The best way to avoid these potential conflicts and provide the new eurozone supervisor with proper incentives is to gradually move deposit insurance and resolution to the eurozone level as well, thus ensuring eventually the needed alignment of responsibilities. A gradual introduction would ensure that both national and EU-level authorities have ‘a skin in the game’ during the transition.
In the US, a two-tier system emerged with banks chartered at the state or federal level. In the end the smaller, state-chartered banks became less and less important. This analogy suggests a compromise: groups of smaller banks with their own mutual guarantee system (e.g. savings or mutual banks) might not fall under the direct supervision of the ECB, with national supervisors, who have a better local knowledge, remaining responsible for the day-to-day supervision of these banks.
However, a large group of small banks with a similar business model can also represent a danger for systemic stability. This implies that, the national supervisors would remain responsible towards the ECB for the systemic stability of these groups of banks and that the ECB should be given the right to require all the information required to assess the stability of these groups.
The debate about Banking Union is running into the typical chicken-and-egg problem; Most academic observers agree that deposit guarantee and resolution should be organised at the same level as supervision. But at present only the creation of a ‘Single Supervisory Mechanism’ to be headed by the ECB is being discussed; with deposit insurance and resolution to be considered only later when this SSM has shown its effectiveness.
We argue that the SSM is unlikely to be working well unless a European Deposit Insurance and Resolution Agency is introduced gradually at the same time.
Read more: Why Europe's bank supervisor is hamstrung | Daniel Gros & Dirk Schoenmaker, VoxEU | Commentary | Business Spectator
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