Understanding Services of General Economic Interest (SGEI) and EU Financial Supervision

Services of General Economic Interest (SGEI)

Public authorities identify Services of General Economic Interest (SGEI) as being important to citizens. These services are not supplied by market forces alone and may require public intervention.

Main Elements of SGEI

• Act of entrustment: Formal designation of a service provider for the SGEI.
• Public service obligation: The provider must carry out the service in the public interest under conditions defined by the State.
• Public service compensation: Financial support to offset the additional costs stemming from the public service obligation.

Why are SGEIs Important?

SGEIs can alter the market mechanism and be a source of distortion unless properly targeted. They pose a threat to competitive neutrality. Controls are needed to ensure compensation is proportionate to the objective pursued, thus avoiding distortions.

Problems Associated with SGEIs

• State Aid: Excessive compensation can constitute illegal State Aid.
• Cross-subsidies: Compensation designated for SGEI might be used to fund other activities in competition with other firms.
• Inadequate (low) calculation of compensation: This puts operators at a disadvantage against their competitors and impacts the quality of public services for end users.
• Overcompensation: Raises concerns over value for money in service provision.

Further complications arise from the common practice of allowing incumbents to maintain monopoly rents and use these to compensate for their public service obligations. This effectively implies a form of cross-subsidization, as firms can make up for potential losses incurred in the provision of SGEI.

Solutions: Treaty on the Functioning of the European Union (TFEU)

• Article 106 TFEU: Undertakings entrusted with services of general economic interest are subject to the rules on competition, insofar as these rules do not obstruct the performance of the specific tasks assigned to them.
• Article 107 TFEU: Addresses distortions of competition.

The European Supervisory Authorities (ESAs)

The ESAs (EBA, ESMA, and EIOPA) form the micro-prudential pillar and are granted powers for a coordination role vis-à-vis the national supervisory authorities. Cooperation between supervisors is limited by regulatory capture. The ESAs represent the agencification of such a network, aiming for consistent application of EU law. These agencies do not possess normative power; their functions ultimately report to the ECB and laws approved by the Commission. In cases where actions of a National Regulatory Authority (NRA) deviate from the powers defined in its entrustment act, the ESAs advise or adjudicate with the banks.

The European Central Bank (ECB)

The ECB takes an institutional approach, acting as the gatekeeper. It assesses the acquisition and disposal of holdings in banks and ensures compliance with capital requirements. The ECB is important for the Single Supervisory Mechanism (SSM), where functions are divided between the ECB and the National Board of Supervisors. Ultimately, the responsibility lies with the EU institution.

ECB Responsibilities

• Authorization and withdrawal of credit institutions' permits.
• Mergers and Acquisitions (M&A) applications.
• Adherence to EU law.
• Supervisory tasks (same functions as national supervisors).
• Responsibility for macro-prudential tools and micro-prudential powers.

The ECB only exercises direct supervision over "significant" banks and has discretionary power.

The Single Supervisory Mechanism (SSM)

The SSM is governed by the Supervisory Board (SB), where all participating national supervisors are entrusted with planning and executing tasks. The SB first issues a proposal to the Governing Council of the ECB. Bank supervision's dual character requires coordination between the ECB and national bank supervisors.

Coordination in the SSM

• Significant banks: The ECB issues regulations, guidelines, or general instructions to national supervisors.
• Non-significant banks: The ECB determines the procedure and time limits but has a less direct role. NRAs retain supervisory powers for non-significant banks, except for tasks involving normative powers.

In either case, the ECB retains discretionary power.