Legal constraints on the expansion of European banking supervision. The case of climate-related and environmental banking supervision

El siguiente artículo ha sido publicado en la Revista de Derecho del Sistema Financiero, marzo de 2026, número 11. Puedes acceder a través del siguiente enlace.

I. Banking Supervision In The European Union After The Entry Into Force Of The Single Supervisory Mechanism And The Single Resolution Mechanism: Basis In Primary Law And Legal Constraints On The Expansion Of Banking Supervision

A. Banking supervision in the European Union has undergone a deep transformation over the last decade.

From a national-based supervision model, the establishment of the Single Supervisory Mechanism (‘SSM’) – which assigned supervisory powers to the European Central Bank (‘ECB’) [1] – and of the Single Resolution Mechanism (‘SRM’) – which enabled a new European agency, the Single Resolution Board (‘SRB’) [2], to apply a new type of corrective measure [3] – has made prudential banking supervision the first administrative supervisory activity to be carried out in a unified manner across the European Union as a whole (or, at least, across a large part of it: Member States whose currency is the euro or Member States that have adhered to the SSM and the SRM through a close cooperation agreement) [4].

The establishment of the SSM and SRM represented a paradigm shift in European financial governance, moving from a decentralised model of banking supervision to one characterised by significant centralisation at the European level. This transformation was largely precipitated by the sovereign debt crisis of 2010-2012, which exposed the inadequacies of purely national supervisory frameworks in addressing systemic risks that transcended national borders. As scholars such as Ferran and Babis have observed, the crisis revealed a 'vicious circle' between sovereign debt and banking sector fragility [5], whereby weaknesses in national banking systems undermined sovereign creditworthiness, whilst deteriorating sovereign credit in turn impaired bank balance sheets. The SSM and SRM were thus conceived as mechanisms to break this destructive feedback loop by severing the link between national sovereigns and their domestic banking sectors. However, the legal architecture chosen to implement these mechanisms has given rise to tensions that continue to constrain the development of European banking supervision.

B. However, despite providing an organised system for prudential banking supervision, the SSM and SRM have significant limitations.

First of all, the SSM and the SRM provide for various kinds of supervisory powers (authorisations, inspections, corrective measures and sanctions) that find their basis in primary law through different powers attributed to the EU by the Treaties [6]. Indeed, the powers included in the SSM are attributed exclusively to the ECB [7] on the basis of Article 127(6) of the Treaty on the Functioning of the European Union (‘TFEU’) [8], regarding monetary policy, which allows the Council to ‘confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings’. In contrast, the powers included in the SRM are attributed to the SRB on the basis of Article 114(1) of the TFEU [9] on the harmonisation of internal market legislation. In addition, regulation the compliance with which is verified through the supervisory powers included in both the SSM and the SRM has been adopted in exercise of the shared competence provided for in Article 114(1) of the TFEU [10].

In this context, Article 127(6) of the TFEU belongs to a section of the TFEU – monetary policy – over which the EU has exclusive competence in those Member States whose currency is the euro, while Article 114(1) refers to the harmonisation of the internal market, which is a competence shared between the EU and all Member States [11]. Therefore, the European legislature has established a system for the coordinated exercise of supervisory powers based on an exclusive competence to confer some powers, and a shared competence to confer others, and it has done so, moreover, when the regulation for which compliance is being supervised is only the result of this second set of powers [12].

In my opinion, this approach is not acceptable on a conceptual basis. The attribution to the European public authorities of different powers for the exercise of the same administrative activity (prudential banking supervision) must be based, in all cases, on the same right to intervene (precisely, the ‘prudential’ aspect, that is, the guarantee of financial stability). If guaranteeing this public interest justifies the competence set out in Article 127(6) of the TFEU, this rule must serve as sufficient basis for all administrative intervention carried out in service of this guarantee (i.e. for the approval of the prudential regulation and for attributing all supervisory powers necessary to verify adequate compliance with that regulation). If it does not, and part of this power to intervene is not covered by this competence, it should be concluded that the competence set out in Article 127(6) of the TFEU is not by itself enough to serve as the basis for the entire public intervention.

In this regard, if prudential banking regulation's right to intervene in the private activities of the individual finds its origin in Article 114(1) of the TFEU, the administrative powers attributed to verify compliance, insofar as they originate from the same right to intervene, must be justified by the same competence. Regulation and supervision are two logically successive phases of the same public intervention and, therefore, share a common basis [13]. It is not conceptually admissible to base the two elements of that intervention on different competences.

Following on from the above, it should be understood, in line with the interpretation of Professor MARTÍNEZ LÓPEZ-MUÑIZ, that the ‘specific prudential banking supervision tasks’ that Article 127(6) of the TFEU allows the ECB to be entrusted with are those that ensure compliance with the regulations approved on the basis of it and the others related to it (i.e. those relating to monetary policy – which could include rules on solvency or liquidity that are relevant to achieving the price stability objective) [14]. But Article 127(6) of TFEU is not a ‘general clause’ that enables the European legislature to attribute to the ECB every kind of prudential supervisory powers over credit institutions. When prudential banking regulations that must be supervised originate from the exercise of monetary policy, Article 127(6) of the TFEU should provide adequate basis for attributing supervisory powers to the ECB; however, if prudential banking regulations are approved in order to harmonise the EU internal market, according to Article 114(1) of the TFEU, that rule should provide sufficient basis for the supervisory powers (not to the ECB, because it is not permitted by primary law, but to other European authorities, as it occurred with the SRB within the SRM).

