European Banking Union 9781509963904, 9783848734887
Can there even be an applied ethics of digital images? What content could such a normative ethics have? And finally: Wha
263 62 7MB
English Pages [1276] Year 2022
Polecaj historie
![European Banking Union [2 ed.]
0198827512, 9780198827511](https://dokumen.pub/img/200x200/european-banking-union-2nbsped-0198827512-9780198827511.jpg)
![The Palgrave Handbook of European Banking Union Law [1st ed.]
978-3-030-13474-7;978-3-030-13475-4](https://dokumen.pub/img/200x200/the-palgrave-handbook-of-european-banking-union-law-1st-ed-978-3-030-13474-7978-3-030-13475-4.jpg)
Citation preview
Preface The initiative for setting up the present book dates back to 2016, just after the Banking Union (BU) became operational. The literature on this field was already significant – and since then has, indeed, exponentially increased, as manifested by the list of references in the commented articles. Nevertheless, it was our firm belief that a systematic, article-by-article Commentary of the Single Supervisory Mechanism Regulation (SSMR) and the Single Resolution Mechanism Regulation (SRMR), as well as of the acts adopted in this relation by the European Central Bank (ECB) and the Single Resolution Board (SRB) would be of value for academics, supervisors, regulators, resolution authorities and practitioners who may wish to refer to it. The delay in the publication of this demanding work on the two main pillars of the BU (the third still missing) was mainly due to the substantial amendment, in 2019, in the course of the so-called first “Banking Package”, of the SRMR, as well as of the Capital Requirements Regulation and Directive (CRR and CRD IV, respectively) and of the Bank Recovery and Resolution Directive (BRRD), which constitute the largest part of the single market component of the European banking regulatory law. In order to cover these changes in the Commentary – which have substantially affected, directly or indirectly, the content and interpretation of the SSMR and the SRMR, the publication was postponed. However, developments are constant. New delegated and implementing acts, as well as guidelines and recommendations have been adopted by September 2021, which in principle is the cut-off date for information included in this Commentary, while others are in the making. In that respect, the possibility is not excluded that at the time readers keep this book in their hands, some provisions may have been supplemented by new ones or even amended. This Commentary benefits from the invaluable work of many distinguished colleagues, practitioners and academics alike, who have contributed thereto with their insightful analyses. We are indebted to them and wish to cordially thank them for the value they added to this book, as well as for their patience as regards the delays in its finalisation. In the preparation of the manuscripts for publication, valuable assistance has been provided by Mr Raphael Reiss, Ms Claire Marshall and Mr Armin Pezhhan, student research assistants at the Chair of Private Law, Company Law, Banking and Securities Law, Eberhard-Karls-University, Tübingen. Last but not least, we wish to thank our publisher for having accepted to include our book in the Brussels Commentary series, and in particular, Dr. Matthias Knopik, for his substantial contribution to its successful publication. February 2022
Jens-Hinrich Binder Christos Gortsos Klaus Lackhoff Christoph Ohler
V
Authors Kern Alexander Prof. Dr. Kern Alexander is Professor of International financial law and banking regulation at the Faculty of Law, University of Zurich and is a Director of Studies at Queens’ College, University of Cambridge. He is the founder of the Research Network of Sustainable and also Co-Director of the bank governance programme at the University of Oxford. Martina Almhofer Mag. Dr. Martina Almhofer, LL.M. BSc is Assistant Professor (post doc) at the Institute for European and International Law at Vienna University of Economics and Business. Previously, she has worked as a Legal Counsel in the Supervisory Law Division of the ECB Legal Services. Fabian Amtenbrink Prof. Dr. Fabian Amtenbrink is Professor of European Union Law at the Erasmus School of Law, Erasmus University Rotterdam, where he also serves as Vice Dean and Director of Research. He is co-founder and member of the academic board of the Erasmus Center for Economic and Financial Governance and a frequent visiting professor at the College of Europe in Bruges. Jens-Hinrich Binder Prof. Dr. Jens-Hinrich Binder, LL.M. is Professor of private law, company law, banking and securities law at Eberhard Karls University, Tübingen. He is also Co-Director of the Tübingen Research Center on the Determinants of Economic Activity (TRIDEA), and a fellow academic Member of the European Banking Institute (EBI). He has been visiting Professor at Università Cattolica del Sacro Cuore, Milan, and Radboud University Nijmegen. Seraina Neva Grünewald Prof. Dr. Seraina Grünewald is Professor of European and Comparative Financial Law at Radboud University Nijmegen. She is a member of the Academic Board of the European Banking Institute and of the Sustainable Finance Lab in the Netherlands. She is also affiliated as an academic fellow with the EUSFiL Jean Monnet Centre of Excellence at the University of Genoa and with the interdisciplinary University Research Priority Programme Financial Market Regulation at the University of Zurich. Christos V. Gortsos Prof. Dr. Christos V. Gortsos is Professor of public economic law at the Law School of the National and Kapodistrian University of Athens. Inter alia, he is also Vice-President of the Board of Appeal of the European Supervisory Authorities, Member of the European Parliament’s expert group on banking resolution and President of the Academic Board of the European Banking Institute (EBI). In the winter semester of the academic year 2017-2018 he was a Bernard Braudel Senior Fellow at the Law Department of the European University Institute in Florence. His work focuses on international and EU monetary and financial law (regulation), as well as on central banking law.
XI
Authors Georg Gruber Dr. Georg Gruber is Head of the SSM Secretariat Division at the European Central Bank. Elke Gurlit Prof. Dr. Elke Gurlit is Professor of public law, comparative law, and European law at the Faculty of Law and Economics at Johannes Gutenberg University of Mainz. She was a Judge at the Staatsgerichtshof Bremen, Germany. Her main research topics are information law, administrative law and financial market regulation. Christos Hadjiemmanuil Prof. Christos Hadjiemmanuil is a Visiting Professor at LSE Law School, as well as a Professor of International and European monetary and financial institutions at the University of Piraeus. He is a member of the Athens Bar Association. Matthias Haentjens Prof. Dr. Matthias Haentjens, LL.M., is a full Professor of law at Leiden Law School and director of the Hazelhoff Centre for Financial Law since 2012. Prior to joining Leiden Law School, he was an attorney with De Brauw Blackstone Westbroek. He was a visiting scholar at Université de Paris II (Panthéon-Assas), Harvard Law School, New York University School of Law and Ghent University. He has been a member of the Expert Group on Securities and Claims at the European Commission, of the Consultative Working Group on Investment Management at ESMA, and a short-term consultant with the World Bank. Since 2016, he has been appointed a deputy judge in the Court of Amsterdam. Janina Heinz Dr. Janina Heinz is Counsel at Freshfields Bruckhaus Deringer Rechtsanwälte Steuerberater PartG mbB, Frankfurt am Main. In a previous role, she worked at the European Central Bank as legal counsel in the Supervisory Law Division of DG Legal Services. Ann-Katrin Kaufhold Prof. Dr. Ann-Katrin Kaufhold holds the chair of constitutional and administrative law at Ludwig-Maximilians-University Munich. Her research focuses on financial market law, esp. financial supervision, and sustainable finance regulation. Klaus Lackhoff Dr. Klaus Lackhoff, M.Iur.Eur. (Saarbrücken), LL.M. (Iowa), worked for more than 15 years in an international law firm before joining the ECB in 2015 as Head of Section in the Supervisory Law Division. In private practice, he advised on banking supervisory issues and a broad range of financing transactions (e.g. IPOs, asset and structured finance transactions). He was involved in the preparation of the ECB for its supervisory tasks and the drafting of the SSM Framework Regulation. At the ECB he leads a team of lawyers dealing, in particular, with CRR related matters. Christoph Ohler Prof. Dr. Christoph Ohler, LL.M.(Brügge) is full professor for public law, European law, public international law and international economic law at the Friedrich-Schiller University of Jena. His focus of research is on EMU and Banking Union.
XII
Authors Chryssa Papathanassiou Dr. Chryssa Papathanassiou, LL.M (Yale) is a lawyer admitted to practice in Athens and New York. Her publications focus on financial market infrastructures, banking supervision, and governance. In her recent project, she analyses the evidence of leasing in ancient silver mines. She leads the supervisory cooperation team at ECB Banking Supervision. She is an external university lecturer at the European Business School (EBS) in Wiesbaden, Germany. Mikulas Prokop Mikulas Prokop is a Legal Counsel at the European Central Bank. Georgios Psaroudakis Georgios Psaroudakis is Associate Professor of Commercial Law at the Faculty of Law, Aristotle University of Thessaloniki. He has studied at the Universities of Athens, Oxford and Hamburg. He has published widely (in Greek, English and German), mostly in the areas of corporate, financial and insolvency law. He has chaired or participated at law drafting committees on financial and corporate law, and since 2021 he is chairing the Insolvency Administration Committee established under Greek law. He is also working on the law of bank supervision and resolution at the Bank of Greece. René Smits René Smits is a Professor Emeritus of the Law of the Economic and Monetary Union (EMU) at the University of Amsterdam, consultant on EMU law & EU banking regulation, Member of the Administrative Board of Review of the ECB and assessor at the Belgian Competition Authority (BCA). He worked for De Nederlandsche Bank N.V. (the Dutch central bank) in Amsterdam for 24 years, where he was general counsel (1989-2001), responsible for legal advice, with a focus on EU banking directives, the IMF and the preparations for monetary union (the introduction of the single currency). He also was a member of the Legal Committee of the European System of Central Banks. Later, he worked for the competition authority of the Netherlands. Emiliano Tornese Emiliano Tornese is Deputy Head of Unit “Resolution and Deposit Insurance” in the European Commission’s DG for Financial Stability, Financial Services and Capital Markets Union. In that capacity, he is involved in the negotiations on the completion of the Banking Union, EDIS and ESM backstop. He has been involved with the preparation and negotiation of the BRRD and TLAC implementation, and with the preparation, negotiation and launch of the Single Resolution Mechanism. He is also Part-time Professor at the Florence School of Banking and Finance, based at the European University Institute, and Visiting Professor at the College of Europe, Bruges. Andreas Witte Dr. iur. Andreas Witte; M.Jur., M.Sc. (Oxon), Dipl.-Jur., Wirtschaftsjurist (Bayreuth) joined the Directorate General Legal Services at the European Central Bank in 2014. During 2011-2014 he worked in the Banking Supervision Department of the Deutsche Bundesbank. For a list of his publications, see www.andreaswitte.com.
XIII
Authors Karl-Philipp Wojcik Dr. Karl-Philipp Wojcik has been the General Counsel to the EU Single Resolution Board in Brussels since 2020, after having joined the European Commission as a Member of its Legal Service in 2010. He graduated in Law from the universities of Münster, Paris I Panthéon-Sorbonne (Licence en droit international) and Cologne (Ph.D.), followed executive education at Harvard Kennedy School and qualified for the bar in Germany. Karl-Philipp Wojcik lectures in law at the University of Bonn as well as at the University of Bologna. His publications focus on EU and national law, in particular on EU constitutional and judicial law, EU financial services law, as well as private and company law. Georgios Zagouras Dr. Georgios Zagouras is a syndic at the European Central Bank. He is a university lecturer at the Philipps-Universität Marburg and the European Business School (EBS) in Wiesbaden. He is also a member of the ECB’s Staff Committee and a Board Member of IPSO.
XIV
Abbreviations ABoR AIFs AIFM AIUFASS AKT AMC AML Art. BCBS BFLR BaFin BEEP BGBl. BGHZ BHC BJIBFL BRRD BRRD II BT-Drucks. BU BUCOM BUWG BVerfG CCP CET CEPS cf. CFI CFREU CFT Ch. CIA CJEU CLR CMLR CMTs CPVO CoCo COD COFRA COREP CoRes CRD IV CRD V
Administrative Board of Review Alternative investment funds Alternative Investment Fund Managers Association Internationale des Utilisateurs de Fils de Filaments Artificiels et Synthétiques et de Soie naturelle Apparel, Knitting & Textiles Alliance Asset management company Anti-money laundering Article Basel Committee on Banking Supervision Banking & Finance Law Review (Journal) Bundesanstalt für Finanzdienstleistungsaufsicht (German Federal Financial Supervisory Authority) Bruges European economic policy briefings (Journal) Bundesgesetzblatt (German Law Gazette) Entscheidungen des Bundesgerichtshofes in Zivilsachen (Decisions of the Federal Court of Justice in civil matters) Bank holding company Butterworths Journal of International Banking and Finance Law Bank Recovery and Resolution Directive (Directive 2014/59/EU) Bank Recovery and Resolution Directive no. II (Directive (EU) 2019/879) Bundestags-Drucksache (German Parliament Document) Banking Union Budget Committee Banking Union Working Group Bundesverfassungsgericht (German Federal Constitutional Court) Central counterparty Common equity tier (capital) Centre for European Policy Studies Confer Corporate Finance Institute Charter of Fundamental Rights of the European Union Combating financing of terrorism Chapter Certified internal auditor Court of Justice of the European Union Columbia Law Review (Journal) Common Market Law Review (Journal) Crisis Management Teams Community Plant Variety Office Contingent convertible bonds Cash on delivery Cooperation Framework (Single Resolution Mechanism) Common reporting Resolution Committee Capital Requirements Directive no. IV (Directive 2013/36/EU) Capital Requirements Directive no. V (Directive (EU) 2019/878)
XV
Abbreviations CRR CRR II CTF CYELP DG COMP DGS DGSD DIF DRI DPO DVBl EBA EBAR EBI EBLR EBOR EBU EC ECB ECEFIL ECGI ECJ ECL ECLI ECOFIN ECON ECSC ed/eds EDIS edn EDPS EEA EEC EFSF EIM EIoP EIOPA EIOPAR ELJ ELR ELRev. EMF EMIR EMU ERL ESAs ESCB ESFS ESM XVI
Capital Requirements Regulation (Regulation (EU) 575/2013) Capital Requirements Regulation no. II (Regulation (EU) 2019/876) Counter-terrorist financing Croatian Yearbook of European Law and Policy (Journal) Directorate-General for Competition (European Commission) Deposit guarantee scheme Deposit Guarantee Schemes Directive (Directive 2014/49/EU) Deposit insurance fund Direct recapitalisation instrument Data protection officer Deutsches Verwaltungsblatt European Banking Authority EBA Regulation (Regulation (EU) 1093/2010) European Banking Institute European Business Law Review (Journal) European Business Organization Law Review European Banking Union European Community European Central Bank European Centre for Economic and Financial Law European Corporate Governance Institute European Court of Justice European Company Law (Journal) European Case Law Identifier Economic and Financial Affairs Council Economic and Monetary Affairs Committee (European Parliament) European Coal and Steel Community Editor/s European Deposit Insurance Scheme Edition European Data Protection Supervisor European Economic Area European Economic Community European Financial Stability Facility Early Intervention Measures European Integration online Papers (Journal) European Insurance and Occupational Pensions Authority EIOPA Regulation (Regulation (EU) 1094/2010) European Law Journal Expected loss ratio European Law Review European Monetary Fund European Market Infrastructure Regulation (Regulation (EU) 648/2012) Economic and Monetary Union Eurosystem resolution liquidity European Supervisory Authorities European System of Central Banks European System of Financial Supervision European Stability Mechanism
Abbreviations ESMA ESMAR ESRB ESZB et seq. EU EUCI EUCJ EUCO EUR EuR EUV EuZW EZB EWU FDIA FDIC FICOD I FICOD II FIDE FRBNY FinDAG FINREP FinSAC FMIR Fn FOLTF FROB FSAP FSB FTEs GAAP G-SIBs G-SIFI G-SII GC GDP GDPR GLRA GSII IAASB IADI ICAAP ICCLR ICLQ ICSD IDI IFD
European Securities and Markets Authority ESMA Regulation (Regulation (EU) 1095/2010) European Systemic Risk Board Europäisches System der Zentralbanken Et sequens (the following) European Union European Union Classified Information European Union Court of Justice (Court of Justice of the European Union) European Council Euro(s) Europarecht (Journal) Vertrag über die Europäische Union (Treaty on European Union) Europäische Zeitschrift für Wirtschaftsrecht (Journal) Europäische Zentralbank (European Central Bank) Europäische Währungsunion Federal Deposit Insurance Act Federal Deposit Insurance Corporation Financial Conglomerates Directive no. I (Directive 2002/87/EC) Financial Conglomerates Directive no. II (Directive 2011/89/EU) Fédération Internationale Pour Le Droit Européen Federal Reserve Bank of New York Finanzdienstleistungsaufsichtsgesetz (German Financial Services Supervision Act) Financial reporting Financial Sector Advisory Center (World Bank) Financial markets, institutions, and risks Footnote Failing or likely to fail Fondo de Reestructuración Ordenada Bancaria Financial sector assessment program Financial Stability Board Full-time equivalents Generally Accepted Accounting Principles Global Systemically Important Banks Global Systemically Important Financial Institution Global Systemically Important Institution General Court Gross domestic product General Data Protection Regulation (Regulation (EU) 2016/679) Group-level resolution authority Global systemically important institution International auditing and assurance standards board International association of deposit insurers Internal Capital Adequacy Assessment Process International Company and Commercial Law Review (Journal) International and Comparative Law Quarterly (Journal) International central securities depositories Insured depository institution Investment Firms Directive (Directive (EU) 2019/2034) XVII
Abbreviations IFR IFRS IGA IIA ILAAP IMF INSOL IOLR IPSAS IRBA IRRBB IRT ISIN ITS IVS IVSC J. Fin. Reg. JCMS JFR JIBLR JÖR JST KWG LAA LCR LDT LFA LREM LSI Maastricht J. of Eur. & Comp. L. MaRisk MCC MEIP MEOP MEPs MiFID I MiFID II MIS MJ M-MDA MoU MPE MREL NCA NCB XVIII
Investment Firms Regulation (Regulation (EU) 2019/2033) International financial reporting standards Intergovernmental agreement Institute of Internal Auditors Internal Liquidity Adequacy Assessment Process International Monetary Fund International Association of Restructuring, Insolvency & Bankruptcy Professionals International Organizations Law Review (Journal) International public sector accounting standards Internal ratings-based approach Interest rate risk in the banking book Internal resolution team International Securities Identification Number Implementing technical standards International Valuation Standards International Valuation Standards Council Journal of Financial Regulation Journal of Common Market Studies Journal of Financial Research Journal of International Banking Law & Regulation Jahrbuch des öffentlichen Rechts der Gegenwart (Journal) Joint supervisory team Kreditwesengesetz (German Banking Act) Loss-absorption amount Liquidity coverage requirement Liability Data Template Loan facility agreement Leverage ratio exposure measure Less significant institution Maastricht Journal of European and Comparative Law Mindestanforderungen an das Risikomanagement (minimum requirements for risk management) Market confidence charge Market Economy Investor Principle Market Economy Operator Principle Members of the European Parliament Markets in Financial Instruments Directive no. I (Directive 2004/39/EC) Markets in Financial Instruments Directive no. II (Directive 2014/65/EU) Management Information System Maastricht Journal of European and Comparative Law Maximum Distributable Amount related to MREL Memorandum of understanding Multiple point of entry Minimum requirement for own funds and eligible liabilities National competent authority National central bank
Abbreviations NCWO NCWOL NDA NJW No. NRA NSFR NVwZ NWULR OCR OECD OJ OLA OLAF OMT O-SIIs Ox. J. Leg. Stud. P2G P2R para(s). PONV PSD PSD II PSPP Q&A RCA Reg. ROI RTS RWA SAG sent. SEP SFR SI SNE SPE SRB SRB-FR SREP SRB SRF SRM SRMR SRMR II SSH
No Creditor Worse Off (principle) No Creditor Worse Off than under Liquidation National designated authority Neue Juristische Wochenschrift (Journal) Number National resolution authority Net stable funding ratio Neue Zeitschrift für Verwaltungsrecht (Journal) Northwestern University Law Review Overall capital requirement Organisation for Economic Co-operation and Development Official Journal Orderly liquidation authority European Anti-Fraud Office (Office de Lutte Anti-Fraude) Outright Monetary Transactions Other Systemically Important Institutions Oxford Journal of Legal Studies Pillar 2 guidance Pillar 2 requirements Paragraph(s) Point of non-viability Payment Services Directive (Directive 2007/64/EC) Payment Services Directive no. II (Directive (EU) 2015/2366) Public sector purchase programme Questions and answers Recapitalisation amount Regulation Return on investment Regulatory technical standards Risk weighted assets Sanierungs- und Abwicklungsgesetz (German Bank Recovery und Resolution Act) Sentence Supervisory examination programme Supervisory Fees Regulation (Regulation (EU) No 1163/2014, ECB/2014/41) Significant Institution Seconded national expert Single point of entry Single Resolution Board SRB Financial Regulation Supervisory review and evaluation process Single Resolution Board Single Resolution Fund Single Resolution Mechanism Single Resolution Mechanism Regulation (Regulation (EU) 806/2014) Single Resolution Mechanism Regulation no. II (Regulation (EU) 2019/877) Single supervisory handbook XIX
Abbreviations SSM SSM‑FR SSMR STE subpara(s). TBTF TEC TEU TFEU TLAC TLOF TREA TRIM UCLAF UCITS UCITS IV UK UNCITRAL US USA VO VwVfG WCCAs WDCCI WM Yale JREG ZBB ZFR ZHR ZÖR
XX
Single Supervisory Mechanism Single Supervisory Mechanism Framework Regulation (Regulation (EU) No. 468/2014) Single Supervisory Mechanism Regulation (Regulation (EU) 1024/2013) Short term exercise Sub-paragraph(s) Too-big-to-fail Treaty (establishing the) European Community Treaty on European Union Treaty on the Functioning of the European Union Total loss-absorbing capacity Total liabilities and own funds Total risk exposure amount Targeted review of internal models Unité de coordination de la lutte anti-fraude Undertakings for Collective Investment in Transferable Securities UCITS Directive no. IV (Directive 2009/65/EC) United Kingdom United Nations Commission on International Trade Law United States (of America) United States of America Verordnung (Regulation) Verwaltungsverfahrensgesetz (German Administrative Procedure Act) Written coordination and cooperation arrangements (for supervisory colleges) Write-down and Conversion of Capital Instruments Wertpapier-Mitteilungen (Journal) Yale Journal on Regulation Zeitschrift für Bankrecht und Bankwirtschaft (Journal) Zeitschrift für Finanzmarktrecht (Journal) Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht (Journal) Zeitschrift für öffentliches Recht (Journal)
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case C-9/56, 13 June 1958, Meroni & Co., Industrie Metallurgiche, SpA v High Authority
SSM
4
127
CJEU
Case C-248/83, 21 May 1985, Commission v Germany
SSM
4
113
CJEU
Case C-361/88, 30 May 1991, Commission v Germany
SSM
4
110
CJEU
Case C-300/89, 11 June 1991, Commission v Council
SSM
4
76
CJEU
Case C-617/10, 26 February 2013, Aklagaren v Hans Akerberg Fransson
SSM
4
51
CJEU
C-270/12, 22 January 2014, United Kingdom v Parliament and Council
SSM
4
127
CJEU
Case C-450/17 P, 8 May 2019, Landeskreditbank BadenWürttemberg
SSM
4
5 12
CJEU
Case C-493/17, 11 December 2018, Weiss,
SSM
4
CJEU
Case T-712/15, 13 December 2017, Crédit Mutuel Arkéa v ECB
SSM
6
66
CJEU
Case C-450/17, 8 May 2019, Landeskreditbank Baden-Württemberg v ECB
SSM
6
63
CJEU
Case C-62/14, 16 June 2015, Gauweiler and others v Deutscher Bundestag
SRM
8
57
CJEU
Case 25/62, 15.7.1963, Plaumann v Commission
SRM
12-12k
25
CJEU
Case C-9/56, 13 June 1958, Meroni v ECSC High Authority
SSM
1
9
CJEU
Case C-222/02, 12 October 2004, Peter Paul
SSM
1
30 et seq.
CJEU
Case C-209/03, 15 March 2005, Bidar
SSM
1
28
CJEU
Case C-164/07, 05 June 2008, Wood
SSM
1
24
CJEU
Case C-149/10, 16 September 2010, Chatzi
SSM
1
24
CJEU
Case C-628/11, 18 March 2014, International Jet Management GmbH
SSM
1
28
CJEU
Case C-62/14, 16 June 2015, Gauweiler
SSM
1
32
CJEU
Case C-270/12, 22 January 2014, UK v. European Parliament and Council
SRM
1
11
CJEU
Cases C-9/56 and C-10/56, 13 June 1958, Meroni v High Authority
SRM
1
12
CJEU
Case C-425/13, 16 July 2015, Comission v. Council
SSM
8
3
CJEU
Case C-327/91, 09 August 1994, France v Commission
SSM
8
6
CJEU
Case C-370/12, 27 November 2012, Pringle
SSM
8
10
CJEU
Case C-62/14, 16 June 2015, Gauweiler
SSM
8
10
CJEU
Case 2/15, 16 May 2017, Avis, Opinion
SSM
8
12
CJEU
Case C-248/83, 21 May 1985, Commission v Germany
SSM
9
18
CJEU
Case C-730/79, 17 September 1980, Philip Morris Holland BV v Commission
SSM
9
28
CJEU
Joined Cases C-15/98 and C-105/99, 19 October 2000, Italy and Sardegna Lines v Commission
SSM
9
28
CJEU
Case C-401/09 P, 27 January 2011, Evropaïki Dynamiki v ECB, Opinion of AG Mengozzi
SSM
9
17
CJEU
Case C-617/10, 26 February 2013, Åklagaren v Hans Åkerberg Fransson
SSM
9
18
CJEU
Case C-209/78, 29 October 1980, van Landewyck
SSM
14
30
CJEU
Case C-188/92, 9 March 1994, Textilwerke Deggendorf
SSM
14
59
CJEU
Case 199/99, 26 September 2002, Sgaravatti
SSM
14
30
CJEU
Case C-417/11 P, 15 November 2012, Council v Bamba
SSM
14
34
CJEU
Case C-18/14, 25 June 2015, CO Sociedad de Gestión y Participación SA et al v. De Nederlandsche Bank NV et al
SSM
14
25
XXI
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case C-219/17, 27 June 2018, Berlusconi and Fininvest, Opinion of AG Campos Sánchez-Bordona
SSM
14
59, 60
CJEU
Case C-663/17 P, 5 November 2019, ECB v Trasta Komercbanka and Others
SSM
14
9, 45, 63,
CJEU
Case C-665/17 P, 5 November 2019, Commission v Trasta Komercbanka and Others et BCE
SSM
14
9, 45, 63,
CJEU
Case C-669/17 P, 5 November 2019, Trasta Komercbanka and Others v ECB
SSM
14
9, 45, 63,
CJEU
Case C-417/11 P, 15.11.2012, Council v Bamba
SSM
15
46
CJEU
Case C-219/17, 27.07.2018, Berlusconi and Fininvest, Opinion of AG Campos Sánchez-Bordona
SSM
15
8, 36, 37, 48,
CJEU
Case T-712/15, 13 December 2017, Crédit Mutuel Arkéa v ECB
SSM
16
14
CJEU
Case T-52/16, 13 December 2017, Crédit Mutuel Arkéa v ECB
SSM
16
14
CJEU
Case T-327/13, 16 October 2014, Mallis and Malli v Commission and ECB
SSM
20
20
CJEU
Case C-17/74, 23 October 1974, Transocean Marine Paint Association v Commission
SSM
22
3, 5
CJEU
Case C-85/76, 13 February 1979, Hoffman-La Roche v Commission
SSM
22
3
CJEU
Case C-301/87, 14 February 1990, France v Commission
SSM
22
18
CJEU
Case C-49/88, 27 June 1991, Al-Jubail Fertilizer Company v Council
SSM
22
5
CJEU
Case C-32/95 P, 24 October 1996, Commission v Lisrestal
SSM
22
5, 8
CJEU
Case C-315/99, 10 July 2001, Ismeri Europa Srl v Court of Auditors
SSM
22
18
CJEU
Case C-378/00, 21 January 2003, Commission v Parliament and Council
SSM
22
29
CJEU
Case C-204/00, 7 January 2004, Aalborg Portland A/S v Commission
SSM
22
20, 23, 25, 26, 27
CJEU
Case C-109/10 P, 25 October 2011, Solvay SA v Commission
SSM
22
27
CJEU
Case C-584/10, 18 July 2013, Commission v Kadi
SSM
22
14, 15
CJEU
Case C-365/12 P, 27 February 2014, Commission v EnBW
SSM
22
22
CJEU
Case 25/62, 15 July 1963, Plaumann & Co. v Commission
SSM
24
22
CJEU
Case 22/70, 31 March 1971, Commission v Council
SSM
24
1
CJEU
Joined Cases 41-44/70, 13 May 1971, International Fruit Company v Commission
SSM
24
22
CJEU
Case C-316/91, 2 March 1994, Parliament v Council
SSM
24
1
CJEU
Case C-386/96 P, 5 May 1998, Dreyfus v Commission
SSM
24
22
CJEU
Case 206/89 R, 31 July 1989, S. v Commission
SSM
24
22
CJEU
Case C-27/04, 13 July 2004, Commission v Council
SSM
24
1
CJEU
Case C-370/12, 27 November 2012, Pringle v Government of Ireland (“Pringle”)
SSM
24
3
CJEU
Case C-62/14, 16 June 2015, Gauweiler v Deutscher Bundestag
SSM
24
3
CJEU
Case C-152/18 P, 2 October 2019, Crédit mutuel Arkéa v ECB
SSM
24
3, 39
CJEU
Case C-153/18 P, 2 October 2019, Crédit mutuel Arkéa v ECB
SSM
24
3, 39
CJEU
Joined Cases C‑663/17 P, C‑665/17 P and C‑669/17 P, 5 November 2019, ECB v Trasta Komercbanka; AS, Ivan Fursin and Others and European Commission v Trasta Komercbanka AS, Ivan Fursin and Others and Trasta Komercbanka AS, Ivan Fursin and Others v ECB
SSM
24
19
CJEU
Case C-9/56, 13 June 1958, Meroni v High Authority
SSM
26
79
CJEU
Case C-5/85, 23 September 1986, Akzo Chemie v Commission
SSM
26
79
CJEU
Case C-301/02, 26 May 2005, Tralli v ECB
SSM
26
79
CJEU
Case C-270/12, 22 January 2014, UK v Parliament and Council
SSM
26
79
XXII
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case C-140/13, 12 November 2014, Altmann and others v Bundesanstalt für Finanzdienstleistungsaufsicht
SSM
27
3
CJEU
Case C-15/16, 19 June 2018, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister
SSM
27
3, 4, 22, 25, 28, 29, 30, 34, 38, 41, 47
CJEU
Case C-15/16, 12 December 2017, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, Opinion of AG Bot
SSM
27
24, 28
CJEU
Case C-594/16, 13 September 2018, Enzo Buccioni v Banca d’Italia
SSM
27
3, 4, 5, 29, 30, 45, 54, 55
CJEU
Case C-594/16, 12 June 2018, Enzo Buccioni v Banca d’Italia, Opinion of AG Bobek
SSM
27
5, 29
CJEU
Case C-358/16, 13 September 2018, UBS Europe and others v DV and others
SSM
27
3, 8, 10, 12, 50
CJEU
Case C-358/16, 1 July 2017, UBS Europe and others v DV and others, Opinion of AG Kokott
SSM
27
3
CJEU
Case C-162/15 P, 14 March 2017, Evonik Degussa GmbH v Commission
SSM
27
43
CJEU
Case 8/81, 19 January 1982, Ursula Becker v Finanzamt MünsterInnenstadt
SSM
27
63
CJEU
Case 152/84, 26 February 1986, M. H. Marshall v Southampton and South-West Hampshire Area Health Authority
SSM
27
63
CJEU
Case C-450/17 P, 8 May 2019, Landeskreditbank BadenWürttemberg – Förderbank v ECB
SSM
27
86
CJEU
Case C-422/18 P, 2 October 2019, ECB v Espírito Santo Financial, Opinion of AG Pikamäe
SSM
27
36
CJEU
Case C-11/00, 10 July 2003, Commission of the European Communities v ECB
SSM
28
2
CJEU
Case C-450/17 P, 8 May 2019, Landeskreditbank BadenWürttemberg – Förderbank v ECB
SSM
28
6
CJEU
Case C-352/98 P, 4 July 2000, Bergaderm and Goupil v Commission
SSM
28
20
CJEU
Case C-11/00, 10 July 2003, Commission of the European Communities v ECB
SSM
29
1
CJEU
Case T-122/15, 16 May 2017, Landeskreditbank BadenWürttemberg v ECB
SSM
32
17
CJEU
Case C-58/08, 06 June 2010, Vodafone Ltd
SRM
4
6
CJEU
Case C-209/03, 15 March 2005, Bidar
SRM
6
10
CJEU
Case C-628/11, 18 March 2014, International Jet Management GmbH
SRM
6
10
CJEU
Case C-62/14, 16 June 2015, Gauweiler and others v Deutscher Bundestag
SRM
10
35, 42
CJEU
Case 9/56, 13 June 1958, Meroni & Co. v High Authority of the European Coal and Steal Community
SRM
18
100
CJEU
Case C-491/01, 10 December 2002, The Queen v Secretary of State for Health, British American Tobacco (Investments) Ltd. and Imperial Tobacco Ltd
SRM
18
12
CJEU
Case C-434/02, 14 December 2004, Arnold André GmbH & Co. KG v Landrat des Kreises Herford
SRM
18
12
CJEU
Case C-210/03 P, 14 December 2004, Swedish Match AB and Swedish Match UK Ltd v Secretary of State for Health
SRM
18
12
CJEU
Joined Cases C-154/04 and C‑155/04, 12 July 2005, Alliance for Natural Health and Others v Secretary of State for Health and National Assembly for Wales
SRM
18
12
CJEU
Case C-66/04, 6 December 2005, United Kingdom v Parliament and Council
SRM
18
12
XXIII
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case C-217/04, 2 May 2006, United Kingdom v Parliament and Council
SRM
18
12
CJEU
Case 9/56, 13 June 1958, Meroni & Co., Industrie Metallurgiche, SpA v High Authority
SRM
21
20
CJEU
Case C-14/83, 10 April 1984, Sabine von Colson und Elisabeth Kamann v Land Nordrhein-Westfalen
SRM
21
4
CJEU
Case C-314/85, 22 October 1987, Foto-Frost v Hauptzollamt Lübeck Ost
SRM
21
36
CJEU
Case C-143/88, 21 February 1991, Zuckerfabrik Süderdithmarschen AG v Hauptzollamt Itzehoe
SRM
21
36
CJEU
Case C-92/89, 21 February 1991, Zuckerfabrik Soest GmbH v Hauptzollamt Paderborn
SRM
21
36
CJEU
Case 9-56, 13 June 1958, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community
SRM
23
5, 8
CJEU
Case 9-56, 13 June 1958, Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community
SRM
27
114
CJEU
Case C-639/17, 17 January 2019, SIA KPMG Baltics v SIA Ķipars AI
SRM
27
98
CJEU
Case C‑156/15, 10 November 2016, Private Equity Insurance Group SIA v Swedbank AS
SRM
27
73
CJEU
Case 9-56, 13 June 1958, Meroni v High Authority of the European Coal and Steel Community
SRM
29
40
CJEU
Case C-25/62, 15 July 1963, Plaumann v Commission
SRM
29
26
CJEU
Case 60/81, 11 November 1981, IBM v. Commission
SRM
29
26
CJEU
Joined Cases 205–215/82, 21 September 1983, Deutsche Milchkontor GmbH v Germany
SRM
29
5
CJEU
Case 294/83, 23 April 1986, Les Verts v European Parliament
SRM
29
22
CJEU
Case 314/85, 22 October 1987, Foto-Frost v Hauptzollamt LübeckOst
SRM
29
19
CJEU
Case C-97/91, 3 December 1992, Oleificio Borelli SpA v Commission
SRM
29
19
CJEU
Case C-239/99, 15 February 2001, Nachi Europe GmbH v Hauptzollamt Krefeld
SRM
29
22
CJEU
Case C–521/04 P(R), 19 April 2005, Tillack v Commission, order of the President of the Court
SRM
29
19
CJEU
Case C 64/05 P, 19 December 2007, Sweden v Commission
SRM
29
19
CJEU
Case C-362/08 P, 26 January 2010, Internationaler Hilfsfonds eV v Commission
SRM
29
26
CJEU
Case C 38/09 P, 15 April 2010, Schräder v CPVO
SRM
29
44
CJEU
Case C-270/12, 22 January 2014, UK v Parliament and Council
SRM
29
41, 42, 43, 46
CJEU
Case C-132/12 P, 27 February 2014, Stichting Woonpunt v Commission
SRM
29
26
CJEU
C-290/13 P, 4 September 2014, Rütgers Germany GmbH v ECHA
SRM
29
44
CJEU
Joined Cases C-622/16 P to C-624/16 P, 6 November 2018, Scuola Elementare Maria Montessori v Commission
SRM
29
28
CJEU
Case C-135/16, 25 July 2018, Georgsmarienhütte GmbH v Bundesrepublik Deutschland
SRM
29
22
CJEU
Case C-219/17, 19 December 2018, Berlusconi and Fininvest v Banca d'Italia
SRM
29
19,
CJEU
Case C-450/17 P, 8 May 2019, Landeskreditbank BadenWürttemberg – Förderbank v ECB
SRM
31
5
CJEU
Case 22-70, 31 March 1971, Commission v Council (ERTA)
SRM
31
48
CJEU
Case C-9/56, 13 June 1958, Meroni v ECSC High Authority
SRM
42
5
XXIV
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case C-11/00, 10 July 2003, Commission v ECB
SRM
42
12
CJEU
Case C-301/02 P, 26 May 2005, Tralli v ECB
SRM
42
13
CJEU
Case C-217/04, 2 May 2006, United Kingdom v Parliament and Council
SRM
42
1
CJEU
Case C-270/12, 22 January 2014, United Kingdom v Parliament and Council
SRM
42
1, 4, 5
CJEU
Case C-402/05 P, 3 September 2008, Kadi
SRM
44
1
CJEU
Case C-362/14, 6 October 2015, Schrems
SRM
44
1
CJEU
Case C-270/12, 22 January 2014, UK v. Parliament and Council
SRM
45
18
CJEU
Case 9-56, 13 June 1958, Meroni v High Authority
SRM
47
6
CJEU
Case 98/80, 14 May 1981, Romano v Institut national d'assurance maladie-invalidité
SRM
47
6
CJEU
Case C-270/12, 22 January 2014, UK v Parliament and Council
SRM
47
6
CJEU
Case C-20/70, 21 October 1970, Commission v Council (“AETR”)
SRM
57
3
CJEU
Case C-5/71, 2 December 1971, Aktien-Zuckerfabrik Schöppenstedt v Council
SRM
57
11
CJEU
Case C-204/86, 27 September 1988, Hellenic Republic v Council
SRM
57
4
CJEU
Case C-152/88, 26 June 1990, Sofrimport SARL v Commission
SRM
57
11
CJEU
Case C-300/89, 11 June 1991, Commission v Council (“titanium dioxide”)
SRM
57
5
CJEU
Case C-370/12, 27 November 2012, Thomas Pringle v Governement of Ireland and others
SRM
57
13
CJEU
Case C- 392/02, 15 November 2005, Commission v Denmark
SRM
58
14
CJEU
Case C-284/90, 31 March 1992, Council v Parliament
SRM
58
14
CJEU
Joined Cases 205 to 215/82, 21 September 1983, Deutsche Milchkontor GmbH and others v Federal Republic of Germany
SRM
59
7
CJEU
Case C-270/83, 28 January 1986, Commission v French Republic
SRM
59
18
CJEU
Case C-101/01, 6 November 2003, Bodil Lindqvist
SRM
59
5
CJEU
Case C-222/04, 10 January 2006, Ministero dell'Economia e delle Finanze v Cassa di Risparmio di Firenze SpA et al.
SRM
59
18
CJEU
Case C-231/05, 18 July 2007, Oy AA
SRM
59
18
CJEU
Case 25/62, 15 July 1963, Plaumann v Commission
SRM
61
3, 4
CJEU
Joined Cases 8-11/66, 15 March 1967, Cimenteries and others v Commission
SRM
61
6
CJEU
Case 138/79, 29 October 1980, Roquette v Council
SRM
61
19
CJEU
Case 283/81, 6 October 1982, CILFIT v Ministry of Health
SRM
61
4
CJEU
Case 84/82, 20 March 1984, Germany v Commission
SRM
61
19
CJEU
Case 23/86 R, 17 March 1986, UK v Parliament
SRM
61
21
CJEU
Case 34/86, 3 July 1986, Council v Parliament, Opinion of AG Mancini
SRM
61
2
CJEU
Case 314/85, 22 October 1987, Foto-Frost v Hauptzollamt LübeckOst
SRM
61
4
CJEU
Case 190/84, 25 February 1988, Parti écologiste “Les Verts” v Parliament
SRM
61
2
CJEU
Case 204/86, 27 September 1988, Greece v Council
SRM
61
5, 19
CJEU
Case C-301/87, 14 February 1990, France v Commission
SRM
61
20
CJEU
Case C-269/90, 21 November 1991, Technische Universität München v Hauptzollamt München-Mitte
SRM
61
5
CJEU
Case C-284/90, 31 March 1992, Council v Parliament
SRM
61
2, 19, 21
CJEU
Joined Cases C-181 and C-248/91, 13 June 1993, Parliament and Council v Commission
SRM
61
2
XXV
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case C-228/92, 26 April 1994, Roquette Frères v Hauptzollamt Geldern
SRM
61
19
CJEU
Case C-210/06, 16 December 2008, Cartesio
SRM
61
4
CJEU
Case C-402/11 P, 18 October 2012, Jager & Polacek GmbH v OHIM (not yet reported) (against the General Court)
SRM
61
22
CJEU
Case 9/56, 13 June 1958, Meroni v High Authority
SRM
63
5
CJEU
Case 5/85, 23 September 1986, Akzo Chemie v Commission
SRM
63
5
CJEU
Case C-315/99 P, 10 July 2001, Ismeri Europa v Court of Auditors
SRM
63
14
CJEU
Case C-301/02 P, 26 May 2005, Tralli v ECB
SRM
63
5
CJEU
Case C-539/09, 15 November 2011, Commission v Germany
SRM
63
14
CJEU
Case C-270/12, 22 January 2014, UK v Parliament and Council
SRM
63
5
CJEU
Case 25/62, 15 July 1963, Plaumann v Commission
SRM
64
6
CJEU
Case 294/83, 23 April 1986, Parti écologiste "Les Verts" v Parliament
SRM
64
6
CJEU
Case C-269/90, 21 November 1991, Technische Universität München v Hauptzollamt München-Mitte
SRM
64
4
CJEU
Case C-316/91, 2 March 1994, Parliament v Council
SRM
64
6
CJEU
Case C-526/14, Kotnik and Others (not yet reported)
SRM
64
6
CJEU
Case C-583/11 P, 3 October 2013, Inuit Tapiriit Kanatami and Others v Parliament and Council (not yet reported)
SRM
65
18
CJEU
Case C-47/16, 16 March 2017, Valsts ieņēmumu dienests v "Veloserviss” SIA
SRM
66
9
CJEU
Case T-323/16, 28 November 2019, Banco Cooperativo Español v SRB
SRM
70
22
CJEU
Case T-365/16, 28 November 2019, Portigon AG v SRB
SRM
70
22
CJEU
Case C-9/56, 13 June 1958, Meroni v High Authority
SRM
75
22, 23
CJEU
Case C-270/12, 22 January 2014, UK v Parliament and Council
SRM
75
23, 25
CJEU
Case C-9/56, 13 June 1958, Meroni v High Authority
SRM
76
3
CJEU
CON/2013/76
SRM
77
4
CJEU
Case 25/62, 15 July 1963, Plaumann v Commission
SRM
85
15
CJEU
Case C-62/70, 23 November 1971, Bock v Commission
SRM
85
14
CJEU
Case 3/75 R, 16 January 1975, Johnson v Commission
SRM
85
26
CJEU
Case 92/78 R, 06 March 1979, Simmenthal
SRM
85
26
CJEU
Case C-56/89 R, 13 June 1989, Publishers Association v Commission
SRM
85
26
CJEU
Case C-386/96, 05 May 1998, Dreyfus v Commission
SRM
85
14
CJEU
Case C-404/96 P, 05 May 1998, Glencore Grain v Commission
SRM
85
14
CJEU
Case C-404/04 P-R, 11 January 2007, Technische Glaswerke Ilmenau v Commission
SRM
85
26
CJEU
Case C-483/07 P, 17 February 2009, Galileo v Commission
SRM
85
16
CJEU
Case C-355/08, 05 May 2009, WWF UK v Council and Commission
SRM
85
16 26
CJEU
Case C-21/14, 12 June 2014, Commission v Rusal Armenal
SRM
85
CJEU
Case C-9/56, 13.06.1958, Meroni v High Authority I
SRM
86
8
CJEU
Case C-10/56, 13.06.1958, Meroni v High Authority II
SRM
86
8
CJEU
Case C-12/03 P, 15.02.2005, Tetra Laval BV v Commission
SRM
86
8
CJEU
Case C-270/12, 22.01.2014, United Kingdom v Parliament and Council
SRM
86
8
CJEU
Case 18/60, 12 July 1962, Worms v High Authority
SRM
87
2
CJEU
Joint Cases 19/69, 20/69, 25/69, 30/69, 28 May 1970, Richez-Parise v Commission
SRM
87
14
XXVI
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
CJEU
Case 74/74, 14 May 1975, CNTA v Commission
SRM
87
16
CJEU
Joined Cases 56/74 to 60/74, 2 June 1976, Kampffmeyer v Commission and Council
SRM
87
16
CJEU
Case 132/77, 10 May 1978, Exportation des Sucres v Commission
SRM
87
18
CJEU
Joined Cases 64/76, 113/76, 167/78, 239/78, 27/79 to 28/79 and 45/79, 19 May 1982, Dumortier Frères v Council
SRM
87
17
CJEU
Case C-352/98 P, 4 July 2000, Bergaderm and Goupil v Commission
SRM
87
11
CJEU
Case C-312/00 P, 10 December 2002, Commission v Camar and Tico
SRM
87
8, 14
CJEU
Case C-222/02, 12 October 2004, Paul and Others v BRD
SRM
87
12
CJEU
Case C-243/05 P, 9 November 2006, Agraz and Others v Commission
SRM
87
16
CJEU
Case C-282/05 P, 19 April 2007, Holcim (Deutschland) v Commission
SRM
87
14, 15
Court of first instance
Case T-380/94, 12 December 1996, AIUFASS and AKT v Commission
SSM
4
108
Court of first instance
Case T-149/95, 5 November 1997, Etablissements J. Richard Ducros v Commission
SSM
4
108
Court of first instance
Case T-214/95, 30 April 1998, Vlaamse Gewest v Commission
SSM
4
108
Court of first instance
Case T-187/06, 19 November 2008, Ralf Schräder v CPVO
SSM
4
150
Court of first instance
Case T-496/11, 4 March 2015, United Kingdom v ECB
SSM
4
154
Court of first instance
Case T-122/15, 16 May 2017, Landeskreditbank BadenWürttemberg v ECB
SSM
4
2, 10
Court of first instance
Joined Cases T-133/16 to T-136/16, 24 April 2018, Caisse régionale de crédit agricole mutuel Alpes Provence v ECB
SSM
4
133
Court of first instance
Case T-122/15, 16 May 2017, Landeskreditbank BadenWürttemberg v ECB
SSM
6
56
Court of first instance
Case T-496/11, 04 March 2015, UK v ECB
SSM
1
34
Court of first instance
Case T‑279/06, 02 July 2009, European Dynamics v ECB
SSM
9
17
Court of first instance
Case T-247/16, 12 September 2017, Trasta Komercbanka AS et al v ECB
SSM
14
38, 40
Court of first instance
Case T-457/09, 17 July 2014, Westfälisch-Lippischer Sparkassenund Giroverband v Commission
SSM
14
45
Court of first instance
Case T-443/08, 24 March 2011, Freistaat Sachsen et al v Commission
SSM
14
Court of first instance
Cases T-133/16 to 136/16, 24 April 2018, Caisse régionale de crédit agricole mutuel Alpes Provence
SSM
14
2, 65
Court of first instance
Case T-321/17 R, Niemelä et al. v. ECB, action brought on 22.5.2017, OJ C 283, 28.8.2017
SSM
14
9, 38, 40
Court of first instance
Cases T-133/16 to 136/16, 24.04.2018, Caisse régionale de crédit agricole mutuel Alpes Provence
SSM
15
52
Court of first instance
Case T-450/93, 6 December 1994, Lisrestal v Commission
SSM
22
8
Court of first instance
Case T-25/95 and T‑104/95, 15 March 2000, Cimenteries CBR v Commission
SSM
22
25
Court of first instance
Case T-5/02, 25 October 2002, Tetra Laval BV v Commission
SSM
22
23
Court of first instance
Case T-134/03, 27 September 2005, Common Market Fertilizers v Commission
SSM
22
13
XXVII
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
Court of first instance
Case T-410/03, 18 June 2008, Hoechst GmbH v Commission
SSM
22
25
Court of first instance
Case T-161/05, 30 September 2009, Hoechst GmbH v Commission
SSM
22
20, 22, 23, 26
Court of first instance
Case T-194/06, 16 June 2011, SNIA v Commission
SSM
22
15
Court of first instance
Case T-122/15, 16 May 2017, L-Bank v ECB
SSM
22
28, 29
Court of first instance
Case T‑712/15, 16 February 2017, Crédit mutuel Arkéa v ECB
SSM
24
39,
Court of first instance
Case T-122/15, 16 May 2017, Landeskreditbank BadenWürttemberg – Förderbank v ECB
SSM
24
31, 38
Court of first instance
Case T-247/16, 12 September 2017, Trasta Komercbanka AS v ECB, Case T-247/16 is now named Fursin and Others v ECB
SSM
24
40
Court of first instance
Case T-52/16, 13 December 2017, Crédit mutuel Arkéa v ECB
SSM
24
39
Court of first instance
Case T-474/04, 12 October 2007, Pergan Hilfsstoffe für industrielle Prozesse v Commission
SSM
27
15
Court of first instance
Case T-198/03, 30 May 2006, Bank Austria Creditanstalt AG v Commission
SSM
27
25, 35, 36
Court of first instance
Case T-353/94, 18 September 1996, Postbank NV v Commission
SSM
27
39
Court of first instance
Case T-122/15, 16 May 2017, Landeskreditbank BadenWürttemberg – Förderbank v ECB
SSM
27
86
Court of first instance
Case T-122/15, 16 May 2017, Landeskreditbank BadenWürttemberg – Förderbank v ECB
SSM
28
6
Court of first Instance
T-122/15, 16 May 2017, Landeskreditbank Baden-Württemberg – Förderbank v. ECB
SRM
7
11
Court of first instance
Joined Cases T-98/16, T-196/16 and T-198/16, 19 March 2019, Italy and Others v Commission
SRM
18
44
Court of first instance
Case T-280/18, ABLV Bank v SRB
SRM
18
98
Court of first instance
Case T-281/18, 6 May 2019, ABLV Bank AS v ECB
SRM
18
98
Court of first instance
Case T-599/18, 10 October 2019, Aeris Invest v SRB
SRM
20
38, 40,
Court of first instance
Case T-2/19, 10 October 2019, Algebris (UK) and Anchorage Capital Group v SRB
SRM
20
38, 40
Court of first instance
Case T-187/06, 19 November 2008, Ralf Schräder v CPVO
SRM
21
28
Court of first instance
Joined Cases T-244/93 and T-486/93, 13 September 1995, TWD Textilwerke Deggendorf GmbH v Commission
SRM
29
22
Court of first instance
Case T-187/06, 19 November 2008, Schräder v CPVO
SRM
29
44
Court of first instance
Case T‑96/10, 7 March 2013, Rütgers Germany GmbH v ECHA
SRM
29
44
Court of first instance
Cases T-133/16 to T-136/16, 24 April 2018, Caisse régionale de crédit v ECB
SRM
29
7
Court of first instance
Case T-411/17, 23 September 2020, Landesbank BadenWürttemberg v SRB
SRM
31
41
Court of first instance
Case T-105/99, 14. December 2000, CCRE v Commission
SRM
58
5
Court of first instance
Case T-45/06, 24 September 2008, Reliance Industries Ltd v Council and Commission
SRM
59
6
XXVIII
List of Cases Court
Case
SSM/ SRM
Article
paragraph number in which the court case is cited
Court of first instance
Joined Cases T-79/89 et al., 27 February 1992, BASF AG and others v Commission
SRM
61
19
Court of first instance
Case T-251/00, 20 November 2002, Lagardère v Commission
SRM
61
22
Court of first instance
Case T-324/05, 02 October 2009, Estonia v Commission
SRM
63
5
Court of first instance
Case T-483/13, 20 July 2016, Oikonomopoulos v Commission
SRM
66
8
Court of first instance
Case T-41/96 R, 03 June 1996, Bayer v Commission
SRM
85
26
Court of first instance
Case T-243/01, 18 March 2005, Sony v Commission
SRM
85
17
Court of first instance
Case T-411/06, 08 October 2008, Sogelma v EAR
SRM
85
14
Court of first instance
Case T-16/04, 02 March 2010, Arcelor v Parliament and Council
SRM
85
16
Court of first instance
Case T-381/11, 04 June 2012, Eurofer v Commission
SRM
85
16
Court of first instance
Case T-133/08, 18 September 2012, Schräder v CPVO
SRM
85
7
Court of first instance
Case T‑201/04, 17.09.2007, Microsoft v Commission
SRM
86
8
Court of first instance
Case T-231/97, 9 July 1999, New Europe Consulting and Brown v Commission
SRM
87
16
Court of first instance
Case T-178/98, 24 October 2000, Fresh Marine v Commission
SRM
87
14
Court of first instance
Case T-415/03, 19 October 2005, Cofradía de `San Pedro de Bermeo’ and Others v Council
SRM
87
11, 16
Court of first instance
Case T-279/03, 10 May 2006, Galileo and Others v Commission
SRM
87
17
Court of first instance
Case T-113/04, 12 December 2007, Atlantic Container Line AB and Others v Commission
SRM
87
17
Court of first instance
Case T-429/05, 3 March 2010, Artegodan v Commission
SRM
87
11
Other Jurisdictions
BVerfG, 30 July 2019, NJW 2019, 3204
SRM
18
Other Jurisdictions
BVerfGE 151, 202
SSM
4
Other Jurisdictions
BVerfGE 154, 17
SSM
4
12
Other Jurisdictions
Verwaltungsgerichtshof Kassel, Case 6 A 2227/08, 6.10.2010, BeckRS 2010, 54766
SSM
15
38
Other Jurisdictions
Nixon v United States, 506 US 224 (1993)
SRM
61
2
Other Jurisdictions
BGHZ 94, 324
SRM
63
20
12
XXIX
Single Supervisory Mechanism Regulation Art. 1 SSMR Subject matter and scope This Regulation confers on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions, with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage. The institutions referred to in Article 2(5) of the 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 are excluded from the supervisory tasks conferred on ECB in accordance with Article 4 of this Regulation. The scope of the ECB’s supervisory tasks is limited to the prudential supervision of credit institutions pursuant to this Regulation. This Regulation shall not confer on the ECB any other supervisory tasks, such as tasks relating to the prudential supervision of central counterparties. When carrying out its tasks according to this Regulation, and without prejudice to the objective to ensure the safety and soundness of credit institutions, the ECB shall have full regard to the different types, business models and sizes of credit institutions. No action, proposal or policy of the ECB shall, directly or indirectly, discriminate against any Member State or group of Member States as a venue for the provision of banking or financial services in any currency. This Regulation is without prejudice to the responsibilities and related powers of the competent authorities of the participating Member States to carry out supervisory tasks not conferred on the ECB by this Regulation. This Regulation is also without prejudice to the responsibilities and related powers of the competent or designated authorities of the participating Member States to apply macroprudential tools not provided for in relevant acts of Union law. Bibliography Kern Alexander, ‘The European Central Bank and Banking Supervision: the regulatory limits of the Single Supervisory Mechanism’ ECFR 24 (2016), 467; Henning Berger, ‘Der einheitliche Aufsichtsmechanismus (SSM) – Bankenaufsicht im europäischen Verbund’, WM (2015), 501; Jens-Hinrich Binder, Alexander Glos and Jan Riepe, Handbuch Bankenaufsichtsrecht (RWS Verlag, Cologne 2018); Jens-Hinrich Binder and Christos V. Gortsos, The European Banking Union (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2016); Giuseppe Boccuzzi, The European Banking Union: Supervision and Resolution (Palgrave/Macmilan, Houndmills, Basingstoke Hampshire, New York, NY 2015); Jan Ceyssens, ‘Teufelskreis zwischen Banken und Staatsfinanzen – Der neue Europäische Bankaufsichtsmechanismus’, NJW (2013), 3704; Veerle Colaert, ‘European Banking, Securities and Insurance Law: Cutting through sectoral lines’, CMLRev 42 (2015), 1579; Larisa Dragomir, European Prudential Banking Regulation and Supervision (Routledge, London and New York 2010); Guido Ferrarini and Fabio Recine, ‘The Single Rulebook and the SSM: Should the ECB have more say in prudential rule-making?’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2015), 118; François Gianviti, ‘The Objectives of Central Banks’ in: Mario Giovanoli and Diego Devos (eds), International Monetary and Financial Law (Oxford University Press, Oxford 2010), 449; Alberto de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union during the debt crisis: the mechanisms of financial assistance’, CMLRev 49 (2012), 1613; Alicia Hinarejos, The Euro area Crisis in Constitutional Perspective (Oxford University Press, Oxford 2014); Luis M. Hinojosa-Martínez and José María Beneyto (eds), European Banking Union. The New Regime (Wolters Kluwer, Alphen aan den Rijn 2016); House of Lords, European Union Committee, European Banking Union: Key Issues and Challenges, HL Paper 88, 12 December 2012; IMF, A Banking Union for the Euro Area, IMF Staff Discussion Note, February 2013, SDN/13/01; Ulrich Karpenstein and
Christoph Ohler
1
Art. 1 SSMR
Subject matter and scope
Olaf Langner, ‘Das Urteil des BVerfG zur Bankenunion: Bis hierher und nicht weiter?‘, EuZW (2020), 270; Ann-Katrin Kaufhold, ‘Instrumente und gerichtliche Kontrolle der Finanzaufsicht‘, Die Verwaltung (2016), 339; Ann-Katrin Kaufhold, Systemaufsicht (Mohr Siebeck, Tübingen 2016); Natalia Kohtamäki, Die Reform der Bankenaufsicht in der Europäischen Union (Mohr Siebeck, Tübingen 2012); Klaus Lackhoff, Single Supervisory Mechanism (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Rosa M. Lastra, International Financial and Monetary Law (2nd edn, Oxford University Press, Oxford 2015); Matthias Lehmann and Cornelia Manger-Nestler, ‘Einheitlicher Europäischer Aufsichtsmechanismus: Bankenaufsicht durch die EZB‘, ZBB (2014), 2; Gianni Lo Schiavo, ‘From National Banking Supervision to a Centralized Model of Prudential Supervision in Europe?’, MJ 21 (2014), 110; Francesco Martucci, L’Union bancaire (Bruylant, Bruxelles 2016); Franz C. Mayer and Daniel Kollmeyer, ‘Sinnlose Gesetzgebung? Die Europäische Bankenunion im Bundestag’, DVBl. (2013), 1158; Niamh Moloney, ‘European Banking Union: assessing its risks and resilience’, CMLRev 51 (2014), 1609; Kerstin Neumann, ‘The supervisory powers of national authorities and co-operation with the ECB – a new epoch of banking supervision’, EuZW-Beilage (2014), 9; Bodil S. Nielsen, ‘Main Features of the European Banking Union’, EBLR 26 (2015), 805; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2015); Christoph Ohler, ‘Das Bundesverfassungsgericht als europäisches Kompetenzgericht’, ZG (2020), 95; Matthias Ruffert, ‘The European debt crisis and European Union Law’, CMLRev 48 (2011), 1777; Garry J. Schinasi, ‘Understanding Financial Stability: Towards a practical framework’ in: IMF (ed), Current Developments of Monetary and Financial Law (Vol. 5, IMF, Washington D.C. 2008), 65; Dirk Schoenmaker, The Financial Trilemma, Tinbergen Institute Discussion Paper No. 11-019/2/DSF (2011); René Smits, The European Central Bank (Kluwer Law International, The Hague 1997); Gunnar Schuster, ‘The banking supervisory competences and powers of the ECB’, EuZW-Beilage (2014), 3; Tobias H. Tröger, ‘The Single Supervisory Mechanism – panacea or quack banking regulation?’, EBOR 15 (2014), 449; Tomi Tuominen, ‘The European Banking Union: A shift in the internal market paradigm?’ CMLRev 54 (2017), 1359; Rainer Wernsmann and Marcel Sandberg, ‘Parlamentarische Mitwirkung bei unionaler Sekundärrechtsetzung’, DÖV (2014), 49; Benedikt Wolfers and Thomas Voland, ‘Level the playing field: The new supervision of credit institutions by the European Central Bank’, CMLRev 51 (2014), 1463; Benedikt Wolfers and Thomas Voland, ‘Europäische Zentralbank und Bankenaufsicht – Rechtsgrundlagen und demokratische Kontrolle des Single Supervisory Mechanism’, BKR (2014), 177; Eddy Wymeersch, ‘The Single Supervisory Mechanism: Institutional Aspects’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 93.
2
A. Origins of the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Banking supervision in the internal market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Global financial crisis and European debt crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. European System of Financial Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The establishment of the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 2 4 4 7
B. Legal basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The scope of Art. 127(6) TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Supplementary national legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 11 18
C. Objectives of the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Safety and soundness of credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Stability of the financial system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Equal treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Unity and integrity of the internal market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Supervision in the public interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 19 21 24 29 30
D. Principle of conferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
Christoph Ohler
Art. 1 SSMR
Subject matter and scope
A. Origins of the SSM I. Introduction The Single Supervisory Mechanism (SSM) that was established by Regulation (EU) 1 No 1024/20131 (SSMR) is a result of a long process of reforms that were triggered by the Global Financial Crisis of 2007-2009 and the European Debt Crisis that followed thereon. It aims at overcoming the weakness of a decentralised banking supervision system administered exclusively by the national authorities that had been a characteristic of the internal market of financial services for more than twenty years. The conferral of pivotal competences to the ECB for the prudential supervision of credit institutions by the SSMR was also motivated by a new, more political assessment of how to handle systemic risks in financial markets. The severe crises that preceded this reform caused a need to develop more efficient instruments in order to prevent a disorderly breakdown of systemically important banks with all its negative effects on the financial system as a whole, the real economy and consequently the societal life. It is against this backdrop that an “EU Banking Union” (EBU) was established within which the SSM forms the first “column” while the second one is constituted by the Single Resolution Mechanism (SRM) under Regulation (EU) No 806/2014 (SRMR).2
II. Banking supervision in the internal market The SSM builds on and co-exists with former models of banking supervision in the 2 EU. They originate in the objective of creating an internal market for financial services in 1989, the EU legislator adopted the Second Banking Coordination Directive, which became effective on 1 January 1993, in order to open up the national markets for banking services on the basis of the principle of EU passporting.3 The approach was to achieve only the essential harmonisation necessary and sufficient to secure the mutual recognition of the authorisation and prudential supervision systems in all Member States.4 In effect, the Second Banking Coordination Directive made it possible to grant a single license recognised throughout the internal market and apply the principle of home Member State prudential supervision. While in the following years, the principle of minimum harmonisation was given up, the European passport5 still permits credit institutions to exercise the freedom of establishment and the freedom to provide services in all other Member States, without being subject to additional authorisation procedures or other forms of prudential supervision.6 As far as the effectiveness of supervision in the internal market was concerned, the 3 European Commission concluded in its Financial Services Action Plan of 1999 that the EU’s framework of prudential legislation “did not require radical surgery”. Rather, it pleaded for a more flexible legislative approach and added that “supervisory authorities can play their part by strengthening co-operation in order to ensure application 1 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, OJ L287, 19.10.2013, p. 63. 2 OJ L225, 30.7.2014, p. 1. 3 Art. 6 Directive 89/646/EEC, OJ L386, 30.12.1989, p. 1. 4 Cf. Recital 4 Directive 89/646/EEC. 5 Art. 33 Directive 2013/36/EU (CRD IV), OJ L176, 27.6.2013, p. 338. 6 Arts. 35 to 46 CRD IV.
Christoph Ohler
3
Art. 1 SSMR
Subject matter and scope
of a uniform understanding of prudential rules”.7 In these years, shortly before the introduction of the single euro currency, when financial crises hit Russia and East Asia, but not Europe, the general focus was on furthering the internal market but not on strengthening the supervisory structures. Also, the Member States would not have accepted a centralisation of competences as they considered the power to supervise financial markets as a part of their national sovereignty. As a result, banking supervision remained confined within national borders, subject only to the obligation of mutual recognition and corresponding cooperation mechanisms. As of today, this model still applies to the non-participating Member States, i.e. those that have not introduced the euro currency.
III. Global financial crisis and European debt crisis 1. European System of Financial Supervision The Global Financial Crisis that started in the USA in 2007 and hit the European Member States in 2008-2009, revealed severe flaws of the decentralised system of banking supervision in the EU. First of all, as the de Larosière Report of 25 February 20098 underlined, it lacked a macro-prudential perspective, next to the traditional micro-prudential approach with its focus on the soundness and stability of individual banks. With a stronger macro-prudential focus, so the analysis was, supervisors would have paid more attention to shocks that can trigger contagion effects within the financial system as a whole. In the view of the de Larosière Report, the decentralised system of banking supervision also favoured distortions and regulatory arbitrage stemming from different supervisory practices that had the potential of undermining financial stability – inter alia by encouraging a shift of financial activity to countries with lax supervision.9 It was also stressed that the existing processes and practices for challenging the decisions of a national supervisor proved to be inadequate and that peer review arrangements were ineffective.10 5 In November 2010, on the basis of the proposals made in the de Larosière Report, the EU legislator established the European System of Financial Supervision (ESFS) as a network of supervisory authorities. In addition to the existing national supervisors, it comprises of three independent EU agencies responsible for the banking sector (European Banking Authority, EBA),11 the insurance and pension funds sector (European Insurance and Occupational Pensions Authority, EIOPA)12 and the securities markets (European Securities and Markets Authority, ESMA).13 The three European Supervi4
European Commission, Financial Services: Building a framework for action (1999), at p. 2. The High-Level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, Report, Brussels, 25 February 2009, at pp. 38 et seq. See also Kohtamäki, Die Reform der Bankenaufsicht in der Europäischen Union (2012); Lastra, International Financial and Monetary Law (2 ndedn, 2015), para. 11.25 et seq. 9 The High-Level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, Report, Brussels, 25 February 2009, at p. 39. 10 The High-Level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, Report, Brussels, 25 February 2009, at p. 40. 11 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), OJ L331, 15.12.2010, p. 12. 12 Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), OJ L331, 15.12.2010, p. 48. 13 Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), OJ L331, 15.12.2010, p. 84. 7
8
4
Christoph Ohler
Art. 1 SSMR
Subject matter and scope
sory Authorities (ESAs) replaced the existing advisory committees, the so-called ‘level-3’ committees of the Lamfalussy process.14 A further element of the ESFS is the European Systemic Risk Board (ESRB) which is responsible for the macro-prudential oversight of the financial system in the EU. The main task of the ESAs is to contribute to the creation of a “European Single 6 Rulebook” in order to provide a single set of harmonised prudential rules for financial institutions throughout the internal market.15 For this purpose, the ESAs may submit proposals for regulations and decisions which are to be adopted by the European Commission under Arts. 290 and 291(2) TFEU. The authorities may also issue non-binding guidelines and recommendations to national authorities or financial institutions. Under certain circumstances, e.g. in the event of a crisis, they have the power to adopt binding decisions addressed to national authorities as well as financial institutions.
2. The establishment of the SSM The strong dynamics of the European sovereign debt crisis, that had started in early 7 2010 and continued throughout the following years, at least until 2015/2016, urged the Member States to agree on a reform of the supervisory system that went beyond the ESFS. The EU legislator found itself in a situation where it had become necessary to cut the vicious circle of rising sovereign indebtedness and continuous instability of banks and markets. The financial weakness of several governments in the EU, in particular, in Spain, Ireland, Portugal, Cyprus and Greece, exposed their countries not only to economic and social risks. It also revealed their inability to stabilise the financial system in their countries, in case that rescue measures for ailing banks should have become necessary again. The SSMR describes this adverse interference with the following words: “The stability of credit institutions is in many instances still closely linked to the Member State in which they are established. Doubts about the sustainability of public debt, economic growth prospects, and the viability of credit institutions have been creating negative, mutually reinforcing market trends. This may lead to risks to the viability of some credit institutions and to the stability of the financial system in the euro area and the Union as a whole, and may impose a heavy burden for already strained public finances of the Member States concerned.”16 Against this backdrop, the political consensus grew considerably to solve the so-called financial trilemma, i.e. the difficulty to achieve simultaneously a single financial market and financial stability while preserving a high degree of nationally based supervision.17 At the peak of the crisis, in mid 2012, the Euro Area Summit asked the Council to 8 consider proposals by the Commission for a single supervisory mechanism on the basis of Art. 127(6) TFEU. The decision to establish the Single Supervisory Mechanism (hereafter SSM) on this legal basis was a highly political step,18 in procedural as well as in substantive terms. Procedurally, it required a unanimous vote by the Council, thereby involving the participation of all Member States, including the Member States outside
14 On this procedure see Lastra, International Financial and Monetary Law (2 nd edn, 2015), para. 11.18 et seq. 15 See e.g. Colaert, CMLRev 42 (2015), 1579; Ferrarini and Recine, in: Busch and Ferrarini (eds), European Banking Union (2015), 118, para. 5.01. 16 Recital 6 SSMR. 17 Lastra, International Financial and Monetary Law (2nd edn, 2015), para. 10.11; Schoenmaker, The Financial Trilemma (2011). 18 Binder and Gortsos, The European Banking Union (2016), at p. 2.
Christoph Ohler
5
Art. 1 SSMR
Subject matter and scope
the euro area, in the legislative process.19 In substantive terms, the political price to be paid for the establishment of the SSM was high. It required a considerable conferral of competences from the national level upon the ECB by the euro area Member States. In contrast thereto, the Member States outside the euro area feared that the SSM would deepen the division between the ins and outs of the Economic and Monetary Union (EMU) and threaten the integrity of the internal market.20 9 The decision to confer supervisory powers upon the ECB and not upon the EBA, that had been established just two years ago, was also influenced by constitutional considerations and practical aspects. Firstly, the Meroni doctrine of the CJEU restrains the conferral of wide administrative powers by the EU legislator.21 It would have hindered a thorough reform of the EBA Regulation, but does not apply when powers are conferred upon an organ of the EU in accordance with the Treaties.22 Secondly, the ECB was seen as an institution particularly qualified for the task of banking supervision. Being the leading monetary authority of the euro area, it disposes off extensive professional knowledge on macroeconomic issues and is familiar with the structure of the euro area’s banking system.23 10 After hefty negotiations within the EU organs and between the Member States, the Council adopted Regulation (EU) No 1024/2013 of 15 October 2013. The SSM became operative on 4 November 2014 with the ECB assuming its tasks under the SSMR. 24
B. Legal basis I. The scope of Art. 127(6) TFEU The legal basis of the SSMR is Art. 127(6) TFEU. This particular provision does not form part of the exclusive competences of the EU in the area of monetary policy under Art. 3(1) (c) TFEU.25 It states that the Council may “[...] 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”. The wording was the result of a political compromise during the negotiations for the Treaty of Maastricht. It goes back to the divergent approaches of the Member States as to which role a central bank should play in the field of banking supervision. Accordingly, Art. 127(6) TFEU suffers from a considerable lack of clarity that concerns the legal concept as a whole, as well as particular terms used therein,26 which has a farreaching bearing on the interpretation of this provision. 12 As far as the notion “specific tasks” is concerned, it is generally assumed that the full spectrum of supervisory tasks and powers may not be conferred on the ECB. 27 11
19 On the political risks of this procedure see Wymeersch, in: Busch and Ferrarini (eds), European Banking Union (2015), 93, at p. 99, para. 4.16. 20 House of Lords, European Union Committee, European Banking Union: Key Issues and Challenges, (12 December 2012), at pp. 40 et seq. 21 Case C-9/56, Meroni v ECSC High Authority, ECLI:EU:C:1958:7. 22 Lackhoff, Single Supervisory Mechanism (2017), at pp. 20 et seq. 23 Recital 13 SSMR. 24 Art. 33(2) SSMR. 25 BVerfG, case 2 BvR 1685/14, paras. 166, 190. 26 Cf. BVerfG, case 2 BvR 1685/14, para. 192. 27 Lackhoff, Single Supervisory Mechanism (2017), at p. 16; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), at p. 145; Wolfers and Voland, CMLRev 51 (2014), 1463, at p. 1486.
6
Christoph Ohler
Art. 1 SSMR
Subject matter and scope
This implies that substantial tasks must remain with national authorities,28 provided, however, that they may be performed in cooperation with the ECB.29 Apart from this analysis ex negativo, the wording does not permit a positive finding on the substance of the ECB’s potential competences. The word “specific” does not only imply that the tasks conferred on the ECB must be spelled out in detail (in the meaning of “certain tasks”) and must be delineated from the supervisory competences that remain in the national sphere. It also means that these tasks must have a substantive quality that is commensurate to the tasks carried out by the ECB as the superordinate monetary authority within the Eurosystem. A systematic interpretation suggests that Art. 127(6) could be read in conjunction with Art. 127(5) TFEU.30 This provision relates the prudential supervision of credit institutions exercised by national authorities to the objective of the stability of the financial system. If one accepts this finding, then the legal basis of Art. 127(6) TFEU may be used to confer supervisory competences upon the ECB as long as their objective relates to issues of financial stability, including the supervision of systemically important banks. Insofar, the EU legislator is also competent to define which banks can be regarded as being systemically important, or, in the words of Art. 6(4) SSMR, as “significant”. With regard to Art. 132 TFEU, the “tasks” conferred upon the ECB also encompass “powers”, i.e. the right of the ECB to adopt measures that are legally binding on the addressees.31 Any other interpretation would render useless the legislative option of which the Council may make use under Art. 127(6) TFEU. The term “credit institutions” which is used in Art. 127(6) TFEU has the same meaning as in EU secondary law. Art. 4(1)(1) CRR,32 to which the SSMR refers, defines a credit institution as an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account. In contrast thereto, the term “financial institutions” as used in Art. 127 (6) TFEU is unclear. While a narrow definition exists in the secondary law (cf. Art. 4(1)(26) CRR), legal doctrine assumes that the term has a broader meaning.33 In any event, the parent undertakings of credit institutions, i.e. financial holding companies and mixed financial holding companies, fall within the scope of application of Art. 127(6) TFEU. The Council did not make use of the possibility to extend the competences of the ECB also to other financial institutions (e.g. specialised lending institutions or investment firms) as Art. 1(1) SSMR only refers to “credit institutions”.
13
14
15
16
17
II. Supplementary national legislation Prior to the adoption of the SSMR, the German Parliament adopted a federal law au- 18 thorising the German government representative in the Council to vote in favour of the proposed regulation. Both the federal government and the Parliament were of the opinion that such an authorising act was necessary under German constitutional law because a regulation according to Art. 127(6) TFEU would trigger the Parliament’s political reThis is stressed by BVerfG, case 2 BvR 1685/14, para. 162 passim. Smits, The European Central Bank (1997), at p. 356. 30 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), at p. 145. 31 BVerfG, case 2 BvR 1685/14, para. 165. This had been disputed by parts of the German doctrine, e.g. Herdegen, WM 2012, 1889, at p. 1891; Kaufhold, Systemaufsicht (2016), at p. 286. 32 Regulation (EU) No 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms OJ L176, 27.6.2013, p. 1. 33 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), at p. 147; Smits, The European Central Bank (1997), at p. 359. 28
29
Christoph Ohler
7
Art. 1 SSMR
Subject matter and scope
sponsibility in matters of EU integration. The constitutional necessity of this law was vividly disputed.34 The solution, however, does not depend directly on German constitutional law35 but on the compatibility of the SSMR with its legal basis in the Treaties. In other words, the question was whether the legislative competence of the Council under Art. 127(6) TFEU had already been conferred upon the EU under the Treaty of Maastricht. Again, the wording of Art. 132(1) first indent TFEU with its reference to Art. 25.2 of the ESCB Statute – the parallel provision to Art. 127(6) TFEU – confirms that this was the case.36 To the extent, this Article can be used as a legal basis for the SSMR, the Council acted within its competences, so that any complementary national legislation would be meaningless. If the legal basis of Art. 127(6) TFEU had not sufficed for the adoption of the SSMR, the Council would have acted ultra vires. In this case, the unilateral approval of the Bundestag by adopting a federal law could not heal the violation of primary law.
C. Objectives of the SSM I. Safety and soundness of credit institutions As it lies traditionally at the heart of any supervisory system, 37 Art. 1(1) SSMR aims at the safety and soundness of individual credit institutions. The objective of prudential supervision is not only to safeguard the functions provided by banks,38 but also to ensure that customers, in particular depositors and investors, have confidence in the banks with whom they are doing business. The underlying concept is that, even if the information asymmetry in the business relationship between a bank and its customers cannot be overcome, it may be compensated by prudential regulation and supervision of banks. Insofar, by aiming at the safety and soundness of banks, so that they do not pose unreasonable risks for depositors and investors, the objective of prudential supervision is not to protect customers individually, but at maintaining a level of trust which is necessary for the functioning of the banking market. 20 This micro-prudential approach is performed by the enforcement of quantitative requirements with respect to own funds (capital) and liquidity of a bank and qualitative requirements that refer mainly to the adequacy of the bank’s risk management. The practical advantage of the micro-prudential task is that it is relatively easy to fulfil because its objectives and the prudential standards are clearly defined in EU secondary law. The objective of safety and soundness of credit institutions does not, however, mean that the SSM should prevent banks from failing. Rather, supervision should aim to reduce the probability and impact of a bank failure.39 19
34 Cf. Mayer and Kollmeyer, DVBl 2013, 1158; Wernsmann and Sandberg, DÖV 2014, 49; Wolfers and Voland, BKR 2014, 177. 35 In contrast thereto, BVerfG, case 2 BvR 1685/14, para. 312, stressed that the Bundestag intended to comply with the constitutional requirements of its “integration responsibility”. 36 See also Dragomir, European Prudential Banking Regulation and Supervision (2010), at p. 233. 37 Cf. Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (September 2012), para. 16. 38 Lackhoff, Single Supervisory Mechanism (2017), at p. 27. 39 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (September 2012), para. 16.
8
Christoph Ohler
Art. 1 SSMR
Subject matter and scope
II. Stability of the financial system Pursuant to Art. 1(1) SSMR, a further objective of the SSM is to preserve the stability 21 of the financial system within the EU and each Member State. Financial stability became a key objective of financial market supervision when the financial crisis of 2007-2009 revealed the weakness of the micro-prudential approach that focused on the individual institutions but neglected the multiple interferences between financial institutions, markets and infrastructures. As of today, it is generally accepted that “supervisors and other authorities need to assess risk in a broader context than that of the balance sheet of individual banks.”40 Accordingly, the objective of financial stability is to be understood in a macro-prudential sense so that the risk correlations within the overall financial system and their effects on credit institutions form the object of supervision. A more precise definition of what exactly constitutes “financial stability” has not 22 been developed so far. In a negative sense, financial stability could be understood as the absence of financial crises. In a more sophisticated, positive understanding, financial stability exists when the elements of the financial system function properly and are able to withstand internal or external shocks.41 In this very broad context, the tasks of a supervisory authority are difficult to per- 23 form: First of all, credit institutions form only one element of the financial system, other ones being investment firms, insurance companies, pension funds and managers of various kinds of investment and hedge funds. The financial system also relies on markets and their infrastructures, including payment and settlement systems.42 Accordingly, financial stability requires the supervisory authority to take a holistic approach. A second challenge results from the fact that the functioning of a firm varies over time and depends primarily on its management and the outcome of competition on the relevant markets. These factors underline the need for a process-oriented approach to financial stability. Thirdly, financial stability is also a relative concept.43 The corrective forces of the market may repair some of the shortcomings of a bank and the insolvency of a (minor) bank does not threaten necessarily the financial system as a whole.44 Fourthly, depending on the territorial reach of markets, the purview of the supervisory task can be more or less limited. Even if Art. 1(1) SSMR limits the ECB’s task to the participating Member States, business relations of firms located in the euro area may extend to all other parts of the world so that the risks can originate from abroad but unfold at home (and vice versa). Fifthly, financial stability interrelates, positively as well as negatively, to decisions of public bodies, mainly monetary policy decisions of central banks, but also to regulatory and supervisory measures. Accordingly, these decisions may produce moral hazard or promote, often unintendedly, the occurrence of risk concentrations. 45
40 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (September 2012), para. 20. 41 Schinasi, in: IMF (ed), Current Developments of Monetary and Financial Law, (Vol. 5, 2008), 65, at p. 91; see also Gianviti, in: Giavanoli and Devos (eds), International Monetary and Financial Law (2010), 449, at p. 475; Lastra, International Financial and Monetary Law (2nd edn, 2015), para. 3.62. 42 Schinasi, in: IMF (ed), Current Developments of Monetary and Financial Law, (Vol. 5, 2008), 65, at p. 92; Gianviti, in: Giavanoli and Devos (eds), International Monetary and Financial Law (2010), 449, at p. 475. 43 Schinasi, in: IMF (ed), Current Developments of Monetary and Financial Law, (Vol. 5, 2008), 65, at p. 93: “occurring along a continuum”. 44 Schinasi, in: IMF (ed), Current Developments of Monetary and Financial Law, (Vol.5, 2008), 65, at p. 92. 45 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), at p. 101.
Christoph Ohler
9
Art. 1 SSMR
Subject matter and scope
III. Equal treatment 24
25
26
27
28
The principle of equal treatment is one of the general principles of European Union law whose fundamental nature is affirmed in Art. 20 of the Charter of Fundamental Rights. It is directly applicable and must be observed in accordance with Art. 51(1) of the Charter also by the ECB when implementing the SSMR. This principle requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. A difference in treatment is justified if it is based on an objective and reasonable criterion, that is, if the difference relates to a legally permitted aim pursued by the legislation in question, and it is proportionate to the aim pursued by the treatment concerned.46 According to the Court’s settled case-law, the comparable nature of different situations is assessed in the light of all the elements that characterise them. Those elements must, in particular, be determined and assessed in the light of the subject matter and purpose of the act making the distinction in question. In addition, the principles and objectives of the field to which the act relates must also be taken into consideration.47 In this regard, the General Court may exercise a full control of any supervisory measures taken by the ECB under the SSMR. In the context of banking supervision, the principle of equal treatment plays an important role as it guarantees a level playing field for all banks in the participating Member States. This concept is built on the idea that regulatory and supervisory requirements should be neutral as regards their effects on the competition between banks. With respect to the internal market, this competitive neutrality may be achieved to the extent that divergent prudential requirements in national law have been harmonised by secondary law. As a result, the concept of a level playing field propels the move towards a full harmonisation of EU banking law. In practice, however, secondary law leaves room for regulatory options and supervisory discretion which are legitimate as long as they exist in order to take into account the peculiarities of certain national markets or of the legal orders of the Member States. To the extent that the ECB is competent under Art. 4(3) SSMR to implement these options or to make use of this discretion, it is bound by the principle of equal treatment under Art. 20 of the Charter of Fundamental Rights. Insofar, Art. 1(3) SSMR clarifies that the ECB, “when carrying out its tasks according to this Regulation, and without prejudice to the objective to ensure the safety and soundness of credit institutions, [it] shall have full regard to the different types, business models and sizes of credit institutions.” This provision obliges the ECB to consider that banks that are comparable as regards relevant economic criteria must not be treated differently and that banks which are different with respect to such criteria must not be treated in the same way. The SSMR itself provides an important distinction as it differentiates between significant and less significant credit institutions. However, Art. 20 of the Charter of Fundamental Rights does not constitute an absolute prohibition of discrimination. Rather, it requires the ECB to apply the principle of proportionality when any of its measures discerns (or does not discern) between certain categories of credit institutions. The risk-based approach which the ECB pursues when performing its tasks under Art. 97 of the CRD IV,48 provides a useful orientation as to whether a differential treatment is necessary or not. In addition to the relative prohibition of discrimination in accordance with Art. 20 SSMR, the ECB must comply with the specific prohibitions of discrimination under 46 Cf. e.g. Case C-356/12, Glatzel, EU:C:2014:350, para. 43; Case C-555/19, Fussl Modestraße, ECLI:EU: C:2021:89, para. 95. 47 See Case C-555/19, Fussl Modestraße, ECLI:EU:C:2021:89, para. 99. 48 ECB, Guide to banking supervision (November 2014), at p. 6.
