Contribution to the economy and society

While always of immense importance to national and international financial stability, banking regulation and supervision (and issues surrounding bank recovery and resolution) have become issues of considerable political salience and even public protest — especially, since the outbreak of the international financial crisis in 2007. Rapidly deteriorating EU-wide banking stability underscored the need to replace divergent (and often biased) national regulatory and supervisory approaches to the supervision of credit institutions and level the playing field for credit institutions in order to restore lost confidence. This interplay can be captured by a ‘supervisory policies trilemma’, which suggests that there is a trade-off between promoting EU-wide banking stability, ensuring a level playing field to credit institutions and maintaining divergent (national) approaches to supervision. The optimal institutional design of bank supervision in order to diminish inevitable financial instability is at the supranational level. However, distinct national practices — rooted in distinct institutional (and legal) frameworks, banking systems and supervisory cultures — have continued.

Despite its obvious importance, banking regulation and supervision remain largely obscure topics to the public in the European Union. A study of the operation of EU and specifically Banking Union supervisory frameworks, and pressures to converge national supervisory practices is now needed — even if both the ESFS and the SSM are in their infancy. Furthermore, a clear overview of ongoing divergence is needed especially given that this divergence can have a deleterious impact on both the single market, the credible operation of the ESFS (EBA) and SSM (ECB) supervision and the Single Resolution Mechanism — i.e., when EU funds are called upon to resolve failing banks in euro area member states.

Home to a large number of subsidiaries of EU and internationally headquartered banks, Luxembourg is particularly concerned about the effects of financial instability elsewhere in the EU. Large cross-border banks are of concern (those subject to ECB supervision) but so to are the smaller subsidiaries of bigger banks that will continue to be subject to direct Luxembourg NCA (CSSF) supervision. The massive size of the Luxembourg banking system to GDP (the highest in the EU and one of the highest on the planet) further demonstrates the immense importance of effective EU / Banking Union level supervision to the country, the dangers of excessive divergence in national supervisory practice and, more generally, financial stability to the Grand Duchy’s economy. At the same time, the maintenance of a certain margin of manœuvre in the operation of national-level supervision remains of potential interest to Luxembourg (and other national) authorities.