The interpretation of Article 127(6) TFEU advanced herein finds support in the broader principles of EU constitutional law. The principle of conferral, enshrined in Article 5(2) TEU, requires that the Union act only within the limits of the competences conferred upon it by the Member States in the Treaties. A teleological interpretation of Article 127(6) TFEU that extends its scope beyond matters genuinely connected to monetary policy would arguably transgress this fundamental principle. Furthermore, the principle of institutional balance, which the Court of Justice has consistently upheld as a constitutional principle of the EU legal order [15], militates against an interpretation that would unduly expand the ECB's competences at the expense of other Union institutions and agencies that might more appropriately exercise supervisory functions in domains unrelated to monetary policy.

Additionally, Article 139(2) of the TFEU states that sections 1, 2, 3 and 5 of Article 127 of the TFEU are not applicable to Member States whose currency is not the euro but makes no mention of section 6 in this regard. However, the fact that Article 139(2) does not expressly mention section 6 of Article 127 is insufficient basis to sustain an intervention unrelated to the exclusive competence contained in Article 3(1)(c) of the TEU (i.e. monetary policy), because section 6 of Article 127 and all the section of the TFEU at which it is located develops that exclusive competence. Matters different from the monetary policy are not regulated by the part of the TFEU to which Article 127(6) belongs to.

Evidence of the above is that the SSM Regulation only applies directly to credit institutions located in Member States whose currency is the euro, although other credit institutions located in other Member States can be subject to the SSM if the Member State in question voluntarily enters into a close cooperation agreement with the ECB on the matter. If Article 127(6) were to be unrelated to monetary policy matters according to Article 3(1)(c) of the TEU, but instead to EU internal market matters according to Article 4(2) of the TEU, the SSM Regulation could directly apply to all credit institutions located in the EU, irrespective of whether the currency of its home Member State is the euro.

The attribution to the ECB of supervisory powers on the basis of Article 127(6) of the TFEU has given rise to some significant problems that are worth mentioning. From a legal perspective, the main one comes from the fact that, according to the rules of primary law, the administrative body that, within the ECB, holds the administrative supervisory powers is the Governing Council (made up of representatives of the Member States whose currency is the euro). However, the SSM and the SRM not only coordinate the exercise of administrative supervisory powers in these Member States, but also in those Member States whose currency is not the euro but which decide to join the arrangements by establishing close cooperation agreements with the ECB. In these cases the transfer of sovereignty to the EU for the prudential supervision of credit institutions is not grounded on an equally solid footing with respect to the supervised credit institutions, given that the administrative body that will produce the legal effects inherent to this transfer of sovereignty is not made up of representatives from all the Member States whose credit institutions are affected by the transfer.

The European legislature has – somewhat unsatisfactorily – tried to overcome this problem, by creating a new administrative body within the ECB, the Supervisory Board, in which all Member States adhered to the SSM and the SRM are represented. The Supervisory Board is responsible for submitting to the Governing Council the draft decisions to be adopted with all elements already determined, such that the Governing Council simply ‘objects’ or ‘does not object’ to their adoption. However, although this solution allows representatives of all Member States to participate in determining the content of the decisions resulting from the exercise of prudential supervisory powers, the final adoption of these acts continues to depend on a body in which they are not represented.

This problem could have been avoided if Article 127(6) of the TFEU had not been used to attribute to the ECB administrative powers other than those related to monetary policy, and they had instead been attributed to an agency (like the SRB) incorporated on the basis of Article 114(1) in order to carry out prudential supervision tasks and in which all participant Member States were represented equally. Logically, this agency could have been the European Banking Authority (the ‘EBA’), in view of its vast experience in banking supervision and the suitability of its legal nature to be the holder of supervisory powers.

The proposition that the EBA would constitute a more appropriate institutional vehicle for the exercise of prudential supervisory powers unrelated to monetary policy merits further elaboration. The EBA was established by Regulation (EU) No 1093/2010 as part of the European System of Financial Supervision, with a mandate to contribute to the establishment of high-quality common regulatory and supervisory standards and practices. Unlike the ECB, the EBA’s governance structure ensures representation of all Member States, thereby avoiding the democratic legitimacy concerns that arise when supervisory decisions affecting credit institutions in non-euro area Member States are taken by bodies in which those Member States are not represented. Moreover, the EBA possesses considerable technical expertise in banking supervision matters, having developed binding technical standards and guidelines across a wide range of prudential topics. The attribution of direct supervisory powers to the EBA would thus represent a natural evolution of its existing role, whilst simultaneously addressing the constitutional difficulties inherent in the current reliance upon Article 127(6) TFEU.

C. Be that as it may, the legal problems that have already arisen as a consequence of the weak basis that Article 127(6) of TFEU constitutes for sustaining the ECB’s prudential banking supervision powers can be overcome, more or less satisfactorily, by the solutions adopted so far, but they will not allow the Banking Union to go further and cover other issues that will, sooner or later, arise in the banking sector and will need to be addressed from the point of view of banking regulation and supervision.

On the one hand, banking supervision carried out through the SSM and the SRM is limited to ‘prudential’ supervision – i.e. supervisory powers to only verify compliance by credit institutions with regulations approved in order to guarantee financial stability, and not to verify compliance with any other banking regulations, such as those approved in order to correct market asymmetries (behavioural regulations) or guarantee price stability (monetary policy regulations) [16].

On the other hand, banking supervision carried out by the ECB in the framework of the SSM is limited to credit institutions [17] – i.e. to companies that take deposits or other repayable funds from the public and grant credits on their own account [18]. However, sometimes there are other institutions that carry out activities that satisfy needs similar to credit needs and therefore, from an economic perspective, occupy the same space as credit activity, but are not considered ‘credit institutions’ from a legal standpoint and are, consequently, not subject to the same regulatory and supervisory framework [19]. These institutions that undertake substitute activities for banking activities without actually being credit institutions are usually referred to as the ‘shadow banking system’.