10
Christoph Ohler
Art. 1 SSMR
Subject matter and scope
Art. 21 of the Charter. In this respect, the prohibition of discrimination on grounds of nationality of a bank, i.e. the Member State where it has been established, is of particular relevance. Art. 1(4) SSMR specifies that “no action, proposal or policy of the ECB shall, directly or indirectly, discriminate against any Member State or group of Member States as a venue for the provision of banking or financial services in any currency.” The CJEU accepted, however, that a difference in treatment based on the criterion of nationality can be justified if it is based on objective considerations independent of the nationality of the persons concerned and is proportionate to the legitimate aim of the national provisions.49 In this context, the CJEU does not permit measures protecting the national economy (against competition), as this is an objective of a purely economic nature which cannot justify a difference in treatment.50
IV. Unity and integrity of the internal market The model of decentralised implementation of prudential requirements by national 29 authorities prior to the establishment of the SSM bore the risk of incoherent approaches to banking supervision. It resulted in inconsistencies between the standards applicable in individual Member States, thereby favouring insufficient supervision of cross-border operations by national authorities and regulatory arbitrage by banks. With the ECB as the superior authority of the SSM, administrative inefficiencies due to divergent prudential standards of national authorities within the internal market should be abolished.51 In addition, the SSM aims at eliminating the national bias in the supervision of cross-border banking operations, thereby safeguarding the unity and integrity of the internal market.52
V. Supervision in the public interest The SSMR qualifies the supervisory activities of the ECB as measures undertaken ex- 30 clusively in the public interest of the Union. This is explicitly provided by Art. 19(1) and Art. 26(1) SSMR saying that all members of the Supervisory Board shall act in the interest of the Union as a whole. Insofar, the SSMR makes it sufficiently clear that its objectives are not pursued in the interest of any of the Member States, the undertakings supervised, their competitors or their customers. This complies with substantive EU banking law which does not confer rights on individual persons, even if they are depositors, investors or consumers.53 Also the wording of Art. 1 SSMR does not permit the interpretation that individual depositors or investors may derive rights or claims against the ECB thereunder. The legal relevance of this concept is high since it excludes claims for damages by 31 individual depositors or investors against the ECB under Arts. 268 and 340 TFEU and against national supervisory authorities under national law in the event of defective supervision.54 The CJEU also accepted the finding that the rules of EU banking law 49 Case C-209/03, Bidar, ECLI:EU:C:2005:169, para. 54; Case C-628/11, International Jet Management GmbH, ECLI:EU:C:2014:171, para. 68. 50 Case C-628/11, International Jet Management GmbH, ECLI:EU:C:2014:171, para. 70. 51 Cf. Recital 12 SSMR. 52 Cf. Binder and Gortsos, The European Banking Union (2016), at p. 7. 53 Cf. Case C-222/02, Peter Paul, ECLI:EU:C:2004:606, paras. 40 seq.; see also Kaufhold, Die Verwaltung 2016, 339, at pp. 363 seq. 54 Lackhoff, Single Supervisory Mechanism (2017), at pp. 260 et seq.
Christoph Ohler
11
Art. 1 SSMR
Subject matter and scope
are based on considerations related to the complexity of banking supervision, in the context of which the authorities are under an obligation to protect a plurality of interests, including more specifically the stability of the financial system.55
D. Principle of conferral The fundamental principle of conferral as provided by Art. 5(2) TEU does not only apply to the relationship between the EU and the Member States, but also to the powers of the EU organs in accordance with Art. 13(2) TEU, including the ECB.56 Art. 4(1) TEU clarifies that competences not conferred upon the Union in the Treaties remain with the Member States. The SSMR reflects this fundamental principle in its Art. 1(5) by providing that this Regulation is without prejudice to the responsibilities and related powers of the competent authorities of the participating Member States to carry out supervisory tasks not conferred on the ECB by this Regulation. With respect to macro-prudential tools, this is reiterated by Art. 1(6) SSMR. 33 The principle of conferral has effects on (1) the territorial scope of application of the SSMR, (2) the competences ratione personae of the ECB, and (3) its tasks as a supervisory authority. With regard to the first aspect, even if the SSMR is binding in its entirety and directly applicable in all Member States of the EU (cf. Art. 288(2) TFEU), the powers (and competences) of the ECB thereunder are limited to the participating Member States in the meaning of Art. 2 (1) SSMR. Accordingly, the non-participating Member States are not affected by the conferral of supervisory powers to the ECB, so that neither their authorities nor banks and other financial institutions established in their territories are subject to prudential measures taken by the ECB. 34 As it is provided by Art. 1(2) SSMR, the ECB is only competent for the supervision of credit institutions in the meaning of Art. 4(1) of the CRR. Art. 4(2) SSMR clarifies that this competence applies also to the branches of credit institutions established in nonparticipating Member States. In addition, the ECB is competent to supervise the parent undertakings of credit institutions, i.e. financial holding companies and mixed financial holding companies, as Art. 6(4) of the SSMR pursues an approach of supervision on a consolidated basis. Due to the principle of conferral, banks that do not fulfil the criteria for credit institutions in the meaning of Art. 4(1) of the CRR do not fall within the purview of the SSMR. Art. 4 SSMR also clarifies that the institutions referred to in Art. 2(5) of Directive 2013/36/EU57 are excluded from the supervisory tasks conferred on the ECB. In addition, Art. 1(2) SSMR exempts central counterparties (cf. Art. 2(1) of Regulation EU No 648/201258) from supervision by the ECB.59 35 As concerns the competences ratione materiae of the ECB, its tasks are exhaustively listed by Art. 4(1) and (2) SSMR. Other areas of prudential supervision remain in the 32
Case C-222/02, Peter Paul, ECLI:EU:C:2004:606, paras. 44–45. Case C-62/14, Gauweiler, ECLI:EU:C:2015:400, para. 41. 57 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 and2006/49/EC, OJ L176, 27.6.2013, p. 338. 58 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, OJ L201, 27.7.2012, p. 1. 59 This was also confirmed by the General Court in Case T-476/11, UK v ECB, ECLI:EU:T:2015:133, with respect to the area of monetary policy. 55
56
12
Christoph Ohler
Art. 2 SSMR
Definitions
competence of the Member States, in particular consumer protection, money laundering and terrorist financing.60 In its decision of 30 July 2019, the Federal Constitutional Court held that the distinc- 36 tion between significant and less significant credit institutions under Art. 6 (4) SSMR has a bearing on the legal nature of the competences conferred on the ECB. Contrary to the position of the General Court and the Court,61 the Federal Constitutional decided that the ECB’s competences in the area of indirect supervision vis-à-vis less significant institutions are non-exclusive.62 In this field, the national competent authorities do not operate on the basis of a re-delegation of powers, but, in accordance with the originals tasks attributed to them under national law.63
Art. 2 SSMR Definitions For the purposes of this Regulation, the following definitions shall apply: (1) ‘participating Member State’ means a Member State whose currency is the euro or a Member State whose currency is not the euro which has established a close cooperation in accordance with Article 7; (2) ‘national competent authority’ means a national competent authority designated by a participating Member State in accordance with 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 Directive 2013/36/EU; (3) ‘credit institution’ means a credit institution as defined in point 1 of Article 4(1) of Regulation (EU) No 575/2013; (4) ‘financial holding company’ means a financial holding company as defined in point 20 of Article 4(1) of Regulation (EU) No 575/2013; (5) ‘mixed financial holding company’ means a mixed financial holding company as defined in point 15 of Article 2 of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate; (6) ‘financial conglomerate’ means a financial conglomerate as defined in point 14 of Article 2 of Directive 2002/87/EC; (7) ‘national designated authority’ means a designated authority of a participating Member State, within the meaning of the relevant Union law; (8) ‘qualifying holding’ means a qualifying holding as defined in point 36 of Article 4(1) of Regulation (EU) No 575/2013; (9) ‘Single supervisory mechanism’ (SSM) means the system of financial supervision composed by the ECB and the national competent authorities of participating Member States as described in Article 6 of this Regulation. Article 2 SSM Framework Regulation Definitions For the purposes of this Regulation, the definitions contained in the SSM Regulation shall apply, unless otherwise provided for, together with the following definitions:
Cf. Recital 28 of the SSMR. Case T-122/15, L-Bank/ECB, ECLI:EU:T:2017:337, para. 53 and 63; case C-450/17 P, ECLI:EU:C: 2019:372, para. 38-41. 62 BVerfG, case 2 BvR 1685/14, para. 188 and 195; critical review by Karpenstein and Langner, EuZW (2020), 270, at p. 273. 63 BVerfG, case 2 BvR 1685/14, para. 187. 60
61
Christos V. Gortsos
13
Art. 2 SSMR
Definitions
(1) ‘authorisation’ means an authorisation as defined in point (42) of Article 4(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council; (2) ‘branch’ means a branch as defined in point (17) of Article 4(1) of Regulation (EU) No 575/2013; (3) ‘common procedures’ means the procedures provided for in Part V with respect to an authorisation to take up the business of a credit institution, withdrawal of an authorisation to pursue such business and decisions with regard to qualifying holdings; (4) ‘euro area Member State’ means a Member State whose currency is the euro; (5) ‘group’ means a group of undertakings of which at least one is a credit institution and which consists of a parent undertaking and its subsidiaries, or undertakings linked to each other by a relationship within the meaning of Article 22 of Directive 2013/34/EU of the European Parliament and of the Council, including any sub-group thereof; (6) ‘joint supervisory team’ means a team of supervisors in charge of the supervision of a significant supervised entity or a significant supervised group; (7) ‘less significant supervised entity’ means both (a) a less significant supervised entity in a euro area Member State; and (b) a less significant supervised entity in a non-euro area Member State that is a participating Member State; (8) ‘less significant supervised entity in a euro area Member State’ means a supervised entity established in a euro area Member State and which does not have the status of a significant supervised entity within the meaning of Article 6(4) of the SSM Regulation; (9) ‘national competent authority’ (NCA) means a national competent authority as defined in point (2) of Article 2 of the SSM Regulation. This definition is without prejudice to arrangements under national law which assign certain supervisory tasks to a national central bank (NCB) not designated as an NCA. In this case, the NCB shall carry out these tasks within the framework set out in national law and this Regulation. A reference to an NCA in this Regulation shall in this case apply as appropriate to the NCB for the tasks assigned to it by national law; (10) ‘NCA in close cooperation’ means an NCA designated by a participating Member State in close cooperation in accordance with Directive 2013/36/EU of the European Parliament and of the Council; (11) ‘national designated authority’ (NDA) means a national designated authority as defined in point (7) of Article 2 of the SSM Regulation; (12) ‘NDA in close cooperation’ means a non-euro area NDA designated by a participating Member State in close cooperation for the purposes of the tasks related to Article 5 of the SSM Regulation; (13) ‘non-euro area Member State’ means a Member State whose currency is not the euro; (14) ‘parent undertaking’ means a parent undertaking as defined in point (15) of Article 4(1) of Regulation (EU) No 575/2013; (15) ‘participating Member State in close cooperation’ means a non-euro area Member State that has entered into close cooperation with the ECB in accordance with Article 7 of the SSM Regulation; (16) ‘significant supervised entity’ means both (a) a significant supervised entity in a euro area Member State; and (b) a significant supervised entity in a participating non-euro area Member State; (17) ‘significant supervised entity in a euro area Member State’ means a supervised entity established in a euro area Member State which has the status of a significant supervised entity pursuant to an ECB decision based on Article 6(4) or Article 6(5)(b) of the SSM Regulation; (18) ‘significant supervised entity in a participating non-euro area Member State’ means a supervised entity established in a participating non-euro area Member State which has the status of a significant supervised entity pursuant to an ECB decision based on Article 6(4) or Article 6(5)(b) of the SSM Regulation; (19) ‘subsidiary’ means a subsidiary as defined in point (16) of Article 4(1) of Regulation (EU) No 575/2013; (20) ‘supervised entity’ means any of the following: (a) a credit institution established in a participating Member State; (b) a financial holding company established in a participating Member State; (c) a mixed financial holding company established in a participating Member State, provided that it fulfils the conditions laid down in point (21)(b); (d) a branch established in a participating Member State by a credit institution which is established in a non-participating Member State. A central counterparty (CCP), as defined in Article 2(1) of Regulation (EU) No 648/2012 of the European Parliament and of the Council, which qualifies as a credit institution within the meaning of Directive 2013/36/EU, shall be considered a supervised entity in accordance with the SSM Regulation, this Regulation and relevant Union law without prejudice to the supervision of CCPs by relevant NCAs as laid down under Regulation (EU) No 648/2012; (21) ‘supervised group’ means any of the following: (a) a group whose parent undertaking is a credit institution or financial holding company that has its head office in a participating Member State; (b) a group whose parent undertaking is a mixed financial holding company that has its head office in a participating Member State, provided that the coordinator of the financial conglomerate, within the
14
Christos V. Gortsos
Art. 2 SSMR
Definitions
meaning of Directive 2002/87/EC of the European Parliament and of the Council, is an authority competent for the supervision of credit institutions and is also the coordinator in its function as supervisor of credit institutions; (c) supervised entities each having their head office in the same participating Member State provided that they are permanently affiliated to a central body which supervises them under the conditions laid down in Article 10 of Regulation (EU) No 575/2013 and which is established in the same participating Member State; (22) ‘significant supervised group’ means a supervised group which has the status of significant supervised group pursuant to an ECB decision based on Article 6(4) or Article 6(5)(b) of the SSM Regulation; (23) ‘less significant supervised group’ means a supervised group which does not have the status of a significant supervised group within the meaning of Article 6(4) of the SSM Regulation; (24) ‘ECB supervisory procedure’ means any ECB activity directed towards preparing the issue of an ECB supervisory decision, including common procedures and the imposition of administrative pecuniary penalties. All ECB supervisory procedures are subject to Part III. Part III also applies to the imposition of administrative pecuniary penalties, unless Part X provides otherwise; (25) ‘NCA supervisory procedure’ means any NCA activity directed towards preparing the issue of a supervisory decision by the NCA, which is addressed to one or more supervised entities or supervised groups or one or more other persons, including the imposition of administrative penalties; (26) ‘ECB supervisory decision’ means a legal act adopted by the ECB in the exercise of the tasks and powers conferred on it by the SSM Regulation, which takes the form of an ECB decision, is addressed to one or more supervised entities or supervised groups or one or more other persons and is not a legal act of general application; (27) ‘third country’ means a country which is neither a Member State nor a European Economic Area Member State; (28) ‘working day’ means a day which is not a Saturday, Sunday or an ECB public holiday in accordance with the calendar applicable to the ECB.
A. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Single Supervision Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
C. Member States – Third countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
D. Financial firms, groups of financial firms and related terms . . . . . . . . . . . . . . . . .
7
E. Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Authorities related to prudential supervision – teams of supervisory authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Designated authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 18 21
F. Authorisation and prudential supervision-specific terms (SSM Framework Regulation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Supervised entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Supervised groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Supervisory procedures and decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 23 26 32 35
A. Introductory remarks The definitions of terms in the SSMR and the SSM‑FR (Art. 2) are presented below, to 1 the extent that there is an overlapping, in a consolidated form with those of the SRMR. The definitions of terms only used in the SRMR are presented when analysing Art. 3 of the latter legislative act. The first sentence of Art. 2 of the SSM‑FR states that, unless otherwise provided for, 2 the definitions contained therein apply together with the definitions contained in the SSMR. Several of these definitions repeatedly refer to other EU legislative acts (of the European Parliament and of the Council) and in particular:
Christos V. Gortsos
15
Art. 2 SSMR
Definitions
First, three acts, which initially were all sources of both EU banking and EU capital markets law (since their rules equally applied to credit institutions1 and investment firms): Regulation (EU) No 575/2013, adopted on26 June 2013, “on prudential requirements for credit institutions and investment firms (…)”2 (CRR) and Directive 2013/36/EU of the same date “on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, (…)”3 (CRD IV), which constitute the single market element for the authorisation, the micro- and macro-prudential regulation and the micro-prudential supervision of credit institutions and hence form the basis for the operation of the SSM; Directive 2014/59/EU of 15 May 2014 “establishing a framework for the recovery and resolution of credit institutions and investment firms (...)”4 (BRRD), which constitutes the single market element for the preparation for resolution, the early intervention regime and the resolution of credit institutions (and hence forms the basis for the operation of the SRM).5 On 20 May 2019, these legislative acts were amended as follows: the CRR by Regulation (EU) 2019/876 (CRR II), the CRD IV by Directive (EU) 2019/878 (CRD V), and the BRDD by Directive (EU) 2019/879 (BRRD II). 6 The rules of the CRR II apply, in principle, from 28 June 2021, while Member States should have incorporated into national law the rules of the CRD V and the BRRD II, in principle again, from 28/29 December 2020. Furthermore, some of their Arts. (including on certain definitions) were amended by Regulation (EU) 2019/2033 “on the prudential requirements of investment firms” (IFR) and Directive (EU) 2019/2034 “on the prudential supervision of investment firms” (IFD) of 27 November 2019.7 It is by virtue of these legislative acts that the CRR and the CRD IV ceased to apply to investment firms and were renamed as follows: “on prudential requirements for credit institutions” and “on access to the activity of credit institutions and the prudential supervision of credit institutions”; on the other hand, the BRRD continues to apply to investment firms. The IFR and the national rules to be adopted for the implementation of the IFD apply from 26 June 2021.8 Second, Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 “establishing a European Supervisory Authority (EBA) (…)”9 (EBAR), as in force.
On the definition of this term, see infra, → para. 7. OJ L176, 27.6.2013, pp. 1-337. As of April 2020, this legislative act applied as repeatedly amended and mainly by the following Regulations of the European Parliament and of the Council: Regulation (EU) 2017/2395 of 12 December 2017, mainly as regards the mitigation of the impact of the introduction of IFRS 9 on own funds (OJ L345, 27.12.2017, pp. 27-33); Regulation (EU) 2017/2401 of 12 December 2017 as well, mainly on the treatment of securitisation positions (OJ L347, 28.12.2017, pp. 1-34), and Regulation (EU) 2019/630 of 17 April 2019, as regards minimum loss coverage for non-performing exposures (OJ L111, 25.4.2019, pp. 4-12). 3 OJ L176, 27.6.2013, pp. 338-436. 4 OJ L173, 12.6.2014, pp. 190-348. 5 This legislative act currently applies as repeatedly amended and most recently in December 2017 by Directive (EU) 2017/2399 (OJ L345, 27.1.2.2017, pp. 96-101). 6 OJ L150, 7.6.2019, pp. 1-225, 253-295 and 296-344, respectively. 7 OJ L 314, 5.12.2019, pp. 1-63 and 64-114, respectively. 8 IFR, Art. 66(2) and IFD, Article 67(1). 9 OJ L331, 15.12.2010, pp. 12-47. 1
2
16
Christos V. Gortsos
Art. 2 SSMR
Definitions
Third, with regard to EU capital markets law: Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 “on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)” (UCITS IV Directive); 10 Regulation (EU) No 648/2012 of 4 July 2012 “on OTC derivatives, central counterparties and trade repositories”11 (EMIR); and Directive 2014/65/EU of 15 May 2014 “on markets in financial instruments (...)” (MiFID II),12 as in force. Finally, with regard to EU financial conglomerates law: Directive 2002/87/EC of 11 February 2003 “on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (...)”13 (the “Financial Conglomerates Directive” or FICOD I), as in force.14 From a systematic point of view, the terms defined in the SSMR and the SSM‑FR are 3 classified into five categories (see infra, paras. 4-37).
B. Single Supervision Mechanism “Single Supervision Mechanism” (SSM) means15 the system of financial supervision 4 composed by the European Central Bank (ECB) and national competent authorities of participating Member States as described in Art. 6 SSMR.
C. Member States – Third countries 5 “Participating Member States” refers to16 two groups of Member States: First, those whose currency is the euro, which in the SSM‑FR are defined as “euro area Member States”.17 Second, those whose currency is not the euro (in the TFEU referred to as Member States with a derogation18 and in the SSM‑FR defined as “non-euro area Member States”19), which have established a close cooperation in accordance with Art. 7 SSMR. In the SSM‑FR these are defined as “participating Member States in close cooperation”20 (and in its Art. 115(5) referred to as “non-euro area participating Member States”). The group of Member States with a derogation also includes Denmark, which has an opt-out clause from the monetary union in accordance with Protocol (No 16) attached to the Treaties.21
OJ L302, 17.11.2009, pp. 32-96. OJ L201, 27.7.2012, pp. 1-59. 12 OJ L173, 12.6.2014, pp. 349-496. This Directive repealed with effect from 3 January 2018 Directive 2004/39/EC of the same institutions of 21 April 2004 “on markets in financial instruments (...)” (OJ L145, 30.4.2004, pp. 1-44) (MiFID I). 13 OJ L35, 11.2.2003, pp. 1-27. 14 Key amendments were introduced by Directive 2011/89/EU of 16 November 2011 (OJ L326, 8.12.2011, pp. 113-141) (FICOD II), which was adopted by virtue of Art. 31 FICOD I. 15 Art. 2(9) SSMR. 16 Art. 2(1) SSMR; see also Art. 4(1) SRMR. 17 Art. 2(4) SSM‑FR. 18 Arts. 139-144 TFEU and Arts. 42-47 ESCB Statute. 19 Art. 2(13) SSM‑FR. 20 Art. 2(15) SSM‑FR. 21 OJ C202, 7.6.2016, p. 287. 10 11
Christos V. Gortsos
17
Art. 2 SSMR 6
Definitions
“Third country” means22 a country which is neither an EU Member State nor (another) Member State of the European Economic Area (i.e., Norway, Liechtenstein and Iceland).
D. Financial firms, groups of financial firms and related terms “Credit institution” means in principle23 an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account. This definition was firstly introduced in Council Directive 77/780/ΕEC of 12 December 1977 “on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions”24 (known as the “First Banking Directive”) and then recurrently adopted unchanged in subsequent legal acts constituting the sources of European banking law. That term was selected as an overarching one, covering all types of financial firms which accept deposits and grant loans for their own account, even if they are not named “banks” (e.g., cajas in Spain, building societies in the UK, casse di risparmio in Italy, Ταχυδρομικό Ταμιευτήριο in Greece) in order to establish a uniform framework regarding their operation.25 8 Noteworthy is also the provision of Art. 9(1) CRD IV, according to which persons or undertakings that are not credit institutions are prohibited from carrying out the business of taking deposits or other repayable funds from the public,26 establishing thus a “legal monopoly” in this respect for credit institutions. 9 “Branch” means27 a place of business which forms a credit institution’s legally dependent part and carries out directly all or some of the transactions inherent in the business thereof. 10 “Parent undertaking” means, in principle, a parent undertaking within the meaning of Art. 22(1)-(5) of Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 “on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC”28 (also referred to as the ‘Accounting Directive’), as in 7
Art. 2(27) SSM‑FR. Art. 2(3) SSMR, with reference to Art. 4(1)(1)(a) CRR. Art. 62(3)(a) IFR amended this definition by inserting to that CRR Art. a new point (b), according to which credit institution also means an undertaking the business of which consists of carrying out the activities referred to in points (3)-(6) of Section A of Annex I to MIFID, albeit under specific conditions and provided that the undertaking is not a commodity and emission allowance dealer, a collective investment undertaking or an insurance undertaking. 24 OJ L322, 17.12.1977, pp. 30-37. 25 Due to divergences in the interpretation of elements of the notion of credit institution across the EU, and in particular with regard to the terms ‘the business of which’, ‘deposits’, ‘other repayable funds’ and ‘from the public’, the EBA issued on 18 September 2020 an Opinion “on elements of the definition of credit institution under Article 4(1), point 1, letter (a) [CRR] and on aspects of the scope of the authorisation” (). It is suggested that these terms should be further clarified by the Commission to enhance the single rulebook and ensure that prudential requirements contained in the CRR and the CRD IV are imposed appropriately in relation to entities presenting similar risks to customers and financial stability. 26 This prohibition does not apply to the taking of deposits or other funds repayable by a Member State, or by a Member State's regional or local authorities, by public international bodies of which one or more Member States are members, or to cases expressly covered by national or EU law, provided that those activities are subject to regulations and controls intended to protect depositors and investors (Art. 9(2) CRD IV). 27 Art. 2(2) SSM‑FR, with reference to Art. 4(1)(17) CRR; see also Art. 3(1)(22) SRMR. 28 OJ L 182, 29.6.2013, pp. 19-76. 22 23
18
Christos V. Gortsos
Art. 2 SSMR
Definitions
force. For the purposes of Sec. II of Ch. 3 and 4 of Title VII and Title VIII of the CRD IV29 and Part Five of the CRR30 it also means a parent undertaking within the meaning of Article 22(1) of the Accounting Directive and any undertaking which effectively exercises a dominant influence over another undertaking.31 According to Article 22(1) of the Accounting Directive, “parent undertaking” means an institution meeting any of the following requirements: First, it has a majority of the shareholders’ or members’ voting rights in another undertaking (a ‘subsidiary undertaking’); Second, it has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of that subsidiary undertaking and is at the same time a shareholder in or member of that (subsidiary) undertaking; Third, it has the right to exercise a dominant influence over that subsidiary undertaking, pursuant to a contract entered into with that subsidiary undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions; or Finally, it is a shareholder in or member of a subsidiary undertaking, and (i) a majority of the members of the administrative, management or supervisory bodies of that (subsidiary) undertaking who have held office during the financial year, during the preceding financial year and up to the time when the consolidated accounts are drawn up, have been appointed solely as a result of the exercise of its voting rights, or (ii) it controls alone, pursuant to an agreement with other shareholders in or members of that subsidiary undertaking, a majority of shareholders’ or members’ voting rights in that (subsidiary) undertaking. “Subsidiary” means32 (in principle) a subsidiary undertaking within the meaning of Art. 22(1)-(5) of the (just above-mentioned) Accounting Directive. Subsidiaries of subsidiaries are also considered to be subsidiaries of their original parent undertaking. “Group” means33 a group of undertakings of which at least one is a credit institution, and which consists of a parent undertaking and its subsidiaries, or undertakings linked to each other by a relationship within the meaning of Art. 22 of the Accounting Directive, including any sub-group thereof. At national discretion, covered are also parent undertakings which have the power to exercise or actually exercise dominant influence or control over a subsidiary undertaking, as well as parent and subsidiary undertakings managed on a unified basis by the former.34 “Qualifying holding” means35 a direct or indirect holding in an undertaking which accounts for 10 % or more of the capital or voting rights or makes it possible to exert significant influence on the management of that undertaking.
29 Arts. 119-127 CRD IV, on the supervision on a consolidated basis of financial holding companies, mixed financial holding companies and mixed activity holding companies; Arts. 135-140 CRD IV, on setting and calculating countercyclical capital buffers; and Arts. 143-144 CRD IV, on disclosure by competent authorities, respectively. 30 Arts. 404-411 CRR, on exposures to transferred credit risk. 31 Art. 2(14) SSM‑FR, with reference to Art. 4(1)(15)(a) and 15(b) CRR, respectively (which still refer to Directive 83/349/EEC that was repealed by the Accounting Directive); see also Art. 3(1)(20) SRMR, which (apparently) only refers to Art. 4(1)(15)(a) CRR. 32 Art. 2(19) SSM‑FR, with reference to Art. 4(1)(16) CRR; see also Art. 3(1)(21) SRMR. 33 Art. 2(5) SSM‑FR. 34 Art. 22(1)-(2) of Directive 2013/34/EU. 35 Art. 2(8) SSMR, with reference to Art. 4(1)(36) CRR.
Christos V. Gortsos
19
11
12
13
14
Art. 2 SSMR
Definitions
“Financial holding company” means36 a financial institution the subsidiaries of which are exclusively or “mainly” institutions, or financial institutions, and which is not a mixed financial holding company. These subsidiaries are “mainly” institutions or financial institutions where at least one of them is an institution and more than 50 % of the financial institution’s equity, consolidated assets, revenues, personnel or other indicator considered relevant by the competent authority are associated with subsidiaries that are institutions or financial institutions.37 In this respect, it is also noted that “institution” means: first, a credit institution authorised under Art. 8 CRD IV; and second, an undertaking as referred to in point (1)(b) of Art. 4(1) CRR (that is also covered by the new definition of credit institution as already noted), which by end-2019 was carrying out activities as investment firm, authorised under MiFID II, and should have applied for authorisation in accordance with Art. 8 CRD IV by 27 December 2020.38 16 “Mixed financial holding company” means39 a parent undertaking, other than a “regulated entity”,40 which, together with its subsidiaries – at least one of which is a regulated entity which has its registered office in the EU – and other entities, constitutes a financial conglomerate.41 17 “Financial conglomerate” means42 a group or subgroup, where a regulated entity is at the head of the group or subgroup, or where at least one of the subsidiaries in that group or subgroup is a regulated entity, and which meets specific conditions, which are (partially) differentiated depending on whether there is a regulated entity at the head of the group or subgroup.43 15
E. Authorities I. Authorities related to prudential supervision – teams of supervisory authorities 18
“National competent authority” (NCA) means44 a national competent authority designated by a participating Member State in accordance with the CRR and the CRD IV (Art. 4). For the purposes of the SSM‑FR this definition is without prejudice to arrangements under national law which assign certain supervisory tasks to a national central bank (NCB) not designated as an NCA, in which case the NCB must carry out these Art. 2(4) SSMR, with reference to Art. 4(1)(20) CRR; see also Art. 3(1)(16) SRMR. According to the EBA, in principle, a distinction should be made between holding companies whose “principal activity” is the acquisition of holdings for investment purposes (acting as a “financial investor”) and holding companies which pursue management tasks for their industrial or manufacturing subsidiaries or holdings and whose “principal activity” is the (operative) group management in the role of a “strategic investor” (see at: ). 38 Art. 3(1)(3) CRR with reference to Art. 8a(3) CRD IV, inserted by virtue of the IFD. 39 Art. 2(5) SSMR, with reference to Art. 2(15) FICOD I; see also Art. 3(1)(17) SRMR. 40 Pursuant to Art. 2(4) FICOD I, ‘regulated entity’ means a credit institution, an insurance and a reinsurance undertaking, an investment firm, an asset management company or an alternative investment fund manager. 41 It is noted in this respect that one of the main pillars of the amendments to the CRD IV by the CRD V was to establish rules on the authorisation and to enhance the framework governing the prudential supervision of financial holding companies and mixed financial holding companies. The new rules apply from 1 January 2021. 42 Art. 2(6) SSMR, with reference to Art. 2(14) FICOD I. 43 Art. 2(14)(a) and (14)(b) FICOD I, respectively. 44 Art. 2(2) SSMR, with reference to Art. 4(1)(40) CRR and Art. 2(9) sent. 1 SSM‑FR, see also Art. 3(1)(1) SRMR. 36
37
20
Christos V. Gortsos
Art. 2 SSMR
Definitions
tasks within the framework set out in national law and the SSMR and a reference to an NCA in the SSMR applies as appropriate to the NCB for the tasks assigned to it by national law.45 “NCA in close cooperation” means46 an NCA designated by a participating Member 19 State in close cooperation in accordance with the CRD IV. “Joint supervisory team” (JST) means47 a team of supervisors in charge of the super- 20 vision of a significant supervised entity or a significant supervised group.
II. Designated authorities “National designated authority” (NDA) means48 a designated authority of a partic- 21 ipating Member State, within the meaning of relevant EU law. As an example, in accordance with Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 “on deposit guarantee schemes”49 (DGSD), “designated authority” means50 a body which administers a deposit guarantee scheme (DGS), or where a DGS’s operation is administered by a private entity, a public authority designated by the Member State concerned for supervising that scheme pursuant to that Directive. “NDA in close cooperation” means51 a non-euro area NDA designated by a partici- 22 pating Member State in close cooperation for the purposes of the tasks related to Art. 5 SSMR.
F. Authorisation and prudential supervision-specific terms (SSM Framework Regulation) I. General “Authorisation” means52 an instrument issued in any form by the authorities by which 23 the right to carry out the business is granted. “Common procedures” means53 the procedures provided for in Part V of the SSM‑FR 24 (Arts. 73-88 SSM‑FR) with respect to an authorisation to take up the business of a credit institution, withdrawal of an authorisation to pursue such business and decisions with regard to qualifying holdings. In these cases, the ECB is responsible for all credit institutions and other supervised entities established in participating Member States, irrespective of whether they are significant or less significant, by virtue of Art. 4(1)(a)(c) SSMR. “Working day” means54 a day which is not a Saturday, a Sunday or an ECB public 25 holiday under the calendar applicable to the ECB (as published on its website).
Art. 2(9) sent. 2 and 4 SSM‑FR. Art. 2(10) SSM‑FR. 47 Art. 2(6) SSM‑FR. 48 Art. 2(7) SSMR and Art. 2(11) SSM‑FR. 49 OJ L173, 12.6.2014, pp. 149-178. 50 Art. 2(1)(18) DGSD. 51 Art. 2(12) SSM‑FR. 52 Art. 2(1) SSM‑FR, with reference to Art. 4(1)(42) CRR. 53 Art. 2(3) SSM‑FR. 54 Art. 2(28) SSM‑FR. 45
46
Christos V. Gortsos
21
Art. 2 SSMR
Definitions
II. Supervised entities 26
27
28
29
30
31
(1) “Supervised entity” means:55 a credit institution established in a participating Member State; a financial holding company established in a participating Member State; a mixed financial holding company established in a participating Member State, provided that it fulfils the conditions laid down in point (21), point (b) of the SSM‑FR (on the definition of “supervised groups”); and/or a branch established in a participating Member State by a credit institution which is established in a non-participating Member State. In addition, a central counterparty (CCP), which qualifies as a credit institution within the meaning of the CRD IV, is considered a supervised entity in accordance with the SSMR, the SSM‑FR and relevant EU law, without prejudice to the supervision of CCPs by relevant NCAs as laid down in EMIR.56 CCP means a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. 57 (2) “Significant supervised entity” means58 both a significant supervised entity in a euro area Member State and a significant supervised entity in a participating non-euro area Member State. (3) “Significant supervised entity in a euro area Member State” means59 a supervised entity established in a euro area Member State, which has the status of a significant supervised entity pursuant to an ECB decision based on Arts. 6(4) or 6(5)(b) SSMR. (4) “Significant supervised entity in a participating non-euro area Member State” means60 a supervised entity established in a participating non-euro area Member State which has the status of a significant supervised entity pursuant to an ECB decision based on Arts. 6(4) or 6(5)(b) SSMR. (5) “Less significant supervised entity” means61 both a less significant supervised entity in a euro area Member State, and a less significant supervised entity in a non-euro area Member State that is a participating Member State. (6) “Less significant supervised entity in a euro area Member State” means 62 a supervised entity established in a euro area Member State, and which does not have the status of a significant supervised entity within the meaning of Art. 6(4) SSMR.
III. Supervised groups 32
(1) “Supervised group” means:63 a group whose parent undertaking is a credit institution or financial holding company that has its head office in a participating Member State; a group whose parent undertaking is a mixed financial holding company that has its head office in a participating Member State, provided that the coordinator of the financial conglomerate, within the meaning of FICOD I, is an authority competent for the supervision of credit institutions and is also the coordinator in its function as supervisor of credit institutions; or supervised entities each having their head office in the same participating Member State if they are permanently affiliated to a central body which suArt. 2(20)(1) SSM‑FR. Art. 2(20)(2) SSM‑FR. 57 Art. 2(1) EMIR. 58 Art. 2(16) SSM‑FR. 59 Art. 2(17) SSM‑FR. 60 Art. 2(18) SSM‑FR. 61 Art. 2(7) SSM‑FR. 62 Art. 2(8) SSM‑FR. 63 Art. 2(21) SSM‑FR. 55 56
22
Christos V. Gortsos
Art. 3 SSMR
Cooperation
pervises them under the conditions laid down in Art. 10 CRR and which is established in the same participating Member State.64 (2) “Significant supervised group” means65 a supervised group which has the status 33 of a significant supervised group pursuant to an ECB decision based on Arts. 6(4) or 6(5)(b) SSMR. (3) “Less significant supervised group” means66 a supervised group not having the 34 status of a significant supervised group within the meaning of Art. 6(4) SSMR.
IV. Supervisory procedures and decisions (1) “ECB supervisory procedure” means67 any ECB activity directed towards prepar- 35 ing the issue of an ECB supervisory decision, including common procedures and the imposition of administrative pecuniary penalties. (2) “NCA supervisory procedure” means 68 any NCA activity directed towards prepar- 36 ing the issue of a supervisory decision by the NCA, which is addressed to one or more supervised entities or supervised groups or one or more other persons, including the imposition of administrative penalties. (3) “ECB supervisory decision” means 69 a legal act adopted by the ECB in the exercise 37 of the tasks and powers conferred on it by the SSMR, which takes the form of an ECB Decision, is addressed to one or more supervised entities or supervised groups or one or more other persons and is not a legal act of general application.
Art. 3 SSMR Cooperation 1. The ECB shall cooperate closely with EBA, ESMA, EIOPA, and the European Systemic Risk Board (ESRB) and the other authorities which form part of the ESFS, which ensure an adequate level of regulation and supervision in the Union. Where necessary, the ECB shall enter into memoranda of understanding with competent authorities of Member States responsible for markets in financial instruments. Such memoranda shall be made available to the European Parliament, to the Council and to competent authorities of all Member States. 2. For the purposes of this Regulation, the ECB shall participate in the Board of Supervisors of EBA under the conditions set out in Article 40 of Regulation (EU) No 1093/2010. 3. The ECB shall carry out its tasks in accordance with this Regulation and without prejudice to the competence and the tasks of EBA, ESMA, EIOPA and the ESRB. 4. The ECB shall cooperate closely with the authorities empowered to resolve credit institutions, including in the preparation of resolution plans. 5. Subject to Articles 1, 4 and 6, the ECB shall cooperate closely with any public financial assistance facility including the European Financial Stability Facility (EFSF) and the ESM, in particular where such a facility has granted or is likely to grant,
It is noted that Arts. 10(4), 10(9) and 10(11) CRR have been amended by Art. 1(4) CRR II. Art. 2(22) SSM‑FR. 66 Art. 2(23) SSM‑FR. 67 Art. 2(24) SSM‑FR. 68 Art. 2(25) SSM‑FR. 69 Art. 2(26) SSM‑FR. 64
65
Ann-Katrin Kaufhold
23
Art. 3 SSMR
Cooperation
direct or indirect financial assistance to a credit institution which is subject to Article 4. 6. The ECB and the competent authorities of non-participating Member States shall conclude a memorandum of understanding describing in general terms how they will cooperate with one another in the performance of their supervisory tasks under Union law in relation to the financial institutions referred to in Article 2. The memorandum shall be reviewed on a regular basis. Without prejudice to the first subparagraph, the ECB shall conclude a memorandum of understanding with the competent authority of each non-participating Member State that is home to at least one global systemically important institution, as defined in Union law. Each memorandum shall be reviewed on a regular basis and shall be published subject to appropriate treatment of confidential information. Bibliography Luigi Chiarella, ‘The Single Supervisory Mechanism: the Building Pillar of the European Banking Union’ Bologna L. Rev.1 (2016), 34; Eilis Ferran, ‘European Banking Union and the EU single financial market: more differentiated integration or disintegration?’ in: Bruno de Witte, Andrea Ott and Ellen Vos (eds), Between Flexibility and Disintegration (Edward Elgar, Cheltenham 2017), 252; Eilis Ferran, ‘The Existential Search of the European Banking Authority’, EBOR 17 (2016), 285; Guido Ferrarini, ‘Single Supervision and the Governance of Banking Markets: Will the SSM Deliver the Expected Benefits?’, EBOR 16 (2015), 513; Guido Ferrarini, ‘Single Supervision and the Governance of Banking Markets’, ECGI Law Working Paper No. 294/2015 (University of Genoa and ECGI, 2015); Christos V. Gortsos, ‘The two main pillars of the European Banking Union: the legal framework in a ‘nutshell’’ in: Jens-Hinrich Binder and Christos V. Gortsos (eds), The European Banking Union (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2016), 17; Elke Gurlit, ‘The ECB’s relationship to EBA’, EuZW-Beilage (2014), 14; Matthias Herdegen, Europäische Bankenunion: ‘Wege zu einer einheitlichen Bankenaufsicht’, WM (2012), 1889; Gerard Hertig and Joseph McCahery, ‘Optional EU Banking Supervision?’ ECL 6 (2009), 4; Rosa Maria Lastra, International Financial and Monetary Law (2nd edn, Oxford University Press, Oxford 2015); Giovanni Lo Schiavo, ‘From National Banking Supervision to a Centralized Model of Prudential Supervision in Europe? The Stability Function of the Single Supervisory Mechanism’, Maastricht Journal 21 (2014), 110; Cornelia Manger-Nestler, ‘European Banking Authority’ in: Simon Grieser and Manfred Heemann (eds), Europäisches Bankenaufsichtsrecht (Frankfurt School Verlag, Frankfurt 2016), 67; Cornelia Manger-Nestler, ‘Ménage à trois? – Zur gewandelten Rolle der EZB im Spannungsfeld zwischen Geldpolitik, Finanzaufsicht und Fiskalpolitik’, EuR (2014), 621; Katja Michel, Institutionelles Gleichgewicht und EU-Agenturen (Duncker & Humblot, Berlin 2015); Niamh Moloney, ‘European Banking Union: Assessing Its Risks and Resilience’, CMLR 51 (2014), 1609; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C. H. Beck, Munich 2015); Pierre Schammo, ‘Differentiated Integration and the Single Supervisory Mechanism: Which Way Forward for the European Banking Authority’ in: Patrick J. Birkinshaw and Andrea Biondi (eds), Britain Alone! The Implications and Consequences of United Kingdom Exit from the EU (Wolters Kluwer, Alphen aan den Rijn 2016), 311; Alexander Thiele, Finanzaufsicht (Mohr Siebeck, Tübingen 2014); Anne van Aaken, ‘Transnationales Kooperationsrecht nationaler Aufsichtsbehörden als Antwort auf die Herausforderung globalisierter Finanzmärkte’ in: Christoph Möllers, Andreas Voßkuhle and Christian Walter (eds), Internationales Verwaltungsrecht. Eine Analyse anhand von Rechtsgebieten (Mohr Siebeck, Tübingen 2007), 219; Eddy Wymeersch, ‘The Single Supervisory Mechanism or “SSM”, Part One of the Banking Union’ (Financial Law Institut, Universiteit Gent Working Paper Series, WP 2014-01, 2014).
24
A. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Background and purpose of the provision: Cooperation as a prerequisite for effective financial supervision and the functioning of the internal market . . . II. Structure of provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Obligation to “cooperate closely” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Consequences of a failure to comply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 2 4 8
B. Art. 3(1) SSMR: Duty to cooperate within the ESFS . . . . . . . . . . . . . . . . . . . . . . . . . . I. Art. 3(1)(1) SSMR: Close cooperation with the members of the ESFS . . . . . . . 1. Cooperation with EBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 9 10 11 12
Ann-Katrin Kaufhold
1
Art. 3 SSMR
Cooperation
2. Cooperation with ESMA and EIOPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Cooperation with ESRB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Cooperation with national competent or supervisory authorities . . . . . . . . . II. Art. 3(1)(2) SSMR: Duty to enter into MoU with national market authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 16 18
C. Art. 3(2) SSMR: Participation in the EBA’s board of supervisors . . . . . . . . . . . . .
25
21
D. Art. 3(3) SSMR: Division of competences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28
E. Art. 3(4) SSMR: Cooperation with resolution authorities . . . . . . . . . . . . . . . . . . . .
29
F. Art. 3(5) SSMR: Coordination with public financial assistance facilities . . . . .
34
G. Art. 3(6) SSMR: Cooperation with authorities in non-participation Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Art. 3(6)(1) SSMR: MoU with competent authorities in non-participating Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Art. 3(6)(2) and (3) SSMR: MoU with competent authorities in Member States host to global systemically important institutions . . . . . . . . . . . . . . . . . . . . .
35 36 38
A. General remarks I. Background and purpose of the provision: Cooperation as a prerequisite for effective financial supervision and the functioning of the internal market In the European Union, just like in many other parts of the global financial system, 1 financial supervisory authorities were multiplied in reaction to the crisis of the years 2007-2008. The newly installed multi-institutional architecture of prudential regulation and supervision, as it is today, however, has not been designed from scratch nor from one cast. It was built upon pre-existing institutional structures and it is the result of a continuous, lengthy and oftentimes disputed process of reform and political compromise. As a consequence, tasks and competences of financial supervisory authorities are not always divided up clearly and strictly. Rather, they overlap and a single institution will oftentimes not be able to complete its tasks without regard to the supervisory measures taken by its fellow authorities. Inter-institutional cooperation and coordination are thus indispensable for providing effective and convergent supervision and, if necessary, resolution. This holds particularly true for the SSM and the ESFS, whose fields of activities overlap in large parts. As for financial supervision, one, if not the major challenge for the EU in the upcoming years will be the integration of the SSM, responsible for credit institutions in the Eurozone and the ESFS with its union wide responsibilities for banks and other financial institutions.1 The two regimes have to be coordinated in a way that both ensures the stability of the financial system and, at the same time, guarantees that the Banking Union does not impair the functioning of the internal market. Art. 3 SSMR therefore explicitly obliges the ECB to cooperate with other national and European financial supervisors and particularly with the authorities which form a part of the ESFS. This duty could also have been derived from Art. 4(3) TFEU.2 But the specific regulation in the SSMR underlines the importance of efficient coordination for effective supervision, it concretizes the partners and, in some cases, the means of coopera1 Cf. from the vast literature e.g. Moloney, CMLR 51 (2014), 1609, at pp. 1661 et seq.; Lastra, International Financial and Monetary Law (2nd edn, 2015), Chapter 11; Ferrarini, EBOR 16 (2015), 513, at pp. 514 et seq.; Ferran, in: de Witte, Ott and Vos (eds), Between Flexibility and Disintegration (2017), Chapter 10, at pp. 252 et seq., and COM(2012) 510 final, Roadmap towards a Banking Union, at pp. 4 et seq. 2 Cf. Art. 2(4) EBAR.
Ann-Katrin Kaufhold
25
Art. 3 SSMR
Cooperation
tion and thus, as lex speciales, replaces the general provision of the Treaty within its scope of application. If the SSM and, more generally, the Banking Union can be linked to the ESFS successfully, financial supervision and its cooperation mechanisms might serve as templates for differentiated integration in other fields of integration within the European Union.
II. Structure of provision Art. 3 SSMR is subdivided into six paragraphs,3 which differ in the institutions, with whom the ECB is obliged to cooperate: with the members of the ESFS (paras. 1-3), with national and European resolution authorities (para. 4), with public financial assistance facilities, namely the EFSF and the ESM (para. 5) and with the competent authorities of the Member States that are not participating in the SSM (para. 6). 3 Two further cooperation partners that instantly come to mind are missing in this enumeration: supervisory authorities from third countries and international organisations with a mandate related to the financial sector.4 The cooperation of the ECB with international organisations, supervisory authorities and/or other administrative bodies of third countries is dealt with separately in the Art. 8 SSMR. The ECB may enter into informal administrative arrangements with the aforementioned institutions, but it is not allowed to create legal obligations in respect of the Union or the Member States.5 The EBAR contains an equivalent provision in its Art. 33(1). Formal international agreements on cooperation in financial supervision thus remain the sole responsibility of the Commission and the competent national authorities.6 2
III. Obligation to “cooperate closely” The duty to “cooperate closely” as such does not oblige the ECB to choose a specific form, object or time of cooperation. Unless a means is explicitly prescribed (as for example the conclusion of memoranda of understanding [MoUs] in Art. 3[6][1] and [3] SSMR), it may decide to coordinate supervisory activities on a case-to-case basis or to enter into general agreements. 5 Typically, informal international administrative cooperation is based on MoU.7 They are not legally binding, but nonetheless influential in practice.8 If they are to govern the cooperation of financial supervisors, they usually include at least provisions for the exchange of information and on the establishment of supervisory colleges (or similar 4
3 The Commissions original legislative proposal consisted of only one paragraph, which is today’s para. 1. 4 Cf. Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014), at p. 28. 5 Cf. Art. 16 EBAR. 6 Cf. Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014), at p. 28. 7 See for an analysis of the use of soft law as a means to internationally coordinate financial supervision e.g. van Aaken, in: Möllers, Voßkuhle and Walter (eds), Internationales Verwaltungsrecht (2007), 219, at pp. 221 et seq. 8 See Thiele, Finanzaufsicht (2014), at pp. 527 et seq.; van Aaken, in: Möllers, Voßkuhle and Walter (eds), Internationales Verwaltungsrecht (2007), 219, at pp. 230 et seq.; skeptical with a view to the effectiveness of a coordination via MoUs e.g. Hertig and McCahery, ECL 6 (2009), 4.
26
Ann-Katrin Kaufhold
Art. 3 SSMR
Cooperation
coordination mechanisms) for the supervision of the cross-border or cross-sectional financial companies and/or activities.9 Art. 3 SSMR does not entitle the ECB to issue or enter into legally binding coopera- 6 tion mechanisms. This has to be concluded from the fact that Art. 3(6)(2) SSMR prescribes noncommittal MoU as the ultimate means, if no other coordination instrument can ensure convergent and effective supervisory practices. However, Art. 3 SSMR does not prohibit binding arrangements, if these are permitted by other provisions of Union law. The SSMR does not clarify, in how far a standard cooperation differs from a coopera- 7 tion qualified as “close”. Considering the background of the provision and the detailed rules of administrative procedure laid down in other articles of the regulation (see Art. 6[5]-[7]SSMR), the adjective is most likely used merely to underline the importance of coordinating supervisory activities without prescribing, for example, a minimum density of regulation within an MoU. In any case, it does not imply, that the ECB shall seek consent of other authorities before taking a supervisory measure. If mutual approval is to be a prerequisite for prudential action, this has to be spelled out explicitly in the regulation.
IV. Consequences of a failure to comply A breach of the obligation to cooperate closely does not have any legal consequences. 8 Therefore, some attest Art. 3 SSMR a “mainly theoretical function”.10 Indeed, no enforcement mechanism for the duty to cooperate is provided for in the SSMR. Nonetheless the significance of the provision seems to be underestimated with the cited assessment. Art. 3 SSMR does constitute a legal responsibility and the concretion of the various dimensions of this responsibility makes a political sanctioning of failures to comply easier and significantly more likely.
B. Art. 3(1) SSMR: Duty to cooperate within the ESFS I. Art. 3(1)(1) SSMR: Close cooperation with the members of the ESFS Amongst the supervisors, the ECB has to cooperate with, are first and foremost, the 9 authorities, which form part of the ESFS. The ESFS is “an integrated network of Union and national supervisory authorities” (see e.g. Recital 9 EBAR), that has been established by the founding regulations of the European Supervisory Authorities11. It comprises the ESRB, the EBA, the EIOPA, the ESMA and the national competent or supervisory authorities including the ECB itself with regard to its supervisory tasks.12 The Joint Committee of the European Supervisory Authorities is also part of the ESFS, but it does not
9 Cf. the analysis of Thiele, Finanzaufsicht (2014), at pp. 527 et seq.; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 107. 10 Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014), at p. 27. 11 See Art. 2(2) EBAR, Art. 2(2) EIOPAR, Art. 2(2) ESMAR. 12 See supra, fn. 11.
Ann-Katrin Kaufhold
27
Art. 3 SSMR
Cooperation
qualify as an authority in the sense of Art. 3 SSMR. The founding regulations of the three ESAs all contain cooperation duties similar to the one imposed by Art. 3 SSMR. 13
1. Cooperation with EBA 10
The most intricate of the relations that are subject to Art. 3 SSMR is the one between the ECB and the EBA, since their prudential activities mutually influence each other in various ways.14 Only at first sight the division of tasks and competences between these two bodies might appear simple and clear:15 The ECB supervises individual credit institutions, whereas the EBA has to further develop the Singe Rule Book for the European financial market. While the first applies the law, the second contributes to its making. This holds true as a very general principle. But numerous exceptions apply so that effectively the responsibilities and competencies of the two bodies overlap significantly in the key areas of their activities, i.e. in the fields of prudential regulation and of micro-prudential supervision. The amended EBAR partially eliminates the potential for conflict that results from this overlap. 16 In order to prevent the disintegration of the internal financial market, it does so by strengthening the position of the EBA.17 However, its formalized mechanisms alone do not guarantee for a seamless coordination of the two competing authorities. Thus, whenever further rebalancing is necessary to ensure a consistent and effective enforcement of substantial financial market regulation in the European Union, Art. 3 SSMR obliges the ECB and the EBA to cooperate informally. Accordingly and in order to conjointly effectuate their supervisory practices, the ECB, the EBA and other European banking supervisory authorities concluded “an MoU establishing a framework for an EU-wide exchange of bank-by-bank data on key risk indicators, which are collected by the EBA from competent authorities across the EU” on 13 March 2015.18 a) Regulation
11
In order to support supervisory convergence, the EBA issues guidelines and recommendations addressed to competent authorities or financial institutions, in which it interprets the applicable Union law, elucidates its legal concepts and defines best supervisory practices (see Arts. 8[1][a], 16 EBAR). EBA’s guidelines and recommendations are not legally binding, but its addressees have to make every effort to comply and if they do not comply, they shall inform EBA and state the reasons for their deviation (see Art. 16[3][1] and [2] EBAR). The ECB, as well, has the right and task to issue regulaArt. 2(3) and (4) EBAR, Art. 2(3) and (4) EIOPAR, Art. 2(3) and (4) ESMAR. From the vast literature on the relation between the ECB and the EBA see e.g. Moloney, CMLR 51 (2014), 1609, at pp. 1663 et seq.; Gurlit, EuZW-Beilage 2014, 14, at pp. 14 et seq.; Lo Schiavo, Maastricht Journal 21 (2014), 110, at pp. 132 et seq.; Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014), at pp. 70 et seq.; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015) § 5 para. 97 et seq.; Manger-Nestler, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 67, at pp. 103 et seq.; Schammo, in: Birkinshaw and Biondi (eds), Britain Alone! (2016), § 16; Chiarella, Bologna L. Rev. 1 (2016), 34, at pp. 76 et seq. 15 See Gurlit, EuZW-Beilage 2014, 14; cf. Recital 32 SSMR: „[…] EBA is entrusted with developing draft technical standards and guidelines and recommendations ensuring supervisory convergence and consistency of supervisory outcomes within the Union. The ECB should not replace the exercise of those tasks by EBA, […].” 16 The SSMR and the amended EBAR both aim at integrating the SSM and the ESFS, see Gortsos, in: Binder and Gortsos (eds), The European Banking Union (2016), 17, at p. 24; for a detailed analysis of the cooperation mechanisms included in the EBAR see the literary references cited supra, fn. 14. 17 Cf. e.g. Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014) at p. 71; Ferrarini, EBOR 16 (2015), 513, at p. 533; Chiarella, Bologna L. Rev. 1 (2016), 34, at p. 78. 18 ECB, Annual Report on supervisory activities 2015, 2016, at p. 56. The MoU is not available to the public. 13
14
28
Ann-Katrin Kaufhold
Art. 3 SSMR
Cooperation
tions, guidelines or general instructions according to which national authorities have to supervise less significant credit institutions (see Art. 6[5][a] SSMR). So as to prevent a contradiction between EBA’s and ECB’s legal acts addressed at national supervisors, the ECB is considered a “competent authority” within the meaning of the amended EBAR (see Art. 2[2][f]EBAR) and is consequently bound by EBA-guidelines in the same way as national authorities are.19 Yet, being subjected to EBA’s “regulatory products”20, as such, does not make it impossible for the ECB to prescribe different practices for the supervision of credit institutions. Pursuant to the Art. 16 EBAR it would only have to explain itself if it deviated from EBA’s provisions. Moreover, assuming there was no additional cooperation duty, the ECB would be free to use the leeway given in EBA’s acts to pursue its own objectives, which would not have to be in accordance with EBA’s.21 By obliging the ECB to cooperate closely with the EBA, Art. 3 SSMR enjoins both bodies from seeking open conflict and, instead, compels them to informally look for common solutions and shared prudential strategies. The ECB fulfils its cooperation duty by actively participating in the EBA Review Panel, which is responsible for conducting peer reviews to strengthen consistency in supervisory outcomes,22 by contributing to 35 of EBA’s committees and sub-groups working on the harmonization of prudential rules for financial institutions and by participating – as a non-voting member – in EBA’s Board of Supervisors, the main decision-making body of the Authority (see Art. 43 EBAR)23. b) Supervision The ECB is responsible for the supervision of all significant credit institutions estab- 12 lished in the Member States whose currency is Euro or where close cooperation in the sense of Art. 7(1) SSMR has been established between the ECB and the national competent authority. With regard to less significant banks, the ECB fulfils the direct supervisory tasks enumerated in Art. 4(1)(a) and (c) SSMR and apart from that it guides the activities of the national authorities by issuing regulations, guidelines or general instructions for the supervision of less significant institutions (Art. 6[5][a] SSMR). While EBA is contributing to an effective and consistent supervisory practice primarily by further developing the Single Rule Book, it may under certain conditions (breach of EU law, emergency situations, disagreement between competent authorities, see Art. 17-19 EBAR) also issue individual decisions addressed to financial institutions or competent authorities. Since the ECB is considered a competent authority in the sense of the EBAR, it can be the addressee of an EBA-instruction.24 However, openly conflicting risk assessments or interpretations of the applicable law by the two supervisors can compromise the effectiveness of both authorities. Thus, if the ECB and the EBA come to different conclusions as to which supervisory measures have to be taken, the ECB is called upon by Art. 3 SSMR to strive for a joint solution upfront. The same applies for the conduct of stress tests as a means to assess the resilience of 13 banks to adverse economic developments in preparation of supervisory activities. Both 19 See for plausible constitutional doubts regarding this construction e.g. Moloney, CMLR 51 (2014), 1609, at p. 1665: “This presents something of a constitutional conundrum in terms of the institutional balance set up under the Treaties in that it subjects the ECB, a Treaty institution, to EBA, an agency set up under secondary law.” 20 Ferran, EBOR 17 (2016), 285, at p. 289. 21 See for the resulting potential for conflict e.g. Gurlit, EuZW-Beilage 2014, 14, at p. 17. 22 ECB, Annual Report on supervisory activities 2016, 2017, at p. 46. 23 ECB, Annual Report on supervisory activities 2016, 2017, at p. 48. 24 Objections derived from the doctrine of institutional balance apart against this arrangement, see e.g. Gurlit, EuZW-Beilage 2014, 14, at p. 17; Herdegen, WM 2012, 1889, at p. 1893, 1896.
Ann-Katrin Kaufhold
29
Art. 3 SSMR
Cooperation
the ECB and the EBA have been given the power to initiate stress tests (see Art. 4[1][f] SSMR; Art. 21[2][b] and Art. 32[3a] EBAR25). While the ECB shall be stress testing on individual banks only, the EBA shall conduct union-wide stress tests. No formal organizational precautions have been taken to prevent contradicting test results,26 although these would undermine the credibility of both tests significantly. Art. 3 SSMR thus applies. So far, the ECB meets its cooperation duty, by using the stress test methodology developed by the EBA27 and by supporting a collaborate design of ECB’s Comprehensive Assessment.28
2. Cooperation with ESMA and EIOPA Just like the EBA, the ESMA and the EIOPA are – within their respective mandates – entitled to issue guidelines and recommendations (Art. 16 ESMAR and Art. 16 EIOPAR) and to take supervisory actions addressed at individual financial institutions and competent authorities (Art. 17 to 19 ESMAR, Art. 17 to 19 EIOPAR). Since ESMA and EIOPA do not have any supervisory competences with regard to credit institutions, the potential for conflict with the ECB is significantly smaller. However, as the performance and the stability of the markets in financial instruments as well as of the insurance sector can affect the banking sector, the regulatory and supervisory measures taken by the ESMA and the EIOPA and their effectiveness are of relevance e.g. for the ECB’s risk assessments. Coordination is thus necessary also for micro-prudential oversight, though the primary importance of cross-sectoral cooperation certainly lies in the field of macroprudential supervision. 15 The ESMA and the ECB have concluded an MoU on 27 January 2016. So far, it has not been made available to the public. According to the press release published by the ESMA and to the ECBs annual report, it “describes in general terms how the authorities will cooperate with one another in the performance of their respective tasks and mandates under European Union law including in relation to financial institutions and markets. The framework proposed by the MoU covers cooperation in the field of statistics, risk management, supervision, market infrastructures and regulation”. 29 “In addition, both authorities acknowledged the importance of the links that exist between the safety and soundness of credit institutions and the stability and effectiveness of the financial system.”30 On the contrary, so far as is publicly known, the ECB has not yet concluded an MoU with the EIOPA. 14
3. Cooperation with ESRB 16
The primary responsibility for the macro-prudential oversight of the financial system within the Union lies with the ESRB. It has been set up and specially designed to analyse, 25 In contrast to the SSMR, the amended EBAR still does not include an explicit provision authorizing the EBA to conduct stress tests. However, the right to request information directly from market participants, which is now assigned to the EBA (see Art. 32 [3a] EBAR), implies that the Authority may not only “initiate and coordinate” stress test (Art. 21 [2][b] EBAR), but may also assess the resilience of financial institutions to adverse market developments, see Michel, Institutionelles Gleichgewicht und EU-Agenturen (2015), at p. 261. 26 Cf. Michel, Institutionelles Gleichgewicht und EU-Agenturen (2015), at p. 261 (“coordination is insufficiently governed by the SSMR”). 27 Moloney, CMLR 51 (2014), 1609, at p. 1667. 28 ECB, Annual Report on supervisory activities 2016, 2017, at p. 48. 29 See the ESMA press release of 8 February 2016, ; ECB, Annual Report on supervisory activities 2015, 2016, at p. 56. 30 See fn. 29.
30
Ann-Katrin Kaufhold
Art. 3 SSMR
Cooperation
identify and prioritize systemic risks. However, the national supervisors and the ECB have been assigned macro-prudential tasks and powers, too. Pursuant to Art. 5(1) SSMR the national competent authorities shall apply requirements for additional capital buffers addressing systemic or other macro-prudential risks to be held by the credit institutions. According to Art. 5(2) SSMR, the ECB may, if deemed necessary, replace their decisions and request higher capital buffers. Whether and to what extend capital buffers are needed to prevent systemic risks, depends upon the developments within the financial system and its macroeconomic environment, which are continuously assessed by the ESRB. The ECB’s duty to cooperate is thus to be read as the obligation to take into account the ESRB’s systemic risk assessments when performing its macro-prudential tasks, thereby acting as “the strong arm of the ESRB”31, since the ESRB itself has no power to enforce its own warnings and recommendations.32 Not only does the ECB rely on the ESRB’s work. The second also hinges on the coop- 17 eration with the first. It can identify systemic risk only if it has at its disposal information both on the financial market participants and on the macroeconomic environment. Thus, the ESRBR also contains a cooperation duty that might, at first sight, appear to intersect with Art. 3 SSMR. Art. 15(2) – (7) ESRBR oblige amongst others the ECB to cooperate with the ESRB and to provide it with all the necessary information. But it thereby addresses the ECB as a member of the System of Central Banks, i.e. in its capacity as a central bank, not as a supervisor. Thus, the obligations to cooperate following from Art. 3 SSMR on the one hand, and from Art. 15(2)–(7) ESRBR on the other hand, differ in scope and there is no overlapping.
4. Cooperation with national competent or supervisory authorities The national competent or supervisory authorities of all financial sectors and all 18 Member States, i.e. banking, insurance and securities and market conduct authorities in participating and in non-participating Member States are participants of the ESFS (see Art. 2[2]EBAR). If national authorities are supervising the parent company and/or subsidiaries of a financial group or a financial conglomerate the rules on consolidated supervision and the provisions on supplementary supervision of financial conglomerates33 guide the cross-sectoral coordination of supervisory measures taken by the authorities involved. As lex specialis they take precedence over the general duty to cooperate established by Art. 3 SSMR. Hence, the ECB, within its supervisory mandate as defined by the SSMR, acts as the coordinator or as one of the coordinating supervisors
31 Wymeersch, The Single Supervisory Mechanism or “SSM”, Part One of the Banking Union (2014), at p. 69. 32 The cooperation between the ECB and the ESRB is facilitated by their close interinstitutional link. The ECB has to ensure the ESRB’s Secretariat and to provide analytical, statistical, logistical and administrative support, see Art. 2 Council Regulation (EU) No 1096/2010. Furthermore, for the first five years of office, the President of the ECB chairs the ESRB and the ESRB’s Vice-Chair is elected from the members of the General Council of the ECB. However, a close cooperation also has its downsides. Most of all, it might compromise the independence of the ECB in defining monetary policy and its strict and single focus on price stability, since financial and monetary stability are closely interrelated, see for further detail on this aspect Manger-Nestler, EuR 2014, 621, at pp. 628 et seq. 33 In so far, the provisions on supplementary supervision, namely the Directive 2002/87/EC of the European Parliament and of the Council and its national implementations, are applicable.
Ann-Katrin Kaufhold
31
Art. 3 SSMR
Cooperation
within colleges of supervisors34 under the overall coordination of the Joint Committee of European Supervisory Authorities.35 19 Yet, as far as the micro-prudential supervision of financial institutions that are neither part of a financial conglomerate nor of a group is concerned, the obligation to coordinate prudential risk assessments and other supervisory measures and to strive for supervisory consistency across sectors follows from Art. 3(1)(1)SSMR. While establishing the Joint Committee of the European Supervisory Authorities (see Art. 54 et seq. EBAR) has institutionalized the cross-sectoral coordination of the primary regulatory work of the three ESAs, the collaboration on the level of individual oversight has to be shaped by the ECB and its fellow institutions. An exception only applies for the coordination of ECB’s supervisory work with national oversight of credit institutions in Member States participating in the SSM. It is comprehensively regulated in Art. 6 SSMR. 20 Only limited information on the cooperation mechanisms that are used in practice is available to the public. It hardly allows for a reliable assessment of the intensity and effectiveness of coordination. In its annual reports, the ECB stresses its efforts to conclude MoU with national market authorities and the supervisory authorities of non-euro area Member States and underlines its contribution to the work of supervisory colleges. In 2016, for example, “the ECB initiated overall 24 negotiations for the conclusion of cooperation agreements with banking supervisory authorities of the non-euro area EU countries, third countries and EU market supervisors. Four of those MoUs have already been concluded”, one of which is the MoU between the ECB and the ESMA.36 Furthermore, the participating national authorities have published the MoUs on prudential supervision of significant branches, which was concluded between the ECB and the financial supervisors of Sweden, Norway, Denmark and Finland in December 2016 and to which the financial oversight authorities of Estonia, Iceland, Latvia and Lithuania acceded in 2017.37 It contains provisions on the exchange of information, the establishment and functioning of colleges of supervisors for significant branches of credit institutions, common principles of consumer protection and of the supervision of information and communication technologies and payment services and systems.38
II. Art. 3(1)(2) SSMR: Duty to enter into MoU with national market authorities 21
Art. 3(1)(2)(1) SSMR obliges the ECB to conclude MoU with national authorities responsible for markets in financial instruments whenever necessary. Conduct authorities both of participating and non-participating Member States fall into the scope of the provision. This follows from a systematic interpretation of the article’s subparagraphs. If they are to refer only to a subgroup of the Member States, this is made explicit, as Art. 3(6)(1)(1) and Art. 3(6)(2) SSMR show. Furthermore, Art. 2(2) SSMR defines, that 34 The Joint Committee of the European Supervisory Authorities annually publishes a list of the financial groups supervised at conglomerate level, which also informs about the ECB participation in the supervisory colleges, see . 35 See Art. 18 FR. 36 Cf. supra, fn. 29. 37 See e.g. . 38 If the partner authority grants its consent, the ECB publishes the MoUs on its webpages, see https://w ww.bankingsupervision.europa.eu/legalframework/mous/html/index.en.html.
32
Ann-Katrin Kaufhold
Art. 3 SSMR
Cooperation
the notion of “national competent authority” (in contrast to “competent authority”, emphasis by author) shall be used if only bodies of participating Member States are meant. Lastly, Art. 3(1)(2) SSMR specifies the general obligation to cooperate, which is established by Art. 3(1)(1) SSMR and which applies to competent authorities of all Member States. According to the Recital 33, the MoU to be concluded between the ECB and national 22 authorities responsible for markets in financial instruments shall describe, “how they will cooperate with one another in the performance of their supervisory tasks under Union law in relation to financial institutions referred to in this Regulation”. The relevance of Art. 3(1)(2)(1) SSMR is anything but obvious. The ECB and the 23 national supervisory authorities – as any other authority – are allowed to conclude MoU anyway, so there was no need for the legislator to explicitly stipulate this right and the obligation to cooperate and to consider whether an MoU is necessary or beneficial to the coordination of supervisory activities already follows from Art. 3(1)(1) SSMR. However, by picking out this one inter-institutional relationship, the provision underlines the particular significance of the coordination between banking and conduct authorities suggesting at the same time that this cooperation is especially important for a stable financial system because of the close interconnections between banking and securities markets.39 It is also because of this particular importance of an effective coordination between the supervision of credit institutions and of markets in financial instruments that Art. 3(1)(2)(2) SSMR obliges the ECB and its cooperation partners to make their MoU available to the European Parliament, to the Council and to all competent authorities that are not themselves part of the MoU. The duty to publish allows for control (by the European Parliament and the Council) and, where deemed appropriate, for imitation (by other authorities). In cooperation with the ESMA, the ECB has devised a template for the MoUs to 24 be concluded with national market authorities, which covers, inter alia, the topics of information exchange and cooperation on on-site inspections.40
C. Art. 3(2) SSMR: Participation in the EBA’s board of supervisors Art. 3(2) SSMR corresponds with Art. 40(1)(d) EBAR, according to which a represen- 25 tative of the ECB, nominated by its Supervisory Board41, participates in the Board of Supervisors of EBA as a non-voting member. Since the ECB’s right and obligation to be represented in EBA’s main steering body already follow from EBAR, the respective provision in Art. 3(2) SSMR has primarily declaratory value. Its (very limited) own substantive content consists in emphasizing the fact that the ECB’s participation in the Board of Supervisors is to be used as a means of coordinating supervisory activities (not only as a means to support the EBA by providing additional information) and in order to pursue the objectives of the SSM.42 The Commission had proposed to give the ECB a stronger position by conferring up- 26 on its representative the task “to coordinate and express a common position of representatives from competent authorities of the participating Member States”. 43 The provision 39 Cf. Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014), at p. 27. 40 ECB, Annual Report on supervisory activities 2015, 2016, at p. 56. 41 For details of the nomination procedure see Art 13 of the Rules of Procedure of the ECB. 42 See hereto Art. 1(1) SSMR (contribute to „the safety and soundness of credit institutions and the stability of the financial system”). 43 See Art. 4(1)(l) COM(2012) 511 final.
Ann-Katrin Kaufhold
33
Art. 3 SSMR
Cooperation
was deleted in the final compromise in order to avoid too dominant a position of the ECB with respect to the other supervisory bodies, especially those from non-participating Member States.44 For the same reason the ECB – other than the representatives of the national supervisors – was not given the right to vote in the Board of Supervisors of EBA. While it is treated the same way as the national authorities throughout the rest of the EBAR, the voting arrangement differentiates. Additionally, Art. 44(1) EBAR requires a qualified majority for a number of particularly important decisions to be taken by the Board of Supervisors, so that Member States participating in the SSM cannot outvote the non-participating Member States.45 Nevertheless it can be expected that the ECB will significantly influence the deliberations and the decision-making process within the EBA.46 Though it is not explicitly assigned the task to devise a common position of all participating Member States, it is likely that its contributions will de facto be designed and understood as such. 27 It is noteworthy that, on the other hand, the EBA is not given any institutionalized position (e.g., as a permanent observer) within the bodies of the SSM.47 It may be invited by the Chair to participate in the meetings of the Supervisory Board as an observer, and the Chair shall issue such an invitation, if a request is submitted by at least three members of the Supervisory Board.48 However, the EBA cannot claim a right to participate and the possibility to be invited is guaranteed only in delegated rules, not in the SSMR itself, and hence less secured.49
D. Art. 3(3) SSMR: Division of competences 28
Paragraph 3 clarifies that the ECB has to cooperate with the other members of the ESFS, but must not take on the competencies or tasks of any one of those members. 50 In case of conflicting or overlapping tasks or competencies, the SSMR does not supersede. Rather, coinciding responsibilities have concurrent validity and are to be fulfilled by both institutions cooperatively.
E. Art. 3(4) SSMR: Cooperation with resolution authorities 29
Supervision and resolution cannot operate effectively one without the other. Rather, they are two complementary and mutually dependent instruments to ensure a safe and stable financial system. Supervisors can only sanction infringements of the law and ultimately withdraw authorisation, without risking to impair the functioning of the financial system, if resolution authorities guarantee for a bank resolution that does not affect the stability of the banking sector. Effective resolution, on the other hand, depends upon timely information on the possible failing of credit institutions and on their asset See Ferrarini, EBOR 16 (2015), 513, at p. 533. See for detailed analysis of the new voting arrangement and its background e.g. Wymeersch, The Single Supervisory Mechanism or "SSM", Part One of the Banking Union (2014), at pp. 73 et seq.; Lo Schiavo, Maastricht Journal 21 (2014), 110, at pp. 134 et seq.; Chiarella, Bologna L. Rev. 1 (2016), 34, at pp. 80 et seq. 46 For similar assessments see e.g. Gurlit, EuZW-Beilage 2014, 14, at p. 15; Manger-Nestler, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), at p. 106; Ferran, in: de Witte, Ott and Vos (eds), Between Flexibility and Disintegration(2017), at pp. 286 et seq. 47 For a critique cf. Gurlit, EuZW-Beilage 2014, 14, at p. 15. 48 Art. 3.5 of the Rules of Procedure of the Supervisory Board of the ECB. 49 Cf. Moloney, CMLR 51 (2014), 1609, at p. 1668. 50 See Gortsos, in: Binder and Gortsos (eds), The European Banking Union (2016), 17, at p. 24. 44
45
34
Ann-Katrin Kaufhold
Art. 3 SSMR
Cooperation
situations. It is thus essential for the functioning of the Banking Union and the stability of the financial system within the Union, that supervisory and resolution authorities cooperate closely. Art. 3(4) SSMR obliges the ECB to cooperate with “the authorities empowered to resolve credit institutions”, i.e. with the SRB (which has to decide on the resolution of banks within the Eurozone qualified as significant and supervised by the ECB), with the national resolution authorities of participating Member States (which are responsible for all less significant credit institutions within the Eurozone and the implementation of resolution schemes decided upon by the SRB) as well as with resolution authorities in non-participating Member States. The duty to cooperate applies to all aspects and stages of the supervisory and the resolution process. The cooperation of the ECB and the SRB in resolution planning, early intervention and the resolution phases is regulated in detail in the SRMR. When drawing up, adopting and updating resolution plans, for example, the SRB is obliged to consult the ECB by Art. 8(1) and (2) SRMR. The ECB in return has to promptly communicate any change relevant to resolution plans to the SRB (Art. 8[12] SRMR), which then again shall transmit any changes to resolution plans to the ECB (Art. 8[13] SRMR). These procedural obligations are supplemented by an institutional linkage between the ECB and the SRB (with the ECB being entitled to participate in the meetings and debates of the SRB 51) and a general cooperation duty for all institutions involved in the resolution process when exercising their responsibilities pursuant to the SRMR52. As lex specialis all of these provisions take precedence over Art. 3(4) SSMR within their scopes of application. Nonetheless, as the MoU concluded between the ECB and the SRB in December 201553 shows, Art. 3(4) SSMR as default provision continues to cover a relevant span of applications. In particular, it shall guide the way in which the cooperating partners implement the explicitly codified cooperation duties. The ECB and the SRB in their MoU agreed upon a common working language (MoU, 6.1.4), an alignment of their annual work cycles (MoU, 7.1) and a common format for any request for information (MoU, 7.2.2)54, and they decided to inform each other not only – as Art. 13(1) SRMR requests – about measures that they have required an institution to take, but also and beforehand about their mere intent to take measures in the early intervention phase (MoU, 7.1.2). As for the efficiency of the coordination in practice these operational arrangements, which can be read as implementations of Art. 3(4) SSMR, are typically just as important as the duty to cooperate itself. Other than as for the cooperation between the ECB and the SRB, there are only very few specific provisions guiding the interaction of the ECB with national resolution authorities.55 This is understandable in so far as the latter are responsible for the resolution of less significant credit institutions within the Eurozone and banks in the non-partici51 See Art. 43(3) SRMR, and for the implementation ECB, Annual Report on supervisory activities 2016, 2017, p. 45 (“An ECB representative participated in SRB meetings, while the SRB Chair was invited to several meetings of the Supervisory Board, promoting a high-level dialogue between the two boards”). 52 See Arts. 30 and 32 SRMR. 53 Memorandum of Understanding between the Single Resolution Board and the European Central Bank in Respect of Cooperation and Information Exchange, see ; see to this also ECB, Annual Report on supervisory activities 2015, 2016, at p. 57. 54 See for further technical improvements of the information exchange between the ECB and the SRB ECB, Annual Report on supervisory activities 2016, 2017, at p. 45 (SRB staff can now directly access the supervisory information IT system and the data stored in the supervisory platform). 55 See as an exception e.g. Section 140(2) No. 7 and Section 157 SAG (German Bank Recovery und Resolution Act).
Ann-Katrin Kaufhold
35
30
31
32
33
Art. 3 SSMR
Cooperation
pating Member States respectively, whose performance is not (directly) overseen by the ECB. However, if located within the Eurozone less significant banks are indirectly supervised by the ECB, so that the activities of the national resolution authorities need to be coordinated not only with the national supervisors, but also with the ECB in order to guarantee a stable bank sector. Besides, the resolvability and resolution of banks in nonparticipating Member States can, of course, influence the liquidity and/or solvability of credit institutions within the Eurozone. SSMR, Recital 27, thus demands cooperation between the ECB and national resolution authorities in the non-participating Member States in particular to ensure “a common understanding about the respective responsibilities in case of crises”, especially “in the context of cross-border crisis management groups and the future resolution colleges established for those purposes”. Art. 3(4) SSMR obliges the ECB to engage in such coordination.
F. Art. 3(5) SSMR: Coordination with public financial assistance facilities 34
Supervisory measures addressed at banks and public financial assistance given to credit institutions can mutually influence each other and thus need to be coordinated so as to not interfere and compromise their respective effectiveness. Art. 3(5) SSMR obliges the ECB as supervisor and within the area of its supervisory competences to engage in such coordination and, more generally, to cooperate with public financial assistance facilities.56 These include all facilities held by a public institution other than the ECB itself, e.g., the facilities set up by the IMF or other International Organizations, the payment facility for non-Member States outside the euro area (see Art. 143[2] TFEU and Regulation No. 332/2002) and, of course, namely the EFSF and its successor, the ESM. In particular, the ECB shall cooperate closely with those facilities that are directly or indirectly (via financial support for a host state) granting assistance to credit institutions in participating Member States. Since any bank requesting or receiving direct assistance from the ESM shall be considered as significant, the ECB will – if it has not already done so beforehand – assume direct supervision of such credit institutions, once it gets to know about the request or grant (Art. 6[4][4] SSMR; Art. 39[3][d], Art. 43[3] and Art. 61 FR). The cooperation with the ESM, to which the ECB is obliged both in view of significant and of less significant banks, but which is, of course, of particular importance with respect to credit institutions directly supervised by the ECB, has in significant parts been formalized by the ESM Treaty. For example, the ECB is represented as observer in the steering bodies of the ESM, and it has the duty to assess the existence of a risk to the financial stability of the euro area as a whole or of its Member States, which is a prerequisite for the granting of financial assistance by the ESM. The general obligation to cooperate that follows from Art. 3(5) SSMR supplements these specific provisions as default rule, and it defines the way the leges specialis have to be applied.
G. Art. 3(6) SSMR: Cooperation with authorities in non-participation Member States 35
The provisions of Art. 3(6) SSMR specify the general obligation to cooperate with the supervisory authorities in non-participating Member States, which already follows from Art. 3(1) SSMR. 56
36
Cf. also Recital 31 sent. 5 SSMR.
Ann-Katrin Kaufhold
Art. 4 SSMR
Tasks conferred on the ECB
I. Art. 3(6)(1) SSMR: MoU with competent authorities in non-participating Member States According to Art. 3(6)(1) SSMR the ECB has to enter into an MoU with the compe- 36 tent authority (or authorities respectively, depending on whether or not a State has chosen a single point of contact approach) in every non-participating Member State without reservation. The MoU to be concluded shall define the way in which the ECB and the national supervisors will cooperate in the performance of their supervisory tasks. The significance of this specification of the content does not lie in a limitation of the permissible scope. On the contrary, it stipulates a comprehensive cooperation agreement covering all aspects of the supervisory process. For example, the MoU that the ECB and the financial supervisors of Sweden, Norway, Denmark, Finland, Estonia, Iceland, Latvia and Lithuania agreed upon57 does consequently not fulfil the requirements of Art. 3(6) (1) SSMR on its own, since it only covers the supervision of significant branches. In its annual report for 2015 the ECB stated without further specification, that it 37 had joined in the MoUs already in place between national authorities in non-euro area and euro area States, so that the specific provisions of these MoUs also apply to the supervision of significant institutions.58 In 2017 it furthermore reported, that it had additionally initiated 24 negotiations for the conclusion of cooperation agreements with supervisory authorities from non-participating Member States and third countries and with EU market supervisors.
II. Art. 3(6)(2) and (3) SSMR: MoU with competent authorities in Member States host to global systemically important institutions In addition to the general cooperation agreements required for by Art. 3(6)(1) SSMR 38 the ECB shall enter into a separate MoU with each non-participating Member State that hosts at least one global systemically important institutions (GSII). GSIIs are submitted to enhanced supervision because of the specific threat they pose to the stability of the financial system. They have to maintain additional capital buffers (Art. 131 CRD IV) and meet higher loss absorbency requirements (see Commission delegated regulation EU No. 1222/2014). Under Art. 131 Directive No. 36/2013, the designated authorities of the Member States have to identify GSIIs by using a methodology, which has to comply with a number of requirements set up in the named provision.59 The agreements according to Art. 3(6)(2) SSMR shall also be reviewed on a regular basis. Additionally, they have to be published with confidential information being omitted whenever necessary, i.e. especially if other legal provisions prohibit the publication.
Art. 4 SSMR Tasks conferred on the ECB 1. Within the framework of Article 6, the ECB shall, in accordance with paragraph 3 of this Article, be exclusively competent to carry out, for prudential supervisory purposes, the following tasks in relation to all credit institutions established in the participating Member States: See supra, fn. 36. ECB, Annual Report on supervisory activities 2015, 2016, at p. 55. 59 A list of GSII is provided by the FSB and available at https://www.fsb.org/.
