The SSM Is Not a Panacea: Recalibrating EU Supervision Through Constitutional Restraint

In the wake of MiCAR’s entry into force, the EU is once again flirting with a familiar temptation— centralising financial supervision in crypto markets. The European Securities and Markets Authority (ESMA) here aims at getting direct supervisory authority over so-called ‘significant’ crypto-asset service providers. This development mirrors, in tone and ambition, the creation of the Single Supervisory Mechanism (SSM) a decade earlier. But what if the SSM was not a model to follow, but a constitutional detour?

At critical moments in the EU’s regulatory history, necessity has masqueraded as design. The SingleSupervisory Mechanism (SSM), created in the shadows of the Eurozone crisis, is often heralded as a model of institutional integration. It should not be.

Born out of urgency, not out of principle, the SSM was engineered to break the vicious circle between sovereigns and banks. In that narrow mission, it largely succeeded. But its success has seeded a broader temptation—to transplant centralised supervision into sectors where neither systemic fragility nor fiscal contagion justify such consolidation. This temptation, however well-meaning, threatens to unmoor the Union’s constitutional foundations.

The essence of the problem is simple: the assumption that harmonised rules demand harmonised enforcement. They do not. And conflating the two, particularly when applied beyond the banking domain, is not only unsound governance; it is constitutional overreach.

The SSM’s Legal Skeleton: Crisis Logic in Constitutional Clothes

The SSM was created not through Treaty reform, but through a workaround. Article 127(6) TFEU allowed for the conferral of supervisory tasks to the European Central Bank (ECB), but it was never designed to birth a permanent framework of supranational oversight. That it was activated in the context of a monetary emergency does not retroactively confer constitutional legitimacy. Nor should it become precedent.

This is where the principle of conferral under Article 5(1) TEU draws its line—EU institutions may act only within the competences explicitly conferred upon them. There was no ordinary legislative procedure, no serious deliberation over scope, duration, or proportionality of this new supervisory architecture.The ECB’s supervisory role emerged through political velocity, not constitutional gravity,  though it is true that its activation under Article 127(6) TFEU did require unanimity in the Council, alongside consultations with the European Parliament and the ECB itself. Yet these procedural formalities, while not insignificant, fell short of the broader democratic deliberation and Treaty-level reform typically expected for such a structural shift. Political unanimity, after all, is not a substitute for the constitutional guardianship vested in national parliaments—whose role is to imbue acts of centralisation with democratic legitimacy and institutional tenancy under the Treaties. To extrapolate this model to other areas, especially non-systemic sectors is to mistake a legal exception for a normative archetype

The Quiet Erosion of Parliamentary Guardrails

Under Article 5(3) TEU, subsidiarity requires that action at Union level should only occur when objectives cannot be sufficiently achieved by Member States. This principle is not rhetorical filler—it is the institutional safeguard that distinguishes legitimate integration from unwarranted power transfer.

Yet during the SSM’s construction, the Early Warning System Protocol No. 2’s mechanism designed to involve national parliaments in subsidiarity review was dormant. No coordinated objections were raised by national parliaments, and the protocol’s early warning function was never meaningfully activated. This bypass matters, not only as a procedural lapse, but as a symptom of a deeper institutional drift. If national parliaments are to remain meaningful actors in the EU’s constitutional order, subsidiarity must be more than a retrospective justification. It must be embedded into design. Without it, the national parliaments were effectively sidelined.

Article 5(4) TEU enshrines proportionality: EU action must not go beyond what is necessary to achieve the Treaties’ objectives. But the SSM’s architecture was never subjected to a formal proportionality test. The ECB was entrusted with the discretion to determine which banks are ‘significant’ and thus fall under its remit, without a structured inquiry into whether centralisation was the least intrusive, most appropriate regulatory response. This is a critical omission. Central supervision may be warranted where moral hazard is acute, where uniformity is essential, and where fiscal backstops are shared. But where these factors are absent, as in many innovation-driven sectors, the yardstick must change. To ignore this is not only to disregard proportionality, but to invite institutional mismatches between risk profiles and regulatory response.