In this context, adequate protection of the public interests involved in banking supervision shall sometimes require that institutions belonging to the shadow banking sector system also be subject to the same supervisory powers to which credit institutions are subject. However, in different circumstances there can be legal constraints that impede supervisory authorities from supervising institutions other than credit institutions [20]. In these cases, the direct supervision of non-banking institutions cannot be carried out by the ECB, breaking the unity of action in financial supervision [21].

The regulatory response to shadow banking at the European level has been fragmented, with different categories of shadow banking entities subject to distinct regulatory frameworks administered by different supervisory authorities. Money market funds, for example, are regulated under Regulation (EU) 2017/1131 [22] and supervised by national competent authorities in coordination with the European Securities and Markets Authority, rather than by the ECB within the SSM framework. This fragmentation creates potential gaps in the supervisory perimeter and may impede the effective monitoring of systemic risks that arise from the interactions between traditional credit institutions and shadow banking entities. A more coherent approach would require either an expansion of the ECB's supervisory mandate to encompass relevant shadow banking entities—which would encounter the legal constraints discussed above—or the development of enhanced coordination mechanisms between the ECB and other supervisory authorities with competence overshadow banking activities.

The phenomenon of shadow banking presents particular challenges for the coherence of the European supervisory framework. The Financial Stability Board has defined shadow banking as 'credit intermediation involving entities and activities outside the regular banking system' [23]. This definition encompasses a diverse array of entities, including money market funds, securitisation vehicles, finance companies, and certain investment funds. The systemic significance of the shadow banking sector has grown substantially in recent decades, with some estimates suggesting that shadow banking assets now rival those of the traditional banking sector in certain jurisdictions. From a financial stability perspective, the interconnections between shadow banking entities and traditional credit institutions create channels for the transmission of systemic risk that transcend the boundaries of prudential supervision as currently conceived.

D. The above-mentioned legal constraints that currently restrict the expansion of supervisory powers within the EU could prevent the EU from taking into account, in the context of banking regulation and supervision, the protection of public interests that could potentially be affected by credit activity as a result of economic development and social progress. The following section analyses one example of that: how to address the potential regulation and supervision of constrictions to be imposed to credit institutions in the context of the fight against climaterelated and environmental issues.

II. The Challenge Of Climate-Related And Environmental Issues In The Banking Sector: Supervision Based On The ECB’s Secondary Mandate, A New Concept Of ‘Prudential’ Supervision Or A Rethinking Of The Entire Supervisory Model?

Addressing climate-related and environmental issues in the banking sector has become mainstream.

European and Member State supervisory authorities have stressed the importance of taking into account the impact that credit activity has on the environment and, particularly, on achieving the objectives set at the EU level to address climate-related and environmental issues [24].

Moreover, a network of central banks and supervisors concerned about the impact of credit activity on the environment have established the ‘Network for Greening the Financial System’ to cooperate to achieve environmental objectives for the financial system [25].

Bearing this in mind, it is only a matter of time before specific legislation for credit institutions is passed aiming to protect the environment by imposing ‘climate constraints’ on banking activities [26]. As it has been said above, as long as that constraints will be related to the achievement of public interests different from financial stability (i.e. in case credit institutions will be used as belt drivers of the general climate-related and environmental policies), the approval of a climate-related and environmental regulation will also require a system of administrative supervision that must be coordinated with the systems that exist specifically to protect other public interests (such as financial stability, monetary policy or credit institutions’ behaviour with their clients). And if this new supervisory system is incorporated at a suprastate level or at the EU level (which would be logical for a matter such as climate-related and environmental one), it should be analysed whether supervisory tools exist within the SSM and SRM that could be employed in the execution of the new supervision activity by the same or different public authorities.

In this context, if climate-related and environmental issues will be taken into account on banking activities in order to guarantee the achievement of public interests different from financial stability, there are various alternatives for configuring a ‘climate-related and environmental banking supervision’ system within the EU, but not all of them fit in the same way within the legal constraints imposed by EU primary law and allow for coordinated and efficient supervision.

First Alternative: The So-Called ‘Secondary Mandate’ Of The ECB

The first alternative would consist of making use of the so-called ‘secondary mandate’ of the ECB, contained in Article 127(1) of the TFEU [27], which allows the ECB to contribute to pursuing other purposes of the EU different to monetary policy’s objectives, according to Article 3 of the TEU [28]. In principle, under this alternative the ECB would be entitled to expand its powers to contribute to achieving the EU’s objective of improving the quality of the environment, contained in Article 3(3) of the TEU.

In my opinion, this alternative presents some significant problems. First of all, Article 127(1) of the TFEU states that the ECB’s second mandate is established ‘without prejudice’ to its first mandate: the achievement of the objectives of monetary policy (i.e. price stability). Consequently, the protection of the public interest covered by climate-related and environmental banking regulations would be subject to them not prejudicing monetary policy objectives. In the event of conflict, the solution would have to protect price stability first of all, irrespective of the fact that the solution might affect the achievement of the climate-related and environmental objectives.

Secondly, apart from the fact that it concerns monetary policy matters and thus only has a weak connection to environmental issues, Article 127(1) of the TFEU is a monetary policy provision that is only applicable in Member States whose currency is the euro [29]. Consequently, unlike with the SSM, it is hard to believe that a supervisory mechanism based on Article 127(1) could be extended to credit institutions located in Member States whose currency is not the euro (e.g. through ‘close cooperation’ agreements).

In the same vein, even if we accept that Member States whose currency is not the euro could voluntarily adhere to the environmental supervision mechanism, the problems regarding the role of those Member States in the ECB’s decision-making process that currently exist in the framework of the SSM will be replicated in the new mechanism, with the handicap that the non-applicability of Article 127(1) of the TFEU to those Member States whose currency is not the euro would make it more difficult to solve these problems through a ‘non-objection’ procedure similar to that of the SSM.