57 58
Klaus Lackhoff and Andreas Witte
37
Art. 4 SSMR
Tasks conferred on the ECB
(a) to authorise credit institutions and to withdraw authorisations of credit institutions subject to Article 14; (b) for credit institutions established in a participating Member State, which wish to establish a branch or provide cross-border services in a nonparticipating Member State, to carry out the tasks which the competent authority of the home Member State shall have under the relevant Union law; (c) to assess notifications of the acquisition and disposal of qualifying holdings in credit institutions, except in the case of a bank resolution, and subject to Article 15; (d) to ensure compliance with the acts referred to in the first subparagraph of Article 4(3), which impose prudential requirements on credit institutions in the areas of own funds requirements, securitisation, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on those matters; (e) to ensure compliance with the acts referred to in the first subparagraph of Article 4(3), which impose requirements on credit institutions to have in place robust governance arrangements, including the fit and proper requirements for the persons responsible for the management of credit institutions, risk management processes, internal control mechanisms, remuneration policies and practices and effective internal capital adequacy assessment processes, including Internal Ratings Based models; (f) to carry out supervisory reviews, including where appropriate in coordination with EBA, stress tests and their possible publication, in order to determine whether the arrangements, strategies, processes and mechanisms put in place by credit institutions and the own funds held by these institutions ensure a sound management and coverage of their risks, and on the basis of that supervisory review to impose on credit institutions specific additional own funds requirements, specific publication requirements, specific liquidity requirements and other measures, where specifically made available to competent authorities by relevant Union law; (g) to carry out supervision on a consolidated basis over credit institutions’ parents established in one of the participating Member States, including over financial holding companies and mixed financial holding companies, and to participate in supervision on a consolidated basis, including in colleges of supervisors without prejudice to the participation of national competent authorities in those colleges as observers, in relation to parents not established in one of the participating Member State; (h) to participate in supplementary supervision of a financial conglomerate in relation to the credit institutions included in it and to assume the tasks of a coordinator where the ECB is appointed as the coordinator for a financial conglomerate in accordance with the criteria set out in relevant Union law; (i) to carry out supervisory tasks in relation to recovery plans, and early intervention where a credit institution or group in relation to which the ECB is the consolidating supervisor, does not meet or is likely to breach the applicable prudential requirements, and, only in the cases explicitly stipulated by relevant Union law for competent authorities, structural changes required from credit institutions to prevent financial stress or failure, excluding any resolution powers. 2. For credit institutions established in a non-participating Member State, which establish a branch or provide cross-border services in a participating Member State, the ECB shall carry out, within the scope of paragraph 1, the tasks for which the
38
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
national competent authorities are competent in accordance with relevant Union law. 3. For the purpose of carrying out the tasks conferred on it by this Regulation, and with the objective of ensuring high standards of supervision, the ECB shall apply all relevant Union law, and where this Union law is composed of Directives, the national legislation transposing those Directives. Where the relevant Union law is composed of Regulations and where currently those Regulations explicitly grant options for Member States, the ECB shall apply also the national legislation exercising those options. To that effect, the ECB shall adopt guidelines and recommendations, and take decisions subject to and in compliance with the relevant Union law and in particular any legislative and non-legislative act, including those referred to in Articles 290 and 291 TFEU. It shall in particular be subject to binding regulatory and implementing technical standards developed by EBA and adopted by the Commission in accordance with Article 10 to 15 of Regulation (EU) No 1093/2010, to Article 16 of that Regulation, and to the provisions of that Regulation on the European supervisory handbook developed by EBA in accordance with that Regulation. The ECB may also adopt regulations only to the extent necessary to organise or specify the arrangements for the carrying out of the tasks conferred on it by this Regulation. Before adopting a regulation, the ECB shall conduct open public consultations and analyse the potential related costs and benefits, unless such consultations and analyses are disproportionate in relation to the scope and impact of the regulations concerned or in relation to the particular urgency of the matter, in which case the ECB shall justify that urgency. Where necessary the ECB shall contribute in any participating role to the development of draft regulatory technical standards or implementing technical standards by EBA in accordance with Regulation (EU) No 1093/2010 or shall draw the attention of EBA to a potential need to submit to the Commission draft standards amending existing regulatory or implementing technical standards. Bibliography Duncan Alford, ‘The Lamfalussy Process and EU Bank Regulation’, Annual Review of Banking & Financial Law 25 (2006), 389; Raffaele D’Ambrosio, ‘Law and Practice of the Banking Union and of its governing Institutions’, Quaderni di Ricerca Giuridica della Consulenza Legale, Vol. 88, 2020; Giovanni Bassani, The Legal Framework Applicable to the Single Supervisory Mechanism (Wolters Kluwer, Alphen aan den Rijn 2019); Claus-Wilhelm Canaris, Mathias Habersack and Carsten Schäfer (eds), Staub, Großkommentar Handelsgesetzbuch, Band 10/1 – Bankvertragsrecht, Erster Teil, Kreditwesen und Organisation (5th edn, De Gruyter, Berlin 2016); Thomas Christiansen and Mathias Dobbels, ‘Non-Legislative Rule Making after the Lisbon Treaty: Implementing the New System of Comitology and Delegated Acts’, ELJ 19 (2012), 42; Deutsche Bundesbank, ‘European Single Supervisory Mechanism for banks – a first step on the road to a banking union’, Monthly Report (July 2013), 13; EBA, ‘2016 EU-Wide Stress Test – Methodological note’ (24 February 2016); Ulrich Forsthoff, ‘Bankenunion und Bundesverfassungsgericht – Von der politischen Erfolgsgeschichte zur politischen Verlustsaga?’ EuZW (2020) 977; Rudolf Geiger, Daniel-Erasmus Khan and Markus Kotzur (eds), European Union Treaties (C. H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2015); Alexander Glos and Markus Benzing, ‘§ 2 Institutioneller Rahmen: SSM, EZB und Aufsichtsbehörden’, in: Jens-Hinrich Binder, Alexander Glos and Markus Benzing (eds), Handbuch Bankaufsichtsrecht (2nd edn, RWS, Cologne 2020); Christos V. Gortsos, ‘The two main pillars of the European Banking Union: the legal framework in a ‘nutshell’’, in: Jens-Hinrich Binder and Christos V. Gortsos (eds), The European Banking Union (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2016), 17; Christos V. Gortsos, The Single Supervisory Mechanism (Nomiki Bibliothiki SA, Athens 2015); Klaus Lackhoff, The Single Supervisory Mechanism – A Practitioner’s Guide (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Klaus Lackhoff and Janina Heinz, ‘§ 10 Großkredite’, in: Jens-Hinrich Binder, Alexander Glos and Markus Benzing (eds), Handbuch Bankaufsichtsrecht (2 nd edn, RWS, Cologne 2020); Mario Martini and Quirin Weinzierl, ‘Nationales Verfassungsrecht als Prüfungsmaßstab des EuGH?’ NVwZ (2017), 177; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C. H. Beck, Munich 2015); Miro Prek and Silvère Lefèvre, ‘The EU Courts as “national” courts: National law in
Klaus Lackhoff and Andreas Witte
39
Art. 4 SSMR
Tasks conferred on the ECB
the EU judicial process’, CMLR 54 (2017), 369; Antonio Luca Riso and Klaus Lackhoff, ‘C. Dividend Recommendation’, in: Klaus Lackhoff (ed), Banking supervision and COVID-19 (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2021); Gunnar Schuster, ‘The banking supervisory competences and powers of the ECB’, Beilage EuZW (2014), 3; Tobias Tröger, ‘How not to do banking law in the 21st century’, SAFE Policy Letter No. 56 (21 June 2017), 1; Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’, JFR 1 (2015), 226; Andreas Witte, ‘The Application Of National Banking Supervision Law By The ECB – Three Parallel Modes Of Executing EU Law?’, MJ 21 (2014), 89; Andreas Witte, ‘When does national law transpose a directive?’, in: European Central Bank (ed), ESCB Legal Conference 2016 (2017), 247; Andreas Witte, ‘Die Europäische Bankenunion als mehrgleisiges Reformvorhaben’, Europarecht Beiheft 1 (2017), 29; Andreas Witte, ‘Die Architektur des einheitlichen Bankenaufsichtsmechanismus und die Bedeutung administrativer Widerspruchsverfahren im europäischen Prozessrecht‘, Europarecht (2017), 648; Andreas Witte, ‘The application of national law by the ECB, including options and discretions, and its impact on the judicial review’ in Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, Cheltenham 2021); Eddy Wymeersch, ‘The Single Supervisory Mechanism: Institutional Aspects’, in: Denny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020); Georgios Zagouras, ‘§ 109 EU-Bankenunion’, in: Jürgen Ellenberger and Herman-Josef Bunte (eds), Bankrechts-Handbuch (6 th edn, C.H. Beck, Munich 2021). A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Supervisory tasks of the ECB (Art. 4(1) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Differentiation between “tasks” and “powers” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Exclusive tasks in respect of all credit institutions? (“Within the framework of Art. 6 …”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The catalogue of tasks in Art. 4(1) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Is the list of tasks in Art. 4(1) SSMR exhaustive? . . . . . . . . . . . . . . . . . . . . . . . . . 2. Art. 4(1)(a) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Art. 4(1)(b) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Art. 4(1)(c) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Art. 4(1)(d) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Art. 4(1)(e) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Art. 4(1)(f) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Art. 4(1)(g) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Art. 4(1)(h) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. Art. 4(1)(i) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The counter-exemptions in Recital 28 SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Conferral of additional tasks on the ECB in other legal acts? . . . . . . . . . . . . . . . . .
3 3
C. Home/host relations (Art. 4(2)SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General features of the supervisory regime for branches and cross-border services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Intra-SSM relations (Art. 17(1) and (2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Inward perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. From non-SSM EEA to SSM (Art. 4(2) SSM‑FR) . . . . . . . . . . . . . . . . . . . . . . . . . . 2. From non-EEA to SSM (Recital 28 SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Outward perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. From SSM to non-SSM EEA (Art. 4(1)(b) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . 2. From SSM to non-EEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. The law to be applied by the ECB (Art. 4(3)(1) and (2) SSMR) . . . . . . . . . . . . . . I. The term “relevant Union law” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Application of Union regulations (especially CRR) and the national exercise of options provided therein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Application of national legislation transposing Union Directives . . . . . . . . . . . . 1. Conceptual matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. National legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Transposing Union Directives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Application of tertiary law (Art. 4(3)(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Conflicts between national prudential provisions and national constitutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 14 14 21 34 35 39 50 52 56 60 62 66 75 82 82 87 88 88 95 98 98 99 101 101 104 109 109 110 112 123 133
E. Legal instruments for the exercise of the supervisory tasks of the ECB (Art. 4 (3)(2) and (3) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
40
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
I. Decisions (Art. 4(3)(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Guidelines and recommendations (Art. 4(3)(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . III. Regulations (Art. 4(3)(2) and (3) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Operational acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137 143 148 153
F. Administrative and judicial review of supervisory acts of the ECB . . . . . . . . . . . 155 G. Participation in the work of the EBA (Art. 4(3)(4) SSMR) . . . . . . . . . . . . . . . . . . . 156
A. Function and background of the provision1 Art. 4 SSMR is a pivotal provision in the system of the SSMR. Art. 4(1) SSMR de- 1 fines the microprudential supervisory tasks of the ECB (with Art. 5 SSMR defining the macroprudential tasks), a term which is frequently referred to in other provisions of the SSMR. Insofar, the question is whether the list of tasks in Art. 4(1) SSMR is a conclusive enumerative list (and if so how it has to be interpreted – more broadly or narrowly) or whether the list is in fact intended to assign – with certain limitations – the tasks relating to the prudential supervision of supervised entities generally to the ECB. Art. 4(2) SSMR sets out parts of the home/host regime (the other parts being defined in Art. 17 SSMR). Lastly, Art. 4(3) SSMR stipulates both the legal acts which the ECB may itself adopt to carry out its tasks, as well as the legal acts to which it is bound to and which it is supposed to apply. In this context and interconnected with the issue relating to Art. 4(1) SSMR, the issue is whether it is a task of the ECB to apply prudential provisions which are exclusively rooted in national law. Moreover, the relationship between Art. 4(1) SSMR and Art. 6 SSMR is decisive to de- 2 termine to which extent the supervision of less significant credit institutions is (a) an exclusive task of the ECB which is carried out by the national competent authorities (NCAs) acting under ECB supervision and subject to the right of the ECB to determine under which circumstances it may take over the supervision2 or (b) remained a task of the NCAs while the ECB has “only” an oversight task and may effectuate a transfer of the full task (i.e. in this regard a latent task of the ECB does exist) if it decides to take over the supervision of a less significant credit institution.3 As background to this question it is of particular importance that the Commission’s initial proposal4 suggested to confer supervisory tasks in relation to all credit institutions in the participating Member States upon the ECB.5 This proved too ambitious to be approved at the political level, which is why the scope of the ECB’s tasks was trimmed down in the legislative proposal, most importantly, by introducing the distinction between significant and less significant institutions which is now enshrined in Art. 6 SSMR. The wording of Art. 4 SSMR was, however, adjusted only to a limited extent, by adding a reference to Art. 6 SSMR which led to the question that the Court had to decide in Case T-122/15, Landeskreditbank Baden-Württemberg v ECB (see infra, → para. 4).
The views and opinions expressed in this contribution are strictly personal. In this manner CJEU, Case T-122/15, Landeskreditbank Baden-Württemberg v ECB, ECLI:EU:T: 2017:337, para. 63. 3 So for example Lackhoff, The Single Supervisory Mechanism (2017), para. 192 et seq. 4 Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (COM/2012/0511 final). 5 Art. 4 of the Commission proposal. 1
2
Klaus Lackhoff and Andreas Witte
41
Art. 4 SSMR
Tasks conferred on the ECB
B. Supervisory tasks of the ECB (Art. 4(1) SSMR) I. Differentiation between “tasks” and “powers” 3
The SSMR differentiates between “tasks” and “powers”. Art. 4(1) SSMR speaks of “tasks”, while Chapter III (Arts. 9 to 18 SSMR) uses the heading “Powers of the ECB” and certain provisions (most notably Arts. 16, 9(1) and (2) SSMR) speak of “powers”. This terminological distinction between “tasks” and “powers”, which is also enshrined in the SSM‑FR,6 can be found consistently in the different language versions.7 It is an intentional and meaningful distinction. Tasks give, with the view to pursue certain objectives, a mandate to the authority on which a task is bestowed by assigning certain areas of activity to it. Only if a task is conferred on the ECB, a power relating to this task may also be conferred on it. For the ECB, these tasks are listed in Art. 4(1) SSMR; the most important of them being lit. (d) and (e), which can be translated as the task to ensure that credit institutions comply with the substantive requirements of the CRR and the CRD (as transposed). But having a task does not yet answer the question of how the ECB may pursue its objectives: It needs tools which it can use to ensure that credit institutions comply with the prudential requirements. The most important tools for this purpose are powers. A power, in the supervisory sense, is the ability of the ECB to address a binding legal act to a credit institution which legally requires the credit institution to take (or refrain from) a particular course of action, to impose a permission requirement prior to pursing a course of action or to sanction the credit institution for certain actions. A task is never a sufficient legal basis for a legal act which imposes an obligation; only if the ECB has a power based on a task it has a sufficient basis to act by issuing a binding legal act. In case of a task attributed to it without a corresponding power being conferred on it and no national power being available that can be exercised by way of instruction (see Art. 9 (1) 3rd subparagraph SSMR), the ECB could only make use of non-binding instruments like recommendations.
II. Exclusive tasks in respect of all credit institutions? (“Within the framework of Art. 6 …”) Art. 4(1) SSMR makes reference to Art. 6 SSMR, which, in its para. 4, establishes the distinction between significant institutions (SIs) and less significant institutions (LSIs) and thereby also the criteria for their delineation. This distinction between SIs and LSIs is of central importance for the delineation of the competences of the ECB and the NCAs. Doctrinally, there are two different principles which could be used to conceptualise the nature of the ECB’s supervisory competences: 5 It could be argued that Art. 4(1) SSMR does, in fact, transfer the supervisory tasks listed in it (which, as will be shown below make up, in essence, the entirety prudential supervision, with the exception of those areas reserved for the NCAs in Recital 28 SSMR) to the ECB with respect to all credit institutions established in the participating Member States. As a second step and logically occurring after this transfer of competences, Art. 6 SSMR assigns the exercise of some of these tasks, with respect to LSIs, back 4
6 See in particular Art. 22 SSM‑FR, which deals with the situations where “the ECB has a supervisory task but no related power”. 7 E.g. German “Aufgaben” versus “Befugnisse”, French “missions” versus “pouvoirs”, Italian “compiti” versus “poteri”, Dutch “taken” versus “bevoegdheden”.
42
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
to the NCAs. This view would therefore postulate a transfer of competences followed by an assignment of tasks in partially reverse directions: First, the supervisory competences are conferred from the NCAs to the ECB with respect to all credit institutions (Art. 4(1) SSMR); second, the actual carrying out of the supervision in respect of LSIs is assigned to the NCAs with respect to LSIs as a support activity of NCAs to the ECB within the SSM (Art. 6 SSMR).8 On the other side, it could be argued that the supervisory tasks with respect to LSIs are not transferred from the NCAs to the ECB to begin with; they remain with the NCAs (where these competencies were before the start of the SSM) because the SSMR carves them out of the transfer of supervisory competences to the ECB. In other words, there is only one process of transfer of competences, from the NCAs to the ECB in respect of the supervision of SIs and the establishment of a (“mere”) oversight function in respect of NCAs supervising LSIs. Consequently, NCAs carry out their own tasks with respect to LSIs and are not merely supporting the ECB in carrying out one of its tasks because these tasks were never transferred to the ECB in the first place. The NCAs carry out this task, therefore, on the basis of national law and in line with the oversight established by the SSMR have to comply with general instructions and guidelines which the ECB issues in exercising this oversight function. Consequently, the fact that the ECB may take over the supervision of LSIs creates a latent task of the ECB. If the ECB takes over the supervision of an LSI it, in fact effectuates the transfer of tasks and powers in respect of the relevant LSI. While the difference between these two views may be stricter in theoretical terms than in practice, it is well possible that it leads to divergent practical results in some situations since the first view would lead to the consequence that LSI supervision is already within the competences of the ECB. The view that the ECB is exclusively competent for the supervision of all credit institutions is supported by the wording of Art. 4(1) SSMR, mostly the formulations “in relation to all credit institutions” and “exclusively competent”. It is, furthermore, supported by the fact that Art. 6(6) SSMR speaks of the NCAs “carry[ing] out” and “be[ing] responsible for” tasks, which could arguably be read as something slightly different from “competences”, which Art. 4(1) SSMR allocates to the ECB. The view that the NCAs retained their national competence for the supervision of LSIs is supported by the fact that Art. 4(1) SSMR does not establish this allocation of competences in an unqualified manner but merely “[w]ithin the framework of Art. 6”. On this basis it can be argued that the tasks for which the NCAs remain competent in this framework are carved out from the transfer of competences effectuated in Art. 4(1) SSMR.9 At the end of the day, the ambiguous and intrinsically contradictory wording of Art. 4(1) SSMR is a relic of the negotiation process and a political statement. The Commission first envisaged a transfer of tasks (and powers) in respect of all credit institutions to the ECB. However, this was not so adopted. It can therefore be argued that with regard to the less significant credit institutions most (but not all) tasks of prudential supervision remained with the NCAs as per Art. 6(6) SSMR. An exclusive competence of the ECB with regard to the tasks envisaged by Art. 4(1) SSMR is, therefore, not in line with Art. 6(6) SSMR. Rather, the ECB can be said to have only a latent competence with regard to the direct supervision of less significant credit institutions. This latent competence can become effective in case of a takeover of direct supervision by means of Art. 6(5)(b) SSMR. 8 See CJEU, Case C-450/17 P, Landeskreditbank Baden-Württemberg, ECLI:EU:C:2019:372, paras. 38 to 41. 9 So for example Lackhoff, The Single Supervisory Mechanism (2017), paras. 192 et seq.
Klaus Lackhoff and Andreas Witte
43
6
7
8
9
Art. 4 SSMR
Tasks conferred on the ECB
In its first ruling relating to the supervision of the credit institutions by the ECB 10 – which was appealed 11– the General Court took the chance to make a more general statement in favour of the centralisation of supervisory tasks (and powers) than required for the specific case.12 It concluded that the national competent authorities when supervising less significant credit institutions are acting within the scope of a decentralised implementation of an exclusive competence of the Union and therefore do not exercise a national competence and act under the control of the ECB.13 The Court rests its position in particular on the following arguments:14 (a) the relationship between Arts. 4 (1) and 6 SSMR is not directed to the distribution of competences between the ECB and the NCAs but to ensure that the ECB can exercise its exclusive competence in a decentralised system; (b) the ECB has prerogatives (e.g. the power to provide guidelines, Art. 6(5)(a) SSMR) even with regard to the tasks not centralised at the ECB; and (c) Art. 6(5)(b) SSMR gives the ECB to a broad extent the possibility to take over the supervision of less significant credit institutions while a transfer of the supervision of a significant credit institution to an NCA requires particular circumstances. Further, it is argued that the Recitals of the SSMR support this understanding as (i) Recital 28 lists supervisory tasks that remain with the NCAs but does not include any of the tasks listed in Article 4(1) SSMR and (ii) as Recitals 38 to 40 of the SSMR (which discuss the responsibilities of NCAs) follow after Recital 37 on the responsibility of NCAs to assist the ECB. This can be seen as confirming that the role of the NCAs is rather that of assisting the ECB than exercising an autonomous competence. 11 This position of the General Court was confirmed by the Court of Justice upon appeal in this case15 and thereby this question for practical purposes was closed from the EU perspective. The Court of Justice stated that “it follows from the wording of Article 4(1) of Regulation No 1024/2013 that the ECB is exclusively competent to carry out the tasks stated in” Art. 4 SSMR “in relation to all … institutions” and concluded that “[t]he national competent authorities thus assist the ECB in carrying out the tasks conferred on it by Regulation No 1024/2013, by a decentralised implementation of some of those tasks in relation to” LSIs. Further it stated, that the SSMR “conferred on the ECB exclusive competence, the decentralised implementation of which by the national authorities is enabled by Article 6 of that regulation, under the SSM and under the control of the ECB, in relation to less significant credit institutions, …”.16 12 The German constitutional court (the BVerfG) took a different view in its judgement on the question whether, by establishing the SSM, the European Union exceeded the competences conferred on it by Germany’s entering into the TFEU.17 It ruled that a transfer of the supervisory competences in respect of all credit institutions would go beyond the competences conferred on the European Union in Art. 127 (6) TFEU. Therefore, such a transfer would be, in the view of the BVerfG, an ultra vires act of the Union 10
CJEU, Case T-122/15, Landeskreditbank Baden-Württemberg v ECB, ECLI:EU:T:2017:337. CJEU, Case C-450/17 P, Landeskreditbank Baden-Württemberg, ECLI:EU:C:2019:372. 12 Tröger, SAFE Policy Letter No. 56 (21 June 2017), 1. Tröger analyses the decision with a view to what incentive structure the law should (in his view) provide and evaluates is against this standard. See also Witte, Europarecht (2017), 648. 13 CJEU, Case T-122/15, Landeskreditbank Baden-Württemberg v ECB, ECLI:EU:T:2017:337, paras. 72 and 63. 14 CJEU, Case T-122/15, Landeskreditbank Baden-Württemberg v ECB, ECLI:EU:T:2017:337, paras. 50 to 64. 15 CJEU, Case C-450/17 P, Landeskreditbank Baden-Württemberg, ECLI:EU:C:2019:372, paras. 36 to 49. 16 CJEU, Case C-450/17 P, Landeskreditbank Baden-Württemberg, ECLI:EU:C:2019:372, para. 38, 41, 49. 17 BVerfG, cases 2 BvR 1685/14 and 2 BvR 2631/14, E 151, 202, para 194. See Ulrich Fortsthoff, EuZW (2020) 977. 10
11
44
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
in relation to Germany as Germany, according to the BVerfG’s interpretation, has not consented to and opened up its legal order by entering into the TFEU for an act with this scope. However, in its judgement on the SSM, the BVerfG did not come to an ultra vires verdict. The BVerfG avoided the ultra vires verdict as it concludes that the statement of the Court of Justice was made in connection with a case on the issue whether “exceptional circumstances” exist that would allow for qualifying an institution exceptionally as LSI although it fulfils the criteria for being an SI. The BVerfG argued that the exclusive competence to define the meaning of exceptional circumstances requires the exclusive supervisory competence in respect of a credit institution fulfilling a significance criterion but not a comprehensive supervisory competence in respect of LSIs (unless the supervision of an LSI is taken over by the ECB). In short, the BVerfG argues that it was not necessary with regard to the specific case that the Court of Justice made a statement on the ECB’s competence in respect of LSIs and, therefore, what the Court of Justice stated should not be read as such a statement, although its wording directs in a different direction. It seems that the BVerfG in the SSM case wanted to avoid the conflict it accepted to enter into in the case on the public sector purchase programme.18 Another issue – which goes beyond the question whether the ECB is competent for 13 the prudential supervision of all credit institutions – is the question whether the ECB has supervisory tasks (and powers) only vis-à-vis credit institutions or also in respect of financial holding companies, mixed financial holding companies and central bodies of cooperative groups which are not credit institutions. This is of even more interest after changes introduced by CRR2, since these entities are/can be the addressees of prudential requirements, see for example Art. 11(2), (5) CRR and Art. 3(3) CRD. The mere wording of Art. 4(1) SSMR (“… tasks in relation to credit institutions …”) including the wording of the different letters of Art. 4(1) SSMR point into the direction that this is not the case. Art. 6(4) SSMR, which distributes the “responsibilities” between the ECB and NCAs according to significance, is broader as it refers also to (mixed) financial holding companies and branches. Art. 10 SSMR and the other investigatory powers enlarge the scope of the addressees of such supervisory measures to those persons determined in Art. 10(1) SSMR. Art. 16 SSMR, the main supervisory power established in the SSMR, 19 stipulates that the ECB shall have the powers set out in Art. 16(2) SSMR to require credit institutions, financial holding companies and mixed financial holding companies in participating Member States to take the necessary measures at an early stage if certain conditions that are described in Art. 16(1) SSMR are met. The different letters of Art. 16(2) SSMR refer, if at all, to ‘institutions’, a term not defined in the SSMR. As the SSMR text is inconsistent, more weight can be attributed to the SSM‑FR which establishes a framework to organise and implement the supervision, Art. 6(7) SSMR. Art. 2 (20) and (21) 18 An (alleged) ultra vires action was, however, found later by the BVerfG in its decision on the public sector purchase programme of the ECB (PSPP). According to this ruling, the decisions of the ECB on the PSPP are ultra vires as they do not assess the principle of proportionality. The BVerfG was of the view that it was not possible to determine whether proportionality of the ECB measures was given; following from this, the BVerfG concluded that ‘unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate to the economic and fiscal policy effects resulting from the programme’ (which the ECB thereafter did), the Bundesbank could not participate in the PSPP (BVerfG, cases 2 BvR 859/15, 2 BvR 1651/15, 2 BvR 2006/15, and 2 BvR 980/16, E 154, 17, paras 116 et seq., 235). It is particularly intricate in this context that the BVerfG qualifies the ruling of the European Court of Justice (CJEU, Case C-493/17, Weiss, ECLI:EU:C:2018:1000), where the latter had determined that the PSPP was not going beyond the powers conferred on the ECB, as an ultra vires act and therefore without binding effect for the BVerfG. The BVerfG is of the view that this conclusion is justified as the CJEU in its ruling (allegedly) disregarded the principle of proportionality (Art. 5(4) TEU) in a fundamental manner. 19 Lackhoff, The Single Supervisory Mechanism (2017), paras. 876 et seq.
Klaus Lackhoff and Andreas Witte
45
Art. 4 SSMR
Tasks conferred on the ECB
SSM‑FR support an understanding of the SSMR according to which (mixed) financial holding companies and central bodies (even if they are not credit institutions themselves) and central counterparties qualifying as credit institutions can be subject to the prudential supervision of the ECB. A different view would (with the exception of the cases where the SSMR itself provides clearly competences in respect of (mixed) financial holding companies) result in the fragmentation of prudential supervision contrary to the aims of the SSMR20 since the supervised group would be subject to supervision by the ECB on consolidated basis but certain non-bank members of the supervised group would be on individual basis subject to supervision by NCAs and only NCAs could address supervisory measures to them.21
III. The catalogue of tasks in Art. 4(1) SSMR 1. Is the list of tasks in Art. 4(1) SSMR exhaustive? The first issue relating to the list of tasks of the ECB is (a) whether this list is exhaustive (i.e. only tasks enumerated explicitly in this list and tasks that can be understood to be mentioned therein are conferred on the ECB) or (b) whether the list expresses that the prudential supervision of significant credit institutions in its entirety (i.e. only with the exceptions envisaged in the SSMR) is assigned to the ECB.22 15 In fact, Art. 4(1) and (2) SSMR do not contain a definitive and conclusive list of the tasks conferred to the ECB. The tasks listed in Art. 4(1) and (2) SSMR express rather as a whole that the entire prudential supervision of significant credit institutions is assigned to the ECB unless specific exceptions apply. This can be derived from the fact that the SSMR intended to establish a functioning centralised system of banking supervision in respect of significant credit institutions and in more detail from the following:23 16 The pure wording of the introductory phrase of Art. 4(1) SSMR (“the following tasks”) and Art. 4(3) SSMR (“relevant Union law”) point to the narrow interpretation that only tasks mentioned in the list are conferred on the ECB.24 The SSMR stipulates that the ECB shall apply all relevant Union law and where this Union law is composed of directives, the national legislation transposing those directives, Art. 4(3)(1) SSMR. Where the relevant Union law is composed of regulations and where currently those regulations explicitly grant options for Member States, the ECB shall apply also the national legislation exercising those options, Art. 4(3)(1) SSMR. 17 However, the context of Art. 4(1) SSMR suggests that the intention of the legislator was to centralise comprehensively the supervision of significant credit institutions with the ECB. Art. 1(1)(2) SSMR points in this direction. It stipulates that the scope of the ECB’s supervisory tasks is limited to the prudential supervision of credit institutions 14
20 See in this context also CJEU, Case T‑52/16, Crédit Mutuel Arkéa v ECB, ECLI:EU:T:2017:902, para. 88. 21 This seems to be the position of the court in CJEU, Case T‑52/16, Crédit Mutuel Arkéa v ECB, ECLI: EU:T:2017:902, paras. 45, 47 to 108 as it confirms that a central body that is not a credit institution can be subject to prudential supervision by the ECB and states at the same time (in an obiter dictum) (para. 92) that it cannot be the addressee of the exercise of supervisory powers by the ECB. 22 Lackhoff, The Single Supervisory Mechanism (2017), paras. 845, 95 et seq. 23 This is disputed. An enumerative character of the list in Art. 4(1) SSMR is postulated, on the basis of the principal of conferral, by (among others) Glos and Benzing, ‘§ 2 Institutioneller Rahmen: SSM, EZB und nationale Aufsichtsbehörden’, in: Jens-Hinrich Binder, Alexander Glos and Markus Benzing (eds), Handbuch Bankaufsichtsrecht (2nd edn, RWS, Cologne 2020), paras. 16, 59 et seq.; Gurlit, ‘Die Entwicklung des Banken- und Kapitalmarktaufsichtsrechts seit 2017 (Teil I)’, WM (2020), 57 at 65. 24 See Grundmann, in: Canaris, Habersack and Schäfer (eds), Staub, Großkommentar Handelsgesetzbuch, Band 10/1 – Bankvertragsrecht, Erster Teil, Kreditwesen und Organisation (5 th edn, 2016), para. 55.
46
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
pursuant to the SSMR. This delineates the tasks conferred to the ECB against other tasks and by implication supports that the prudential supervision is comprehensively conferred on the ECB. That the intention of the legislator was to centralise prudential supervision to the largest extent is further supported by Recital 12 SSMR. 25 Another supporting aspect results from the first sentence of Recital 34 SSMR according to which the ECB shall apply the material rules relating to the prudential supervision of credit institutions.26 The fact that the universe of prudential provisions is then identified with the rules in Union law and national law implementing directives or making use of legislative options may result from the misleading idea that this creates the single rulebook and that the single rulebook is comprehensive.27 In reality the universe of rules of prudential supervision is rather more diverse. Moreover, the teleological interpretation is in line with the purpose of the SSM to 18 centralise the prudential supervision28 and the aim to establish a functioning system of centralised banking supervision29 so that a fragmentation of prudential supervision between the ECB and NCAs would be contrary to the aims of the SSMR30. If this interpretation were to be rejected, a split of competences would arise with regard to prudential tasks in addition to the split that already results from the exclusion of certain areas from the ECB’s tasks.31 Take, as an example, the German provisions on decisions on large exposures. By these 19 provisions the German legislator establishes certain governance-related provisions in connection with large exposures by requiring that certain resolutions are taken by the management board of the credit institutions.32 Under the teleological interpretation the ECB is, in respect of a significant supervised entity, competent to supervise the large exposure rules of the CRR (Art. 387 et seq. CRR) and the autonomous national prudential rules on corporate resolutions required for large exposures. Under a broad interpre25 Recital 12 SSMR: “In a context where banking supervision is effectively moved to a single supervisory mechanism”. 26 Recital 34 sent. 1 and 2 SSMR: “For the carrying out of its tasks and the exercise of its supervisory powers, the ECB should apply the material rules relating to the prudential supervision of credit institutions. Those rules are composed of the relevant Union law, in particular directly applicable Regulations or Directives, such as those on capital requirements for credit institutions and on financial conglomerates …”. 27 See also European Commission, A Roadmap towards a Banking Union, COM(2012) 510 final, at p. 7, . 28 For the fragmentation of supervision between the ECB and NCAs being not in line with the objective of the SSMR see CJEU, Case T‑52/16, Crédit Mutuel Arkéa v ECB, ECLI:EU:T:2017:902, para. 88. 29 It cannot be assumed that the legislator intended to set up a system (see Art. 1(9) SSMR) whose ability to function effectively and efficiently is jeopardised by system breaks like split competences. In this regard, the issue whether all areas of prudential supervision (other than specifically excluded ones) and in the same vein the application of national prudential rules not transposing the CRD (“national powers”) are conferred on the ECB is likely of higher importance for the effective and efficient functioning of the supervision by the ECB than the issue whether the ECB is also exclusively competent for LSIs. CJEU, Case T‑52/16, Crédit Mutuel Arkéa v ECB, ECLI:EU:T:2017:902, para. 63 can be read as accepting the notion that the SSMR should establish a functioning system, based on the legislator’s intention to enable the ECB to have an overall picture of the risks likely to affect a credit institution and to avoid the fragmentation of prudential supervision between the ECB and national authorities. 30 See in this context also CJEU, Case T‑52/16, Crédit Mutuel Arkéa v ECB, ECLI:EU:T:2017:902, para. 88, where the Court draws attention to the consequences for the prudential supervision of cooperative credit institutions affiliated with a central body (that is not a credit institution) if no consolidated prudential supervision could be carried out by the ECB because the central body is not a credit institution. 31 Areas of supervision that are excluded from ECB’s supervision are e.g. the supervision of payment services, the supervision of financial market regulation, and the supervision of insurances. Thereby, the supervisory approach is a sectoral approach. 32 Section 13(2) and (3) KWG (German Banking Act). See Lackhoff and Heinz, ‘§ 10 Großkredite’, in: Binder, Glos and Benzing (eds), Handbuch Bankaufsichtsrecht (2nd edn, RWS, Cologne 2020), paras. 94 and 95.
Klaus Lackhoff and Andreas Witte
47
Art. 4 SSMR
Tasks conferred on the ECB
tation of national law implementing the CRD (the broader interpretation), the ECB would only be competent if one accepts that the CRD also covers such provisions on decisions on large exposures as a part of governance rules – a rather extensive interpretation of the CRD. According to the narrow interpretation, the ECB would not be competent. Accordingly, the narrow interpretation and likely the broader interpretation would result in a split of competences according to which the ECB reviews the large exposure rules of the CRR and BaFin, the German NCA, in respect of the same significant credit institution reviews whether the rules on resolutions on large exposures were complied with. With a view to the objective of the SSM this is not a convincing result. In contrast, the teleological interpretation would ensure that the concentration of the supervision is effective. 20 Finally, this approach is not contradicting Art. 1(1) SSMR and Recital 28 SSMR. From these provisions it follows that tasks not conferred on the ECB remain with the national competent authorities.33 Which tasks are (not) conferred has to be determined by interpreting the SSMR. It is also in line with Art. 127(6) TFEU as still only specific tasks of prudential supervision are conferred on the ECB and certain tasks in respect of certain institutions are explicitly excluded from such transfer (see infra, → para. 66). Further, with the exception of the common procedures, the direct supervisory tasks of the ECB are limited to the significant credit institutions. Resulting from the foregoing, in so far as national powers fall within the scope of the ECB’s tasks, they may be also conferred on the ECB. See to this end also Recital 3 of Decision (EU) 2019/322 of the European Central Bank of 31 January 2019 on the delegation of the power to adopt decisions regarding supervisory powers granted under national law which states that “[t]he ECB's competence extends to the exercise of supervisory powers granted under national law that are not explicitly provided for in Union law as long as such powers fall within the ECB's tasks under Article 4 of Regulation (EU) No 1024/2013 and underpin a supervisory function. The ECB, as the competent authority, is required to adopt a substantial number of decisions regarding supervisory powers granted under national law each year.”34
2. Art. 4(1)(a) SSMR Lit. (a) bestows upon the ECB the task to grant and withdraw the authorisation as a credit institution. The exercise of these tasks is not assigned to the NCAs under Art. 6(4) SSMR, meaning the ECB exercises them in relation to all credit institutions. That the task to authorise credit institutions extends to all applications for authorisation irrespective whether the credit institution will be significant or less significant is also supported by Art. 6(5)(a) SSMR and Article 14 SSMR, the corresponding power. Article 14(1) SSMR stipulates that the procedure described therein applies to “[a]ny application”. Art. 14 SSMR spells out procedural specificities together with Arts. 73-84, 88 SSM‑FR; for details see the annotations to Art. 14 SSMR. 22 As the task of granting an authorisation is conferred exclusively on the ECB and as an authorisation is dependent on the compliance by the applicant with certain requirements, national laws providing for the automatic transfer of an authorisation (e.g. in case of a merger) to another legal entity are not deemed to be compliant with Art. 4(1)(a) SSMR and Art. 14 SSMR. 21
Gortsos, in: Binder and Gortsos (eds), The European Banking Union (2016), 17, at p. 26. See Recital 3 of Decision (EU) 2019/322 of the European Central Bank of 31 January 2019 on delegation of the power to adopt decisions regarding supervisory powers granted under national law (ECB/2019/4), OJ L 55/7 of 25.2.2019. 33
34
48
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
The task pursuant to Art. 4(1)(a) SSMR (and the power granted by Art. 14 SSMR to the ECB) include the task (and power) to grant or reject the application but neither the task nor the power to take actions if the business as a credit institution is carried out without the relevant authorisation. This is a task that remains with the NCAs. The substantive law to be applied by the ECB when deciding upon an application for authorisation is the national law transposing Arts. 8-21 CRD. The national law transposing the CRD provides the substantive criteria under which authorisations are granted, denied or withdrawn; however, in addition also autonomous national law or national law based on other EU law may be the basis for not granting/withdrawing the authorisation. Approvals of (mixed) financial holding companies as envisaged by Art. 21a CRD and decisions in connection with intermediate EU parent undertakings pursuant to Art. 21b CRD are not “authorisations” within the present meaning. This is already apparent from the wording of the provisions (compare Art. 8, 15 CRD and Arts. 21a and 21b CRD). This understanding is also in line with the definition of authorisation (Art. 3(1)(38) CRD, Art. 4(1)(42) CRR) as an instrument issued in any form by the authorities by which the right to carry out the business is granted. While acting as holding company is a business activity, it is not a business in the meaning of this provision as it is not a business activity vis-à-vis clients. This is also supported by Art. 14 SSMR which is only focussed on the authorisation to take up the business as a credit institution. While granting approvals envisaged in Art. 21a CRD and taking decisions envisaged in Art. 21b CRD (as transposed in national law) does not fall within the scope of Art. 4(1)(a) SSMR, it falls within the scope of Art. 4(1)(e) SSMR, so that the ECB may be competent (in case of holdings in significant groups) but not based on the tasks (and powers) in respect of authorisations as enshrined in Art. 4(1)(a) (and Art. 14) SSMR. The procedural law that is applied in an authorisation procedure includes national procedural law for the part of the procedure that has to be carried out by the NCA and the ECB procedural law for the ECB supervisory procedure; the ECB procedural provisions are established in particular in the SSM‑FR and the general principles of European administrative law, as developed in case law and include national law transposing procedural rules of the CRD. This reflects the fact that the authorisation procedure is a hybrid procedure consisting of two parts: a national part and an ECB part. The NCA carries out a first stage of the procedure in which the authorisation requirements under national law (including national law implementing CRD) are assessed. Such procedure may result in either a rejection of the application or in a proposal of the NCA to the ECB to grant the authorisation. By this proposal the procedure passes from the national stage to the ECB stage. The procedure in case of a withdrawal does not consist of two procedures (with a national and an ECB procedure) but is in its entirety an ECB supervisory procedure. An NCA may, however, in its supporting function propose a draft withdrawal decision to the ECB but may itself – in contrast to the authorisation procedure – not adopt a withdrawal decision even if the withdrawal should be based exclusively on provisions for whose on-going supervision the NCA (or even another specialised authority) and not the ECB is competent. This results from the fact that only the ECB may withdraw an authorisation. In line with assigning the exclusive task to grant and withdraw the authorisation as credit institution in respect of all credit institutions to the ECB, the SSMR deems all existing authorisations as being granted by the ECB, Art. 33(5) SSMR. The purpose of this legal fiction is to clarify that the ECB is competent to withdraw the authorisation (actus contrarius) that was issued by another authority before the creation of the SSM. That the ECB must be able to withdraw, revoke or amend – provided a sufficient legal basis does Klaus Lackhoff and Andreas Witte
49
23
24
25
26
27
Art. 4 SSMR
Tasks conferred on the ECB
exist – all types of supervisory decisions adopted by NCAs is an issue not limited to authorisations.35 28 Art. 4(1)(a) SSMR assigns to the ECB the tasks to grant/withdraw the authorisation as a credit institution. Credit institutions are, leaving aside the extension of the definition by the Investment Firm Regulation (Art. 62(3) Regulation (EU) 2019/2033), undertakings the business of which is to take deposits or other repayable funds from the public and to grant credits for its own accounts, Art. 4(1)(1) CRR. Depending on the scope of the authorisation according to national law, credit institutions may carry out further activities in addition to accepting repayable funds and granting loans. According to the law of some Member States the authorisation as a credit institution encompasses all activities which are, according to the CRD, subject to mutual recognition36 while in certain Member States (e.g. Germany) a permission is required for each specific activity (listed in Annex I to the CRD). With regard to the latter jurisdictions the question arises whether in case of credit institutions the ECB is competent to grant/withdraw such additional authorisations covered by the CRD. 29 A narrow view based on the wording would argue that the competence of the ECB to authorise credit institutions only covers (i) granting the authorisation for taking repayable funds and granting credits cumulatively or (ii) granting the authorisation to carry out the business of a credit institution if an undertaking holds already a permission for one of these two activities and applies for the other. The application for an authorisation to carry out only one of these two activities (i.e. either taking repayable funds or granting credit, but not both) as well as the application to carry out any other activities would according to this position not fall within the tasks of the ECB. 30 However, it should be taken into account that according to Art. 33(1) CRD the Member States shall provide that the activities listed in Annex I to the CRD may be carried out within their territories in accordance with the provisions on the “European passport”. In a number of participating Member States the authorisation to take repayable funds and to grant credits encompasses the authorisation to carry out the activities listed in Annex I of the CRD. A further aspect complicating the situation for determining the scope of the ‘authorisation task’ of the ECB is that the activities listed in Annex I CRD overlap to a certain extent with the activities covered by the provisions on markets in financial instruments in so far as they are carried out in respect of financial instruments. The MiFID II requires that investment firms that want to carry out such activities in respect of financial instruments need an authorisation. However, Recital 38 clarifies that “[c]redit institutions that are authorised under Directive 2013/36/EU should not need another authorisation under this Directive in order to provide investment services or perform investment activities. When a credit institution decides to provide investment services or perform investment activities the competent authorities, before granting an authorisation under Directive 2013/36/EU, should verify that it complies with the relevant provisions of this Directive.”37 And finally under national law certain activities like issuing covered bonds or acting as home saving bank require a specific extension of the authorisation to carry out the business as credit institution or an additional authorisation.
35 On the revocation of lawful and unlawful ECB supervisory decisions see Lackhoff, The Single Supervisory Mechanism (2017), para. 558 et seq. 36 See Art. 33 CRD and Annex I CRD. 37 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173/349 of 12.6.2014.
50
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
In order to determine in which cases the ECB is competent for the authorisation 31 procedure, it is helpful to determine first for which cases the ECB is not competent. If only the authorisation for taking repayable funds or granting credit is applied for, the ECB is not competent for the authorisation procedure. If an undertaking that is not a credit institution applies for an authorisation of activities other than taking repayable funds and granting credits the ECB is – irrespective of the activities – not competent. If, however, a credit institution applies for an authorisation of an activity listed 32 in Annex 1 CRD or an activity requiring a permission under the MiFID, and this authorisation requirement is established (also) for prudential purposes, then one could argue that the ECB is competent for granting such an authorisation. Accordingly, the question would be whether the authorisation requirement under which the credit institution applies for authorisation, exists only or at least also for prudential purposes. If the authorisation requirement pursues only non-prudential purposes, then the ECB is not competent. Accordingly, if for example the German authorisation requirement for issuing covered bonds (see Section 1(1)(1a) German Banking Act – KWG) pursues product related objectives, the ECB is not competent to grant this authorisation. The most problematic cases are those in which an authorisation requirement pursues 33 both prudential and other purposes. This was most likely irrelevant before the establishment of the SSM as national law usually entrusted the same authority with pursuing both. With the establishment of the ECB as centralised supervisor for pursuing prudential tasks (and only prudential tasks), this twofold purpose of authorisation requirements raises a competence issue as the ECB is (only) competent to assess the prudential aspects but not other aspects (like cooperative elements in connection with cooperative banks). In these cases one could base the allocation of the competence on the main purpose pursued by the authorisation requirement and have consequently only one authorisation (in this case the authorities would have to cooperate with regard to their respective field of competence), or alternatively conclude that two authorisations are required: one from the ECB in so far the authorisation requirement pursues prudential purposes and one from the relevant national authority in so far the authorisation requirement was established for other purposes. Most likely the existing law assigns the decision to one authority (e.g. the competent authority which is now for SIs the ECB). In such a case the ECB would need to work together with the authority competent for the assessment of the other aspects pursued by the provision. Ultimately this issue should be solved by the European legislator in a revision of the CRD. However, for the time being the current legal framework does not provide for a clear solution to this competence conflict.
3. Art. 4(1)(b) SSMR Lit. (b) is a part of the regime of home/host relations, especially the passporting of 34 branches and cross-border provision of services. For details see the annotations to Art. 4(2) SSMR infra, → para. 82 et seq.
4. Art. 4(1)(c) SSMR Lit. (c) confers on the ECB the task to assess notifications to acquire or dispose of 35 qualifying holdings. The corresponding power of the ECB and procedural provisions are established in Art. 15 SSMR and Arts. 85-88 SSM‑FR. The relevant substantive law, including the substantive criteria for the assessment, is codified in Arts. 22-27 CRD and the national transposing legislations thereto. This is also a “common procedure”, involving the ECB and the NCA irrespective of the significant status of the bank in question and assigning the adoption of the final decision to the ECB. The provision relates only to
Klaus Lackhoff and Andreas Witte
51
Art. 4 SSMR
Tasks conferred on the ECB
the assessment of the notification to acquire or dispose of qualifying holdings; it does not include supervisory powers over the acquirer by virtue of being an acquirer. Consequently, the ECB is only competent for supervisory measures in respect of holders of a qualifying holding in an SI, should the holder no longer comply with the statutory requirements. As far as disposals of existing qualifying holdings are concerned, it is to be noted that Art. 25 CRD requires a notification of the competent authority supervising the institution in which the holding is held prior to such disposal, but does not give that authority an opportunity to oppose (as is the case for acquisitions of qualifying holdings, Art. 22(5) and (6) CRD). In the case of disposals, the assessment is therefore not aimed at a possible intervention by the supervisor. 36 The task and power conferred on the ECB relates to the “acquisition or disposal” of a qualifying holding or such increase/decrease of a qualifying holding that certain thresholds are exceeded or undercut. The change from an indirect to a direct holding may be understood as an acquisition of a qualifying holding but with a view to proportionality considerations simplifications in the procedure are justified. 37 Further, the task to assess notifications on the acquisition and disposal of qualifying holdings is conferred on the ECB only “except in the case of a bank resolution”. This limits the scope of the ECB’s task and consequently its powers. As neither the CRD nor the BRRD/SRMR provide for an exemption from the qualifying holding rules, such an assessment has to be carried out also with respect to the acquisition of a qualifying holding (Art. 3(1)(33) CRD, Art. 4(1)(36) CRR) in connection with a bank resolution. Article 4(1)(c) SSMR only exempts the acquisition of a qualifying holding in case of a bank resolution from the tasks conferred to the ECB so that in these cases the NCA remains competent. The purpose originally pursued by this limitation seems to be to ensure the swift execution of the qualifying holding procedure by ensuring that the authority competent for the qualifying holding assessment is located in the same country as the resolution authority carrying out the resolution or is even the same authority; since the establishment of the SRM it is only ensured that the authority implementing the resolution scheme and the NCA competent for the qualifying holding procedure are located in the same country. 38 Consequently, the relevant NCA is only competent to carry out the assessment of a qualifying holding if (i) the acquisition occurs because of the application of a resolution tool like the bridge institution tool or the bail-in tool and (ii) relates to a credit institution established in the participating Member State in which the resolution authority is located. If for example a conversion of capital instruments of the credit institution CI (which is located in the participating Member State MS) leads to its former creditor C acquiring a direct holding in CI and an indirect holding in CI’s subsidiary S which is established in another participating Member State, then the NCA of MS is competent for the assessment of the qualifying holding in CI while the ECB remains competent for the assessment of the qualifying holding in S. Further, if after the application of a resolution tool the share-holding in a bridge institution is sold, then the ECB is competent for assessing the acquirer as the exception does not refer to this case since this is not a transfer of a qualifying holding because of the application of a resolution tool.
52
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
5. Art. 4(1)(d) SSMR Art. 4(1)(d) SSMR entrusts the ECB with the supervision of the requirements relating 39 to own funds requirements,38 securitisation,39 large exposure limits,40 liquidity,41 leverage,42 reporting and disclosure.43 These areas are mostly governed by the CRR. In addition, the implementing technical standards (ITS) and the regulatory technical standards (RTS) which are adopted by the Commission in the form of regulations and are prepared by the EBA complement the applicable prudential supervisory law (tertiary law). Additional guidance follows from EBA Guidelines if the ECB decided to comply with them. Although not legally binding, EBA answers to Q&As44 have often also a factually binding force.45 The capital requirements (or own funds requirements) are intended to ensure that 40 the supervised entities hold sufficient levels of own funds against risks inherent to the business of credit institutions. The objective is to make the credit institutions more resistant to losses in order to avoid their failure and, thereby, to foster financial stability. 46 To this end the CRR requires that own funds comply with certain standards in order to ensure their loss absorbing capacity.47 Further, it requires that the amount of own funds held by credit institutions is calculated in relation to their total risk exposure amount (which includes the risk weighted assets (RWA)) for the CET 1 ratio, tier 1 ratio and total capital ratio and in case of the leverage ratio in relation to the exposure measure, which is not risk-weighted).48 For example, according to Art. 107(1) CRR the riskweighted exposure amounts for determining the capital requirements for credit risk can be based on either the standardised approach49 or the internal ratings-based approach (IRBA).50 Accordingly this task covers also the assessment of applications for internal models.51 In addition, the credit risk mitigation (Arts. 192 et seq. CRR), the treatment of securitisations for own funds purposes (Arts. 242 et seq. CRR), the rules on counterparty credit risk (Arts. 271 et seq. CRR), and the requirements for operational risk (Arts. 312 et seq. CRR), for market risk (Arts. 325 et seq. CRR), for settlement risk (Arts. 378 et seq.
Arts. 25 to 386 CRR. Arts. 242 to 270e CRR and the Regulations cited in fn. 60. 40 Arts. 387 to 403 CRR. 41 Arts. 411 to 428az CRR. 42 Arts. 429 to 429g CRR. The unweighted leverage ratio is now a fully-fledged and binding own funds requirement, on par with the weighted own funds requirements (see Art. 92(1)(d) CRR). At the time of adoption of the SSMR, it was a distinct monitoring parameter, hence its separate listing in Art. 4(1)(d). See infra, → para. 40. 43 Arts. 430 to 430c and 431 to 455 CRR. The disclosure rules are the so called “Pillar 3” of the current supervisory framework. 44 For the Q&A tool of the EBA see . 45 In light of the quality of certain questions and answers this is not without concern. On the factually binding force of non-binding instruments like recommendations, see Riso and Lackhoff, ‘C. Dividend Recommendation’, in: Lackhoff (ed), Banking supervision and COVID-19 (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2021), part 2, C, para. 33. – As for EBA guidelines, it has been held in case law that they are not contestable via Art. 263 TFEU, but their validity can be scrutinised by means of a preliminary reference from a national court: CJEU, Case C-911/19 FBF v ACPR, ECLI:EU:C:2021:599. 46 Gortsos, The Single Supervisory Mechanism (2015), at p. 143 fn. 523. 47 Arts. 25 to 91 CRR. 48 See in particular Art. 92 CRR and for the leverage ratio Art. 429 CRR. The minimum capital requirements for credit, market and operational risk form the core of the so called “Pillar 1” of the current supervisory framework. 49 Arts. 111 to 141 CRR. 50 Arts. 142 to 191 CRR. 51 See Arts. 143(1), 151(4), (9), 283, 312(2), 363 CRR. 38
39
Klaus Lackhoff and Andreas Witte
53
Art. 4 SSMR
Tasks conferred on the ECB
CRR) and for credit valuation adjustment risk (Arts. 381 et seq. CRR) are enclosed in the task to supervise own funds requirements. 41 In order to ensure compliance with the capital requirements52 the ECB has “the task of ensuring compliance with those rules, including in particular by granting approvals, permissions, derogations, or exemptions foreseen for the purposes of those rules”. 53 Accordingly, the ECB is for example competent to decide on applications for the reduction/ repayment or redemption of own funds instruments under Arts. 77, 78 CRR. The permission needs to be adopted in the form of an ECB supervisory decision in a non-objection procedure.54 In this context the ECB has to choose between a point-in-time assessment and a forward-looking one for the assessment of the sufficiency of own funds after the reduction/repayment or redemption without replacement.55. The latter position is supported by a systematic interpretation taking also into account Art. 30(1)(b) of Commission Delegated Regulation (EU) No 241/2014 which requires that information for a three-year period is provided.56 42 The prudential rules on securitisation cover two dimensions.57 The first dimension relates to the credit institutions making use of securitisations in order to reduce the own funds to be held for the securitised exposures. In this regard, the core question is whether a significant risk transfer is achieved.58 The other dimension relates to the role of credit institutions as an investor. Insofar, the credit institution needs to determine the amount of own funds to be held for the acquired position in a securitisation.59 Further, the legislator stipulated that credit institutions may only invest in securitisation Arts. 92 to 386 CRR. Recital 23 SSMR. 54 For the delegation of decision-making powers from the Supervisory Board and the Governing Council to employees of the ECB, the ECB has established a system in which three legal acts need to work together: First, a decision establishing the general framework for delegation (see Decision (EU) 2017/933 of the ECB of 16 November 2016 on a general framework for delegating decision-making powers for legal instruments related to supervisory tasks (ECB/2016/40), OJ L141, 1.6.2017, p. 14); second a decision delegating the decision making powers relating to specified areas like, for example, the decision on delegation of the power to adopt own funds decisions (Decision (EU) 2018/546 of the ECB of 15 March 2018 (ECB/2018/10), OJ L 90/105, 6.4.2018), the decisions delegating certain significance decisions and fit and proper decisions (Decision (EU) 2017/934 of the ECB of 16 November 2016 on the delegation of decisions on the significance of supervised entities (ECB/2016/41), OJ L 141, 1.6.2017, p. 18; Decision (EU) 2017/935 of the ECB of 16 November 2016 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/2016/42), OJ L141, 1.6.2017, p. 21); and third, a decision nominating the delegates (see for example Decision (EU) 2017/936 of the ECB of 23 May 2017 nominating heads of work units to adopt delegated fit and proper decisions (ECB/2017/16), OJ L141, 1.6.2017, p. 26, and Decision (EU) 2017/937 of the ECB of 23 May 2017 nominating heads of work units to adopt delegated decisions on the significance of supervised entities (ECB/2017/17), OJ L141, 1.6.2017, p. 28). On delegation see Lackhoff, The Single Supervisory Mechanism (2017), paras. 363 to 385. 55 Art. 78(1)(b) CRR. 56 Commission delegated Regulation (EU) No 241/2014 of 7 January 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for Own Funds requirements for institutions, OJ L74, 14.3.2014, p. 8. 57 The securitisation regime was recently reviewed with the aim to revive the securitisation market, see (a) Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, OJ L347, 28.12.2017, p. 35 and (b) Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms, OJ L347, 28.12.2017, p. 1. 58 See Art. 244 CRR for traditional securitisations and Art. 245 CRR for synthetic securitisations. 59 Arts. 112(m), 113(4), 130, 242 et seq. CRR. Also, for retained securitisation positions it is necessary to calculate the own funds requirements, if the institution achieved a significant risk transfer and for example excluded in case of a traditional securitisation the underlying exposures, Art. 247 (1), (2) CRR. 52
53
54
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
positions if certain standards are met.60 The ECB is competent to supervise compliance with these requirements among others by exercising investigatory powers. With regard to the securitisation framework this led to the key question whether the requirements for risk retention, transparency and re-securitisation, which are set out under Arts. 6 to 8 of the Securitisation Regulation,61 are of a prudential character and therefore fall within the scope of the tasks of the ECB. The final regulation of 31 March 2021 amending the Securitisation Regulation62 continued (as did the regulation which it amended) to qualify the requirements for risk retention, transparency and re-securitisation, which are set out under Articles 6 to 8 of the Securitisation Regulation63, as prudential so that they fall within the scope of the tasks assigned to the ECB. With its press release of 14 May 202164 the ECB accepted this qualification as prudential and the tasks resulting from this. These events raise concerns. The term “prudential supervision” and its content result from Art. 127(6) TFEU and must be interpreted consistently. Primary law is silent on the exact meaning of the words “prudential supervision” as used in this provision, which gives the legislators leeway to provide a specification by means of secondary law; but this leeway is not unrestricted and reaches its limits where tasks that secondary law purports to confer on the ECB cannot reasonably be subsumed under the meaning of the term “prudential supervision” as developed from an autonomous interpretation of primary law. The ECB supervises also whether the credit institutions comply with large exposure requirements. The purpose of the large exposure regime is to avoid excessive risk concentration and to foster the steering of risks. To this end, with regard to the banking book, a large exposure limit of (in principle) 25 % of the Tier 1 capital is established. The ECB as competent supervisor of significant credit institutions may, in case of a breach of the large exposure limits, make use of Art. 396 CRR and provide time to the significant institution to comply again with the large exposure limits.65 60 Former Arts. 404 to 410 CRR; see now Arts. 5 to 9 of Regulation (EU) 2017/2402 of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, OJ L 347, 28.12.2017, p. 35 (the Securitisation Regulation) (based on Art. 1 (11) of Regulation (EU) 2017/2401 of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms, OJ L 347, 28.12.2017, p. 1). 61 Regulation (EU) 2017/2402, see preceding fn. See in this context Opinion of the European Central Bank of 11 March 2016 on (a) a proposal for a regulation laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation; and (b) a proposal for a regulation amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (CON/2016/11), OJ C 219, 17.6.2016, p. 2 (p. 3, 4) and Opinion of the European Central Bank of 23 September 2020 on proposals for regulations amending the Union securitisation framework in response to the COVID-19 pandemic (CON/2020/22), OJ C 377, 9.11.2020, p. 1 (2). 62 Regulation (EU) 2021/557 of the European Parliament and of the Council of 31 March 2021 amending Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation to help the recovery from the COVID-19 crisis, OJ L 116, 6.4.2021, p. 1. 63 Regulation (EU) 2017/2402 see fn. 60. 64 Press Release – ECB Banking supervision to supervise securitisation requirements for banks, 14 May 2021, https://www.bankingsupervision.europa.eu/press/pr/date/2021/html/ssm.pr210514~3ee1e3e4a8.en. html. See fn. 61 for statements of the ECB in its Opinions on this issue. 65 On the large exposure limits see EBA Guideline specifying the criteria to assess the exceptional cases when institutions exceed the large exposure limits of Article 395(1) of Regulation (EU) No 575/2013 and the time and measures to return to compliance pursuant to Article 396(3) of Regulation (EU) No 575/2013 (EBA/GL/2021/09); on the large exposure rules see also Lackhoff and Heinz, ‘§ 10 Großkredite’, in: Binder, Glos and Benzing (eds), Handbuch Bankaufsichtsrecht (2nd ed., RWS, Cologne 2020).
Klaus Lackhoff and Andreas Witte
55
43
44
45
46
Art. 4 SSMR
Tasks conferred on the ECB
The task to ensure compliance with liquidity requirements relates to the two liquidity metrics envisaged in the CRR. These are the Liquidity Coverage Requirement which is intended to ensure that institutions have a sufficient liquidity buffer for 30 days under stressed conditions,66 and the Net Stable Funding Ratio (NSFR). The NSFR aims at ensuring the long-term stable funding over a horizon of one year. It was originally a mere monitoring metric subject to reporting but became a binding requirement in June 2021.67 48 The leverage ratio is a novel instrument to limit the overall, unweighted exposure values of assets and off-balance sheet items of credit institutions compared to their Tier 1 capital.68 Originally the ECB would have had to decide in this context (for SIs) for example about exempting certain assets from the calculation of the exposure measure pursuant to the former Art. 429(14) CRR. This provision provided for discretion (“may”) of the competent authority which it may exercise in line with the objective pursued by the leverage ratio. After the court cases on the French Livret A, the legislator changed the structure of the norm and envisages now exceptions of which the credit institution can make use without requiring a prior permission (Art 429a(1)(j) CRR). 69 49 Further, the ECB has the task to review whether the credit institutions comply with the reporting70 and public disclosure requirements71. The disclosure requirements, which form the “Pillar 3” of the current supervisory framework, intend to enhance transparency and to provide investors with information for investment decisions. By this the legislator intended to expose credit institutions to market reactions based on a broader information basis (market discipline), thereby allowing them to factor the institution’s risk into their pricing so that the costs of an institution’s risk appetite are internalised. The ECB is tasked with reviewing compliance with these requirements. 47
6. Art. 4(1)(e) SSMR 50
Lit (e) mandates the ECB to ensure that significant credit institutions comply with requirements mostly provided for in the CRD and the related tertiary law acts (e.g. EBA binding technical standards, see annotations to Art. 4(3) SSMR infra, → para. 123 et seq.). This task of the ECB includes ensuring compliance by the supervised entities with governance and risk management requirements72 as part of the supervisory review process which forms the “Pillar 2” of the current supervisory framework. The task covers in particular the supervision of fit and proper requirements for the persons responsible for
66 Arts. 411 et seq. CRR and in particular Commission delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions, OJ L 11, 17.1.2015, p. 1. The Liquidity Coverage Requirement looks in so far to the asset side of the balance sheet in order to determine whether sufficient highly liquid assets are available. The NSFR has a focus on the liabilities side. 67 Arts. 427, 428 CRR on the reporting on stable funding, Arts. 413(1) and 428a to 428az on the calculation of the Net Stable Funding Ratio, and Art. 510 CRR. 68 Arts. 429 to 429g CRR. 69 See Press release No 110/18 of the General Court of the European Union Luxembourg, 13 July 2018 and CJEU, Case T-733/16, La Banque Postale v ECB, ECLI:EU:T:2018:477. 70 See Arts. 430 to 430c CRR and Commission Implementing Regulation (EU) 2021/451 of 17 December 2020 laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to supervisory reporting of institutions and repealing Implementing Regulation (EU) No 680/2014, OJ L 97, 19.03.2021, p. 3. 71 See Arts. 431 to 455 CRR. Disclosure requirements are addressed to another audience than the reporting obligations as they are directed to the public while reporting requirements are directed to the supervisors. 72 See also Recital 25 SSMR.
56
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
the management of credit institutions,73 risk management processes,74 internal control mechanisms,75 remuneration policies and practices76 and effective internal capital adequacy assessment processes,77 including internal ratings-based approaches. As these requirements are established in the CRD, the ECB has to apply the national 51 law implementing them. The mere existence of 19 (21 including the currently two Member States in close cooperation) diverging implementations can impose a substantial burden on the ECB. Moreover, it is not necessarily clear whether a national provision is transposing the directive (see infra, → para. 112 et seq.). This problem may in particular arise where a directive provides only for general principles and Member States implement then a detailed framework. In order to minimise this problem, Member States, when implementing the directive, are obliged by the principle of sincere cooperation to show consideration for the effectiveness of the SSM.78 Moreover, insofar as the different national laws provide room for interpretation, the ECB would interpret the laws in the same manner in order to comply with the equal treatment principle;79 this would also support the harmonisation goal pursued by the directive.
7. Art. 4(1)(f) SSMR Lit. (f) envisages different types of supervisory reviews which the ECB may under- 52 take, either in its own responsibility or in cooperation with the other authorities. The most important of these supervisory reviews is the Supervisory Review and Evaluation Process (SREP)80 mandated by Art. 97 CRD. This is a periodical exercise – the ECB’s policy is to perform the SREP annually for the significant banks under its direct supervision, but this interval is not mandated by law for all institutions – in which supervisors conduct a thorough and comprehensive assessment of the risk profile of credit institutions to determine whether the risks to which they are exposed are adequately covered. The SREP focusses on four key elements: (a) the business model assessment, (b) the governance and risk management assessment, (c) the assessment of risks to capital and (d) the assessment of risks to liquidity. In its first element the ECB reviews the viability and sustainability of the current business model of the supervised entity. The aim is to determine whether risks for the viability of the credit institution result from it. The second element encompasses the assessment of the adequacy of the governance and risk management. Element three looks at the different categories of risk relating to the capital and their treatment (credit risk, market risk, operational risk, and interest rate risk in the banking book (IRRBB)). The last element focusses on the assessment of the short-term liquidity risk and funding sustainability. The overall SREP assessment is based on the result of the assessment of each of the four elements. These results are expressed in scores. The scores are based on an automated quantitative assessment which can be modified by supervisory judgement. The overall SREP assessment serves as a basis for the supervisory measures expressed in the SREP decision. These measures are based on a comprehensive view of the results of the assessments. In the 2022 SREP decisions, a certain part of the pillar 2 capital add-on was for the first time attributed to a specific risk (coverage of See Art. 91 CRD. See Arts. 74, 76 to 87 CRD. 75 See Arts. 4(5) CRD. 76 See Arts. 74(1), 75, 92 to 96 CRD. 77 Arts. 73, 108 CRD. 78 See CJEU, Case C-617/10, Aklagaren v Hans Akerberg Fransson, ECLI:EU:C:2013:105, para. 29. 79 See Lackhoff, Single Supervisory Mechanism (2017), para. 710. 80 See on the SREP on the webpage of the ECB – Banking Supervision: https://www.bankingsupervision .europa.eu/banking/srep/html/index.en.html 73
74
Klaus Lackhoff and Andreas Witte
57
Art. 4 SSMR
Tasks conferred on the ECB
NPEs). The SREP process is carried out annually and consists of three phases (a) the preparation of the process, normally during the first quarter of the calendar year; (b) the assessment, normally during the second and third quarter and (c) the decision-making phase including the hearing normally during the third and fourth quarter. As a consequence, from the SREP, the ECB can – and typically does – impose supervisory measures on banks intended to ensure a sound coverage of risks; the powers which the ECB uses for this purpose stem mostly from Art. 16 SSMR (see annotations thereto), thereby fulfilling the mandate of Arts. 102 and 104 CRD. 53 The meaning of supervisory reviews (as that term is used in lit. (f)) is not limited to the (annual) SREP process. Rather, any other review carried out with the same objective (assessing the risk to which an institution is exposed as a result of its particular circumstances) is also a supervisory review. Supervisory reviews are therefore all reviews carried out in order to determine whether the arrangements, strategies, processes and mechanism put in place by credit institutions and the own funds held by them ensure a sound management and coverage of their risk. This includes reviews based on the investigatory powers of the ECB. 54 This broad understanding of supervisory reviews is important as the micro-prudential powers of the ECB pursuant to Art. 16 SSMR require either a breach or likely breach or that a “supervisory review” has revealed that the arrangements, strategies, processes and mechanism put in place by credit institutions and the own funds and liquidity held by them do not ensure a sound management and coverage of their risk. The conclusion that supervisory reviews include not only the annual SREP but also other reviews follows from the wording of Art. 4(1)(f) SSMR as the term “including” does not exclude further reviews. A teleological view provides further support to this understanding as a limitation of the tasks and powers only to the annual SREP would substantially devalue the relevance of such other reviews. 55 A supervisory review can also come in the form of a stress test whereby the impact of a predefined scenario of external shocks on the financial situation of a credit institution is simulated. A stress test may be initiated and coordinated by the EBA81 or be carried out by the ECB in its own responsibility. The EBA describes the process of a stress test initiated by it as follows: “The EBA coordinates the exercise, defines the common methodology as well as the minimum quality assurance guidance for competent authorities […]. The EBA acts as a data hub for the final dissemination of the common exercise. […] Competent authorities are responsible for conveying to banks the instructions on how to complete the exercise and for receiving information directly from banks. Competent authorities are also responsible for the quality assurance process – e.g. for validating banks’ data and stress test results based on bottom‐up calculations, as well as for reviewing the models applied by banks for this purpose. […] They are also responsible for the supervisory reaction function and for the incorporation of the findings from the EU‐wide exercise into the SREP.”82 The normal practice for the ECB is to participate in EBA-initiated stress tests and to use the resulting data as one of the many inputs which feed into its annual SREP exercise.83
Arts. 22(1a), 32 EBAR. EBA, ‘2016 EU-Wide Stress Test – Methodological note’ (24 February 2016), at p. 14. 83 See on the website of the ECB – Banking supervision: https://www.bankingsupervision.europa.eu/ba nking/tasks/stresstests/html/index.en.html. 81
82
58
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
8. Art. 4(1)(g) SSMR Banking supervision complements entity-level supervision (supervision of each credit institution as a separate legal entity) with consolidated supervision (supervision over an entire group, consisting of a parent and its subsidiaries as if those entities form one single entity). In the pre-SSM era (and still today with respect to non-SSM EEA), where no centralised supervisor existed, the CRD established supervisory colleges and joint decisions as means to coordinate the supervision of a group with entities established in different Member States by the relevant competent authorities. They are led by the “consolidating supervisor” (see Art. 111 CRD) which, in simplified terms, can be said to be typically the competent authority supervising the parent credit institution or largest credit institution of the group. The SSMR entrusts the ECB with carrying out the supervision on a consolidated basis if the ECB is the consolidating supervisor.84 If the ECB is the consolidating supervisor, it is also the authority appointed to establish the college of supervisors (supervisory college). If the ECB is not the consolidating supervisor but a credit institution supervised by it is part of a group for which the consolidating supervisor has established a supervisory college, then it is part of the tasks of the ECB to participate in this supervisory college. If, in a peculiar situation in addition to a significant supervised entity supervised by the ECB, also one or more LSIs supervised by NCAs are part of the group,85 then the respective NCA(s) is/are also members of the college; otherwise, NCAs in whose territory significant banks of the group are located are participating in the supervisory college as observers. Art. 17(2) SSMR clarifies that for groups established only in participating Member States no college is established; this is reasonable from a policy perspective, since the more intense level of cooperation within the SSM makes the lower degree of integration by means of supervisory colleges dispensable. While colleges have no powers vis-à-vis the supervised entities forming the group which is subject to consolidated supervision, they are mandated to adopt joint decisions to determine the adequacy of the consolidated level of own funds, liquidity and the capital guidance, Art. 113(1) CRD. Such joint decision must be implemented by supervisory decisions of the relevant supervisory authorities in order to create legal effects vis-à-vis the supervised entities, Art. 113(4) CRD, which stipulates that the joint decision shall be “... applied by the competent authorities in the Member States concerned”. For decisions relating to internal models and on the level of application of liquidity requirements, Arts. 20 and 21 CRR provide for joint decisions. Arts. 20(1)(a) and (4) CRR provide insofar for a peculiar regime as they seem to imply that the consolidating supervisor can under certain conditions adopt a decision directly binding for all entities of the group, including those in other jurisdictions (transnational decisions).
56
57
58
59
9. Art. 4(1)(h) SSMR The Financial Conglomerates Directive (FICOD)86 provides that conglomerates 60 (i.e., groups which conduct, above defined minimum levels, both banking and insurance Art. 8 SSM‑FR. An example would be a group consisting of a parent credit institution established in Sweden with a subsidiary credit institution in France that is significant, and another subsidiary established in Germany that is less significant. 86 Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/ EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council, OJ L35, 11.2.2003, p. 1. 84
85
Klaus Lackhoff and Andreas Witte
59
Art. 4 SSMR
Tasks conferred on the ECB
activities) are, in addition to the sectoral supervision by banking and insurance supervisors, subject to “supplementary supervision” as conglomerates. This supplementary supervision is led and coordinated by the “coordinator” determined in accordance with Art. 10 FICOD. This is typically the sectoral supervisor of the regulated entity (credit institution, insurance or investment firm) heading the conglomerate in accordance with the provisions of the FICOD. The ECB can thus be a coordinator (for conglomerates whose lead entity is a significant credit institution established in the SSM87), or it can be an entity-level supervisor in a conglomerate led by another authority as coordinator (e.g. a non-SSM banking supervisory authority or an SSM insurance supervisory authority). 61 When participating in the supplementary supervision the ECB may, among others, be involved in determining whether certain undertakings may be excluded from the calculation of the capital adequacy requirements and in reassessing waivers from the application of supplementary supervision.
10. Art. 4(1)(i) SSMR Lit. (i) bestows upon the ECB the tasks carry out supervision in relation to recovery planning and early intervention as provided for in the relevant Union law. It is not in itself a legal basis for action vis-à-vis institutions. 63 Entrusting the ECB with supervisory tasks in respect of recovery plans results in the ECB being competent to assess the recovery plans of significant supervised entities. As a result of such assessment it may for example require the institution to submit a revised plan by making use of the power of Art. 6(5) BRRD as implemented in national law.88 64 Further it is an ECB task to adopt early intervention measures. Early intervention measures are those measures provided for in Arts. 27 to 30 BRRD. They are only “early” in relation to a resolution. From a supervisory perspective they are “late” as they are at least in part more severe measures (Arts. 28, 29 BRRD) requiring a more severe situation (“significant deterioration in the financial situation or … serious infringements”) than supervisory measures. Moreover, certain early intervention measures cannot be differentiated from supervisory measures. This is evident from the fact that the legislator itself is not able to differentiate them (see Art. 13 SRMR) and that early intervention measures pursuant to Art. 27 BRRD overlap with supervisory measures pursuant to Art. 16 SSMR.89 This shows that early intervention measures are supervisory measures. This casts doubt on the usefulness of the category “early intervention measures” as a category of powers distinct from ordinary supervisory measures, as even the mere fact that a measure is adopted as an “early intervention measure” is a relevant factual information that alone may result in qualifying it as insider information when assessing whether an insider information exists that has to be published.90 65 Art. 4(1)(i) SSMR finally envisages that the ECB is, in the cases explicitly stipulated by relevant Union law, competent to decide upon structural changes required from credit institutions to prevent financial stress or failure. It ensures that in a (future) regulation 62
Art. 18 SSM‑FR. If the revised plan does not remedy the deficits the powers under Art. 6(6) BRRD as implemented are available. 89 See Art. 27(1)(b) BRRD / Art. 16(2)(c) SSMR and Art. 27(1)(d) BRRD / Art. 16(2)(m) SSMR. 90 See Arts. 17, 7 of Regulation (EU) No 596/2014 of the European Parliament and the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, OJ L173, 12.6.2014, p. 1. If a measure had to be published just because it is an early intervention measure which is understood to express the view that the situation of the credit institution might deteriorate, then this could impede the supervisory efforts and result in a self-fulfilling prophecy. 87 88
60
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
on the separation of certain business activities91 supervisory tasks can be assigned to the ECB. Supervisory tasks can only be conferred on the ECB in a Regulation pursuant to Art. 127(6) TFEU, which is why it demonstrates foresight to include such an allocation of competences in the SSMR already. The separation of activities (in particular investment banking activities from deposit taking) which require structural changes was not an existing prudential task when the SSMR was adopted. Art. 4(1)(i) SSMR assigns this task already now to the ECB but only if the EU legislator should create such provisions in the future and wants to entrust the ECB with this task.92
IV. The counter-exemptions in Recital 28 SSMR Union law is premised upon the principle of conferral,93 i.e. the fundamental rule that competences remain, by default, with the Member States. Consequently, a transfer of competences to the European level cannot be assumed but must be provided for in Union law. The list in Recital 28 SSMR of supervisory tasks which remain (in addition to those excluded in the conferral of specific tasks; see e.g. supra, → para. 21) in their entirety with the NCAs is, therefore, not binding in a strictly legal sense, for two reasons: First, it is a Recital rather than an operative Article; second, it reiterates something which already follows from the principle of conferral and can consequently be neither exhaustive nor constitutive. Nonetheless the list is of great practical use, as it provides guidance for the delineation of NCA and ECB tasks. Some annotations on the individual items in the list: On the power to receive passporting notifications: See the annotations on Art. 4(2) for more detail. On the supervision of entities which are credit institutions under national law but not Union law: The background to this item is the fact that Union law relies on a definition of “credit institution” based solely on accepting repayable funds and lending, leaving aside the extension by the investment firm regulation (Art. 62(3) Regulation (EU) 2019/2033).94 Some national legal systems employ a much wider definition of the term “credit institution”,95 resulting in the possibility of entities being “credit institutions” under national law but not Union law. Such entities will continue to be supervised by the NCAs and do not fall within the remit of the SSM. On the supervision of branches established by credit institutions from third-countries (i.e., non-EEA): For details see the annotations to Art. 4(2) SSMR infra, → para. 95 et seq. On the supervision of payment services or legislation governing markets in financial instruments: Even where such services are provided by credit institutions within the meaning of Union law (including significant credit institutions), ensuring compliance
91 See proposal for a regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions, COM(2014) 43 final, 29.1.2014, . In 2017 this proposal was withdrawn (https://ec.europa.eu/info/sites/default/files/cwp_2018_annex_iv_en.pdf), COM(2017) 650 final, Annex 4, 24.10.2017. 92 This does not contradict the position pursued herein with regard to the national powers debate (see B.III.); rather it shows that the legislator excludes the prudential task with regard to structural changes under national laws from the transfer of powers and makes it in case of an EU regulation dependent on the effectuation of the transfer in the relevant regulation. 93 Art. 5(1) and (2) TEU; reiterated in the SSMR (with declaratory effect) in Art. 1(5). 94 Art. 4(1)(1) CRR, to which Art. 2(1)(3) SSMR refers. 95 E.g. Section 1(1) KWG (German Banking Act).
Klaus Lackhoff and Andreas Witte
61
66
67 68
69
70
Art. 4 SSMR
71
72
73
74
Tasks conferred on the ECB
with the relevant legislation is a task of the NCAs, in accordance with their national legislation. On the supervision of AML and CFT rules: Ensuring compliance with anti-money laundering (“AML”) legislation, legislation against the use of the financial system for the financing of terrorism (combating financing of terrorism, “CFT”), and consumer protection legislation is not a task conferred on the ECB even for significant credit institutions within the meaning of Union law. Day-to-day verifications of credit institutions: This provision should be read in conjunction with Art. 6(6)(2) SSMR (see annotations thereto), according to which NCAs retain investigatory and information retrieval powers even with respect to significant credit institutions. Insofar as tasks (like the task to ensure compliance with AML legislation) are not conferred on the ECB, these tasks remain with the national authorities determined by the relevant national law. This might (and in the vast majority of cases will) assign the task to the NCA. The relevant national authority may also exercise corresponding powers vis-à-vis the credit institutions, including significant credit institutions, to ensure compliance with the relevant law (e.g. AML legislation). However, even if breaches of such law (e.g. AML legislation) would justify the withdrawal of the authorisation to take up the business as credit institution, such withdrawal can only be adopted by the ECB. The NCA96 may suggest such withdrawal. The ECB, as it is exclusively responsible for such withdrawal, needs to assess whether the withdrawal is justified from a prudential perspective. It may build upon the assessment provided to it by the NCA but should not blindly rely on it. In this context, the ECB needs to be able to assess also legal provisions for whose supervision it is not competent. This assessment may even result in the conclusion that a withdrawal is not justified. The fact that certain tasks relating to prudential matters are not assigned to the ECB (like ensuring compliance with AML legislation, supervision of payments services or legislation governing markets in financial instruments) requires the cooperation between the authorities competent for the prudential supervision of these activities and the ECB as prudential supervisor. The authorities competent for these areas may take action vis-à-vis the (significant) credit institutions (except for the withdrawal of the authorisation) insofar as the national law provides such powers to them in their function as supervisor of the relevant subject matter. In addition, the ECB may want to impose measures on the credit institutions with a view to prudential risks (e.g. operational risks) resulting from non-compliance with such provision (e.g. AML legislation). If, for example, the securities supervisor of a credit institution finds out that the credit institution did not provide its clients in connection with security transactions with the necessary information, this poses also a prudential risk (in the form of liability risks, for instance) to the credit institution that may justify a capital add-on. If the securities supervisor has no power to impose a capital add-on with regard to significant credit institutions, then only the ECB may impose such capital add-on for such operational risk. Or to generalise this issue, the fact that the SSM centralised certain areas of prudential supervision for credit institutions requires that it is clarified in national law which powers relate to the tasks of prudential supervision not assigned to the ECB.
96 If the national authority competent to supervise e.g. AML legislation is not the NCA, such national (e.g. AML) authority may ask the NCA to propose the withdrawal to the ECB. The legal basis for such cooperation must be found in national law.
62
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
V. Conferral of additional tasks on the ECB in other legal acts? A question which is subject to some ambiguities concerns the question whether other legal acts outside the SSMR can add new supervisory tasks for the ECB. In the light of this there are doubts with respect to the SRM Regulation, in so far as it appears to stipulate that the failing-or-likely-to-fail determination for all banks under the direct remit of the SRB (see Art. 7(2) SRMR), even in so far as they are not SIs, falls within the competences of the ECB (Art. 18(1) SRMR).97 This scope ratione personæ would include some LSIs (i.e. cross border groups, Art. 7(2)(b) SRMR). It is doubtful whether the SRM Regulation can add tasks for the ECB which would, under the SSMR, be presumed to be assigned to the NCAs. The starting point of this analysis is the fact that the SSMR and the SRMR were based on different legal bases in primary law: The SRMR was adopted under the general harmonisation power of Art. 114 TFEU, whereas the SSMR was adopted under Art. 127(6) TFEU. Union law does not recognise a difference in rank among the various acts of secondary law; it is not as if the SSMR is hierarchically superior to the SRMR. Nonetheless, the fact that the TFEU provides for a special legal basis – with a specific majority requirement and legislative procedure for the conferral of tasks of prudential supervision upon the ECB – makes it necessary to argue that the use of Art. 114 TFEU for such a conferral is excluded by the existence of Art. 127(6) TFEU as a lex specialis. Otherwise the unanimity requirement under the special legislative procedure of this provision would be undermined.98 Consequently, while it is certainly possible to add supervisory tasks for the ECB by virtue of new legal acts of Union law, such acts would have to utilise Art. 127(6) TFEU as a legal basis (and comply with its procedural requirements). From the above one has to differentiate cases in which legislative acts (e.g. the Regulation (EU) No 648/2012 (EMIR)99 or the Securitisation Regulation, supra, → para. 42 et seq.) provides for supervisory requirements whose supervision is already assigned by the SSMR to the ECB. Art. 4 EMIR stipulates clearing obligations and provides for the possibility to exempt intra-group transactions from these clearing obligations. Is this in respect of significant credit institutions a task of the ECB or the relevant NCA? The obligation of financial counterparties – including significant credit institutions – to clear certain OTC derivatives contracts can be set aside for intragroup transactions if such OTC derivatives contracts are concluded between a credit institution and another counterparty which is included in the same consolidation on a full basis and which is, together with the credit institution, subject to appropriate centralised risk evaluation, measurement and control procedures. The counterparties must notify the relevant competent authorities of their intention to use such intra-group exemption, whereas these competent authorities have 30 days to object to the use of this exemption. Pursuant to Art. 11 EMIR, financial counterparties that enter into OTC derivatives contracts which are not cleared are subject to certain risk mitigation requirements. Under one of these requirements, financial counterparties are required to have “risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral” (Art. 11(3) EMIR). This obligation relates purely to the risk management of OTC derivatives transaction and does not touch upon the operation of cen97 The tasks to carry out the FOLTF assessment in respect of SIs is with the ECB based on Art. 4(1)(f) SSMR. 98 For this argument see CJEU, Case C-300/89, Commission v Council, ECLI:EU:C:1991:244. 99 Regulation (EU) No 648/2012 of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, OJ L201, 27.7.2012, p. 1.
