A European supervisory system: from vision to reality

Speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the colloquium in commemoration of Tommaso Padoa-Schioppa

Frankfurt am Main, 18 December 2020

Ladies and gentlemen,

I am particularly honoured to welcome you to this event we have organised to mark the tenth anniversary of Tommaso Padoa-Schioppa’s passing.

Many of the people gathered to remember him today were close to him during his life, many worked with him here in Frankfurt, in Italy or in many other places in Europe and around the globe and everybody knows his achievements and his legacy.

Like many of you, I have very warm memories of the time spent collaborating with him and consider myself very lucky to have had that extraordinary learning experience. The impressive breadth of his knowledge meant that any interaction with him led to a rich exchange of professional experience on central banking issues, financial services regulation and supervision, as well as European and international matters. But working with Padoa-Schioppa was much more than that. His attitude to civil service as the passionate, relentless pursuit of the public interest has always been, and still is, a source of inspiration for me. His lifelong dedication to the progress of the European project was contagious and created a broader sense of mission, even when drafting the most basic of memos. Very importantly, working with him was fun, and he himself once celebrated the playful nature of work as an important factor enabling us to endure long hours in the office and preparations with the team.

As many personal memories come to mind, today I would like to focus on what I learned from him about policymaking and, in particular, policymaking within the European Union, probably the most complex policymaking process in the whole world.

Padoa-Schioppa had a unique ability to merge strategic vision and tactical capacity to achieve a compromise when it was clear that only a pragmatic approach would allow the whole European project to progress. His natural inclination was to take the “long view” built on a careful assessment of the public interests at stake, supported by both theoretical research and empirical evidence. But he also admired and nurtured the ability to drive incremental progress and, in particular, to use a setback to create the conditions for longer-term progress.

When I thought about this trait of his personality, I was reminded of a brief speech he gave on the 20th anniversary of the death of one of the fathers of European integration, Altiero Spinelli.

It is a very brief speech indeed^[1], delivered when he had just been appointed Italian finance minister, in his last service to his country at a very delicate moment.

In that speech, set against the evocative scenario of the Italian island of Ventotene, where the Manifesto for a Federal Europe had been drafted many years earlier by some political prisoners in a fascist confinement centre, Padoa-Schioppa refers to the distinction between “leaders” and “advisers”. As Padoa-Schioppa recalls in his speech, Spinelli used to say that the “leaders” are those who need to know the limits of what can be achieved at a specific point in time while the “advisers” are responsible for looking ahead and not losing sight of the final objective. Paraphrasing, the “leaders” are the tacticians while the “advisers” are the strategists. The combination of tactical and strategic skills and the alliance between the tacticians (often the politicians) and the advisers (the technical experts) ensures that the final objective is achieved through incremental steps.

To illustrate this point, Padoa-Schioppa refers to Spinelli’s achievements as an “adviser” but also as a “leader”. The ability to merge these two aspects is a quality that only few people have. For instance, he said that in Spinelli’s life the Ventotene Manifesto setting out a federal vision for Europe after the destruction of the Second World War was the work of an “adviser”, just like the Draft Treaty establishing the European Union produced in 1984 by the committee of the European Parliament that Spinelli chaired. Those are the acts of a man who looks at the ultimate goal: a federal Europe.

On the contrary, when, as a result of the first intergovernmental conference, the Single European Act was presented to the European Parliament in 1986 for the final ratification^[2], Spinelli delivered a famous speech in which he likened the Single European Act to the fish in Hemingway’s “The Old Man and the Sea” that reaches the shore almost completely eaten up by other fish. This notwithstanding, even if the Single European Act did not have much flesh left on the bone compared with his own Draft Treaty, Spinelli recommended his fellow parliamentarians to approve it because, as Padoa-Schioppa points out, he acted as a “leader”. He understood that, in that particular moment, if he wanted the integration process to move forward, he needed to compromise and, adopting the reality principle, accept the almost bare bones, in relative terms, of the Single European Act.

Legal and political historians are much more able than I am to assess the significance of the Single European Act for the process of European integration, but I would say that there is a common consensus on the fundamental relevance of that institutional reform. Only a few years after its ratification, also through the agency of the Commission chaired by Jacques Delors, the monumental achievements of the Single Market and the single currency were a reality.

