Institutional Independence, Concentration of Powers and Administrative Changes at the European Central Bank

This paper aims to examine some significant implications of the new European single banking supervision for the economics of banking and the market of financial services. It is one of the three pillars of the European Banking Union architecture, as part of a longer-term vision for further economic and monetary integration in EU. The new supervisory mechanisms implies a huge and complex transfer of powers from national authorities to the European Central Bank. It aims to ensure the safety and soundness of the European banking system, to increase financial integration and stability, and to permit consistent supervision. Banks are being held to common supervisory standards. The structure of this paper is as follows. Section 1 introduces the paper and outlines the general context of the study. Section 2 analyzes some organizational and regulatory issues of the single supervisory scheme. Section 3 examines the comprehensive assessment of the main banks performed by the European Central Bank together with the national supervisors. Section 4 discusses the implications of the single supervisory mechanism for banks' business models and management, and explores some of the challenges likely to be faced by the supervised banks. This section also sheds some lights on relevant drawbacks of the single prudential supervisory approach. Section 5 concludes.

This chapter discusses the institutional aspects governing the systems and mechanisms participated in by the European Central Bank (ECB) and the national central banks (NCBs). The first section elaborates on the composition and legal nature of the European System of Central Banks (ESCB) and the Eurosystem, the objectives, tasks and financial provisions of the ESCB, as well as the role of national central banks therein. The second section presents (in more detail than in Chap. 4) the Single Supervisory Mechanism (SSM), with an emphasis on its two components, while the third briefly discusses the Single Resolution Mechanism (in particular with regard to aspects of relevance to the ECB) and, then the fourth analyses the two components of the European System of Financial Supervision (ESFS), that is the European Banking Authority (EBA) and the European Systemic Risk Board, with specific reference to the SSM as part thereof. Appendix of this chapter contains an analysis of the role of the EBA in the making of European banking (and, in general, financial) law.

This chapter considers Article 123 TFEU as a cornerstone of the systems of economic and monetary governance in the Union. It discusses how Article 123 TFEU lays down a prohibition on monetary financing, which is intended to contribute to the independence of the central banks that make up the European System of Central Banks (ESCB). It also analyzes the prohibition on monetary financing that ensures price stability and could be jeopardized if it were possible to monetize deficits with the consequent inflation of money in circulation. The chapter features the ban on monetary financing in Article 123(1) TFEU that has the European Central Bank (ECB) and national central banks (NCBs) that are barred from granting overdraft facilities or other types of credit facilities to the Member State (MS) or to the Union. It highlights how the ECB and NCBs can purchase government bonds on the secondary market.

The EU ratification of the Paris Agreement initiated extensive political and legislative activities within the EU to reach agreed climate objectives. The declaration of the climate crisis, the publication of the European Green Deal, and the obligation to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels created the foundations for establishing an ambitious climate legal framework at the EU level. At the center of that legal framework is the European Climate Law, which obliges the EU to achieve climate neutrality by 2050. Completing the set goals requires a strong climate transition, which includes, among other actions, a change to a low-carbon economy. At the EU level, the obligation to fulfill the goals of the Paris Agreement and the related goals of the European Climate Law is primarily on the institutions of executive and legislative power that have the democratic legitimacy to act actively to achieve climate neutrality. However, the international agreements concluded by the EU (including the Paris Agreement) are binding upon all EU institutions, i.e., the European Central Bank, as explicitly prescribed in the TFEU. The European Central Bank, simply put, represents the supranational central bank of the eurozone. With regard to its legal nature, the European Central Bank is often defined as an EU institution sui generis, which reflects its unique position given by the TFEU and the Statute of the ESCB and the ECB. Apart from the fact that the European Central Bank has a legal personality and regulatory powers and that its financial resources are separated from those of the EU, the ECB’s unique position derives from the fact that the TFEU strictly limits its legal mandate. The primary mandate of the European Central Bank is to maintain price stability within the eurozone. The secondary mandate of the European Central Bank is to support, without prejudice to its price stability objective, the general economic policies in the EU, with a view to contributing to the achievement of the objectives of the EU, including a high level of protection and improvement of the quality of the environment. Considering its strictly prescribed goals, addressing the climate objectives could contradict the European Central Bank’s legal mandate. Even though the European Central Bank has already decided to take into consideration climate- related objectives, there is still an ongoing debate in academic and central banks’ circles whether the European Central Bank could or must address climate objectives in its activities or, following the rule of law principle, is precluded in doing so. This paper aims to contribute to this debate by giving the legal perspective of the European Central Bank’s price stability mandate and its secondary mandate, as well as their relation to EU climate objectives.