Klaus Lackhoff and Andreas Witte
63
75
76
77
78
79
Art. 4 SSMR
Tasks conferred on the ECB
tral counterparties (CCPs) or effectiveness of clearing. There is, however, also an intragroup exemption possible from this obligation if certain conditions are met. 80 The rationale for these exemptions is to allow for privileged intragroup transactions when necessary for aggregating risks within a (banking) group structure and managing these risks on a consolidated basis (e.g. interest rate risk or foreign exchange risk is incurred in banking subsidiaries, but aggregated and managed by a centralised group treasury). Submission of such transactions to the clearing obligation or an obligation to exchange collateral may limit the effectiveness of those intragroup risk-management processes. 81 Consequently, these provisions could be seen as relating to prudential supervision, which would mean that their supervision is a task of the ECB for significant credit institutions. Nevertheless, a competence of the ECB would be excluded if these provisions were part of carrying “out the function of competent authorities over credit institutions in relation to markets in financial instruments”, see Recital 28 SSMR. This would be the case if EMIR as a whole were to be interpreted as a product and market related regulation so that consequently the ECB cannot be competent to apply even certain parts of it. However, EMIR includes certain provisions which rather relate to monitoring and mitigating operational risk and counterparty credit risk, risk management procedures or holding of sufficient capital and relate therefore to prudential aspects for which the task to supervise them was already conferred on the ECB. As EMIR confers such competences on prudential authorities100 and not to authorities responsible for the supervision of the markets in financial instruments one may even conclude that EMIR itself differentiates. And as prudential tasks, granting the above exemptions is a task assigned to the ECB.
C. Home/host relations (Art. 4(2)SSMR) I. General features of the supervisory regime for branches and cross-border services 82
Primary law guarantees the freedom of establishment, i.e., the right of credit institutions to set up branches in other Member States from which to conduct their business in the territory of that Member State (Art. 49 TFEU). Primary law also guarantees the free movement of services, which includes the right of credit institutions to conduct business across borders without a physical presence in the territory of the target Member State (Art. 56 TFEU). This principle entails the removal of barriers, such as licensing requirements. For this purpose, Union law has, since 1990,101 embraced the concept of the “European passport”: Credit institutions authorised in one Member State may carry out their business in all other Member States, both by means of branches and through cross-border provision of services, relying solely on their home Member State authorisation without the need for additional local authorisations; those local authorities only need to be informed (see infra, → para. 84). The principle has been included also in the CRD, making use of the legal basis provided by Art. 53 TFEU.
100 See Art. 2(13) EMIR in combination with Art. 2(8) EMIR which refers to the CRD when defining competent authorities in respect of credit institutions. 101 The principle was introduced by the Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, OJ L386, 30.12.1989, p. 13.
64
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
This principle extends to the entire European Economic Area (not just the Union) and covers, both via the establishment of branches and via cross-border provision of services, a broad range of activities, which Union law summarises under the heading of mutual recognition.102 It does not extend to the setting up of subsidiaries, which – owing to their legal personality, which is distinct from the parent company – need to be licenced by the competent authority of the Member State in which they are set up which is for the euro area now the ECB. It does not extend to representative offices either: The CRD requires neither a permission nor a notification for the opening of representative offices. Some national laws do, however; where such a permission requirements is established; the ECB would be competent to grant the permission to open a representative office (assuming that such permission requirement is in line with the freedom of establishment under Art. 49 TFEU, which may be doubtful). The delineation between branch and representative offices follows the principle that a branch conducts, in itself, banking business (i.e., engages in activities requiring authorisation as a credit institution), whereas the representative office engages only in preparatory activities ahead of actual banking business (e.g. establishment and maintenance of client contacts, public relations and research). The precise line may be blurry at times. The supervisory powers of host Member State supervisors over the activities of branches of EEA credit institutions in their territory or the cross-border activities carried out by EEA credit institutions in their territory, are severely limited. 103 Nevertheless, host supervisors still have a legitimate interest in being aware of such activities in order to assess the potential effects on the financial stability of their economies. For this reason, the European passport replaces the need for a local authorisation in the target Member State with a notification procedure: Credit institutions which wish to avail themselves of the European passport are still required to notify (indirectly) the host supervisors of their intention to open a branch or provide cross-border services in a formalised procedure. The legal regime thus strikes a balance between freedom of establishment and services on the one hand and the need for (reduced) host authority involvement on the other hand. Moreover, the national authorities may enforce provisions based on the general good (other than rules of prudential supervision), Art. 36(1) CRD. The interpretation of this provision is best informed by the case law on the considerations which Union law accepts as restrictions on the fundamental freedoms under primary law. This passporting regime is spread over a variety of legal acts and provisions which follow the same logic but govern different scenarios which should not be confused:
83
84
85
86
II. Intra-SSM relations (Art. 17(1) and (2) SSMR) Art. 17(1) SSMR, further elaborated upon by Arts. 11 and 12 of the SSM‑FR, provides 87 for the intra-SSM passporting regime, i.e. for situations where a bank from one SSM participating Member State wishes to set up a branch or to provide cross-border services in another SSM participating Member State. In such situations, the credit institution is required to notify its home NCA. The home NCA will inform the ECB. In the case of cross-border provision of services (Art. 12 SSM‑FR), the NCA will also inform the NCA of the target Member State of this notification. In the case of branches, the ECB (in case of significant institutions, Art. 11(3) SSM‑FR) or the NCA of the home Member State (in case of LSIs, Art. 11(4) SSM‑FR) has an opportunity to oppose the establishment of the 102 103
See Arts. 33, 36, 39, Recital 19 and Annex I CRD. Art. 49 CRD.
Klaus Lackhoff and Andreas Witte
65
Art. 4 SSMR
Tasks conferred on the ECB
branch within two months from the notification. If no such objection is raised, the ECB (in case of significant credit institutions) shall communicate this information to the NCA of the participating Member State where the branch will be established (Art. 11(3) SSM‑FR). Such oppositions are, owing to their character as interferences with the principles of the internal market, rare. The criteria which would allow such an opposition have to be developed from the material supervisory law and would be reserved for exceptional cases where the business of the branch would, in the judgment of the home supervisor (ECB for SIs and NCA for LSIs) endanger the sound management of the bank or create severe risks that would justify the objection. If the ECB were to object, it would have to adopt a supervisory decision in a non-objection procedure.
III. Inward perspectives 1. From non-SSM EEA to SSM (Art. 4(2) SSM‑FR) 88
89
90
91
92
93
Art. 4(2) SSM‑FR deals with the perspective of banks from non-SSM EEA countries which wish to provide cross-border services or open a branch in an SSM participating Member State. It refers to “relevant Union law”, the sedes materiæ of which is, in this case, Arts. 33-39 CRD. The details and necessary adjustments to take account of the structure of the SSM are provided by Arts. 13, 14 and 15 SSM‑FR. The procedure runs as follows: The non-SSM bank submits a notification of its intention to its home competent authority. This authority forwards the notification to the NCA of the target Member State (Arts. 13(1) and 15 SSM‑FR). This NCA informs the ECB (Arts. 13(1) and 15 SSM‑FR). The future competent authority within the SSM shall then prepare to supervise the branch, Art. 13(2) SSM‑FR; this will be the ECB for branches which meet a significance criterion (see → Art. 6 SSMR) and the NCA for branches which do not. This interaction is exemplary for a basic feature of the SSM: It was grafted upon pre-existing European banking law but has a more restrictive geographic scope (participating Member States as opposed to the entire EEA). As a consequence, the rules of non-SSM banking legislation continue to apply in the relation between the SSM and the non-SSM EEA in much the same way as they did before the start of the SSM in between all EEA countries. A separate passporting procedure is necessary for each SSM participating Member State in which the non-SSM bank wishes to commence activities; there is no unified passporting into the entire SSM at once. A relevant issue that, because of Brexit, received increased attention is whether a credit institution located in a Member State can use a branch established in a third country in order to provide cross border services to another Member State to which the institution has passported cross-border services. Can, for example, a credit institution established in Germany (which may be the newly established subsidiary of a credit institution established in the UK) use its UK branch (third country branch) to provide services to clients in France to which it has “passported” its services (cross-border services)? The fact that the branch in the third country is an integral part of the credit institution that has “passported” its services could be an argument in favour of allowing the provision of services from a third country under the EU passport. On the other hand, a number of arguments support that such services are not covered by the passport. The freedom to provide services (Art. 56 TFEU) prohibits restrictions for cross-border services within the Union. The passporting regime of the CRD implements this specifically 66
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
for the banking sector. Interpreting the passporting regime in light of this Art. 56 TFEU may lead to the conclusion that services from a branch in a third country to clients in a Member State to which the credit institution has “passported” its activities are not within the scope of this regime. The purpose of Art. 56 TFEU is to create a privilege for cross-border services provid- 94 ed within the Union. Only services provided from within the Union and by a national of a Member State104 may claim the privilege of unrestricted access to EU markets. While a branch is not a separate legal entity but part of the entity that established it, it nevertheless is subject to the supervision of and has to comply with the prudential provisions in a third country. In some countries the branch is therefore also for supervisory purposes deemed to be a separate credit institution by means of a legal fiction. Consequently, it can be argued that services provided from a branch in a third country are not such services within the Union.
2. From non-EEA to SSM (Recital 28 SSMR) According to Recital 28, the supervision of branches or cross-border provision of 95 services of non-EEA credit institutions in the SSM remains a competence of the NCAs. “Supervision” in this sense also includes authorisation of the host Member State, where required. Substantive Union law is silent about branches of third country credit institutions – 96 likely as their treatment was seen as an element related to foreign affairs of the relevant Member State. In particular, it does not stipulate an authorisation requirement for them. The only clear provision in Union law on the matter is Art. 47 CRD; according to its first paragraph branches of credit institutions having their head office in a third country (branches from third countries) must not receive treatment which is more favourable than that applied to banks from other EEA countries. It follows that national legislation must require at least a passporting procedure before third country banks may establish a branch or provide cross-border provision of services in the territory of an EEA Member State. In practice, national legislation typically provides for an authorisation requirement.105 Such authorisations are granted (or revoked) by the NCAs in accordance with their relevant national law. Since end-2020, the CRD requires Member States to establish certain reporting requirements for branches from third countries and obliges competent authorities to provide certain information about these branches to the EBA in order to avoid that branches from third countries remain a black box. These principles apply only to branches and cross-border provision of services. 97 Subsidiaries of non-EEA institutions in the SSM are themselves credit institutions established in the participating Member States and require an authorisation granted by the ECB in accordance with Arts. 4(1)(a) and 14 SSMR.
104 Or a third country to which the freedom to provide services was extended pursuant to Art. 56(2) TFEU. 105 E.g. Section 53 KWG (German Banking Act), which provides for an authorisation requirement for branches of foreign banks in Germany; section 53b of the KWG, which constitutes the German transposition of the CRD passporting regime, reduces this requirement to a mere passporting (notification) requirement for EEA banks.
Klaus Lackhoff and Andreas Witte
67
Art. 4 SSMR
Tasks conferred on the ECB
IV. Outward perspectives 1. From SSM to non-SSM EEA (Art. 4(1)(b) SSMR) 98
Art. 4(1)(b) SSMR deals with the mirror image of Art. 4(2) SSMR. In this scenario, a bank from an SSM participating Member State wishes to establish a branch or to provide cross-border services in a non-SSM EEA country. Arts. 33-39 CRD apply, with the necessary SSM-specific adjustments made by Art. 17 SSM‑FR: The notification to the home authority is sent to the NCA as an entry point, irrespective of the significance of the credit institution. In case of LSIs, the NCA exercises the role of home competent authority as provided for in the CRD (and interacts in this capacity with the competent authority of the target Member State); for significant institutions, this role is exercised by the ECB, which is informed by the NCA about the receipt of the notification.
2. From SSM to non-EEA Credit institutions established in a participating Member State which wish to establish branches or provide cross-border services into non-EEA countries will have to abide by the local legislation in place in the target jurisdiction. The European passport can and does not extend outside the EEA. If the local legislation of the host State requires an authorisation, then it is the credit institution’s own responsibility to obtain the necessary authorisation from the supervisory authority of this jurisdiction. 100 From the perspective of Union law, a European bank does not require an authorisation of its home Member State to conduct such activities in third countries. However, some national laws provide for such a requirement. In such cases, these national provisions will be honoured in the SSM: LSIs will, thus, have to obtain such an authorisation from their respective NCA and significant institutions from the ECB, which will apply the national legislation in question (see annotations to Art. 4(3) SSMR infra, → para. 109 et seq.). The same applies to the national legislation of SSM participating Member States, which (as is neither required nor prohibited by the CRD) require credit institutions to obtain supervisory permission for the opening of representative offices in third countries. 99
D. The law to be applied by the ECB (Art. 4(3)(1) and (2) SSMR) I. The term “relevant Union law” 101
The SSMR uses the term “relevant Union law” to describe the legal acts which the ECB shall apply (in contrast with the legal acts which the ECB itself adopts in the application of this “relevant Union law”). The term is neither defined in the SSMR nor the SSM‑FR but it covers regulations as well as directives. This provides flexibility for future legislators, who may decide to adopt new acts in the area of prudential supervision currently not foreseen or envisaged. One may draw from Recital 34 to interpret the term “relevant Union law” as “the material rules relating to the prudential supervision of credit institutions”. They are, most importantly, laid down in the CRR, the CRD, the BRRD, the SRMR, and the tertiary law acts adopted on their basis (such as Commission delegated acts, etc.). However, other acts which deal primarily with matters beyond prudential supervision may also, peripherally, include rules relating to the prudential supervision of credit institutions and thereby relevant Union law (see supra, → para. 77 et seq. on EMIR). A good indicator for the status of “relevant Union law” is if the act in 68
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
question provides for a role of the “competent authority” as defined in Art. 4(1)(4) CRR; this role is assigned to the ECB, for significant institutions, by Art. 6(4) SSMR. 106 Applying this relevant Union law is only a task of the ECB if this is covered by one of the tasks conferred upon it in the SSMR. This leads to a somewhat circular reasoning, since several of the tasks listed in 102 Art. 4(1) SSMR refer to “the acts referred to in the first subparagraph of Article 4(3)” and thus back to “relevant Union law”, or directly to “relevant Union law”. This tautology can be resolved if one considers the wide scope of the catalogue of Art. 4(1) SSMR and the wording of Recital 34 SSMR: If an act of Union law relates to the prudential supervision of credit institutions (which would have to be determined by means of statutory interpretation107), then it is “relevant Union law” and applied by the ECB for significant institutions, unless otherwise provided for, especially in Recital 28 SSMR. The provision in Art. 4(3)(1) SSMR according to which the ECB is mandated to apply 103 the relevant Union law should be read in conjunction with Art. 9(1) SSMR. According to this provision, the ECB shall be considered to be the competent or designated (this term is of relevance in macro-prudential matters, see Art. 5 SSMR) authority in the participating Member States as established by the relevant Union law and have all the powers and obligations assigned to these authorities by the relevant Union law; this covers consequently powers provided for in regulations like the CRR and powers envisaged by directives like the CRD. The conjunction between Arts. 4(3) and 9(1) SSMR is therefore a regime of allocating a role to the ECB: Where relevant Union law uses the term “competent authority” or “designated authority” for the purposes of banking supervision, that term should be read as, and replaced with, “the ECB” as far as the ECB’s tasks under Arts. 4 and 5 SSMR are concerned.
II. Application of Union regulations (especially CRR) and the national exercise of options provided therein In situations where the relevant Union law consists of regulations, this mandate for 104 the ECB to apply the relevant Union law does not pose further questions. Regulations are directly applicable within the Member States and their legal systems,108 and partake in the supremacy of Union over national law. The CRR introduced a special feature on the use of regulations in Union law: options 105 for national legislators to deviate from the regulation (regulations with options).109 A number of provisions in the CRR provide Member States with (a) the possibility to choose between several available options, or (b) the discretion to prescribe a particular supervisory treatment deviating from the treatment envisaged in the CRR. In these
106 This rule of thumb has to be applied with caution, however, as the terminology in Union law is somewhat confusing: A number of other acts also use the term “competent authority” without intending to refer to the banking supervisor; examples include Arts 4(1)(26) and 67 MIFID II (where it means the securities supervisor). 107 For the substantive content of the term see Lackhoff, The Single Supervisory Mechanism (2017), paras. 106-130. 108 Art. 288(2) TFEU. 109 The CRR knows two types of options: (a) options for national legislators and (b) options for supervisory authorities. In the context of Art. 4(3) SSMR only the options provided for national legislators are relevant. If the CRR provides an option or discretion for the competent authority, the ECB may exercise it if it is competent. There is, however, no meaningful distinction between an “option” and a “discretion” in the present sense; see Giovanni Bassani, The Legal Framework Applicable to the Single Supervisory Mechanism (2019), pp. 137-138.
Klaus Lackhoff and Andreas Witte
69
Art. 4 SSMR
Tasks conferred on the ECB
cases, the exercise of this option or discretion by the national legislator becomes binding on and applicable by the ECB. 106 This applies, however, only to options and discretions granted by the Union regulation to the legislators in the Member States. A number of other provisions attribute this option or discretion to the competent authority. National competent authorities may exercise them case by case or in a general manner within their administrative powers. In these cases, it is within the remit of the ECB’s tasks under Art. 4(1) SSMR to exercise these options for significant credit institutions. The ECB has done so by means of a regulation adopted by itself under its power to adopt Regulations (Art. 4(3)(2) and (3) SSMR) for some of the options assigned to competent authorities.110 This regulation is a Union law regulation within the meaning of Art. 288(2) TFEU111 and is thus of direct applicability to significant credit institutions. If the Member State had adopted a national statute which purports to exercise the CRR option envisaged for competent authorities, this statute would be incompatible with Union law (because it exercises an option not attributed to the Member State’s legislators and therefore contradicts the CRR) and would become inapplicable by virtue of the primacy of Union law. The ECB would not be bound to apply it; in light of the principle of supremacy of Union law also NCAs should – like national courts112 – not to be obliged to follow national law contradicting directly applicable Union law.113 107 As far as less significant credit institutions are concerned, the NCAs carry out the supervision. Nonetheless, the ECB can exercise its power under Art. 6(5)(a) SSMR to issue regulations, guidelines or general (but not individual, i.e. case-specific) instructions to NCAs governing the supervision of LSIs. It has made use of this power.114 108 The duty of the ECB to apply Union regulations extends also to the SSM‑FR (SSM‑FR; see the annotations to Art. 6(7)); this regulation may cover content wise the scope determined in the SSMR. The bindingness of the SSM‑FR on the ECB follows from its status as a Union regulation, i.e., an act of direct and general applicability. The legally binding effect is thus not the result of a mere indirectly binding self-commitment on the basis of the principle of legitimate expectations, which can be overcome if cir-
110 Regulation (EU) 2016/445 of the ECB of 14 March 2016 on the exercise of options and discretions available in Union law (ECB/2016/4), OJ L78, 24.3.2016, p. 60. Currently (June 2021) the ECB is in the process of reviewing this regulation because of the changes made to the CRR by CRR2. For options and discretions not exercised in this regulation, the ECB has provided its stance in a guide (which is currently also under review), see ECB Guide on options and discretions available in Union law – Consolidated version, November 2016, https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ond_guide_consolidat ed.en.pdf?b25f5581d5a00743a99da8af78899056 (last accessed 30.06.2021). 111 And, with identical content, Art. 132(1), first indent, TFEU and Art. 34(1), first indent, ESCB Statute. 112 CJEU, Case C-555/07, Kücükdeveci, ECLI:EU:C:2010:21; CJEU, Joined Cases C-188, 189/10, Aziz Melki and Sélim Abdeli, ECLI:EU:C:2010:363. 113 See CJEU, Case C-5/89, Commission v Federal Republic of Germany, ECLI:EU:C:1990:320, paras. 18 et seq. requiring non-application of a Member State’s law that is not in line with the state aid regime of the Treaty as it makes the recovery of unlawful state aid “practically impossible”. 114 Examples are the Guideline (EU) 2017/697 of the ECB of 4 April 2017 on the exercise of options and discretions available in Union law by national competent authorities in relation to less significant institutions (ECB/2017/9), OJ L101, 13.4.2017, p. 156; the Recommendation of the ECB of 4 April 2017 on common specifications for the exercise of some options and discretions available in Union law by national competent authorities in relation to less significant institution (ECB/2017/10), OJ C120, 13.4.2017, p. 2. Such ECB Guidelines are legally binding on the NCAs; this constitutes, in spite of the similarity in terminology used, an important difference to the “guidelines and recommendations” adopted by the EBA on the basis of Art. 16 EBAR, which carries only a comply-or-explain effect.
70
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
cumstances justify.115 It would be incompatible with the rule of law to allow the ECB to deviate from its own SSM‑FR on a case-by-case basis. However, in case of need the ECB may amend the SSM‑FR.
III. Application of national legislation transposing Union Directives 1. Conceptual matters Art. 4(3) SSMR also mandates the ECB to apply, for the purposes of carrying out its 109 tasks under the SSMR, the national legislation transposing Union directives where the relevant Union law consists of directives. The background for this provision lies in the fact that prudential law is only to a limited extend unified by means of regulations while a substantial part is (only) harmonised by the CRD, which requires national transposition. Insofar no “single rulebook” in the meaning of a uniform codification exists. Consequently, the ECB as single supervisor cannot apply a single prudential law but has to apply (a) the CRR (and other regulations containing prudential provisions falling within the tasks conferred to the ECB) and (b) the national laws transposing the CRD (and other directives containing prudential provisions falling within the tasks conferred to the ECB).116 This is a peculiar situation in Union law: A European institution needs to adopt binding legal acts (ECB decisions) on the basis of, and applying, national rather than European law.117 Nonetheless, the decisions which the ECB adopts on the basis of national legislation are Union law decisions within the meaning of Art. 288(4) TFEU.118 They are binding on their addressees, the limits on the exercise of discretion follow Union rather than national administrative law,119 and judicial review lies with the CJEU exclusively,120 from whose perspective the question whether the national law was cor-
115 CJEU, Case T-149/95, Etablissements J. Richard Ducros v Commission, ECLI:EU:T:1997:165, para. 61; CJEU, Case T-380/94, AIUFASS and AKT v Commission, ECLI:EU:T:1996:195, para. 57; CJEU, Case T-214/95, Het Vlaamse Gewest v Commission, ECLI:EU:T:1998:77, para. 89. This approach is not unknown to the ECB either; see, as a notable example, the “ECB Guide on options and discretions available in Union law” cited in fn. 110. This “Guide” is not legally binding in a strict sense, but it may lead, as described in the text, to a self-commitment about the future exercise of the ECB’s discretion under the Union law provisions on which the Guide elaborates. It is thus of a legal nature which is distinct from the ECB “Guidelines” addressed to NCAs and EBA “Guidelines” addressed to competent authorities (and the latter two also differ from each other, as mentioned supra, → para. 144 et seq.). The confusing terminology can only be called unfortunate in this regard. 116 Case law of the Court of Justice acknowledges a direct applicability of Directives (as opposed to Regulations) only to a limited extent; they can typically not be relied on to derive obligations for private parties, as is objective of banking supervision. As a consequence, the national transposing legislation is the only reliable way to make the Directive applicable by the ECB. 117 For a doctrinal explanation of the phenomenon see Witte, MJ 21 (2014), 89. See also Lackhoff, The Single Supervisory Mechanism (2017), para. 423 et seq., 425, 426, 429, and 1086. 118 And, with identical content, Arts. 132(1), second indent, TFEU and 34.1, second indent, ESCB Statute. See also Lackhoff, The Single Supervisory Mechanism (2017), para. 430 et seq. and 448 to 455. 119 On the issue which procedural law the ECB has to apply see in more detail Lackhoff, The Single Supervisory Mechanism (2017), para. 462 et seq. 120 Witte, in: European Central Bank (ed), ESCB Legal Conference 2016 (2017), 247, at pp. 250-251; Witte, Europarecht Beiheft 1 (2017), 29, at pp. 37-38; Witte, in Zilioli and Wojcik (eds), Judicial Review in the European Banking Union (2021), at paras. 15.02-15.05. See also Lackhoff, The Single Supervisory Mechanism (2017), para. 1086.
Klaus Lackhoff and Andreas Witte
71
Art. 4 SSMR
Tasks conferred on the ECB
rectly applied constitutes a question of law, not a question of fact.121 A specific issue arises if national law transposing a prudential directive (like CRD) does transpose the directive incorrectly. For national law that contradicts directly applicable Union law (e.g. CRR), it can be argued – following the principle of supremacy of the Union law and the obligation to comply with Union law – that the ECB may not apply such provisions. The issue is more complex in case of directives. If the conditions for a direct applicability of directives are met and no negative effect is resulting from such application for private parties, then it may be argued that the same as in case of a regulation applies, i.e., the national provision becomes inapplicable. Otherwise the ECB may consider whether a harmonious interpretation of the national transposition in line with the directive is possible. If this is not the case, the ECB should consider not to apply national law that aims to transpose a directive but is not in line with that directive, provided that the application of such national law would negatively effect the rights of a credit institution.122
2. National legislation The term “national legislation” is broad; it comprises any act of general (as opposed to case-specific) application, provided it is legally binding. The latter criterion excludes non-binding pronouncements made by national authorities. Such documents are frequently used in banking supervision; practical examples include the “circulaires” issued by the CSSF in Luxembourg, or the Mindestanforderungen an das Risikomanagement (MaRisk) issued by BaFin in Germany. Even though such documents are, as a matter of practice, often adhered to in a way similar to laws by both supervisors and credit institutions alike, they are not binding legal acts (although they have a self-binding effect on the issuing authority) and can therefore not constitute a transposition of a Directive.123 The ECB is not bound to apply them. Whether a particular document possesses the legal bindingness required for being considered as transposing a directive has to be determined by reference to the effect given to it by the national legal system. 124 111 The hierarchical rank of the act within the national legal system is irrelevant. The Member States can transpose directives by means of acts of Parliament or secondary legislation which are based on acts of Parliament (“regulations”, “decrees” or whatever the term in the national legal terminology). In exceptional cases, even a constitutional provi110
121 Prek and Lefèvre, CMLR54 (2017), 369, at pp. 380-381. This would also mean that where (as is normally the case for actions of annulment) the case is heard by the General Court at first instance, the correct interpretation of national law is reviewable by the Court of Justice upon appeal, unlike questions of fact. Nonetheless, Prek and Lefèvre argue, owing to the lack of familiarity of CJEU judges with national (as opposed to Union) law, for an increased level of party involvement in the determination of national law, implying a degree of modification of the iura novit curia principle. As to the interpretation of national law, it would appear that the General Court and Court of Justice are bound by the interpretation given to the national statute by the national courts: Prek and Lefèvre, ibid. at fn. 94 and accompanying text. It is further remarkable that this article assumes that the Court can review the application of national law by the ECB, see at p. 381 subject to an obligation of the Court to take into account the interpretation of the relevant national law by the national courts, at p. 388. 122 CJEU, Case C-384/17, Link Logistics, ECLI:EU:C:2018:810, para. 61 which refers to national courts. 123 This is well-established in the case law of the Court of Justice to determine whether a Member State has complied with its obligation to transpose a Directive; see e.g. CJEU, Case C-361/88, Commission v Germany, ECLI:EU:C:1991:224. See on the quasi binding effect of non-binding legal acts also Riso and Lackhoff, ‘C. Dividend Recommendation’, in: Lackhoff (ed), Banking supervision and COVID-19 (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2021), part 2, C, para. 33. 124 This has the consequence of precluding purely formalistic approaches. For instance, the designation of a document as a “circular” will typically indicate a lack of bindingness, because this is the meaning within which that term is normally used. Exceptions exist, however; in Spain, for instance, Banco de España possesses the ability to issue “circulares” with binding legal effect which qualify as Directive transpositions for the purposes of Art. 4(3) SSMR.
72
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
sion may qualify as a directive transposition. It does not matter either whether the national law establishing a supervisory task and granting a supervisory power speaks, when assigning the task and power, of the “competent authority” in the abstract or rather lists the authority by name (as is typically the case for statutes which were adopted before the establishment of the SSM and have not been amended since). Such statutes often explicitly refer to the then (national) competent authority by name, when determining the competent authority. If the national statute meets the conditions for direct application by the ECB (see infra, → para. 112 et seq.), it will be applied by it as commanded by the SSMR, i.e. by virtue of Union law, and the ECB will read references to the national competent authority in the statute as references to itself, Art. 9(1) SSMR.
3. Transposing Union Directives Under Art. 4(3) SSMR, the ECB is not supposed to apply national legislation in gen- 112 eral, but only those provisions of national legislation falling in the scope of its tasks which transpose a directive of relevant Union law – most importantly the CRD; to a lesser extent also the BRRD and other directives establishing prudential rules 125. This creates the need to identify whether and to what extent a particular national provision which the ECB is thinking of applying can actually be said to constitute a transposition of a directive that establishes prudential rules (directive transposition) falling within the scope of tasks conferred (by Art. 4(1) SSMR) on the ECB. 126 Whether a national provision is the transposition of a provision of a directive is 113 not always obvious. In many cases, national legislators do not transpose a directive by adopting a new statute which, in wording and structure, closely mirrors the directive, but rather integrate or incorporate it into existing national statutes, which in turn exist within the context of the broader environment of a country’s laws, unwritten legal traditions and interpretative approaches.127 In principle it is well within the Member State’s discretion to choose the form and method of transposition.128 In some cases Member States already have legislation in place which, in substance, conforms to the directive, and consequently adopt no new measures even though the wording in national law may differ from the directive text; such legislation is nevertheless a transposition of the directive as it achieves the purpose pursued by the directive.129 Apart from these rather formal aspects, also substantive aspects may raise the 114 question whether a national provision is the transposition of a directive. Are for example provisions of national law which transpose provisions of a prudential directive (like the CRD) but go beyond what is required by the directive (gold-plating) part of the law to 125 On the issue what is prudential supervision see Lackhoff, The Single Supervisory Mechanism (2017), para. 106 et seq. 126 Such a need to determine whether a national prudential provision is the transposition of a directive does not exist if one concludes that a comprehensive view of the SSMR supports the interpretation of Art. 4 SSMR that the entire prudential supervision of significant credit institutions is conferred on the ECB, see Lackhoff, The Single Supervisory Mechanism (2017), para. 95 et seq. 127 See Witte, in: European Central Bank (ed), ESCB Legal Conference 2016 (2017), 247 for the conceptual and practical difficulties which can complicate the determination whether a particular national provision transposes a directive, and also for an explanation why existing case law is of only limited usefulness for the clarification of this issue. Likewise, the problem is not entirely solved by the practice of many Union directives to require Member States to include references to the directive in their national statutes transposing it. 128 Art. 288(3) TFEU. See also Kotzur, in: Geiger, Khan and Kotzur (eds), European Union Treaties (2015), TFEU Art. 288 para. 11 for the – well-established – case law on the limits to the discretion of Member States in choosing their respective transpositions. 129 This has been confirmed as lawful in CJEU, Case C-248/83, Commission v Germany, ECLI:EU:C: 1985:214, para. 49.
Klaus Lackhoff and Andreas Witte
73
Art. 4 SSMR
Tasks conferred on the ECB
be applied by the ECB? If this were not the case, national competent authorities would remain competent to supervise the compliance of significant credit institutions in respect of the “gold-plated” rules. That such “gold-plated” rules are part of the substantive law which the ECB has to apply is in line with Art. 4(3) SSMR. This provision provides also that national rules making use of the options under the CRR shall be applied by the ECB. The same should apply with regard to gold-plating in respect of the directives like the CRD. While gold-plated rules go beyond the mere transposition of the directive, they still transpose the directive, as within the gold-plated rules the (minimum) requirements of the Directive are also transposed. 115 Even more pressing is the question whether national provisions are transposing a directive with regard to national provisions that pursue a prudential purpose but are not explicitly envisaged in (for example) the CRD.130 The issue is here even more relevant as one could argue that national provisions that are not transposing directives shall not be applied and accordingly also do not fall within the scope of the tasks (and powers) conferred on the ECB (see also infra, → para. 116 et seq.). Examples for national provisions that pursue a prudential purpose but are not explicitly envisaged in the CRD or another directive setting prudential standards include a wide range of pre-approval requirements according to which activities or transactions conducted by credit institutions which are considered to have potentially a severe impact on its prudential requirements must be approved ex ante. This may, for instance, be the case for mergers with another bank or de-mergers whereby some activities are split off into a separate legal entity,131 for the establishment of branches in third countries or for changes to a bank’s articles of association.132 Such pre-approval requirements are not mandatory under Union law, and, consequently, not all Member States have them. They are an example for national powers, i.e. prudential powers based on national law not predetermined by Union directives. 116 In essence, two extreme approaches are conceivable to determine whether such provisions constitute a directive transposition: 117 a) A narrow approach, according to which only supervisory instruments explicitly foreseen in the text of the Union directive in question are transpositions of Union law. Under this interpretation, the pre-approval requirements given as examples above would not be directly applied by the ECB (in the sense of adopting an ECB supervisory decision based on the national statute) since they are not mentioned in the text of the CRD.133 In this context it is partially argued that provisions on prudential powers not explicitly envisaged in a prudential directive do not qualify for direct application by the ECB but would be subject to the power of the ECB to issue instructions to the NCA concerning the granting or refusal of such approval, to the extent such instructions are necessary for carrying out the ECB’s tasks under the SSMR.134 Such instructions would be legally 130 This is the so called national powers discussion in respect of which the ECB has sent to each significant credit institution two letters (dated 31.3.2017 and summer 2016) clarifying which powers granted under national law that are not explicitly mentioned in Union law are exercised by the ECB in respect of significant credit institutions. 131 E.g. Art. 57 decreto legislativo 385/1993 (Italian Banking Act) or Art. 77(3) Loi relative au statut et au contrôle des établissements de credit (Belgian Banking Act). 132 E.g. Art. 56 decreto legislativo 385/1993 (Italian Banking Act). 133 One could attempt to argue that such pre-approval powers are transpositions of Art. 104(1)(b) CRD, aimed to reinforce the governance arrangements of the bank. However, the wording “require the reinforcement” is more reminiscent of an ex post intervention power rather than an ex ante pre-approval power. 134 Art. 9(1)(3) SSMR and Art. 22 SSM‑FR.
74
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
binding on the NCA and can limit the discretion of the NCA potentially available under national law, up to the point of leaving the NCA no discretion but to issue or deny approval as instructed;135 they would thus amount to a type of indirect application of the national law by the ECB. However, another position would be to conclude that such national provisions would not at all be within the tasks conferred on the ECB as they are not transposing a relevant directive and Art. 4 SSMR (in particular (e) thereof) refers to the relevant Union law for determining what tasks are assigned. Consequently, the ECB would, according to this view, not be competent to apply them, not even by instruction. b) A wider approach, according to which any provision relating to the subject matters of the prudential directives is considered to be a transposition of relevant Union law and thus falling within the scope of the tasks assigned to the ECB by Art 4 SSMR and consequently directly applicable by the ECB for significant banks. This would mean, for the examples cited above, that applying the pre-approval provisions of national law would be within the tasks conferred on the ECB if they relate to an area covered by the CRD (and based on Art. 9 SSMR one may also conclude that this power is also conferred on the ECB). Both positions have shortcomings.136 The wide approach takes a very extensive reading of the concept of “transposition of a (prudential) directive” that goes beyond the actual wording of that directive. The narrow approach is difficult to reconcile with the telos of Arts. 104(1) and 64(1) CRD, which indicate that the powers explicitly listed in the CRD are not exhaustive and that the Member States are free to add additional supervisory powers they deem necessary for the exercise of the supervisory function; this would not be a case of gold-plating as that term is often derogatorily used, as the CRD explicitly foresees this freedom to add supervisory powers, but rather a case of the CRD’s appeal to national legislators to equip competent authorities with the powers necessary to achieve the objectives of prudential supervision. In order to determine which national provisions can be seen as transposition of prudential rules of a directive although not explicitly pre-formed by the directive, the objectives pursued by the SSMR may provide guidance (a teleological interpretation). The context of Art. 4(1) SSMR suggests that the intention of the legislator was to centralise comprehensively the supervision of significant credit institutions with the ECB. Also Art. 1(2) SSMR and Recitals 12 and 34 SSMR point in this direction and delineate the tasks conferred on the ECB against other tasks and by implication support the argument that the prudential supervision is comprehensively conferred on the ECB (supra, → para. 17). The fact that the universe of prudential provisions is then identified with the rules in Union law and national law implementing directives or making use of legislative options may result from the misleading idea that this creates the single rulebook and that the single rulebook is comprehensive. In reality in addition to these rules of prudential supervision further purely national rules of prudential supervision exist. Another consideration to keep in mind is the need to avoid a split of competences which would arise in addition to the split that already results from the exclusion of certain areas from the ECB’s tasks. Take as an example the German provisions on resolutions on large exposures by which the German legislator, going beyond the CRR, requires in respect of large exposures that certain resolutions are adopted by the management board of the credit institutions (see supra, → para. 19). 135 In practice, this would amount to a two-step procedure for the application of substantive law: An ECB instruction to the NCA under Union law, followed by an administrative act of the NCA under national law in fulfilment of the instruction. See Witte, MJ 21 (2014), 89, at p. 98. 136 For a discussion of the two positions, see Witte, in: European Central Bank (ed), ESCB Legal Conference 2016 (2017), 247.
Klaus Lackhoff and Andreas Witte
75
118
119
120
121
Art. 4 SSMR 122
Tasks conferred on the ECB
This teleological approach would result in a three-pronged test as a set of cumulative criteria to determine whether a national prudential provision is to be applied by the ECB. A particular national provision (e.g. giving a power to the competent authority) would have, firstly, to fall within the remit of the ECB’s tasks. This means that it must be a prudential task.137 This requires that the provision in question must have a sufficiently close link to prudential banking supervision. Not every legal provision existing in national law which concerns credit institutions is to be applied by the ECB, but only those tasks which can be said to be prudential in nature. This is a qualitative test; reference would have to be made to the particular objectives of the national provision in question (i.e., whether it is aimed at ensuring that credit institutions manage their risks in a sound manner and that the risks to which credit institutions are exposed are sufficiently covered; this excludes, for instance, provisions which have a market conduct angle). Secondly, the provision may not relate to a task not conferred on the ECB, especially not one listed in Recital 28 SSMR as excluded from the conferral of competences. Thirdly, the credit institution in question must be a significant one, since the supervision of LSIs, including the adoption of supervisory decisions, is reserved for the NCAs as far as LSIs are concerned, with the exception of qualifying holding and authorisation/withdrawal procedures.138
IV. Application of tertiary law (Art. 4(3)(2) SSMR) Many of the secondary law acts of relevant Union law (especially CRR and CRD) provide for legal bases for the adoption of tertiary law acts. Such acts may spell out the details which are deemed to be too technical for stipulation in secondary law itself (regulatory technical standards, RTS) or determine the details of the implementation (implementing technical standards, ITS). Since the Treaty of Lisbon, primary law explicitly allows for such empowerments, in Arts. 290-291 TFEU.139 124 Both regulatory technical standards (Art. 290 TFEU) as well as implementing technical standards (Art. 291 TFEU) are prepared by the EBA and adopted by the Commission. 125 Regulatory technical standards (Art. 290 TFEU), are quasi-legislative acts delimited by the legislative acts on which they are based and which contain substantive provisions spelling out the details of the act which provides for their legal bases.140 126 Implementing technical standards (Art. 291 TFEU) determine the conditions of applications of the acts that provide for their adoption and consequently focus often on 123
137 On the issue what is prudential supervision see Lackhoff, The Single Supervisory Mechanism (2017), para. 106 et seq. 138 Art. 6(6) SSMR. 139 These provisions can be seen as a primary law attempt to organise and structure the system of delegations of tertiary law acts which existed before Lisbon and which had developed in a rather confusing manner (“comitology”). For a general account from the Union law perspective, see Christiansen and Dobbels, ELJ 19 (2012), 42. In the area of financial supervision, this hierarchical system of several layers of financial legislation and regulation can be seen as a transposition of the recommendations of the “Lamfalussy report” (Final Report of the Committee of Wise Men on the Regulation of European Securities Markets) of 2001. On this see Alford, Annual Review of Banking & Financial Law 25 (2006), 389. 140 Art. 10 EBAR.
76
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
formal matters such as procedures for supervisory co-operation among authorities and templates.141 Both types of standards are developed by the EBA (typically within the framework of a working group chaired by the EBA which brings together experts from the supervisory authorities) and submitted as a draft to the Commission,142 which enacts them as a binding act of tertiary law.143 They can be enacted in the form of regulations or decisions,144 but the common practice is to use the form of a regulation. Commission delegated acts are also enacted by the Commission. Unlike in the case of binding technical standards, there is no formalised procedure for the presentation of a draft by the EBA to the Commission, even though the Commission’s standard practice is to obtain the EBA’s expert advice nonetheless. The procedure to adopt Commission delegated acts is specified in Art. 462 CRR. They are also typically adopted as a regulation. An example of particular practical importance is the delegated act pursuant to Art. 460 CRR defining the Liquidity Coverage Requirement.145 Both binding technical standards (after adoption by the Commission) and the Commission delegated acts form, insofar as they concern prudential banking supervision, part of relevant Union law and are therefore binding on and applicable by the ECB. The particular reference to the EBA standards in Art. 4(3)(2) sent. 2 SSMR is therefore only declaratory, but it emphasises the intention of the legislator of the SSMR to avoid a rift within the EEA by binding the ECB, within the framework of the SSM, to the same substantive law as the other competent authorities of the EEA under the harmonising umbrella of the EBA and the Commission. Where such acts provide for prudential powers of the “competent authority”, the ECB can adopt supervisory decisions on their basis in respect of significant credit institutions. Owing to the nature of these acts as regulations, they are directly applicable. The reference in Art. 4(3)(2) SSMR to Art. 16 EBAR means that the ECB can also be an addressee of EBA guidelines and recommendations. These are not legally binding stricto sensu; competent authorities can choose to deviate from them, but then they need to state the reasons for this to the EBA. A formal notification of compliance or reasons for non-compliance to the EBA is mandatory (“comply-or-explain”). Owing to the lack of legal force, EBA guidelines and recommendations cannot themselves be the legal basis for supervisory legal acts vis-à-vis supervised entities, but they can provide guidance on the interpretation and application of other binding acts. A special case is the single supervisory handbook (SSH). This is developed by the EBA for the purposes of building a common supervisory culture, i.e. to ensure that the many competent authorities in the EEA, including the ECB, are not only bound by the
141 Art. 15 EBAR. The distinction laid out in the text cannot be found in the text of the EBAR but can be observed in the actual regulatory practice of the EBA. In many cases, both a regulatory and an implementing technical standard exist alongside each other on the same matter. 142 The reason for this technique is the long-standing Meroni case law, according to which new agencies established by secondary law (such as the EBA) cannot be given their own discretionary powers (CJEU, Case C-9/56 Meroni & Co., Industrie Metallurgiche, SpA v High Authority, ECLI:EU:C:1958:7). More recent case law, most notably the “short selling case” (CJEU, C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18) ostensibly affirms the Meroni precedent but, substantially, applies it in a more liberal manner. 143 For the adoption process and the rights of the Council and European Parliament see Arts. 10 to 14 and 15 EBAR. 144 Arts. 10(4) and 15(4) EBAR. 145 Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions Text. OJ L11, 17.1.2015, p. 1.
Klaus Lackhoff and Andreas Witte
77
127
128
129
130
131
Art. 4 SSMR
Tasks conferred on the ECB
same letter of the law but also apply this letter in a coherent manner.146 The handbook is not a legal act, but rather sets out supervisory best practices as a “how-to” guide for the staff of the competent authorities in applying prudential legislation. The handbook, which is not publicly available, is still in development; among others chapters on the assessment of recovery plans147 and the business model analysis148 exist, but the EBA’s intention was to further develop the handbook by adding more chapters in the future.149 132 In this context, it should be noted that the SSMR (Art. 4(3), second subpara., SSMR) stipulates that the ECB is only subject to the provisions of the EBAR on the SSH developed by the EBA in accordance with the EBAR (Arts. 8(1)(aa) and 29(2)), but not to the SSH itself.
V. Conflicts between national prudential provisions and national constitutions A very specific problem arises if there are doubts as to the compatibility of a national statute that includes prudential provisions which the ECB should apply with higherranking national law (especially constitutional law). Judicial review of ECB decisions adopted on the basis of such national law will typically take the form of actions for annulment (Art. 263 TFEU) before the Court of Justice of the EU.150 Consequently, the CJEU might be put into a situation where it is called upon to decide the incidental question whether the national provision is in line with national constitutional law and, if not, whether it should not be applied.151 134 This may create a quandary: If there are doubts concerning the constitutionality of the national statute, some national jurisdictions provide for a constitutional review that may result in the law being declared inapplicable by the national constitutional court. If the CJEU simply ignored these doubts, it could be seen as acting against fundamental principles of the rule of law, according to which even legislation is bound and constrained by higher-ranking constitutional norms152 and against the autonomy of the national legal systems and the binding effects of national constitutional law on national legislators which these systems impose. If, on the other hand, the CJEU undertook an assessment of the national statute against national constitutional law, it would assume for itself the jurisdiction over the interpretation and validity of national law with a 133
Even though it is not a legal act, the EBAR provides a legal basis for it in Art. 29(2) EBAR. A supervisory task under Arts. 5 and 8 BRRD, and assigned to the ECB under Art. 4(1)(i) SSMR. 148 Which is, most notably, part of the assessment under the SREP (Art. 98(1)(i) CRD). 149 EBAR on the Convergence of Supervisory Practices, EBA-Op-2016-11, July 2016, , paras. 227-229 and EBA Work Programme 2021, EBA/REP/2020/26, p. 20, https://www.eba.europa.eu/sites/default/documents/files/document_library/Ab out%20Us/Work%20Programme/2021/932669/EBA%202021%20Annual%20Work%20Programme.pdf. 150 An example is provided by CJEU, Joined Cases T-133/16 to T-136/16, Caisse régionale de Crédit Agricole Mutuel Alpes Provence v ECB, ECLI:EU:T:2018:219, concerning actions for annulment brought by various French banks against ECB supervisory decisions. 151 The problem is discussed by Martini and Weinzierl, NVwZ (2017), 177. 152 The situation might be different in legal systems which acknowledge no substantive constraints on the powers of legislators, as exemplified by the British doctrine of sovereignty of Parliament or by Art. 190 of the Swiss Federal Constitution. Among the participating Member States of the SSM, however, a supremacy of the constitution over legislation, enforced by some kind of constitutional jurisdiction, typically exists. 146
147
78
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
view to national constitutional law which it does not possess and has never claimed for itself.153 A solution to this issue would be a system by which, in case of doubt whether a 135 national law provision which the ECB has applied is in line with the national constitution, the CJEU may refer this question to the national constitutional court in those jurisdictions where national law provides for a constitutional court with the power to declare national law as non-applicable because of constitutional concerns.154 On the first sight, this could be seen as a surprising result but it is rather the consequence of the fact (a) that the ECB has to apply national supervisory law as no single rulebook in the form of directly applicable Union law exists yet and (b) that national constitutions may provide for limitations in national law implementing directives going beyond the limitations resulting from higher ranking EU law. However, in order to clearly establish such a solution, amendments to the Treaties and, presumably, also the national legal systems may be required. However, the cases in which this issue may arise will be scarce: First, not all jurisdic- 136 tions provide for the possibility of a constitutional review of national law. Second, as the national law (in particular when implementing directives) is subject to compliance with the higher-ranking Union law including the provisions of the CFREU, the cases where national constitutional limitations go beyond such limitations may not occur too often. Third, the Court may interpret the national provision in light of the national constitution and rely on existing judgements of the national constitutional court.155
E. Legal instruments for the exercise of the supervisory tasks of the ECB (Art. 4 (3)(2) and (3) SSMR) I. Decisions (Art. 4(3)(2) SSMR) The typical act adopted by the ECB in carrying out its supervisory tasks156 based 137 on a power conferred on it is the decision (with specific addressees). It is a legal act capable of imposing binding and enforceable obligations, foreseen in Arts. 288(4) TFEU, 132(1), second indent, TFEU.157 Unlike the regulation, it is not of general applicability but rather is binding only on those addressees which are explicitly specified in it. This is what makes it the instrument of choice for issuing supervisory measure in individual cases in the course of ongoing supervision. It thus finds its functional equivalent in the case-specific legal instruments available under national law (e.g. the Verwaltungsakt of 153 One might presume that this applies only to Member States where (as in Germany or Italy), under national law, the power to strike down national statutes for unconstitutionality is reserved to a dedicated highest court, whereas the problem does not arise in other Member States where any court is entitled to scrutinise the constitutionality of national statutes and to strike them down. But even in the latter case, strong doubts exist as to whether the Court of Justice possesses jurisdiction to rule on the interpretation and application of national (as opposed to Union) law; see Martini and Weinzierl, NVwZ (2017), 177, at pp. 180-181. 154 This is the solution suggested by Martini and Weinzierl, NVwZ (2017), 177. 155 This is one of the reasons why it goes too far to conclude (as is done by Martini and Weinzierl, NVwZ (2017), 177, at pp. 181 et seq.) that the architecture of the SSM is unsustainable without a kind of “preliminary reference procedure” from the CJEU to national constitutional courts: The usual tools of statutory interpretation, including most importantly the principle of harmonious interpretation, should be sufficient to avoid or mitigate the risk of unacceptable lacunae in judicial review. 156 See on the legal instruments available to the ECB also Lackhoff, The Single Supervisory Mechanism (2017), para. 430 et seq. 157 See also Art. 34(1), second indent ESCB Statute for the monetary policy side.
Klaus Lackhoff and Andreas Witte
79
Art. 4 SSMR
138
139
140
141
142
Tasks conferred on the ECB
German law or the acte administratif of French law), but, being an act of Union law, the interpretation, legal effects, validity and judicial review of a decision have to be derived from Union law. This is also true in cases in which the ECB acts in accordance with the national law transposing a directive (see supra, → para. 109 et seq.): Even in such cases, the resulting decision is an act of Union, not national, law. Union law also offers the possibility of decisions without addressees. A decision without addressees is a binding instrument that applies after its publication in the Official Journal158 directly to all persons in all participating Member States that now or in the future fall in its scope of applicability and fulfil the conditions provided for in the decision. An example of a decision without addressee is the decision of the ECB on close cooperation determining the procedure for the establishment of a close cooperation and the suspension or termination of a close cooperation.159 Another example was the decision of the ECB regarding the collection of data regarding fee factors.160 Further examples are the decisions of the ECB by which it amends its Rules of Procedure. Decisions without addressees can determine the rights of supervised entities and NCAs as the example show. Decisions without addressees are used among others for organisational measures or in order to establish provisions with normative character which are functionally comparable to the regulations. It is not clear which criteria determine whether the latter type of a decision without addressees may be used instead of a regulation, unless the SSMR determines explicitly the available legal act. This issue is of relevance as for the adoption of a regulation in principle a public consultation and a cost/benefit assessment is required while the SSMR does not provide explicitly for these requirements in case of a decision without addressees. Taking into account that the procedural provisions intend to enhance transparency, provide for a potential influence of the affected parties on the content and intend to avoid unreasonable burdens for the affected parties, it may be assumed that only a regulation is available if material obligations are established.161 Decisions without addressees may be adopted within a non-objection procedure and only within the scope of tasks conferred on the ECB and must comply with higher-ranking law. A hearing is not required as the circle of addressees is open.162 An open public consultation and a cost/benefit analysis are not provided for in case of a decision without addressee. But in case of normative character of such a decision without addressee, it should be carried out. A consultation with NCAs should take place based on the same reasoning applying for regulations if the ECB intends to adopt a decision without addressee that can be relevant only for NCAs in respect of less significant institutions. The relevant criterion to differentiate decisions without addressees and decisions with addressees is the scope of affected parties. The circle of affected parties of a decision without addressees is open while the circle of affected parties of a decision with addressees is limited to the named addressees. The term “decision” as that term is used in Art. 26(8) SSMR is not synonymous with the meaning with which the term is used presently. The Art. 26(8) SSMR meaning is wider; it comprises all legal acts concerning the exercise of banking supervision tasks, so Art. 297 (2) TFEU. Decision of the ECB of 31 January 2014 on the close cooperation with the national competent authorities of participating Member States whose currency is not the euro, OJ L198, 5.7.2014, pp. 7. 160 Decision of the ECB of 11 February 2015 on the methodology and procedures for the determination and collection of data regarding fee factors used to calculate annual supervisory fees, OJ L84, 28.3.2015, pp. 67. 161 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 188 suggests to allow decisions without addressees only in cases referring to specific, well defined circumstances. 162 See Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 188. 158 159
80
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
that the adoption of a regulation (as discussed infra, → para. 148) would also be a “supervisory decision” within the meaning of Art. 26(8) SSMR. This confusion surrounding the use of the word “decision” is deplorable.163
II. Guidelines and recommendations (Art. 4(3)(2) SSMR) The word “guidelines” is subject to a similar deplorable terminological confusion. Three different kinds of guidelines have to be distinguished in banking supervision: Guidelines issued by the EBA on the basis of Art. 16 EBAR. They are not strictly binding in the legal sense and are subject only to a comply-or-explain the mechanism.164 Based on a ruling of the Court confirming the possibility to review the validity of a recommendation in a preliminary ruling (see infra, → para. 147), it can be concluded that this also applies to EBA guidelines and guidelines issued by the ECB to supervised entities. Guidelines issued by the ECB to supervised entities. These are neither binding nor subject to a comply-or-explain mechanism, because no legal basis providing for such a comply-or-explain character in this case exists. They can, however, create the indirect self-committing effect described supra, → para. 108. Guidelines issued by the ECB to NCAs on matters of LSI supervision.165 These are binding upon the NCAs. A binding effect on third parties does not exist in a legal sense, but their binding effect upon the NCAs means the NCAs will have to use their powers under national law in accordance with the guidelines, meaning that an indirect effect on LSIs exist. The guidelines issued by the ECB are, however, not in themselves legal bases for supervisory action by the NCAs vis-à-vis supervised entities; the powers used by the NCAs in the fulfilment of the guidelines must be provided in a legally binding act (typically either the CRR or a national statute). As the guidelines issued by the ECB to NCAs are binding legal acts, they could, in principle, be contested by an NCA by an action for annulment. With recommendations, the situation is less confused. They have no binding force, irrespective of their addressees; nonetheless, they are categorised as legal acts. 166 They 163 There are, in fact, at least four different meanings with which the word “decision” is used within the SSM. One is the use discussed in the present annotations, that of a type of legal act as defined in Art. 288(4) TFEU. The second is the meaning within which it is used in Art. 26(8) SSMR, i.e., that of an act which must be adopted in the non-objection procedure. The third is that of an institutional act, i.e., that of a decision-making item approved by a body competent to make such an approval. “Decisions” in this last sense can also be of a purely internal matter, recorded in the minutes of a meeting, without the external effect that characterises “decisions” in the first sense; e.g. the Supervisory Board might “decide”, in the third sense, to approve a template for supervisory acts that would be used by ECB staff when drafting such acts. Such templates are not in themselves “decisions” in the sense of a legal act with external effect (even though the drafts that will be developed using them may well be); nonetheless, by virtue of the Supervisory Board’s competence to plan the exercise of supervisory tasks (Art. 26(1) SSMR), they may be submitted to the Supervisory Board for approval before ECB staff is encouraged to use them. Fourth, there is the meaning of “decision” in the sense of an act which can be challenged in the Administrative Board of Review (Art. 24 SSMR). Since the Administrative Board of Review procedure was modelled after the action for annulment under Art. 263 TFEU, it appears preferable to interpret the word “decision” in the same sense in which case law has elaborated upon the concept of contestable acts (which would include any act with legally binding effect and thus also, for instance, ECB Regulations). See Witte, JFR 1 (2015), 226, at pp. 234-235. 164 See Witte, JFR 1 (2015), 226, at p. 240 and fn. 79 for the question whether they are contestable acts subject to judicial review. 165 They find their legal basis in Art. 6(5)(a) SSMR and are authorised, under primary law, by Art. 14.3 ESCB Statute. See Lackhoff, The Single Supervisory Mechanism (2017), para. 443 et seq. 166 Art. 288(5) TFEU.
Klaus Lackhoff and Andreas Witte
81
143 144
145
146
147
Art. 4 SSMR
Tasks conferred on the ECB
are not contestable by an action for annulment, Art. 263 TFEU. For recommendations issued by the EBA the CJEU, however, determined that their validity can be reviewed as part of a preliminary ruling as “it follows from Article 19(3)(b) TEU and the first paragraph of Article 267(b) TFEU that the Court has jurisdiction to give preliminary rulings on the interpretation and validity of acts of the institutions of the Union, without any exception”.167
III. Regulations (Art. 4(3)(2) and (3) SSMR) Art. 4(3) SSMR also provides for the adoption of regulations by the ECB. The resulting acts are Union regulations within the meaning of Art. 288(2) TFEU, 168 which means they have a direct effect in the legal systems of the Member States169 and supremacy over contravening national law. The ECB’s regulatory powers are, however, constrained in several ways and limited in scope. That is why the ECB is a supervisor (supervisory authority) but not a regulator. 149 Firstly, Art. 4(3) SSMR does not in itself provide a sufficient power to adopt a regulation that imposes obligations on third parties. Any interference with third-party rights must be based on a specific legal basis allowing for such interference; the effect of Art. 4(3) SSMR is only to state that such specific legal basis – where they exist – may be exercised in the form of any legal act suitable for the matter, unless the choice of type of legal act is constrained by the legal basis in question itself. Thus, the ECB could, for instance, use Art. 10 SSMR, to impose reporting obligations on all credit institutions (even LSIs) (if no conclusive reporting requirements exist in Union legislation),170 without prejudice to the possibility to use Art. 10 SSMR for decisions (in the Art. 288(4) TFEU sense) for ad hoc information requests in individual cases. The only type of regulation which the ECB could adopt on the basis of Art. 4(3) SSMR alone, without additional reference to a subject-specific legal basis, is a regulation which does not encroach upon third-party rights, i.e. one which for example only affects the organisation of its own tasks. 150 Secondly, the SSMR allows the adoption of regulations by the ECB “only to the extent necessary to organise or specify the arrangements for the carrying out of the tasks conferred on it” by the SSMR. As this provides discretion (“necessary”) to the ECB, judicial review would appear to be limited in the sense that the Court may not substitute its assessment of the facts for the assessment made by the ECB. It is restricted to examining the accuracy of the findings of fact and law made by the ECB and to verifying, in particular, that the action taken by the ECB is not vitiated by a manifest error or misuse of powers and that it clearly did not exceed the bounds of its discretion.171 Such a clear exceedance of the bounds of discretion would, for instance, occur where the matter governed by the ECB regulation cannot reasonably be subsumed under the concept of 148
167 CJEU, Case C-501/18 BT v Balgarska Narodna Banka, ECLI:EU:C:2021:249, para. 82, see also para. 83. See also CJEU, Case C-911/19 FBF v ACPR, ECLI:EU:C:2021:599 for the scrutiny of the (equally non-binding) EBA guidelines via Art. 267 TFEU. 168 And, with identical content, Art. 132(1), first indent, TFEU and Art. 34.1, first indent, ESCB Statute. 169 But only in the Member States of the euro area: Art. 42.1 ESCB Statute. As a consequence, Art. 7 SSMR (see annotations thereto) had to provide for a different mechanism for giving effect to ECB legal acts in the non-euro area Member States who voluntarily opt into the banking union. 170 Regulation (EU) 2015/534 of the ECB of 17 March 2015 on reporting of supervisory financial information (ECB/2015/13), OJ L86, 26.3.2015, p. 13. 171 See, in lieu of many others, CJEU, Case T-187/06, Ralf Schräder v CPVO, ECLI:EU:T:2008:511, para. 59.
82
Klaus Lackhoff and Andreas Witte
Art. 4 SSMR
Tasks conferred on the ECB
organising or specifying the arrangements for the carrying out of ECB tasks under the SSMR. The ECB thus has a wide (though not unlimited) choice of the type of legal act, depending on how it assesses this criterion. In any case, the provision from the SSMR may be read as implying a degree of subsidiarity of ECB regulations relative to other types of legal acts less intrusive into existing legislation. Thirdly, the procedural requirements for the adoption of a regulation are more 151 cumbersome. In particular, an open public consultation and cost-benefit analysis are normally necessary, unless proportionality considerations or particular urgencies justify a deviation from this172 – a clause which, in the light of its character as an exception to a rule, should be narrowly construed. These additional procedural steps serve as a substitute for the hearing of the addressee of a decision provided for in Arts. 22 SSMR, 31 SSM‑FR and 41(2)(a) CFREU, since regulations have no addressees which could be heard. Lastly, even though the ECB is itself a Union institution on par with Parliament, 152 Council or Commission,173 it is not free to deviate from the acts of relevant Union law adopted by these institutions. Art. 4(3) SSMR makes it unambiguous that these acts of Union law are binding and to be applied by the ECB, meaning that the ECB cannot, for instance, invoke its status as a Union institution to argue that its acts are hierarchically equivalent to the CRR and can therefore deviate from the CRR on the basis of a lex posterior or lex specialis line of argument. Both the SSMR and the EBAR also make it clear that the ECB is also subject to the harmonising work of the EBA, in spite of the fact that the EBA’s character as a Union agency established by secondary law give it an institutionally less exalted status. The ECB is thus not a regulator but a supervisor; as such it has to apply the applicable prudential law. It has no general regulatory powers but is limited to adopting regulations only to the extent necessary to organise and specify the arrangements for the carrying out of the tasks conferred on it by the SSMR. An example is the Regulation on Options and Discretions (see supra, → para. 106) as with this regulation the ECB consistently exercises, within the scope of its administrative tasks, the options and discretions assigned by the legislator of the CRR to the competent authorities.
IV. Operational acts In line with common practice among supervisory authorities, the ECB is not preclud- 153 ed from interacting with supervised entities in a format other than legal acts. Since banking supervision is supposed to take place in the context of an ongoing dialogue between credit institutions and supervisor, this informal communication actually makes up the bulk of supervisory interaction. In the context of this dialogue, the ECB can transmit in any form whatsoever – verbally, electronically or in writing – questions, information and suggestions to the credit institution. Such communication is legally non-binding, since the imposition of obligations can only occur by means of a legal act (such as a decision) adopted in the decision-making process envisaged by the SSMR; nonetheless, in the interest of good cooperation between supervisor and supervised entities, credit institutions are often willing to comply with the content of such communication even in the absence of an obligation to do so. The terminology used for such vast variety of informal, non-binding communication by the ECB to the supervised entity is “operational act”.174 Such acts are indispensable for the efficient exercise of supervision, since ECB leArt. 4(3)(3) SSMR. Art. 13(1) TEU. 174 See Lackhoff, The Single Supervisory Mechanism (2017), paras. 457 et seq. 172 173
Klaus Lackhoff and Andreas Witte
83
Art. 4 SSMR
Tasks conferred on the ECB
gal acts (including but not limited to decisions in the sense of Art. 288(4) TFEU) in supervision require approval in an non-objection procedure stipulated in Art. 26(8) SSMR, which is too cumbersome a process to be conducted for every communication. The operational act is thus the ordinary format of ECB-credit institution interactions at working level. 154 In accordance with the case law of the CJEU, the delineation between supervisory legal acts (especially decisions) and operational acts is one of substance, not form. The decisive question is whether the act in question is capable of having legal effects, which depends on how, in the light of the wording and the context of the act in question, it could reasonably have been perceived by its addressee(s).175 The test is thus one of a reasonable recipient. If, in the light of this interpretation, the act has to be interpreted as imposing a legal obligation, then it constitutes, in substance, a legal rather than an operational act. It is immaterial whether the act carries the usual form of a supervisory act (official ECB letterhead, signature, etc.), even though such formalities can serve as an indicator to the addressee, affecting how the act may reasonably be perceived by them. If the act is, by these standards, a legal act but does not conform to the substantive or procedural requirements for the adoption of a legal act, then an action for annulment against it will be successful even if the ECB, subjectively, did not intend the act to be of a legal nature. It is thus of essence that the ECB refrains, in the communication of operational acts, from ambiguous wording; it must remain evident from a communication by the ECB to a bank whether the act is supposed to impose legal obligations or not.
F. Administrative and judicial review of supervisory acts of the ECB 155
Supervisory decisions of the ECB can be the subject matter of an administrative and/or judicial review by the ABoR and/or judicial review.176 See the annotations to Art. 24 SSMR.
G. Participation in the work of the EBA (Art. 4(3)(4) SSMR) 156
The European Banking Authority (EBA), post-Brexit headquartered in Paris, is one of the sectoral “European Supervisory Authorities” (ESAs), together with the European Securities and Markets Authority (ESMA) (for securities markets) in Paris and the European Insurance and Occupational Pensions Authority (EIOPA) (for insurances and occupational pension schemes) in Frankfurt. In spite of its name, it does not actually supervise banks itself, but rather develops supervisory standards and promotes the convergence of supervisory practices by the actual supervisory (“competent”) authorities.177 It was established by means of Regulation (EU) No 1093/2010 (cited here as EBAR) and exercises this task e.g. by means of drafting binding technical standards or the single supervisory handbook (see supra, → para. 123 et seq.), but also by means of participating in, and monitoring the work of, supervisory colleges. Further, the EBA coordinates the Questions & Answers process by which the EBA provides answers to ques-
CJEU, Case T-496/11, United Kingdom v ECB, ECLI:EU:T:2015:133, paras. 31-76. See Lackhoff, The Single Supervisory (2017), paras. 1009 et seq. and 1072 et seq. General on the possibilities of a legal review of act of the ECB in it function as supervisor see Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (2021). 177 For the background of the establishment of the EBA, the ESMA and the EIOPA, the tools they use, and the (limited) direct supervisory powers they have, see Witte, JFR 1 (2015), 226, at pp. 234-239. 175
176
84
Klaus Lackhoff and Andreas Witte
Art. 5 SSMR
Macro-prudential tasks and tools
tions of interpretation of the existing prudential rules.178 In addition the EBA could exercise limited supervisory powers if the envisaged proceeding would be used (see for example Art. 17(6) EBAR). This task has a geographic scope which covers the entire EEA and thus extends 157 beyond the SSM. From the perspective of the EBA, the ECB is – in the exercise of its supervisory tasks under the SSMR – one of the many competent authorities within the EEA,179 consistency among which the EBA is tasked to ensure. This supervisory convergence mandate of the EBA existed before the establishment of the SSM based on the concept of a harmonisation of supervisory laws and practices. The ECB as single supervisor for participating Member States, however, unifies in respect of these Member States the supervisory practices as the SSM is going a step further in integration by centralising the supervision for significant credit institutions; likewise, in its oversight role it may foster the unification also in respect of the supervision of LSIs. This may raise the question whether the mandate of the EBA that is conceptually addressed to a harmonisation environment needs to be adjusted. However, with the establishment of the SSM, a risk of a rift, within the EEA, occurred between the SSM on the one hand and the non-SSM competent authorities on the other.180 One could argue that the EBA in its current form is needed to prevent this rift and keep supervisory practices between the SSM and the non-SSM EEA aligned. Art. 4(3)(3) SSMR gives the ECB a mandate to contribute in a participating role in 158 the development of draft binding technical standards. It is thus encouraged to become a member of, and active contributor to, the working groups of experts from the competent authorities which, under the leadership of the EBA, conduct the actual drafting work for such standards. These working groups are not decision-making bodies and operate, as a matter of practice, by consensus rather than voting; the lack of voting power of the ECB in the EBA Board of Supervisors is therefore not as relevant as it seems on first sight.
Art. 5 SSMR Macro-prudential tasks and tools 1. Whenever appropriate or deemed required, and without prejudice to paragraph 2 of this Article, the national competent authorities or national designated authorities of the participating Member States shall apply requirements for capital buffers to be held by credit institutions at the relevant level in accordance with relevant Union law in addition to own funds requirements referred to in point (d) of Article 4(1) of this Regulation, including countercyclical buffer rates, and any other measures aimed at addressing systemic or macro-prudential risks provided for, and subject to the 178 In this context the disadvantage that the EBA is not a supervisor becomes apparent. The answers often seem to be prepared from the perspective of a body preparing legislation than from a supervisor, which is evidenced by the often limited focus on the facts of specific cases in the EBA Q&A. 179 In one important aspect, however, the ECB differs from the other competent authorities vis-à-vis the EBA: The ECB has only observer status in the EBA’s supreme decision-making body, the Board of Supervisors (Art. 40(1)(d) EBAR). The SSM is thus represented, in the Board of Supervisors, primarily by representatives of the NCAs. This does not, of course, prevent intra-SSM coordination of positions ahead of meetings of the Board of Supervisors. 180 There is thus a certain potential for the emergence of the SSM as a powerful, monolithic block within the wider EEA. This was used as an argument by non-SSM Member States to insist on a questionable “double majority” modification of EBA voting arrangements which gives them undue weight in the Board of Supervisors; see Witte, Europarecht Beiheft 1 (2017), 29, at fn. 19 and Deutsche Bundesbank, Monthly Report (July 2013), 13, at p. 25.
Kern Alexander
85
Art. 5 SSMR
Macro-prudential tasks and tools
procedures set out, in the Regulation (EU) No 575/2013 and Directive 2013/36/EU in the cases specifically set out in relevant Union law. Ten working days prior to taking such a decision, the concerned authority shall duly notify its intention to the ECB. Where the ECB objects, it shall state its reasons in writing within five working days. The concerned authority shall duly consider the ECB’s reasons prior to proceeding with the decision as appropriate. 2. The ECB may, if deemed necessary, instead of the national competent authorities or national designated authorities of the participating Member State, apply higher requirements for capital buffers than applied by the national competent authorities or national designated authorities of participating Member States to be held by credit institutions at the relevant level in accordance with relevant Union law in addition to own funds requirements referred to in point (d) of Article 4(1) of this Regulation, including countercyclical buffer rates, subject to the conditions set out in paragraphs 4 and 5 of this Article, and apply more stringent measures aimed at addressing systemic or macro-prudential risks at the level of credit institutions subject to the procedures set out in the Regulation (EU) No 575/2013 and Directive 2013/36/EU in the cases specifically set out in relevant Union law. 3. Any national competent authority or a national designated authority may propose to the ECB to act under paragraph 2, in order to address the specific situation of the financial system and the economy in its Member State. 4. Where the ECB intends to act in accordance with paragraph 2, it shall cooperate closely with the national designated authorities in the Member States concerned. It shall in particular notify its intention to the concerned national competent authorities or national designated authorities ten working days prior to taking such a decision. Where any of the concerned authorities objects, it shall state its reasons in writing within five working days. The ECB shall duly consider those reasons prior to proceeding with the decision as appropriate. 5. When carrying out the tasks referred to in paragraph 2, the ECB shall take into account the specific situation of the financial system, economic situation and the economic cycle in individual Member States or parts thereof. Bibliography Christos V. Gortsos, European Central Banking Law, The Role of the European Central Bank and National Central Banks under European Law (Palgrave Macmillan, 2020); Eddy Wymeersch, ‘The Single Supervisory Mechanism for Banking Supervision: Institutional Aspects’ in: Danny Bush and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020); Bank of England, Financial Policy Committee, Financial Stability Report (March 2012); European Commission, Report of the High-level Expert Group on financial supervision in the EU (Chaired by Jacques de Larosière, 25 February 2009); FSB, IMF and BIS, Macroprudential Policy Tools and Frameworks; Progress Report to G20 (October 2011); Petra Senkovic, European Central Bank, ECB advisory letter to banks (SSM/ 2017/0140, 31 March 2017); UK Financial Services Authority, The Turner Review—a regulatory response to the global banking crisis (March 2009).
86
A. Limited macro-prudential supervisory competence of ECB (Art. 5(1) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Specific Competence of ECB (Art. 5(2)-(5) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
C. National designated authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
D. Conflict between NDAs and ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
Kern Alexander
Art. 5 SSMR
Macro-prudential tasks and tools
A. Limited macro-prudential supervisory competence of ECB (Art. 5(1) SSMR) As analysed elsewhere in this commentary, the SSMR allocates broad competencies 1 and powers to the ECB in the field of prudential supervision for individual credit institutions and certain investment firms, but the scope of those competencies is limited by Art. 127(6) TFEU and the enumerated powers set forth in Art. 4 SSMR. 1 In contrast, Art. 5 SSMR confers on the ECB a limited number of macro-prudential tasks and tools. Under the heading in Art. 5, entitled “Macro-prudential tasks and tools”, the ECB is allocated powers to impose stricter prudential requirements, including higher capital buffers, on individual banks based on macro-prudential factors in the country where the bank is based.2 However, Art. 5(1) SSMR states that the decision to utilize macro-prudential tools rests primarily with the NCAs.3 The ECB has recognized this limitation on its supervisory competence in a 2017 Advisory Letter that states: “national authorities remain exclusively competent to exercise powers which do not fall within the scope of the ECB’s tasks or which do not underpin the ECB’s supervisory function. This applies in particular to (i) macro-prudential supervisory tasks, (ii) the approval of mergers from competition law, (iii) the ‘supervision’ of external auditors, (iv) the imposition or enforcement of conditions attached by regulation to banking activities such as product rules; and (v) the imposition of penalties to absorb the economic advantage gained from the breach of prudential requirements (which primarily serve competition law purposes).4”
The areas of supervision identified by the ECB as not its own, because neither falling 2 within the scope of the ECB’s tasks nor underpinning the ECB’s supervisory function, is a recognition of the limits of its supervisory competencies and the barrier beyond which its efforts to promote harmonized standards are unlikely to go. However, it should be noted, as discussed below, that the ECB itself does have an explicit macro-prudential function pursuant to Art. 5(2) SSMR, so that the “exclusivity” of macro oversight for NCAs is debatable.
B. Specific Competence of ECB (Art. 5(2)-(5) SSMR) Despite this limitation on its supervisory competence, Art. 5(2) SSMR authorizes the 3 ECB to intervene and utilize these tools “if deemed necessary” to apply stricter requirements than those set out by the national competent authorities.5 In particular, Art. 5(4) SSMR authorizes the ECB to adopt specific measures if neces- 4 sary by taking into account the specific circumstances of the Member State’s financial and economic situation 6 as well as “duly consider” any objection of a national competent 1 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L287, 29.10.2013, p. 63), Art. 4(1)(3), especially Art. 4(1)(d) and (e) SSMR; see discussion in Wymeersch, ‘The Single Supervisory Mechanism for Banking Supervision: Institutional Aspects’ in: Busch and Ferrarini (eds), European Banking Union, 145, at 157, 163. 2 Art. 5 SSMR; The ECB’s macro-prudential tasks and tools can be contrasted with those recommended by international standard setting bodies. See FSB, IMF and BIS, Macroprudential policy Tools and Frameworks; Progress Report to G20 (October 2011). 3 Art. 5(1) SSMR. 4 See Senkovic, ECB advisory letter to banks (European Central Bank, 31 March 2017), on file with author. 5 Art. 5(2) SSMR. 6 Art. 5(5) SSMR.
Kern Alexander
87
Art. 5 SSMR
Macro-prudential tasks and tools
authority that seeks to address a macro-prudential risk on its own.7 Moreover, the CRR permits the ECB as the competent supervisory authority to take macro-prudential tools, other than increased capital buffers, only in limited circumstances for banks based in a participating SSM Member State where the ECB has identified macro-prudential or systemic risks.8 Specifically, Art. 458 CRR, entitled “Macro-prudential or systemic risk identified at the level of a Member State”, provides in relevant part that “[w]here the authority determined in accordance with paragraph 1 identifies changes in the intensity of macro-prudential or systemic risk in the financial system with the potential to have serious negative consequences to the financial system and the real economy in a specific Member State and which that authority considers would better be addressed by means of stricter national measures, it shall notify the European Parliament, the Council, the Commission, the ESRB and EBA of that fact and submit relevant quantitative or qualitative evidence.”9
C. National designated authorities 5
Although the ECB has specific powers to impose stricter prudential requirements and additional capital buffers have been carved out in Art. 5 SSMR10, the use of these tools now rests primarily with the national designated authorities. Under the SSMR, the term used for national macro-prudential authorities is “national designated authorities” (NDAs). The NDA can, but does not have to, be identical to the NCA. As discussed above, the ECB may take over the task “if deemed necessary”,11 and is then required to take the specific circumstances of the Member State’s financial and economic situation into account12 as well as “duly consider” any objection of an NDA or NCA proposing to address the local situation on its own.13 However, if the NDA is not the same body as the NCA, the NDAs (not the NCAs) will be responsible for macro-prudential tasks and tools, such as imposing “countercyclical buffer rates”.14 Furthermore, NDAs are empowered to propose draft national legislation if they identify changes in the intensity of systemic or macro-prudential risks in the financial system.15 The draft national legislation can be rejected within one month period by the Council, but only upon a proposal by the Commission.16 As discussed above, the ECB may decide (instead of the NDA) to exercise a macro-prudential task regarding a credit institution based in a participating Member State “if deemed necessary”,17 but is then required to take the specific circumstances of the Member State’s financial and economic situation into account18 as well as “duly consider” any objection of an NDA or NCA proposing to address the local situation on its own.19 Art. 5(4) SSMR. 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 (OJ L 176, 27.6.2013, p. 1), Art. 458 CRR. 9 Art. 458 CRR. 10 Art. 5(2) SSMR. 11 Art. 5(2) SSMR. 12 Art. 5(5) SSMR. 13 Art. 5(4) SSMR. 14 Art. 136(1) CRD. 15 Art. 458(1)-(2) CRR. 16 Art. 458(4) CRR. 17 Art. 458(4) CRR. 18 Art. 5(5) CRR. 19 Art. 5(4) CRR. 7 8
88
Kern Alexander
Procedural provisions for the use of macro-prudential tools
Arts. 103–105 SSM‑FR
D. Conflict between NDAs and ECB The division of macro-prudential supervisory competencies within Art. 5 SSMR has 6 created some legal and institutional uncertainty over the issue of whether the ECB has primary competence to exercise macro-prudential tools, and there has been tension between the ECB and national competent/designated authorities over the timing and use of macro-prudential tools. Macro-prudential regulatory tools generally involve a broader array of prudential supervisory tools that include both, some ex ante supervisory powers and ex post crisis management measures, such as liquidity and resolution tools, deposit insurance, and lender of last resort.20 In EU Member States, either central banks or other nationally-designated macro-prudential supervisory authorities have the authority to utilize macro-prudential levers or tools (i.e. counter-cyclical capital requirements and loan-to-income ratios) to address the build-up of systemic risks.21 For example, the use of counter-cyclical capital requirements can be varied depending on the riskiness of assets at points in the economic cycle. Since the creation of SSM, Denmark and the Netherlands have used counter-cyclical capital buffers to dampen credit booms in their respective housing markets by imposing higher capital requirements on home mortgage loans as opposed to other types of loans. Regarding the Dutch Central Bank’s use of macro-prudential tools, there have been some concerns raised by the SSM Supervisory Board. Other macro-prudential measures include liquidity tools that require financial institutions to hold a certain ratio of liquid assets, i.e. assets that can be easily turned into cash, relative to total assets.22
Arts. 103–105 SSM Framework Regulation Procedural provisions for the use of macro-prudential tools Art. 103 SSM Framework Regulation List of NCAs and NDAs responsible for macro-prudential tools The ECB shall collect from NCAs and NDAs of participating Member States information regarding the identity of the authorities designated for the respective macro-prudential tools referred to in Article 101 and the macro-prudential tools that these authorities can use. Art. 104 SSM Framework Regulation Exchange of information and cooperation in respect of the use of macro-prudential tools by an NCA or an NDA 1. In accordance with Article 5(1) of the SSM Regulation, the relevant NCA or NDA, when it intends to apply such tools, shall notify its intention to the ECB ten working days prior to taking such a decision. This notwithstanding, if an NCA or NDA intends to make use of a macro-prudential tool, it shall inform the ECB as early as possible of its identification of a macro-prudential or systemic risk for the financial
20 See European Commission, Report of the High-level Expert Group on financial supervision in the EU (25 February 2009), available at: ; see also UK Financial Services Authority, The Turner Review – a regulatory response to the global banking crisis (March 2009), available at: . 21 See Financial Policy Committee Bank of England, Financial Stability Report – June 2012 (2012). 22 Financial Policy Committee Bank of England, ‘Financial Stability Report – June 2012’ (2012). Other macro-prudential tools include leverage ratios could be used to limit the amount of leverage relative to the value of the bank’s assets. Forward-looking loss provisions: Financial institutions can be required to set aside provisions against potential future losses on their lending. Collateral requirements: Lending could be limited by imposing higher collateral restrictions, for example if growth in lending appears to be unsustainable. An example is a loan to value requirement, which would limit the size of a loan relative to the value of the asset. Similarly, “haircuts” on repurchase agreements would limit the amount of cash that can be lent as a proportion of the market value of a set of securities. Information disclosure: Greater transparency could help markets work better. For example, in times of crisis, more information about different institutions’ risk exposure could increase the flow of credit as uncertainty is reduced.
Kern Alexander
89
Arts. 103–105 SSM‑FR
Procedural provisions for the use of macro-prudential tools
system and, where possible, of the details of the intended tool. Such information shall as far as possible include specificities of the intended measure, including the intended date of application. 2. The notification of intent shall be provided by the NCA or NDA to the ECB. 3. If the ECB objects to the intended measure of an NCA or NDA, the ECB shall state its reasons for doing so within five working days after the day of receipt of the notification of intent. Such objection shall be in writing and state the reasons for the objection. The NCA or NDA shall duly consider the ECB’s reasons prior to proceeding with the decision as appropriate. Art. 105 SSM Framework Regulation Exchange of information and cooperation in respect of the ECB’s use of macro-prudential tools 1. In accordance with Article 5(2) of the SSM Regulation, when the ECB intends on its own initiative, or on the proposal of an NCA or NDA, to apply higher requirements for capital buffers or to apply more stringent measures aimed at addressing systemic or macro-prudential risks it shall cooperate closely with the NDAs in the Member States concerned and, in particular, notify its intention to the NDA or NCA 10 working days prior to taking such a decision. This notwithstanding, if the ECB intends to apply higher requirements for capital buffers or to apply more stringent measures aimed at addressing systemic or macro-prudential risks at the level of credit institutions subject to the procedures set out in Regulation (EU) No 575/2013 and Directive 2013/36/EU in the cases specifically set out in Union law, it shall inform the relevant NCA or NDA as early as possible of its identification of a macro-prudential or systemic risk to the financial system and, where possible, of the details of the intended tool. Such information shall, as far as possible, include the specificities of the intended measure, including the intended date of application. 2. If any of the concerned NCAs or NDAs objects to the intended measure of the ECB, it shall state its reasons to the ECB within five working days after the day of receipt of the ECB’s notification of intent. Such objection shall be in writing and state the reasons for the objection. The ECB shall duly consider those reasons prior to proceeding with the decision as appropriate.
Bibliography European Commission, Report of the High-level Expert Group on financial supervision in the EU (Chaired by Jacques de Larosière,25 February 2009); Financial Services Authority, The Turner Review – a regulatory response to the global banking crisis (March 2009); Christoph Ohler, ‘Banking Supervision’ in: Fabian Amtenbrink and Christoph Herrmann (eds), The EU Law of Economic and Monetary Union (Oxford University Press, Oxford 2020). A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Art. 103 SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Art. 104 SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Art. 104(1) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Art. 104(2) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Art. 104(3) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 3 4 5
D. Art. 105 SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Art. 105(1) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Art. 105(2) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 6 7
E. ECB’s scope of authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
A. Introduction 1
The SSM‑FR contains procedural provisions for the use of macro-prudential tools by the ECB and participating Member State authorities with competence under national law to exercise macro-prudential tools (so-called national designated authorities). 1
1
90
SSM‑FR, Title 2: Procedural Provisions for the Use of Macro-Prudential Tools, Arts. 103-105 SSM‑FR.
Kern Alexander
Procedural provisions for the use of macro-prudential tools
Arts. 103–105 SSM‑FR
B. Art. 103 SSM Framework Regulation Art. 103 SSM‑FR provides that the ECB shall compile a list of the NDAs and NCAs of 2 the participating Member States that have authority under Member State law to utilize macro-prudential tools. As macro-prudential tools are a limited and a shared competence for the ECB, Member State NDAs and NCAs have retained a wider competence to exercise an array of macro-prudential tools. Macro-prudential tools include, but are not limited to, counter-cyclical capital buffers, loan-to-income limits, and other measures set forth under EU law.
C. Art. 104 SSM Framework Regulation I. Art. 104(1) SSM Framework Regulation Under the SSM‑FR, the NDAs and NCAs are required to inform the ECB both of 3 their intention to use macro-prudential tools, the systemic risks they are designed to address, and the actual decision to use such measures.2
II. Art. 104(2) SSM Framework Regulation The decision to use macro-prudential tools must be notified to the ECB in advance 4 not less than 10 days before the decision is actually taken, and the identification of systemic risks by NDAs or NCAs must be notified to the ECB as soon as possible after the risks are identified.
