Empowering the ECB to Supervise Banks: A Choice-Based Approach

The reform of bank supervision represents a significant institutional challenge for the European Union. This paper explores the merits of a choice-oriented approach under which individual Member states have the option to delegate prudential supervision of their largest banks to the European Central Bank, while retaining the right to re-assume such a role at a later date. Responsibilities, commitments and costs would be allocated by means of a binding arrangement with the ECB that can be tailored to Member states' specific circumstances. The proposal offered here is superior to both existing supervisory arrangements and proposed alternatives. Its adoption would also significantly reinforce the new, post financial crisis EU supervisory architecture.