The ‘supervisory effects’ of the ECB soft law as a dialogue tool in the field of banking supervision: reimaging soft law effects

The European Central Bank (ECB) publishes a variety of legal instruments, many of which are ‘soft’ law, to explain and interpret the ambit of its tasks for banking supervision. In the absence of legally binding force, the legal effects of such instruments are unclear and can be perceived as similar to those of hard law. Indeed, what is classified as soft law may not appear as such when it is issued by the ECB in accordance with its rules of procedure governing its relationship with central banks and national competent authorities to discharge its task of bank supervision. We argue that, in relation to the ECB, the understanding of the classification of hard law and soft law is a simplistic view of the reality, firstly conflating all instruments that have similar titles as soft law, and secondly failing to take account of the important roles that soft law plays in bank supervision and the continuous dialogue between the ECB and significant banks within the Single Supervisory Mechanism. In the banking sector, a one-size-fits-all approach to rule application is not suitable due to its heterogeneous nature and the constant necessity to adapt and change according to the market environment. Thus, tools such as soft law can aid by offering the industry a view of rule interpretation in the supervisory dialogue that occurs between supervisor and banks. We argue that the unique relationship between the ECB and significant banks in banking supervision serves as a space where soft law instruments give rise to what we refer to as ‘supervisory effects’ that are situated between the traditional hard law and soft law dichotomy. Through decisions taken via the Supervisory Review and Evaluation Process, once it is adopted by the Governing Council, a decision has a binding effect, or rather supervisory effects. Supervisory effects occur through decisions by the bank supervisor, as the competent authority, on reflection of soft and hard law instruments that modify the behaviour of banks and lead to changes in the way they manage their risks and business activities, or through formal enforcement decisions. We show that the silo approach of a soft and hard law dichotomy is not conducive for bank supervisory decision-making by the ECB. The accountability of the ECB soft law can only be understood in the context of its decision-making authority.