III. Art. 104(3) SSM Framework Regulation The ECB can object to the use of macro-prudential tools but must put its objections 5 in writing and convey them to the relevant NDA/NCA. Before deciding to use (or not) the macro-prudential tools, the relevant NDA must duly consider the ECB’s objections before proceeding with the decision.3
D. Art. 105 SSM Framework Regulation I. Art. 105(1) SSM Framework Regulation Where the ECB has the competence to apply macro-prudential tools that impose 6 stricter requirements on banking institutions, it shall cooperate closely with the competent NDAs/NCAs and inform them of the intended decision. If the ECB decides to apply more stringent macro-prudential tools to credit institutions that are subject to
2 3
Art. 104(1) SSM‑FR. Art. 104(3) SSM‑FR.
Kern Alexander
91
Art. 6 SSMR
Cooperation within the SSM
Regulation (EU) No 575/20134 and Directive 2013/36/2013,5 the ECB is required to inform the relevant NDAs/NCAs as early as possible of identification of systemic or macro-prudential risks and the details of its use of specific macro-prudential tools. 6
II. Art. 105(2) SSM Framework Regulation 7
NDAs and NCAs may object to the ECB’s decision to use macro-prudential tools by stating their reasons in writing which shall be duly considered by the ECB7. Regarding the role of host State authorities where the local operations (i.e., branch) of a credit institution based in a participating Member State, the principle of cooperation applies as to the decision of whether to take macro-prudential tools. Host country authorities are also subject to the notification obligation regarding their decision to impose macroprudential tools on the local operations of a credit institution based in a participating Member State.
E. ECB’s scope of authority 8
Macro-prudential regulatory measures are wider in the scope of coverage and application and necessarily involve a broader array of prudential supervisory tools that include both ex ante supervisory powers, such as licensing, authorisation and compliance with regulatory standards, and ex post crisis management measures, such as liquidity and resolution tools, deposit insurance and lender of last resort.8 Indeed, the objectives of macro-prudential regulation – to monitor and control systemic risks and related risks across the financial system – will require greater regulatory and supervisory intensity that will necessitate increased intervention in the operations of cross-border banking and financial groups and a wider assessment of the risks they pose.9 Under the SSM, the question arises does the ECB have the necessary scope of authority to be an effective macro-prudential supervisor?
Art. 6 SSMR Cooperation within the SSM 1. The ECB shall carry out its tasks within a single supervisory mechanism composed of the ECB and national competent authorities. The ECB shall be responsible for the effective and consistent functioning of the SSM.
4 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 OJ L176, 27.6.2013, p. 1. 5 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 OJ L176, 27.6.2013, p. 338. 6 Art. 105(1) SSM‑FR. 7 Art. 105(2) SSM‑FR. 8 See European Commission, ‘De Larosière report’; see also Financial Services Authority, ‘The Turner Review – a regulatory response to the global banking crisis’, available at: . 9 See discussion in Ohler, ‘Banking Supervision’ in: Amtenbrink and Herrmann (eds), The EU Law of Economic and Monetary Union, 1102, at 1119-1120.
92
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
2. Both the ECB and national competent authorities shall be subject to a duty of cooperation in good faith, and an obligation to exchange information. Without prejudice to the ECB’s power to receive directly, or have direct access to information reported, on an ongoing basis, by credit institutions, the national competent authorities shall in particular provide the ECB with all information necessary for the purposes of carrying out the tasks conferred on the ECB by this Regulation. 3. Where appropriate and without prejudice to the responsibility and accountability of the ECB for the tasks conferred on it by this Regulation, national competent authorities shall be responsible for assisting the ECB, under the conditions set out in the framework mentioned in paragraph 7 of this Article, with the preparation and implementation of any acts relating to the tasks referred to in Article 4 related to all credit institutions, including assistance in verification activities. They shall follow the instructions given by the ECB when performing the tasks mentioned in Article 4. 4. In relation to the tasks defined in Article 4 except for points (a) and (c) of paragraph 1 thereof, the ECB shall have the responsibilities set out in paragraph 5 of this Article and the national competent authorities shall have the responsibilities set out in paragraph 6 of this Article, within the framework and subject to the procedures referred to in paragraph 7 of this Article, for the supervision of the following credit institutions, financial holding companies or mixed financial holding companies, or branches, which are established in participating Member States, of credit institutions established in non-participating Member States: — those that are less significant on a consolidated basis, at the highest level of consolidation within the participating Member States, or individually in the specific case of branches, which are established in participating Member States, of credit institutions established in non-participating Member States. The significance shall be assessed based on the following criteria: (i) (ii) (iii)
size, importance for the economy of the Union or any participating Member State, significance of cross-border activities.
With respect to the first subparagraph above, a credit institution or financial holding company or mixed financial holding company shall not be considered less significant, unless justified by particular circumstances to be specified in the methodology, if any of the following conditions is met: (i) (ii) (iii)
the total value of its assets exceeds EUR 30 billion; the ratio of its total assets over the GDP of the participating Member State of establishment exceeds 20 %, unless the total value of its assets is below EUR 5 billion; following a notification by its national competent authority that it considers such an institution of significant relevance with regard to the domestic economy, the ECB takes a decision confirming such significance following a comprehensive assessment by the ECB, including a balance-sheet assessment, of that credit institution.
The ECB may also, on its own initiative, consider an institution to be of significant relevance where it has established banking subsidiaries in more than one participating Member States and its cross-border assets or liabilities represent a significant part of its total assets or liabilities subject to the conditions laid down in the methodology.
Christos V. Gortsos
93
Art. 6 SSMR
Cooperation within the SSM
Those for which public financial assistance has been requested or received directly from the EFSF or the ESM shall not be considered less significant. Notwithstanding the previous subparagraphs, the ECB shall carry out the tasks conferred on it by this Regulation in respect of the three most significant credit institutions in each of the participating Member States, unless justified by particular circumstances. 5. With regard to the credit institutions referred to in paragraph 4, and within the framework defined in paragraph 7: (a) the ECB shall issue regulations, guidelines or general instructions to national competent authorities, according to which the tasks defined in Article 4 excluding points (a) and (c) of paragraph 1 thereof are performed and supervisory decisions are adopted by national competent authorities. Such instructions may refer to the specific powers in Article 16(2) for groups or categories of credit institutions for the purposes of ensuring the consistency of supervisory outcomes within the SSM; (b) when necessary to ensure consistent application of high supervisory standards, the ECB may at any time, on its own initiative after consulting with national competent authorities or upon request by a national competent authority, decide to exercise directly itself all the relevant powers for one or more credit institutions referred to in paragraph 4, including in the case where financial assistance has been requested or received indirectly from the EFSF or the ESM; (c) the ECB shall exercise oversight over the functioning of the system, based on the responsibilities and procedures set out in this Article, and in particular point (c) of paragraph 7; (d) the ECB may at any time make use of the powers referred to in Articles 10 to 13; (e) the ECB may also request, on an ad hoc or continuous basis, information from the national competent authorities on the performance of the tasks carried out by them under this Article. 6. Without prejudice to paragraph 5 of this Article, national competent authorities shall carry out and be responsible for the tasks referred to in points (b), (d) to (g) and (i) of Article 4(1) and adopting all relevant supervisory decisions with regard to the credit institutions referred to in the first subparagraph of paragraph 4 of this Article, within the framework and subject to the procedures referred to in paragraph 7 of this Article. Without prejudice to Articles 10 to 13, the national competent authorities and national designated authorities shall maintain the powers, in accordance with national law, to obtain information from credit institutions, holding companies, mixed holding companies and undertakings included in the consolidated financial situation of a credit institution and to perform on site inspections at those credit institutions, holding companies, mixed holding companies and undertakings. The national competent authorities shall inform the ECB, in accordance with the framework set out in paragraph 7 of this Article, of the measures taken pursuant to this paragraph and closely coordinate those measures with the ECB. The national competent authorities shall report to the ECB on a regular basis on the performance of the activities performed under this Article. 7. The ECB shall, in consultation with national competent authorities, and on the basis of a proposal from the Supervisory Board, adopt and make public a framework to organise the practical arrangements for the implementation of this Article. The framework shall include, at least, the following: 94
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
(a) the specific methodology for the assessment of the criteria referred to in the first, second and third subparagraph of paragraph 4 and the criteria under which the fourth subparagraph of paragraph 4 ceases to apply to a specific credit institution and the resulting arrangements for the purposes of implementing paragraphs 5 and 6. Those arrangements and the methodology for the assessment of the criteria referred to in the first, second and third subparagraph of paragraph 4 shall be reviewed to reflect any relevant changes, and shall ensure that where a credit institution has been considered significant or less significant that assessment shall only be modified in case of substantial and non-transitory changes of circumstances, in particular those circumstances relating to the situation of the credit institution which are relevant for that assessment. (b) the definition of the procedures, including time-limits, and the possibility to prepare draft decisions to be sent to the ECB for consideration, for the relation between the ECB and the national competent authorities regarding the supervision of credit institutions not considered as less significant in accordance with paragraph 4; (c) the definition of the procedures, including time-limits, for the relation between the ECB and the national competent authorities regarding the supervision of credit institutions considered as less significant in accordance with paragraph 4. Such procedures shall in particular require national competent authorities, depending on the cases defined in the framework, to: (i) notify the ECB of any material supervisory procedure; (ii) further assess, on the request of the ECB, specific aspects of the procedure; (iii) transmit to the ECB material draft supervisory decisions on which the ECB may express its views. 8. Wherever the ECB is assisted by national competent authorities or national designated authorities for the purpose of exercising the tasks conferred on it by this Regulation, the ECB and the national competent authorities shall comply with the provisions set out in the relevant Union acts in relation to the allocation of responsibilities and cooperation between competent authorities from different Member States. Bibliography Kern Alexander, ‘European Banking Union: A Legal and Institutional Analysis of the Single Supervisory Mechanism and the Single Resolution Mechanism’, ELR, Issue 2 (2015), 154; Filippo Annunziata, ‘Fostering Centralization of EU Banking Supervision Through Case-Law: The European Court of Justice and the Role of the European Central Bank’, Bocconi Legal Studies Research Papers, No. 3372346 (2019); Filippo Annunziata, ‘European Banking Supervision in the Age of the ECB: Landeskreditbank Baden-Württemberg ‒ Förderbank v. ECB’, Bocconi Legal Studies Research Paper No. 3139567(2018); Tomas Arons, ‘Judicial Protection of Supervised Credit Institutions in the European Banking Union’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 93; Jens-Hinrich Binder, ‘The European Banking Union – Rationale and Key Policy Issues’ in: Jens-Hinrich Binder and Christos V. Gortsos (eds), The European Banking Union. A Compendium (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2016); Concetta Brescia Morra, ‘From the Single Supervisory Mechanism to the Banking Union. The role of the ECB and the EBA’, Working paper No 2, Luiss Guido Carli School of European Political Economy, Luiss University Press, Italy (2014); Danny Busch and Annick Teubner, ‘Fit and Proper Assessments within the Single Supervisory Mechanism’, European Banking Institute Working Paper Series 2019 – no. 34 (2019); Claus-Wilhelm Canaris, Mathias Habersack and Carsten Schäfer (eds), Staub, Großkommentar Handelsgesetzbuch, Band 10/1 – Bankvertragsrecht, Erster Teil, Kreditwesen und Organisation (5 th edn, De Gruyter, Berlin 2016); Elena Carlettiand Giovanni Dell’Ariccia, ‘Supervisory incentives in a Banking Union’, mimeo (2015); Mario Pilade Chiti, ‘The European Banking Union in the Case Law of the Court of Justice of the European Union’ in: Mario Pilade Chitiand Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, Cham (Switzerland) 2019), 105; Raffaele D’Ambrosio, ‘The SSM: Allocation of Tasks and Powers between the ECB and the NCAs and Organisational Issues’ in: Raffaele
Christos V. Gortsos
95
Art. 6 SSMR
Cooperation within the SSM
D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials), Quaderni di Ricerca Giuridica, Banca d’Italia, Numero 88 (April 2020), 25; Raffaele D’Ambrosio, ‘The Involvement of the NCAs in the ECB’s Supervisory Proceedings’ in: Raffaele D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials), Quaderni di Ricerca Giuridica, Banca d’Italia, Numero 88, (April 2020), 163; Raffaele D’Ambrosio and Stefano Montemaggi, ‘Supervision of Less Significant Credit Institutions’ in: Raffaele D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials), Quaderni di Ricerca Giuridica, Banca d’Italia, Numero 88 (April 2020), 203; European Court of Auditors, ‘Single Supervisory Mechanism – Good start but further improvements needed’, No. 29, Publications Office of the EU (Luxembourg 2016); Eilís Ferran and Valia Babis, ‘The European Single Supervisory Mechanism’, Legal Studies Research Paper Series, University of Cambridge, Faculty of Law, Paper No. 10/2013 (March 2013); Guido Ferrarini and Luigi Chiarella, ‘Common Banking Supervision in the Eurozone: Strengths and Weaknesses’, European Corporate Governance Institute, Working Paper Series in Law No 223/2013 (August 2013); Alexander Glοs and Markus Benzing, ‘Institutioneller Rahmen: SSM, EZB und nationale Aufsichtsbehőrde – Zuständigkeitsverteilung im SSM’ in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS Verlag GmbH, Cologne 2020), 31; Christos V. Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (Palgrave Macmillan, Cham – Switzerland 2020); Christos V. Gortsos, ‘The application of the EU banking resolution framework amidst the pandemic crisis’ in: Christos V. Gortsos and Wolf-Georg Ringe (eds), Pandemic Crisis and Financial Stability (European Banking Institute, 2020), 361; Christos V. Gortsos, ‘Identifying Groups as ‘Financial Conglomerates’ under European Financial Law (Directive 2002/87/EC): A not so straightforward exercise’ in: Liber Amicorum of Emeritus Professor Thanassis Papachristou (Nomiki Bibliothiki SA, Athens 2019); Christos V. Gortsos, The Single Supervisory Mechanism (SSM): Legal aspects of the first pillar of the European Banking Union (Nomiki Bibliothiki SA, Athens 2015); Christos V. Gortsos, ‘Competence Sharing Between the ECB and the National Competent Supervisory Authorities Within the Single Supervisory Mechanism (SSM)’ EBOR 16 (2015), 401; Christos V. Gortsos, The new EU Directive (2014/49/EU) on deposit guarantee schemes: an element of the European Banking Union (Nomiki Bibliothiki SA, Athens 2014); Christos Hadjiemmanuil, ‘Economic and Monetary Union’ in: Damian Chalmers et al. (eds), European Union Law (Cambridge University Press, Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paolo 2006), 506; Klaus Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Rosa María Lastra, Banking Union and Single Market: Conflict or Companionship?, Fordham International Law Journal Volume 36 (2013), 1189; Rosa María Lastra, Legal foundations of international monetary stability (OUP, Oxford 2006); Jean-Victor Louis, ‘L’Union européenne et sa monnaie’, in: Commentaire J. Megret (3rd edn, Institut d’Etudes Européennes, Editions de l’ Université de Bruxelles, Bruxelles 2009); Francesco Martucci, ‘The Crédit Mutuel Arkéa case: central bodies and the SSM and the interpretation of national law by the ECJ’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), Chapter 30, 504; Stefano Montemaggi, ‘Judgements of the General Court and of the ECJ on the Landeskreditbank (General Court, T-122/15 and ECJ, C-450/17 P)’ in: Raffaele D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials), Quaderni di Ricerca Giuridica, Banca d’Italia, Numero 88, (April 2020), 217; Peter Mülbert and Alexander Wilhelm, ‘CRD IV Framework for Bank’s Corporate Governance’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 22; Christoph Ohler, ‘Banking Supervision’ in: Fabian Amtenbrink and Christoph Hermann (eds), The EU Law of Economic and Monetary Union (Oxford University Press, Oxford 2020), 1103; Francisco-Javier Priego and Fernando Conlledo, ‘The role of the decentralisation principle in the legal construction of the European System of Central Banks’ in: Legal Aspects of the European System of Central Banks: Liber Amicorum Paolo Zamboni Garavelli (European Central Bank, 2005), 189; Antonio Luca Riso, ‘A Prime for the SSM before the Court: the L-Bank case’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), Chapter 29, 494; Dirk Schoenmaker and Nicolas Véron, ‘European Overview’, in: Dirk Schoenmaker and Nicolas Véron (eds), European Banking Supervision: The first eighteen months (Bruegel Blueprint Series, Volume XXV, 2016); René Smits, Short note on the Arkéa judgments (2018); René Smits, The European Central Bank – Institutional Aspects (Kluwer Law International, The Hague 1997); Alexander Thiele, Finanzaufsicht (Mohr Siebeck, Tübingen 2014); Tobias Tröger, ‘The Single Supervisory Mechanism (SRM)’ in: Frederico Fabbrini and Marco Ventoruzzo (eds), Research Handbook of EU Economic Law (Edward Elgar, Cheltenham/Northampton 2019), 287; Tobias Tröger, ‘How Not To Do Banking Law in the 21st Century – The Judgement of the European General Court (EGC) in the Case T-122/15 Landeskreditbank Baden-Württemberg ‒ Förderbank v European Central Bank (ECB)’, Oxford Business Law Blog (16 June 2017); Tobias Tröger, ‘The Single Supervisory Mechanism – Panacea or Quack Banking Regulation?’, SAFE Working Paper Series No. 27, (19.10.2013); Rosalind Wiggins, Michael Wedow and Andrew Metrick, ‘European Banking Union A: The Single Supervisory Mechanism’, Yale Program on Financial Stability, Case Study 2014-5A-V1 (2014);
96
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
Laura Wissink, Ton Duijkersloot and Rob Widdershoven, ‘Shifts in Competences between Member States and the EU in the New Supervisory System for Credit Institutions and their Consequences for Judicial Protection’, Utrecht Law Review Vol. 10 (2014), 92; Eddy Wymeersch, ‘The Single Supervisory Mechanism for Banking Supervision: Institutional Aspects’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 145; Eddy Wymeersch, ‘The single supervisory mechanism or “SSM”, part one of the Banking Union’, ECGI Working Paper Series in Law, Working Paper N°. 240 (February 2014); Chiara Zilioli and Phoebus Athanassiou, ‘The European Central Bank’ in: Robert Schütze and Takis Tridimas (eds), Oxford Principles European Union Law – Volume I: The European Union Legal Order (Oxford University Press, Oxford 2018), 610. A. General provisions applying to the operation of the SSM: principles and obligations – legal basis of the “SSM Framework Regulation” . . . . . . . . . . . . . . . . I. Definition, composition and legal nature of the SSM (Art. 6(1) SSMR) . . . . . . II. The legal basis and structure of the SSM Framework Regulation . . . . . . . . . . . . 1. The provisions of the SSMR (Art. 6(7) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The provisions of the SSM Framework Regulation: An overview . . . . . . . . . III. Main principles and obligations imposed on the ECB and NCAs (Art. 6(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The interaction between the ECB and NCAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Provisions of the SSMR (Art. 6(3) and 6(8) SSMR) . . . . . . . . . . . . . . . . . . . . . . . 2. Provisions of the SSM Framework Regulation (Arts. 22-24 SSM Framework Regulation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Right of the ECB to instruct NCAs or NDAs to make use of their powers and take action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Language regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Classification of supervised entities and groups as significant or less significant (Article 6(4) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introductory remarks and general provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. From the Commission’s proposal to the SSM Regulation and the SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. General provisions relating to the classification of a supervised entity or group as significant or less significant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Classification on an individual basis – implications for direct supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Classification on a group basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Specific provisions for branches and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 3. Classification of supervised entities and groups as significant . . . . . . . . . . . . a) Review of the status of a supervised entity or group: regular and ad hoc classification processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Procedure applicable in determining the significance of a supervised entity or group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. List of supervised entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The individual criteria for significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Significance on the basis of the size criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) General provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Basis of determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) The rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Basis of determination in specific or exceptional circumstances . . . . (iii) Groups of consolidated undertakings – methods of consolidation . . 2. Significance on the basis of the economic importance criterion . . . . . . . . . . 3. Significance on the basis of the cross-border activities criterion . . . . . . . . . . 4. Significance on the basis of the direct public financial assistance criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Significance on the basis of the fact that the supervised entity is one of the three most significant credit institutions in a participating Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. The term “particular circumstances” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Quantitative vs. qualitative criteria for determining significance . . . . . . . . . III. The Landeskreditbank Baden-Württemberg ‒ Förderbank v ECB case . . . . . . 1. The facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The decision of the Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christos V. Gortsos
1 1 5 5 6 8 11 11 13 13 14 15 15 15 17 17 21 24 26 26 30 33 35 35 35 36 36 39 41 42 44 45 50 51 53 56 56 58
97
Art. 6 SSMR
Cooperation within the SSM
C. Micro-prudential supervision of significant supervised entities and groups I. General provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. JSTs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Establishment and composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Tasks of JSTs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Supervision on a consolidated basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Supplementary supervision of credit institutions participating in financial conglomerates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Procedures for micro-prudential supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Micro-prudential supervision of significant supervised entities and assistance by NCAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. In particular: compliance with fit and proper requirements for managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Other procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Beginning and end of direct supervision by the ECB . . . . . . . . . . . . . . . . . . . . . . . . . 1. Beginning of direct supervision by the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. End of direct supervision by the ECB – reclassification of a significant supervised entity or group as less significant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Pending procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Micro-prudential supervision of less significant supervised entities and groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Powers of the ECB (Art. 6(5) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The provisions of Art. 6(5)(a) and (c)-(d) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The individual powers of the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Direct supervision of less significant supervised entities by the ECB in accordance with Art. 6(5)(b) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Procedure for preparing ECB Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Activation of Art. 6(5)(b) SSMR on the ECB’s initiative . . . . . . . . . . . . (ii) Activation of Art. 6(5)(b) SSMR at the request of an NCA . . . . . . . . . c) Supervised entities classified as significant on the basis of Art. 6(5)(b) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Responsibilities of NCAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The provisions of Art. 6(6) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The provisions of Arts. 96-100 SSM Framework Regulation on the procedures for micro-prudential supervision of less significant supervised entities (and groups) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Notification and information requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Rapid and significant deterioration of a less significant supervised entity’s financial situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Information requirements relating to “material” supervisory procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Requirements relating to “material” draft supervisory Decisions . . . b) Ex-post reporting to the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64 64 64 64 65 66 71 72 72 74 77 78 78 81 85 89 89 89 89 90 93 93 95 95 96 97 98 98 101 101 101 102 104 105
A. General provisions applying to the operation of the SSM: principles and obligations – legal basis of the “SSM Framework Regulation” I. Definition, composition and legal nature of the SSM (Art. 6(1) SSMR) 1
The specific (micro- and macro-prudential) supervisory tasks conferred upon the ECB by virtue of Arts. 4(1)-(2) and 5 SSMR are carried out within the SSM, which
98
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
consists of the ECB and the NCAs of the participating Member States.1 According to the ECB “Guide to banking supervision” of November 2014, “[t]he SSM combines the strengths of the ECB and the NCAs. It builds on the ECB’s macroeconomic and financial stability expertise and on the NCAs’ important and long-established knowledge and expertise in the supervision of credit institutions within their jurisdictions, taking into account their economic, organisational and cultural specificities.”2 In this respect, the ECB has been assigned the responsibility for the “effective and consistent functioning of the SSM”,3 including the prudential supervision of all credit institutions, financial holding companies or mixed financial holding companies (the “supervised entities”) established in participating Member States. The SSM is neither an authority nor an agency and has no legal personality. It is de- 2 fined as meaning the “system of financial supervision” composed, as prescribed in Art. 6 SSMR, of the ECB and the NCAs of participating Member States, including those of Member States with derogation, if the latter have established a “close cooperation” pursuant to Art. 7 SSMR.4 The division of competencies between the ECB and the NCAs of Member States participating in the SSM reflects the decision to create a “hub” (i.e., the ECB) without doing away with the “spokes” (i.e., the NCAs).5 It is evident that the SSM has a different institutional architecture from the Eurosys- 3 tem, whose members are the ECB and (exclusively) the NCBs of Member States whose currency is euro6 operating under the principle of decentralisation, which, nevertheless, does not apply to the SSM in the way it is applied within the Eurosystem (Art. 6 SSMR
1 Art. 6(1) sent. 1 SSMR. On the case for and against centralising micro-prudential supervision at EU level, focusing particularly on cross-border banking groups and the risks created by fragmented supervision, see Ferrarini and Chiarella, Corporate Governance Institute, Working Papier Series in Law No 223/2013 (2013), at p. 6-13. 2 ECB, Guide to banking supervision (2014), para. 8, sent. 1 and 2; this Guide, of November 2014, is available at: . In the same vein, also Tröger, SAFE Working Paper Series No. 27(2013), at p. 20: “It is at least comprehensible that the novel supervisory architecture seeks to integrate NCAs in order to capitalize on their knowledge of national, regional and local banking markets, their longstanding expertise particularly with regard to the interpretation and application of (harmonized) national banking regulation, and their advantages with regard to location and language-skills. As a consequence, the ECB is tasked with devising a general “framework to organise the practical modalities” of the interplay between itself and the NCAs not only with regard to the supervision of less significant institutions (…) but also with regard to that of the euro area’s biggest banks that fall under its direct oversight.” 3 Art. 6(1) sent. 2 SSMR. 4 Art. 2(9) SSMR. According to the German doctrine, the SSM is described as a progressive form of a “Verwaltungsverbund”, namely a product of administrative federalism within the EU; see on this Grundmann, in: Canaris, Habersack and Schäfer (eds), Staub, Großkommentar Handelsgesetzbuch, Band 10/1 – Bankvertragsrecht, Erster Teil, Kreditwesen und Organisation (5th edn, 2016) at p. 54 (para. 57) and Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), at p. 1124. 5 On this terminology, see Carletti and Dell’ Ariccia, Supervisory incentives in a Banking Union (2015) and Tröger, in: Fabbrini and Ventoruzzo (eds), Research Handbook of EU Economic Law (2019), at p. 297. 6 Art. 282(1) sent. 2 TFEU. NCAs, other than NCBs, are not members of the Eurosystem. The same holds for central banks of Member States with a derogation, which nevertheless are members of the European System of Central Banks (ESCB), unlike NCAs. For an overview of the ESCB and the Eurosystem, see by means of mere indication Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), at p. 185, with extensive further references.
Christos V. Gortsos
99
Art. 6 SSMR
Cooperation within the SSM
being entitled and governing “cooperation within the SSM”).7 In addition, the ECB’s objective within the SSM (in accordance with Art. 1(1) SSMR, analysed above) is as well different from the primary objective of the ESCB under the TFEU, i.e., maintaining price stability.8 4 A participating Member State’s NCA may be the NCB, i.e., its former monetary authority if it is a euro area Member State, or its monetary authority if it is a Member State with derogation and has established a close cooperation with the ECB by virtue of Art. 7 SSMR. This is the case in 11 participating Member States, as well as in the two participating Member States in close cooperation (Bulgaria and Croatia), which joined the SSM in October 2020,9 while in another three micro-prudential banking supervision has been assigned to autonomous national (administrative) authorities, albeit under the auspices of the NCB. Nevertheless, with a view to fully separating monetary policy from banking supervisory tasks,10 in four participating Member States the NCB is not designated as an NCA (even though it is called upon to contribute to micro-prudential supervision).11 In such cases, NCBs of participating Member States must carry out these specific supervisory tasks within the framework set out in national law and the SSM‑FR. In addition, a reference to an NCA therein applies, as appropriate, also to the NCB for the tasks assigned to it by national law.12
II. The legal basis and structure of the SSM Framework Regulation 1. The provisions of the SSMR (Art. 6(7) SSMR) 5
In consultation with participating Member States’ NCAs and based on a proposal from the Supervisory Board, the ECB was required to adopt and make public a framework to organise the practical modalities of implementation of Art. 6 SSMR. In particular, pursuant to Art. 6(7) SSMR, this framework should include, at least, the following: First, the specific methodology for assessing the criteria on the classification of a credit institution (or any other supervised entity) as significant or less significant (according to Art. 6(4)(1)-(3) SSMR the criteria under which Art. 6(4)(4) SSMR ceases to apply to a specific credit institution (or any other supervised entity), and the resulting arrangements for the purposes of implementing Art. 6(5)-(6) SSMR.
7 On this aspect, see infra, → paras. 56-63, when discussing the judgement of the CJEU on the Landeskreditbank Baden-Württemberg ‒ Förderbank v European Central Bank (ECB) case. On the decentralised structure of the Eurosystem and the operations therein, see Smits, The European Central Bank – Institutional Aspects (1997), at p. 92; Priego and Conlledo, in: Legal Aspects of the European System of Central Banks: Liber Amicorum Paolo Zamboni Garavelli (2005), Hadjiemmanuil in: Chalmers et al. (eds), European Union Law (2006), at p. 551; Lastra, Legal foundations of international monetary stability (2006), at p. 208; Louis, in: Commentaire J. Megret (2009), at p. 135 and Zilioli and Athanassiou, in: Schütze and Tridimas (eds), Oxford Principles European Union Law – Volume I: The European Union Legal Order (2018), at p. 625. 8 Art. 127(1) sent. 1 TFEU, inter alia; see indicatively Smits, The European Central Bank - Institutional Aspects (1997), at p. 184, Louis, in: Commentaire J. Megret (2009), at p. 150, and Zilioli and Athanassiou, in: Schütze and Tridimas (eds), Oxford Principles European Union Law – Volume I: The European Union Legal Order (2018), at p. 612. 9 See at: and . 10 This aspect is discussed in more detail in the analysis of Art. 25 SSMR. 11 See Zilioli and Athanassiou, in: Schütze and Tridimas (eds), Oxford Principles European Union Law – Volume I: The European Union Legal Order (2018), at p. 648. 12 Art. 2(9) sent. 3 and 4 SSM‑FR.
100
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
This methodology and these arrangements should be reviewed in order to reflect any relevant changes, and ensure that, if any supervised entity has been classified as significant or less significant, that assessment will only be modified in case of substantial and non-transitory changes of circumstances. Second, the definition of the procedures, including time limits, and the possibility to prepare draft decisions to be sent to the ECB for consideration concerning the relationship between the ECB and NCAs with regard to the micro-prudential supervision of credit institutions and other supervised entities not considered less significant (thus considered significant) in Art. 6(4) SSMR. Finally, the definition of the procedures, including time limits, for the relationship between the ECB and NCAs regarding the micro-prudential supervision of supervised entities is considered less significant under Art. 6(4) SSMR. Such procedures should, in particular, require that NCAs, depending on the cases defined in the SSMR, notify the ECB of any “material supervisory procedure”, further assess, on the ECB’s request, specific aspects of the procedure, and transmit to the ECB “material draft supervisory Decisions” on which the ECB may express its views.
2. The provisions of the SSM Framework Regulation: An overview On the basis of (the just above-mentioned) Art. 6(7) SSMR, the ECB adopted on 16 6 April 2014 its Regulation (EU) No 468/2014 “establishing the framework for cooperation within the SSM between the ECB and NCAs and with national designated authorities (NDAs) (SSM‑FR)” (ECB/2014/17).13 The subject matter and purpose of that Regulation, which entered into force on 15 May 201414 and contains 153 Articles structured in 12 Parts, is to lay down rules on the following aspects:15 First, the framework referred to in that SSMR Article, namely a framework to organise the practical arrangements for implementing Art. 6 SSMR concerning cooperation within the SSM, covering all aspects mentioned above; Second, cooperation and exchange of information between the ECB and NCAs within the SSM with regard to the procedures relating to significant supervised entities and less significant supervised entities, including common procedures applying to authorisations to take up the business of credit institutions, withdrawals of such authorisations, and the assessment of acquisitions and disposals of qualifying holdings; Third, the procedures relating to the following aspects: cooperation between the ECB and NCAs or NDAs regarding macro-prudential tasks and tools within the meaning of Art. 5 SSMR; the operation of close cooperation within the meaning of Art. 7 SSMR and applicable between the ECB, the NCAs and the NDAs; cooperation between the ECB and the NCAs with regard to Arts. 10-13 SSMR, inter alia, on certain aspects relating to supervisory reporting; the adoption of supervisory Decisions addressed to supervised entities and other persons; and the ECB’s and NCA’ sanctioning powers within the SSM in relation to the tasks conferred on the ECB by the SSMR;16 Fourth, the linguistic arrangements between the ECB and the NCAs, as well as between the ECB and supervised entities and other persons (infra, → para. 14); Finally, transitional provisions. OJ L141, 14.5.2014, pp. 1-50. Art. 153 SSM‑FR. 15 Art. 1(1)(a)-(i) SSM‑FR. 16 These aspects are discussed in the analysis of the respective SSMR Articles. 13 14
Christos V. Gortsos
101
Art. 6 SSMR 7
Cooperation within the SSM
The provisions of the SSM‑FR do not affect the supervisory tasks that have not been conferred on the ECB by the SSMR and hence, remain with NCAs.17 In addition, the Regulation must be read in conjunction with: first, the ECB Decision 2004/257/EC “adopting the rules of procedure of the ECB” (ECB/2004/2)18 and the Rules of Procedure of the Supervisory Board of the ECB19 (which supplement the ECB Rules of Procedure and entered into force on 1 April 2014), in particular with regard to the decision-making within the SSM, including the procedure applying between the Supervisory Board and the Governing Council as regards the non-objection procedure referred to in Art. 26(8) SSMR; and second, other relevant ECB legal acts, including Decision 2014/360/EU “concerning the Administrative Board of Review [ABOR] and its Operating Rules” (ECB/ 2014/16),20 which entered into force on 15 June 2014.21
III. Main principles and obligations imposed on the ECB and NCAs (Art. 6(2) SSMR) The ECB and NCAs are subject to two fundamental obligations: a “duty of cooperation in good faith” and an obligation to exchange information.22 These obligations introduced a new qualitative element in the relations of NCAs, traditionally reluctant to cooperate and exchange information about their domestic credit institutions.23 9 In this respect, NCAs must provide the ECB, in a timely and accurate manner, with all information necessary for carrying out its tasks under Arts. 4-5 SSMR; this is without prejudice to the ECB’s power to receive directly, or to have direct access to, information reported, on an ongoing basis, by supervised entities, including information arising from the NCAs’ verification and on-site activities.24 The procedures concerning the submission to the ECB of data reported to NCAs by the supervised authorities on the basis of Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 “laying down implementing technical standards with regard to supervisory reporting of institutions according to [the CRR]”25 (remittance dates, data quality checks, qualitative information and specification of the transmission format) are laid down in ECB Decision 2014/477/EU of 2 July 2014 “on the provision to the ECB of supervisory data reported to the NCAs by the supervised entities pursuant to Commission Implementing Regulation (EU) No 680/2014” (ECB/2014/29),26 which was adopted on the basis of Article 21 (and 140(4)) SSM‑FR. This Decision applies as amended by ECB Decision (EU) 2017/1493 of 3 August 2017 (ECB/2017/23). 27 8
Art. 1(2) SSM‑FR. OJ L80, 18.3.2004, pp. 33-41, as in force. 19 OJ L182, 21.6.2014, pp. 56-60, as in force. 20 OJ L175, 14.6.2014, pp. 47-53. 21 Art. 1(3) SSM‑FR. 22 Art. 6(2)(1) SSMR, and Art. 20 SSM‑FR. See Grundmann, in: Canaris, Habersack and Schäfer (eds), Staub, Großkommentar Handelsgesetzbuch, Band 10/1 – Bankvertragsrecht, Erster Teil, Kreditwesen und Organisation (5th edn, 2016), at p. 54 para. 57; on the value-added of these obligations, see also Thiele, Finanzaufsicht (2014), at p. 525 (under Section C II, discussing therein the SSM as an effective supervisory structure). 23 See Gortsos, EBOR 16(2015), at p. 417. According to Wymeersch, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), at p. 176, with extensive further references, this pattern of cooperation is comparable to the one also found, inter alia, in the fields of competition, medicines, airplane safety, notwithstanding the differences between them. 24 Art. 6(2)(2) SSMR and Art. 21(1) SSM‑FR. 25 OJ L191, 28.6.2014, pp. 1-1861. 26 OJ L214, 19.7.2014, pp. 34-37. 27 OJ L216, 22.8.2017, pp. 23-26. 17
18
102
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
Vice versa, when the ECB obtains information directly from the legal or natural per- 10 sons referred to in Art. 10(1) SSMR, it must further provide it to the NCAs concerned, in a timely and accurate manner as well, including, in particular, information necessary for the NCAs to carry out their role in assisting it. Without prejudice to this, the ECB must ensure that NCAs have regular access to the updated information necessary for them to carry out their tasks related to micro-prudential supervision.28
IV. The interaction between the ECB and NCAs 1. Provisions of the SSMR (Art. 6(3) and 6(8) SSMR) Recital (37) SSMR makes the following consideration: “National supervisors have im- 11 portant and long-established expertise in the supervision of credit institutions within their territory and their economic, organisational and cultural specificities. They have established a large body of dedicated and highly qualified staff for those purposes. Therefore, in order to ensure high-quality, Union-wide supervision, national competent authorities should be responsible for assisting the ECB in the preparation and implementation of any acts relating to the exercise of the ECB supervisory tasks. This should include, in particular, the ongoing day-to-day assessment of a credit institution’s situation and related on-site verifications.” On this basis, Art. 6(3) SSMR provides that, if deemed appropriate, NCAs are responsible for assisting the ECB, under the conditions laid down in the SSM‑FR, with the preparation and implementation of any acts relating to its tasks under Art. 4 SSMR with regard to all supervised entities. This includes assistance in verification activities and is without prejudice to the ECB’s responsibility and accountability in relation to its tasks under the SSMR.29 In addition, in the performance of the tasks laid down in Art. 4 SSMR, NCAs must follow the instructions given by the ECB.30 To the extent that the ECB is assisted by NCAs or NDAs for exercising its tasks 12 under the SSMR, the ECB and NCAs must comply with the relevant provisions set out in European banking law (notably the CRD IV) as far as the allocation of responsibilities and cooperation between competent authorities from different Member States is concerned.31
2. Provisions of the SSM Framework Regulation (Arts. 22-24 SSM Framework Regulation) a) Right of the ECB to instruct NCAs or NDAs to make use of their powers and take action To the extent necessary to carry out its tasks under the SSMR and where the SSMR 13 does not confer respective powers on the ECB, the latter may require, by way of instructions, the NCAs and/or, in respect of Art. 5 SSMR, the NDAs to make use of their powers, under and in accordance with the conditions set out in national law and as provided Art. 21(2)-(3) SSM‑FR. Art. 6(3) sent. (1) SSMR. It is noteworthy that, by virtue of Recital (28) SSMR, the task of carrying out day-to-day verifications remains with NCAs; nevertheless, with regard to significant supervised entities it is carried out through JSTs (see infra, → paras. 64-65). The ECB accountability in relation to its tasks under Arts. 4-5 SSMR is governed by Arts. 20-21 SSMR; see the analysis of these Articles below. 30 Art. 6(3) sent. 2 SSMR. On Art. 6(3) SSMR, see also Glοs und Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2020), at p. 49-50 paras. 72-75 and D’Ambrosio, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020), at p. 173. 31 Art. 6(8) SSMR. 28
29
Christos V. Gortsos
103
Art. 6 SSMR
Cooperation within the SSM
for in Art. 9 SSMR. NCAs and/or NDAs must inform the ECB about the exercise of these powers without undue delay.32 b) Language regimes 14
The ECB and NCAs must adopt arrangements for their communications within the SSM, including the language(s) to be used.33 Any document sent by a supervised entity or any other legal or natural person individually subject to ECB supervisory procedures to the ECB may be drafted in any one of the EU official languages, chosen by the supervised entity or person. The ECB, the supervised entities and any other legal or natural person individually subject to ECB supervisory procedures may agree to exclusively use one EU official language in their written communication (including for ECB supervisory Decisions). The revocation of such an agreement affects only the aspects of the ECB supervisory procedure which have not yet been carried out. If participants in an oral hearing request to be heard in an EU official language other than the language of the ECB supervisory procedure, they must give to the ECB sufficient advance notice in order for the necessary arrangements to be made.34
B. Classification of supervised entities and groups as significant or less significant (Article 6(4) SSMR) I. Introductory remarks and general provisions 1. From the Commission’s proposal to the SSM Regulation and the SSM Framework Regulation 15
According to Recital (4.6) and Art. 27 of the Commission’s Proposal for a Council Regulation “conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions”, all credit institutions incorporated in participating Member States should, on a gradual basis, be submitted to the regime of the ECB’s specific tasks. The proposed timeframe for the ECB’s supervisory competence over such credit institutions was the following: as of 1 January 2013, over those credit institutions which had received or requested State aid; as of 1 July 2013, over “systemically important” credit institutions; and as of 1 January 2014, over all other credit institutions. Nevertheless, certain Member States, led by Germany, the Netherlands and Finland, voiced their opposition to the eventuality of all credit institutions incorporated within their jurisdiction being subjected to the ECB’s micro-prudential supervision, arguing that the micro-prudential supervision of smaller credit institutions, mainly those without cross-border business, exercising activity exclusively at local level, should remain with NCAs.35 It is noteworthy that even the then ECB President (Mario Draghi) subscribed to this argument, stating in the ECB press conference of 6 December 2012: 36 Art. 22(1)-(2) SSM‑FR. Art. 23 SSM‑FR. 34 Art. 24(1)-(2) SSM‑FR. 35 For a brief overview of the inter-institutional discussions on this aspect, which lead to the adoption of Art. 6(4) SSMR in its final form, see Ferran and Babis, Legal Studies Research Paper Series, University of Cambridge, Faculty of Law, Paper No. 10/2013 (2013), at p. 4 (which analytically discuss the Commission’s proposal for the SSMR), Alexander, ELR, Issue 2(2015), at p. 168-169 and Glοs und Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2020), at p. 35. 36 This is available at: . 32
33
104
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
“One should aim to have this mechanism covering all euro area banks from a legal, jurisdictional viewpoint, because you want to avoid fragmentation in the banking market, you want to keep a level playing field, and you want to avoid stigma for some categories of banks. However, in practice, I do not think that there is going to be much difference between this position and that which has been advocated by others. It is quite obvious that the ECB supervisor will not be able to supervise 6,000 banks, and that, as the size of the bank and as its systemic significance decreases, so the intensity of the supervision that is carried out at the central level will decrease and the intensity of the supervision carried out at the national level will increase.” Considering the above, Art. 6(4) SSMR established, in principle, a “two-tier system” 37 16 on the distribution of powers within the SSM, distinguishing between “significant” and “less significant” supervised entities.38 This distinction took, in particular, under consideration of the substantive restrictions (conferral of specific tasks) laid down in Art. 127(6) TFEU, i.e., the legal basis of the SSMR.39 The SSMR provisions are further specified by Arts. 39-72 SSM‑FR (Part IV) “on determining the status of a supervised entity as significant or less significant”.40 Recital (39) SSMR considers in this respect the following: “The criteria laid down in this Regulation defining the scope of institutions that are less significant should be specified in a framework adopted and published by the ECB in consultation with national competent authorities. On that basis, the ECB should be responsible to apply those criteria and verify, through its own calculations, whether those criteria are met. The ECB’s request for information to perform its calculation should not force the institutions to apply accounting frameworks differing from those applicable to them pursuant to other acts of EU and national law.”
2. General provisions relating to the classification of a supervised entity or group as significant or less significant a) Classification on an individual basis – implications for direct supervision All supervised entities within participating Member States are assessed, on the basis 17 of a regular review, to determine whether they fulfil the criteria (conditions) for significance of Art. 6(4) SSMR. A supervised entity is classified as significant upon notification of a reasoned ECB Decision to this effect, according to Arts. 43-49 SSM‑FR (the “signifi-
37 On this aspect, see also infra, → paras. 58-61, when discussing the ECJ’s judgement on the Landeskreditbank Baden-Württemberg ‒ Förderbank v European Central Bank (ECB) case. 38 As correctly pointed out by Brescia Morra (Working paper No 2, Luiss Guido Carli School of European Political Economy (2014), at pp. 8-10), on the basis of this distinction, more than one authority will be responsible to carry out the same prudential tasks on a different perimeter of financial firms in the single market for financial services, taking also into account that credit institutions in non-participating Member States continue to be supervised by NCAs solely; she also notes that this situation is “not dissimilar” with the one in the United States. On the link between the Banking Union and the single market, see Lastra, Fordham International Law Journal Volume 36 (2013), Binder, in: Binder and Gortsos (eds), The European Banking Union. A Compendium (2016), at p. 13 and Alexander, ELR, Issue 2(2015), at pp. 160-162. 39 See Glοs und Benzing, in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (2020), at p. 36 (para. 23, in finem). 40 The (vast) majority of these Articles are analysed in this Section below. Exceptionally, Arts. 45-48 SSM‑FR concerning the beginning and end of direct supervision by the ECB are presented in paras. 78-88 and Arts. 67-69 SSM‑FR on the direct supervision of less significant supervised entities by the ECB in accordance with Art. 6(5)(b) SSMR are discussed in → paras. 93-97.
Christos V. Gortsos
105
Art. 6 SSMR
Cooperation within the SSM
cance Decision”).41 In turn, it ceases to be classified as significant, if the ECB determines, also in a reasoned Decision notified to the entity, that it is either a less significant supervised entity or no longer a supervised entity.42 18 A supervised entity is classified as significant upon meeting any of the following criteria: its size (the “size criterion”, see below, under II 1); its importance for the EU economy or the economy of a participating Member State (the “economic importance criterion”, under II 2); its significance with regard to cross-border activities (the “cross-border activities criterion”, under II 3); a request for or receipt of direct public financial assistance (the “direct public financial assistance criterion”, under II 4); and the fact that it is one of the three most significant credit institutions (or groups) in each participating Member State (under II 5).43 Supervised entities and groups not meeting these criteria are considered “less significant” and are classified as such.44 It is noteworthy that the ECB may also, on its own initiative or upon a request by an NCA, directly supervise a less significant supervised entity or group under a Decision adopted pursuant to Art. 6(5)(b) SSMR to the effect that it will itself exercise directly all relevant powers referred to in Article 6(4) SSMR. Such an entity or group is thus reclassified as significant.45 19 With regard to the specific (supervisory) tasks conferred upon it by virtue of Arts. 4(1)-(2) and 5 SSMR, significant supervised entities are directly supervised by the ECB, unless “particular circumstances” justify their supervision by NCAs (infra, under II 6).46 On the other hand, with regard to these specific tasks, less significant entities are directly supervised by NCAs within the SSM under the overall oversight of the ECB in accordance with the provisions of Art. 6(5)-(6) SSMR and Arts. 96-100 SSM‑FR. 47 In areas of financial supervision not covered by Arts. 4(1)-(2) and 5 SSMR, NCAs retained their competences for both significant and less significant supervised entities. 48 20 In all the above-mentioned cases, the ECB must consult with the relevant NCAs prior to taking decisions and notify them to the latter.49 41 Art. 39(1) SSM‑FR; on Arts. 43-49 SSM‑FR, see infra, → paras. 26-33. Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 145, para. 635, notes in this respect that a supervised entity or group becomes legally significant only upon adoption of this Decision and, hence, the significance status depends on it. 42 Art. 39(2) SSM‑FR; on the end of direct supervision by the ECB, see infra, → paras. 81-84. 43 Art. 6(4) SSMR and Art. 39(3) SSM‑FR. 44 Art. 6(4)(1) SSMR. 45 Art. 39(5) SSM‑FR. 46 Art. 6(4) SSMR and Art. 39(4) SSM‑FR. 47 Art. 6(4)(1) SSMR and Art. 6(5)(a) SSMR. For a schematic overview of the division of competences between the ECB and NCA with regard to significant and less significant supervised entities (further analysed in detail below), see Wiggins, Wedow and Metrick, ‘European Banking Union A: The Single Supervisory Mechanism’, Yale Program on Financial Stability, Case Study 2014-5A-V1 (2014), Table 4 at p. 7. For a critical evaluation, see Ferran and Babis, ‘Legal Studies Research Paper Series’, University of Cambridge, Faculty of Law, Paper No. 10/2013 (2013), at pp. 10-12. They note in particular (p. 11): “Although the ECB has had a longstanding interest in prudential supervision born of its established statutory responsibility to contribute to the smooth conduct of policies pursued by national authorities relating to prudential supervision and financial stability, it has no track record as a direct supervisor and must build capacities and resources in the area. Since it is untested, there is absolutely no guarantee that the ECB will do a better job in supervision than many national supervisors, but it must at least be given a fair chance to prove its worth. It would have been suicidal to have overwhelmed it from the start. But the approach is certainly not risk-free. A major concern is that the allocation of supervision of less significant banks to national authorities or the outsourcing of labour from the ECB to national authorities may not afford the ECB with sufficient visibility of emerging problems quickly enough for timely intervention.” 48 See D’Ambrosio, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020), at pp. 31-32. 49 Art. 39(6) SSM‑FR.
106
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
b) Classification on a group basis The criteria for significance of supervised entities which form a part of a supervised 21 group are set at the highest level of consolidation within participating Member States in accordance with the provisions of Arts. 50-66 SSM‑FR.50 This is based on the consideration made in Recital (38) SSMR: “The criteria laid down in this Regulation defining the scope of institutions that are less significant should be applied at the highest level of consolidation within participating Member States based on consolidated data. Where the ECB carries out the tasks conferred on it by this Regulation with regard to a group of credit institutions that is not less significant on a consolidated basis, it should carry out those tasks on a consolidated basis with regard to the group of credit institutions and on an individual basis with regard to the banking subsidiaries and branches of that group established in participating Member States.” Each such supervised entity is deemed to be significant in any of the following cases: First, the supervised group at its highest level of consolidation within participating Member States fulfils the size criterion, the economic importance criterion or the cross-border activities criterion; and Second, one of the supervised entities either fulfils the direct public financial assistance criterion or is one of the three most significant credit institutions in the participating Member State.51 On the basis of these provisions, all members of a supervised group are either 22 significant or less significant.52 If a supervised group is classified as significant or is deemed as no longer significant, 23 the ECB must adopt a decision to this effect and notify the start and end dates of direct ECB supervision to each supervised entity forming part thereof in accordance with the criteria and procedures laid down in Art. 39 SSM‑FR.53 c) Specific provisions for branches and subsidiaries The branches opened by a credit institution from a participating Member State in an- 24 other participating Member State are supervised by the ECB as the home supervisor; the same applies, by virtue of Art. 4(1)(b) SSMR, to the branches of such a credit institution in a non-participating Member State. Furthermore, the branches opened in a participating Member State by a credit institution incorporated (and thus authorised) in a nonparticipating Member State are supervised by the ECB according to the provisions of Art. 4(2) SSMR.54 In relation to the latter case, the SSM‑FR provides that all these branches are deemed to be a single supervised entity but, and without prejudice to this provision, when determining whether any of the criteria for significance is fulfilled, they must be assessed individually as separate supervised entities and separately from subsidiaries of the relevant credit institution. On the other hand, branches opened in different participating Member States by a credit institution incorporated in a non-participating Member State are treated individually as separate supervised entities.55
Art. 40(1) SSM‑FR; on Arts. 50-66 SSM‑FR, see infra, → paras. 35-50. Art. 40(2)(a) and (b)-(c) SSM‑FR, respectively. 52 See Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 144 paras. 627-629. 53 Art. 40(3) SSM‑FR; on Art. 39 SSM‑FR, see supra, → paras. 17-20. 54 With respect to both cases, see Art. 4 SSMR; it is also noted that by virtue of Recital (28) SSMR, the supervision of the branches opened in the EU by third-country credit institutions is not a competence of the ECB but of the NCAs of the Member State of their establishment. 55 Art. 41(1)-(3) SSM‑FR. 50
51
Christos V. Gortsos
107
Art. 6 SSMR 25
Cooperation within the SSM
When determining whether any of the criteria for significance is fulfilled, subsidiaries established in (one or more) participating Member States by a credit institution incorporated in a non-participating Member State or in a third country are assessed separately from its branches. For the same purpose, the subsidiaries incorporated in a participating Member State, those belonging to a group whose parent undertaking has its head office in a non-participating Member State or in a third country and those not belonging to a supervised group within participating Member States are assessed separately as well. 56
3. Classification of supervised entities and groups as significant a) Review of the status of a supervised entity or group: regular and ad hoc classification processes The status of supervised entities and groups may change for several reasons, including normal business activity or structural changes (e.g., mergers and acquisitions). Taking this into account, Recital 40 considers that, “[w]here a credit institution has been considered as significant or less significant, that assessment should generally not be modified more often than once every 12 months, except if there are structural changes in the banking groups, such as mergers or divestitures.” Accordingly, the SSM‑FR sets out a “regular classification process” with regard to the significance status, according to which (and unless otherwise provided for therein) the ECB must review, at least on an annual basis, whether a significant supervised entity or group continues to fulfil any of the criteria for significance.57 For the same reasons and under the same constraint, each NCA must also review, at least on an annual basis as well, whether a less significant supervised entity fulfils any of the criteria for significance; in the case of a less significant supervised group, this review must be carried out by the relevant NCA of the participating Member State in which the parent undertaking, determined at the highest level of consolidation within participating Member States, is incorporated. If it assesses that any of these criteria is fulfilled, it must, without undue delay, inform the ECB.58 27 The SSM‑FR also provides for an “ad hoc classification process”, in accordance with which, at any time following receipt of relevant information (in particular under the circumstances specified in Art. 52 SSM‑FR concerning the basis for the determining significance on the basis of the size criterion in specific or exceptional circumstances 59), the ECB may review whether a supervised entity or group fulfils any of the criteria for significance and whether it no longer fulfils any of them.60 28 At the request of the ECB or an NCA, the ECB and the relevant NCA must cooperate in determining whether any of the criteria for significance are fulfilled in respect of a supervised entity or group. The ECB must also cooperate with the relevant NCA if it decides either to assume the direct supervision of a supervised entity or group or that its direct supervision over a supervised entity or group must end, in order to ensure the smooth transition of supervisory competencies.61 26
56 Art. 42(1)-(2) SSM‑FR. For a detailed analysis of the rules governing the supervision of foreign branches and subsidiaries under the SSMR and their effect, see Wymeersch, ‘ECGI Working Paper Series in Law’, Working Paper No. 240 (2014), at pp. 32-37. 57 Art. 43(1) SSM‑FR. 58 Art. 43(2) and (4) SSM‑FR. 59 On Art. 52 SSM‑FR, see infra, → paras. 39-40. 60 Art. 43(3) SSM‑FR. 61 In particular, a report setting out the supervisory history and risk profile of the supervised entity must be prepared by the relevant NCA when the ECB assumes the direct supervision of a supervised entity and by the ECB when the relevant NCA becomes competent to supervise the entity concerned (Arts. 43(5)-(6) SSM‑FR).
108
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
The determination whether a supervised entity or group is significant is made by an 29 ECB Decision and must be based on the criteria for significance in the order set out in Art. 6(4) SSMR.62 In this respect, the ECB’s “SSM Supervisory Manual – European banking supervision: functioning of the SSM and supervisory approach” of March 2018,63 distinguishes between the “quantitative criteria” that must be taken into account and various “qualitative criteria”, which may determine its decision.64 b) Procedure applicable in determining the significance of a supervised entity or group When taking a Decision on the classification of a supervised entity or group as sig- 30 nificant, and unless otherwise provided, the ECB must apply the procedural rules set out in Arts. 25-35 SSM‑FR (on the general provisions relating to due process for adopting ECB supervisory Decisions).65 In this case, a new JST must be set up for the ECB to take over its supervisory responsibilities.66 For supervised entities that are not notified by the ECB, the list referred to in Art. 49(2) SSM‑FR (infra, → para. 33) serves as notification of their classification as less significant.67 Within the timeframe laid down in Art. 45 SSM‑FR (on the beginning of its direct 31 supervision; infra, → paras. 78-80), a Decision on the classification of a supervised entity or group as significant (“the status Decision”) must be notified in writing by the ECB to each supervised entity concerned and should be communicated to the relevant NCA. For supervised entities that are part of a significant supervised group, the Decision must be notified to the supervised entity at the highest level of consolidation within the participating Member States and ensure that all supervised entities within that group are duly informed.68 The ECB must allow each relevant entity to make submissions in writing prior to the adoption of such a Decision and the relevant NCAs (in accordance with Art. 39(6) SSM Framework regulation; supra, → para. 20) an opportunity to submit observations and comments in writing and duly consider them.69 A supervised entity or group is classified as significant from the date of notification of the ECB Decision to this effect.70 By virtue of Art. 2 of the ECB Decision (EU) 2017/934 of 16 November 2016 “on the 32 delegation of decisions on the significance of supervised entities (ECB/2016/41)”, 71 the ECB Governing Council has delegated, in accordance with Art. 4 of Decision (EU) 2017/933 (ECB/2016/40), 72 the adoption of amendments to Decisions on significance to the heads of work units nominated by the Executive Board in accordance with Art. 5 of the latter. Such an amendment can only be adopted by means of a delegated Decision upon fulfilment of the criteria for the adoption of such Decisions, as set out in Art. 3 of ECB Decision (EU) 2017/934.
Art. 44(7) SSM‑FR. This manual sets out the processes, procedures and methodologies for the supervision of all supervised entities and groups, significant and less significant, following a formally defined supervisory cycle; it is available at: . 64 SSM Supervisory Manual (2018), p. 58-59; this aspect is further discussed infra, → paras. 53-55. 65 Art. 44(1) SSM‑FR. 66 SSM Supervisory Manual (2018), p. 59. 67 Art. 44(3) SSM‑FR. 68 Art. 44(2) SSM‑FR. 69 Art. 44(4)-(5) SSM‑FR. 70 Art. 44(6) SSM‑FR. 71 OJ L141, 1.6.2017, pp. 18-20. 72 OJ L141, 1.6.2017, pp. 14-17. 62 63
Christos V. Gortsos
109
Art. 6 SSMR
Cooperation within the SSM
4. List of supervised entities In accordance with Art. 49 SSM‑FR, the ECB must publish the following: First, a list containing the name of each supervised entity and supervised group which it directly supervises, indicating (if relevant) the supervised group to which it belongs and the specific legal basis for such direct supervision; in the case of a classification as significant based on the size criterion, the list must include the total value of the supervised entity’s or group’s assets; Second, the name of supervised entities which, despite meeting one of the criteria referred to in Art. 6(4) SSMR, are considered less significant because of particular circumstances; Third, a list containing the name of each supervised entity which is supervised by an NCA and the name of that authority. These lists must be published electronically, be accessible on the ECB’s website and be regularly updated.73 34 On the basis of the list of supervised entities and groups set up by the ECB, which is updated on a monthly basis, on 1 November 2021, 115 credit institutions, other types of supervised entities and groups were classified as significant, which accounted for 82 % of the total assets held by the banking industry in participating Member States.74 The (vast) majority met the size criterion (infra, → para. 35), while some have been classified as such by virtue of Art. 6(5)(b) SSMR (infra, → para. 97). 33
II. The individual criteria for significance75 1. Significance on the basis of the size criterion a) General provisions 35
According to the size criterion, supervised entities and groups are deemed to be significant if the total value of their assets exceeds thirty billion euros (the “size threshold”), unless otherwise justified by “particular circumstances”.76 The “total value of assets” is derived from the line “total assets” on a balance sheet prepared for prudential purposes, in accordance with EU law.77 b) Basis of determination (i) The rule
36
If the supervised entity is part of a supervised group, the total value of its assets is determined, in principle, on the basis of the year-end prudential consolidated reporting for
73 Art. 49(1)-(4) SSM‑FR. For the purposes of this Article, a supervisory procedure means an ECB or NCA supervisory procedure (Art. 48(1), last sent. SSM‑FR). 74 The list is available at: ; see also Wymeersch, in: Busch and Ferrarini (eds), European Banking Union (2 nd edn, 2020), at p. 174. 75 For a schematic overview of these criteria, see Tröger, in: Fabbrini and Ventoruzzo (eds), Research Handbook of EU Economic Law (2019), Table 11.1 at p. 297 and Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), Table 8.4 at p. 350. On their application, see by means of mere indication Wymeersch, ECGI Working Paper Series in Law, Working Paper N°. 240(2014), at pp. 29-31 and (in more detail) Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 146 paras. 637-664. 76 Art. 6(4)(2)(i) SSMR and Art. 50 SSM‑FR. 77 Art. 55 SSM‑FR.
110
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
the supervised group in accordance with applicable law. 78 If the determination cannot be made on that basis, the assets must be determined either on the basis of the most recent audited consolidated annual accounts prepared in accordance with the International Financial Reporting Standards (IFRS) as applicable within the EU in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 “on the application of international accounting standards”79 or, if those annual accounts are not available, on the basis of the consolidated annual accounts prepared in accordance with applicable national accounting laws.80 If the supervised entity is not part of a supervised group, the determination of the total 37 value of assets is made, in principle as well, on the basis of the year-end prudential individual reporting in accordance with applicable law. If total assets cannot be determined on the basis of such data, they must be determined either on the basis of the most recent audited annual accounts prepared in accordance with the IFRSs (as mentioned above) or, if those annual accounts are not available, on the basis of the annual accounts prepared in accordance with applicable national accounting laws.81 Finally, if the supervised entity is a branch of a credit institution established in a 38 non-participating Member State, the total value of its assets is determined on the basis of the statistical data reported pursuant to ECB Regulation (EU) No 1071/2013 of 24 September 2013 “concerning the balance sheet of the monetary financial institutions’ sector (recast)”82 (ECB/2013/33).83 (ii) Basis of determination in specific or exceptional circumstances If in respect of a less significant supervised entity, there is an “exceptional substantial 39 change in circumstances” relevant for determining significance on the basis of the size criterion, the relevant NCA must review whether the size threshold continues to be met. If such a change occurs in respect of a significant supervised entity, the review must be made by the ECB.84 A less significant supervised entity, and, in the case of a less significant supervised group, the less significant supervised entity at the highest level of consolidation within the participating Member States must inform the relevant NCA of any such change. On the other hand, a significant supervised entity and, in the case of a significant supervised group, the supervised entity at the highest level of consolidation within the participating Member States must notify the ECB of any such change.85 By way of derogation from the three-years rule laid down in Art. 47(1)-(3) SSM‑FR 40 (infra, → paras. 82-83), in case of such exceptional circumstances, the ECB must decide, in consultation with NCAs, whether the affected supervised entities are significant or Art. 51(1) SSM‑FR. OJ L243, 11.9.2002, pp. 1-4; the consolidated text of this legislative act, as in force, is available at: . 80 Art. 51(2) SSM‑FR. 81 Art. 51(3)-(4) SSM‑FR. 82 OJ L297, 7.11.2013, pp. 1-50; this legislative act repealed on 1 January 2015 ECB Regulation (EC) No 25/2009 of 19 December 2008 (OJ L15, 20.1.2009, pp. 14-62), reference to which is made in the SSM‑FR. The consolidated text of this Regulation, as in force, is available at: . 83 Art. 51(5) SSM‑FR. 84 An “exceptional substantial change in circumstances” includes: first, the merger of credit institutions; second, the sale or transfer of a substantial business division; third, the transfer of shares in a credit institution such that it no longer belongs to a supervised group to which it belonged prior to the sale; fourth, the final decision to carry out an orderly winding up of the supervised entity (or group); or finally, any comparable factual situations (Art. 52(1) SSM‑FR). 85 Art. 52(2) SSM‑FR. 78 79
Christos V. Gortsos
111
Art. 6 SSMR
Cooperation within the SSM
less significant and the date from which supervision will be carried out by the ECB or an NCA.86 (iii) Groups of consolidated undertakings – methods of consolidation 41
For determining significance on the basis of the size criterion, the supervised group of consolidated undertakings consists of the undertakings which have to be consolidated for prudential purposes in accordance with EU law and includes its subsidiaries and branches in the non-participating Member States and third countries. The method of consolidation is the one applicable in accordance with EU law for prudential purposes.87
2. Significance on the basis of the economic importance criterion According to Art. 6(4) SSMR, a supervised entity is also considered significant, if any of the following conditions apply (yet again unless otherwise justified by “particular circumstances”): First, the ratio of its total assets over the GDP of the participating Member State of establishment exceeds 20 %, unless the total value of its assets is below five billion euros. Second, following a notification by the NCA that it considers such an entity of significant relevance with regard to the domestic economy, the ECB takes a Decision confirming such significance, following a Comprehensive Assessment of that entity, including a balance sheet assessment.88 In relation to this condition, Recital 41 provides that in its Decision the ECB should take into account all relevant circumstances, including level-playing field considerations. 43 The SSM‑FR further specifies this criterion by providing the following: First, a supervised entity established in a participating Member State or a supervised group whose parent undertaking is established in a participating Member State is classified as significant based on its importance for the domestic economy if two conditions are met: the total value of assets over the gross domestic product at market prices (as defined in point 8.89 of Annex A to Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 “on the European system of national and regional accounts in the European Union” (ESA 2010)89 and published by Eurostat for the given calendar year) is higher than or equal to 20 % (“the national economic importance threshold”); and the total value of assets is higher than five billion euros.90 Second, when assessing whether or not a supervised entity or group is significant for the EU economy or the economy of a participating Member State for reasons other than the above, the ECB must take into account, in particular, four criteria: the supervised entity’s or group’s significance for specific economic sectors in the EU or a participating Member State; its interconnectedness with the EU economy or the economy of such a Member State; its substitutability as both a market participant and client service provider; and its business, structural and operational complexity.91 42
Art. 52(3) SSM‑FR. Arts. 53-54 SSM‑FR. 88 Art. 6(4)(2)(ii) and (iii) SSMR. 89 OJ L174, 26.6.2013, pp. 1-727; the consolidated text of this legislative act, as in force, is available at: . 90 Art. 56 SSM‑FR. 91 Art. 57(1) SSM‑FR; Art. 52(3) SSM‑FR on the derogation from the three-year rule laid down in Art. 47(1)-(3) SSM‑FR (see supra, → para. 40) applies accordingly (Art. 57(2) SSM‑FR). 86 87
112
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
Finally, an NCA may also notify the ECB that it considers a supervised entity to be significant for its domestic economy. In such a case, the ECB must assess this notification on the basis of the (just above-mentioned) criteria laid down in Art. 57(1) SSM‑FR.92
3. Significance on the basis of the cross-border activities criterion The ECB may also, on its own initiative, consider a supervised entity or group 44 to be of significant relevance, if it has established banking subsidiaries in more than one participating Member States and its cross-border assets or liabilities represent a significant part of its total assets or liabilities.93 In that respect, a supervised group may be considered significant by the ECB on the basis of its cross-border activities, if two conditions are met: First, its parent undertaking has established subsidiaries, which are themselves credit institutions, in more than one other participating Member State; and Second, the following additional conditions are met: the total value of its assets exceeds five billion euros, and the ratio of its cross-border assets to its total assets is above 20 %, or the ratio of its cross-border liabilities to its total liabilities is above 20 %.94
4. Significance on the basis of the direct public financial assistance criterion Significant are also considered to be supervised entities for which public financial as- 45 sistance has been requested or received directly from the EFSF or (now) the ESM. 95 In that respect, Art. 61 SSM‑FR makes the following distinction: On the one hand, direct public financial assistance to a supervised entity is considered 46 to have been requested, if a request is made by an ESM member for financial assistance to be granted by the ESM to that entity in accordance with a Decision taken by the Board of Governors of the ESM in accordance with Art. 19 of the ESM Treaty 96 regarding the direct recapitalisation of a credit institution and the instruments adopted under that Decision. The direct recapitalisation instrument (DRI) of the ESM is operational since 8 December 2014, is governed by the Guideline of the ESM Board of Directors “on Financial Assistance for the Direct Recapitalisation of Institutions” (DRI Guideline) 97 and is available to euro area credit institutions, which are of “systemic relevance”. In view of the strict conditions attached and in particular of the fact that bail-in is a prerequisite, no use has been made of this instrument since its introduction.98 Art. 58(1) SSM‑FR; Art. 52(3) SSM‑FR applies accordingly as well (Art. 58(2) SSM‑FR). Art. 6(4)(3) SSMR. 94 Art. 59(1)-(2) SSM‑FR; Art. 52(3) SSM‑FR applies in this case accordingly as well (Art. 58(3) SSM‑FR). In terms of definitions (Art. 60 SSM‑FR): “cross-border assets” means the part of the total assets in respect of which the counterparty is a credit institution or other legal or natural person located in a participating Member State other than the Member State in which the parent undertaking of the relevant supervised group has its head office; “cross-border liabilities” means the part of the total liabilities in respect of which the counterparty is a credit institution or other legal or natural person located in a participating Member State other than the Member State in which the parent undertaking of the relevant supervised group has its head office. 95 Art. 6(4)(4) SSMR. It is noted that the EFSF never provided any direct public financial assistance. 96 The consolidated version of this Treaty, signed on 2 February 2012, is available at . 97 Available at: . 98 See at: ; on this instrument, see Gortsos, in: Gortsos and Ringe (eds), Pandemic Crisis and Financial Stability (2020), at p. 371, with further references. 92 93
Christos V. Gortsos
113
Art. 6 SSMR
Cooperation within the SSM
On the other hand, direct public financial assistance is considered to have been received by a supervised entity, if it has been received according to the above Decision and instruments. 48 Without prejudice to the obligation set out in Art. 96 SSM‑FR to inform the ECB of the deterioration of the financial situation of a less significant supervised entity (infra, → para. 101), as soon as the relevant NCA becomes aware of the possible need for public financial assistance for such an entity to be granted at national level indirectly from the ESM, it must inform the ECB. Its assessment of the financial situation must be submitted to the ECB, for consideration, before submitting it to the ESM, except in duly justified cases of urgency.99 49 A supervised entity in respect of which direct public financial assistance is requested from the ESM or which has received such assistance is classified as significant from the date on which direct public financial assistance was requested on its behalf. The date on which the ECB assumes the direct supervision is specified in its Decision. If such assistance is requested in respect of a supervised entity which is part of a supervised group, all supervised entities which are part of that supervised group are classified as significant.100 47
5. Significance on the basis of the fact that the supervised entity is one of the three most significant credit institutions in a participating Member State 50
The three most significant credit institutions or supervised groups in each participating Member State are covered in any case, irrespective of whether they meet other criteria, unless otherwise justified by “particular circumstances”.101 For this purpose, the ECB and the relevant NCA must take into account the size of the supervised entity and supervised group respectively, as determined in accordance with Arts. 50-55 SSM‑FR. 102 In this respect, the following review process is laid down:103 First, with regard to each participating Member State, the ECB must establish by 1 October of each calendar year whether or not three credit institutions or supervised groups with a parent undertaking established therein should be classified as significant supervised entities; Second, at the request of the ECB, the NCAs must inform it of the three most significant credit institutions or supervised groups established in their respective participating Member States by 1 October of the calendar year in question; the determination by the NCA is made on the basis of the criteria laid down in Arts. 50-55 SSM‑FR; Third, for each of the three most significant credit institutions or supervised groups in the participating Member States, the relevant NCA must provide the ECB with a Report setting out the supervisory history and risk profile in each case, unless this is already classified as significant; on receipt of the above-mentioned information, the ECB must carry out its own assessment, requesting the relevant NCA to provide any relevant information;
Art. 62 SSM‑FR. Arts. 63-64 SSM‑FR. 101 Art. 6(4)(5) SSMR, and Art. 65(1) SSM‑FR. According to Wymeersch, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), at p. 173 (para. 4.80), this provision “addresses banks in mainly smaller Member States, where the ECB wants to have a direct view on the local banking system. It may include subsidiaries of – even smaller – non-euro area banks”. 102 Art. 65(2) SSM‑FR; on Arts. 50-55 SSM‑FR, see supra, → paras. 35-41. 103 Arts. 66(1)-(5) SSM‑FR, respectively. 99
100
114
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
Fourth, if, on 1 October of a given year, one or more of the three most significant credit institutions or supervised groups in a participating Member State are not classified as significant supervised entities, the ECB must adopt a Decision in respect of any of them not classified as significant; and Finally, in case of exceptional circumstances, Art. 52(3) SSM‑FR on the derogation from the three-year rule laid down in Art. 47(1)-(3) SSM‑FR (supra, → paras. 82-83) applies accordingly.
6. The term “particular circumstances” “Particular circumstances”, as referred to in Art. 6(4)(2) and (5) SSMR, exist if there 51 are “specific and factual circumstances” leading to the classification of a significant supervised entity as less significant, in which case its supervision should remain with the relevant NCA. Account must be taken of the objectives and principles of the SSMR and, in particular, the need to ensure the consistent application of high supervisory standards.104 The interpretation of this term must be strict,105 while the assessment (and determination) of the existence of such circumstances must be made on a case-by-case basis and specifically for the supervised entity or group concerned, but not for categories of supervised entities. The relevant ECB Decision must state the reasons supporting its conclusion.106 According to the review clause laid down in Art. 72 SSM‑FR, the ECB must, with the 52 support of the relevant NCAs, review at least once a year whether particular circumstances continue to exist with respect to a supervised entity or group that is classified as less significant because of particular circumstances. The supervised entity concerned must provide any information and documents requested by the ECB to carry out such a review. If the ECB considers that particular circumstance no longer exists, it must adopt a Decision addressed to the relevant supervised entity determining that it is classified as significant and that particular circumstances no longer exist.107
7. Quantitative vs. qualitative criteria for determining significance As already noted,108 the determination of whether a supervised entity or group is sig- 53 nificant must be made by the ECB on the basis of the (just) above-analysed criteria for significance in the order set out in Art. 6(4) SSMR. In this respect, the SSM Supervisory Manual distinguishes between “quantitative criteria” and “qualitative criteria”:109 On the one hand, the quantitative criteria, which must be taken into account, encom- 54 pass the size in terms of total assets and the ratio of total assets over the GDP of the participating Member State of establishment; the number of participating Member States where a credit institution has subsidiaries (one of the inputs for the cross-border significance criterion); and cross-border assets and cross-border liabilities (if necessary for assessing cross-border activity). Art. 70(1) SSM‑FR. Art. 70(2) SSM‑FR. 106 Applicable accordingly in this case are Arts. 40, 44-46 and 48-49 SSM‑FR (Art. 71(1)-(3) SSM‑FR). On the basis of the initial list set up by the ECB on 4 September 2014, five credit institutions were classified as less significant under such particular circumstances (see Gortsos, EBOR 16(2015), at p. 117). On this aspect, see Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 151 paras. 665-668; see also infra, → paras. 58-62, where the ECJ’s judgement on the Landeskreditbank Baden-Württemberg ‒ Förderbank v European Central Bank (ECB) case is discussed. 107 Applicable accordingly in this case are Arts. 43-49 SSM‑FR (Art. 72(1)-(4) SSM‑FR). 108 See supra, → para. 29 discussing Art. 44(7) SSM‑FR. 109 SSM Supervisory Manual (2018), pp. 58-59. 104 105
Christos V. Gortsos
115
Art. 6 SSMR 55
Cooperation within the SSM
On the other hand, qualitative criteria may determine that a supervised entity should be classified as significant; they cover the following: First, the transfer of supervision is mandatory when public financial assistance has been requested or received directly from the ESM by a supervised entity; Second, the NCA may propose to the ECB to declare a supervised group to be significant to its domestic economy even if no quantitative threshold is met, in which case the ECB must conduct its own assessment to determine whether it can take the Decision confirming such significance; Third, the ECB may, at the request of the NCA or based on the significance of the entity’s cross-border activities, reclassify a supervised entity in the event of an exceptional and substantial change in circumstances that is relevant for determining significance on the basis of size or importance for the economy of the EU or any participating Member State; an institution may also exceed some of the quantitative thresholds and still be considered to be a less significant supervised entity based on specific factual circumstances under the SSM‑FR; and Finally, the ECB may, on its own initiative or at the request of the NCA, decide to take over supervisory responsibilities and decision-making powers from the NCA for any less significant entity by virtue of Art. 6(5)(b) SSMR (infra, → para. 39).
III. The Landeskreditbank Baden-Württemberg ‒ Förderbank v ECB case 1. The facts Of significant importance in this context is the judgment of the General Court of 16 May 2017 in Case T-122/15 Landeskreditbank Baden-Württemberg ‒ Förderbank v European Central Bank (ECB)110 (also referred to as the “L-Bank Case”). This German credit institution, which is an investment and development bank and a legal person governed by public law and wholly owned by the German State (Land) of Baden-Württemberg, was classified by the ECB as significant on the basis of the size criterion, since the value of its assets exceeded 30 billion euros by virtue of Art. 6(4) SSMR. 111 Accordingly, it became subject to direct supervision by the ECB. 57 The Landeskreditbank brought before the General Court an action for the annulment of the contested ECB Decision, putting forward five pleas in law: First, infringement of Art. 6(4) SSMR and Art. 70 SSM‑FR in the choice of criteria applied by the ECB; Second, manifest errors of assessment of the facts; Third, infringement of the obligation to state reasons; Fourth, misuse of powers arising from the ECB’s failure to exercise its discretion; and Fifth, an infringement by the ECB of its obligation to take into consideration all the relevant circumstances of the case. 56
110 Case T-122/15, Landeskreditbank Baden-Württemberg – Förderbank v European Central Bank ECLI: EU:T:2017:337. 111 The initial ECB Decision was taken on 1 September 2014. In its Opinion of 20 November 2014, the ABOR found this Decision lawful and on 5 January 2015 the ECB adopted Decision ECB/SSM/15/1 (which is “the contested decision”), which repealed and replaced the decision of 1 September 2014, whilst maintaining the applicant’s classification as a significant entity; see ECJ Decision, paras. 4-7.
116
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
2. The decision of the Court In its judgement, the General Court rejected all five pleas (the fifth as unfounded) 58 and, accordingly, dismissed the action brought by the Landeskreditbank in its entirety.112 The first plea was rejected, inter alia, on the basis that, under the relevant provisions of the SSMR and the SSM‑FR, a credit institution must be classified as a “significant entity” and therefore become subject to the direct supervision of the ECB, inter alia, where the value of its assets exceeds 30 billion euros. Its classification as significant may be avoided only if there are “particular circumstances” entailing that the direct prudential supervision by NCA is better able to attain the objective of financial stability protection and to ensure the consistent application of high supervisory standards. In this context, the Court highlighted, in particular, that the exercise by NCAs of direct prudential supervision of LSIs “is overseen by the ECB, which, under Article 6(5)(a) and (b) [SSMR], has the competence to communicate to those authorities ‘regulations, guidelines or general instructions to national competent authorities, according to which the tasks defined in Article 4 (…) … are performed’ and, moreover, to remove authority from a national authority and to ‘decide to exercise directly itself all the relevant powers for one or more credit institutions’.”113 Most importantly, when discussing the first plea, the General Court pointed out that, 59 from the examination of the interaction between Art. 4(1) and Art. 6 SSMR, it is apparent that “the logic of the relationship between them consists in allowing the exclusive competences delegated to the ECB to be implemented within a “decentralised framework”,114 rather than having a distribution of competences between the ECB and the NCAs in the performance of the tasks referred to in Article 4(1)”. Similarly, under Art. 6(4)(2) the ECB has exclusive competence for determining the “particular circumstances” in which direct supervision of an entity that should fall solely under its supervision might instead be under the supervision of an NCA.115 According to the Court, this finding is supported by the reading of Recitals (15), (28) and (38)-(40), noting in particular that the arrangement of the latter suggests that direct prudential supervision by the NCAs under the SSM was envisaged by the Council “as a mechanism of assistance to the ECB rather than the exercise of autonomous competence”.116 It also noted that the ECB retains important prerogatives even when NCAs perform 60 the supervisory tasks laid down in Art. 4(1)(b) and (d)-(i) SSMR, the existence of which is indicative of the subordinate nature of the intervention by the national authorities in the performance of those tasks (with further analysis of the provisions of Art. 6(5) SSMR). Furthermore, it considers that the competencies conferred on the ECB are also evident from the comparison of the provisions allowing for adjustments to the criterion for distribution of the roles between the ECB and the NCAs relating to the size of the supervised entity (comparing Art. 6(5)(b) SSMR to Art. 6(4)(2) SSMR). 117 112 ECJ Decision, paras. 100, 112, 136, 142 and 150, respectively. On this judgement, critically as well, see Tröger, Oxford Business Law Blog (2017), Annunziata, Bocconi Legal Studies Research Paper No. 3139567 (2018) and Annunziata, Bocconi Legal Studies Research Papers, No. 3372346 (2019), at pp. 3-13, Chiti, in: Chiti and Santoro (eds), The Palgrave Handbook of European Banking Union Law (2019), at p. 129; Montemaggi, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020); and Riso, in: Zilioli and Wojcik (eds), Judicial Review in the European Banking Union (2021), at pp. 494-503. For its interpretation by the German Constitutional Court (Bundesverfassungsgericht), see BVerfGE 151, 202. 113 ECJ Decision, para. 24. 114 Emphasis added. 115 ECJ Decision, para. 54. 116 ECJ Decision, paras. 55-58. 117 ECJ Decision, paras. 59-61 and 62, respectively.