In a highly controversial decision, the German Federal Constitutional Court (FCC) decided that the Public Sector Purchase Program (PSPP) of the European Central Bank (ECB) was ultra vires because it violated the principle of proportionality. The FCC took a procedural approach to proportionality, finding that the ECB had failed to substantiate its balancing assessment. Therefore, the Court considered itself unable to review whether PSPP was substantively proportionate, but announced that it might do so in a future case. The judgment raises the fundamental question of how courts should review monetary policy. The article begins by exploring the role of central banks between independence and accountability. Then, it analyzes, in three steps, what role the principle of proportionality should play in the realm of monetary policy. First, I argue that a traditional substantive balancing test as part of proportionality review is not applicable to monetary policy decisions and highlight the pitfalls of the FCC’s approach. Second, I claim that the imposed procedural “duty to substantiate” is not suitable to promote the democratic accountability of the ECB. Third, I contend that, therefore, the PSPP ruling creates an impetus for strengthening the ECB’s supranational accountability. I suggest that improving the monetary dialogue with the EU Parliament and establishing a comprehensive transparency regime for the ECB could further this goal. Ultimately, I propose that a narrow reading of the PSPP ruling could reconcile the current conflict between the FCC and the ECB and still provide a sufficient level of judicial accountability for the ECB’s monetary policy-making.

This chapter explores the judicial accountability of the European Central Bank (ECB). Has judicial control kept pace with the evolution of its functions? The euro-area crisis, in the fight against which the ECB assumed a dominant role, and the advent of Banking Union have had a transformative effect on the ECB’s mandate. Is judicial scrutiny a reliable form of accountability? How has the Court of Justice responded? The chapter engages with the rationale for judicial review of central bank decisions, discusses the distinction between economic and monetary policy, and reflects on the role of proportionality. It also looks at the standard of review and the application of process requirements by the Court of Justice. It then examines the new litigation landscape of prudential supervision focusing on composite procedures, the application of national law by the ECB, and litigation on the imposition of fines. It finds that, thus far, judicial control has kept pace with the evolution of the ECB’s functional transformation although the ECB remains part of a governance framework that suffers from an undue level of uncertainty and the greatest challenges are perhaps still to come.

In recent years, the European Central Bank (ECB) has integrated climate considerations into its policy framework. This paper assesses whether the ECB’s approach adequately responds to the challenges posed by the climate crisis. I identify three transformative implications of the climate crisis for the ECB: (i) the diminishing effectiveness of traditional monetary policy tools in controlling inflation; (ii) the growing necessity for the ECB to actively support decarbonisation in line with the EU’s net-zero targets; and (iii) the insufficiency of traditional risk exposure approaches to address financial instability arising from physical climate risks. I examine the extent to which these implications are reflected in the ECB’s climate actions and plans, arguing that a significant gap exists between the ECB’s ‘tinkering around the edges’ approach and the systemic transformation of central banking required in the climate crisis era. Drawing on post-Keynesian and critical macro-finance perspectives, I develop the theoretical foundations of a climate-aligned central banking paradigm and explore its implications for the ECB’s policy toolbox and mandate.

Trust in the Central Bank and Inflation Expectations

The economic and financial crisis, especially the sovereign debt crisis, discovered many deficiencies and weaknesses in the banking sector in the European Union (EU). The need for special surveillance and supervision of cross-border banking cooperation and termination of the toxic link between sovereign debt and banking sector have accelerated the process of forming and establishing a Banking Union (BU). An integrated financial framework has been established in which the European Central Bank (ECB) through the Single Supervisory Mechanism (SSM) has a key role and the responsibility for the overall supervision of the banking sector of the euro zone. The Single Resolution Mechanism (SRM) and schemes of the Single Deposit Guarantee Mechanism (SDGM) are under the national supervisory authorities while the European Banking Authority (EBA) is responsible for developing the Single Rules. From the new architecture is expected the preservation of the single market and a common currency, breaking “toxic connections” between sovereign debt and banks, mitigation and removal of financial instability and economic growth. The research shows that the BU together with the ECB in a certain sense, also contributes to the normalization of credit and financial conditions in the single mark. Estimates through SSM, conducted by the ECB and the EBA, during, 2014 and 2015 on 107 banks in 21 countries indicate progress toward solvency and resilience of the banking system of the euro area. Despite some initial success the entire project BU seems to have missed on opportunities, resulted in late reactions, and was too complex to be feasible. The political will of national governments to give up sovereignty over its banking sector and transfer competencies to the supranational institutions is a key factor in the success or failure of a BU. It seems so but past experience indicates that there is no political willingness to solve problems. Mainly most of the government avoids cleaning a hidden “skeleton in closets” due to lack of means for recapitalization while some are trying for loans from the ECB to help their banks. The ECB plays a key oversight role at the EU level and has too much power, which can cause risks caused by conflicting goals. The ECB is losing the role of the final refuge of liquidity, which is the main disadvantage of a BU. The SSM is susceptible to criticism due to difficulty in operation because of slow incorporation of European legislation into national law. Slow implementation carries risks of fragmentation of the market, regardless of the responsibility of the ECB. The financial capacity of the temporary agreement with the SRM is insufficient in solving the crisis of more banks while procedural application is complex and time-consuming. Planned backstop with a centralized resource is a resolution that is insufficient for solving the failure of big systemic banks, which are too big to bail. The heterogeneity of the existing Deposit Guarantee Schemes (DGS) and the banking systems of the member states of the euro zone caused controversy in terms of setting of common insurance schemes. The procedures for the recovery and resolution of critical banks are problematic.