In light of the above, it is not possible to attribute to the ECB supervisory powers to verify that credit institutions comply with climate-related and environmental regulations on the basis of the secondary mandate contained in Article 127(1) of the TFEU.

The limitations of the secondary mandate as a basis for climate-related supervision have been acknowledged by the ECB itself. In its 2021 action plan to include climate change considerations in its monetary policy strategy, the ECB emphasised that its climate-related actions must be consistent with its primary mandate of maintaining price stability [30]. This conditionality significantly constrains the scope for supervisory action motivated primarily by environmental objectives. Furthermore, the secondary mandate is framed in terms of ‘supporting’ the general economic policies in the Union, which suggests a subsidiary role rather than an independent basis for action. Where climate-related supervisory measures would conflict with or detract from the pursuit of price stability, the secondary mandate would not provide adequate legal cover for such measures.

Second Alternative: To Enwiden ‘Prudential’ Matters. The case of CRR III

A. Another alternative for configuring an environmental banking supervision system would be to identify the term ‘prudential’ contained in Article 127(6) not only with financial stability, but also with other public interests related to the more general idea of ‘precaution’, in which the fight against climate-related and environmental issues could be accommodated [31].

From this perspective, climate-related and environmental banking supervision could be considered a particular instance of prudential supervision and, if that were the case, be carried out at the European level under the SSM on the basis of Article 127(6) of the TFEU. In other words, if ‘prudential’ is equivalent to ‘precaution’, ‘prudential’ banking regulations would be able to include climate-related and environmental constraints that, like financial stability constraints, will have the purpose of preserving a public interest consisting of not damaging the environment in which credit institutions carry out their activities from either an environmental or a financial perspective, and the ‘prudential’ supervision mechanism would ensure compliance with all these regulations jointly.

In my opinion, this approach is not free of the same problems that stem from basing the SSM on Article 127(6) of the TFEU, aggravated by the fact that interpreting ‘prudential’ as ‘precaution’ could undermine its real meaning and the European legislature’s intention behind this primary law provision, unduly widening the limits set for ECB action. Additionally, expanding the concept of ‘prudential’ to include ‘precaution’ could lead to neglect of other aspects of climate-related and environmental policies more related to behavioural – or even monetary policy – regulations. That circumstance will lead to either not taking into account other perspectives of climate-related and environmental policies or taking them into account within the framework of the behavioural or monetary policy regulations, therefore splitting the public interest in combatting climate-related and environmental issues and generating inefficiencies in the system. Thus, at the end of the day that solution could prejudice the public interest pursued by considering climate-related and environmental policies in banking regulations. 

The conceptual difficulties inherent in expanding the notion of 'prudential' supervision to encompass climate-related and environmental matters are compounded by practical considerations. The expertise required to assess climate-related risks differs substantially from that traditionally associated with prudential supervision. Climate risk assessment requires understanding of climate science, energy systems, and the physical and economic impacts of climate change—domains that lie outside the core competencies of banking supervisors. Whilst supervisory authorities have sought to develop this expertise, the integration of climate considerations into prudential frameworks remains at an early stage. 

B. Notwithstanding the above, this alternative has been partially adopted by the European legislature in the recent amendment of CRR through Regulation of the European Parliament and of the Council of 31 May 2024 amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (‘CRR III’), that, among other matters, impose obligations on credit institutions in order to take into account within their risk management environmental, social and governance (‘ESG’) elements. According to Recitals (54) and (56) of CRR III:

‘Achieving the environmental and climate ambitions of the European Green Deal set out in the communication of the Commission of 11 December 2019 and contributing to the United Nations 2030 Agenda for Sustainable Development requires the channelling of large amounts of investments from the private sector towards sustainable investments in the Union. Regulation (EU) No 575/2013 should reflect the importance of environmental, social and governance (ESG) factors and a full understanding of the risks of exposures to activities that are linked to overall sustainability or ESG objectives. To ensure convergence across the Union and a uniform understanding of ESG factors and risks, general definitions should be laid down. ESG factors can have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Common examples of ESG factors include greenhouse gas emissions, biodiversity and water use and consumption in the environment area; human rights, and labour and workforce considerations in the social area; and rights and responsibilities of senior staff members and remuneration in the governance area [...].

As the transition of the Union economy towards a sustainable economic model gains momentum, sustainability risks become more prominent and potentially require further consideration. An appropriate assessment of the availability and accessibility of reliable and consistent ESG data should form the basis for establishing a full link between ESG risk drivers and traditional categories of financial risks and sets of exposures’.

By doing so, some of the main ESG risks (or climate-related and environmental risks) are incorporated into the risk mix of credit institutions, turning some sustainability objectives into objectives specific to the maintenance of financial stability and, therefore, into ‘prudential issues, falling in the scope of Article 127(6) of TFEU. This operation lets the ECB employ its ordinary supervision powers (the same used to verify the compliance by credit institutions with ordinary prudential regulations: authorisations, inspections, corrections and sanctions) to ensure compliance with these ESG rules and thus the achievement of these ESG objectives.

Furthermore, ESG ‘prudential’ regulations implemented by CRR III largely reflect the supervisory criteria (known as ‘supervisory expectations’) determined in previous years by the ECB, according to which the supervisor sought to guide ‘prudential’ risk management towards the achievement of ESG objectives (without a clear regulatory basis) [32].

In any case, despite its limitations and the problems deriving from the thin grounds provided by Article 127(6) of TFEU to enwiden the prudential supervisory activities carried out by the ECB, CRR III evidences that this alternative is going to be, at least, the temporary solution found by the European Union public authorities to manage with climate-related and environmental matters.