I thought about this masterly, albeit succinct, homage to the work and life of Altiero Spinelli when I had to think about the legacy of Tommaso Padoa-Schioppa and his contribution to building European banking supervision.

In fact, as I have already mentioned, if I have to choose a distinctive feature of his personality, it is precisely this ability to act at the same time, or as the time required, as an “adviser” with a long-term vision and the eyes on the final prize, but also as a “leader” reaching a compromise and accepting it whenever possible in order to advance the project of European integration.

Although his contributions to the European project were numerous – let me mention here his fundamental role as co-rapporteur of the Delors report on Economic and Monetary Union, a quintessential role as “adviser” – nowhere was his ability to act with both a long-term vision and a pragmatic approach more evident than in the sphere of European banking regulation and supervision, which is also the main theme of our colloquium today.

In the long journey towards the centralisation of prudential supervision and the establishment of a Single Supervisory Mechanism in Europe, I have witnessed many times his willingness to compromise as long as the final goal drew closer, as well as his tenacity in advocating the need to centralise prudential banking supervision once monetary policy had been centralised.

In this regard, I would like to draw your attention to the foundational period of the European Central Bank and the drafting of the Maastricht Treaty. It is well known, and there are already many academic analyses of this^[3], that the draft Statute of the European System of Central Banks sent to the EC Presidency by the Committee of Governors in April 1991 also included a direct role in prudential supervision and financial stability as one of the System’s basic tasks. Moreover, in accordance with the draft Statute, the ECB would have been entrusted with the role of the competent prudential authority for a limited number of banks in order to create a pan-European banking sector. As everybody knows, this direct role of the ECB in banking supervision was eventually dropped from the Maastricht Treaty. The ECB was granted, in the end, only an “advisory” and “contributory” role with respect to the policies pursued by the national competent supervisory authorities, without being a competent authority itself.

But, then, that initial clause entrusting the ECB with direct supervisory powers morphed, with the direct intervention of Padoa-Schioppa, into the famous “enabling clause” of what is now Article 127(6) of the Treaty on the Functioning of the European Union, which, as everybody knows, is the legal basis of Regulation (EU) 1024/2013 for the establishment of the Single Supervisory Mechanism. Here we have a perfect example of Padoa-Schioppa acting as a “leader” and proposing a compromise that would pave the way a couple of decades later for the actual centralisation of prudential supervisory powers at the supranational level.

I could provide you with many other examples I witnessed directly of his capacity to blend realism and strategic vision, but let me mention just two other milestones on the path towards the establishment of a truly European system of banking supervision.

The first is his celebrated lecture at the Financial Markets Group of the London School of Economics, and I am very glad to welcome here today Professor Charles Goodhart, who will certainly remember that day fondly.

In that lecture, Padoa-Schioppa accepts that the first battle to establish a European banking supervisor had been lost a few years earlier with the Maastricht Treaty, which had codified the unprecedented separation between the jurisdiction of monetary policy (at the supranational level) and the jurisdiction of banking supervision which remained at the national level. But he immediately proposes an incremental strategy of enhanced cooperation and information sharing between the competent national authorities in order to “allow a sort of euro area collective supervisor to emerge that can act as effectively as if there were a single supervisor”.

I have already noticed elsewhere^[4] that even this approach based on cooperation and coordination “was at the time seen by the [national supervisory authorities] as an “‘imperialistic move”’ or an attempt for a “‘hostile takeover”’ of supervisory tasks on the side of the ECB”, and no significant progress was achieved in that regard in the subsequent years. But it was the unwillingness of national authorities to really cooperate at that stage that made the subsequent centralisation of responsibilities an absolute necessity.

