU (Intermediate EU Parent Undertaking) colleges.

80 Boccuzzi (2016); Heims (2018).

81 Article 29(2), EBA’s Founding Regulation. The Single Supervisory Handbook is a modular based (periodically updated) product developed by the EBA in consultation with competent authorities to promote best practices in supervisory processes and methodologies across the Union. Each module covers a different area of supervisory practice, as identified by a steering committee under the guidance of the BoS. While not legally binding, CAs are expected to apply the Handbook. Application of the Handbook will be considered as a significant element in the assessment of the convergence of supervisory practices conducted by the EBA.

82 i.e. Bank Resolution and Recovery Directive.

83 Article 115(1) CRD.

84 Article 6 ITS.

85 See supra note.

86 Article 113(1)(2) CRD. See also Implementing Regulation (EU) No 710/2014.

87 Articles 6(2) and 8(2) BRRD.

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In addition, the EBA conducts EU-wide assessments (stress tests) of the resilience of financial institutions to adverse market developments⁸⁸ and develops common methodologies for assessing the financial position of institutions; coordinates the national supervisors’ response in times of duress by making use of its power to act in emergency situations⁸⁹, as well as mediate and settle disputes between NCAs⁹⁰, and promote transparency and fairness for consumers of financial products or services in the internal market⁹¹. Other regarded functions of the EBA consist of making provisions for a common supervisory culture among NCAs⁹² and consistent supervisory practices via common training programmes; interacting with international organisations and third countries (e.g. within the Colleges of Supervisors), especially on technical issues; keeping close cooperation with the ESRB by providing the necessary information⁹³; fostering depositor and investor protection, by contributing to strengthening the European system of deposit guarantee schemes⁹⁴; assisting the Commission when preparing equivalence decisions of third-country supervisory regimes, and investigating cases of non-application of sectoral legislation by Competent Authorities or application in a way which appears to be in breach of Union Law (BUL)⁹⁵.

3. Practical framework

3.1. Overview

In the preceding sections, we have shed light on the EBA’s legal mandates and specific nature in reference to its role in the sphere of European banking supervision and regulation. We now dwell on the specifics of the traineeship carried out at the Agency, in Paris⁹⁶.

The EBA launches a call for applications for the Traineeship Programme on a yearly basis with the aim to inter alia provide recent graduates with ‘a unique and first-hand experience of the workings of the EBA, an understanding of the objectives including goals of financial regulation and oversight generally, and specifically of the objectives of the EBA’⁹⁷.

88 Article 32, EBA’s Founding Regulation. See also EBA (2016), p. 6.

89 Article 18(3), EBA’s Founding Regulation. For discussion, see Gortsos (2020).

90 This refers to the EBA’s so-called binding mediation power. See Articles 19(3) and 31(c), EBA’s Founding Regulation.

91 Article 9(1), EBA’s Founding Regulation.

92 Article 29, EBA’s Founding Regulation. See Gortsos (2011); Dragomir (2010).

93 Article 36, EBA’s Founding Regulation.

94 Article 26, EBA’s Founding Regulation.

95 See Article 17(3)(6), EBAs’ Founding Regulations and Article 258 TFUE. See also EBA/DC/2020/312.

96 Please note that stemming from the COVID-19 sanitary crisis, the first two months of the Traineeship were held remotely. The remaining time at the EBA was held on-site.

97 See EBA/DC/455.

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For the scope of this Report, we focus on the vacancy notice available for the Prudential Regulation and Supervisory Policy (PRSP) Department whose work concerns the prudential requirements for credit institutions. The one-year traineeship⁹⁸ took place at the PRSP Department and more specifically within the Supervisory Review, Recovery and Resolution (SuRRR) Unit⁹⁹.

In the first instance, the mentor and Head of Unit have established with the trainee the main objectives of the traineeship, in particular, expanding the trainee’s horizon and acquaintance with the EBA’s mandates and relevant primary tasks in the areas of supervisory/resolution colleges and convergence¹⁰⁰.