From a comparative perspective, the approach to climate-related banking supervision varies considerably across jurisdictions. In the United Kingdom, the Prudential Regulation Authority has issued supervisory expectations regarding the management of climate-related financial risks, whilst the Bank of England has conducted climate stress tests of major UK banks. In the United States, the approach has been more cautious, with federal banking regulators only recently beginning to develop frameworks for the supervisory treatment of climate-related risks. These divergent approaches reflect differing views about the appropriate scope of prudential supervision and the extent to which environmental considerations should inform supervisory practice. The European approach, as embodied in CRR III and the ECB's supervisory expectations, represents a relatively ambitious attempt to integrate climate considerations into the prudential framework, but the legal and institutional constraints discussed in this article may limit the extent to which this integration can be deepened.

Third Alternative: To Establish A Banking Supervision Mechanism Focused On The Compliance With Climate-Related And Environmental Regulations 

The third and final alternative for protect a public interested potentially affected by banking activities consisting of the achievement of the climate-related and environmental policies’ purposes would be to establish a banking supervision mechanism for verifying that credit institutions comply with climate-related and environmental regulations, attributing supervisory powers on the basis of Article 114(3) of the TFEU, which allows the EU to legislate for the purposes of harmonising Member States’ legislation on environmental matters [33].

Given that the subjects of the supervision would be credit institutions, from my point of view the EBA would be the appropriate agency for being assigned the corresponding ‘climate-related and the environmental supervisory powers’. Furthermore, attributing the climate-related and environmental supervision powers to the EBA may be accompanied by the reorganisation of other banking supervision powers, making the EBA the banking supervisory authority for all matters which, by reason of its speciality, the ECB is no required to deal with by primary law (i.e. monetary policy issues).

The attribution of climate-related supervisory powers to the EBA would offer several advantages over the current approach. First, it would provide a clearer legal basis for supervisory action, grounded in Article 114 TFEU rather than the contested provisions of Article 127. Second, it would ensure that climate-related supervision is conducted by an authority with a mandate that extends to all Member States, avoiding the fragmentation that arises from the differential application of Article 127 to euro area and non-euro area Member States. Third, it would facilitate the coordination of climate-related supervision with other aspects of banking supervision that are already within the EBA's remit, promoting a more coherent and integrated approach. Fourth, it would allow the ECB to focus on its core mandate of monetary policy, avoiding the institutional overstretch that may result from the progressive expansion of its supervisory responsibilities.

In this regard, as the number of public interests potentially affected by credit institutions’ activities is of course larger than the sole achievement of monetary policy objectives, but also larger than financial stability with its two aspects (continuity of credit institutions in the market and eliminating market asymmetries protecting bank customers), the principle of efficient administrative activity could advise rethinking the banking supervision model. This could entail identifying which part of it needs to be carried out by the ECB (that related to monetary policy) and which part of it can be undertaken by an independent agency (like the EBA) to protect the remaining public interests affected by credit activities that should be supervised at the EU level.

The reorganisation of banking supervision along the lines suggested would require amendments to the existing regulatory framework, but not necessarily to primary law. The Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (“EBA Regulation”) could be amended to confer direct supervisory powers upon the EBA in respect of matters falling within its existing mandate, including climate-related and environmental supervision. The SSM Regulation could be correspondingly amended to clarify the division of responsibilities between the ECB and the EBA, with the ECB retaining responsibility for those aspects of supervision that are genuinely connected to monetary policy. Such a reorganisation would represent a significant institutional reform, but it would be consistent with the principle of conferral and would address the constitutional difficulties that currently afflict the Banking Union framework.

The proposal for a reorganisation of banking supervision responsibilities raises questions about the coordination between different supervisory authorities. Effective supervision requires not only clear allocation of responsibilities but also robust mechanisms for information sharing and cooperation. The existing framework for cooperation between the ECB and national competent authorities within the SSM provides a model that could be adapted for cooperation between the ECB and the EBA. Memoranda of understanding, joint supervisory teams, and common supervisory databases could facilitate the coordination of supervisory activities across different domains. The experience of the SSM demonstrates that effective cooperation between supervisory authorities at different levels is achievable, provided that appropriate institutional arrangements are put in place.

III. Conclusion: New Wine Requires New Wineskins

As a result of the above, the expansion of the boundaries of banking supervision to the protection of new public interests should lead to a rethinking of the banking supervision model in order to make it efficient and fit within the legal constraints deriving from EU primary law. On the one hand, Article 127(1) of the TFEU corresponds to an exclusive power of the EU that cannot be implemented in the whole EU with the same intensity, provoking relevant differences in how Member States address climate-related and environmental issues in the banking sector. On the other hand, Article 127(6) of the TFEU has a very limited scope and, although it could be stretched further to accommodate new public needs, it could be stretched to bursting and its effectiveness lost.

The analysis presented in this paper demonstrates that the current legal framework for banking supervision in the European Union is ill-suited to accommodate the expanding range of public interests that may be affected by credit institution activities. The reliance upon Article 127(6) TFEU as the primary legal basis for the SSM has created a supervisory architecture that is both constitutionally fragile and institutionally constrained. The difficulties that arise in extending this framework to encompass climate-related and environmental supervision are symptomatic of deeper structural problems that will only become more acute as new supervisory challenges emerge.

The three alternatives examined for configuring climate-related and environmental banking supervision each present significant limitations. The secondary mandate of the ECB, whilst superficially attractive, is too weak and too narrowly circumscribed to provide an adequate foundation for comprehensive environmental supervision. The expansion of the concept of 'prudential' supervision, as partially implemented through CRR III, offers a pragmatic shortterm solution but risks conceptual confusion and may ultimately prove insufficient to address the full range of climate-related and environmental concerns. The establishment of a dedicated supervisory mechanism, whilst legally and institutionally more coherent, would require significant regulatory reform and political that may not be forthcoming in the near term.