The Mixed Record of Centralised Supervision

Even within banking, the Single Supervisory Mechanism (SSM) has not left an unqualified legacy. On the one hand, it has delivered methodological consistency, particularly in capital reviews, stress testing, and horizontal risk assessments. Yet it has also introduced bureaucratic drag, constrained supervisory agility, and distanced enforcement from local market knowledge—raising concerns about the responsiveness of centralised oversight.

On the other hand, the SSM remains structurally incomplete. Without a fully realised European Deposit Insurance Scheme (EDIS), the centralised supervision it provides is decoupled from the fiscal backstop that would give it credibility and cohesion. This asymmetry undermines the integrity of the broader Banking Unionand leaves it vulnerable in moments of systemic stress—an issue that also animates the Commission’s efforts to strengthen retail financial markets, as seen in its Savings and Investments Union Strategy (2024).

Similarly, cooperative federalism, long embedded in EU law, offers a framework where supervision can be distributed, coordinated, and aligned without being centralised. Under this model, supervisory convergence is achieved through benchmarking, joint priorities, and mutual accountability, not through hierarchical control.

A Constitutional Recalibration, not a Regulatory Expansion

The European Supervisory Authorities (ESAs) already possess many of the tools needed for effective oversight: peer reviews, common enforcement actions, technical standards, and strategic supervisory priorities. What is missing is the political will to activate these mechanisms systematically—and to do so without defaulting to institutional consolidation. Rather than expand the SSM’s reach, the Union should reinvest in this cooperative model: a system of convergence without unification. It is constitutionally sound, politically viable, and institutionally efficient. Most importantly, it keeps supervision close to those who are legally and democratically accountable for it.

The Single Supervisory Mechanism (SSM), as developed under Council Regulation (EU) No 1024/2013, was a constitutional anomaly, activated under extreme conditions. Its legal base—Article 127(6) TFEU—was never intended as a permanent gateway for institutional consolidation. Transposing this structure into sectors governed by the Capital Requirements Regulation (CRR), Capital Requirements Directives (CRD IV–VI), the Bank Recovery and Resolution Directive (BRRD), the Deposit Guarantee Schemes Directive (DGSD), or the EBA Regulation would be both constitutionally inappropriate and politically provocative.

Moreover, any move to extend ‘SSM-type’ centralisation into non-monetary sectors, such as through the ESMA-led oversight of crypto-asset service providers (CASPs), would rest on a different Treaty base, namely Article 114 TFEU, not Article 127(6). The Meroni doctrine, which limits the delegation of discretionary powers to EU agencies, further constrain such a design, though the CJEU’s decision in the Short Selling case (Case C-270/12) did allow for narrowly defined agency discretion under Article 114 TFEU, provided certain safeguards are met.

Scholars such as Niamh Moloney, Eilis Ferran, Valia Babis and Eddy Wymeersch have all highlighted the legal and institutional fragilities of the SSM framework. Even political economists like David Howarth and Lucia Quaglia treat it as an emergency compromise, not a model to be copy-pasted across regulatory domains.

Conclusion

The legitimacy of any EU action is conditioned not only by its political necessity but most importantly by its conformity with the treaty-based principles of conferral, subsidiarity and proportionality. Every act of centralisation must meet three tests: it must be necessary, it must be proportionate, and it must be constitutionally grounded. Most sectors under the current debate fail one or all these tests.

The Union’s constitutional discipline lies precisely in its restraint—its ability to calibrate integration, not impose it. This restraint is not a weakness; it is a safeguard against uniformity becoming a substitute for judgment. What Europe needs now is not another SSM. It needs a smarter Union: one that knows when to act, where to coordinate, and where to let Member States feel useful and participative.

Dr Ian Gauci is the Managing Partner at GTG, Malta.