Governance of bank supervision is central to its success

Blog post

Governance of bank supervision is central to its success

Publishing date: 31 August 2012
Authors: Guntram B. Wolff

As the first reports start to leak about how the Commission intends to organise European bank supervision, it is worthwhile offering some remarks on the questions of governance of banking supervision. As in today's FT reports, the Commission intends to propose that 17 national representatives plus six independent members would form a "supervisory board", which would hold ultimate supervisory responsibility. This board will be separate from the governing council of the Eurosystem so that there is a Chinese wall between monetary policymaking and banking supervision.

Three immediate remarks on this structure appear warranted.

1) Strong bank supervision requires swift decision making. It also requires the individuals on the decision-making committee to have the right incentives to search for banking problems to support their decision-making process. , among others, has studied the effects of committee size on performance of the Committee. She concludes that a committee size of five or less is ideal.

2) on the European Systemic Risk Board (ESRB) argued that the detection of systemic risk requires a certain diversity of the skills of Committee members, notwithstanding the small committee size. She concluded that the set up of the ESRB, consisting mostly of national central bank representatives, is not conducive to effective systemic risk assessment.

3) Chinese walls are often introduced in banks or other large financial institutions to separate conflicts of interest between different departments. Yet, in practice, the effectiveness of Chinese walls has often been questioned.

These remarks suggest that the Commission should carefully consider whether a different governance of banking supervision in the euro area might be warranted. A small, yet heterogeneous committee, able to take swift decisions based on a wide variety of views, appears central to effective bank supervision. Moreover, the Committee should be as free as possible from entrenched national interests but instead be solely accountable to a common European interest. The of the common European supervisor is to mitigate the failure of national supervision and its tendency for forebearance, in particular in circumstances in which costs could be mutualised. To achieve this goal, the euro-area supervisory board should have as few national representatives as possible, and it should have a small and strong decision-making structure.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.