Looking beyond the immediate question of climate-related supervision, the analysis suggests that a more fundamental reconsideration of the institutional architecture of European banking supervision may be warranted. The current division of responsibilities between the ECB, the SRB, the EBA, and national competent authorities reflects historical contingencies and political compromises rather than a coherent vision of optimal supervisory design. A more rational allocation of supervisory functions would distinguish clearly between those aspects of supervision that are genuinely connected to monetary policy—and which therefore appropriately fall within the ECB's mandate—and those aspects that relate to other public interests and which might more appropriately be exercised by other Union bodies.

The EBA emerges from this analysis as a potentially suitable vehicle for the exercise of supervisory powers in domains unrelated to monetary policy. Its governance structure, which ensures representation of all Member States, addresses the democratic legitimacy concerns that arise under the current SSM framework. Its technical expertise in banking supervision matters provides a foundation upon which expanded supervisory responsibilities could be built. And its legal basis in Article 114 TFEU avoids the constitutional difficulties that attend the use of Article 127(6) for purposes unconnected to monetary policy.

The transition to such a reformed supervisory architecture would not be without challenges. Questions of institutional design, resource allocation, and inter-authority coordination would need to be addressed. The political obstacles to reform should not be underestimated, particularly given the institutional interests that have developed around the current framework. Nevertheless, the analysis presented in this article suggests that such reform may ultimately Legal constraints on the expansion of European banking supervision. The case of climaterelated and environmental banking supervision prove necessary if European banking supervision is to evolve in a manner that is both legally sound and responsive to emerging supervisory challenges.

In the interim, the approach adopted in CRR III—incorporating climate-related and environmental considerations within the existing prudential framework—represents a workable, if imperfect, solution. This approach has the merit of building upon existing supervisory structures and expertise, whilst avoiding the need for fundamental institutional reform. However, it should be recognised as a transitional measure rather than a permanent solution. As the importance of climate-related and environmental considerations in banking supervision continues to grow, the limitations of the current framework will become increasingly apparent, and the case for more fundamental reform will strengthen.

The metaphor of new wine requiring new wineskins captures the essential challenge facing European banking supervision. The 'new wine' of climate-related and environmental supervision—and, more broadly, of supervision oriented towards the protection of an expanding range of public interests—cannot be adequately contained within the 'old wineskins' of a supervisory framework designed primarily for the pursuit of financial stability through the instruments of monetary policy. The institutional architecture of the ECB within EU primary law may indeed have become outdated, as this article has suggested. The question is whether the political will exists to undertake the reforms necessary to create supervisory structures adequate to the challenges of the twenty-first century.

Ultimately, the effectiveness of banking supervision depends not only upon the legal and institutional frameworks within which it operates, but also upon the clarity of purpose that animates supervisory action. The proliferation of supervisory objectives—financial stability, consumer protection, market integrity, environmental sustainability—creates risks of confusion and conflict that may undermine the effectiveness of supervision across all domains. A reformed supervisory architecture should therefore be accompanied by a clear articulation of the hierarchy of supervisory objectives and the mechanisms for resolving conflicts between them. Only through such clarity can European banking supervision hope to navigate the complex challenges that lie ahead.

IV. Epilogue: Implications For Future Treaty Reform

The analysis presented in this article has implications that extend beyond the immediate question of climate-related and environmental banking supervision to the broader question of Treaty reform. The difficulties identified in the current legal framework for banking supervision suggest that future revisions of the Treaties should consider amendments to the provisions governing the ECB's mandate and the allocation of supervisory competences within the Union.

Several possible approaches to Treaty reform merit consideration. First, Article 127(6) TFEU could be amended to clarify its scope and to specify more precisely the relationship between the ECB's supervisory powers and its monetary policy mandate. Such clarification would reduce the legal uncertainty that currently surrounds the use of this provision as a basis for supervisory action unrelated to monetary policy. Second, a new Treaty provision could be introduced specifically addressing banking supervision, distinct from the provisions governing monetary policy. This would provide a clearer legal basis for the exercise of supervisory powers and would facilitate the development of a more coherent supervisory architecture. Third, the Treaties could be amended to confer upon the EBA or another Union agency the power to exercise direct supervisory functions, thereby providing an alternative institutional vehicle for supervision in domains unrelated to monetary policy.

The prospects for Treaty reform in the near term are admittedly uncertain. The experience of recent decades suggests that Treaty amendments are politically difficult to achieve and are typically undertaken only in response to major crises or as part of broader packages of institutional reform. Nevertheless, the analysis presented in this article suggests that the current Treaty framework for banking supervision is suboptimal and that reform would yield significant benefits in terms of legal clarity, institutional coherence, and supervisory effectiveness. The emergence of climate-related and environmental supervision as a priority for banking regulators may provide the impetus for a broader reconsideration of the legal and institutional foundations of European banking supervision.

Carlos Lora González. Socio responsable de público y regulatorio en ITER Law

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[1] The SSM was created by Regulation (EU) No 1024/2013 of the European Parliament and of the Council of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (SSM Regulation) [2013] OJ L287/63.

[2] The SRM was created by Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (SRM Regulation) [2014] OJ L225.

[3] From a legal theory perspective, banking resolution consists of a singular corrective measure that involves the curtailing of a right with respect to either its subjective element (the holder of the right) or objective element (the content of the right). For instance, the sale-of-business tool or the bridge-institution tool consist of the compulsory transfer of the shareholders’ ownership rights over the shares in the credit institution, whereas the bail-in tool or write-down and conversion of capital instruments consist of the mandatory transformation of ‘rights to receive things’ (derechos de crédito) into ‘rights in things’ (derechos reales) after suffering a haircut, given that the bondholder is converted into a shareholder (and, if the write-down affects the whole of the shareholding’s value, just into a holder of nothing): see Lora González (2024), p. 140-146. 

[4] Only Bulgaria entered a close cooperation agreement with the ECB on 10 July 2020, as part of its way to enter into the Economic and Monetary Union 1 January 2026. 