3.2. Traineeship at the EBA – tasks performed

Under the scope of the SuRRR Unit’s work and endeavours on Colleges and Convergence, there were assigned duties on:

i. the monitoring of the (supervisory and resolution) colleges indirectly monitored by the EBA, including the management of the EBA Colleges functional mailbox in use to connect with supervisors, banks, and other EU peers. This task consisted of managing the incoming messages and analysing their content in order to flag them for immediate reaction and correctly store them;

ii. the information collection directed to the indirectly monitored colleges, carried out in 2021 Q3, via a self-assessment template;

iii. the preparatory tasks of the 2021 Convergence Report on supervisory practices for the designated year and the implementation of the 2021 Convergence Plan¹⁰¹;

98 From 1^st July 2021 to 30^th June 2022. However, this report will focus solely on the first 6 months.

99 The SuRRR Unit contributes to the i. preparation of supervisory and resolution colleges; ii. preparation of policy instruments or report in the area of ongoing supervision, governance and resolution, and iii. other recovery and resolution-related activities.

100 On its convergence mandate, the EBA follows-up on the key topics for supervisory attention as included in the annual ESEP (European Supervisory Examination Programme), formerly Convergence Plan, as well as monitoring the extent to which supervisory practices are converging and facilitating the sharing of supervisory best practices. Thus, the EBA prepares overall assessment of the degree of convergence of supervisory practices, which will be fed into the so-called Report on Convergence of Supervisory Practices, prepared in accordance with Article 107 of the CRD. In line with its legal mandate of enhancing supervisory convergence across the internal market, the EBA summarises in the Report the main takeaways in terms of supervisory convergence in the previous cycle and the most important remarks on the supervisory developments observed.

101 See EBA/REP/2022/10, p. 7.

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iv. the work on the 2022 ESEP, in particular, the preparatory work in reference to the key topics/objective elements set forth for supervisory attention and implementation;

v. the administrative tasks on colleges under the Unit’s remit, namely the submission of contributions to the EBA’s Management Board (MB), and

vi. tasks concerning the resolution colleges and convergence.

Considering the workload of the SuRRR’s Unit, the tasks effectively carried out were adjusted to the needs of the Unit, also bearing in mind that the traineeship’s timespan was extended by six months¹⁰². Ultimately, there was the occasion to contribute to more demanding tasks envisioned by the EBA 2021 Consolidated Annual Activity Report¹⁰³ putting forward the ‘EBA’s multi-annual objectives for 2021-2023’¹⁰⁴, which shapes the tasks assigned to the Department and Unit.

The tasks undertaken focused primarily on the EBA’s supervisory colleges and convergence mandates, as anticipated at the beginning of the traineeship. In addition to the tasks and duties described above in the areas of Colleges and Convergence, the trainee was also designated to:

i. Elaborate horizontal reviews, deep-dives, and comprehensive analysis on the EBA’s closely monitored colleges’¹⁰⁵ legal deliverables, such as SREP reports, group recovery plans (GRPs), joint decisions on capital and liquidity, and WCCAs. These tasks required to apply in practice the relevant regulations¹⁰⁶ and identify any potential gaps to report to the consolidating supervisors¹⁰⁷, in order to ensure the sound implementation of supervisory practices and standards within the closely monitored colleges;

ii. Design and update the templates used for collecting consistent information on colleges (e.g., regulatory deliverables);

iii. Elaborate a questionnaire on the Effectiveness and Efficiency of supervisory colleges, making use of the EU Survey Tool, as well as the respective report to be presented at the

102 In December 2021, the traineeship contract was renovated for 6 additional months, bringing the end of term to June 2022.

103 EBA/Rep/2022/13.

104 EBA/Rep/2022/13, p. 8.

105 The EBA closely monitors 9 banking groups colleges, designated for a 3-year timespan (2021-2023).

106 E.g., Commission Implementing Regulation (EU) 2016/99; Commission Delegated Regulation (EU) 2016/98; Commission Implementing Regulation (EU) No 710/2014 ; EBA/GL/2018/03.

107 The consolidating supervisor (generally the home supervisor) is the authority responsible for supervision on a consolidated basis, given specific powers to coordinate the supervision of cross-border groups.

Traineeship Report at the European Banking Authority – A critical assessment of the EBA’s stance on its 10 years of activity