The second aspect I would like to touch upon is the concept of the Single Rulebook that can really be considered Padoa-Schioppa’s brainchild. Again, on this point I have already offered my recollection of the events that led to this seminal proposal.^[5]

In short, when Padoa-Schioppa realised that all the attempts to substantially strengthen supervisory cooperation and entrust the ECB with an effective coordination role in supervisory policies were successfully pushed back by the national authorities, he came to the conclusion that euro area-wide supervision would not become a reality if the regulatory framework remained segmented along national lines. Hence, we prepared here at the ECB an Opinion, which was submitted to the Lamfalussy Committee of Wise Men. In fact, while the specific focus of that Committee was not on banking issues, it was clear that the process for EU rule-making on financial services would be subsequently extended to all sectors. The main thrust of the report was to focus the legislation agreed via co-decision by the Council and the Parliament on high-level principles only and to develop a more efficient mechanism for the production and maintenance of a wide body of technical rules. One of the main contributions of the ECB’s Opinion was the suggestion to rely almost exclusively on European regulations rather than directives to achieve maximum harmonisation at all levels of the regulatory process. The suggestion was enthusiastically espoused by Lamfalussy in his report but was not followed up until the crisis made it necessary to revisit the issue.

And it is when the financial crisis strikes that Padoa-Schioppa resumes his proposal for a single rulebook. At the time he was the Italian finance minister, and in a letter to his colleagues within the ECOFIN Council and an article in the Financial Times in December 2007, he again makes the case for harmonised European banking regulation. As he wrote in that article, “common principles have been developed, but the convergence of day-by-day practice has lagged behind. A banking group providing financial services in, say, 10 countries must fulfil 10 different reporting systems and capital requirements, although they all stem from the same European directives”.^[6]

His proposals were rejected at first, but were than taken up by the de Larosière report and became one of the key tenets of post-crisis reforms in the EU. The fact that we now have a Capital Requirements Regulation and many delegated and implementing regulations for prudential rules directly applicable in all Member States is a direct consequence of the many efforts Padoa-Schioppa made in order to establish a single rulebook in Europe. And, then, of course, we now have the Single Supervisory Mechanism directly deriving from that “enabling clause” in the Treaty. Padoa-Schioppa was not able to see that happen, but without his combination of vision and realism, we would never have got to where we are today.

European banking supervision is now a reality. The European Central Bank is a competent prudential supervisory authority and the Single Supervisory Mechanism, which includes the national competent authorities, oversees one of the largest banking sectors in the world. With some loopholes, we now also have a single rulebook for prudential requirements.

And even though we can look back at those achievements with deep satisfaction we cannot, at the same time, be complacent. The quest for an integrated European banking sector that can act as a shock absorber in the event of a crisis in the single currency area has still not come to an end. Our ultimate goal of a pan-European banking sector is still an elusive target because the banking union itself is still an unfinished project. We all know that until a common deposit insurance scheme becomes a reality, a bank deposit in one Member State is not fully fungible with a bank deposit in another Member State because its value remains dependent on the strength of the local safety net. This ultimate reliance on local safety nets is also the main argument that Member States rely upon to justify the remaining regulatory barriers and protective policies that impede European groups from operating seamlessly throughout the banking union.

As political negotiations on the completion of the banking union may well take some time, we at ECB Banking Supervision have proposed practical solutions that would require very limited legislative changes, or, maybe, only a generous amount of trust among Member States, to foster the cross-border integration of European banking groups and to help create a genuinely integrated “domestic” market in the banking union.^[7]

However, the remaining segmentation generated by national rules and policies is making our system more fragile at a very delicate moment. The downfall deriving from the pandemic shock is yet to materialise on bank balance sheets, and the impact may well differ across Member States. A more integrated banking sector may be of great help in absorbing shocks and show the enhanced resilience delivered by the banking union. A segmented banking sector would instead amplify local shocks and potentially reignite dangerous adverse feedback loops between banks and sovereigns. This is one of those moments in which the “leaders” should pay more attention to the “advisers” and abandon the “short view” that Padoa-Schioppa stigmatised in his interview book with Beda Romano.^[8]

Conclusion

Ladies and gentlemen, I have tried to describe today the lasting impression that Padoa-Schioppa left me with and what I consider to be his most important legacy: this combination of vision and pragmatism that is the hallmark of many great men and women who have built the European project. And even if their example might seem to us daunting and impossible to imitate, nothing prevents us from trying, always remembering that only by being both “advisers” and “leaders” will we eventually reach our final destination of a united Europe.