[5] See Ferran and Babis (2013), p. 5.

[6] For a general overview of the administrative powers within the SSM, see Lora González (2026); Deprés Polo, Villegas Martos, y Ayora Aleixandre (2017); Esteban Ríos (2020); García de Cal (2016); Uría Fernández (2018); García-Álvarez García (2014); Laguna de Paz (2014). With regard to the SRM as an administrative power, see Lora González (2024) or Lara Ortiz (2020).

[7] See Case C-450/17 P Landeskreditbank Baden-Württemberg v BCE [2019] ECLI:EU:C:2019:372.

[8] Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/47.

[9] ‘Save where otherwise provided in the Treaties, the following provisions shall apply for the achievement of the objectives set out in Article 26. The European Parliament and the Council shall, acting in accordance with the ordinary legislative procedure’ and after consulting the Economic and Social Committee, adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market’.

[10] `Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 [2013] OJ L176/1 (‘CRR’), and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338 (‘CRD’).

[11] See Article 3(1)(c) of the Consolidated Version of the Treaty on European Union [2012] OJ C326/13 (‘TEU’).

[12] Banking prudential regulation protects a public interest other than monetary policy: financial stability. So much so that the European legislature configures supervisory powers related to banking prudential regulation on the basis of the separation of functions within the ECB in order to prevent the exercise of these powers with the monetary policy objectives (price stability). Consequently, it does not seem appropriate to say that banking prudential regulation and supervision are both monetary policy rules.

[13] See Magide Herrero (2018), p. 26-30.

[14] See Martínez López-Muñiz (2013), p. 114; and Ferran and Babis (2013), p. 12.

[15] See, a. e., Cases C-9/56 Meroni & Co., Industrie Metallurgiche, SpA v High Authority [1958] ECLI:EU:C:1958:7; C-70/88 European Parliament v Council [1990] ECLI:EU:C:1990:217; C-68/86 United Kingdom v Council [1988] ECLI:EU:C:1988:85; C-270/12, United Kingdom v Parliament and Council (ESMA) [2014] ECLI:EU:C:2014:18; and C-370/12, Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756.

[16] Credit institutions are subject to different regulations approved by public powers guaranteeing ‘protected legal interests’ (bienes jurídicos protegidos). For the time being, these legal interests are financial stability (pursued by the prudential regulations), correcting market asymmetries (pursued by the behavioural regulations) and price stability (pursued by the monetary policy regulations). In this context, the emergence of new public interests potentially affected by banking activities (such as combatting climate change or the digitalisation of the credit sector) could be addressed from two sides: considering how they are directly related to or affected by banking activities (i.e. being considered within their risks structure) or considering how banking activity can prevent the new public interest’s purposes from being achieved, which involves understanding credit institutions as a belt drive for other policies different from those properly considered to be banking or financial policies. For instance, climate-related and environmental risks can be relevant to credit institutions to the extent they affect their solvency regarding either credit or operational risks (e.g. ‘damage caused by extreme weather events or a decline in asset value in carbon-intensive sectors’: see Networking for the Greening the Financial System, ‘Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision’ (May 2020) <https://www.ngfs.net/sites/default/files/medias/documents/ngfs_guide_for_supervisors.pdf> accessed 15 September 2025); however, in other cases, when public authorities want to use credit institutions as a drive belt for climate-related and environmental policies irrespective of the specific impact of the climatic situation on their risks structure, the relationship between climate or the environment and prudential regulation and supervision is weak, because the purpose of the former will not be to protect financial stability (the legal interest protected by prudential regulation and supervision) but other different interests (protecting the environment or combatting climate-related and environmental issues: see Commission Notice on the Guidance to Member States for the update of the 2021-2030 national energy and climate plans, 2022/C 495/02 [2022] OJ C495/24 <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52022XC1229(02)> accessed 15 September 2025). It is in this second set of cases in which new protected legal interests different from the prudential one will emerge and, consequently, new formulas for regulation and supervision should be developed.

[17] This is not the case of banking supervision activities carried out by the SRB (i.e. banking resolution), which, as the corresponding supervision powers are not based on Article 127(6) of the TFEU, but in Article 114(1) of the TFEU, they can be extended to other entities, such as investment firms, which are currently subject to the SRB’s resolution powers.

[18] See Article 4(1)(a) of CRR. The EBA, as requested by the European Commission, set out some limitations involved in this concept of a credit institution, particularly regarding the different concepts of ‘deposit’, ‘other repayable funds’, ‘granting credits’ and ‘public’ in Member States’ legislation. On this basis, the EBA has proposed some amendments to the legal definition of “credit institution” (seeEBA, Opinion of the European Banking Authority on matters relating to the perimeter of credit institutions: EBA/OP/2014/12 (27 November 2014 <https://www.eba.europa.eu/sites/default/files/documents/10180/657547/a7bf5c46-2b80-4286-8771-d14a22c87354/EBA-Op-2014-2%20%28Opinion%20on%20perimeter%20of%20credit%20institution%29.pdf> accessed 15 September 2015; EBA, Report to the European Commission on the perimeter of credit institutions established in the Member States (27 November 2014) < https://www.eba.europa.eu/sites/default/files/documents/10180/534414/6bbabcef-ac51-48b8-a4fb-45dfd483e486/2014%2011%2027%20-%20EBA%20Report%20-%20Credit%20institutions.pdf> accessed 15 September 2025; and EBA, Opinion of the European Banking Authority on elements of the definition of credit institution under Article 4(1), point 1, letter (a) of Regulation (EU) No 575/2013 and on aspects of the scope of authorisation: EBA/OP/2020/15 (18 September 2020 <https://www.eba.europa.eu/sites/default/files/document_library/Publications/Opinions/2020/931784/EBA%20Opinion%20on%20elements%20of%20the%20definition%20of%20credit%20institution.pdf> accessed 15 September 2025). On the other hand, the CJEU highlighted the necessary connection between taking deposits or other repayable funds from the public and granting credits to determine whether an entity should be considered ‘credit institution’ (see case C-427/22 BG v Varhovna kasatsionna prokuratura [2023] ECLI:EU:C:2023:877).

