European Banking Union As a Case-Study in Administrative Legitimacy

A banking union stands on three pillars: bank supervision, resolution authority, and deposit insurance. The US has had these three pillars in place since the New Deal. The EU, by contrast, has sought to recreate some of those pillars in the midst of the Eurozone crisis. The European Central Bank will gain supervisory authority over Europe’s largest banks, but the remainder will stay under national supervision. There will be a common resolution mechanism but bank closures will remain subject to an effective national veto, while recapitalization, if any, will depend on creditor “bail-ins” in order to protect the public fisc. Finally, a common regime of deposit insurance—has proven to be a bridge entirely too far. It involves too great a risk of fiscal burden-sharing between the so-called core (led by Germany) and the Eurozone periphery. Consequently, deposit-guaranty schemes will remain a national obligation governed by common rules. The result is a still-deeply fragmented European Banking Union—and indeed, monetary union—with variable country-specific risks and interest-rate differentials. This paper will argue that Europe’s emergent banking union reflects a deeper process of institutional change related to the evolution of administrative governance. In this legal-historical dynamic, certain kinds of regulatory power (e.g., monetary policy, bank supervision) are capable, at least in part, of delegation to supranational institutions. However, other powers (i.e., ones demanding strong democratic legitimacy like taxation, spending, and borrowing) have remained national, because they demand the “legitimacy resources” that, at this point in Europe’s history, only national institutions can muster.