Adrian Dumitrescu Pasecinic, Dalvinder Singh and Oana Ștefan, Limits for the ECB when adopting soft law instruments in the field of banking supervision, ECB Legal Papers Series, 2021, forthcoming

The European Central Bank publishes a variety of soft law to explain and interpret the ambit of its mandate for banking supervision. As expressed by the literature and judicial practice, the legal effects of such instruments in the absence of legally binding force are unclear and can be similar to those of hard law. The consequence would be that soft law instruments are powerful tools through which the ECB can expand its powers illegitimately. We argue that this is a simplistic view of the reality, which fails to take account of the important regulatory functions that soft law plays in orchestrating complex relationships between the ECB and its addressees: within the single supervisory mechanism, significant and less significant banks, and national authorities. Placing these relationships at the core of our analysis, we explore the limits of the ECB when issuing soft law in banking supervision. We adopt a pragmatic approach that recognises both the value of soft law within the EU set-up and acknowledges the crucial importance of monitoring its deployment. Endorsing the position that soft law is a tool turning ‘EU policy into practical reality’, this paper takes the extra step in exploring the avenues through which ECB soft law can achieve its full potential without frustrating fundamental rule of law values. Drawing on Diver's work, the paper argues soft law serves an important purpose to improve rule transparency, rule congruence and rule accessibility. It is suggested soft law aids the understanding and application of technical rules and provide context to ensure they serve the public interest concerns that technical rules are designed to achieve. We argue that the unique relationship between the ECB and significant banks in banking supervision serves as a space where non-binding instruments give rise to supervisory effects.

Bozena Gulija, Costanza Russo and Dalvinder Singh, ECB Significant-Bank Risk Profile and COVID-19 Crisis Containment: What Approach in the Transitioning Phase? IADI Sponsored Paper Series, No. 2, July 2022.

The COVID-19 pandemic has caused an unprecedented degree of public and private intervention to avert a social, economic and financial crisis. EU member states, and especially participating member states of the European Banking Union (EBU), introduced a broad set of measures, including public guarantees, moratoria and amendments to the European Commission State Aid framework, to contain the negative effects of the pandemic on the economy. The EU suspended its fiscal rules and the European Central Bank increased its monetary operations. The paper uses an empirical analysis to review the impact of public support on the Single Supervisory Mechanism (SSM) banks and the acutely exposed participating EBU member states because of their significant increase in government debt levels. We argue that the containment of the crisis creates a major uncertainty, namely a possible insolvency lag once the benefits of the public support subside and insolvencies start to materialise. This uncertainty is associated with non-financial corporates, the safety and soundness of the SSM significant banks and sovereign debt sustainability, forming a new ‘doom loop’. We suggest the design of a ‘transition phase’ as a mechanism of accountability to improve the understanding of those uncertainties to ensure financial stability.

I am on the International Advisory Panel of the International Association of Deposit Insurers (IAD), Bank for International Settlements. Since 2008, the Advisory Panel has been involved in providing expert opinions and feedback on IADI’s core work on deposit insurance and financial stability. I have also collaborated with the World Bank (2016) and the IMF (2003).

I collaborated with the OECD on Public Guarantees by organising an event ‘Financial crisis management and the use of government guarantees’ which coincided with the OECD’s 50th Anniversary, 2011. [Insert Link 1] My joint paper was selected for publication in the OECD Journal on Financial Market Trends. The joint paper titled ‘Developing a Framework for Effective Financial Crisis Management’ [Insert Link 2] provides a unique stakeholder approach to crisis management; and a crisis management decision tree that we designed to assist a Financial Safety Net to execute their responsibilities across the stages of managing a financial crisis.

The paper has directly influenced the shape of the Philippine’s systemic risk crisis management framework, published in June 2022. It clearly indicates the ‘[FSCC] adopt the earlier work of Singh and LaBrosse (OECD, 2012) and refine their framework to generate the following decision tree,’ at p. 6: [Insert Link 3]

The FSCC later show their Protocols draw on the work to build its crisis management framework: ‘…the unique challenge that crisis management bears upon various financial authorities, we quote from the Singh and LaBrosse (OECD, 2012), which undertook its seminal study on crisis management frameworks in response to the Global Financial Crisis (GFC)….at p.11’ [Insert Link 4]

The publication of the paper by numerous press agencies explains how the Philippines adopts a stakeholder approach which is a strong theme in the paper. In the OECD 2012 paper, we emphasize the stakeholder approach by highlighting the importance of both private and public ‘actors’ interests and responsibilities are reflected in the crisis decision making process.

The OECD 2012 paper has also influenced the decision-making process in Zimbabwe. The Reserve Bank of Zimbabwe published its ‘Framework for Contingency planning and Systemic Crisis Management’ in July 2014. [Insert Link 5] The Reserve Bank of Zimbabwe directly incorporates our crisis management decision tree (Figure 3) into their decision-making process (Appendix III).

The OECD 2012 paper has also been cited in other domestic and international policy forums on crisis prevention frameworks and country reviews of such measures: The US Office of Inspector General of the Federal Deposit Insurance Corporation (OIG), in its evaluation of the FDIC’s Readiness for Crises, April 2020, directly quote the paper to highlight the importance of looking at coordination and collaboration between Financial Safety Net Players:

The OIG explain “According to an article in the Organisation for Economic Co-operation and Development (OECD) Journal, Developing a Framework for Effective Financial Crisis Management, “[d]eposit protection has become an important feature of modern banking systems” and part of the official financial system safety net along with a lender of last resort, prudential banking regulator, and a government treasury department. The article further states: In normal times the regulation and supervision of banks, . . . explicit deposit protection and an effective bank closure mechanism all help to reduce the adverse consequences of a financial crisis emanating from bank failures . . . . However, when problems become systematic, governments tend to play a much more active role and call upon the agencies that make up the [financial system safety net] to undertake extraordinary measures. . . . As such, there is a clear need for officials to undertake coherent contingency planning. . . .. [Emphasis added.]” at pp. 2-3 [Insert Link 6]

The paper is also referred to by the New Zealand review of the New Zealand Reserve Bank Act, 2019. [Insert Link 7] The consultation document refers to the importance of putting the different components of the Financial Safety Net together to ensure an effective policy response, which is a central tenet of the paper. At p. 91

In 2017, I was invited to join the IADI Technical Committee to prepare the Guidance paper on ‘Deposit Insurers’ Role in Contingency Planning and System-wide Crisis Preparedness and Management’. The Committee prepared the guidance paper to operationalize Core Principle 6 of the IADI Core Principles for Effective Deposit Insurance 2014. The final guidance paper also cites the OECD 2012 paper. I assisted with writing the guidance paper. The paper is also cited by the Association of Supervisors of the Banks of the Americas (ASBA) in the ASBA Working Group paper ‘Effective Cooperation for Resolution of Financial Institutions in the Americas’, May 2018. The ASBA paper also emphasizes the importance of coordination and cooperation between the Financial Safety Net.