On June 1, 2018, the European Central Bank (ECB) celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB's monetary policy over these two decades. The first section gives a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases "conditioning" ECB monetary policy. We describe the monetary policy decisions from the ECB's perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key, critical issues that were the subject of debate. The second section contains various assessments. We analyze the achievement of the price stability mandate and developments in the ECB's credibility, and we also investigate the ECB's interest rate decisions through the lens of a simple empirical interest rate reaction function. Finally, we present the ECB's framework for thinking about nonstandard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how the ECB utilized its monetary policy to respond to the challenges posed by the European twin financial and sovereign debt crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary, and developing the strategic underpinnings of its policy framework.

Over the years, the European Central Bank (ECB) has taken on new tasks in response to fresh challenges, and its mandate has been interpreted in novel ways. This broader role for the ECB – whether it translates into a novel interpretation of its mandate, the creation of a new form of public money, more complex and discretionary decision-making, or the conferral of new tasks – has brought greater scrutiny onto the ECB. This introduction and the contributions to this special issue focus squarely on the “new” or “modern” ECB. They examine its accountability across the range of tasks that it nowadays carries out, including its interinstitutional relationships with other actors in this area. Although the ECB has assumed a broader role than the one envisaged at the time of its creation, its accountability framework, which is by and large hardwired into the Treaties, has remained unchanged. It is argued that the expansion of the ECB’s role and tasks must be accompanied by robust accountability and transparency arrangements. As the ECB pushes new frontiers in the future, those options to enhance accountability, transparency and legitimacy which are available within the existing Treaty framework should be pursued. This would also ensure that the ECB and other relevant authorities go far enough in meeting their objectives.

A decade ago, the European Central Bank (ECB) became the chief prudential supervisor of euro area's credit institutions. In order to carry out its supervisory tasks, the ECB is, inter alia, competent to apply national legislation transposing directives, including Capital Requirements Directive IV (CRD IV). The ECB is thus the first EU institution with a mandate to apply not only EU law but also national law. This has raised a number of practical and legal-constitutional questions, many of which remain to be answered. The BAWAG PSK v ECB judgment by the General Court offers some new important insights. In particular, it sheds some light on the scope of national law which the ECB is competent to apply, further clarifies the principles of judicial review of ECB decisions based on national law, and indicates the obligations of the ECB in case the national law which it intends to rely on or apply is in conflict with the directive which it (the national law) is supposed to transpose.

Central banks lie at the interface between domestic and international political economy. Powerful technocracies tasked with domestic and international macroeconomic governance functions are responsible for monetary policy, sometimes banking supervision, and to contribute to overall financial stability. On occasion, they supervise a variety of non-banking financial services and other functions, such as anti-money laundering. During economic and financial turmoil, central banks can be crisis managers of last resort, or actually crisis managers of first resort. Today, many central banks often enjoy independence from the political authorities. They are important actors in the international monetary and financial systems acting separately from government actors. Central banks contribute to shaping these systems, and are, in turn, affected by them. Major geopolitical developments pose significant challenges to central banks and thus to the scholars studying them. This forum takes stock of current academic and policy debates on the European Central Bank (ECB) and the euro. Individual contributions explore key aspects of the ECB and the euro: the ECB as an overstretched multi-tasking technocracy, struggling with multiple goals; the distributive effects of ECB’s policies; the ECB as a global normative and policy entrepreneur in combating climate change; and the geopolitics of the euro, in particular, the failed promise of the euro as a leading international currency. Together, these contributions tackle fundamental questions about the past, present, and future of the euro and the ECB; offer contending perspectives on the success (or otherwise) of this experiment; and point out what features would warrant further study. We reflect on how these analyses feed into the broader literature on central banks and international organizations in the global political economy more generally.

We examine public trust in the European Central Bank (ECB) and its determinants using data from the Bundesbank Household Panel survey for Germany.Employing an interdisciplinary approach that integrates insights from political science and psychology, we offer a fresh perspective on the factors influencing central bank trust that is more holistic than the conventional one.Our primary findings can be summarized as follows.Households who state that competence, which we define as the ECB's performance in maintaining stable prices and making decisions grounded in rules, science, and data, matters for their trust in the ECB, tend to express higher trust in the ECB.Conversely, those who place greater importance on values, particularly the integrity of top central bankers, honest communication and broader concern, tend to trust the ECB less.Trust in the ECB also hinges on trust in political institutions more generally and, to a lesser extent, on generalized trust (i.e.trust in others).

This paper analyzes the effectiveness of the foreign exchange market interventions of the European Central Bank (ECB) by studying the information policy of the ECB and examining whether the ECB relied on a specific transmission channel to influence exchange rates. Against the background of a discussion of the transmission channels through which foreign exchange market interventions of central banks may affect exchange rates, we are led to the conclusion that the information policy of the ECB was not in line with the assumptions underlying the transmission channels discussed in the theoretical literature. We argue that this finding could provide a possible explanation for the ineffectiveness of the ECB's foreign exchange market intervention in the fall of 2000.