Christos V. Gortsos
117
Art. 6 SSMR
Cooperation within the SSM
On the basis of the above, the Court concluded that the Council has delegated to the ECB exclusive competence in respect of the tasks laid down in Art. 4(1) SSMR and that “the sole purpose of Article 6 (…)is to enable decentralised implementation under the SSM of that competence by the [NCAs], under the control of the ECB, in respect of the less significant entities and in respect of the tasks listed in Article 4(1)(b) and (d) to (i) (…), whilst conferring on the ECB exclusive competence for determining the content of the concept of “particular circumstances” within the meaning of Article 6(4), second subparagraph, which was implemented through the adoption of Articles 70 and 71 of the SSM‑FR”.118 62 The General Court also rejected the second plea, in which the Landeskreditbank claimed that it should, inter alia, have been classified as a “less significant” entity, because the objectives of the SSMR (namely ensuring financial stability, the safety and solidity of credit institutions and the protection of depositors) would be sufficiently achieved by being supervised by the German NCA (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Federal Financial Supervisory Authority), given its low-risk profile by virtue of the practical impossibility of its finding itself in a situation of insolvency. In this respect, the Court noted that the applicant credit institution did not argue that the German authorities would be better able to attain these objectives than the ECB. 119 63 It is finally noted that the appeal on this judgement was also dismissed by the Judgment of the Court (First Chamber) of 8 May 2019 in Case C-450/17.120 61
C. Micro-prudential supervision of significant supervised entities and groups I. General provisions 1. JSTs a) Establishment and composition 64
As already mentioned, the ECB is responsible for the direct micro-prudential supervision of significant supervised entities and groups in participating Member States.121 For the supervision of each of them a JST is established, which is composed of staff members from the ECB and the NCAs appointed in accordance with Art. 4 SSM‑FR and working under the coordination of a designated ECB staff member (“JST coordinator”) and one or more NCA sub-coordinators, as laid down in Art. 6 SSMR.122 In particular: First, the responsibility for the establishment and composition of JSTs has been assigned to the ECB. On the other, it is the NCAs that appoint one or more persons from their staff as a member or members of a JST in accordance with the principles laid down in Art. 6(8) SSMR and without prejudice to Art. 31 SSMR thereof. An NCA staff member may be appointed as a member of more than one JST. NevertheECJ Decision, para. 63. ECJ Decision, paras. 101-111. 120 Case C-450/17, Landeskreditbank Baden-Württemberg v ECB, ECLI:EU:C:2019:372. 121 Art. 39(4) SSM‑FR; see also supra, → para. 19. 122 Art. 3(1) SSM‑FR. Even though the (ECB) Guide to banking supervision (2014) (Box 3 at p. 17) prescribes that the coordinator should not generally be a national of the Member State where the supervised entity is established, the Report of the European Court of Auditors (2016), at p. 58, para. 123, notes that at that time 18 coordinators of 123 did not meet this requirement. Schoenmaker and Véron, in: Schoenmaker and Véron (eds), European Banking Supervision: The first eighteen months (2016), at p. 10, footnote 12, note in this respect that, by contrast, in the United States each bank’s supervisory team is led, on a decentralised basis, by one of the Federal Reserve System’s 12 regional Federal Reserve Banks. 118
119
118
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
less, the ECB may require the NCA to modify the appointments they have made if appropriate for the purpose of the composition of a JST.123 If either more than one NCA exercises supervisory tasks in a participating Member State or a participating Member State’s national law confers on an NCA specific supervisory tasks and the latter is not an NCA, the relevant authorities must coordinate their participation within the JSTs.124 The ECB and the NCAs must consult with one another and agree on the use of the latter’s resources with regard to the JSTs.125 Second, since the JST coordinator must ensure the coordination of the work within the JST, its members must follow the coordinator’s instructions as regards their tasks in the JST, without prejudice to their tasks and duties with their respective NCA. Each NCA appointing more than one staff member to the JST must designate an NCA sub-coordinator assisting the coordinator as regards the organisation and coordination of the tasks in the JST and may give instructions to the JST members appointed by the same NCA, provided that these do not conflict with the coordinator’s instructions.126 b) Tasks of JSTs The ongoing supervision of significant supervised entities and groups is conducted 65 by the JSTs,127 which are considered as the “true operational core of the SSM”.128 Without prejudice to other provisions of the SSM‑FR, the tasks of a JST include, mainly (but indicatively), the following:129 First, it must perform the “supervisory review and evaluation process” (SREP) 130 for significant supervised entities or groups, a process governed by Arts. 97-101 CRD IV. On this basis, NCAs must review the arrangements, strategies, processes and mechanisms implemented by credit institutions to comply with the CRD IV and the CRR. They must also evaluate several risk aspects, taking into account the identification and measurement of systemic risk under Art. 23 EBAR, ESRB RecommenArt. 4(1)-(3) SSM‑FR. Art. 4(4) SSM‑FR. 125 Art. 4(5) SSM‑FR. NCBs of participating Member States involved in the micro-prudential supervision of a significant supervised entity or group under national law, which are not NCAs, may also appoint members of their staff to a JST, informing the ECB, accordingly; in such a case, Art. 4 SSM‑FR applies accordingly. If staff members of such NCBs are appointed to a JST, references to NCAs in relation to JSTs must be read as including a reference to those NCBs (Art. 5(1)-(3) SSM‑FR). 126 Art. 6(1)-(2) SSM‑FR. 127 As a matter of fact, the term “JST” is defined to mean a team of supervisors in charge of the supervision of a significant supervised entity or group (Art. 2(6) SSM‑FR). 128 See Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), at p. 1131 para. 37.71. According to Tröger, in: Fabbrini and Ventoruzzo (eds), Research Handbook of EU Economic Law (2019), at p. 304 (with further references), the “self-organizational” forces shaping the ECB-led JSTs is not sufficient to overcome the countervailing incentives of bureaucrats at NCAs whose rational self-interest may preclude them from engaging optimally. A legitimate counterargument to this remark (which in principle is robust) is that in such a case NCAs would violate the duty of cooperation in good faith and the obligation to exchange information, as laid down in Art. 6(2) SSMR (see supra, → paras. 8-9). See, nevertheless, also European Court of Auditors (2016), at pp. 59-63 paras. 126-137 raising concerns about the efficiency of NCAs’ role in JSTs (at least during the first years of the SSM’s operation), noting particularly that (at that time) the ECB had little control over NCA resources (paras. 126-128). 129 Art. 3(2) SSM‑FR. 130 Since 1 January 2019, the SPEP is performed in accordance with the EBA Guidelines of 19 July 2018 (EBA/GL/2018/03), which were adopted on the basis of Art. 107(3) CRD IV; these Guidelines, which also cover supervisory stress testing (adopted on the basis of Art. 100(2) CRD IV), are available at: . See also SSM Supervisory Manual (2018), pp. 80-87. 123 124
Christos V. Gortsos
119
Art. 6 SSMR
Cooperation within the SSM
dations, as well as the nature, scale and complexity of an institution’s activities.131In this context, of particular importance are the internal capital adequacy assessment process (ICAAP) and the internal liquidity adequacy assessment process (the ILAAP), since their insights feed into SREP assessments and supervisors’ decisions about capital and liquidity requirements. The aim of these processes is to encourage credit institutions to identify, effectively manage and cover their capital and liquidity risks at all times, taking into account their business models, size, complexity and risk exposure. The ECB Guides to the ICAAP and ILAAP were published in November 2018.132 Second, taking into account the SREP, it is responsible for drafting and organising the “supervisory examination program” (SEP), which covers, for each significant supervised entity or group, the main supervisory tasks and activities for the next 12 months, including an “on-site inspection plan” (in accordance with Art. 99 CRD IV133), and is then submitted to the Supervisory Board.134 Finally, it must implement the SEP, as approved by the ECB, and any ECB supervisory Decisions with respect to the significant supervised entity or group it supervises, ensure coordination with the on-site inspection team referred to in Arts. 138-146 SSM‑FR on the implementation of the (above-mentioned) on-site inspection plan and liaise with NCAs, where relevant.135
2. Supervision on a consolidated basis 66
By virtue of its specific (supervisory) task laid down in Art. 4(1)(g) SSMR, the ECB conducts supervision on a consolidated basis as provided for by Art. 111 CRD IV (on the determination of the consolidating supervisor) in respect of significant supervised entities, where the parent undertaking is either a “parent institution in a participating Member State” or an “EU parent institution” established in a participating Member
131 Art. 97(1) CRD IV; when making the above reviews and evaluations, NCAs must take into account the technical criteria set out in Art. 98 CRD IV. 132 Available, respectively, at: and . 133 Art. 99(1) CRD IV provides that NCAs must, at least annually, adopt a SEP for the institutions they supervise, containing: an indication of how they intend to carry out their tasks and allocate their resources (point (a)); an identification of which institutions are intended to be subject to enhanced supervision and the measures taken for such supervision (point (b)); and a plan for inspections at the premises used by an institution, including its branches and subsidiaries established in other Member States (pursuant to Arts. 52, 119 and 122(c) CRD IV). 134 For more details on the SEP, see SSM Supervisory Manual (2018), pp. 54-55. 135 On the role of JSTs, see more details in the SSM Supervisory Manual (2018), pp. 11-13; see also Laura Wissink, Ton Duijkersloot and Rob Widdershoven, Utrecht Law Review Vol. 10 (2014), at pp. 95-96. It is noted in this respect that, according to Principle 9 (essential criterion 1) of the 2012 “Core Principles for Effective Banking Supervision” of the Basel Committee on Banking Supervision, supervisors should employ an appropriate mix of “on-site” and “off-site” supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix may be determined by the particular conditions and circumstances of the country and the bank and supervisors should regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amend their approach, as necessary. These Principles, of September 2012, are available at: .
120
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
State.136 On the other hand, the relevant NCA must perform the task of the supervisor on a consolidated basis in respect of less significant supervised entities.137 Art. 116 CRD IV requires the establishment of College of Supervisors (supervisory colleges) for cooperation and coordination among the NCAs responsible for, and involved in, the supervision of the different components of cross-border banking groups. In this respect, the SSM‑FR provides that, within the SSM, the role of the ECB varies as follows:138 When the ECB is the consolidating (home) supervisor for colleges that include NCAs from non-participating Member States (European colleges) and/or from third countries (international colleges), it acts as its chair. The NCAs of the participating Member States where the parent, the subsidiaries and the significant branches within the meaning of Art. 51 CRD IV, if any, are established, participate as observers. If there is no such college and a significant supervised entity has branches in non-participating Member States considered as significant, the ECB must establish a supervisory college with the competent authorities of the host Member States.139 When the ECB is a host supervisor, since the consolidating (home) supervisor is from a non-participating Member State or from a third country, the ECB and NCAs participate in the supervisory college pursuant to the following rules and to relevant EU law:140 First, if the supervised entities in participating Member States are all significant, the ECB participates therein as a member and the NCAs as observers; Second, if the supervised entities in participating Member States are all less significant, the NCAs participate therein as members; and Third, if the supervised entities in participating Member States are less significant and significant, the ECB and the NCAs participate therein as members and the
136 Art. 111 CRD IV applies as amended by Art. 1(37) CRD V. In terms of definitions (Art. 4(1)(28) and (29) CRR, respectively): “parent institution in a Member State” means an institution in a Member State which has an institution, a financial institution or an ancillary services undertaking as a subsidiary or which holds a participation therein, and which is not itself a subsidiary of another institution authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in the same Member State; ”EU parent institution” means a parent institution in a Member State which is not a subsidiary of another institution authorised in any Member State, or of a financial holding company or mixed financial holding company set up in any Member State. 137 The supervision on a consolidated basis allows the ECB to assess comprehensively the risks resulting from the group as such and prevents that parent and subsidiary undertakings are subject to the supervisory competences of different authorities; see Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), at p. 1129 para. 37.67, with reference to the CJEU, Case T-712/15, 8 May 2019, Crédit Mutuel Arkéa v ECB, ECLI:EU:T:2017:900, paras. 58-61. On this case, see Smits, Short note on the Arkéa judgments (2018) and (within the context of the decisions taken by the General Court); Chiti, in: Chiti and Santoro (eds), The Palgrave Handbook of European Banking Union Law (2019), at p. 130; Arons, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), at p. 104; and Martucci, in: Zilioli and Wojcik (eds), Judicial Review in the European Banking Union (2021), at pp. 504-509. Art. 8(1) and (2) SSM‑FR, respectively. 138 For a schematic overview, see Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), Table 8.3 at p. 342. 139 Art. 9(1)-(2) SSM‑FR. 140 Art. 10(a)-(c) SSM‑FR, respectively.
Christos V. Gortsos
121
67
68
69
70
Art. 6 SSMR
Cooperation within the SSM
NCAs of the participating Member States where the significant supervised entities are established participate as observers.141
3. Supplementary supervision of credit institutions participating in financial conglomerates 71
By virtue of its specific (supervisory) task laid down in Art. 4(1)(h) SSMR, the ECB also participates in the supplementary supervision of financial conglomerates (which is not exercised on a consolidated basis, but on a “solo plus basis”) 142in relation to the credit institutions included therein and assumes the responsibilities of a coordinator, where EU law (namely the Financial Conglomerates Directive, FICOD) provides that it should be appointed as the coordinator for such conglomerates. In this case, the JST assumes the related tasks in accordance with Art. 11 FICOD.143 According to the most updated version of the “List of Identified Financial Conglomerates”, published by the ESAs’ Joint Committee144 in accordance with Art. 2(14) FICOD, of 17 December 2019, there were 77 financial conglomerates with their head of group located in an EU/EEA country and 3 with the head group located in a third country (Switzerland, USA and Bermuda); the ECB was the coordinator in 26 cases.145
II. Procedures for micro-prudential supervision 1. Micro-prudential supervision of significant supervised entities and assistance by NCAs 72
The ECB must perform the direct supervision of significant supervised entities pursuant to the procedures set out in Arts. 3-18 SSM‑FR, in particular in relation to the composition and the tasks of the JSTs.146 It is assisted by NCAs, which must, in particular, perform the following activities: First, they must submit draft Decisions to the ECB in respect of significant supervised entities established in their Member State, in accordance with Art. 91 SSM‑FR. This provides that, pursuant to Art. 6(3) and 6(7)(b) SSMR (supra, → paras. 11 and 5), the ECB may request an NCA to prepare a draft Decision regarding the exercise 141 See also ECB, Guide to banking supervision (2014), Box 2. On the operational functioning of colleges, see also the EBA Report of 16 March 2018 “on the functioning of supervisory colleges” (available at: ). Of relevance are also the Commission Delegated Regulation (EU) 2016/98 of 16 October 2015 “supplementing [the CRD IV] with regard to regulatory technical standards for specifying the general conditions for the functioning of colleges of supervisors”, adopted on the basis of Art. 51(4) (OJ L21, 28.1.2016, pp. 2-20) and the Commission Implementing Regulation (EU) 2016/99 of the same date “laying down implementing technical standards with regard to determining the operational functioning of the colleges of supervisors (…)”, adopted on the basis of Art. 51(5) (OJ L21, 28.1.2016, pp. 21-44). 142 The difference between supervision on a consolidated basis and supervision on a “solo plus” basis lies on the fact that, in the latter case, the point of reference used are the financial statements of each individual undertaking, which are then corrected to take into account the impact at group level. 143 See also SSM Supervisory Manual (2018), p. 34. 144 The Joint Committee is a joint body of the ESAs, governed by Arts. 54-57 of their founding Regulations, as in force. 145 This list is available at: . For an analysis of that Directive (2002/87/EC), as in force, see Gortsos, in: Liber Amicorum of Emeritus Professor Thanassis Papachristou (2019). 146 Art. 89 SSM‑FR. The planning of supervisory activities (“supervisory planning”) contains two steps: strategic and operational planning (for details, see ECB, Guide to banking supervision (2014), paras. 56-58; and SSM Supervisory Manual (2018), pp. 61-65).
122
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
of its tasks under Art. 4 SSMR for its consideration, specifying the time limit for sending this draft Decision. An NCA may also, on its own initiative, submit such a draft Decision to the ECB for its consideration through the JST. Second, they must assist the ECB in preparing and implementing any acts relating to the exercise of its tasks (including in verification activities and the day-to-day assessment of the supervised entities’ situation) and in enforcing its Decisions, using, if necessary, the powers referred to in Arts. 9(1)(3) and 11(2) SSMR; in both cases, they must follow the ECB instructions.147 The ECB and the NCAs must, without undue delay, exchange information relating to 73 a significant supervised entity in two cases: if there is a serious indication that it can no longer be relied on to fulfil its obligations towards its creditors and, in particular, provide security for the assets entrusted to it by its depositors; or if there is a serious indication of circumstances that could lead to a determination that its deposits are unavailable according to Art. 2(1)(8) DGSD; the exchange of information must take place prior to a Decision relating to such a determination.148
2. In particular: compliance with fit and proper requirements for managers In order to ensure the existence of robust governance arrangements, and in particular 74 the existence of members of the management body that are of sufficiently good repute and possess sufficient knowledge, skills and experience to perform their duties, a significant supervised entity must notify, without undue delay, the relevant NCA of any change in the membership of its management bodies as far as managerial and supervisory functions are concerned (the “managers”), within the meaning of Arts. 3(1)(7) and 3(2) CRD IV, including the renewal of their terms of office.149 This is without prejudice to relevant EU and national law and Arts. 73-88 SSM‑FR, which further specify the provisions of Arts. 14-15 SSMR on the granting and withdrawal of credit institutions’ authorisations and the assessment of notifications of the acquisition and disposal of qualifying holdings therein (the so-called “common procedures”; infra, → Arts. 14 and 15 SSMR). The ECB must be notified by the relevant NCA without undue delay of the timeframe within which a Decision has to be taken, in accordance with relevant national law.150 For the purposes of assessing the suitability of significant supervised entities’ man- 75 agers, the ECB has the supervisory powers that competent authorities have under the relevant EU and national law.151 This “fit and proper assessment” of the members of the management body of significant and less significant institutions is a key part of su-
Art. 90(1)-(2) SSM‑FR. Art. 92 SSM‑FR. On the definition of the term “unavailable deposit”, see Gortsos, The new EU Directive (2014/49/EU) on deposit guarantee schemes: an element of the European Banking Union (2014), at p. 125. 149 According to Art. 3(1)(7) CRD IV, “management body” means a credit institution’s (or investment firm’s) body or bodies (depending on the corporate model or model of governance existing in each Member State), which meet the following conditions: are appointed in accordance with national law, are empowered to set the institution’s strategy, objectives and overall direction, and oversee and monitor management decision-making, and include the persons who effectively direct the business of the institution. Art. 3(2) CRD IV provides that, where the CRD IV refers to the management body and, pursuant to national law, its managerial and supervisory functions are assigned to different bodies or different members within one body, the bodies or members of the management body responsible in accordance with national law must be identified, unless otherwise specified therein, by Member States. 150 Art. 93(1) SSM‑FR. 151 Art. 93(2) SSM‑FR. 147 148
Christos V. Gortsos
123
Art. 6 SSMR
Cooperation within the SSM
pervisory activities concerning both the initial authorisation, as well as any membership change.152 76 A significant supervised entity must, without undue delay, inform the relevant NCA of any new facts that may affect an initial assessment of the suitability or any other issue which could impact the suitability of a manager, once these are known to the supervised entity or the relevant manager. The NCA must notify the ECB of such new facts or issues without undue delay. The ECB may initiate a new assessment, either based on new facts or issues, or if it becomes aware of any new facts that may have an impact on the initial assessment of the relevant manager or any other issue which could impact the suitability of a manager. It must then decide on the appropriate action in accordance with the relevant EU and national law and inform the relevant NCA of such action without undue delay.153
3. Other procedures 77
Without prejudice to the common procedures set out in Arts. 73-88 SSM‑FR and to its ordinary interaction with its NCA, a significant supervised entity must address all its requests, ad hoc notifications and/or applications relating to the exercise of its supervisory tasks to the ECB, which must make them available to the relevant NCA and may request it to prepare a draft Decision in accordance with Art 91 SSM‑FR.154 If there are any substantial changes to the authorisation given for the initial request, notification or application, the significant supervised entity must address a new one to the ECB following the same procedure.155
III. Beginning and end of direct supervision by the ECB 1. Beginning of direct supervision by the ECB 78
The date on which the ECB will assume direct supervision of a supervised entity or group that has been classified as significant must be specified in an ECB Decision. This “take-over Decision” may (but does not have to) be the same as the status Decision in 152 See ECB, Guide to Banking Supervision (2014), para. 67. As regards the process and criteria used for this assessment, initially, applicable were the Joint ESMA and EBA Guidelines of 26 September 2017 “on the assessment of the suitability of members of the management body and key function holders” (ESMA 71-99-598, EBA/GL/2017/12, available at: ); the ECB “Guide to fit and proper assessments” of 29 May 2018 (at: ); and para. 89 of the EBA Guidelines on the SREP (EBA/GL/2018/03); see also SSM Supervisory Manual (2018), pp. 72-77. The above 2017 ESMA/EBA Guidelines were repealed with effect from 31 December 2021 by new ones of 2 July 2021 (ESMA35-36-2319, EBA/GL/2021/06, available at: ); a new version of the 2018 ECB Guide was, accordingly, published in December 2021 (available at: ). By means of mere indication, see also from the literature Busch and Teubner, European Banking Institute Working Paper Series 2019 – no. 34 (2019), as well as Mülbert and Wilhelm, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), at p. 231. 153 Art. 94(1)-(2) SSM‑FR. 154 On Art. 91 SSM‑FR, see supra, → para. 72. On the general process governing such requests, notifications and applications, see ECB, Guide to banking supervision (2014), para. 59 and, in more details, SSM Supervisory Manual (2018), pp. 89-95. 155 Art. 95(1)-(3) SSM‑FR.
124
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
accordance with Art. 44(2) SSM‑FR.156 In principle, the ECB must notify that Decision to each supervised entity concerned, at least one month prior to the date on which it will assume direct supervision and provide copies thereof to the relevant NCAs; by way of exception, if the ECB assumes direct supervision of a supervised entity or group either on the basis of a request for or receipt of direct public financial assistance from the ESM, the Decision must be notified to each supervised entity concerned in due time, at least one week prior to the date on which it will assume direct supervision.157 The ECB assumes this direct supervision, at the latest, twelve months after the date 79 on which it notifies to that entity or group its Decision pursuant to Art. 44(2) SSM‑FR.158 For the above purposes, in the case of a supervised group, the ECB must notify 80 its Decision to the supervised entity at the highest level of consolidation within the participating Member States and ensure that all supervised entities within that group are duly informed by the relevant deadline.159
2. End of direct supervision by the ECB – reclassification of a significant supervised entity or group as less significant When the ECB determines that direct supervision of a supervised entity or group will 81 end, it must issue a Decision to each supervised entity concerned, which must specify the date and reasons for this. This Decision may be adopted together with the Decision classifying it as less significant and must be adopted at least one month prior to the date on which direct supervision will end and a copy thereof must be provided to the relevant NCA (the just above-mentioned Article 45(5) SSM‑FR pertaining to supervised groups applies accordingly). Each relevant supervised entity should also be allowed to make submissions in writing prior to its adoption.160 Art. 47 SSM‑FR distinguishes four cases of ending direct ECB supervision (by an ECB 82 Decision):161 First, in the case that a significant supervised entity is classified as such on the basis of the size criterion, the economic importance criterion, the cross-border activities criterion or because it is part of a supervised group fulfilling at least one of these criteria, if, for three consecutive calendar years, none of the above criteria has been met either on an individual basis or by the supervised group to which the supervised entity belongs; Second, in the case that a supervised entity is classified as significant on the basis that direct public financial assistance from the ESM has been requested in respect of itself, the supervised group to which it belongs or any supervised entity belonging to that group and which is not significant on other grounds, if this assistance has been denied or fully returned or is terminated; in case of return or termination of the assistance, the ECB Decision may only be taken three calendar years after the complete return or termination; Third, in the case that a supervised entity is classified as significant on the basis that it is one of the three most significant credit institutions in a participating Member 156 Art. 45(1), sent. 1 and 2 SSM‑FR; on this Article, see Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 146 para. 636. On Art. 44(2) SSM‑FR, see supra, → para. 31. 157 Art. 45(1) sent. 3 and 45(2)-(3) SSM‑FR. 158 Art. 45(4) SSM‑FR. 159 Art. 45(5) SSM‑FR. 160 Art. 46(1)-(3) SSM‑FR. 161 Art. 47(1)-(4) SSM‑FR, respectively.
Christos V. Gortsos
125
Art. 6 SSMR
Cooperation within the SSM
State or belongs to the supervised group of such a credit institution, and is not significant on other grounds, if, for three consecutive calendar years, this supervised entity does not meet that criterion; and Finally, in the case that a supervised entity is directly supervised by the ECB under a Decision adopted pursuant to Art. 6(5)(b) SSMR (infra, → paras. 95-96), if, in its reasonable discretion, this is no longer necessary to ensure consistent application of high supervisory standards. 83 The “three-year rule” established in the first three cases above162 has been introduced in order to avoid rapid or repeated alternations of supervisory responsibilities, hence for the sake of stability of the status of a supervised entity as significant.163 Accordingly, a “moderation mechanism” has been embedded in the entire classification process: On the one hand, in accordance with Art. 43 SSM‑FR, the status change from less significant to significant is triggered if even one criterion is met in any one year (supra, → paras. 26-27); On the other hand, a significant entity or group qualifies for reclassification as less significant if the relevant criteria have not been met over three consecutive calendar years.164 84 As already noted (supra, → para. 40), by way of derogation from this three-year rule, when deciding on the basis of the size criterion, the economic importance criterion and cross-border activities criterion, in the case of the exceptional circumstances laid down in Art. 52(3) SSM‑FR, the ECB must decide, in consultation with NCAs, whether the affected supervised entities are significant or less significant and the date from which supervision will be carried out by the ECB or an NCA.
3. Pending procedures If a change in competence between the ECB and an NCA is to take place, the authority whose competence ends must inform the authority assuming supervision of any supervisory procedure formally initiated which requires a Decision. This information must be provided immediately after the former becomes aware of the imminent change in competence and be updated on a continual basis (in principle on a monthly basis), when there is new information on a supervisory procedure to report. The authority assuming supervision may, in duly justified cases, allow reporting on a less frequent basis. Prior to the change in competence, the authority whose competence ends must liaise with the one assuming supervision without undue delay after the formal initiation of any new supervisory procedure which requires a Decision.165 86 When the supervisory competence changes, the authority whose competence ends must undertake efforts to complete any pending supervisory procedure which requires a Decision prior to the date on which the change in the supervisory competence is to occur.166 87 If a formally initiated supervisory procedure, which requires a Decision, cannot be completed prior to the date on which a change in the supervisory competence occurs, the authority whose competence ends must undertake the following: 85
Art. 47(1)-(3) SSM‑FR. See Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 144 paras. 630-633. 164 See ECB, Guide to banking supervision (2014), Box 1, fourth paragraph, and SSM Supervisory Manual (2018), pp. 59-60); see also Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), at p. 1130 para. 37.70. 165 Art. 48(1) SSM‑FR. For the purposes of this Article, a supervisory procedure means an ECB or NCA supervisory procedure (Art. 48(1) last sent. SSM‑FR). 166 Art. 48(2) SSM‑FR. 162 163
126
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
First, maintain competence to complete such pending supervisory procedure; retain all relevant powers until the supervisory procedure has been completed; Second, complete the pending supervisory procedure in question in accordance with the applicable law under its retained powers; Third, inform the authority assuming supervision prior to taking any Decision in a supervisory procedure pending prior to the change in competence; and Finally, provide to the authority assuming supervision a copy of the Decision taken and any relevant related documents.167 The ECB and the relevant NCA must cooperate with regard to the completion of any 88 pending procedure and may exchange any relevant information to this end.168
D. Micro-prudential supervision of less significant supervised entities and groups I. Powers of the ECB (Art. 6(5) SSMR) 1. The provisions of Art. 6(5)(a) and (c)-(d) SSMR a) Introductory remarks As already noted (supra, → para. 199), supervised entities and groups considered less 89 significant and classified as such are supervised directly by NCAs, albeit within the SSM.169 Indeed, NCAs are responsible for the direct supervision of less significant supervised entities and groups but their supervisory actions are subject to the provisions of Art. 6(5)-(6) SSMR and Arts. 96-100 SSM‑FR.170 In accordance with the rules set out in these Articles, and since the ECB has been assigned the responsibility for the “effective and consistent functioning of the SSM”,171 the ECB has a wide range of powers with regard to such entities and groups.172 Recital (16) SSMR makes in this respect the following considerations: “The safety and soundness of large credit institutions is essential to ensure the stability of the financial system. However, recent experience shows that smaller credit institutions can also pose a threat to financial stability. Therefore, the ECB should be 167 Art. 48(3) SSM‑FR. By way of derogation, the ECB may decide within one month of receiving the information necessary to complete its assessment of the relevant formally initiated supervisory procedure, and in consultation with the relevant NCA, to take over the supervisory procedure concerned. If, due to reasons of national law, an ECB Decision is required prior to the end of the above assessment period, the NCA must provide the ECB with the necessary information. If the ECB takes over a supervisory procedure, it must notify the relevant NCA and the parties of its Decision, which must also specify the consequences (Art. 48(4) SSM‑FR). 168 Art. 48(5) SSM‑FR; Art. 48 SSM‑FR does not apply to common procedures (Art. 48(6) SSM‑FR). 169 According to Glοs und Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2020), at pp. 51-52 para. 82, with further references, the supervisory competences of NCAs are original competences (originäre mitgliedstaatliche Zuständigkeiten), which were not transferred to the ECB but remained with them; see also D’Ambrosio, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020), at pp. 32-34, stating that the SSMR simply recognises and does not establish NCAs’ supervisory responsibilities. 170 Art. 6(4)(1) SSMR. 171 Art. 6(1) sent. 2 SSMR; see supra, → para. 1. 172 On these ECB powers, further analysed below, see also Tröger (2019), pp. 300-302, Glοs und Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2020), at p. 53 paras. 84-114 and Ohler (2020), pp. 1131-1132. On the basis of further literature referred to therein, Glοs und Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2020), at p. 53 para. 83 consider that the ECB is acting in this respect as “supervisor of supervisors”.
Christos V. Gortsos
127
Art. 6 SSMR
Cooperation within the SSM
able to exercise supervisory tasks in relation to all credit institutions authorised in, and branches established in, participating Member States.” b) The individual powers of the ECB In particular, the powers of the ECB regarding less significant supervised entities and groups under Art. 6(5)(a) and (c)-(e) SSMR173 (and taking into consideration the rules laid down in the SSM‑FR) include the following: First, it can issue Regulations, Guidelines or general instructions, which are addressed to NCAs in relation to the performance of their specific tasks laid down in Art. 4(1) SSMR (with the exception of points (a) and (c))174 and the adoption by them of supervisory Decisions. In order to ensure consistency of supervisory outcomes within the SSM, such instructions may refer to the specific supervisory powers under Art. 16(2) SSMR for groups or categories of credit institutions; 175 Second, it exercises oversight over the functioning of the SSM on the basis of the responsibilities and procedures set out in Art. 6 SSMR and the SSM‑FR, by virtue of which several obligations are imposed on NCAs;176 this covers the general oversight of NCAs’ supervisory activities to ensure the adequate and harmonised conduct of supervision of less significant supervised entities and groups. Such oversight activities can be conducted through reviews of specific risk areas across NCAs; they provide “a targeted insight into their supervision at the level of individual institutions or classes of similar institutions”;177 Third, it may, at any time, make use of its investigatory powers under Articles 10-13 SSMR, i.e., information requests, as well as the conduct of general and (judicially authorised) on-site investigations;178 and Fourth, it may request, on an ad hoc or on a continuous basis, information from NCAs on the performance of their tasks.179 This covers the oversight of supervisory practices and standards applied by NCAs; in this respect, the ECB collects and processes from them information regarding their practices and decisions, as well as on the financial condition of the entities and groups they supervise, in line with the procedures set out in the SSMR and the SSM‑FR.180 91 Noteworthy is also that the NCAs and ECB apply a proportionate approach to supervision and supervisory oversight and have, accordingly, adopted a methodology classifying less significant supervised entities and groups as a low, medium or high-priority, based on their intrinsic riskiness and potential impact on the domestic financial 90
Point (b) is separately discussed infra, → paras. 93-96. These points are exempted since the supervisory tasks referred to therein are performed by the ECB for all supervised entities in accordance with Arts. 14-15 SSMR (the “common procedures” under Arts. 73-88 SSM‑FR). 175 Art. 6(5)(a) SSMR; on the ECB supervisory powers under Art. 16(2) SSMR, infra → Art. 16 SSMR. 176 Art. 6(5)(c) SSMR; this aspect is further discussed infra, → paras. 102-106. 177 ECB, Guide to banking supervision (2014), para. 94; for more details on this aspect, see also SSM Supervisory Manual (2018), pp. 107-108. 178 Art. 6(5)(d) SSMR. 179 Art. 6(5)(e) SSMR. 180 See also ECB, Guide to banking supervision (2014), paras. 91-93 and SSM Supervisory Manual (2018), p. 107. 173
174
128
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
system.181 This prioritisation is reflected in the scope and intensity of the specific oversight performed by the ECB and the direct supervision conducted by NCAs and is used in allocating supervisory resources and activities within the SSM as well as in determining the amount of supervisory information required by the ECB from NCAs. “High-priority” less significant supervised entities and groups are considered as medium or high risk with high or medium impact (meaning their failure may endanger the domestic financial system); “medium-priority” entities and groups have high intrinsic riskiness with low or medium impact, low intrinsic riskiness but medium or high impact or medium riskiness and medium impact; finally, “low-priority” entities and groups are considered to represent a very limited threat to financial stability and have manageable intrinsic riskiness. Furthermore, the “sector-related approach” to oversight pursued allows the ECB to 92 exercise a more focused oversight and NCAs to exercise a more targeted supervision. It aims at identifying common risks for supervised entities clustered in a sector that do not form part of a group but share specific common features (e.g., compliance with the same specific legal requirements, similar business models or shared central services, mutual support agreements or other forms of interconnection); capture potential contagion effects between individual entities; and assess the risk reduction imparted by sectoral arrangements.182
2. Direct supervision of less significant supervised entities by the ECB in accordance with Art. 6(5)(b) SSMR a) Criteria In addition to its above powers, if considered necessary in order to ensure consistent 93 application of “high supervisory standards”, the ECB may, at any time, decide to exercise directly the supervision of a less significant supervised entity or group, taking over supervisory responsibilities and decision-making powers from the relevant NCA. 183 This Decision may be taken either on its own initiative after consulting with the relevant NCA or upon the latter’s request;184 before taking it, the ECB must take into account, in particular, the following factors:185 First, whether the less significant supervised entity or group is close to meeting one of the criteria for significance; Second, its interconnectedness with other credit institutions; Third, whether it is a subsidiary of a supervised entity with its head office either in a non-participating Member State or in a third country and has established subsidiaries, which are also credit institutions or branches in participating Member States, one at least of which is significant; 181 See ECB, LSI supervision with the SSM (November 2017), at pp. 13-14, discussing institution-specific supervision and oversight of less significant supervised entities and groups (available at: ). This methodology enables the classification of all categories but only high-priority less significant supervised entities and groups have been officially determined by the ECB and NCAs so far. 182 ECB, LSI supervision with the SSM (November 2017), at p. 14. 183 Art. 6(5)(b) SSMR. In order to achieve consistent high supervisory standards, the ECB and NCAs have developed a series of joint supervisory standards (JSS); see details in LSI supervision with the SSM (2017), pp. 14-18. On Art. 6(5)(b) SSMR, see, in addition to the literature referred to below, D’Ambrosio and Montemaggi, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020). 184 Art. 67(1) SSM‑FR. 185 Art. 67(2) SSM‑FR.
Christos V. Gortsos
129
Art. 6 SSMR
Cooperation within the SSM
Fourth, the facts that the ECB instructions have not been followed by the NCA concerned, and that the NCA has not complied with the acts referred to in Art. 4(3)(1) SSMR; and/or Finally, the fact that the entity has requested or received indirect financial assistance from (the EFSF or anymore from) the ESM.186 94 On the other hand, the deterioration of a less significant supervised entity’s financial condition or the initiation of crisis management proceedings are not per se reasons for the ECB to take over supervision from the responsible NCAs;187 in the first case, though, applicable is Art. 96 SSM‑FR (infra, → para. 101). b) Procedure for preparing ECB Decisions (i) Activation of Art. 6(5)(b) SSMR on the ECB’s initiative 95
The procedure for activating Art. 6(5)(b) SSMR may start with an ECB request to an NCA to provide a Report setting out the supervisory history and risk profile of a less significant supervised entity or group, specifying the date by which this should be submitted to it. Prior to its final assessment as to whether supervision of that entity or group by it is necessary to ensure the consistent application of high supervisory standards the ECB must consult with the NCA. If it concludes that direct ECB supervision is necessary, it must adopt a Decision in accordance with Arts. 43-49 SSM‑FR.188 (ii) Activation of Art. 6(5)(b) SSMR at the request of an NCA
96
An NCA is also entitled submit a request to the ECB, identifying the less significant supervised entity or group in respect of which it is of the view that the ECB should assume direct supervision, stating why this is necessary to ensure the consistent application of high supervisory standards; this request must be accompanied by a report indicating the supervisory history and risk profile of the relevant entity or group. Based on this request, the ECB must then assess the necessity of exercising direct supervision in respect of that entity or group and in case of disagreement, consult with the NCA prior to its final assessment. If it concludes that assuming direct supervision is necessary, it must as well adopt a Decision in accordance with Arts. 43-49 SSM‑FR.189
186 See also Art. 62 SSM‑FR discussed supra, → para. 48. According to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 153 para. 671, Art. 6 (5)(b) SSMR should not be interpreted narrowly as covering only cases of “home bias”, namely those where an NCA does not consistently apply the appropriate supervisory standards. His argument for a broader reading is based, inter alia, on the considerations set out in (the above-mentioned) Recital (16) SSMR. On the other hand (but not in contradiction to the above position), Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), at p. 1115 para. 37.28 claims that the ECB should apply this power restrictively, since an extensive use could eventually undermine NCAs’ competencies, which would be incompatible with the wording of Art. 127(6) TFEU, i.e., the legal basis of the SSMR. See also para. 61 (second sentence) of the General Court’s above-mentioned judgement in the Landeskreditbank case, which notes: “(…) the terms employed in that provision that the exercise of that prerogative calls for broad discretion conferred on the ECB, stating as it does that ‘when necessary to ensure consistent application of high supervisory standards, the ECB may at any time, on its own initiative after consulting with national competent authorities or upon request by a national competent authority, decide to exercise directly itself all the relevant powers for one or more credit institutions referred to in paragraph 4 …’”. 187 See ECB, Guide to banking supervision (2014), para. 99, last sent. 188 Art. 69(1)-(3) SSM‑FR; on Arts. 43-49 SSM‑FR, see supra, → paras. 26-33. 189 Art. 68(1)-(5) SSM‑FR.
130
Christos V. Gortsos
Art. 6 SSMR
Cooperation within the SSM
c) Supervised entities classified as significant on the basis of Art. 6(5)(b) SSMR Art. 6(5)(b) SSMR has already been activated several times. Based on the list of super- 97 vised entities set up by the ECB, by 1 May 2021, the following supervised entities (credit institutions and holding companies) and groups were classified as significant on the basis of this SSMR Article: AXA Bank Belgium SA; AXA Bank Belgium NV (Belgium); Goldman Sachs Bank Europe SE (Germany); Morgan Stanley Europe Holding SE (Germany); and Banca Carige S.p.A. – Cassa di Risparmio di Genova e Imperia (Italy); by 1 November 2021, the first four changed grounds for significance as a result of the annual significance review of 2021.190
II. Responsibilities of NCAs 1. The provisions of Art. 6(6) SSMR With regard to less significant supervised entities, taking into account the provisions of 98 and subject to the procedures laid down in the SSM‑FR (infra, → paras. 101-106) and without prejudice to the ECB responsibilities, NCAs must carry out and are responsible for the tasks referred to in Art. 4(1) SSMR, with the exception of points (a) and (c) (common procedures) and point (h) on the supplementary supervision of financial conglomerates, and adopt all relevant supervisory Decisions.191 Without prejudice to Art. 31(1) SSMR on staff exchange and if deemed appropriate, the ECB may require an NCA to involve in its supervisory team in relation to the supervision of such entities staff members from other NCAs.192 On the other hand, with regard to all supervised entities, NCAs and NDAs maintain 99 their powers, in accordance with national law, to obtain information both from such entities and from undertakings included in their consolidated financial situation and to perform on-site inspections; this is without prejudice to Arts. 10-13 SSMR on the ECB’s investigatory powers.193 Furthermore, NCAs must inform the ECB, pursuant to Arts. 96-100 SSM‑FR (infra, 100 → paras. 101-106), of the measures taken and closely coordinate those measures with the ECB and report to it, on a regular basis, on the performance of their activities in accordance with Art. 6 SSMR.194
2. The provisions of Arts. 96-100 SSM Framework Regulation on the procedures for micro-prudential supervision of less significant supervised entities (and groups) a) Notification and information requirements (i) Rapid and significant deterioration of a less significant supervised entity’s financial situation If the situation of a less significant supervised entity deteriorates “rapidly and signifi- 101 cantly”, NCAs must inform the ECB. This obligation applies especially if such deterioration could lead to a request for direct or indirect financial assistance from the ESM, without prejudice to the application of Art. 62 SSM‑FR (on the obligation of NCAs to inform See at: . Art. 6(6)(1) SSMR. 192 Art. 7 SSM‑FR. 193 Art. 6(6)(2) sent. 1 SSMR. 194 Art. 6(6)(2) sent. 2 SSMR and Art. 6(6)(3) SSMR, respectively. 190
191
Christos V. Gortsos
131
Art. 6 SSMR
Cooperation within the SSM
the ECB of a possible request for or receipt of public financial assistance by a less significant supervised entity).195 (ii) Information requirements relating to “material” supervisory procedures NCAs must provide the ECB with information relating to their “material” supervisory procedures concerning less significant supervised entities to enable it to exercise its oversight over the functioning of the SSM in accordance with Art. 6(5)(c) SSMR (supra, → para. 90); such procedures consist of the removal of management board members of such an entity and the appointment of special managers to take over, and of procedures having a significant impact on it. In this respect, the ECB defines “general criteria”, taking into account, in particular, the risk situation and the potential impact on the domestic financial system of the less significant supervisory entity concerned in order to determine the information to be notified with respect to it. This information must be provided by NCAs either ex-ante or, in duly justified cases of urgency, simultaneously to the opening of a procedure.196 103 In addition to the above information requirements, the ECB may, at any time, request from NCAs information on the performance of their tasks in respect of less significant supervised entities, while NCAs must, on their own initiative, notify it of any other supervisory procedure which either they consider material or may negatively affect the SSM’s reputation.197 Any ECB request to an NCA to further assess specific aspects of its material supervisory procedures must specify the aspects concerned; the ECB and the relevant NCA must respectively ensure that the other party has sufficient time to enable the procedure and the SSM as a whole to function efficiently.198 102
(iii) Requirements relating to “material” draft supervisory Decisions 104
For the same above-mentioned purpose as well, NCAs must send to the ECB draft supervisory Decisions concerning less significant supervised entities for which the latter considers that, on the basis of the (yet again) “general criteria” defined by it regarding the risk situation of such entities and the potential impact on the domestic financial system, the information must be notified to it.199 This obligation applies to such draft Decisions, called “material” draft ECB supervisory Decisions, if the following criteria are met: First, they relate to the removal of members of the management boards of less significant supervised entities and the appointment of special managers or have a significant impact on it; in this case, they must be sent to the ECB prior to being addressed to the entity concerned; and Second, the ECB’s views are sought on a draft supervisory Decision or this may negatively affect the reputation of the SSM.200
Art. 96 SSM‑FR; on Article 62 SSM‑FR, see supra, → para. 48. Art. 97(1)-(2) SSM‑FR. 197 Art. 97(3)-(4) SSM‑FR. 198 Art. 97(5) SSM‑FR. 199 Art. 98(1) SSM‑FR. 200 Art. 98(2)-(3) SSM‑FR. In principle, such material draft Decisions must be sent to the ECB at least 10 days in advance of the planned date of their adoption; in cases of urgency, a reasonable period for sending such a draft Decision to the ECB must be defined by the relevant NCA. The ECB must express its views on the draft Decision within a reasonable time before their planned adoption (Art. 98(4) SSM‑FR). 195
196
132
Christos V. Gortsos
Close cooperation with the competent authorities of participating Member States Art. 7 SSMR
b) Ex-post reporting to the ECB In order to enable it to exercise oversight over the functioning of the SSM pursuant to 105 Art. 6(5)(c) SSMR as well, the ECB may require NCAs to report, on a regular basis, on the measures they have taken and on the performance of their tasks in accordance with Art. 6(6) SSMR; it must also inform them annually of the categories of less significant supervised entities and the nature of the information required. These requirements are as well without prejudice to the ECB’s right to make use of the investigatory powers referred to in Arts. 10-13 SSMR in respect of less significant supervised entities. 201 In addition, NCAs must submit to the ECB an Annual Report on less significant 106 supervised entities and groups or categories of such supervised entities in accordance with the ECB’s requirements.202
Art. 7 SSMR Close cooperation with the competent authorities of participating Member States whose currency is not the euro 1. Within the limits set out in this Article, the ECB shall carry out the tasks in the areas referred to in Articles 4(1), 4(2) and 5 in relation to credit institutions established in a Member State whose currency is not the euro, where close cooperation has been established between the ECB and the national competent authority of such Member State in accordance with this Article. To that end, the ECB may address instructions to the national competent authority or to the national designated authority of the participating Member State whose currency is not the euro. 2. Close cooperation between the ECB and the national competent authority of a participating Member State whose currency is not the euro shall be established, by a decision adopted by the ECB, where the following conditions are met: (a) the Member State concerned notifies the other Member States, the Commission, the ECB and EBA the request to enter into a close cooperation with the ECB in relation to the exercise of the tasks referred to in Articles 4 and 5 with regard to all credit institutions established in the Member State concerned, in accordance with Article 6; (b) in the notification, the Member State concerned undertakes: — to ensure that its national competent authority or national designated authority will abide by any guidelines or requests issued by the ECB, and — to provide all information on the credit institutions established in that Member State that the ECB may require for the purpose of carrying out a comprehensive assessment of those credit institutions; (c) the Member State concerned has adopted relevant national legislation to ensure that its national competent authority will be obliged to adopt any measure in relation to credit institutions requested by the ECB, in accordance with paragraph 4. 3. The decision referred to in paragraph 2 shall be published in the Official Journal of the European Union. The decision shall apply 14 days after its publication.
201 202
Art. 99(1)-(2) SSM‑FR. Art. 100 SSM‑FR.
Christoph Ohler
133
Art. 7 SSMR Close cooperation with the competent authorities of participating Member States 4. Where the ECB considers that a measure relating to the tasks referred to in paragraph 1 should be adopted by the national competent authority of a concerned Member State in relation to a credit institution, financial holding company or mixed-financial holding company, it shall address instructions to that authority, specifying a relevant timeframe. That timeframe shall be no less than 48 hours unless earlier adoption is indispensable to prevent irreparable damage. The national competent authority of the concerned Member State shall take all the necessary measures in accordance with the obligation referred to in point (c) of paragraph 2. 5. The ECB may decide to issue a warning to the Member State concerned that the close cooperation will be suspended or terminated if no decisive corrective action is undertaken in the following cases: (a) where, in the opinion of the ECB, the conditions set out in points (a) to (c) of paragraph 2 are no longer met by the Member State concerned; or (b) where, in the opinion of the ECB, the national competent authority of the Member State concerned does not act in accordance with the obligation referred to in point (c) of paragraph 2. If no such action has been undertaken within 15 days of notification of such a warning, the ECB may suspend or terminate the close cooperation with that Member State. The decision to suspend or terminate the close cooperation shall be notified to the Member State concerned and shall be published in the Official Journal of the European Union. The decision shall indicate the date from which it applies, taking due consideration of supervisory effectiveness and legitimate interests of credit institutions. 6. The Member State may request the ECB to terminate the close cooperation at any time after a lapse of three years from the date of the publication in the Official Journal of the European Union of the decision adopted by the ECB for the establishment of the close cooperation. The request shall explain the reasons for the termination, including, when relevant, potential significant adverse consequences as regards the fiscal responsibilities of the Member State. In this case, the ECB shall immediately proceed to adopt a decision terminating the close cooperation and indicate the date from which it applies within a maximum period of three months, taking due consideration of supervisory effectiveness and legitimate interests of credit institutions. The decision shall be published in the Official Journal of the European Union. 7. If a participating Member State whose currency is not the euro notifies the ECB in accordance with Article 26(8) of its reasoned disagreement with an objection of the Governing Council to a draft decision of the Supervisory Board, the Governing Council shall, within a period of 30 days, give its opinion on the reasoned disagreement expressed by the Member State and, stating its reasons to do so, confirm or withdraw its objection. Where the Governing Council confirms its objection, the participating Member State whose currency is not the euro may notify the ECB that it will not be bound by the potential decision related to a possible amended draft decision by the Supervisory Board. The ECB shall then consider the possible suspension or termination of the close cooperation with that Member State, taking due consideration of supervisory effectiveness, and take a decision in that respect.
134
Christoph Ohler
Close cooperation with the competent authorities of participating Member States Art. 7 SSMR
The ECB shall take into account, in particular, the following considerations: (a) whether the absence of such suspension or termination could jeopardize the integrity of the SSM or have significant adverse consequences as regards the fiscal responsibilities of the Member States; (b) whether such suspension or termination could have significant adverse consequences as regards the fiscal responsibilities in the Member State which has notified a reasoned disagreement in accordance with Article 26(8); (c) whether or not it is satisfied that the national competent authority concerned has adopted measures which, in the ECB’s opinion: — ensure that credit institutions in the Member State which notified its reasoned disagreement pursuant to the previous subparagraph are not subject to a more favourable treatment than credit institutions in the other participating Member States, and — are equally effective as the decision of the Governing Council under the second subparagraph of this paragraph in achieving the objectives referred to in Article 1 and in ensuring compliance with relevant Union law. The ECB shall include these considerations in its decision and communicate them to the Member State in question. 8. If a participating Member State whose currency is not the euro disagrees with a draft decision of the Supervisory Board, it shall inform the Governing Council of its reasoned disagreement within five working days of receiving the draft decision. The Governing Council shall then decide about the matter within five working days, taking fully into account those reasons, and explain in writing its decision to the Member State concerned. The Member State concerned may request the ECB to terminate the close cooperation with immediate effect and will not be bound by the ensuing decision. 9. A Member State which has terminated the close cooperation with the ECB may not enter into a new close cooperation before a lapse of three years from the date of the publication in the Official Journal of the European Union of the ECB decision terminating the close cooperation. Bibliography Jens-Hinrich Binder, ‘Participation of non-euro area Member States in the SRM: centralised decision-making, decentralised implementation – shared responsibilities’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference 2019, pp. 314–330; Klaus Lackhoff, Single Supervisory Mechanism (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Rosa Lastra, ‘Close Cooperation in the SSM’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference 2019, pp. 283-295; Niamh Moloney, ‘Close Cooperation: the SSM Institutional Framework and lessons from the ESAs’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference 2019, pp. 296–313. A. Rationale of close cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Legal basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Notification by the Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Decision by the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Complementary national legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Legal effects of a close cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 6 8 9 11
C. Fundamentals of close cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Application of the SSMR mutatis mutandis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Powers of the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Indirect supervision of all credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 13 14 16
D. Suspension and termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
Christoph Ohler
135
Art. 7 SSMR Close cooperation with the competent authorities of participating Member States
A. Rationale of close cooperation The participating Member States, as defined in Art. 2(1) SSMR, either belong to the euro area or have established a close cooperation with the ECB in accordance with Art. 7 SSMR. This distinction reflects a fundamental principle of the architecture of Economic and Monetary Union (EMU). Member States which have introduced the euro currency in accordance with Art. 140 TFEU are fully bound by the provisions of the Treaties in respect of EMU and by all measures adopted by the ECB thereunder, while the socalled Member States with a derogation under Art. 139(2) TFEU (“Pre-Ins” and “Outs”) are excluded from the rights and obligations within the framework of the Eurosystem.1 As a consequence, Art. 139(2)(1)(e) and (2) TFEU and Arts. 34 and 42 of the ESCB Statute confine the territorial scope of all legal acts adopted by the ECB under Art. 132 TFEU to the Member States of the euro area.2 This applies also to measures taken by the ECB within the SSM as the SSMR cannot supersede primary law. 2 Contrary to the limited regional scope of EMU and SSM, the internal market covers all Member States, cf. Art. 26 TFEU. Credit institutions established in any of the Member States enjoy the freedom of establishment and the freedom to provide services in accordance with secondary law.3 As a result, there is a mismatch between the territorial scope of the internal market and the one of the SSM that could threaten the unity of the internal market and increase the risk of loopholes in the supervision of cross-border operating banks. The EU legislator aimed at overcoming this latent conflict by introducing the concept of close cooperation. The legal basis of Art. 7 SSMR is complemented by a decision of the ECB of 31 January 2014.4 The SSM‑FR contains additional provisions in its Arts. 106 to 118. Art. 4 SRMR extends the legal effects of a close cooperation also to the SRM. 3 Participation in the SSM is voluntary for Member States outside the euro area. So far, only Bulgaria (2018) and Croatia (2019) requested the establishment of a close cooperation with the ECB. In 2020, this mechanism became applicable to both countries.5 The reasons why this model has been hesitantly accepted by other “Pre-Ins” are to be found in the design of EMU and of the SSMR. In particular, non-euro area Member States are represented in the Supervisory Board, but not in the Governing Council,6 the main decision-making body of the ECB and, accordingly, also under Art. 26(8) SSMR. Furthermore, the mechanics of close cooperation are complex and burdensome for both sides. Contrary to the general objectives and structure of the SSMR, a close cooperation results in a system of complete indirect supervision,7 while the direct responsibility for all credit institutions, significant and less significant ones, remains with the NCA of the Member State concerned. The benefits, however, of this system are the guarantee of an independent supervision with a priority on financial stability, adequate treatment of home-host 1
Cf. Art. 139(3) TFEU. Lackhoff, Single Supervisory Mechanism (2017), at p. 228; Moloney, ‘Close Cooperation: the SSM Institutional Framework and lessons from the ESAs’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 297. 3 Cf. Arts. 35 to 46 of 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 (CRD IV), OJ L176, 27.6.2013, p. 338. 4 Decision of the ECB of 31 January 2014 (ECB/2014/5). 5 Decision (EU) 2020/1015 of the European Central Bank of 24 June 2020, OJ L 224 I, p. 1; Decision (EU) 2020/1016 of the European Central Bank of 24 June 2020, OJ L 224 I, p. 4. 6 Art. 283(1) TFEU; Art. 10.1 ESCB Statute. 7 Lackhoff, Single Supervisory Mechanism (2017), at p. 227. 1
2
136
Christoph Ohler
Close cooperation with the competent authorities of participating Member States Art. 7 SSMR
issues, credibility and reputation, and participation in the SRM.8 A close cooperation can be also seen as a preparatory step on the way to full euro-area membership. When a non-participating Member State does not wish to establish a close cooper- 4 ation, the ECB and the competent authorities of this Member State shall conclude a memorandum of understanding.9 This legally non-binding document describes in general terms how both sides will cooperate with one another in the performance of their supervisory tasks. In addition, the ECB cooperates with supervisory authorities of these Member States within colleges of supervisors, as provided by secondary law.
B. Legal basis A close cooperation builds on two legal elements: a decision adopted by the ECB in 5 accordance with Art. 7(2) SSMR and national legislation that implements the requirements of Art. 7(2)(c) SSMR. However, as neither primary law nor the SSMR itself imposes an obligation on these Member States to participate in the SSM, Member States with a derogation are free to decide whether they wish to establish a close cooperation with the ECB. Therefore, a close cooperation can only be established on their initiative.
I. Notification by the Member State For this purpose, the Member State notifies the other Member States, the Commis- 6 sion, the ECB and the EBA request to enter into a close cooperation with the ECB.10 In this request, the Member State undertakes to ensure that its NCA will abide by any guidelines or requests issued by the ECB and provide all information required by the ECB.11 With a view to Art. 6(4) SSMR, the Member State must also commit itself to provide all information on the credit institutions established in its territory that the ECB may require for the purpose of carrying out a comprehensive assessment of those credit institutions.12 This assessment is compulsory and comprises an asset quality review and a stress test of all significant and potentially significant banks, prior to the ECB’s decision to establish a close cooperation. In addition, decision ECB/2014/5 requires that the Member State undertakes in its re- 7 quest that it will adopt the relevant national legislation necessary for the performance of its obligations under Art. 7(2)(c) SSMR. The requesting Member State must also attach a copy of the draft legislation and an English translation thereof, as well as a request for an ECB opinion on such draft legislation.13 The ECB then assesses the national legislative basis whether it properly reflects and safeguards the mechanics of close cooperation within the SSM.
8 Lastra, ‘Close Cooperation in the SSM’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 286. 9 Art. 3(6) SSMR. 10 Art. 7(2) (a) SSMR. 11 Art. 7(2)(b), first indent SSMR. 12 Art. 7(2)(b), second indent SSMR and Art. 2(1) of Decision of the ECB of 31 January 2014 (ECB/ 2014/5). 13 Art. 2(2) of Decision of the ECB of 31 January 2014 (ECB/2014/5).
Christoph Ohler
137
Art. 7 SSMR Close cooperation with the competent authorities of participating Member States
II. Decision by the ECB 8
The close cooperation will be established by a decision in the meaning of Art. 132(1), second indent TFEU that the ECB adopts in accordance with Art. 7(2) SSMR. As it is the case for all supervisory measures of the ECB, the internal procedure that results in the adoption of that decision is governed by Art. 26 SSMR. As regards the substantive requirements, the ECB may only adopt the decision once it has been assured that the conditions laid down in Art. 7(2)(a) to (c) SSMR are met.14 The decision must be published in the Official Journal of the EU and applies 14 days after its publication.15
III. Complementary national legislation Prior to the adoption of the ECB’s decision to establish a close cooperation, the requesting Member State must have adopted relevant national legislation to ensure that its NCA will be obliged to adopt any measure in relation to credit institutions requested by the ECB, cf. Art. 7(2)(c) SSMR. Upon the entry into force of the measures, the Member State must provide a confirmation that the legal effects envisaged by Art. 7(2)(c) SSMR are actually ensured. 10 The national legislation provided by Art. 7(2)(c) SSMR forms the legal basis within the legal order of the Member State concerned that credit institutions can be supervised indirectly by the ECB. For this purpose, the legislator must ensure that its NCA will comply with all instructions issued by the ECB under Art. 7(4) SSMR. This also means that the Member State must abolish all national provisions which could hinder the NCA from implementing supervisory requirements which the ECB may impose in accordance with the SSMR. Insofar, the national legislation must mirror the legal system of the SSMR, including the powers which the ECB possesses thereunder. 9
IV. Legal effects of a close cooperation When analysing the legal effects of Art. 7 SSMR, two things must be discerned. Firstly, the SSMR as such is legally binding for all Member States, also for all Member States with a derogation, as Art. 139(2)(c) TFEU does not mention Art. 127(6) TFEU which forms the legal basis of the SSMR. Secondly, due to Art. 139(2)(e) TFEU, legal measures adopted by the ECB are not binding for a Member State with a derogation and do not have a legal effect within its legal order. Accordingly, supervisory decisions or other measures addressed towards credit institutions in that Member State would not have any binding effect, what the SSMR reflects in its Art. 9(3). 12 Against this legal backdrop, the establishment of a close cooperation does not mean that a Member State outside the euro area “accedes” in some way to the SSM. 16 The decision remains a unilateral act which is binding for the ECB itself and all Member States of the euro area, but not for the Member State concerned. Accordingly, it cannot be interpreted as a contractual relationship between both sides. Its legal content is limited to saying that from the date of its entering into force Art. 7 SSMR applies to that Member State. The latter provision is binding for the Member State and requires that it adopts all 11
14 Cf. Lackhoff, Single Supervisory Mechanism (2017), at p. 228 who acknowledges that the ECB enjoys discretion in this respect. 15 Art. 7(3) SSMR. 16 Lackhoff, Single Supervisory Mechanism (2017), at p. 227.
138
Christoph Ohler
Close cooperation with the competent authorities of participating Member States Art. 7 SSMR
legislative and administrative measures within its own legal order that are necessary in order to implement fully and immediately the supervisory instructions issued by the ECB. Only these national measures have a direct legal effect on the credit institutions which the ECB supervises under the system of close cooperation.17 This system applies regardless of whether the ECB exercises its supervisory competences towards significant banks or less significant banks in that Member State.
C. Fundamentals of close cooperation I. Application of the SSMR mutatis mutandis A close cooperation extends to all tasks conferred on the ECB in accordance with 13 Arts. 4(1), 4(2) and 5 SSMR. As far as the ECB’s competences ratione personae, i.e., with respect to the entities supervised, are concerned, the ECB is in a position comparable to the one it does normally hold under the SSMR.18 The SSM‑FR translates this concept into an application of the SSMR mutatis mutandis.19
II. Powers of the ECB As a result of Art. 139(2)(e) TFEU and Art. 9(3) SSMR, the ECB may not exercise its 14 supervisory and investigatory powers under Arts.10 to 18 SSMR directly in that Member State20 but must rely exclusively on its right to issue instructions to the NCA in accordance with Art. 7(4) SSMR.21 In addition, it may also make requests and issue guidelines to the NCA.22 The ECB adopts these measures in accordance with Art. 26 SSMR. They are, however, not binding as such,23 but only according to the national laws that were adopted by the Member States in order to safeguard the functioning of the close cooperation within the domestic legal order. In the instruction, request or guideline, the ECB must specify a relevant time limit 15 for the adoption of the corresponding measure by the NCA, which shall be no less than 48 hours, unless earlier adoption is necessary to prevent irreparable damage.24 When determining the time limit, the ECB shall take into account the administrative and procedural law with which the NCA has to comply.25 The NCA must take all necessary measures to comply with the ECB’s instructions, requests or guidelines and it must inform the ECB without undue delay of the measures it has taken.26 This system requires a close and effective cooperation between the ECB and NCA.
See also Lackhoff, Single Supervisory Mechanism (2017), at p. 227. Cf. Art. 107(2) SSM‑FR; see also Lackhoff, Single Supervisory Mechanism (2017), at p. 228. 19 Cf. Arts. 109, 110(1), 111(1), 112(1), 113(1), 114(1) and 115(1) SSM‑FR; cf. Lackhoff, Single Supervisory Mechanism (2017), at p. 229. 20 Cf. Arts. 107(2) and 114 of the SSM‑FR. 21 Art. 107(3) SSM‑FR. 22 Art. 108(1) SSM‑FR. 23 Moloney, ‘Close Cooperation: the SSM Institutional Framework and lessons from the ESAs’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 297. 24 Art. 7(4) SSM Regulation. 25 Art. 108(4) SSM‑FR. 26 Art. 108(5) SSM‑FR. 17
18
Christoph Ohler
139
Art. 7 SSMR Close cooperation with the competent authorities of participating Member States
III. Indirect supervision of all credit institutions As regards to significant credit institutions that are established in the Member State concerned, the ECB has the exclusive competence for their supervision. In particular, the ECB may also establish Joint Supervisory Teams that perform the task of day-to-day supervision.27 However, as the ECB is unable to exercise a direct supervision, it does not address decisions of these credit institutions, as it would normally be the case within the framework of Art. 6(4) SSMR. 28 Instead, it must issue a specific or general instruction to the NCA which, in a second step, will then adopt the corresponding supervisory measure.29 The SSM‑FR does not provide an obligation of the ECB to hear the supervised entity prior to issuing an instruction.30 In order to protect the rights of defence of the credit institution, the NCA must carry through an administrative procedure including a hearing that complies with general legal principles as reflected in Art. 41 of the Charter of Fundamental Rights. As a consequence of the ECB’s exclusive competence, the NCA does not have the power to act on its own initiative towards a significant credit institution31 but must, in any event, rely on instructions issued prior thereto by the ECB.32 Whenever the NCA wishes to become active, it must request an instruction. 17 With regard to less significant credit institutions, the SSM‑FR provides that the ECB may issue only general instructions and guidelines and make requests to the NCA,33 while the responsibility for the direct supervision remains with the NCA. Also the investigatory powers, of which the ECB could normally make use in accordance with Arts. 6(5)(d) and 10 to 13 SSMR, apply only mutatis mutandis. Insofar, the ECB may instruct the NCA in accordance with Art. 7(4) SSMR to provide the necessary information. 18 As far as the common procedures under the SSMR (cf. Art. 14: Authorisation, and Art. 15: Assessment of acquisitions of qualifying holdings) are concerned, all decisions, which regularly the ECB would adopt, must be adopted by the NCA, based on instructions issued by the ECB. 16
D. Suspension and termination Both the ECB and the Member State may initiate the termination of the close cooperation in accordance with the conditions provided by Art. 7(5) to (8) SSMR. The formal decision, however, will be exclusively taken by the ECB. Insofar, the following situations must be discerned: 20 The ECB may suspend or terminate the close cooperation in the cases where the conditions set out in subparas. (a) to (c) of Art. 7(2) SSMR are no longer met by the Member State concerned or where its NCA does not comply with an instruction issued by the ECB. Prior to the suspension or termination, the ECB must issue a warning, where upon the Member State concerned has a time period of 15 days to comply with its obligations under the SSMR. The decision of the ECB to suspend or terminate the close cooperation must be notified to the Member State concerned and must be published in the Official Journal of the EU. 19
Art. 115(3) SSM‑FR. Cf. Art. 107(2) SSM‑FR. 29 Cf. Arts. 107(3) and 116 SSM‑FR. 30 For a different view see Lackhoff, Single Supervisory Mechanism (2017), at p. 230. 31 Lackhoff, Single Supervisory Mechanism (2017), at p. 229. 32 Art. 116(1) SSM‑FR. 33 Cf. Arts. 107(3) and 117 SSM‑FR. 27 28
140
Christoph Ohler
Art. 8 SSMR
International relations
As long as the exemption under Art. 139(2) TFEU applies to the Member State, it may request the ECB to terminate the close cooperation at any time after a lapse of three years from the date of the publication of the decision to establish the close cooperation, cf. Art. 7(6) SSMR. In its request, the Member State must explain the reasons for the termination, including, when relevant, potential significant adverse consequences as regards its fiscal responsibilities. In this case, the ECB immediately proceeds to adopt a decision terminating the close cooperation and indicates the date from which it applies within a maximum period of three months, taking due consideration of supervisory effectiveness and legitimate interests of credit institutions. Further reasons to terminate a close cooperation may result from the fact that the Member State is only represented on the Supervisory Board but not in the Governing Council, the ultimate decision-making body of the SSM. Insofar, the right to terminate is a safeguard in a situation where the standpoints of the Member State and the Governing Council cannot be reconciled.34 Depending on the specific circumstances, the SSMR attributes the right to initiate the termination either to the ECB or to the Member State. In any event, the right to adopt the formal decision remains vested in the ECB. Under Art. 7(7) SSMR, the Member State may notify its reasoned disagreement with an objection of the Governing Council to a draft supervisory decision of the Supervisory Board in accordance with Art. 26(8) SSMR. Where the Governing Council confirms its objection, the Member State may notify the ECB that it will not be bound by the potential decision related to a possible amended draft decision by the Supervisory Board. The ECB will then consider whether to suspend or terminate the close cooperation with that Member State, taking due consideration of all effects of such suspension or termination, in particular on all aspects mentioned in subparas. (a) to (c), and take a decision in that respect. Under Art. 7(8) SSMR, when the Member State disagrees with a draft decision of the Supervisory Board, it informs the Governing Council of its reasoned disagreement within five working days of receiving the draft decision. The Governing Council will then decide about the matter within five working days, taking fully into account those reasons, and explain in writing its decision to the Member State concerned. The Member State concerned may request the ECB to terminate the close cooperation with immediate effect and will not be bound by the ensuing decision. On the date of the entry into force of the ECB’s decision to terminate the close cooperation, its tasks, competences and powers vis-à-vis the Member State and the credit institutions established in its territory will end.
Art. 8 SSMR International relations Without prejudice to the respective competences of the Member States and institutions and bodies of the Union, other than the ECB, including EBA, in relation to the tasks conferred on the ECB by this Regulation, the ECB may develop contacts and enter into administrative arrangements with supervisory authorities, international organisations and the administrations of third countries, subject to appropriate coordination with EBA. Those arrangements shall not create legal obligations in respect of the Union and its Member States.
34
Cf. Recital 43 SSMR.
Christoph Ohler
141
21
22
23
24
25
Art. 8 SSMR
International relations
Bibliography Anthony Aust, Modern Treaty Law and Practice (3rd edn, Cambridge University Press, Cambridge 2013); Chris Brummer, Soft Law and the Global Financial System (Cambridge University Press, Cambridge 2012); Christian Calliess and Matthias Ruffert (eds), EUV/AEUV (5th edn, C.H. Beck, Munich 2016); Jörn Axel Kämmerer, ‘Bahnfrei der Bankenunion? Die neuen Aufsichtsbefugnisse der EZB im Lichte der EU-Kompetenzordnung’, NVwZ (2013), 830; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2015); Helmut Siekmann (ed), EWU, Kommentar zur Europäischen Währungsunion (Mohr Siebeck, Tübingen 2013); René Smits, The European Central Bank (Kluwer Law International, The Hague 1997); Franziska Strauß, Soft Law als Steuerungsinstrument der Bankenaufsicht (Nomos, Baden-Baden 2016); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht, Band 3 (7th edn, Nomos, Baden-Baden 2015); Chiara Zilioli and Martin Selmayr, The Law of the European Central Bank (Hart Publishing, Oxford 2001). A. External relations of the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. External competences in the area of monetary policy . . . . . . . . . . . . . . . . . . . . . . . . 1. Treaty making power of the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Treaty-making power of the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Shared competences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. External competences in matters of banking supervision . . . . . . . . . . . . . . . . . . . .
1 1 3 3 7 8 10
B. External competences under Art. 8 SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
A. External relations of the euro area I. Overview The external relations of the euro area are subject to a complex system of explicit and implicit competences. This is the result of the EMU’s architecture, where competences for economic and financial policies are shared, to varying degrees, between the EU and its Member States.1 While, in general, monetary policy forms an exclusive competence of the EU under Art. 3(1)(c) TFEU, the competences in relation to issues of economic policy are shared between the EU and the Member States. In addition, the Treaties distinguish between the specific competences of the EU to conclude international agreements (treaty making power) and the general competence of international cooperation with other countries and international institutions. 2 In the field of EMU, the Member States concerned are, in general, only those that have introduced the euro currency. Furthermore, the practical operation of international relations is complicated by the fact that not all euro area Member States are members of all relevant international institutions and fora. While all EU Member States are members of the IMF, only a sub-set of them is represented in the OECD, G7, G20, the Financial Stability Board2 or the various international standard setting bodies, in particular the Basel Committee on Banking Supervision. 1
II. External competences in the area of monetary policy 1. Treaty making power of the EU 3
As regards the EU’s competences of international cooperation in matters of monetary policy, the principle of conferral according to Art. 5(1) and (2) TEU applies. The most 1 Cf. ECB, Monthly Bulletin May 2011, at p. 90; see also Zilioli and Selmayr, The Law of the European Central Bank (2001), at pp. 183 et seq. 2 ECB, Monthly Bulletin May 2011, at p. 91.
142
Christoph Ohler
Art. 8 SSMR
International relations
important provisions in this respect are Arts. 138 and 219 TFEU which deviate in parts, as far as the allocation of powers between the Union organs is concerned, from the general rules under Art. 17(1)(6) TEU and Art. 218 TFEU.3 Art. 138(1) TFEU provides that “in order to secure the euro’s place in the internation- 4 al monetary system, the Council […] shall adopt a decision establishing common positions on matters of particular interest for economic and monetary union within the competent international financial institutions and conferences. The Council shall act after consulting the European Central Bank.” Art. 138(2) TFEU adds that “the Council […] may adopt appropriate measures to ensure unified representation within the international financial institutions and conferences. The Council shall act after consulting the European Central Bank.” In addition, the EU has the competence to enter into agreements for the establish- 5 ment of international exchange rate systems. Art. 219(1) TFEU attributes the power to the Council to conclude the respective agreements for the euro in relation to the currencies of third States. In the absence of such agreements, the Council may formulate general orientations for exchange-rate policy in relation to these currencies. Parties to the agreements mentioned before will be the relevant third States and the 6 EU, as only institutions with a legal personality, i.e., subjects of international law, may establish rights and obligations under public international law.4
2. Treaty-making power of the ECB The Treaties attribute international legal personality not only to the EU, but also to 7 the ECB,5 so that it is able to conclude international agreements. 6 In contrast thereto, the Eurosystem, the ESCB, and also the SSM lack legal personality as neither the Treaties nor a secondary law attribute this legal quality to them.7 The treaty making power of the ECB is rather limited, however. Art. 23, third indent of the ESCB Statute provides that the ECB may “conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations.” The right “to conduct foreign-exchange operations consistent with the provisions of Art. 219” and “to hold and manage the official foreign reserves of the Member States” is also confirmed by Art. 127(2), second and third indents TFEU. In addition, the ECB may rely on implied powers, e.g., in relation to the Exchange Rate Mechanism II.8
3. Shared competences As has been said before, however, the EU shares its competences with the Member 8 States in the external sphere with regard to the various subject matters of EMU. Art. 219(4) TFEU provides that “without prejudice to Union competence and Union agreements as regards economic and monetary union, Member States may negotiate in 3 On the constitutional character of Art. 218 TFEU see Case C-425/13, Comission v. Council, ECLI:EU: C:2015:483, para. 62. 4 Cf. Case C-327/91, France v Commission, ECLI:EU:C:1994:305, para. 24, with respect to states see Art. 6 of the Vienna Convention on the Law of Treaties; Aust, Modern Treaty Law and Practice (3 rd edn, 2013), at p. 55. 5 Art. 282(3)(1) TFEU. 6 For an extensive analysis see Zilioli and Selmayr, The Law of the European Central Bank (2001), at pp. 179 et seq.; see also Häde, in: Calliess and Ruffert (eds), EUV/AEUV (5th edn, 2016), AEUV Art. 282, para. 34; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), at p. 36. 7 With respect to the ESCB see Häde, in: Calliess and Ruffert (eds), EUV/AEUV (5 th edn, 2016), AEUV Art. 282, para. 2. 8 Cf. Zilioli and Selmayr, The Law of the European Central Bank (2001), at pp. 206 et seq.
Christoph Ohler
143
Art. 8 SSMR
International relations
international bodies and conclude international agreements.” In addition, Art. 23 of the ESCB Statute grants treaty making powers also to national central banks. 9 The general right to cooperate with third countries and international organisations, other than in relation to the negotiation and conclusion of international agreements, also remains a competence shared between the EU and the participating Member States. This is a consequence of the general rule of Art. 220 TFEU that permits the EU to establish “all appropriate forms of cooperation” with international organisations. With respect to the specific tasks of the Eurosystem, this principle is reiterated by Art. 6 of the ESCB Statute.9 Art. 6.1 provides that “in the field of international cooperation involving the tasks entrusted to the ESCB, the ECB shall decide how the ESCB shall be represented.” Art. 6.2 adds that “the ECB and, subject to its approval, the national central banks may participate in international monetary institutions.”
III. External competences in matters of banking supervision In the Treaties, no specific provisions exist, as far as the external aspects of the EU’s competence for the supervision of credit institutions in accordance with Art. 127(6) TFEU are concerned. This subject matter does not constitute an exclusive competence that falls within the scope of Art. 3(1)(c) TFEU as this provision refers only to “monetary policy”10 but not to supervisory issues. Rather, Art. 127(6) TFEU must be treated as a competence that is shared between the EU and the Member States.11 This also corresponds to Art. 114 TFEU which forms a shared competence and constitutes the legal basis for legislative measures in the area of banking supervision. 11 Hence, the external competences of the EU in this area can be derived from Art. 216(1) TFEU. This provision refers to the general treaty-making power of the EU which can be activated in the cases provided therein, in particular, when the conclusion of an international agreement is provided for in a legislative act of the Union. In the CRD IV, the EU legislator made express use of this empowerment, as far as the treatment of branches of credit institutions having its head office in a third country12 and matters of supervision on a consolidated basis13 are concerned. 12 In addition, the EU also has a shared competence which is conferred by Art. 216(1) TFEU in respect of the conclusion of an agreement which is “necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties”.14 13 As regards the general competence of the EU to cooperate with third countries and international organisations in the area of banking supervision, other than in relation to the conclusion of an international agreement, Art. 220(1)(subpara. 2) TFEU is applicable. This provision permits the Union to “maintain such relations as are appropriate with other international organisations.” However, it is not the ECB that may implement that Article but the High Representative of the Union, cf. Art. 220(2) TFEU. In contrast thereto, the scope of Art. 6.2 of the ESCB Statute is narrower as it refers only to the ECB’s participation in “international monetary institutions”. This competence does not extend 10
9 Cf. Herrmann, in: Siekmann (ed), EWU, Kommentar zur Europäischen Währungsunion (2013), ESCB Statute Art. 6, para. 6. 10 On this term see Case C-370/12, Pringle, ECLI:EU:C:2012:756, para. 53; Case C-62/14, Gauweiler, ECLI:EU:C:2015:400, para. 42. 11 Cf. Kämmerer, NVwZ 2013, 830, at p. 833. 12 Cf. Art. 47(3) CRD IV. 13 Cf. Art. 48(1) CRD IV. 14 See in this respect Opinion 2/15, ECLI:EU:C:2017:376, para. 242.
144
Christoph Ohler
Art. 8 SSMR
International relations
to issues of prudential regulation and supervision.15 However, Art. 6 of the ESCB Statute does not hinder the EU legislator to confer a respective competence to the ECB by a legislative act that is based on an appropriate competence in the Treaties. Insofar, Art. 127(6) TFEU can also be used as a legal basis for the conferral of competences in the area of international supervisory cooperation. Art. 8 SSMR is a result of the EU legislator making use of this competence.
B. External competences under Art. 8 SSMR Art. 8 SSMR does not confer a treaty making power to the ECB. It refers only to issues 14 of general international cooperation with supervisory authorities, international organisations and the administrations of third countries in relation to tasks conferred on the ECB by the SSMR. The competence conferred by Art. 8 SSMR does not exclude the Member States and their supervisory authorities from participating in international institutions and fora, concluding agreements and administrative arrangements. The relevant partners with whom the ECB may cooperate are not specified by the 15 SSMR. From the point of view of EU law, it is sufficient that they perform supervisory tasks in the meaning of Arts. 4 and 5 SSMR. Whether they actually have such competences is not a matter of EU law but depends on the allocation of powers by the relevant provisions of domestic or international law under which these institutions were established. To the extent that the ECB enters into administrative arrangements with these institutions, the SSMR clearly provides that these may not create legal obligations in respect of the Union and its Member States. Insofar, the ECB may only agree on so-called Memoranda of Understanding with other supervisory authorities, which are legally not binding at all.16 It may also cooperate with the relevant standard setting bodies, in particular the Basel Committee on Banking Supervision. The international supervisory standards, which these bodies adopt, do not constitute binding obligations but are considered as recommendations. Nonetheless, the political and practical relevance of this international soft law is high.17 The competences of the EBA, to which Art. 8 SSMR refers, are laid down in Art. 33 of 16 the EBA Regulation.18 It provides, similarly to Art. 8 SSMR, that “the Authority may develop contacts and enter into administrative arrangements with supervisory authorities, international organisations and the administrations of third countries. Those arrangements shall not create legal obligations in respect of the Union and its Member States.” Therefore, it is possible that ECB and EBA act in parallel in many cases and must, accordingly, coordinate their policies. As regards international standard setting, both ECB and EBA are represented in the Basel Committee. A major difference between both authorities, however, may arise from the fact that the ECB is exclusively responsible for the direct supervision of significant credit institutions, while the main task of the EBA is to
15 For an application on the area of banking supervision, cf. Herrmann, in: Siekmann (ed), EWU, Kommentar zur Europäischen Währungsunion (2013), ESCB Statute Art. 6, para. 7; Smits, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Band 3 (7th edn, 2015), ESCB Statute Art. 6, paras. 21–23; see also Smits, The European Central Bank (1997), at pp. 426 et seq. 16 Cf. Aust, Modern Treaty Law and Practice (2013), at pp. 28 et seq. 17 For an overview see Brummer, Soft Law and the Global Financial System (2012), and Strauß, Soft Law als Steuerungsinstrument der Bankenaufsicht (2016). 18 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, OJ L331, 15.12.2010, p. 12.
Christoph Ohler
145
Art. 9 SSMR
Supervisory and investigatory powers
contribute to the Single Rulebook. Insofar, the different tasks in the internal sphere will also be reflected in the performance of external competences.
Art. 9 SSMR Supervisory and investigatory powers1 1. For the exclusive purpose of carrying out the tasks conferred on it by Articles 4(1), 4(2) and 5(2), the ECB shall be considered, as appropriate, the competent authority or the designated authority in the participating Member States as established by the relevant Union law. For the same exclusive purpose, the ECB shall have all the powers and obligations set out in this Regulation. It shall also have all the powers and obligations, which competent and designated authorities shall have under the relevant Union law, unless otherwise provided for by this Regulation. In particular, the ECB shall have the powers listed in Sections 1 and 2 of this Chapter. To the extent necessary to carry out the tasks conferred on it by this Regulation, the ECB may require, by way of instructions, those national authorities to make use of their powers, under and in accordance with the conditions set out in national law, where this Regulation does not confer such powers on the ECB. Those national authorities shall fully inform the ECB about the exercise of those powers. 2. The ECB shall exercise the powers referred to in paragraph 1 of this Article in accordance with the acts referred to in the first subparagraph of Article 4(3). In the exercise of their respective supervisory and investigatory powers, the ECB and national competent authorities shall cooperate closely. 3. By derogation from paragraph 1 of this Article, with regard to credit institutions established in participating Member States whose currency is not the euro, the ECB shall exercise its powers in accordance with Article 7. Bibliography Giovanni Bassani, ‘The Centralisation of Prudential Supervision in the Euroarea: The Emergence of a New ‘Conventional Wisdom’ and the Establishment of the SSM’ (2020) EBLR, 1001; Henning Berger, ‘Rechtsanwendung durch die EZB im Single Supervisory Mechanism – Teil I’, WM (2016), 2325; Henning Berger, ‘Rechtsanwendung durch die EZB im Single Supervisory Mechanism –Teil II’, WM (2016), 2361; Andrea Biondi and Alessandro Spano, ‘The ECB and the Application of National Law in the SSM: New yet old’, (2020) EBLR, 1023; Florin Coman-Kund and Fabian Amtenbrink, ‘On the Scope and Limits of the Application of National Law by the European Central Bank within the Single Supervisory Mechanism’, 33 B.F.L.R (2018), 133; Christos V. Gortsos, The Single Supervisory Mechanism (SSM) (Nomiki Bibliothiki, Athens 2015); Carmen Hernández Saseta, ‘The Legal Review of ECB Instructions under Article 9 SSM Regulation’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar Publishing Limited 2021), 304; Peter Jedlicka and Gerald Lederer, ‘Auf der Suche nach dem nationalen Recht innerhalb des SSM – Zur Aufteilung behördlicher Befugnisse nach dem EuGH-Urteil “VTB Bank (Austria)”’, ZFR (2021), 218; Jörn Axel Kämmerer, ‘Rechtsschutz in der Bankenunion (SSM, SRM)’, WM (2016), 1; Klaus Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Asen Lefterov, ‘The Single Rulebook: legal issues and relevance in the SSM context’, ECB Legal Working Paper Series No 15 (2015); Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck 2015); Enrico Peuker, ‘Die Anwendung nationaler Rechtsvorschriften durch Unionsorgane’, JZ (2014), 764; Miro Prek, ‘Mutual judicial deference? The delineation of (interpretative) competence of European and national courts in the judicial review of ECB acts based on national law’, in: Building bridges: central banking law in an interconnected world – ECB Legal Conference 2019, 129 (available under www.ecb.europa.eu); Antonio Luca Riso and Georgios Zagouras, ‘Single Supervisory Mechanism (SSM)’, in: Simon G. Grieser and Manfred Heemann (eds), Europäisches Bankenaufsichtsrecht (School Verlag, Frankfurt 2016), 106; 1 This contribution should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the author and do not necessarily reflect those of the ECB.
146
Georg Gruber
Art. 9 SSMR
Supervisory and investigatory powers
Gunnar Schuster, ‘The banking supervisory competences and powers of the ECB’, EuZW-Beilage (2014), 3; Andreas Witte, ‘The Application of National Banking Supervision Law by the ECB: Three Parallel Modes of Executing EU Law’, 21 MJ 1 (2014), 89; Andreas Witte, ‘The Application of National Law by the ECB, including Options and Discretions and its Impact on the Judicial Review’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar Publishing Limited 2021), 236. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Competence of the ECB to exercise powers – Art. 9(1) SSMR . . . . . . . . . . . . . . . . I. The ECB as the competent or designated authority . . . . . . . . . . . . . . . . . . . . . . . . . . II. Powers of the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Powers under the SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Powers under Union law and national law transposing Union law . . . . . . . 3. Other supervisory powers under national law . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Possibility to give instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 4 7 8 15 21 25
C. Exercise of powers by the ECB – Art. 9(2) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
D. Exercise of powers in non-euro area Member States – Art. 9(3) SSMR . . . . . . .
31
A. Introduction Art. 9 SSMR is a general provision on the ECB’s supervisory and investigatory 1 powers which are further specified in Arts. 10-18 SSMR. The provision thus serves as an introduction to Chapter III on the powers of the ECB. Art. 9 SSMR specifies in its first paragraph that the ECB shall be considered as the competent and designated authority in the participating Member States and shall have all the supervisory powers which such authorities have under Union law; the first paragraph also includes the power of the ECB to give instructions to national competent authorities (NCAs) to make use of their powers under national law. Art. 9(2) SSMR specifies how the ECB should exercise its powers. Art 9(3) SSMR concerns the exercise of powers in Member States whose currency is not the euro but have entered into a close cooperation with the ECB. Art. 9 SSMR was substantially amended during the discussions on the SSMR to clarify the ECB’s powers. The Commission’s proposal only foresaw two paragraphs which basically correspond to the current Art. 9(1)(1) SSMR.2 The changes introduced during the legislative process have, however, not necessarily contributed to a higher degree of clarity.3 The term “powers” is not explicitly defined in the SSMR. The term refers to the ECB’s 2 competence to undertake investigations and to impose legally binding supervisory measures on supervised entities.4 The exercise of such investigatory or supervisory powers which affect the fundamental rights of the entities concerned requires a specific legal basis.5 The ECB’s powers need to be distinguished from its tasks.6 The ECB’s micro-pru2 See Art. 8 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (COM(2012) 511 final) . 3 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 37 rightly points out that the first and the third sent. of Art. 9(1)(2) SSMR basically state the same, namely that the ECB may exercise the powers set out in the SSMR. 4 The term “powers” is often used in a broader sense to include the power to adopt legal acts of general application or other legal instruments or is used as an equivalent to the terms “tasks” or “responsibilities”. For the purposes of Art. 9 SSMR, the term should, however, be interpreted in a narrower sense since the scope of Chapter III, of which Art. 9 SSMR is part, is limited to supervisory measures imposed on individual supervised entities. Moreover, Art. 9 SSMR clearly distinguishes between “tasks” and “powers” which indicates that the two terms have a different meaning. 5 Witte, 21 MJ 1 (2014), 89, at pp. 94-95. 6 Schuster, EuZW-Beilage 2014, 3, at p. 6.