[19] In this regard, see Adrian, T., Ashcraft, A., Boesky, H., and Pozsar, Z. 2012, p.184; and Palá Laguna, 2014, p. 377.

[20] As an example, the prudential supervisory powers attributed to the ECB in the framework of the SSM on the basis of Article 127(6) of the TFEU only relate to ‘credit institutions’, in the terms set out above. Consequently, the ECB cannot be entitled on that basis to supervise directly any kind of entity other than credit institutions (without prejudice of the indirect supervision that the ECB can carry out throughout the ‘prudential consolidation’ on payment services institutions, electronic money institutions, other financial institutions, etc.), belonging to a group headed by a credit institution.

[21] The European legislature has faced this problem with regard to certain investment firms that could jeopardise financial stability and, thus, should be subject to banking prudential regulation and supervision by expanding the legal concept of credit institution to investment firms that manage a large amount of capital (see Article 4(1)(1) of CRR).

[22] Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds.

[23] Financial Stability Board, 'Global Monitoring Report on Non-Bank Financial Intermediation 2023' < https://www.fsb.org/uploads/P181223.pdf> accessed 9 January 2026.

[24] See, in this regard, the ECB, ‘Climate change and the ECB’ <https://www.ecb.europa.eu/ecb/climate/html/index.en.html> accessed 15 September 2025; EBA, ‘Sustainable EBA’ <https://www.eba.europa.eu/about-us/sustainable-eba> accessed 15 September 2025; the Bank of Spain ‘Banco de España y cambio climático’ [‘Bank of Spain and climate change’] <https://www.bde.es/wbe/es/areasactuacion/sostenibilidad/informacion-institucional/banco-espana-y-cambio-climatico/> accessed 15 September; or the Commission Notice on the Guidance to Member States for the update of the 2021-2030 national energy and climate plans, 2022/C 495/02 [2022] OJ C495/24 <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52022XC1229(02)> accessed 15 September 2025.

[25] See Network of Central Banks and Supervisors for Greening the Financial System (NFGS), ‘Welcome to the NGFS website’ <https://www.ngfs.net/en> accessed 15 September 2025. 

[26] ECB, Treading softly: How central banks are addressing current global challenges (BCE 2023), 54-108.

[27] ‘Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union’.

[28] Something as wide as the following: ‘1. The Union's aim is to promote peace, its values and the well-being of its peoples. 2. The Union shall offer its citizens an area of freedom, security and justice without internal frontiers, in which the free movement of persons is ensured in conjunction with appropriate measures with respect to external border controls, asylum, immigration and the prevention and combating of crime. 3. The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance. It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child. It shall promote economic, social and territorial cohesion, and solidarity among Member States. It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe's cultural heritage is safeguarded and enhanced. 4. The Union shall establish an economic and monetary union whose currency is the euro. 5. In its relations with the wider world, the Union shall uphold and promote its values and interests and contribute to the protection of its citizens. It shall contribute to peace, security, the sustainable development of the Earth, solidarity and mutual respect among peoples, free and fair trade, eradication of poverty and the protection of human rights, in particular the rights of the child, as well as to the strict observance and the development of international law, including respect for the principles of the United Nations Charter (...)’.

[29] See Article 139(2) of the TFEU.

[30] ECB (2021), ‘Ocasional Paper Series. Climate chante and monetary policy in the euro area’ < https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op271~36775d43c8.en.pdf> accessed 9 January 2026.

[31] It should be borne in mind that this solution will be needed when the inclusion of climate-related and environmental constraints on banking activities relates to the achievement of public interests that are not directly related to banking activities. If, on the contrary, such constraints are incorporated into banking regulation as part of the risk structure of credit institutions (as either credit or operational risk), they will have, reasonably clearly, the purpose of protecting financial stability and, consequently, could be more easily included within ‘prudential’ supervision under Article 127(6) of the TFEU. Although currently the prudential banking regulations do not contain such constraints, the EBA is employing a ‘green asset ratio’ and a ‘banking book taxonomy alignment ratio’ in order to evaluate the impact that banking activities are having on the environment. Maybe in the future this kind of ratio could be included within the banking regulations and the requisite compliance could be supervised by the prudential supervisory authorities.

[32] The ECB defined as ‘Priority 3’ the need to face the ‘exposure to climate-related and environmental risks’, consisting of the fact that ‘supervised institutions should proactively incorporate climaterelated and environmental risks into their business strategies and their governance and risk management frameworks, in order to mitigate and disclose such risks and comply with the corresponding regulatory requirements’ (ECB, ‘ECB Banking Supervision: SSM Supervisory Priorities for 2022-2024’ <https://www.bankingsupervision.europa.eu/framework/priorities/pdf/ssm.supervisory_priorities2022~0f890c6b70.en.pdf> accessed 15 September 2025, 9). These supervisory expectations were defined within ECB, ‘Guide on climate-related and enviromental risks. Supervisory expectations relating to risk management and disclosure’ (November 2020 <https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.202011finalguideonclimaterelatedandenvironmentalrisks~58213f6564.en.pdf> accessed 15 September 2025, which had an self-alleged ‘non-binding’ nature but that has been included within the ECB’s prudential supervision activities during last years.

[33] ‘The Commission, in its proposals envisaged in paragraph 1 concerning health, safety, environmental protection and consumer protection, will take as a base a high level of protection, taking account in particular of any new development based on scientific facts. Within their respective powers, the European Parliament and the Council will also seek to achieve this objective’.

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