States ceding control: Explaining the shift to centralized bank supervision in the Eurozone

This article explains why there was a dramatic centralization of supervisory authority over the European Union’s largest banks under the European Central Bank (ECB) by the end of 2014. We note that scholars had long acknowledged that nationally fragmented banking markets could potentially undermine a common currency. But it was not until 2012 that there was sudden and broad consensus in favor of much stronger and more centralized bank supervision for the Eurozone. Particularly in comparison with the failure of the European Banking Authority (EBA) in 2011 to conduct credible bank stress tests that would restore confidence in the Eurozone’s financial sector, the ECB’s Asset Quality Review and stress tests of 2014 were a major step toward severing bank–state ties and rationalizing bank oversight – not to mention advancing European integration. We argue that the severity of the European debt and currency crisis by 2012 disrupted the coalitions that had long supported national bank control at the expense of supranational institutions. Specifically, multinational bank lobbying groups became among the strongest proponents by 2014 of centralized supervision and Banking Union, even if in earlier decades some of the same banks represented there had benefited from national supervisory forbearance. Moreover, the EBA’s earlier bank stress tests were, despite their initial flaws, an important institutional stepping stone on the path to a more effective Banking Union.