Georg Gruber
147
Art. 9 SSMR
Supervisory and investigatory powers
dential tasks are defined in Art. 4 SSMR and its macro-prudential tasks in Art. 5 SSMR. These provisions define the scope of the ECB’s supervisory responsibilities, i.e. the persons and areas of which the ECB is in charge. In accordance with the principle of conferral set out in Art. 5 TEU7, the ECB may only exercise supervisory powers that fall within its tasks under SSMR.8 The existence of a task as such is, however, not sufficient to impose supervisory measures on supervised entities. In addition, a specific supervisory power to impose such a measure needs to be granted to the ECB.9 Supervisory powers are granted to the ECB for the purpose of fulfilling its tasks and may only be exercised for that purpose. At the same time, they limit the tasks since the ECB may only effectively perform its tasks if appropriate powers are available.10 3 The ECB may exercise its powers in principle only vis-à-vis entities that fall under its direct supervision, i.e. credit institutions, (mixed) financial holding companies and branches that are classified as significant institutions in accordance with Art. 6(4) SSMR and Arts. 39-72 of Regulation of the ECB No 468/201411. Less significant institutions remain under the direct supervision of the NCAs that may exercise the powers they have under Union and national law.12 The ECB in its oversight function may only take measures vis-à-vis the NCAs in accordance with Art. 6 SSMR. As an exception to this distribution of powers, the ECB may make use of its investigatory powers also vis-àvis less significant institutions (Art. 6(5)(d) SSMR). Moreover, its powers to grant and withdraw authorisations and to approve acquisitions of qualifying holdings extend to all credit institutions, regardless of whether they are significant or less significant. 13
B. Competence of the ECB to exercise powers – Art. 9(1) SSMR I. The ECB as the competent or designated authority 4
Art. 9(1)(1) SSMR provides that the ECB, for the exclusive purpose of carrying out the tasks conferred on it by Arts. 4 and 5 SSMR, is the competent authority or the designated authority in the participating Member States as established by the relevant Union law. The purpose of this provision is to clarify that the ECB takes over the competences of NCAs or national designated authorities (NDAs) and may exercise the micro and macroprudential powers conferred upon them, to the extent that these powers fall within the ECB’s tasks.14
Ohler, Bankenaufsicht und Geldpolitik (2015), § 5, para. 184. Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 37. See also Recital 45 SSMR according to which the ECB should be competent to exercise supervisory powers to “the extent that those powers fall within the scope of the supervisory tasks conferred on the ECB”. 9 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 25 and 37; Schuster, EuZW-Beilage 2014, 3, at p. 8. 10 Riso and Zagouras, in Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at p. 111. 11 Regulation of the ECB of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated authorities (SSM‑FR) (ECB/2014/17), OJ L141, 14.5.2014, p. 1. 12 According to Witte, 21 MJ 1 (2014), 89, at p. 97 the ECB may also exercise its powers set out in Art. 16 SSMR vis-à-vis less significant institutions since Art. 16 SSMR would only refer to Art. 4 SSMR but not to Art. 6 SSMR. However, Art. 4 SSMR refers to Art. 6 SSMR and it was the legislator’s clear intention to entrust NCAs with the direct supervision of less significant institutions. 13 Arts. 4(1)(a) and (c), 6(6), 14, and 15 SSMR. 14 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 37. 7
8
148
Georg Gruber
Art. 9 SSMR
Supervisory and investigatory powers
Art. 9(1)(1) SSMR is more of a declaratory nature since the conferral of tasks from 5 Member States to the ECB under the SSMR automatically entails that the ECB becomes the competent or designated authority in all euro area Member States and may exercise the powers set out in relevant Union law that are related to such tasks. Other tasks not conferred on the ECB remain with NCAs and NDAs; they are competent to exercise the related powers.15 This concerns, for instance, the exercise of supervisory powers vis-àvis financial institutions that are not credit institutions within the meaning of Regulation (EU) No 575/2013 of the European Parliament and of the Council16, the supervision of third-country branches or the exercise of powers aiming to prevent money laundering or terrorist financing or the exercise of powers related to consumer protection. 17 Since the SSMR applies directly in all euro area Member States, the ECB’s status as a 6 competent or designated authority in a Member State does not depend on national law. It may exercise the powers that fall within its tasks, irrespective of whether national law explicitly confers this power to the ECB, or to the competent authority or still mentions the respective NCA or NDA as the competent authority.18
II. Powers of the ECB Art. 9(1)(2) SSMR specifies that the ECB shall have (a.) all the powers and obligations 7 set out in the SSMR, in particular the ones listed in Sections 1 and 2 of the Chapter III on the powers of the ECB and (b.) all the powers and obligations, which competent and designated authorities shall have under relevant Union law which includes national law transposing Union law. In addition, the ECB may have additional powers under national law which are not explicitly mentioned in Union law (c.).
1. Powers under the SSMR The ECB’s powers under the SSMR comprise the investigatory powers set out in 8 Section 1 of Chapter III (Arts. 10-13 SSMR) and the specific supervisory powers set out in Section 2 (Arts. 14-18 SSMR). The ECB’s investigatory powers include the general power to request from the legal 9 and natural persons listed in Art. 10 SSMR all information that is necessary for the ECB to perform its tasks under the SSMR (infra, → Art. 10 SSMR). The information may be requested ad hoc or at recurring intervals. Moreover, the ECB may conduct general investigations in accordance with Art. 11 SSMR which includes the right to require the submission of documents, to examine books and records, to obtain written or oral explanations, and to conduct interviews (infra, → Art. 11 SSMR). Finally, the ECB may conduct on-site inspections at the business premises of the persons listed in Art. 10 SSMR, i.e. in-depth investigations of risks, risk controls and governance with a pre-defined scope and time frame.19
Art. 1(5) and (6) as well as Recital 28 SSMR. Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012, OJ L176, 27.6.2013, p. 1. 17 For an overview see Gortsos, The Single Supervisory Mechanism (SSM) (2015), at pp. 138-139; Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 35 et seq. 18 Of a different view: Berger, WM 2016, 2361, at p. 2362 who considers that the ECB may only apply national law where the national legislator has empowered the ECB to apply it. 19 For an overview see the ECB Guide to banking supervision, pp. 34 et seq., available under , for further details see infra, → Art. 12 SSMR. 15
16
Georg Gruber
149
Art. 9 SSMR
Supervisory and investigatory powers
The ECB’s supervisory powers set out in Section 2 of Chapter III comprise the power to grant and withdraw authorisations to take up the business as a credit institution (Art. 14 and Art. 4(1)(a) SSMR). The ECB’s competence covers all credit institutions, regardless of whether they are significant or less significant. The ECB must exercise these powers in line with the common procedure defined in Art. 14 SSMR and Arts. 73-84 of Regulation of the ECB No 468/214, i.e. in cooperation with the relevant NCA, and the substantive requirements set out in national law transposing Arts. 8-21 of Directive 2013/36/EU of the European Parliament and of the Council.20 11 Moreover, the ECB has the power to approve the acquisition of a qualifying holding in a credit institution established in a participating Member State (Art. 15 SSMR). The ECB’s power is limited by the scope of its task defined in Art. 4(1)(c) SSMR which covers all credit institutions established in the participating Member States including less significant institutions but excludes acquisitions that are part of a resolution measure. The ECB must exercise its power in accordance with the common procedure defined in Art. 15 SSMR and Arts. 85-88 of Regulation of the ECB No 468/214 and the substantive requirements set out in national law transposing Arts. 22 et seq. of Directive 2013/36/ EU.21 12 In addition, the ECB may exercise the specific supervisory powers set out in Art. 16 SSMR which specifies in paragraph 2, a number of specific supervisory measures including the power to require institutions to hold own funds in excess of the statutory capital requirements. Art. 16(2) SSMR serves as the legal basis to impose on significant institutions capital, liquidity and other requirements as part of the regular Supervisory Review and Evaluation Process (SREP).22 But Art. 16(2) SSMR may also be used to impose on an ad hoc basis specific supervisory measures on supervised entities. The powers set out in Art. 16 SSMR are broadly identical to the powers listed in Art. 104 of Directive 2013/36/EU; the inclusion of these powers in the SSMR was necessary to ensure that the ECB can exercise them in a fully harmonised manner and does not depend on the national laws transposing Art. 104 of the said Directive.23 13 Finally, Art. 18 SSMR empowers the ECB under certain conditions to impose administrative penalties on supervised entities, either as a sanction for breaches of prudential requirements or as a measure to enforce compliance with prudential requirements. 24 Art. 18 SSMR foresees a complex distribution of powers between the ECB and NCAs: The ECB is only competent to impose administrative pecuniary penalties for breaches of requirements set out in directly applicable acts of Union law (i.e. regulations) in accordance with Art. 18(1) SSMR, or sanctions, in case of a breach of an ECB regulation or decision, in accordance with Art. 18(7) SSMR and Council Regulation (EC) No 2532/9825. For other cases (breaches of national law transposing Union law; breaches by 10
20 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, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, p. 338. 21 For an overview see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 171 et seq. For further details see infra, → Art. 15. 22 For an overview see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 205 et seq.; for further details see infra, → Art. 16 SSMR. 23 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 206. 24 For an overview, see Gortsos, The Single Supervisory Mechanism (SSM) (2015), at pp. 225 et seq. For further details see infra, → Art. 18 SSMR and Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 211 et seq. 25 Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions, OJ L318, 27.11.1998, 4. The term “sanctions” covers fines of a repressive nature and periodic penalty payments which serve the enforcement of supervisory measures.
150
Georg Gruber
Art. 9 SSMR
Supervisory and investigatory powers
natural persons), the ECB may only require NCAs to open proceedings in accordance with Art. 18(5) SSMR. In addition to the powers set out in Chapter III, the ECB also has macroprudential 14 powers as specified in Art. 5 SSMR.26 These powers are, however, not exclusive powers of the ECB. Rather, NCAs or NDAs are primarily responsible for taking macroprudential measures, in particular defining additional capital buffer requirements in accordance with national law transposing Arts. 129-142 of Directive 2013/36/EU. 27 The ECB is responsible for assessing the exercise of these powers by NCAs or NDAs; it may object to the measures taken by NCAs/NDAs or apply more stringent measures, in particular, impose higher capital buffer requirements (top-up power) in accordance with the procedure defined in Art. 5 SSMR. But the ECB may not only top up measures taken by NCAs/NDAs but also act instead of the NCAs/NDAs if they remain inactive.
2. Powers under Union law and national law transposing Union law In addition to the powers set out in the SSMR, the ECB may also exercise all supervi- 15 sory powers set out in relevant Union law. This term refers to Art. 4(3) SSMR which specifies the law to be applied by the ECB in the performance of its supervisory tasks. 28 The relevant Union law includes all Union law instruments that lay down prudential rules for credit institutions and are part of the Single Rulebook.29 The relevant Union law is composed of secondary law, i.e. directly applicable Regulations and Directives that are not directly applicable and require transposition into national law. Primary law is also part of the relevant Union law in the sense that it puts limits on the exercise of the supervisory powers conferred on the ECB. When taking supervisory measures, the ECB must respect the fundamental freedoms and fundamental rights set out in the Treaties and the Charter of Fundamental Rights as well as the general principles of Union law such as the principle of proportionality.30 Of relevance also are non-binding instruments like the Guidelines and Recommendations issued by the EBA.31 While these non-binding instruments do not include powers to take supervisory measures, they are relevant for the interpretation of secondary Union law. The ECB’s powers under directly applicable Union law are primarily laid down 16 in Regulation (EU) No 575/2013. On the basis of this Regulation, the ECB may for instance grant waivers from own funds and liquidity requirements32, grant exemptions from the scope of consolidation33, decide on the recognition of capital instruments issued by significant institutions as Common Equity Tier 134, authorise the reduction of own funds35 or approve internal models36. The ECB may also exercise the options 26 For an overview see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 186 et seq. 27 These provisions allow for the imposition of a capital conservation buffer, an institution specific countercyclical buffer, risk buffers for systemically relevant institutions and systemic risk buffers. 28 Berger, WM 2016, 2325, at p. 2330; Coman-Kund and Amtenbrink, 33 BFLR (2018), 133, at pp. 145 et seq.; Biondi and Spano (2020) EBLR, 1023, at p. 1027; Bassani (2020) EBLR, 1001, at pp. 1007 et seq. 29 See Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 95 and Lefterov, ECB Legal Working Paper Series No 15 (2015), at pp. 7 and 45, who rightly point out that the Single Rulebook is more a political concept than reality, taking into account that prudential law is not yet fully harmonised at Union level. 30 Berger, WM 2016, 2325, at p. 2330. 31 Berger, WM 2016, 2325, at p. 2330. 32 Arts. 7 and 8 Regulation (EU) No 575/2013. 33 Art. 19(2) Regulation (EU) No 575/2013. 34 Art. 26(3) Regulation (EU) No 575/2013. 35 Arts. 77 and 78 Regulation (EU) No 575/2013. 36 Art. 143 Regulation (EU) No 575/2013.
Georg Gruber
151
Art. 9 SSMR
Supervisory and investigatory powers
set out in Regulation (EU) No 575/2013 where they are granted to the competent authorities.37 Where the ECB has exercised such options, its decision takes precedence over the previous exercise of options by NCAs.38 Of relevance also are the numerous regulations adopted by the European Commission in accordance with Arts. 290 and 291 TFEU, by which the Commission converts the implementing technical standards and the regulatory technical standards developed by the EBA into legally binding Union law. 17 Powers set out in Directives may not be exercised directly by the ECB since Directives are addressed to Member States and therefore in principle not directly applicable. They can therefore in principle not serve as a legal basis for taking supervisory measures, at least not for measures having adverse effects.39 The ECB may though, in accordance with Art. 4(3) SSMR, exercise the powers set out in national law transposing those Directives.40 The exercise of powers set out in national law by the ECB as a European institution is one of the peculiarities of the SSM.41 This empowerment was a prerequisite for the establishment of the SSM, otherwise the ECB would have been limited to powers set out in directly applicable Union law which would have led to a two-tier system of banking supervision. The legal concerns raised by some authors42 against the ECB exercising powers under national law are not substantiated. Art. 127(6) TFEU, as ratified by all Member States, allows for the conferral of supervisory tasks and powers on the ECB including the power to exercise powers under national law that transposes Union law.43 Moreover, the application of national law by European institutions is less “exotic” than presented by some authors; there are other areas where European institutions need to apply or at least respect national law.44 The application of national law by the ECB also does not lead to a gap in the judicial protection since the Court of the Justice is fully
37 The ECB has exercised options and discretions by way of Regulation (EU) 2016/445 of the ECB of 14 March 2016 on the exercise of options and discretions available in Union law (ECB/2016/4), OJ L 78, 24.3.2016, p. 60 and the ECB Guide on options and discretions available in Union law, published under . For further details see Witte, in: Judicial Review in the European Banking Union, 236, at pp. 245 et seq.; Bassani (2020) EBLR, 1001, at pp. 1017-1019. 38 Berger, WM 2016, 2325, at p. 2331. 39 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 41; Witte, 21 MJ 1 (2014), 89, at p. 106. 40 Berger, WM 2016, 2361, at p. 2362; Coman-Kund and Amtenbrink, 33 BFLR (2018), at pp. 147 et seq.; Bassani (2020) EBLR, 1001, at pp. 1012-1013. See for instance Joined Cases T-133/16 to T-136/16, Crédit Agricole v ECB, ECLI:EU:T:2018:219 concerning the application of provisions of the French Monetary and Financial Code prohibiting the exercise of executive functions by the chair of the board of directors. Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 38. 41 See Berger, WM 2016, 2325, at pp. 2328, 2329 and 2332; Witte, 21 MJ 1 (2014), 89, at pp. 105 et seq.; Coman-Kund and Amtenbrink, 33 BFLR (2018), at pp. 149-150; Biondi and Spano (2020) EBLR, 1023, at pp. 1025 et seq.; Prek, in: Building bridges: central banking law in an interconnected world – ECB Legal Conference 2019, 129 et seq. 42 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5, para. 180; Kämmerer, WM 2016, 1, at pp. 3-4 who qualifies the application of national law by the ECB as an exotic exception to the general principle that Union institutions only apply Union law and argues that the application of national law that goes beyond a transposition would be incompatible with the principle of conferral; Peuker, JZ 2014, 764, at pp. 767 et seq. 43 Witte, in: Judicial Review in the European Banking Union, 236, at p. 238. 44 Prek, in: Building bridges: central banking law in an interconnected world – ECB Legal Conference 2019, 129, at p. 131 referring inter alia to trade-mark litigation; Berger, WM 2016, 2325, at pp. 2328 and 2332. See for instance Case T‑279/06, European Dynamics v ECB, ECLI:EU:T:2009:241, para. 64 et seq. concerning the application of German law in a procurement procedure undertaken by the ECB. See also the opinion of AG Mengozzi on the related appeal (Case C-401/09 P, Evropaïki Dynamiki v ECB, ECLI: EU:C:2011:31), delivered on 27.01.2011, outlining the cases where European courts have to apply and interpret national law.
152
Georg Gruber
Art. 9 SSMR
Supervisory and investigatory powers
empowered to interpret and apply national law and to disregard it if it is incompatible with Union law.45 In line with the settled case law of the Court of Justice of the European Union46, the 18 term “transposition” has to be interpreted broadly.47 It covers not only national law provisions that are a one-to-one transposition of a Directive but also provisions that are more detailed than the provisions in the Directive or even go beyond the requirements set out in a Directive (so called gold-plating provisions).48 The ECB is, however, only bound by national law, i.e. by legally binding instruments such as acts adopted by the national parliaments, regulations adopted by national governments or legally binding circulars adopted by NCAs based on a delegation from the national legislator. The ECB is therefore not bound by non-binding guidelines issued by NCAs or administrative practices of NCAs; 49 it may, however, take such guidelines or practices into account until it has developed its own administrative practice. Of particular relevance for the ECB are powers set out in national law transposing 19 Directive 2013/36/EU. For instance, the ECB is competent to decide on the suitability of members of supervised entities’ management bodies50 or on the exemption of material risk takers in a credit institution from the restrictions regarding their remuneration 51. The ECB may also exercise the powers conferred on competent authorities by national law transposing the BRRD52, in particular the power to take early intervention measures. In addition to powers set out in national law transposing Directives, the ECB may 20 also exercise powers set out in national law by which a Member State has exercised an option granted in a Regulation. For instance, the ECB may grant exemptions from large exposure limits on the basis of national law which Member States have adopted in the exercise of the option set out in Art. 439(3) Regulation (EU) No 575/2013 or approve the
45 For further details see Witte, in: Judicial Review in the European Banking Union, 236, at pp. 238 et seq.; Prek, in: Building bridges: central banking law in an interconnected world – ECB Legal Conference 2019, 129 et seq. 46 Case C-617/10, Åklagaren v Hans Åkerberg Fransson, ECLI:EU:C:2013:105, paras. 27-28: National provisions on penalties and criminal proceedings that penalise the infringement of a Directive are considered as a transposition even if the national legislator did not adopt the national law provisions for that purpose. Case C-248/83, Commission v Germany, ECLI:EU:C:1985:214, paras. 19 and 30 (pre-existing national law as implementation of a Directive); Case C-52/17, VTB Bank (Austria) AG v Finanzmarktaufsichtsbehörde, ECLI:EU:C:2018:648, para. 30 et seq. (administrative measure under national law considered as an implementation of Directive 2013/36/EU even if not mentioned in the Directive). 47 Bassani (2020) EBLR, 1001, at p. 1014; Riso and Zagouras, in Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at p. 120. 48 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 97; Berger, WM 2016, 2325, at p. 2333; Schuster, EuZW-Beilage 2014, 3, at p. 8; Coman-Kund and Amtenbrink, 33 BFLR (2018), 133, at pp. 154-155. See for instance Joined Cases T-133/16 to T-136/16, Crédit Agricole v ECB, ECLI:EU: T:2018:219: While Article 88(1)(e) Directive 2013/36/EU only prohibits the chair of the management body in its supervisory function to exercise simultaneously the function of a chief executive officer, the French transposition of this provision goes beyond that and prohibits the chair to exercise any executive function. 49 Berger, WM 2016, 2325, at p. 2331; Biondi and Spano (2020) EBLR, 1023, at p. 1033. 50 Art. 91 Directive 2013/36/EU. 51 Art. 92 Directive 2013/36/EU. 52 Directive 2014/59/EU of the European of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L173, 12.6.2014, p. 190.
Georg Gruber
153
Art. 9 SSMR
Supervisory and investigatory powers
computation of capital instruments as Additional Tier 1 capital or Tier 2 capital in accordance with national law53.
3. Other supervisory powers under national law Soon after the establishment of the SSM, the question arose whether the ECB may also exercise supervisory powers under national law which are not explicitly provided for in Union law (so-called national powers).54 For instance, while Directive 2013/36/EU requires an authorisation for the acquisition of a qualifying holding in a credit institution established in the European Union, some national laws55 go beyond that and also require an authorisation for the acquisition of a qualifying holding in a non-credit institution or in a credit institution established outside the European Union. Moreover, in some Member States a merger involving a credit institution56, the transfers of assets to a credit institution57 or operations in third countries58 require prior approval by or a notification to the competent supervisory authority. And in some Member States amendments to a credit institution’s statutes59, the outsourcing of activities60 or the appointments of so-called key function holders61 need to be approved by or notified to the competent supervisory authority. Such approval and notification requirements go beyond Directive 2013/36/EU which only lay down general governance requirements but neither mentions statutes nor key function holders. 22 Some legal authors62 follow a narrow approach and consider that the ECB is not competent to exercise such powers under national law since they do not constitute a transposition of Directive 2013/36/EU and therefore do not fall under the powers conferred on the ECB under Art. 9(1) SSMR and Art. 4(3) SSMR. In the view of these authors, the wording of Art. 4(3) SSMR and the principle of conferral set out in Art. 5 TEU limit the powers conferred on the ECB. 23 The ECB and the European Commission63, supported by other authors64, follow a broader approach. In a communication published in June 2017,65 the ECB informed all banks that it has, in cooperation with the European Commission, clarified the delineation of competences between the ECB and the NCAs as regards the exercise of supervisory powers granted under national law. According to this communication, the 21
53 See Recital 75 Regulation (EU) No 575/2013 which clarifies that Member States may establish a pre-approval requirement for such capital instruments although the Regulation does not foresee such a requirement. 54 For an overview see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 26 et seq. who refers to autonomous national prudential law; Jedlicka and Lederer, ZFR (2021), at pp. 218 et seq. 55 See for instance Art. 57(1) Luxembourg Law of 5 April 1993; Art. 77(1)(2) Belgian Banking Law. 56 See for instance Art. 21(1)(1)(6) and (7) Austrian Banking Act; Art. 77(1)(3) Belgian Banking Act. 57 See for instance Art. 77(1)(3) Belgian Banking Act; Art. 58 Italian Consolidated Banking Act. 58 See for instance Arts. 15(2) and 16(2) Italian Consolidated Banking Act. 59 See for instance Art. 56 Italian Consolidated Banking Act; Art. 9(4) Slovak Act on Banks. 60 See for instance Art. 53 Italian Consolidated Banking Act. 61 See for instance the Irish Central Bank Reform Act 2010, sec. 23, Part 3; Art. 43(1) and (2) Austrian Banking Act. 62 Berger, WM 2016, 2325, at p. 2334; Kämmerer, WM 2016, 1, at p. 4; Schuster, EuZW-Beilage 2014, 3, at p. 8; Jedlicka and Lederer, ZFR (2021), 218, at p. 219. 63 Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No 1024/2013, COM(2017) 12 and accompanying Commission Staff working document (SWD (2017) 336 final, 26-27). 64 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 27, 31, 33-35; Biondi and Spano (2020) EBLR, 1023, at pp. 1032 et seq.; Bassani (2020) EBLR, 1001, at pp. 1014-1016; Hernández Saseta, in: Judicial Review in the European Banking Union, 304, at p. 306. 65 Published on the ECB’s webpage under ‘Letters to banks’.
154
Georg Gruber
Art. 9 SSMR
Supervisory and investigatory powers
ECB considers itself competent to exercise all the supervisory powers granted under national law listed in the communication which includes all the examples given above. The ECB explained that it may exercise supervisory powers granted under national law, even if they are not explicitly mentioned in Union law provided that they (i) fall within the scope of the ECB’s tasks under Arts. 4 and 5 SSMR and (ii) underpin a supervisory function under Union law. The latter requirement covers powers of a prudential nature, i.e. that serve prudential purposes. In a recent judgment, the Court of Justice of the European Union66 indirectly confirmed the ECB’s and the Commission’s broad interpretation by deciding that national law provisions imposing absorbing interest for the breach of large exposure requirements should be qualified as an administrative measure within the meaning of Art. 65(2) of Directive 2013/36/EU even if not explicitly mentioned in Article 67(2) of that Directive. As a consequence of this judgment, the ECB is competent to exercise this national power vis-à-vis significant institutions since it is considered as a transposition of Directive 2013/36/EU. This broad interpretation is supported by the following arguments: First, the above- 24 mentioned powers, even if not explicitly mentioned in Directive 2013/36/EU, can still be considered as a transposition of that Directive since they serve the effective application and enforcement of the prudential requirements set out in the Union law.67 The Directive explicitly requires in Art. 64(2) that “[c]ompetent authorities shall be given all supervisory powers to intervene in the activity of institutions that are necessary for the exercise of their function ...”. Moreover, most of the national powers are linked to the powers set out in Art. 104 of Directive 2013/36/EU which empowers competent authorities to require changes to their governance arrangements or to impose business restrictions. Second, the purpose of the SSMR is to centralise the supervision of all significant institutions at the ECB as a single banking supervisor with all powers that are needed to effectively perform supervision.68 The narrow interpretation would lead to a two-tier system of banking supervision where the ECB is only competent to exercise certain supervisory powers whereas NCAs remain competent to exercise national powers. This is hardly compatible with the idea of a single supervisory mechanism and may lead to inconsistencies, in particular because in many cases a single economic operation triggers several approval requirements. For instance, a capital increase by a credit institution may require amendments to its statutes and the recognition of the newly issued capital instruments as Common Equity Tier 1 capital.
III. Possibility to give instructions Pursuant to Art. 9(1)(3) SSMR, the ECB may, to the extent necessary to carry out its 25 tasks, require NCAs, by way of instructions, to make use of their powers under and in accordance with national law where this Regulation does not confer such powers on the ECB. The scope of this provision is unclear. It depends on whether one follows the narrow 26 or the broad interpretation of the ECB’s competences to exercise supervisory powers un66 Case C-52/17, VTB Bank (Austria) AG v Finanzmarktaufsichtsbehörde, ECLI:EU:C:2018:648, para. 30 et seq.; see on this judgment Jedlicka and Lederer, ZFR (2021), 218, at pp. 220-221. 67 Biondi and Spano (2020) EBLR, 1023, at p. 1034. 68 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 27, 31, 34; similarly Biondi and Spano (2020) EBLR, 1023, at p. 1035 who argue that an instruction would “represent a confusing and questionable legal instrument with the potential to undermine the direct supervision tasks and powers of the ECB”.
Georg Gruber
155
Art. 9 SSMR
Supervisory and investigatory powers
der national law as outlined under II above.69 If one follows the narrow approach and considers that the ECB may not exercise supervisory powers under national law, Art. 9(1)(3) SSMR could have a broad scope and serve as the legal basis for the ECB to instruct NCAs to exercise these national supervisory powers and to take a specific supervisory decision.70 The ECB would then have two ways to impose supervisory measures on supervised entities: Either directly by way of an ECB decision if the power is conferred on the ECB or indirectly by way of an instruction if the power remains with the NCA. 27 If one follows, however, the broad approach according to which the ECB may also exercise national powers if they fall within its tasks and underpin a supervisory function, the scope for giving instructions in accordance with Art. 9(1)(3) SSMR is very limited. 71 It would only cover powers that do not fall within the ECB’s tasks or are not of a prudential nature but may have at the same time an impact on the performance of the ECB’s tasks.72 One could think of cases where NCAs have powers to enforce compliance with anti-money laundering or consumer protection regulations and where the exercise of these powers is necessary to avoid a prudential impact. 28 Apart from its scope, the application of Art. 9(1)(3) SSMR raises a number of additional issues. The provision sets-up a two-stage process which is similar to the framework for state aid decisions.73 In the first stage, the ECB adopts an instruction addressed to an NCA. The instruction is legally binding and constitutes an ECB legal instrument. In the second stage, the NCA has to adopt a supervisory measure in accordance with national law and notify the measure to the entity or entities concerned. The discretion left to the NCA depends on the level of detail of the ECB instruction. Against this background, the question arises whether the addressee(s) of the supervisory measure may only challenge the NCA decision before national courts or also or instead the ECB instruction before the Court of Justice of the European Union. Building on the case-law of the Court of Justice74 in the area of state aid, one can argue that the addressees of individual NCA decisions may request the annulment of the ECB’s instruction pursuant to Art. 263 TFEU, if they are directly and individually concerned by the instruction.75
69 Jedlicka and Lederer, ZFR (2021), at pp. 218 and 222. Yet another interpretation is followed by Witte, 21 MJ 1 (2014), 89, at pp. 103-104, who considers that Art. 9(1)(3) SSMR does not constitute a separate legal basis to give instructions but only gives guidance on how existing powers to give instructions should be exercised. 70 Schuster, EuZW-Beilage 2014, 3, at p. 9; Riso and Zagouras, in Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at p. 121. 71 Hernández Saseta, in: Judicial Review in the European Banking Union, 304, at p. 307; similar Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 38-39; Biondi/Spano (2020) EBLR, 1023, at p. 1035; Jedlicka and Lederer, ZFR (2021), 218, at p.222 emphasise that the broad interpretation leaves no room for instructions under Art. 9(1)(3). 72 Biondi and Spano (2020) EBLR, 1023, at p. 1036 refer to powers of resolution authorities under national law to suspend payments or impose a moratorium. Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 38-39 refers to Recital 35 of Council Regulation (EU) No 1024/2013 which mentions early intervention and precautionary powers. This reference is not fully clear since the power to take early intervention measures is part of the powers which the ECB has under the relevant Union law. It may only be relevant if a national legislator has implemented Directive 2014/59/EU incorrectly and conferred this power on a different authority. 73 Hernández Saseta, in: Judicial Review in the European Banking Union, 304, at pp. 306 et seq.; Witte, 21 MJ 1 (2014), 89, 98 et seq. 74 Case C-730/79, Philip Morris Holland BV v Commission, ECLI:EU:C:1980:209; Joined Cases C-15/98 and C-105/99, Italy and Sardegna Lines v Commission, ECLI:EU:C:2000:570, paras. 32-34. 75 Hernández Saseta, in: Judicial Review in the European Banking Union, 304, at pp. 313-315; ComanKund and Amtenbrink, 33 BFLR (2018), at pp. 165-167.
156
Georg Gruber
Art. 9 SSMR
Supervisory and investigatory powers
C. Exercise of powers by the ECB – Art. 9(2) SSMR The first sentence of Art. 9(2) SSMR clarifies that the ECB shall exercise its powers 29 in accordance with the acts referred to in the first subpara. of Art. 4(3) SSMR, i.e. in accordance with relevant Union law and national law transposing Union law. The relevant Regulations and Directives are mentioned under B.II. above. Art. 9(2) sent. 1 SSMR is more of a declaratory nature since Art. 9(1) SSMR refers already to the relevant Union law (which is specified in Art. 4(3) SSMR) and it is somehow self-evident that the ECB must exercise its powers in accordance with the acts on which these powers are based. As regards the procedure, the ECB shall exercise its powers in accordance with the procedural rules laid down in the SSMR and Regulation of the ECB No. 468/2014 and with the general principles of Union law.76 National procedural law is in principle not applicable.77 The second sentence of Art. 9(2) SSMR specifies that the ECB and the NCAs shall 30 cooperate closely in the exercise of their supervisory and investigatory powers. The provision replicates the ECB’s and NCAs’ general duty of cooperation in good faith, as set out in Art. 6(2)(1) SSMR.78 Good cooperation is in particular required for common procedures or in cases where the same powers are conferred on the ECB and NCAs (e.g. investigatory powers vis-à-vis less significant institutions). Art. 9(2) SSMR appears though to go beyond Art. 6 SSMR which governs the cooperation within the SSM. Its scope seems to extend to the NCAs’ supervisory powers outside the SSM.
D. Exercise of powers in non-euro area Member States – Art. 9(3) SSMR Art. 9(3) SSMR regulates the exercise of powers in Member States whose currency is 31 not the euro but have entered into a close cooperation with the ECB in accordance with Art. 7 SSMR. The provision clarifies that, by derogation from paragraph 1, the ECB may not be considered as the competent or designated authority in that Member State. It may only exercise supervisory powers in accordance with Art. 7 SSMR, i.e. by way of instructions to the NCA of that Member State.79 Following the establishment of close cooperation with the Bulgarian National Bank and the Croatian National Bank on 1 October 2020, the ECB is now exercising its supervisory powers vis-à-vis significant institutions established in these Member States by way of instructions according to Art. 7 SSMR (infra, → Art. 7 SSMR).
76 Of particular relevance are the due process requirements set out in Art. 22 SSMR and Art. 31 et seq. of Regulation of the ECB 468/2014. 77 Berger, WM 2016, 2325, at p. 2335; Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 37. See also Recital 34 SSMR specifying that the ECB should apply the ‘material rules relating to the prudential supervision of credit institution’ set out in Union or national law which excludes national procedural law. 78 For further details on this general duty, see the commentary of Gortsos on → Art. 6 SSMR. 79 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 39 and 229; Gortsos, The Single Supervisory Mechanism (SSM) (2015), at pp. 186-187. Of a different view Witte, 21 MJ 1 (2014), 89, at p. 95: Member States that have entered into a close cooperation with the ECB are qualified as “participating Member States” which implies that the ECB’s powers should be the same as in other participating Member States. This view is difficult to reconcile with Art. 9(3) SSMR which includes a derogation from Art. 9(1) SSMR and explicitly refers to Art. 7 SSMR.
Georg Gruber
157
Art. 10 SSMR
Request for information
Art. 10 SSMR Request for information 1. Without prejudice to the powers referred to in Article 9(1), and subject to the conditions set out in relevant Union law, the ECB may require the following legal or natural persons, subject to Article 4, to provide all information that is necessary in order to carry out the tasks conferred on it by this Regulation, including information to be provided at recurring intervals and in specified formats for supervisory and related statistical purposes: (a) credit institutions established in the participating Member States; (b) financial holding companies established in the participating Member States; (c) mixed financial holding companies established in the participating Member States; (d) mixed-activity holding companies established in the participating Member States; (e) persons belonging to the entities referred to in points (a) to (d); (f) third parties to whom the entities referred to in points (a) to (d) have outsourced functions or activities. 2. The persons referred to in paragraph 1 shall supply the information requested. Professional secrecy provisions do not exempt those persons from the duty to supply that information. Supplying that information shall not be deemed to be in breach of professional secrecy. 3. Where the ECB obtains information directly from the legal or natural persons referred to in paragraph 1 it shall make that information available to the national competent authorities concerned. Bibliography Klaus Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (C.H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden 2017); Georgios Zagouras, ‘Der Rechtsrahmen für Vor-Ort-Prüfungen der Europäischen Zentralbank nach Art. 12 SSM‑VO’, WM 2019, 2191; Georgios Zagouras, ‘Onsite Inspections Conducted by the European Central Bank: Legal Considerations’, JIBLR 33 (2018), 437; Daniel Segoin, ‘The investigatory powers, including on-site inspections, of the ECB and their judicial control’, in: Chiara Zilioli/Karl-Philipp Wojcik, Judicial Review in the European Banking Union (Edward Elgar Publishing, Cheltenham 2021), pp. 285-303.
158
A. Overview to the investigatory powers of Arts. 10 to 13 SSMR . . . . . . . . . . . . . . . .
1
B. Function and background of Art. 10 SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
C. Scope of the information request power of the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . I. Material scope – what can be requested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Personal scope – who can be requested information . . . . . . . . . . . . . . . . . . . . . . . . . III. Professional secrecy – no limitation to the obligation to provide information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 11 18 31
D. Procedural aspects of the exercise of the power to request information and consequences of non-compliance with such request . . . . . . . . . . . . . . . . . . . . . . . . . .
34
E. Exchange of information between the ECB and national competent authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
F. Power to require the provision of information at recurring intervals and in specified formats for supervisory and related statistical purpose . . . . . . . . . . . . .
40
Klaus Lackhoff and Mikulas Prokop
Art. 10 SSMR
Request for information
A. Overview to the investigatory powers of Arts. 10 to 13 SSMR The Arts. 10-13 SSMR form the first section of the chapter on the powers of the ECB. 1 This mirrors that the ability to receive information on the supervised entities is key for a supervisor.1 To this end, different methods of information acquisition are envisaged by the SSMR. Art. 10 SSMR provides ECB the power to require supervised entities to provide on ad hoc basis institution-specific information if necessary for carrying out a supervisory task (ad hoc information requests). In addition, this provision is the basis on which the ECB may require additional recurring reporting from supervised entities. Art. 11 SSMR empowers the ECB to carry out (off-site) specific measures to obtain information. Art. 12 SSMR finally stipulates that the ECB may go on the site of a supervised entity in order to carry out all necessary inspections and shall have the powers envisaged in Art. 11 SSMR. Part of an on-site inspection is in addition that the ECB may search itself for information on-site in the files (including in the IT systems of the supervised entity). If an on-site inspection by the ECB or the assistance by an NCA requires authorisation by a judicial authority according to national rules such authorisation shall be applied for, Art. 13 SSMR. This is relevant if the supervised entity does not voluntarily provide comprehensive access to its premises and/or files (including IT systems). Art. 10 SSMR on requests for information together with Art. 11 SSMR on general in- 2 vestigations and Arts. 12 and 13 SSMR on on-site inspections vest in the ECB investigatory powers for the exclusive purpose of carrying out its tasks under Arts. 4(1), (2) and 5(2) SSMR. These investigatory powers (Section 1 of Chapter III, Arts. 10 to 13 SSMR) together with the other supervisory powers (Section 2 of Chapter III, Arts. 14-18 SSMR) and the complementary general provision of Art. 9 SSMR (and the powers under applicable national law) form the toolbox of directly applicable powers that the ECB may exercise in order to perform effective risk-based supervision. In general, the investigatory powers reflect the powers that the national competent authorities are required to have under the national law implementing Art. 65(3) Directive 2013/36/EU (CRD). 2 The underlying concept of the investigatory powers is that the supervised entities 3 are required to grant access and provide any information necessary for the exercise of the supervisory tasks of the ECB. From this, it follows that the supervised entities are also subject to an obligation to ensure that they are in a position to be able to comply with the supervisory powers insofar as they may influence this. Assume for example that a subsidiary of an “SSM parent credit institution” is located in a third country and is included in the prudential supervision on a consolidated basis. Assume further, that according to the laws of this country borrower related information may be provided by this subsidiary to other entities and supervisors only with the consent of the borrower or the prior approval of the competent authority of this third country. In such a case, it needs to be ensured that this information (which is for example relevant to identify borrower units) can be provided to the parent credit institution and the ECB. To this end, the subsidiary, for example, should ensure a sufficient consent of the borrowers 1 See also Lackhoff, The Single Supervisory Mechanism – European Banking Supervision by the SSM (2017), at pp. 754 et seq. 2 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, OJ L176, 27.6.2013, p. 338. Art. 65(3) Directive 2013/36/EU requires that competent authorities have all information gathering and investigatory powers that are necessary for the exercise of their functions. Those powers should include power to require information, the power to conduct all necessary investigations and power, subject to other conditions set out in Union law, to conduct all necessary inspections at the business premises.
Klaus Lackhoff and Mikulas Prokop
159
Art. 10 SSMR
Request for information
in the loan documentation. Another example could result from the substantial making use of the home office in the Corona pandemic. If employees would have relevant documentation in their home office, the institution has (among others with a view to the investigatory powers) to ensure that it may require return of such documentation on site within a short notice. 4 Another common feature of all investigatory powers is that in terms of process the SSMR stipulates that a hearing prior to the adoption of a supervisory decision is not required (see Art. 22(1) SSMR, Art. 25(1) SSM‑FR).3
B. Function and background of Art. 10 SSMR Art. 10 SSMR enshrines the core investigatory power as it provides to the ECB the power to ask for “all information” necessary for carrying out its tasks. According to the wording of Art. 10(1) SSMR this power is subject to two conditions: (i) the conditions set out in relevant Union law and (ii) the condition that the information requested (ad hoc or in recurring intervals) must be necessary in order to carry out the tasks conferred on the ECB by the SSMR. A general requirement is that the information request must be proportional, i.e. there must be for example no less burdensome (for the credit institutions) and equally effective way (taking also into account the efforts required at the ECB) to receive such information. 6 With regard to the part of the wording that the power is subject to the conditions set out in relevant Union law it should be noted that the term (relevant) Union law is not expressly defined in the SSMR (see also supra, → Art. 4 para. 101 et seq.). According to Recital 32 SSMR, Union law seems to be encompassing (only) legal acts of the Union: “The ECB should carry out its tasks subject to and in compliance with relevant Union law including the whole of primary and secondary Union law, Commission decisions in the area of State aid, competition rules and merger control and the single rulebook applying to all Member States.” On the other side, in connection with the obligation of the ECB to also apply national law implementing directives, the concept of Union law seems to extend also to national implementing provisions. Recital 34 SSMR states as Art. 4(3) SSMR: “For the carrying out of its tasks and the exercise of its supervisory powers, the ECB should apply the material rules relating to the prudential supervision of credit institutions. Those rules are composed of the relevant Union law, in particular directly applicable Regulations or Directives, such as those on capital requirements for credit institutions and on financial conglomerates. Where the material rules relating to the prudential supervision of credit institutions are laid down in Directives, the ECB should apply the national legislation transposing those Directives.” 7 It is argued here that the reference to Union law in Art. 10 SSMR intends to equip the ECB with the same investigatory powers as those envisaged for national competent authorities under Directive 2013/36/EU (CRD), and therefore the condition refers in this specific context only to the provisions of the Directive 2013/36/EU on investigatory powers. They in fact envisage also only the need that the information gathering must be necessary for the function of the competent authority (Art. 65(3) Directive 2013/36/EU). In addition, it is envisaged that the national competent authorities are bound by professional secrecy obligations when processing confidential information 4 (Arts. 53 et seq. Di5
See also infra, → para. 36. On the concept of confidential information see EUCJ Case C-15/16 Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2018:464, in particular para. 35. 3
4
160
Klaus Lackhoff and Mikulas Prokop
Art. 10 SSMR
Request for information
rective 2013/36/EU)5. This understanding, which does not refer to the potentially deviating national implementations of Union law does also ensure the effet utile of the provision. It follows that the power to request information under Art. 10(1) SSMR is only sub- 8 ject to the condition that the information request must be necessary for carrying out a supervisory task of the ECB and that it is proportional. In addition, the ECB is subject to professional secrecy obligations as set out in the relevant acts of Union law, Art. 27(1) SSMR. The direct vesting of investigatory powers to the ECB under the SSMR does not pre- 9 clude the ECB to make use of all the powers which competent authorities have under the relevant Union law, including national law transposing the relevant Union law. Hence, next to the investigatory powers conferred by Arts. 10-13 SSMR, the ECB would be able to request information and make on- and off-site investigations based on the national law, including the one implementing Art. 65(3) Directive 2013/36/EU. Conversely, the national competent authorities and national designated authorities 10 maintain the powers, in accordance with national law6, to obtain information from significant credit institutions, holding companies, mixed holding companies and undertakings included in the consolidated financial situation of a credit institution and to perform on-site inspections at those entities7. A more narrow reading of Art. 6(6) SSMR, limiting its scope to less significant credit institutions, could be seen as depriving this clause of its function as such powers belong to the national competent authorities (NCAs) as the direct supervisor of less significant credit institutions anyhow. 8 Such position could, however, be based on the argument that otherwise the SSMR would envisage a remaining power of the NCAs in respect of significant credit institutions although the tasks for the supervision of significant credit institutions are exclusively assigned to the ECB, see Art. 4(1) SSMR.
C. Scope of the information request power of the ECB I. Material scope – what can be requested Art. 10(1) SSMR grants the power to the ECB to directly request from specified per- 11 sons (information providers, see infra, → para. 18) all information that is necessary in order for the ECB to carry out its tasks conferred on it under the SSMR (see → Art. 4 SSMR). This power covers one-off information requests (ad hoc information requests) but also the power to require the provision of information at recurring intervals, i.e. additional reporting of information. It covers, subject to limitations resulting from the principle of proportionality, also the request for the delivery of information not yet available at the relevant information provider. Such a request is in fact a request to compile information and is covered by Art. 10(1) SSMR as the information that shall be deliv5 On the interpretation of Art 53 Directive 2013/36/EU see also EUCJ Case C-594/16, Enzo Buccioni v Banca d'Italia, ECLI:EU:C:2018:464. 6 The ability of NCAs to make use of powers under national law to receive information may be limited, as the NCA may not be able to justify that the NCA requires the information for its tasks. However, as supporting the supervision by the ECB is a task of the NCAs resulting from the SSMR, the NCA would act in carrying out its tasks if it collects information on behalf of the ECB. 7 Art. 6(6) sent. 2 SSMR. The national competent authorities must inform the ECB, in accordance with the framework set out in Art. 6(7) SSMR, of the measures taken pursuant to this para. and closely coordinate those measures with the ECB. 8 See also Lackhoff, The Single Supervisory Mechanism (2017), para. 756.
Klaus Lackhoff and Mikulas Prokop
161
Art. 10 SSMR
12 13
14
15
Request for information
ered is determined from the perspective of supervisory needs (“all information that is necessary to carry out the tasks conferred on it”). Also, the format in which requested information shall be delivered can be determined by the ECB subject to proportionality considerations. Thus the ECB may for example oblige the credit institutions to deliver for a horizontal review the information in a specific data format. To require a unified format also from those credit institutions that want to deliver the data in another format can be proportional if otherwise an effective evaluation would be substantially hindered. However, the power of the ECB under Art. 10(1) SSMR is limited by both factual and legal constrains. The ECB may in principle not request information under this provision if such information is already available to it or to a national competent authority (already available information), see Art. 139(2) SSM‑FR. Requesting such information could impose an unjustified burden on the supervised entities and hence contradict the principle of proportionality. However, if the ECB for example could only extract the information from other information available to it with substantial additional use of resources or costs, it may be proportional to request such information from a supervised entity. The ECB may only require information providers under Art. 10(1) SSMR to provide information if and insofar as the information is necessary for carrying out the tasks conferred on it by the SSMR. This means that the requested information must be related to and necessary for carrying out its supervisory tasks. These tasks include both microprudential tasks under Art. 4(1) and (2) SSMR and macro-prudential tasks under Art. 5(2) SSMR. Consequently, it is necessary that the ECB demonstrates in an information request why any information requested is necessary for carrying out such tasks. In respect of significant credit institutions, this justification should be in principle easier (as they are directly supervised by the ECB) than for less significant credit institutions in respect of which the ECB does not carry out the direct supervision but is limited to an oversight function. Moreover, it can be expected that there is some leeway for the ECB to determine whether certain information is necessary for carrying out its tasks. An issue raising particular questions with regard to the powers of the ECB under Arts. 10–13 SSMR is the fact that (i) the ECB has certain powers (the power relating to the so-called common procedures (authorisations, withdrawal of authorisations, qualifying holdings) although the credit institution in respect of which these powers may be exercised is not directly supervised by the ECB (in case of a less significant credit institution) or (ii) an area of supervision is excluded from the tasks of the ECB (e.g. supervision of payment services and compliance with anti-money laundering and counter-terrorist fighting rules (AML/CTF) but certain powers that may be based on the breach of such rules in respect of a credit institution are centralised with the ECB (e.g. the withdrawal of an authorisation) or such breaches are relevant (also) for prudential measures (such as the fit and proper assessment of a board member of a credit institution). In case the tasks and powers of the ECB extend to credit institutions not directly supervised by it, the ECB may exercise its investigatory powers in respect of these entities in so far as this is necessary for carrying out these tasks (see also infra, → para. 23). With regard to the areas of supervision excluded from the tasks of the ECB, in particular, the area of AML/CTF is and may be of relevance in the future. In respect of the issue whether the ECB can use its investigatory powers to collect evidence in order to withdraw an authorisation the ECB stated on its webpage: “Since the ECB’s tasks do not include AML/CTF, it cannot conduct its own investigations (for example, on-site inspections) into AML/CTF compliance. It has to rely on the facts as investigated by the other authorities competent for AML/CTF. Drawing conclusions from these facts, in particular
162
Klaus Lackhoff and Mikulas Prokop
Art. 10 SSMR
Request for information
whether they justify a licence withdrawal, would, however, be a competence of the ECB.”9 In addition the ECB expresses the view that it cannot determine “whether breaches of AML legislation have taken place. The competence for investigating such breaches, and determining whether AML legislation has indeed been breached, lies solely with the AML authority, as part of its fact-finding competences. The AML authority may also use its own powers to respond to its findings, for example by imposing a fine. Once such breaches have been established by the AML authority, the ECB can take the facts thus identified as given and use its Pillar 2 powers. The most appropriate context for doing so would be the annual Supervisory Review and Evaluation Process exercise. Any measures adopted by the ECB would, however, always be applied from a prudential perspective and not from a crime avoidance perspective.”10 As the ECB may only request information necessary for carrying out its supervisory 16 tasks, the ECB may not use the supervisory power under Art. 10(1) SSMR to request information to fulfil its monetary policy tasks. This follows from the principle of separation.11 Similarly, the ECB is not allowed to use its powers under Art. 10(1) SSMR to request information only on behalf of other competent authorities, for example, in insurance and securities markets or the SRB, even in cases where cooperation is agreed in a respective Memorandum of Understanding. However, information which the ECB has already collected or which it is also collect- 17 ing under Art. 10(1) SSMR for the performance of its tasks can be exchanged pursuant to Art. 27 SSMR with national or Union authorities, subject to the conditions in Arts. 53-62 Directive 2013/36/EU. For the exchange of information between the supervisory directorates general of the ECB and its directorates pursuing monetary policy the Decision of the ECB 2014/723/EU of 17 September 2014 on the implementation of the separation between the monetary policy and supervisory functions of the European Central Bank (ECB/2014/39)12 determines the framework for the possible information exchange.
II. Personal scope – who can be requested information Art. 10(1) SSMR provides for a conclusive list of legal and natural persons which 18 the ECB may require to provide information (“information provider(s)”) and which are obliged to provide the requested information (Art. 10(2) SSMR: “… shall supply the information requested.”). This list is equivalent in scope with the list of natural and legal persons from which the national competent authorities should under the national law be able to request information as required in Art. 65(3)(a) Directive 2013/36/EU. The list includes credit institutions (see infra, → paras. 22-23), (mixed) financial holding companies (see infra, → para. 25) and mixed-activity holding companies that are established in the participating Member States (see infra, → para. 26) as well as persons belonging to these entities (see infra, → paras. 27-29) and third parties to whom these entities have
9 See . 10 See . See in this context CJEU, Cases T‑351/18 and T‑584/18, Versobank, ECLI:EU:T:2021:669, paras. 197, 219. See also discussion in Lackhoff, The Single Supervisory Mechanism (2017), paras. 735 et seq. 11 Art. 25 SSMR. 12 Decision of the European Central Bank of 17 September 2014 on the implementation of separation between the monetary policy and supervision functions of the European Central Bank (ECB/2014/39), OJ L300, 18.10.2014, p. 57.
Klaus Lackhoff and Mikulas Prokop
163
Art. 10 SSMR
Request for information
outsourced functions and activities (see infra, → para. 30), no matter where such persons or third parties are established. 19 If the information that the ECB needs for carrying out its tasks is available to several information providers, the ECB has the discretion to select which person it asks to provide the information. In doing so it has to apply the principle of proportionality. In the case of groups, where the ECB is the consolidating supervisor, it may ask the consolidating entity also for information available to it in respect of consolidated entities. The ECB may address such request to the parent undertaking, insofar as the parent undertaking and the subsidiaries are obliged to ensure that the data required for consolidation are duly forwarded, Art. 11(1) Regulation (EU) No 575/2013. The ECB should, in particular do so in cases where information providers are located in third countries and there may be an issue with the enforceability of request for information (see infra, → para. 20-22). 20 Insofar as the obliged information provider is located outside the participating Member States (Art. 2(1) SSM‑FR), the SSMR claims effects also outside the euro area and even the EU (hereafter called “extraterritorial effects”). However, it needs to be noted that Art. 10(1)(a)-(d) SSMR refers only to credit institutions and (mixed) financial/ activity holding companies established in the participating Member States. Thereby the provision limits the scope of the obliged entities. Whether this limitation makes sense can be questioned. In respect of the persons belonging to the entities referred to in Art. 10(1)(a)-(d) SSMR 13 and outsourcing providers no such limitation exists, Art. 10(1) (e) and (f) SSMR.14 It is argued that Art. 42(1) ESCB Statute should not exclude extraterritorial effects in respect of Member States with a derogation. Art. 42(1) ESCB Statute determines that certain articles of the ESCB Statute shall not confer any rights or obligations to Member States in respect of which the Council has not decided that they fulfil the necessary conditions for the adoption of the euro (Member States with a derogation). First, one could argue that the Statute in principle is only of relevance for the ESCB – thus not referring to tasks conferred under the SSMR, and second, even if one does not follow this position it should be noted that Art. 42 ESCB Statute does not refer to Art. 25(2) ESCB Statute and, thereby, to Art. 127(6) TFEU and therefore, the Council may confer upon the ECB tasks whereby ECB powers may extend beyond participating Member States. An opposite view would deny the ECB’s ability to impose obligations by binding legal acts outside of participating Member States, due to a primary law limitation pursuant to Art. 42 ESCB Statute which could be interpreted as limiting the effectiveness of the ECB decisions to participating Member States. 21 If one follows the first approach, the legislator of the SSMR appears to have provided for an extraterritorial effect of Art. 10 SSMR. This is justified as (i) the envisaged obligation to provide information is limited to information necessary for carrying out the tasks conferred on the ECB and (ii) the required connection of the information provider with the (significant) supervised entity provides a sufficient connecting factor to justify such effect. For this reason, a credit institution and (mixed) financial/activity holding company established in a participating Member State would be well advised to ensure in any contractual relationship which it has with an information provider (e.g. in its contract with an outsourcing provider) that such information provider will comply with any information request of the ECB. First, the ECB could in case of non-response to an information request ask the supervised entity to provide such information. Second, if such information cannot be provided it is not excluded that the ECB may conclude that risks 13 Parties belonging to the entities referred to in Art. 10(1)(a)-(d) SSMR include in particular subsidiaries of such entities but also their parent undertaking if it is established in another State. 14 See Lackhoff, The Single Supervisory Mechanism (2017), para. 758.
164
Klaus Lackhoff and Mikulas Prokop
Art. 10 SSMR
Request for information
exist that can be the basis for supervisory measures pursuant to Art. 16 SSMR vis-à-vis a credit institution located in the participating Member State. Even if the legislator of the SSMR has provided to the ECB the possibility to oblige in- 22 formation providers located in non-participating Member States and in third countries to provide information, this obligations cannot be enforced by the ECB itself. The ECB may not impose sanctions on such information providers which do not comply with a supervisory decision obliging them to provide information. This is because under Council Regulation 2532/98 15 such sanctions may only be imposed on undertakings in a participating Member State.16 Under Art. 10(1)(a) SSMR, the ECB may request information from credit institu- 23 tions established in participating Member States. The provision does not differentiate whether the credit institution is significant or less significant. As the ECB has tasks in respect of both types of institutions, it makes sense that the power to require information extends to both: In respect of significant institutions, the necessity to request information emanates from day-to-day direct supervision needs. In respect of less significant institutions, the ECB needs to have an information gathering power,17 to determine the significance of institutions,18 to carry out common procedures,19 to ensure consistency of supervisory outcomes within the SSM,20 in order to be able to effectively exercise its powers directly vis-à-vis less significant institutions, where necessary, 21 and in order to fulfil its oversight role.22 The ECB may request credit institutions to provide information on an individual lev- 24 el, but also on a consolidated level, in particular in cases where the credit institution is obliged to comply with the prudential requirements on a consolidated basis (see Art. 11 Regulation (EU) No 575/2013). The proportionality of the ECB’s request for information from credit institutions obliged to comply with the prudential requirements on a consolidated basis in respect of subsidiaries within the perimeter of consolidation23 can be defended by the fact that parent institutions should under the pillar 1 rules possess all the information necessary for the purposes of consolidated supervision as such information has to be delivered to the parent in order to comply with this requirement. In particular, Art. 11 Regulation (EU) No 575/2013 requires parent institutions and subsidiaries subject to Regulation (EU) No 575/2013 to set up a proper organisational structure and appropriate internal control mechanisms in order to ensure that the data required for consolidation are duly processed and forwarded. In addition, parent institutions in the Member States must also ensure that subsidiaries not subject to Regulation (EU) No 575/2013 implement arrangements, processes and mechanisms to ensure a proper consolidation (Art. 11(1) Regulation (EU) No 575/2013). Hence the ECB should be able to
15 Regulation (EU) No 2532/98 of the Council of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions, OJ L318, 27.11.1998, p. 4 as amended by Regulation (EU) 2015/159 of the Council of 27 January 2015, OJ L27, 3.2.2015, p. 1. 16 De lege ferenda, discussion could be opened whether it is possible to abolish this limitation to undertakings in participating Member States as it is justified to ensure also that undertakings in other States can be sanctioned if they do not comply with an ECB supervisory decision requiring the provision of information. 17 This is also made explicit in Art. 6(5)(d) SSMR. 18 Art. 6(4) SSMR. 19 See Arts. 73-88 of SSM‑FR. Common procedures consist of authorisations, withdrawals of authorisations and assessments of qualifying holdings. 20 Art. 6(5)(a) SSMR. 21 Art. 6(5)(b) SSMR. 22 Art. 6(5)(c) SSMR. 23 Art. 18 Regulation (EU) No 575/2013.
Klaus Lackhoff and Mikulas Prokop
165
Art. 10 SSMR
25
26
27
28
29
Request for information
request information from the parent institutions for the entire consolidation scope, irrespective of the location of the consolidated entities.24 Under Art. 10(1)(b) and (c) SSMR, the ECB may request information from financial holding companies 25 and mixed financial holding companies26 established in participating Member State regardless of the fact whether such holding companies belong to a significant or less significant group.27 The ECB might need to make such a request in particular where it carries out supervision on a consolidated basis pursuant to Art. 4(1)(g) SSMR. The relevance of this power may increase based on the fact that following changes by CRR 2 financial holding companies and mixed financial holding companies are under certain conditions obliged to comply with prudential requirements on consolidated basis (see Art. 11(2) CRR, Art. 3(3) CRD). The ECB does not exercise direct supervision over mixed activity holding companies. However, under Art. 10(1)(d) SSMR, the ECB is still able to request information from mixed activity holding companies established in the participating Member States but only to the extent to which it is necessary for the supervision of credit institutions which belong to such companies. Under Art. 10(1)(e) SSMR, the ECB may request information from persons, wherever they are located,28 belonging to credit institutions, (mixed) financial holding companies and mixed activities holding companies established in the participating Member States. It is not fully clear whether the term “belonging to” should be read in a narrow sense of ownership or a broader sense of affiliation. In case of a narrow reading in a sense of ownership, only legal persons that are owned by a credit institution or a (mixed) financial/activity holding company established in a participating Member State would fall within the scope of Art. 10(1)(e) SSMR. However, it would not be clear what level of ownership is necessary, for example, whether it is needed that the ownership must lead to control or whether a lower threshold is sufficient. It is considered that as a minimum, even the narrow reading of the term “belonging to” could be interpreted as including all subsidiaries. However, a parent undertaking in another State pursuant to this reading would not belong to the entities referred to in Art. 10(1)(a)-(d) SSMR. In case of a broader reading in sense of affiliation, the scope of Art. 10(1)(e) SSMR would include both natural and legal persons which have a sufficiently close connection to a credit institution, (mixed) financial holding company or mixed activity holding company established in a participating Member State. This would include subsidiaries but also a parent undertaking in a State which is not a participating Member State (unless one is of the view this is excluded in light of the reference to “participating Member States” in letters (a) to (d) of Art. 10(1) SSMR). Further, this would for example include the board members or staff29 as well as companies in which these entities hold interest. Also members of a management body in its supervisory function would be covered by such broader reading even if the body acts only as a collegial organ as they are only asked to provide their factual knowledge and not to speak on behalf of the body. Such a broader interpretation is preferable as it is in line with the wording and as it would sup24 The information request in respect of non-EU entities raises concern regarding confidentiality, which are discussed infra, → para. 33. 25 As defined in Art. 2(4) SSMR. 26 As defined in Art. 2(5) SSMR. 27 Reasons set out in supra, → para. 23 apply to financial holding companies and mixed financial holding companies mutatis mutandis. 28 The information request in respect of non-EU entities raises concern regarding confidentiality, which are discussed infra, → para. 33. 29 See Lackhoff, The Single Supervisory Mechanism (2017), para. 759.
166
Klaus Lackhoff and Mikulas Prokop
Art. 10 SSMR
Request for information
port the effectiveness of the provision since the ability to receive the relevant information is decisive for effective supervision. However, if this approach is taken, the ECB should heed the principle of proportionality in determining which persons are obliged to provide information. Under Art. 10(1)(f) SSMR, the ECB may request information from third parties to 30 whom the credit institutions, (mixed) financial holding companies and mixed activities holding companies established in the participating Member States have outsourced functions and activities.30 Such third persons could be both natural and legal persons. The functions and activities referred to in Art. 10(1)(f) SSMR should be interpreted as including all (or part of the) functions and activities which would be subject to the ECB’s prudential supervision pursuant to Art. 4(1) and (2) SSMR, if the outsourcing credit institutions or (mixed) financial holding companies would have been performing such functions and activities themselves. It would not matter whether such functions and activities are outsourced directly or indirectly as Art. 10(1)(f) SSMR focuses on functions and activities of outsourcing entities, not on the way how these are outsourced.31 In this regard, the ECB may request from the third parties to whom such functions and activities have been outsourced not only the information on the performance of such functions and activities but also all relevant information which is necessary to investigate whether such functions and activities can be performed properly (e.g. all service level agreements, organisational structure of the third party, etc).
III. Professional secrecy – no limitation to the obligation to provide information Art. 10(2)(1) SSMR expressly stipulates that professional secrecy provisions do not 31 exempt entities subject to information requirements from the duty to supply such information and supplying such information shall not be deemed to be in breach of professional secrecy. In this context, it should be noted that the obligation of professional secrecy can be based on two different sources: a contractual and/or a statutory. Contractual secrecy obligations cannot be raised against an information request 32 based on Art. 10(1) SSMR as the statutory obligation to provide information to the ECB is not subject to a contractual agreement between the information provider and its contractual counterparty. Accordingly, information providers should ensure when entering in contractual secrecy obligations that they may provide information upon request to the ECB in order to avoid that they are in breach of contract when complying with this obligation. So, for example, a credit institution must in its contract with clients ensure that no contractual obstacle exists that would be in contradiction to its obligation to comply with an (justified) information request under Art. 10(1) SSMR. Insofar as professional secrecy obligations to which an information provider is sub- 33 ject are based on statutory provisions, Art. 10(2) SSMR overrules such provisions of EU Member States (i.e. the Member States whose professional secrecy rules apply in respect of a person that is obliged under Art. 10(1), (2) SSMR to provide information). Insofar as the information provider is subject to third-country professional secrecy rules, the SSMR cannot overrule statutory third-country professional secrecy obligations. This brings in particular difficulties where the ECB requires information, for example, in respect of transactions with non-EU clients, consolidated information which includes 30 On the other hand, Art. 10(1)(f) SSMR does not cover outsourcing of persons referred to in Art. 10(1)(e) SSMR. 31 See also Lackhoff, The Single Supervisory Mechanism (2017), para. 760.
Klaus Lackhoff and Mikulas Prokop
167
Art. 10 SSMR
Request for information
non-EU subsidiaries related information or if information is requested directly from non-EU entities (e.g. under Art. 10(1)(e) and (f) SSMR). In such a situation, the principle of proportionality would not allow the ECB to require the information provider to provide information, which it could only provide in breach of such third-country statutory professional secrecy provisions. However, the information provider is obliged based on its obligation under Art. 10(1) SSMR to undertake bona fide all efforts to obtain any available waivers or consents that would allow the delivery of such information. If the unavailability of the information would form an obstacle in effective supervision – for example by preventing the ECB to properly assess risks to the credit institution – the ECB may have recourse to alternative measures, such as the exclusion of a non-EU entity from the scope of consolidation32 or requiring the supervised entity established in the participating Member State to make necessary divestments to reduce the risk inherent in the activities, products and systems of the institution.33
D. Procedural aspects of the exercise of the power to request information and consequences of non-compliance with such request Unlike for general investigations under Art. 11(1) SSMR and on-site inspections under Art. 12(3) SSMR, the SSMR does not expressly require that the ECB adopts an ECB 34 supervisory decision to request information under Art. 10 SSMR. Although the ECB may indeed request information by a not enforceable “operational act”35 or even in the supervisory dialogue, an enforceable information request36 may only be issued by way of an ECB supervisory decision adopted in a non-objection procedure.37 This position is based on the need for a justification to impose an obligation (i.e. the obligation to deliver specific information) on the information provider. A counter position, arguing that Art. 10 SSMR already imposes by operation of law an obligation may not be convincing as such obligation must be specified to be operational and only thereby creates the obligation. 35 A connected issue is whether information providers which are requested to provide information would only be able to avail themselves of the exemption from the professional secrecy (Art. 10(2) SSMR) if they are requested to provide information by an ECB supervisory decision and not if the information request is made (only) in the ongoing supervisory dialogue or by an “operational act”. In light of the effectiveness of the provision and the wording of Art. 10(2)(1) SSMR it seems justified to assume that the exemption also covers information requests other than in the form of an ECB supervisory decision. 34
Art. 19(2)(a) Regulation (EU) 575/2013. Art. 16(2)(f) SSMR. 34 See Art. 2(26) SSM‑FR. See also Segoin, ‘The investigatory powers, including on-site inspections, of the ECB and their judicial control’, in: Zilioli/ Wojcik, Judicial Review in the European Banking Union (Edward Elgar Publishing, Cheltenham 2021), para. 17.09. who is of the view that a decision under Art 10 SSMR is not a contestable act (para. 17.10). On the legal form and procedural requirements for measures under Art. 10 SSMR see also Lackhoff, The Single Supervisory Mechanism (2017), para. 761 et seq. 35 This means by an informal supervisory measure, in general on the concept of informal supervisory measures see → Art. 4 paras. 153 et seq. 36 Even if a credit institution may not provide information upon an informal request it is under a factual ‘obligation’ in its own interest to do so, as this interferes with the on-going supervisory relationship. 37 Art. 26(8) SSMR and Art. 13g Decision of the European Central Bank of 19 February 2014 adopting the Rules of Procedure of the European Central Bank (ECB/2004/2), OJ L80, 18.3.2004, p. 33. 32 33
168
Klaus Lackhoff and Mikulas Prokop
Art. 10 SSMR
Request for information
The text of SSMR (Art. 22(1) SSMR38) and the SSM‑FR (Art. 25 SSM‑FR) does not 36 envisage a hearing prior to the adoption of such a decision.39 The ECB may request information on an ad hoc basis. Ad hoc information requests 37 are a crucial tool in risk-based supervision as it grants power to the ECB to make targeted information requests in ongoing supervision depending on the need and phase in the supervisory dialogue. This being said, ad hoc information requests may be substantiated not only by specific objectives of supervision of the supervised entity from which the information is requested but also by horizontal supervisory objectives. The details of the exercise of ad hoc information requests are specified in Art. 139 SSM‑FR. When making ad hoc information request, the ECB must specify the information concerned and a reasonable time limit within which the specified person is to provide information to the ECB.40 In setting the scope and timing for the provision of information, the ECB must observe the principle of proportionality.41 In this respect, the ECB must be able to justify why it needs the information and why it needs them at a particular time. In particular, providing the same information twice should be prevented – therefore Art. 139(2) SSM-FR requires the ECB to first take account of information already available to the national competent authorities before requiring information to be provided under Art. 10 SSMR. If an information request is enshrined in an ECB supervisory decision non-compli- 38 ance with such decision can be sanctioned pursuant to Art. 18(7) SSMR.
E. Exchange of information between the ECB and national competent authorities Under Art. 10(3) SSMR, the ECB is obliged (“shall”) to share information that it has 39 obtained from the entities with the national competent authorities concerned. This obligation of the ECB is part of the duty of cooperation in good faith and the obligation to exchange information between the ECB and national competent authorities under Art. 6(2) SSMR. In practical terms the duty to share information is likely the most effective way to prevent double reporting by supervised entities in the single supervisory mechanism.42 The exchange of information is also possible from the perspective of professional secrecy requirements, in particular by the combination of Art. 27 SSMR and Art. 56 Directive 2013/36/EU.
38 Art. 22(1) SSMR does not require hearing for decisions made in accordance with Section 1 of Chapter III SSMR. 39 See court rulings on the parallel provisions in the field of competition, see CJEU Case T‑357/06, Koninklijke Wegenbouw Stevin BV v European Commission, ECLI:EU:T:2012:488, para. 227. 40 Art. 139(1) SSM‑FR. 41 Recital 55 SSMR states that “The conferral of supervisory tasks implies a significant responsibility for the ECB to safeguard financial stability in the Union, and to use its supervisory powers in the most effective and proportionate way.” More generally, the principle of proportionality stems from the basic principles of the European Administrative law. 42 Recital 47 SSMR.
Klaus Lackhoff and Mikulas Prokop
169
Art. 10 SSMR
Request for information
F. Power to require the provision of information at recurring intervals and in specified formats for supervisory and related statistical purpose In addition to ad hoc information requests, additional reporting may be required based on Art. 10(1) SSMR from information providers only if the Union law does not determine conclusively the reporting requirements in a certain area and (only) in so far as necessary for carrying out its supervisory tasks.43 41 The ECB may request information at recurring intervals and in specified formats for supervisory and related statistical purposes. In particular, under Art. 141 SSM‑FR, the ECB may specify the categories of information that should be reported as well as the process, formats, frequencies and time limits for the provision of the information concerned. Practically, under Arts. 141(2) and 140(3) and (4) SSM‑FR, entities subject to the reporting obligation will submit the requested information to their relevant national competent authorities, whereas the national competent authorities will perform the initial data checks and make the information available to the ECB. The ECB shall organise the processes relating to the collection and quality review of data reported by supervised entities. 42 From an individual supervised entity the ECB may require additional or more frequent institution-specific reporting based both on Art. 10(1) SSMR as well as pursuant to Art. 16(2)(j) SSMR. Consequently, the question arises whether the latter provision is (at least insofar as their personal scope overlaps) lex specialis to Art. 10(1) SSMR. Art. 10(1) SSMR provides for a legal basis to request information in ongoing supervision where it may not yet be possible to assess that any of the conditions in Art. 16(1) SSMR are fulfilled. On the other hand, Art. 16(2)(j) SSMR may be imposed only to address identified risks and in this regard may provide for more onerous reporting obligations proportionate to the risks identified. If this should be the case individual reporting requirements for those entities that can be the addressees of supervisory measures pursuant to Art. 16 SSMR could be only based on Art. 16(2)(j) SSMR. That Art. 16(2)(j) SSMR is a special provision compared to Art. 10(1) SSMR could be supported by the fact that it applies under more restrictive conditions than Art. 10(1) SSMR. 43 With CRD V44 another question arises. According to the new Art. 104(2) CRD the possibility to require additional reporting pursuant to Art. 104(1)(j) CRD shall be restricted. Art. 104(1)(j) CRD was the model for Art. 16(2)(j) SSMR. Consequently, it can be asked whether a limitation of Art. 104(1)(j) CRD should also impact Art. 16(2)(j) SSMR and in this specific case also the ability to ask for reporting under Art. 10 SSMR. The answer could be that this cannot be the case45 as it could be argued that it follows already from the different legislative process necessary for amending the SSMR on the one side and the CRD on the other side. The opposite position would be that the ECB 40
43 See for example Regulation (EU) 2015/534 of the European Central Bank of 17 March 2015 on reporting of supervisory financial information, OJ L 86, 31.03.2015, p. 13 as amended by Regulation (EU) 2017/538 of European Central Bank of 25 August 2017, OJ L 240, 19.09.2017, p. 1. In so far the ECB is of the view that Regulation 680/2014 of 16 April 2014, OJ L 191, 28.06.2014, p. 1 does not exhaustively determine the financial reporting. 44 Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, OJ L150, 7.6.2019, p. 253 (274), Art. 1 (32). 45 Another provision where this issue applies is Art. 104a CRD V which provides for limitations of the power to impose own funds requirements.
170
Klaus Lackhoff and Mikulas Prokop
Art. 11 SSMR
General investigations
must apply all relevant Union law, which includes the new requirements under the CRD V and that this determines also the understanding of the SSMR. The ECB can stipulate based on Art. 10(1) SSMR and Art. 4(3) SSMR also generally 44 applicable reporting obligations by way of a regulation or identical decisions. It may introduce such reporting requirements only if the Union law neither comprehensively imposes reporting requirements on credit institutions as a part of the pillar 1 framework nor excludes such additional reporting requirements. In particular, the ECB may not impose additional reporting requirements where the Union law establishes uniform requirements in relation to supervisory reporting to competent authorities as is the case of Commission Implementing Regulation (EU) 2021/451.46 That Regulation aims at increasing efficiency and reducing the administrative burden by establishing a coherent reporting framework on the basis of a harmonised set of standards.47 If the national competent authorities or the ECB within the scope of this regulation were able to impose additional reporting requirements this would directly contradict the maximum harmonisation objective of the common supervisory reporting standards.48 Consequently, the reporting obligations established by the ECB in Regulation (EU) 2015/534 on reporting of supervisory financial information and by individual decisions requiring additional supervisory information at recurring intervals (e.g. in the past the so-called “Short Term Exercise” – STE) are only possible as they are out of the scope of established reporting obligations.
Art. 11 SSMR General investigations 1. In order to carry out the tasks conferred on it by this Regulation, and subject to other conditions set out in relevant Union law, the ECB may conduct all necessary investigations of any person referred to in Article 10(1) established or located in a participating Member State. To that end, the ECB shall have the right to: (a) require the submission of documents; (b) examine the books and records of the persons referred to in Article 10(1) and take copies or extracts from such books and records; (c) obtain written or oral explanations from any person referred to in Article 10(1) or their representatives or staff; (d) interview any other person who consents to be interviewed for the purpose of collecting information relating to the subject matter of an investigation; 2. The persons referred to in Article 10(1) shall be subject to investigations launched on the basis of a decision of the ECB. When a person obstructs the conduct of the investigation, the national competent authority of the participating Member State where the relevant premises are located shall afford, in compliance with national law, the necessary assistance including, in 46 Commission Implementing Regulation (EU) 2021/451 of 17 December 2020 laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to supervisory reporting of institutions and repealing Implementing Regulation (EU) No 680/2014, OJ L97, 19.3.2021, p. 1. 47 Recital 1 of Regulation (EU) No 680/2014. 48 Under Art. 4(3)(2) SSMR the ECB may take decisions on information requests subject to and compliance with the relevant Union law and in particular any legislative and non-legislative act, including binding regulatory and implementing technical standards developed by EBA and adopted by the Commission.
Klaus Lackhoff and Mikulas Prokop
171
Art. 11 SSMR
General investigations
the cases referred to in Articles 12 and 13, facilitating the access by the ECB to the business premises of the legal persons referred to in Article 10(1), so that the aforementioned rights can be exercised. Bibliography Klaus Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (C. H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden 2017); Jürgen Schwarze, European Administrative Law (revised 1st edn, Sweet & Maxwell, London 2006); Georgios Zagouras, ‘Der Rechtsrahmen für Vor-Ort-Prüfungen der Europäischen Zentralbank nach Art. 12 SSM‑VO’, WM 2019, 2191; Georgios Zagouras, ‘On-site Inspections Conducted by the European Central Bank: Legal Considerations’, JIBLR 33 (2018), 437; Daniel Segoin, ‘The investigatory powers, including on-site inspections, of the ECB and their judicial control’, in: Chiara Zilioli and Karl-Philipp Wojcik, Judicial Review in the European Banking Union (Edward Elgar Publishing, Cheltenham 2021), pp 285-303. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Personal scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
C. Material scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
D. Exercise of the general investigation powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
A. Function and background of the provision The power of the ECB to conduct general investigations is one of ECB’s investigatory powers specified in Section 1 of Chapter III of the SSMR. The provision of Art. 11 SSMR on general investigations complements both Art. 10 SSMR on the off-site requests of information and Art. 12 SSMR on on-site inspections by providing the specific manner in which the ECB may obtain information about supervised entities in both on-site and off-site investigations.1 The investigation tools envisaged in Art. 11 SSMR are consequently available to the Joint Supervisory Teams in their ongoing supervision and to onsite inspection teams based on Arts. 12 and 11 SSMR. As with all investigatory powers, the power of general investigations is available to the ECB for the exclusive purpose of carrying out its tasks under Arts. 4(1), 4(2) and 5(2) SSMR. These powers cannot be used to facilitate any other tasks of the ECB or tasks of other authorities. 2 2 The power of the ECB to conduct general investigations under Art. 11(1) SSMR mirrors the general investigation powers that the national competent authorities shall have under the national law implementing Art. 65(3)(b) CRD. In this regard, direct vesting of the power to conduct general investigations to the ECB under the SSMR does not preclude the ECB from making use of all the powers which competent authorities have under the relevant Union law, including national law transposing the relevant Union law.3 Conversely, the national competent authorities and national designated authorities also maintain the powers, in accordance with national law, to conduct, in principle, general investigations based on their national law even at significant supervised entities.4 1
B. Personal scope 3
Art. 11 SSMR empowers the ECB to conduct “all necessary investigations of any person referred to in Article 10(1) established or located in a participating Member State”. Hence, its personal scope prima facie follows the personal scope of Art. 10(1) SSMR. See Lackhoff, The Single Supervisory Mechanism (2017), para. 755. See supra, → Art. 10 para. 16. 3 Arts. 4(3) and 9(1) SSMR. 4 Art. 6(6) sent. 2 SSMR. See also supra, Art. 10 para. 10. 1
2
172
Klaus Lackhoff and Mikulas Prokop
Art. 11 SSMR
General investigations
However, by the addition of “established or located in a participating Member State” this personal scope is according to the wording limited in all cases to persons established or located in a participating Member State. This would be a substantial limitation of the personal scope of Art. 11(1) SSMR compared to Art. 10(1)(e) and (f) SSMR. The ECB would only be able to apply the power to perform general investigations to persons belonging to a credit institution or (mixed) financial/activity holding company established or located in a participating Member State or third parties to whom such an entity has outsourced functions and activities5 if such a person or third party is established or located in a participating Member State. As this limitation of the personal scope to persons listed in Art. 10(1) SSMR which 4 are established or located in a participating Member State is neither repeated in Art. 11(2) SSMR, which only refers to the persons referred to in Art. 10(1) SSMR, nor included in Art. 10 SSMR or Art. 12 SSMR one could argue that the context shows that the addition of “established or located in a participating Member State” in Art. 11(1) SSMR was a drafting error. Also the purpose of the investigatory power to ensure that the ECB is in the position to get the information necessary for carrying out its supervisory tasks could be seen as supporting this view, in particular taking into account that an “extraterritorial effect” would be justified.6
C. Material scope Art. 11(1)(2) SSMR provides a list of general investigation powers which consists of 5 (i) the power to require the submission of documents (see infra, → para. 7), (ii) the power to examine books and records (see infra, → paras. 10 et seq.), (iii) the power to obtain written or oral explanations (see infra, → paras. 14 et seq.) and (iv) the power to interview any other person who consents to be interviewed (see infra, → para. 10). This list could be deemed to be exhaustive but the wording does not provide a conclusive hint. Rather the list is preceded by the statement that the ECB may conduct “all necessary investigations”. Based on this and the fact that also Art. 12(1)(1) SSMR emphasise that the ECB may carry out “all necessary on-site inspections” and further taking into account that the text does not express that the list of investigation measures is exhaustive, the list should be interpreted broadly. All of the powers entailed in Art. 11(1)(2) SSMR provide a specific way of obtaining 6 information and should be interpreted broadly so as to achieve their effet utile, which is that the ECB should have sufficient access to information and data to fulfil its prudential supervisory tasks. According to Art. 11(1)(2)(a) SSMR, the ECB may require the submission of docu- 7 ments. The documents which an obliged party has to submit extend to all documents which relate to the subject matter of the investigation. The scope of the investigation determines the limits of the investigation; the purpose of the investigation needs to be included in the decision relating to the investigation, see Art. 142 SSM‑FR. However, the ECB may also require the submission of documents in respect of which it is not clear whether they are relevant for the investigation in order to assess their relevance. “Documents” are not only paper documents but also electronic documents wherever stored. See supra, → Art. 10 paras. 20 et seq. See supra, → Art. 10 paras. 22 et seq. Different, i.e. limiting with the exception of interviews the scope to persons established or located in a participating Member State, Segoin, ‘The investigatory powers, including on-site inspections, of the ECB and their judicial control’, in: Zilioli and Wojcik, Judicial Review in the European Banking Union (2021), p. 289 para. 17.17. 5
6
Klaus Lackhoff and Mikulas Prokop
173
Art. 11 SSMR 8
9
10
11
12
13
14
15
General investigations
The power to require the submission of documents extends not only to already existing documents but also to documents which the supervised entity needs to compile (unless one sees the power to request such documents only included in Art. 10 SSMR). However, the request to submit not already existing documents must, in particular, be assessed with regard to its proportionality. Among others, the effort needed and the cost of the compilation of documents, the availability of the relevant data, and the relevance for the tasks of the ECB have to be assessed and the request may not be disproportionate to the objective that the ECB seeks to achieve. The ECB may, subject to limitations resulting from the principle of proportionality, determine the manner – be it in paper or electronic form and in which electronic format – in which the documents shall be submitted to it. Under Art. 11(1)(2)(b) SSMR, the ECB may examine books and records and take copies and extracts from such books and records. The entities referred to in Art. 10(1) SSMR must fully cooperate with the ECB to access books and records and refrain from any actions which would manipulate or withhold information from examined books and records. “Books and records” means any documents (in whatever format) relating to the business activities carried out by the obliged information provider to which the information request or on-site inspection of the ECB relates. In the case of an outsourcing provider books and records refer, therefore, only to those part of the books and records relating to the credit institution to which the information request or on-site inspection of the ECB relates. Part of the books and records are among others business-related correspondence (including e-mails, short messages, letters), and contracts. The power to examine books and records encompasses also the right for the ECB to have direct (reading) access to the IT system of the information provider. It also covers the right of the ECB to have such access without being observed by the information provider (e.g. by an observer) as otherwise the effectiveness of the power may be impaired. Necessary measures to ensure data security and integrity have to be followed by the persons carrying out the investigation. Non-compliance with such requirements could give rise to a claim for damages of the information provider, Art. 340 TFEU. The power to take copies and extracts from books and records covers all technically available forms to take such copies, e.g. by photo. The rules on professional secrecy, apply also with regard to the treatment of such copies and excerpts as with regard to the books and records themselves. Under Art. 11(1)(2)(c) SSMR, the ECB may request written or oral explanations from any person referred to in Art. 10(1) SSMR or their representative or staff. Oral or written explanations are crucial for the ECB’s understanding of data and documents it collects, and to get all the facts necessary. The persons obliged to provide written or oral explanations encompass the information providers listed in Art. 10(1) SSMR. In so far as a person listed in Art. 10(1) SSMR is a legal person, Art. 11(1) SSMR clarifies that the legal representatives e.g. board members or authorised officers have to provide such explanations. In order to ensure comprehensive access to information, also staff members of an information provider have to provide explanations. “Staff ” covers any full or parttime employee of the information provider. In order to ensure the effectiveness of the provision freelancers also should be covered. Service providers that are not outsourcing providers should not be covered (Art. 10(1)(f) SSMR a contrario). It is noteworthy that this provision ensures that the ECB may access the staff even if the obliged person in the meaning of Art. 10(1) SSMR concentrates the communication to the ECB to certain representatives; this follows from the fact that the possibility to request explanations from the staff is provided in addition to the possibility to ask the 174
Klaus Lackhoff and Mikulas Prokop
Art. 11 SSMR
General investigations
obliged person and its representatives for explanations. So, if the obliged person would concentrate the communication to e.g. one contact person the ECB may nevertheless contact directly (other) staff and representatives. Art. 11(1)(2)(c) SSMR which relates to representatives or staff of any person men- 16 tioned in Art. 10(1) SSMR differs from Art. 11(1)(2)(d) SSMR that relates to any other persons. The difference is that Art. 11(1)(2)(c) SSMR does not require the consent of (i) the obliged person in the meaning of Art. 10(1) SSMR, (ii) its representatives or (iii) staff to provide the requested information. It follows that this provision stipulates as a mirror image to the power of the ECB to require the delivery of this information an obligation to provide these explanations. This obligation is only limited by general principles of law and fundamental rights in specific cases. The obliged person, its representatives and staff are also obliged to make themselves 17 available to the ECB within a reasonable time in order to comply with the obligation to provide explanations when stipulated in a supervisory decision. This applies also – subject to applicable health rules – if the employees should be in the home office due to the Corona pandemic. Subject to proportionality considerations7, they may also be obliged to appear in Frankfurt to this end. In the case of non-compliance, in principle, a sanction according to Art. 18(7) SSMR could be a consequence. Finally, under Art. 11(1)(2)(d) SSMR, the ECB has the right to interview any other 18 person who consents to be interviewed in order to collect information relating to the subject matter of an investigation. The power to interview goes beyond the personal scope of investigatory powers as the ECB may interview any other person who consents to be interviewed, even those who are not listed in Art. 10(1) SSMR and are neither representatives nor staff of a supervised entity. Accordingly, these are the persons that are providing information voluntarily to the ECB. Consequently, if such a person refuses his/her consent, the ECB may not interview it and may not impose a sanction.
D. Exercise of the general investigation powers Art. 11(2) SSMR expressly requires that the ECB adopts a decision to launch investi- 19 gations at any legal or natural person listed in Art. 10(1) SSMR. Art. 142 SSM‑FR requires that such ECB decision must specify (i) the legal basis for the decision and its purpose; (ii) the intention to exercise one of the general investigations powers and (iii) the fact that any obstruction of the investigation by the person being investigated constitutes a breach of an ECB decision within the meaning of Art. 18(7) SSMR. The ECB decision to launch an investigation needs to be adopted in a non-objection procedure.8 A different position would only be conceivable if the decision9 in the meaning of Arts. 11(2), 12(2) and (3) SSMR would be understood just as an internal act. This would, however, not be convincing as imposing an obligation (i.e. the obligation to tolerate the investigation) requires a legal basis as it otherwise interferes with the rights of the addressee.
7 In many cases it might be sufficient and proportionate that a person makes themselves available by electronic means. 8 Art. 26(8) SSMR and Art. 13g Decision of the European Central Bank of 19 February 2014 adopting the Rules of Procedure of the European Central Bank (ECB/2004/2), OJ L80,18.3.2004, p. 33. See also Lackhoff, The Single Supervisory Mechanism (2017), para. 761 et seq., and 772. 9 Art. 12(2) SSMR stipulates that business premises may be accessed based on an “investigation decision” and Art. 12(3) SSMR which determines that “[t]he legal persons referred to in Article 10(1) shall be subject to on-site inspections on the basis of a decision of the ECB.”
Klaus Lackhoff and Mikulas Prokop
175
Art. 11 SSMR 20
21
22
23
24
25
26
General investigations
The text of the SSMR (Art. 22(1) SSMR10) and the SSM‑FR (Art. 25 SSM‑FR) does not envisage a hearing prior to the adoption of such a decision.11 Moreover, the supervisory decision needs to be motivated. Such motivation may be brief and concise and can be encompassed in the statement on the intention of the exercise of the power. The legal basis for a decision launching an investigation, which needs to be stated in the decision launching a general investigation,12 would be Art. 11 SSMR. General investigation powers are often used in an on-site inspection. In such case, one could argue that the decision to launch an on-site inspection would also have to include a decision on the use of general investigation powers. Such a decision would then be based both on Arts. 11 and 12 SSMR. This is supported by the fact that Art. 12 SSMR in its paras. (2) and (3) differentiates between an investigation decision and a decision allowing an onsite inspection. However, one could also hold the view that the decision allowing the onsite inspection includes the decision to apply the general investigation powers. The ECB’s decision to launch an investigation must state its purpose, i.e. reasons and the aim for launching a general investigation.13 The purpose must be based on the ECB’s prudential supervisory tasks. Further it this decision needs also to state the intention to exercise one of the general investigation powers.14 Insofar, the decision should be precise as to which powers are to be used vis-à-vis which persons. The use of the investigatory powers must be proportionate. In addition, the ECB’s decision to launch the investigation must state the fact that any obstruction of the investigation by the person being investigated constitutes a breach of an ECB decision within the meaning of Art. 18(7) SSMR. 15 This requirement of Art. 142 SSM‑FR clarifies that the obstruction of general investigations launched by an ECB decision would be a breach of the ECB decision for which the ECB may impose sanctions in accordance with Regulation (EC) No 2532/98,16 which include fines and periodic penalty payments. In addition, pursuant to the second subpara of Art. 11(2) SSMR, when a person obstructs the conduct of the investigation, the national competent authority of the participating Member State where the relevant premises are located must afford, in compliance with national law, the necessary assistance. This assistance would for example, in case of an on-site inspection, mean facilitating the access by the on-site inspection team of the ECB to the business premises of the legal persons subject to the on-site inspection. The professional secrecy provisions do not exempt the entities which are subject to a general investigation from an obligation to provide any information, documents, access to books and records or other data to the ECB. Supplying such information to the ECB should not be deemed to be in breach of professional secrecy. The provisions of Art. 10(2) SSMR applies mutatis mutandis to all information received in the course of a general investigation. This follows from the fact that Art. 11 SSMR complements Arts. 10 and 12 SSMR by providing specific powers by which the ECB may obtain information about supervised entities in both on-site and off-site investigations and, there10 Art. 22(1) SSMR does not require hearing for decisions made in accordance with Section 1 of Chapter III SSMR. 11 See supra, → Art. 10 para. 36. 12 Art. 142(a) SSM‑FR. 13 Art. 142(a) SSM‑FR. Setting reasons on which a decision is based is also a requirement under Art. 22(2) SSMR. 14 Art. 142(b) SSM‑FR. 15 Art. 142(b) SSM‑FR. 16 Regulation (EC) No 2532/98 of the Council of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions, OJ L318, 27.11.1998, p. 4.
176
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 12, 13 SSMR
fore, should be subject to the same regime in respect of professional secrecy rules. Furthermore, such interpretation is also necessary to ensure the effectiveness of the general investigation powers; otherwise, the entities subject to general investigations could easily obstruct general investigations. By a similar logic, Art. 10(3) SSMR also applies mutatis mutandis to information ob- 27 tained in a general investigation. Hence, the ECB has to share information that it has obtained from the entities with the national competent authorities concerned. This obligation of the ECB is a part of a duty of cooperation in good faith and an obligation to exchange information between the ECB and national competent authorities.17 If an investigation should be carried out without being based on a supervisory 28 decision, the question arises whether the results of such an investigation can be utilised. If documents are submitted to the ECB upon an information request in form of an operational act in a voluntary manner, i.e. recognizing that no obligation to deliver information exists, the information gained from such documents can be used. Banking supervision encompasses an ongoing communicative process between the credit institutions and the supervisor. The exchange of information is an inseparable part of this process. As long as the credit institution does provide within this process information although it is aware that no obligation by a supervisory decision to do so exists, this information can be utilised. The situation may change if the credit institution is obliged by a supervisory decision to deliver the information, but this decision is annulled by the CJEU because it had defects. It could be argued that information received by using a supervisory power is only received in a justified manner if the decision is justified in terms of procedure and substance. If this is not the case and the decision is annulled, one could consider that a prohibition to utilise the information for sanctioning cases may be the consequence.18
Art. 12 SSMR On-site inspections 1. In order to carry out the tasks conferred on it by this Regulation, and subject to other conditions set out in relevant Union law, the ECB may in accordance with Article 13 and subject to prior notification to the national competent authority concerned conduct all necessary on-site inspections at the business premises of the legal persons referred to in Article 10(1) and any other undertaking included in supervision on a consolidated basis where the ECB is the consolidating supervisor in accordance with point (g) of Article 4(1). Where the proper conduct and efficiency of the inspection so require, the ECB may carry out the on-site inspection without prior announcement to those legal persons. 2. The officials of and other persons authorised by the ECB to conduct an on-site inspection may enter any business premises and land of the legal persons subject to an investigation decision adopted by the ECB and shall have all the powers stipulated in Article 11(1). 3. The legal persons referred to in Article 10(1) shall be subject to on-site inspections on the basis of a decision of the ECB. 4. Officials and other accompanying persons authorised or appointed by the national competent authority of the Member State where the inspection is to be conducted Art. 6(2) SSMR. See Joint Cases 197-200, 243, 245 and 247/80, Ludwigshafener Walzmühle, ECLI:EU:C:1981:311, paras. 13 et seq.; Schwarze, European Administrative Law (revised 1st edn, 2006), at pp. 1241 et seq. 17 18
Klaus Lackhoff and Mikulas Prokop
177
Arts. 12, 13 SSMR
On-site inspections/Authorisation by a judicial authority
shall, under the supervision and coordination of the ECB, actively assist the officials of and other persons authorised by the ECB. To that end, they shall enjoy the powers set out in paragraph 2. Officials of the national competent authority of the participating Member State concerned shall also have the right to participate in the on-site inspections. 5. Where the officials of and other accompanying persons authorised or appointed by the ECB find that a person opposes an inspection ordered pursuant to this Article, the national competent authority of the participating Member State concerned shall afford them the necessary assistance in accordance with national law. To the extent necessary for the inspection, this assistance shall include the sealing of any business premises and books or records. Where that power is not available to the national competent authority concerned, it shall use its powers to request the necessary assistance of other national authorities.
Art. 13 SSMR Authorisation by a judicial authority 1. If an on-site inspection provided for in Article 12(1) and (2) or the assistance provided for in Article 12(5) requires authorisation by a judicial authority according to national rules, such authorisation shall be applied for. 2. Where authorisation as referred to in paragraph 1 of this Article is applied for, the national judicial authority shall control that the decision of the ECB is authentic and that the coercive measures envisaged are neither arbitrary nor excessive having regard to the subject matter of the inspection. In its control of the proportionality of the coercive measures, the national judicial authority may ask the ECB for detailed explanations, in particular relating to the grounds the ECB has for suspecting that an infringement of the acts referred to in the first subparagraph of Article 4(3) has taken place and the seriousness of the suspected infringement and the nature of the involvement of the person subject to the coercive measures. However, the national judicial authority shall not review the necessity for the inspection or demand to be provided with the information on the ECB’s file. The lawfulness of the ECB’s decision shall be subject to review only by the CJEU. Bibliography Klaus Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (C. H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden 2017); Georgios Zagouras, ‘Der Rechtsrahmen für Vor-Ort-Prüfungen der Europäischen Zentralbank nach Art. 12 SSM‑VO’, WM 2019, 2191; Georgios Zagouros, ‘Onsite inspections conducted by the European Central Bank: legal considerations’, JIBLR 33 (2018), 437; Daniel Segoin, ‘The investigatory powers, including on-site inspections, of the ECB and their judicial control’, in: Chiara Zilioli/Karl-Philipp Wojcik, Judicial Review in the European Banking Union (Edward Elgar Publishing, Cheltenham 2021), pp 285-303.
178
A. Background and purpose of on-site inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Scope of the on-site inspection powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Personal scope of an on-site inspection – who can be subject to an on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Territorial scope of an on-site inspection – where can the ECB conduct an on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
C. Exercise of the on-site inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Planning and initiation of an on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Conduct of an on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Follow up on the on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 14 20 27
D. Art. 13 SSMR: Authorisation by a judicial authority . . . . . . . . . . . . . . . . . . . . . . . . . .
29
Klaus Lackhoff and Mikulas Prokop
4 8
On-site inspections/Authorisation by a judicial authority
Arts. 12, 13 SSMR
A. Background and purpose of on-site inspections The power to conduct on-site inspections is the most intrusive of ECB’s investigatory 1 powers. As with all investigatory powers, the power to conduct on-site inspections is available to the ECB for the exclusive purpose of carrying out its tasks under Arts. 4(1), 4(2) and 5(2) SSMR. This power cannot be used to facilitate any other tasks of the ECB or tasks of other authorities.1 The direct vesting of on-site inspection powers to the ECB under the SSMR does not 2 preclude the ECB to make use of all the investigatory powers which competent authorities have under the relevant Union law, including national law transposing the relevant Union law. Hence, the ECB would also be able to perform an on-site inspection based on the national law, including the one implementing Art. 65(3)(c) CRD IV. Conversely, the national competent authorities and national designated authorities maintain the powers, in accordance with national law, to conduct an on-site inspection of credit institutions, financial holding companies, mixed financial holding companies and undertakings included in the consolidated financial situation of a credit institution even with respect to significant supervised entities.2 The objective of the on-site inspection power is to enable the ECB to obtain a 3 more in-depth view of different risks, internal control systems, the business model and the governance of an inspected entity by investigations within a predefined scope and timeframe at the premises of the inspected legal entity.3 More specifically, an on-site inspection aims according to the ECB’s view to perform a focused and on the ground investigation of (i) (ii) (iii) (iv) (v) (vi)
the level, nature and features of the inherent risks to which the entity is exposed, also taking into account the entity’s risk culture; the appropriateness and quality of the inspected legal entity’s corporate governance and internal control framework in the light of the nature of its business and risks; the control systems and risk management processes, focusing, in particular on detecting weaknesses or vulnerabilities that could have an impact on the own funds of the inspected legal entity; the quality of balance-sheet items and the financial situation of the inspected legal entity; the business model of the inspected legal entity; as well as compliance with banking regulation, and, in the case of internal models, with the legal requirements pertaining to internal models used for the calculation of capital requirements (initial approval, material changes, extensions, roll-out, permanent partial use or reversion to less sophisticated approaches).4
This is done in an on-site inspection by interacting with the key individuals responsible for the management of business or risk areas of a credit institution and having access See supra, → Art. 10 para. 2. Art. 6(6) sent. 2 SSMR. The national competent authorities must inform the ECB, in accordance with the framework set out in Art. 6(7) SSMR, of the measures taken pursuant to this para. and closely coordinate those measures with the ECB. See also supra, → Art. 10 para. 10. 3 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf?49b4c0998c62d4ab6f31a4733c 7ea518, at p. 6, Section 1.3. 4 ECB, Guide to on-site inspections and internal model investigations, https://www.bankingsupervisi on.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf?49b4c0998c62d4ab6f31a4733c7ea518, at p. 6, Section 1.3. 1 2
Klaus Lackhoff and Mikulas Prokop
179
Arts. 12, 13 SSMR
On-site inspections/Authorisation by a judicial authority
to the relevant documentation and IT-systems, the management and the reporting systems which go beyond the regulatory reports that the ECB receives in the course of the on-going off-site supervision. With this detailed and focused “access to people and documents/IT -systems on-site”, the ECB shall be put in the position to form its own view on the risk situation and the compliance with regulatory requirements in order to be also able to challenge the position of the management body and the senior management on these issues in an informed way. It follows from the above that on-site inspections complement the ongoing supervision5 by providing focused and detailed information to understand the weaknesses of the credit institution feeding into the follow-up supervisory work of the relevant joint supervisory team.
B. Scope of the on-site inspection powers I. Personal scope of an on-site inspection – who can be subject to an on-site inspection Art. 12(1) SSMR empowers the ECB to conduct “all necessary on-site inspections at the business premises of legal persons referred to in Article 10(1) and any other undertaking included in supervision on a consolidated basis where the ECB is the consolidating supervisor in accordance with point (g) of Article 4(1).” Hence, the personal scope of the power to carry out on-site inspections broadly follows the personal scope of the power to request information under Art. 10(1) SSMR.6 This includes less significant credit institutions.7 However, two notable exemptions exist. 5 First, an on-site inspection may only be made at the business premises of legal persons. This is a difference to the personal scope of Arts. 10 and 11 SSMR which apply both to natural and legal persons. However, the power under Arts. 10 and 11 SSMR can be used by the ECB vis-à-vis natural persons (such as managers or employees) when performing an on-site inspection at the business premises of a legal person. This distinction between the personal scope of an on-site inspection (legal persons only) and the general investigation powers (also natural persons) used during an on-site inspection is apparent from Art. 12(2) SSMR which, subject to a decision under Art. 11 SSMR, vests into official and other persons authorised by the ECB to conduct an on-site inspection all general investigation powers stipulated in Art. 11(1) SSMR. Consequently, the ECB could not carry out an on-site inspection at the home-office of a manager or employee of a supervised entity, but the supervised entity would be obliged to ensure that for example all documents that are located in such home-office are moved back on-site if they fall in the scope of documents whose review is subject to the on-site inspection and the manager could be required to provide information according to Art. 10 or 11 SSMR. 6 Second, an on-site inspection may be carried out at the business premises of any undertaking included in supervision on a consolidated basis where the ECB is the con4
See also ECB, Guide to on-site inspections and internal model investigations, at p. 5, Section 1.1.4. See supra, → Art. 10 paras. 7-13. 7 Zagouros, JIBLR 33 (2018), 437, at p. 439 is, contrary to the wording which does not differentiate between significant and less significant credit institutions, of the view that less significant credit institution fall only in the scope of Art. 12 SSMR once the ECB has taken over their supervision. 5
6
180
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 12, 13 SSMR
solidating supervisor under Art. 4(1)(g) SSMR.8 Art. 111 CRD determines in which circumstances the ECB is the consolidating supervisor and hence has to carry out supervision on a consolidated basis under Art. 4(1)(g) SSMR. The scope of consolidated undertakings in respect of which the ECB may exercise its on-site inspection powers is determined by Art. 18 CRR. According to this provision, the scope of prudential consolidation includes institutions,9 financial institutions10 and ancillary services undertakings.11 These undertakings are subject to the consolidated supervision if (i) a parent–subsidiary relationship12 exists with the consolidating credit institution or (mixed) financial holding company13 (Art. 18(1) CRR), (ii) they are managed on a unified basis14 with the consolidating credit institution or the administrative, management or supervisory bodies consist in the majority of the same persons as those of the consolidating credit institution15(Art. 18(3) CRR) or (iii) those institutions, financial institutions and ancillary services undertakings need to be proportionally consolidated under Art. 18(4) CRR. The proportional consolidation covers joint ventures and this extends the scope of Art. 12 SSMR compared to the persons belonging to the entities referred to in Art. 10(1)(a) - (d) SSMR. On the other hand, in cases where the ECB or the NCAs may determine whether and how consolidation shall be carried out (i) because of participations or capital ties other than those mentioned in Art. 18(1) to (4) CRR (Art. 18(5) CRR), or (ii) because of a significant influence or single management (Art. 18(6) CRR), the consolidation would insofar not result in a power of the ECB to conduct an on-site inspection at the entities consolidated as the relevant consolidation method (equity method or the other consolidation method) under Art. 22(7)-(9) of Directive 2013/34/EU 16 does not constitute inclusion of the undertakings concerned in supervision on a consolidated basis. On-site inspections may be conducted at different levels of consolidation, depend- 7 ing on the goals of the inspection. An inspection can be done at a group level in which case the scope of an on-site inspection would include the parent entity as well as some or all of the subsidiaries and branches in the group or it can be conducted at an individual level, in which case the on-site inspection investigates one particular member of a group (be it the parent or a subsidiary).
8 Art. 12(1) SSMR. Under point (g) of Art. 4(1) SSMR, the ECB has a task to carry out supervision on a consolidated basis over credit institutions’ parents established in one of the participating Member States, including over financial holding companies and mixed financial holding companies, and to participate in supervision on a consolidated basis, including in colleges of supervisors without prejudice to the participation of national competent authorities in those colleges as observers, in relation to parents not established in one of the participating Member State. 9 As defined in Art. 4(1)(3) CRR. 10 As defined in Art. 4(1)(26) CRR. 11 As defined in Art. 4(1)(18) CRR. For inclusion of ancillary services undertakings into the prudential consolidation scope see Article 18(2) CRR. 12 Art. 18(1) CRR. 13 Art. 11 CRR. 14 Art. 22(7)(a) Directive 2013/34/EU. 15 Art. 22(7)(b) Directive 2013/34/EU. 16 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L182, 29.6.2013, p. 19.
Klaus Lackhoff and Mikulas Prokop
181
Arts. 12, 13 SSMR
On-site inspections/Authorisation by a judicial authority
II. Territorial scope of an on-site inspection – where can the ECB conduct an on-site inspection Art. 12 SSMR empowers the ECB to conduct an on-site inspection also at the premises of legal persons established in the non-participating EU Member States and in third countries. In particular, (i) the cross-reference to Art. 10(1) SSMR includes persons belonging to participating Member State-based credit institutions, (mixed) financial holding companies and mixed activity holding companies17 and third parties to which participating Member State based credit institutions, (mixed) financial holding companies and mixed activity holding companies have outsourced their functions and activities,18 without any express territorial limitation; and (ii) in Art. 12(1) sent. 1 SSMR the reference to “other undertakings included in supervision on a consolidated basis” is also without any territorial limitation. In this respect, the SSMR seems to claim EU-wide 19 as well as “extraterritorial effects”. 20 However, the exercise of on-site inspections outside of the euro-area and outside of the EU is subject to several legal and practical considerations. 9 In this context, the rules applying to on-site inspections in the non-participating Member States and in third countries are different although the underlying questions are the same. These underlying questions are (i) on which basis the ECB may exercise the investigatory power in a non-participating Member State/third country and (ii) whether the ECB has a legal basis to get access to the premises of the relevant entity. Certain specificities apply also if an on-site inspection shall be carried out in a Member State whose currency is not the euro but that entered into a close cooperation with the ECB, Art. 7 SSMR although such a Member State is a participating Member State, Art. 1(1) SSMR. In this case the ECB may not issue supervisory measures directly to the supervised entities established in the Member State in close cooperation, Art. 7(1), (4) SSMR. Consequently, the ECB has to instruct the national competent authority of the Member State in close cooperation to issue a decision to initiate an on-site inspection. With this instruction it may also instruct this national competent authority to appoint as persons carrying out the on-site inspection the same persons which the ECB has appointed for the on-site inspection at the supervised entity established in other participating and not participating Member States.21 10 Where the ECB intends, in its role as consolidating supervisor, to carry out an on-site inspection at an institution, a financial holding company, a mixed financial holding company, a financial institution, an ancillary services undertaking, a mixed-activity holding company, a subsidiary as referred to in Art. 125 CRD (insurance companies or investment firms) or a subsidiary as referred to in Art. 119(3) CRD situated in a nonparticipating Member State, it must follow the relevant Union law provisions in order to carry out the inspection in this country (‘access to the country’). This stems from the requirement of Art. 12(1) sent. 1 SSMR which empowers the ECB to conduct on-site inspections “subject to other conditions set out in relevant Union law”. In particular, the 8
Art. 10(1)(e) SSMR. Art. 10(1)(f) SSMR. 19 The limitation of Art. 139 TFEU does not apply to the powers conferred on the ECB by the SSMR, as the legal basis for the SSMR is Art. 127(6) TFEU, which is omitted from the list of derogations under Art. 139(2)(c) TFEU. 20 See supra, → Art. 10 paras. 20 et seq. for a general discussion of “extraterritorial effects” of investigatory powers. 21 See in this context also Arts. 114 and 115 SSM‑FR. 17
18
182
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 12, 13 SSMR
ECB has to follow in such a case Art. 118 CRD.22 According to this provision, the ECB must first ask the competent authorities of that non-participating Member State to have that check carried out. The competent authorities of that non-participating Member State are then required, within the framework of their competence, to act upon the request of the ECB either (i) by carrying out the check themselves, (ii) by allowing the ECB to carry it out, or (iii) by allowing an auditor or expert to carry it out. The ECB may participate in the check where it does not carry out the check itself. If the ECB is allowed to carry out the on-site inspection itself (which is what normally happens), the officials and other accompanying persons authorised or appointed by the national competent authority of the Member State where the inspection is to be conducted are, pursuant to Art. 12(4) SSMR, required to actively assist the officials of and other persons authorised by the ECB under the supervision and coordination of the ECB. To that end, they shall enjoy all the investigatory powers provided in Art. 11(1) SSMR. These rules should be also applied to on-site inspections at the premises of outsourcing providers in the nonparticipating Member States as there is no reason to treat them differently. If the competent authority in the non-participating Member State should carry out 11 the inspection itself, it has to rely on the powers vested to it in its national law to get access to the premise of the inspected entity. If the ECB is allowed by the competent authority to carry out the inspection, the ECB may base its request for access on its onsite inspection decision23 and if necessary on the judicial authority by a national court which it may have to receive in line with Art. 13 SSMR. Where the ECB subjects entities located in a third country to an on-site inspection, 12 the ECB is faced with the same questions as in connection with on-site inspections in non-participating Member States in a different legal context. First, the ECB staff and other accompanying persons for such an on-site inspection may only enter the third country in order to carry out the inspection subject to the permission of such a third country (‘access to the country’). To this end, the ECB carries out on-site inspections only with the consent of the relevant authorities of the relevant third country. Secondly, the members of the on-site inspection team possess no power to demand access to the premises of the inspected entity. Therefore, the ECB’s ability to access the premises and to carry out the inspection on-site depends on the law of the third country and the assistance of the competent authorities of that third country or the (voluntary) cooperation of the inspected entity. The ECB may only perform during an on-site inspection in a third country such checks which are allowed by the law of the third country and under the conditions of the law of that third country. An investigated entity located in a third country may voluntarily provide necessary cooperation to the ECB, however, it may also only do so subject to the restrictions imposed by laws of the third country (including any statutory confidentiality requirements). The ECB may not impose sanctions on entities in the non-participating Member 13 States or third countries that oppose or do not cooperate in the on-site inspection as initiated by the ECB supervisory decision. While a sanction would be in principle be possi-
22 Art. 118 CRD is also relevant in the inverse situation that the competent authority of a non-participating Member State intends to carry out an on-site inspection in participating Member State. Since Art. 118 CRD is finally an expression of state sovereignty it may be argued that it is not for the ECB but the relevant Member State (via its competent authority) to decide whether to allow the competent authority of the non-participating Member State to carry out the on-site. In the case of third-country authorities, this argument would be even stronger. 23 See discussion on “extraterritorial effects” supra, → Art. 10 para. 20.
Klaus Lackhoff and Mikulas Prokop
183
Arts. 12, 13 SSMR
On-site inspections/Authorisation by a judicial authority
bly based on Art. 18(7) SSMR it follows from Council Regulation 2532/9824 that such sanctions may only be imposed on undertakings in a participating Member State.25
C. Exercise of the on-site inspections I. Planning and initiation of an on-site inspection The need for on-site inspections stems from the on-going supervisory needs either on an institution/group-specific level or on a horizontal level. Based on such institutionspecific and strategic supervisory needs, the Supervisory Board adopts for each institution annually the Supervisory Examination Programme (SEP)26 in line with Art. 99 CRD. The Supervisory Examination Programme determines (i) how the ECB intends to carry out its tasks and to allocate resources; (ii) identifies institutions subject to enhanced supervision; and (iii) a plan for the on-site inspections, including those of branches and subsidiaries. In addition to the planned on-site inspections, the ECB may carry out ad hoc on-site inspections that are not part of the Supervisory Examination Programme. With such ad hoc on-site inspections, the ECB may react to rapidly changing risks at the level of an individual institution or at the broader system level.27 Finally, the ECB may also conduct, in the form of an on-site inspection, thematic inspections which focus on one issue (e.g. the business area, types of transactions) across a group of peer credit institutions; such inspections with a specific focus have to be differentiated from “deep dives” which are part of the on-going review.28 15 Pursuant to Art. 12(3) SSMR and Art. 143(2) SSM‑FR, on-site inspections are conducted on the basis of an ECB decision.29 This decision is an ECB supervisory decision (Art. 2(26) SSM‑FR)30 which must specify at least (i) the subject matter and the purpose of the on-site inspection and (ii) the fact that any obstruction to an on-site inspection by the legal person subject thereto shall constitute a breach of an ECB decision within the meaning of Art. 18(7) SSMR, without prejudice to national law as laid down in Art. 11(2) SSMR.31 As a matter of practice, the on-site inspections planned by the Supervisory Examination Programme are conducted on the basis of the ECB’s supervisory decision, which specifies the subject matter and purpose of each inspection32 while on the other hand, ad hoc on-site inspections (i.e. those not planned in the Supervisory Examination Programme) are based on an ad hoc ECB supervisory decision. 14
24 Regulation (EU) No 2532/98 of the Council of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions, OJ L318, 27.11.1998, p. 4 as amended by Regulation (EU) 2015/159 of the Council of 27 January 2015, OJ L27, 03.02.2015, p. 1. 25 See Art. 4b(2) Regulation (EU) No 2532/98. 26 See also ECB, Guide to on-site inspections and internal model investigations, at p. 5, Section 1.2. 27 See also ECB, SSM Supervisory Manual, March 2018, https://www.bankingsupervision.europa.eu/ecb /pub/pdf/ssm.supervisorymanual201803.en.pdf?42da4200dd38971a82c2d15b9ebc0e65, p. 5 para. 1.1.3. 28 ECB, SSM Supervisory Manual, March 2018, https://www.bankingsupervision.europa.eu/ecb/pub/pd f/ssm.supervisorymanual201803.en.pdf?42da4200dd38971a82c2d15b9ebc0e65, p. 64 para. 4.1.3 29 See also Lackhoff, The Single Supervisory Mechanism (2017), para. 761 et seq. and 775 30 See Art. 143(2) SSM‑FR. 31 However, given the territorial limitation of sanctioning and investigatory powers to the territory of participating Member States, the ECB shall not be able to impose sanctions on entities located outside of participating member states due to limitations under Regulation (EC) No 2532/98. 32 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, p. 5, para. 1.2.
184
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 12, 13 SSMR
The SSMR (Art. 22(1) SSMR33) and the SSM‑FR (Art. 25 SSM‑FR) do not envisage a hearing prior to the adoption of a decision subjecting a legal person to an on-site inspection.34 Where this is necessary for the proper conduct and efficiency of the on-site inspection, no prior announcement on an on-site inspection is to be made in such a case pursuant to the last sent. of Art. 12(1) SSMR and Art. 145(2) SSM‑FR. It is sufficient that the reasoning of the supervisory decision to carry out an on-site inspection is brief; it may solely consist of the description of the content and purpose of the on-site inspection. If the inspected entity is located in a participating Member State, the officials of and other persons authorised by the ECB shall have all the powers stipulated in Art. 11(1) SSMR, Art. 12(2) SSMR. Accordingly, in such cases, the ECB decision based on which an on-site inspection is conducted covers all general investigation powers and in addition as an element genuine to on-site inspections the power to carry out searches for information/documents falling within the scope of the on-site inspection. If an on-site inspection shall be carried out based on Art. 12 SSMR, the ECB is in charge of the establishment and composition of the on-site inspection team (OSI team) with the involvement of the relevant NCAs, Art. 144(1) SSM‑FR. Under Art. 144(2) SSM‑FR, the ECB must also designate the head of the on-site inspection team (‘Head of mission’) from among ECB and NCA staff members. In general, the on-site inspection team will consist of staff members of the ECB and NCAs (both from the NCA in the jurisdiction of the supervised entity as well as other NCAs)35 and/or third parties authorised by the ECB. The composition of the team, in terms of size, skills, expertise and seniority will depend on the scope and nature of each individual inspection.36 Members of the Joint Supervisory Team (JST) responsible for the ongoing supervision may participate in inspections as inspectors, but not as heads of mission, in order to ensure that onsite inspections are conducted independently.37 Where necessary and appropriate, the ECB can call on external consultants38 such as external auditors or other specialists.39 Pursuant to Art. 144(3) SSM‑FR, the ECB and NCAs are to consult with each other and agree on the use of NCA resources with regard to the on-site inspection teams. Finally, without prejudice to the composition of the on-site inspection team, Art. 12(4) SSMR gives the right to the officials of the national competent authority of the participating Member State concerned to participate in the on-site inspection (as observers). As a final step in the initiation of an on-site inspection, the ECB must under Art. 145 SSM‑FR notify the legal person subject to an on-site inspection at least five working days before the start of the on-site inspection (i) on the ECB decision to carry out an onsite inspection, and (ii) on the identity of the members of the on-site inspection team. This provision modifies the rules on the notification of ECB supervisory decisions (Art. 39 SSM‑FR) for the decision to carry out a supervisory decision. However, pursuant to Art. 12(1) SSMR and Art. 145(2) SSM‑FR, the notification of the legal person 33 Art. 22(1) SSMR does not require hearing for decisions made in accordance with Section 1 of Chapter III SSMR. 34 See supra, → Art. 10 para. 36. 35 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 7 et seq., Section 1.6. 36 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 8, Section 1.6. 37 See also ECB, Guide to on-site inspections and internal model investigations, September 2018, https:/ /www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 7, Section 1.5. 38 See also ECB, Guide to on-site inspections and internal model investigations, September 2018, https:/ /www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 8, Section 1.6. 39 See also Lackhoff, The Single Supervisory Mechanism, para. 778 and fn. 850.
Klaus Lackhoff and Mikulas Prokop
185
16
17
18
19
Arts. 12, 13 SSMR
On-site inspections/Authorisation by a judicial authority
subject to the on-site inspection is not necessary if the proper conduct and efficiency of the inspection so require. This would be the case, in particular, where there is a risk that the legal entity subject to inspection would manipulate data, systems or people in order to hamper the on-site inspection. The NCA of the Member State where the on-site inspection is to be conducted must also be notified by the ECB. This shall be done at least one week before notifying the legal person subject to the on-site inspection. If the on-site inspection is carried out in a third country the notification of the competent authority shall follow the rules laid down in a Memorandum of Understanding (MoU) with that authority; if no MoU exists or the MoU does not deal with the issue, it is recommendable to apply Art. 145 SSM‑FR also in this case.
II. Conduct of an on-site inspection 20
21
22
23
24
The head of an on-site inspection team appointed by the ECB is responsible for leading the on-site inspection and all persons in the on-site inspection team. The members of an on-site inspection team (ECB staff, NCA staff and external experts) are obliged to follow the instructions of the head of an on-site inspection team (Art. 146(1) SSM‑FR). Furthermore, in case of significant credit institutions the coordination between the JST and the on-site inspection team is crucial to ensure the efficiency of the on-site inspection. Art. 146(2) SSM‑FR makes the head of an on-site inspection team responsible for the coordination between the on-site inspection team and the JST responsible for the supervision of the significant credit institution. If the on-site inspection is conducted in a Member State, the ECB may ask the NCA for assistance without authorising these NCA members (assisting NCA team). In this case, the officials and other accompanying persons authorised or appointed by the NCA of the Member State where the inspection is to be conducted are required under Art. 12(4) SSMR, under the supervision and coordination of the ECB, to actively assist the officials of and other persons authorised by the ECB. To that end, the NCA officials or other accompanying persons shall have the power to enter the premises of the inspected entity and shall have all investigatory powers as specified in Art. 11(1) SSMR. The officials of the NCAs of the participating Member State where the on-site inspection is conducted shall also have the right to participate in the on-site inspection (Art. 12(4) sent. 3 SSMR) (observers). Where the officials of and other accompanying persons authorised or appointed by the ECB find that the inspected legal person opposes an inspection, the national competent authority of the participating Member State concerned are required under Art. 12(5) SSMR to afford them the necessary assistance in accordance with national law. To the extent necessary for the inspection, this assistance shall include the sealing of any business premises and books or records. Where that power is not available to the national competent authority concerned, it shall use its powers to request the necessary assistance of other national authorities (e.g. market authorities). Other national authorities are required to provide assistance in line with the national law. The on-site inspection team has a right to enter premises and use all the investigatory powers under Art. 11(1) SSMR and to search for information, Art. 12(2) SSMR. Hence, it may require submission of necessary documents and (reading-) access to ITsystems, examine books and records, obtain written or oral explanation and also interview any person other than those listed in Art. 10(1) SSMR. Under the conditions of the COVID pandemic on-site inspections may also be carried off-site by asking for remote
186
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 12, 13 SSMR
access to documents and IT-systems, the delivery of documents and carrying out meetings on-line. The use of these powers needs to be proportionate to the subject matter and goals of the on-site inspection and risk based.40 In general, the scope of an on-site inspection and the powers used will depend on the type of an on-site inspection. A full-scope inspection would cover a broad spectrum of risk and activities of the credit institution in order to provide a holistic view of the credit institution, whereas a targeted inspection would focus on a particular part of the credit institution’s business, or on a specific issue or risk. The legal professional privilege may (only) in specific situations limit the access to documents. It does only limit the access in on-site inspections to the communication between an independent (i.e. not employed) lawyer and the reviewed supervised entity in respect of communication connected with the right of defence.41 The professional secrecy provisions do not exempt the entities subject to an on-site 25 inspection from an obligation to provide access to premises, information, documents, access to books and records or other data to the on-site inspection team. Supplying such information to the on-site inspection team may not be deemed to be in breach of professional secrecy. Art. 10(2) SSMR 42 applies mutatis mutandis to all information received in the course of an on-site inspection. This interpretation stems from the fact that Art. 12 SSMR complements Arts. 10 and 11 SSMR by allowing the ECB to obtain and verify information about supervised entities in the on-site investigations and therefore the same principles with regard to professional secrecy rules should apply. Furthermore, such interpretation is also necessary to ensure the effectiveness of the on-site inspection powers; otherwise the entities subject to an on-site inspection could easily obstruct such on-site inspection. The on-site inspection is finalised by an on-site inspection report (OSI-report). 43 26 The drafting of the report is under the responsibility of the head of the on-site inspection team. The report is consulted with the legal person subject to inspection in a closing meeting and should be based on the facts and objections on which the inspected legal entity had an opportunity to comment.44 The final report, signed by the head of the on-site inspection team (Head of Mission), is provided to the inspected legal entity.
III. Follow up on the on-site inspection After the on-site inspection report is finalised, the work of the on-site inspection 27 team is finished. It is then up to the JST to follow up on any findings of the on-site inspection. The follow-up is either made by (i) a follow-up letter (operational act) that includes (non-binding) recommendations to remedy the shortcomings mentioned in the final report or (ii) an ECB supervisory decision that stipulates binding supervisory mea-
40 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 6, Section 1.3. 41 Segoin, ‘The investigatory powers, including on-site inspections, of the ECB and their judicial control’, in: Zilioli/ Wojcik, Judicial Review in the European Banking Union (Edward Elgar Publishing, Cheltenham 2021), para. 17.57 et seq. 42 See supra, → Art. 10 paras. 31 et seq. 43 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 13 et seq., Section 2.2.3. 44 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 22 et seq., Section 3.3.1.
Klaus Lackhoff and Mikulas Prokop
187
Arts. 12, 13 SSMR
On-site inspections/Authorisation by a judicial authority
sures to remedy those shortcomings.45 Such a decision needs to be adopted in a nonobjection procedure and is normally based on Art. 16 SSMR. The procedural rules for adopting supervisory decisions apply. Non-compliance with such a “follow-up decision” can be sanctioned (Art. 18(7) SSMR) while “non-compliance” with a follow-up operational act cannot be sanctioned. 28 Finally, if the on-site inspection report has identified intentional or negligent breaches of requirements under directly applicable acts of Union law (in particular CRR), the ECB may impose for such breaches sanctions under Art. 18(1) SSMR. In case the on-site inspection report reveals other breaches of Union law (in particular national transposition of CRD), the ECB may require NCAs to open proceedings with a view to taking action in order to ensure that appropriate penalties are imposed in accordance with national law implementing Union law (Art. 18(5) SSMR).
D. Art. 13 SSMR: Authorisation by a judicial authority The conduct of the on-site inspections may interfere with the protection of (also) business premises against arbitrary or disproportionate intervention by public authorities in the sphere of the private activities of any person, whether natural or legal. 46 As stated by the CJEU in the context of EU competition law in the Hoechst case, “in all the legal systems of the Member States, any intervention by the public authorities in the sphere of private activities of any person, whether natural or legal, must have a legal basis and be justified on the grounds laid down by law, and, consequently, those systems provide, albeit in different forms, protection against arbitrary or disproportionate intervention. The need for such protection must be recognized as a general principle of Community law”.47 Therefore, carrying out an on-site inspection requires an ECB supervisory decision to justify this interference. 30 In addition, Art. 13 SSMR clarifies that the ECB shall also apply for judicial authorisation for accessing the business premises and carrying out on-site investigations if this is required pursuant to national law (Art. 13(1) SSMR in connection with Art. 12(1) and (2) SSMR). The same applies for an NCA assisting the ECB (Art. 13(1) SSMR in connection with Art. 12(5) SSMR). 31 However, if the ECB applies for such an authorisation envisaged by national legislation, the scope of control by the national judicial authorities is limited by Art. 13(2) SSMR. They may (only) review whether the ECB decision initiating an on-site inspection is authentic and that coercive measures envisaged by the ECB in the on-site investigation are proportionate, i.e. neither arbitrary nor excessive having regard to the subject matter of the inspection. In particular, Art. 13(2) SSMR specifies further the nature of control of the proportionality of the coercive measures - the national judicial authority may ask the ECB for detailed explanations, in particular relating to the grounds the ECB has for suspecting that an infringement of the Union law has taken place and the seriousness of the suspected infringement and the nature of the involvement of the person subject to the coercive measures. 32 This definition of the scope of national judicial review is similar to the scope provided in the context of EU competition law as specified in Art. 20(8) of Council Regulation 29
45 See ECB, Guide to on-site inspections and internal model investigations, September 2018, https://ww w.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.osi_guide201809.en.pdf, at p. 15, Section 2.3.1. 46 See Case C-94/00, Roquette Frères, ECLI:EU:C:2002:603, paras. 27 et seq. 47 Joined Cases 46/87 and 227/88, Hoechst v. Commission, ECLI:EU:C:1989:337, para. 19.
188
Klaus Lackhoff and Mikulas Prokop
Art. 14 SSMR
Authorisation
(EC) No 1/200348 which in turn follows the terms of the CJEU competition law judgment in the Roquette Freres case.49 It is however questionable to what extent the principles developed for the national judicial review of investigations by the Commission in its capacity as a competition authority may be so easily applied to the on-site investigations by the ECB as a prudential supervisor. In particular, the ECB’s on-site inspections are not necessarily driven only by the aim to investigate an infringement of the relevant Union prudential law but follow a much wider scope and purpose as noted supra, para. 3. For this reason, the “suspected infringement” of the relevant Union law as a test for 33 proportionality under Art. 13(2) SSMR of on-site inspections should be read widely and include the possible necessity of investigations of risks commensurate with the size, activities and risk profile of the inspected legal entity.50 Only this wide interpretation ensures that on-site inspection may fulfil their purpose in line with the objectives of and tasks conferred on the ECB by the SSMR. Finally, the national judicial authority may not examine the lawfulness of the ECB’s 34 decision initiating on-site inspection or any other ECB decisions following up on the onsite inspection. Such examination is pursuant to Art. 13(2) SSMR in the exclusive competence of the CJEU.
Art. 14 SSMR Authorisation 1. Any application for an authorisation to take up the business of a credit institution to be established in a participating Member State shall be submitted to the national competent authorities of the Member State where the credit institution is to be established in accordance with the requirements set out in relevant national law. 2. If the applicant complies with all conditions of authorisation set out in the relevant national law of that Member State, the national competent authority shall take, within the period provided for by relevant national law, a draft decision to propose to the ECB to grant the authorisation. The draft decision shall be notified to the ECB and the applicant for authorisation. In others cases, the national competent authority shall reject the application for authorisation. 3. The draft decision shall be deemed to be adopted by the ECB unless the ECB objects within a maximum period of ten working days, extendable once for the same period in duly justified cases. The ECB shall object to the draft decision only where the conditions for authorisation set out in relevant Union law are not met. It shall state the reasons for the rejection in writing. 4. The decision taken in accordance with paragraphs 2 and 3 shall be notified by the national competent authority to the applicant for authorisation. 5. Subject to paragraph 6, the ECB may withdraw the authorisation in cases set out in relevant Union law on its own initiative, following consultations with the national competent authority of the participating Member State where the credit institution is established, or on a proposal from such national competent authority. These consultations shall in particular ensure that before taking decisions regarding withdrawal, the ECB allows sufficient time for the national authorities to decide on 48 Regulation (EC) No 1/2003 of the Council of 16 December 2002 on the implementation of the rules on competition laid down in Arts. 81 and 82 of the Treaty, OJ L 1, 4.1.2003, p. 1. 49 Case C-94/00, Roquette Frères, ECLI:EU:C:2002:603. 50 See third subpara. of Art. 1 SSMR.
Elke Gurlit
189
Art. 14 SSMR
Authorisation
the necessary remedial actions, including possible resolution measures, and takes these into account. Where the national competent authority which has proposed the authorisation in accordance with paragraph 1 considers that the authorisation must be withdrawn in accordance with the relevant national law, it shall submit a proposal to the ECB to that end. In that case, the ECB shall take a decision on the proposed withdrawal taking full account of the justification for withdrawal put forward by the national competent authority. 6. As long as national authorities remain competent to resolve credit institutions, in cases where they consider that the withdrawal of the authorisation would prejudice the adequate implementation of or actions necessary for resolution or to maintain financial stability, they shall duly notify their objection to the ECB explaining in detail the prejudice that a withdrawal would cause. In those cases, the ECB shall abstain from proceeding to the withdrawal for a period mutually agreed with the national authorities. The ECB may extend that period if it is of the opinion that sufficient progress has been made. If, however, the ECB determines in a reasoned decision that proper actions necessary to maintain financial stability have not been implemented by the national authorities, the withdrawal of the authorisations shall apply immediately. Bibliography Tomas A. Arons, ‘Judicial protection of supervised credit institutions in the European Banking Union’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 93; Henning Berger, ‘Der einheitliche Aufsichtsmechanismus (SSM) – Bankenaufsicht im europäischen Verbund’, WM (2015), 501; Henning Berger, ‘Rechtsanwendung durch die EZB im Single Supervisory Mechanism (SSM)’, WM (2016), 2325; Jens-Hinrich Binder, ‘Erlaubnispflicht, Zulassungsvoraussetzungen und Zulassungsverfahren’ in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, RWS Verlag, Cologne 2020), 115; Karl-Heinz Boos, Reinfrid Fischer and Hermann Schulte-Mattler (eds), KWG/CRR VO (5 th edn, C.H. Beck, Munich 2016); Josefa Breitenlechner and Marija Radosavljevic, ‘Die Entscheidungsbefugnis der EZB im Rahmen des europäischen Zulassungsverfahrens von Kreditinstituten’, ZFR (2016), 170; Concetta Brescia Morra, ‘The administrative and judicial review of decisions of the ECB in the supervisory field’, in: Banca d’Italia, Quaderni di Ricerca Giuridica No 81 (2016), 109; Alexander Glos and Markus Benzing, ‘Institutioneller Rahmen: SSM, EZB und nationale Aufsichtsbehörde’ in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, RWS Verlag, Cologne 2020), 23; Elke Gurlit, ‘Die Entwicklung des Banken- und Kapitalmarktaufsichtsrechts seit 2017 – Teil I’, WM (2020), 57; Jörn Axel Kämmerer, ‘Rechtsschutz in der Bankenunion’, WM (2016), 1; Ann-Kathrin Kaufhold, ‘Einheit in Vielfalt durch umgekehrten Vollzug? Zur Anwendung mitgliedstaatlichen Rechts durch europäische Institutionen’, JÖR 66 (2018), 85; André Kruschke, ‘Zulassung von Instituten’, in: Simon G. Grieser and Manfred Heemann (eds), Europäisches Bankaufsichtsrecht (Frankfurt School Verlag, Frankfurt 2016), 193; Klaus Lackhoff, Single Supervisory Mechanism (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Asen Lefterov, ‘Judicial review in a multi-level administrative framework – the case of the SSM’, ESCB Legal Conference 2020 (Frankfurt 2021), p. 286; Mario Martini and Quirin Weinzierl, ‘Nationales Verfassungsrecht als Prüfungsmaßstab des EuGH’, NVwZ (2017), 177; Yves Mersch, ‘Mehrteilige Verwaltungsverfahren in der Aufsichtspraxis der EZB’, EuZW (2020), 781; Peter-Christian Müller-Graff, ‘Rechtsschutz von Kreditinstituten in der Bankenaufsicht der Europäischen Zentralbank’, EuZW (2018), 101; Christian Müller, Reinfrid Fischer and Jan Hendrik Müller, ‘Rechtsschutz bei der Erteilung und Entziehung von Erlaubnissen für Kreditinstitute’, WM (2015), 1505; Kerstin Neumann, ‘The supervisory powers of national authorities and cooperation with the ECB – a new epoch of banking supervision’, EuZW-Supplement 1 (2014), 9; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2015); Bernhard Raschauer, Finanzmarktaufsichtsrecht (Verlag Österreich, Vienna 2015); Josef Ruthig, ‘Die EZB in der europäischen Bankenunion’, ZHR 2014, 443; Gunnar Schuster, ‘The banking supervisory competences and powers of the ECB’, EuZW-Supplement 1 (2014), 3; Tobias Tröger, ‘Der Einheitliche Aufsichtsmechanismus (SSM) – Allheilmittel oder quacksalberische Bankenregulierung?’, ZBB (2013), 373; Eddy Wymeersch, ‘The Single Supervisory Mechanism for banking supervision – Institutional aspects’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 93.
190
Elke Gurlit
Art. 14 SSMR
Authorisation
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Basic content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Relevant substantive and procedural law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Substantial requirements for authorisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Substantial requirements for withdrawal of authorisation . . . . . . . . . . . . . . . . 3. Procedural requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Practical relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 2 2 5 7 8
B. Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. All credit institutions irrespective of significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Territorial scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 10 16 17
C. Authorisation (Art. 14(1)-(4) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Triggers for Art. 14 SSMR procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Submission of application to an NCA (Art. 14(1) SSMR) . . . . . . . . . . . . . . . . . . . . III. Assessment of an application by an NCA (Art. 14(2) SSMR) . . . . . . . . . . . . . . . . . 1. Draft decision to grant authorisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Final decision to reject application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The ECB’s assessment and decision (Art. 14(3) and (4) SSMR) . . . . . . . . . . . . . . 1. Assessment of compliance with Union law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The ECB’s decision on an application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Scope of authorisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 18 21 24 24 27 28 28 29 32 36
D. Withdrawal of authorisation (Art. 14(5) and (6) SSMR) . . . . . . . . . . . . . . . . . . . . . I. Authorisations subject to withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Withdrawal initiated by the NCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Assessment of the NCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Assessment and decision by the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Withdrawal initiated by the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Assessment of ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Lapsing of the authorisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38 38 40 41 42 44 44 45 47 49 49 51 55 56
E. Judicial review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Distribution of competences between national and European courts . . . . . . . . II. Review in the European courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Optional administrative review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Admissibility of action for annulment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Assessment of the court und judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59 59 61 61 62 64
A. Introduction I. Basic content Art. 14 SSMR opens the section on specific powers granted to the ECB within the 1 SSM, thereby giving force to the tasks conferred on the ECB by Art 4(1)(a) SSMR. The authorisation of credit institutions and the withdrawal of licences are among the direct supervisory powers granted to the ECB irrespective of the significance of the credit institution. However, direct supervision of the ECB is performed within a complex cooperation arrangement with the NCAs of the relevant Member States. Art. 14 SSMR outlines the so-called common procedures to be followed, thereby vesting the final decision on
Elke Gurlit
191
Art. 14 SSMR
Authorisation
the authorisation (Art. 14(1)-(4) SSMR) and withdrawal of licence (Art. 14(5) and (6) SSMR) in the ECB.
II. Relevant substantive and procedural law 1. Substantial requirements for authorisation Substantive rules governing the authorisation of credit institutions are contained in Arts. 8 and 10 to 14 CRD IV1 and in the national laws implementing these provisions. According to Art. 10 CRD IV, an application must be accompanied by a programme of operations setting out the types of business envisaged, the structural organisation of the credit institution, and its internal governance. However, the supervisory review of the applicant’s business plan is limited, since, pursuant to Art. 11 CRD IV, the programme of operations is not to be examined in terms of the economic needs of the market. Art. 12 CRD IV requires the applicant to hold separate own funds and an initial capital of at least EUR 5 million, giving the option to accept an initial capital no less than EUR 1 million. According to Art. 13(1) CRD IV, an authorisation shall only be granted where at least two persons, that are deemed fit and proper within the meaning of Art. 91(1) CRD IV, effectively direct the business of the credit institution.2 Additionally, pursuant to Art. 13(2) CRD IV, a credit institution is required to have its head office in the Member State which received its application and in which it actually carries out its business. Finally, authorisation requires disclosure of the shareholders and members that have qualifying holdings. Art 14(2) and (3) CRD IV mandates the refusal of authorisation if those shareholders are not deemed suitable for the sound and prudent management of the credit institution or if close links between the credit institution and third parties could prevent the effective exercise of supervisory functions. 3 The RTS and ITS drafted by the EBA under Art. 8(2) and (3) CRD IV, specifying the requirements on authorisation,3 are still awaiting adoption by the Commission. They will form part of the relevant Union law that has to be applied by the ECB according to Art. 4(3)(2) SSMR. The ECB adopted two sets of guidelines setting out the policies on assessment of licence applications and on assessments of licence applications filed by FinTech credit institutions.4 While there is no doubt that this guidance does not have a legally binding nature and that regulatory standards drafted by the EBA and adopted by the Commission prevail over them, the NCAs have agreed to interpret national law in line with these policies to the extent possible. 4 The authorisation requirements laid down in the CRD IV are minimum harmonisation provisions not forestalling the Member States to set additional requirements 5 that form part of the cooperative licensing process according to Art. 14(2) SSMR. 2
Directive 2013/36/EU as amended by Directive (EU) 2019/878, OJ L150, 7.6.2019, p. 253. See for this requirement joined cases T-133/16 to 136/16, Caisse régionale de credit agricole mutual Alpes Provence v. ECB, ECLI:EU:T:2018:219. 3 EBA, Final Report – Draft regulatory technical standards under Article 8(2) of Directive 2013/36/EU on the information to be provided for the authorisation of credit institutions, the requirements applicable to shareholders and members with qualifying holdings and obstacles which may prevent the effective exercise of supervisory powers, 14.7.2017 (EBA/RTS/2017/08); Draft implementing technical standards under Article 8(3) of Directive 2013/36/EU on standard forms, templates and procedures for the provision of the information required for the authorisation of credit institutions, 14.7.2017 (EBA/ITS/2017/05). 4 ECB, Guide to assessments of licence applications, 2 nd edn (2019); ECB, Guide to assessments of FinTech credit institutions licence applications (2018). 5 Art. 8(1) CRD IV; Recital 15 CRD IV. 1
2
192
Elke Gurlit
Art. 14 SSMR
Authorisation
2. Substantial requirements for withdrawal of authorisation The rules for withdrawal of authorisation are set out in Art. 18 CRD IV. According 5 to this provision, an authorisation may be withdrawn in a number of cases: – if the credit institution does not make use of the authorisation within 12 months, expressly renounces the authorisation or has ceased to engage in business for more than six months unless the national law provides for lapsing of authorisation in such cases,6 – if the credit institution has obtained the authorisation through false statements, – if it no longer fulfils the conditions under which authorisation was granted, – if the credit institution no longer meets the prudential requirements set out in Parts Three, Four or Six of the CRR or imposed under Art. 104(1)(a) or Art. 105 CRD IV or can no longer be relied on to fulfil its obligations towards its creditors and, in particular, no longer provides security for the assets entrusted to it by its depositors; or – if the credit institution commits one of the breaches referred to in Art. 67(1) CRD IV. The reference to Art. 67(1) CRD IV, providing for administrative sanctions, has the 6 effect of establishing quite a number of reasons for withdrawal, for instance cases of non-compliance with requirements on governance, large exposures and liquidity. But even with the long list of cases of non-compliance, the catalogue of reasons justifying a withdrawal is not conclusive. As is stipulated in Art. 18 lit. e CRD IV, an authorisation may also be withdrawn in cases provided for in national law, thereby giving Art. 18 CRD IV the effect of minimum harmonisation.7 Therefore, Member States may provide for withdrawal in cases that do not express a prudential concern and are not in the ambit of the SSMR.8 Because Art. 18 CRD IV stipulates that the relevant authority “may” withdraw the authorisation, the decision to withdraw is discretionary.
3. Procedural requirements The procedures are set out in detail in Arts. 73 to 79 SSM‑FR with regard to licensing 7 and in Articles 80 to 84 SSM‑FR relating to the withdrawal of authorisation. Some formal aspects of the application for an authorisation are detailed in the EBA’s draft ITS under Art. 8(3) CRD IV, which is awaiting the approval of the Commission. Finally, the ECB’s non-binding guide on assessments of applications contains a number of procedural considerations especially with regard to timelines.9
III. Practical relevance The legislature considered the instrument of prior authorisation a key prudential 8 technique to ensure that only appropriate operators carry out banking activities, and, 6 See also Art. 18 lit aa) CRD IV as amended by Art. 62 IFD providing for withdrawal if an investment firm qualified as a credit institution pursuant to Art. 4(1) point 1 lit. b CRR has, for a period of five consecutive years, average total assets below the thresholds set out in that Article. 7 Lackhoff, Single Supervisory Mechanism (2017), at pp. 166, 170; Kruschke, in: Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), 193 at p. 210; see also Berger, WM 2016, 2361, at p. 2366: additional reasons for withdrawal are not to be considered as gold-plating of Union law, but national autonomous law; Recital 21 SSMR; obviously different view by Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 213. 8 Lackhoff, Single Supervisory Mechanism (2017), at pp. 166–168, 179 with the example of § 35, para. 2, point 6 KWG (German Banking Act) justifying a withdrawal in the case of non-compliance with antimoney laundering requirements; Berger, WM 2016, 2361, at p. 2366 with the example of the general withdrawal provisions in §§ 48, 49 VwVfG (German Administrative Procedure Act). 9 ECB, Guide to assessments of licence applications (2019), at pp. 27 et seq.
Elke Gurlit
193
Art. 14 SSMR
Authorisation
therefore, should be conferred on the ECB.10 While the academic production on issues of authorisation of credit institutions according to Art. 14 SSMR is quite impressive, the ECB’s report on supervisory activities of 202011 shows that its practical relevance lags behind despite the ECB’s broad reading of the applicability of Art. 14 SSMR (→ paras. 12 et seq.) The bulk of ECB decisions on authorisations relate to fit and proper decisions taken by the ECB12 on the presumption that national laws requiring an approval of the appointment of all members of the management bodies of significant credit institutions are to be applied by the ECB.13 Out of almost 3.400 applications notified by the NCAs in 2020, only 28 concerned licensing, and 18 related to withdrawals, respectively. The main drivers for applications for authorisations are the licensing of FinTech companies and Brexit-related applications by UK and third country credit institutions. Withdrawal procedures were in most instances initiated by credit institutions voluntarily terminating their banking activities and by banks entering into mergers or engaging in a restructuring.14 9 Decisions of the ECB on authorisations or withdrawals contested in the European courts are sparse. So far, judicial review focussed on procedural issues of actions for annulment of withdrawal decisions, relating to the admissibility of action of banks in liquidation and their shareholders,15 and the availability of preliminary suspension of ECB’s withdrawal decisions.16 However, there are more withdrawal cases pending at the General Court.17
B. Scope of application I. Credit institutions 10
The procedure set out in Art. 14 SSMR is applicable for all undertakings to be established as credit institutions within the meaning of Art. 4(1) CRR, Art. 2(3) SSMR. According to Art. 4(1) point 1 lit. a CRR, this covers the business to take deposits or other repayable funds from the public and, cumulatively, to grant credits for its own ac-
Recital 20 SSMR. The following statistical data are derived from ECB, Annual Report on supervisory activities 2020 (2021), at pp. 56 et seq. 12 2.828 out of 3.385 applications notified by the NCAs in 2019 related to fit and proper assessments. 13 ECB, Guide to fit and proper assessments, 2018, at pp. 5 et seq.; ECB’s power to decide ex ante on approval on the appointment of all members of the management bodies is debatable since neither Art. 16 SSMR nor Art. 91 CRD IV require an ex ante approval procedure, see Gurlit, WM 2020, 57 at pp. 64 et seq. The self-acclaimed burden to decide on high numbers of fit and proper applications induced the ECB to delegate decision-making procedures, see Decision (EU) 2017/935 of the ECB of 16.11.2016 on delegation of powers to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/ 2016/42), OJ L141, 1.6.2017, p. 21. 14 ECB, Annual Report on supervisory activities 2020 (2021), at pp. 57 et seq. 15 Joined cases C-663/17 P, C-665/17 P, C-669/17 P – Trasta Komercbanka AS et al v ECB, ECLI:EU:C: 2019:923. 16 Case T-797/19 R – Anglo Austrian AAB Bank and Belegging-Maatschappij ‘Far East’ BV v ECB, ECLI: EU:T:2019:801 (decision of the President of the GC of 20.11.2019, revoked by order of 7.2.2020); Case T-230/20 R – PNB Banka AS v ECB, ECLI:EU:T:2021:68 (order of the President of the GC of 8.2.2021). 17 Action brought on 22.5.2017, Case T-321/17 R – Niemelä et al. v ECB, OJ C 283, 28.8.2017, p. 52; action brought on 5.6.2018, Case T-351/18 – Ukrselhosprom and Versobank v ECB, OJ C294, 20.8.2018, p. 51. 10 11
194
Elke Gurlit
Art. 14 SSMR
Authorisation
counts.18 Since the harmonising focus of the CRR and the CRD IV is directed towards institutions engaged or striving to engage in both types of business, applications to take up business in only one activity – either in granting credits or in taking deposits – are not in the ambit of Art. 14 SSMR notwithstanding distinct authorisation requirements according to national law.19 Certain public sector credit institutions listed in Art. 2(5) of the revised CRD IV are excluded from the regime of the CRD IV and hence are no longer a credit institution within the meaning of the CRR and the SSMR. Other categories of financial institutions such as financial holding companies and mixed financial holding companies are – despite their indirect inclusion in the SSM pursuant to Art. 4(1) lit. g SSMR – not considered as credit institutions and therefore not addressees of the licencing regime of Art. 14 SSMR.20 As part of the regulatory package for prudential requirements und prudential super- 11 vision of investment firms,21 the definition of credit institutions was recently extended. According to Art. 4(1) point 1 lit. b CRR, an investment firm dealing on own accounts and/or engaging in the activity of underwriting financial instruments or placing financial instruments on a firm commitment basis, will qualify as a credit institution if the total value of the consolidated assets of the firm is equal or exceeds EUR 30 billion. 22 In the view of the legislature, big-size investment firms engaging in bank-like activities may pose a bank-like risk to financial stability.23 Consequently, investment firms exceeding the threshold will fall in the ambit of Art. 14 SSMR.24 Because of the link between the definition of CRR credit institutions and the scope of 12 the SSM, it seems self-evident that authorisation for other financial activities remains in the competence of the Member States.25 However, passporting of CRR credit institutions includes business services listed in Annex I of the CRD IV such as portfolio management or investment services if authorised by the NCA (Art. 33 CRD IV). Therefore, the question comes up whether an application of a credit institution to extend its licence to these types of business is within the scope of Art. 14 SSMR. The same issue arises with regard to further national authorisation requirements going beyond the activities listed in Annex I of the CRD IV.26 In the view of the ECB as communicated to the NCAs and 18 For a deeper understanding of the meaning of these essential activities see Breitenlechner and Radosavljevic, ZFR 2016, 170, at pp. 174 et seq.; ECB, Guide to assessments of licence applications (2019), at pp. 9 et seq.; crit. because of different understandings in the Member States EBA, Opinion of the European Banking Authority on matters relating to the perimeter of credit institutions, 27.11.2014 (EBA/Op/2014/12); EBA, Report to the European Commission on the perimeter of the credit institutions established in the Member States, 27.11.2014. 19 Lackhoff, Single Supervisory Mechanism (2017), at pp. 36, 161; Neumann, EuZW Supplement (2014), 9, at p. 10; Breitenlechner and Radosavljevic, ZFR 2016, 170, at p. 174; ECB, Guide to assessments of licence applications (2018), at p. 7; see also Recital 14 CRD IV. 20 Gurlit, WM 2020, 57, at p. 60; Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 126; detailed analysis by Wymeersch, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), paras. 4.60 et seq. 21 Regulation (EU) 2019/2033 on the prudential requirements of investment firms (IFR), OJ L314, 5.12.2019, p. 1; Directive (EU) 2019/2034 on the prudential supervision of investment firms (IFD), OJ L314, 5.12.2019, p. 64. 22 Art 4(1) CRR as amended by Art. 62 IFR. 23 Recitals 38 et seq. IFR, Recital 33 IFD. 24 See Art. 8a CRD IV as amended by Art. 62 IFD for the phasing-in of application requirements for investment firms. 25 Binder, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 3 paras. 5, 65, 78; Fischer and Müller, in: Boos, Fischer and Schulte-Mattler (eds), KWG/CRR-VO (5 th edn, 2016), KWG § 32 para. 66; Kämmerer, WM 2016, 1, at p. 5. This is obviously the view of the German legislature as well, see BT-Drucks. 18/2575, 196. 26 See Recital 14 CRD IV stating that Member States may require additional authorisations for specific banking activities.
Elke Gurlit
195
Art. 14 SSMR
Authorisation
the banking industry, as far as national law requires credit institutions to hold a separate licence for additional activities, the granting of the licence is within the ambit of Art. 14 SSMR.27 Moreover, ECB’s power to withdraw authorisations would extend to authorisations for other activities required by national law.28 This view is based on the general assumption that the ECB may exercise supervisory powers granted under national law but not intended to transform Union law (autonomous national law) if they fall within the scope of tasks under Arts. 4 and 5 SSMR and underpin a supervisory function under Union law (“the national power issue”).29 13 The approach of the ECB is highly problematic. First, it tends to stretch the competences and powers of the ECB beyond the wording and systematic structure of the SSMR. The ECB’s stance is hardly compatible with the much stricter language of Art. 14(1) SSMR, which refers to the activity “to take up the business of a credit institution”. The ECB’s reading of Art. 4(3), Art. 9(1)(2) SSMR, as empowering the ECB to apply the national law transforming Union law, thereby using all the powers granted to the NCAs, cannot carry the argument that national authorisation procedures not based on Union law shall be executed by the ECB. On the contrary, Art. 9(1)(3) SSMR – which is not cited by the ECB – expressly stipulates that in cases where powers are not conferred upon the ECB, it may require, by way of instructions to the NCAs, to make use of their powers, thereby clarifying that the ECB may not use powers not based on Union law.30 Art. 78(5) SSM‑FR, stipulating that the decision to grant an authorisation shall cover the applicant’s activities as a credit institution as provided for in national law, cannot serve as a confirmation for the ECB’s view (infra, → para. 36).31 The SSM‑FR, as based on Art. 132 TFEU, Art. 34(1) ESCB Statute and Art. 4(3)(2) SSMR, has to be read in the light of the superior SSMR. 14 Furthermore, bringing additional business activities requiring authorisation according to national law within the ambit of Art. 14 SSMR, provokes further ambiguities with regard to the question of what types of authorisation requirements “underpin a supervisory function” that in the view of the ECB justify the use of autonomous national powers by the ECB. Considering that the ECB actually excludes the separate authorisation for the issuance of covered bonds from the scope of Art. 14 SSMR,32 there could be
27 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140. 28 Lackhoff, Single Supervisory Mechanism (2017), at p. 166. 29 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, at p. 2; ECB, Guide to assessments of licence applications (2019), at pp. 7, 11 and 13; see also Lackhoff, Single Supervisory Mechanism (2017), at pp. 27, 31, 33. The ECB’s stance is obviously shared by the Commission, see Commission Staff, Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism (SSM) established pursuant to Regulation (EU) No 1024/2013, 11.10.2017, SWD (2017) 336 final, at p. 27; for the evolution of this doctrine see Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 paras. 59 et seq. 30 Schuster, EuZW Supplement (2014), 3, at p. 8; Kämmerer, WM 2016, 1, at p. 4; Berger, WM 2016, 2325, at pp. 2333 et seq.; Breitenlechner and Radosavljevic, ZFR 2016, 170, at p. 174; Gurlit, WM 2020, 57 at p. 65; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 paras. 179 et seq; Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 paras. 58 et seq., 124, 184. 31 For a different understanding ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, fiche VII, at p. 13; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 210. 32 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, at p. 1; ECB, Guide to assessments of licence applications (2019), at p. 13 note 13.
196
Elke Gurlit
Art. 14 SSMR
Authorisation
more national product and market-related licence obligations not connected with prudential concerns.33 Finally, extending the scope of Art. 14 SSMR to additional licensing requirements 15 provided for in autonomous national law, raises jurisdictional problems if the ECB decisions are contested in the European courts. Even if the GC and the CJEU have jurisdiction to judge on the ECB’s interpretation of national law implementing relevant Union law, this must not be the case with regard to national law never intended to transpose Union law (infra, → para. 65).
II. All credit institutions irrespective of significance According to Art. 4(1)(a) SSMR, the ECB is assigned the task to authorise credit insti- 16 tutions and to withdraw an authorisation. Art. 6(4) SSMR excludes the tasks of authorisation and withdrawal of licences from the work sharing arrangements based on the significance of a credit institution. Additionally, Art. 14(1) SSMR stipulates that “any” application should be submitted to the NCA. There is no doubt that the ECB has the exclusive competence and the power to decide on authorisations and their withdrawal with regard to all credit institutions (to be) established in a participating Member State irrespective whether the institution is significant or less significant. 34 However, this is different with investment firms qualified as credit institutions pursuant to Art. 4(1) point 1 lit. b CRR. Since their status as a credit institution is linked to a total value of consolidated assets of at least EUR 30 billion (supra, → para. 11), this threshold is constitutive for the authorisation regime of Art. 14 SSMR.
III. Territorial scope of application Art. 14 SSMR applies to all credit institutions (to be) established in one of the partic- 17 ipating Member States. Credit institutions incorporated in non-participating Member States are authorised by the NCA of the non-participating Member State that is the location of their incorporation. Passporting granted by Art. 17 CRD IV enables them to establish a branch or provide cross-border services in participating Member States without further authorisation – notwithstanding the ECB’s supervisory tasks pursuant to Art. 4(2) SSMR.35 While the establishment of branches of credit institutions of third countries does not fall within the supervisory powers of the ECB,36 a different rule applies if the establishment of a subsidiary of a third country credit institution in a participating Member State is at stake. In this case, Art. 14 SSMR applies.37
33 Recital 28 SSMR; Lackhoff, Single Supervisory Mechanism (2017), at p. 162 concedes the need of clarification especially with regard to authorisation requirements under MiFID II. Lately, authorisation requirements under the IFD came into focus. 34 Lackhoff, Single Supervisory Mechanism (2017), at p. 159. 35 For the complex regime with regard to the supervision of branches and subsidiaries see Tröger, ZBB 2013, 373, at pp. 378, 383.; Wymeersch, in: Busch and Ferrarini (eds), European Banking Union (2 nd edn, 2020), paras. 4.66 et seq. 36 Recital 28 SSMR; Schuster, EuZW Supplement (2014), 3, at p. 4; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 121. 37 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 162.
Elke Gurlit
197
Art. 14 SSMR
Authorisation
C. Authorisation (Art. 14(1)-(4) SSMR) I. Triggers for Art. 14 SSMR procedures Since the task to authorise credit institutions is an exclusive competence of the ECB regardless of the significance of the credit institution – subject to the special case of big investment firms (supra, → para. 11), Art. 14 procedures apply to all potential credit institutions within the meaning of Art. 4(1) CRR irrespective of significance. The submission of an application to the NCA is required for the initial authorisation to take up the business of a credit institution.38 According to the problematic view of the ECB, Art. 14 SSMR procedures also apply for credit institutions already authorised for extending the licence to other activities, e.g. portfolio management or money broking, if national law mandates a separate licence for these types of activities (supra, → paras. 12 et seq.),39 as is the case for instance in Austria, France and Germany.40 19 The ECB promotes the view that Art. 14 SSMR procedures also apply if an authorised credit institution engages in certain types of organisational restructuring; however, there are no specific provisions in Union law. A mere change of legal form not accompanied by a change of the business programme or other factors relevant for an authorisation usually does not trigger a requirement for a new authorisation.41 This is different in the case of a merger of two or more credit institutions creating a new legal entity 42 not merely established as a temporary construct for a “legal second”.43 If national law requires an approval of the merger, thereby allowing the transferral of the licence to the universal successor,44 this may not be in line with the provisions of the CRD IV if the merger approval procedure only incidentally touches the issue of the authorisation as a credit institution. The ECB seems to suspect a circumvention of the centralised authorisation system of the SSMR.45 However, even accepting the broad reading of the ECB for the scope of application of Art. 14 SSMR, an application for an approval of a merger required by national law can hardly be viewed as falling within the scope of Art. 4 SSMR and underpinning a supervisory function. 20 Finally, a bridge bank, created to hold the assets of another (insolvent) credit institution, has to apply for a licence, following Art. 14 SSMR procedures, if the activities the bridge institution acquires by virtue of the transfer are the activities of a credit institution. This follows from Art. 41(1)(e) BRRD and the national law transposing the BRRD.46 A preliminary and limited waiver from compliance with the requirements of 18
ECB, Guide to assessments of licence applications (2019), at p. 10. ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140; Lackhoff, Single Supervisory Mechanism (2017), at pp. 160 et seq. 40 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, fiche VII. 41 Lackhoff, Single Supervisory Mechanism (2017), at p. 40 with fn. 145. 42 ECB, Guide to assessments of licence applications (2019), at p. 10. 43 ECB, Guide to assessments of licence applications (2019), at p. 10 considers an exception if there are safeguards in place in case the transfer to the final new entity cannot be completed within a legal second; see also Lackhoff, Single Supervisory Mechanism (2017), at p. 40 with fn. 145. 44 This is the legal scheme of § 21 Austrian Banking Act, example taken from Lackhoff, Single Supervisory Mechanism (2017), at p. 40. 45 Lackhoff, Single Supervisory Mechanism (2017), at p. 40. 46 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, OJ L173, 12.6.2015, p. 190, as amended by Directive (EU) 2019/879, OJ L150, 7.6.2019, p. 296; see ECB, Guide to assessments of licence applications (2019), at p. 11. 38
39
198
Elke Gurlit
Art. 14 SSMR
Authorisation
authorisation according to CRD IV is not to be confused with the need to apply for a licence as provided for in Art. 41(1)(2) BRRD.
II. Submission of application to an NCA (Art. 14(1) SSMR) Pursuant to Art. 14(1) SSMR, any application for an authorisation to take up the busi- 21 ness of a credit institution to be established shall be submitted to the NCA of the Member State where the credit institution is to be established in accordance with the requirements set out in national law. As regards with the form and procedure to be followed for the submission of an application, Art. 14(1) SSMR refers to the requirements set out in relevant national law. National law provides for information and documents to be submitted with the application, thereby typically requiring the use of specific templates.47 Since the NCA has to assess compliance both with national law and with Union law (infra, → para. 24), and since the ECB’s decision on compliance with Union law has to be based on the application (infra, → para. 33), the documents required by national law to accompany the application must contain all information necessary to assess compliance both with national law und Union law. If the application is incomplete, the NCA shall ask the applicant, according to Art. 73(3) SSM‑FR, to provide more information, either on its own initiative or at the request of the ECB. As far as national law does not provide for further information requests, Art. 73(3) SSM‑FR serves as directly applicable power of the NCAs. According to Art. 73(1) SSM‑FR, the NCA shall notify the ECB of the receipt of an 22 application within 15 working days. The notification has to consist of the application itself and the information and documents accompanying such application. This follows indirectly from Art. 73(3) sent. 2 SSM‑FR, which requires the NCA to send additional information received to the ECB in 15 working days from receipt thereof. The receipt of the application starts the countdown period of Art. 15 CRD IV and 23 the national law transposing this provision,48 mandating that a decision of the ECB to grant or to refuse authorisation shall be taken within 12 months of the receipt of the application. However, while in some Member States the countdown starts when the NCA receives an application even if it is incomplete, in others only an application qualified complete by the NCA will be considered as the receipt of an application;49 therefore, the starting point of the time limit may differ. In view of these circumstances, the ECB strongly recommends pre-application discussions with the potential applicant to ensure a smooth and timely authorisation process.50 Once the countdown starts, the time period of 12 months is an absolute one, as follows from the language of Art. 15 CRD IV. Hence, suspension periods provided for in national law for the time until additional information is submitted cannot postpone the legal deadline.51
47 See e.g. § 32(1) of the KWG (German Banking Act) together with § 14 Regulation concerning reports and the submission of documentation under the Banking Act. 48 Art. 15 CRD IV was not transformed e.g. by Germany. However, since the requirement is clear and does not leave any discretion, it can be applied directly by the ECB; slightly different view with regard to timelines for procedures expressed by Lackhoff, Single Supervisory Mechanism (2017), at p. 42. 49 ECB, Guide to assessments of licence applications (2019), at p. 27. 50 ECB, Guide to assessments of licence applications (2019), at p. 28. 51 ECB, Guide to assessments of licence applications (2019), at p. 29.
Elke Gurlit
199
Art. 14 SSMR
Authorisation
III. Assessment of an application by an NCA (Art. 14(2) SSMR) 1. Draft decision to grant authorisation Pursuant to Art. 14(2) SSMR, the NCA shall take a draft decision to propose to the ECB to grant the authorisation if the applicant complies with all conditions set out in the relevant national law of that Member State. Art. 74 SSM‑FR confirms that the NCA’s assessment has to be based on the relevant national law. According to Art. 14(3) SSMR, the ECB shall object to the draft decision only where the conditions set out in relevant Union law are not met. This does not mean, however, that the assessments of the NCA and the ECB are complimentary. On the contrary, since final licensing by the ECB according to Art. 14(3) SSMR can be done by way of no-objection to the draft decision, the NCA’s draft has to assess compliance of the application with Union law as well. Accordingly, the NCA has to examine the application with respect to autonomous national law, national law transposing Union law, and directly applicable Union law. 52 25 Art. 76(3) sent. 1 SSM‑FR empowers the NCA to attach recommendations, conditions and restrictions to a draft authorisation decision in accordance with national law and Union law. In the terms of Union law, recommendations are non-binding suggestions to the applicant. Conditions concern the validity of the authorisation, requiring the applicant to undertake an action or to refrain from action to make the authorisation become effective. Restrictions or obligations, on the other hand, do not affect the validity of the licence. Instead, they are part of the licence on an ongoing basis and can be enforced or sanctioned.53 Union law considers these types of ancillary provisions as justified in cases where an application would otherwise be rejected.54 Thus, conditions and restrictions serve as enabling the supervisor to grant the licence. The NCA may also attach a condition or obligation provided for in national law to ensure compliance with requirements of autonomous national law. Pursuant to Art. 76(3) sent. 2 SSM‑FR, the assessment of compliance with conditions and restrictions lies within the responsibility of the NCA. However, this does not give the NCA power to decide exclusively on the necessity of conditions or restrictions based on Union law.55 Rather, the follow-up examination of compliance with these ancillary decisions is entrusted to the NCAs while the decision to attach conditions or restrictions, at least with regard to Union law, is assigned to the ECB (infra, → para. 28). 26 The draft decision proposed to the ECB in favour of granting a licence is not a final decision. Instead, the proposal shall be notified to the ECB at least 20 working days before the end of the assessment period provided for by the national law according to Art. 14(2) sent. 2 SSMR, Art. 76(2) SSM‑FR. If the national law does not provide for a timeline, the relevant time limit follows from Art. 15 CRD IV. Additionally, the NCA has to notify the applicant of its draft authorisation decision pursuant to Art. 88(3)(a) SSM-FR. 24
52 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 211; Lackhoff, Single Supervisory Mechanism (2017), at p. 164; Raschauer, Finanzmarktaufsichtsrecht (2015), at p. 157; Berger, WM 2015, 501, at p. 503. 53 ECB, Guide to assessments of licence applications (2019), at pp. 31 et seq. 54 Case C-18/14, CO Sociedad de Gestión y Participación SA et al v. De Nederlandsche Bank NV et al, ECLI:EU:C:2015:419, paras. 30 et seq. 55 Lackhoff, Single Supervisory Mechanism (2017), at p. 165.
200
Elke Gurlit
Art. 14 SSMR
Authorisation
2. Final decision to reject application If the applicant does not comply with all conditions set out in national law, Art. 14(2) 27 sent. 3 SSMR requires the NCA to reject the application for authorisation. The NCA’s rejection can be based on autonomous national law as well as on national law transposing Union law.56 Since refusal of authorisation is a final decision not requiring any further involvement by the ECB, the NCA has to comply with national law on administrative procedure providing, e.g., for the applicant’s right to be heard.57 An element of the right to a hearing is the applicant’s right of access to the application file prior to the NCA’s intended decision to reject the application.58 According to Art. 88(3)(b) SSM‑FR, the NCA has to notify the applicant of its decision to reject the application. The relevant national law may require information on the availability of judicial review.59 However, if rejection of the application by the NCA is based on Union law or national law transposing Union law, the procedural rights provided for in Art. 41(2) CFREU (infra, → paras. 30 et seq.) have to be granted regardless of the provisions of national administrative law. This follows from Art. 51(1) CFREU.60
IV. The ECB’s assessment and decision (Art. 14(3) and (4) SSMR) 1. Assessment of compliance with Union law According to Art. 14(3) sent. 2 SSMR, the ECB shall object to the draft decision only 28 where the conditions for authorisation set out in relevant Union law are not met. It follows in conjunction with Art. 4(3)(1) SSMR and Art. 77(1) SSM‑FR that the ECB has to assess the application against directly applicable Union Law and national law transposing Union law. However, according to the view of the ECB, the application has also to be examined with regard to autonomous national law that falls within the scope of tasks under Arts. 4 and 5 SSMR and underpins a supervisory function under Union law (supra, → paras. 12 et seq.). Therefore, the ECB will also assess if the applicant complies with the requirements set forth in autonomous national law for an extension of licence to carry out business activities other than granting credits and taking deposits. Additionally, the ECB will assess the conditions and restrictions based on national law and suggested by the NCA pursuant to Art. 76(3) SSM‑FR. However, if these conditions and restrictions are based on autonomous national law, it is highly questionable if the ECB has the power to reject conditions and restrictions suggested by the NCA. If national law provides that conditions and restrictions to an authorisation may be attached if otherwise an application must be refused,61 the ECB would, by rejecting a certain condition or restriction, create a (positive) decision on the authorisation not compatible with national law.
56 Berger, WM 2015, 501, at p. 503; different view expressed by Breitenlechner and Radosavljevic, ZFR 2016, 170, at p. 176: NCA’s final decision is limited to a rejection based on autonomous national law. 57 Lackhoff, Single Supervisory Mechanism (2017), at p. 164; see e.g. § 28(1) VwVfG (German Administrative Procedure Act). 58 See e.g. § 29 VwVfG (German Administrative Procedure Act). 59 See e.g. § 37(6) VwVfG (German Administrative Procedure Act). 60 Mersch, EuZW 2020, 781, at p. 784. 61 This is the case e.g. in Germany, see § 36(1) VwVfG (German Administrative Procedure Act).
Elke Gurlit
201
Art. 14 SSMR
Authorisation
2. Procedure According to Art. 77(1) sent. 2 SSM‑FR, the ECB shall give the applicant the opportunity to comment in writing on the facts and objections relevant to the assessment, if in the view of the ECB the conditions for authorisation are not met. Furthermore, pursuant to Art. 77(2) SSM‑FR, the ECB may give the applicant the opportunity to comment in a meeting. Hereby the ECB fulfils the applicant’s right to be heard as provided for in Art. 22 SSMR, Art. 31(1) and (2) SSM‑FR. Since the right to be heard is guaranteed (only) if the decision intended by the ECB adversely affects the rights of the applicant, 62 a hearing must take place if the ECB wants to reject the application or intends to attach conditions and/or restrictions to the authorisation.63 30 The right to be heard guarantees the opportunity to comment in writing as provided for in in Art. 31(1) sent. 1 and Art. 77(1) sent. 2 SSM‑FR. In contrast, Art. 31(1) sent. 2 and Art. 77(2) SSM‑FR gives the ECB broad discretion if a meeting should be held.64 However, primary law, especially Art. 41(2)(a) CFREU, does not give a right to a meeting.65 According to Art. 31(1) sent. 3 SSM‑FR, the ECB’s notification to give the applicant the opportunity to comment shall mention the material content of the intended decision and the material facts, objections and legal grounds on which the ECB intends to base its decision. If the ECB intends to substitute the legal grounds or wants to base the decision on different or additional facts, it is required to give the opportunity for a second hearing.66 31 Finally, the right to be heard encompasses the right of access to the ECB’s application file subject to the conditions set out in Art. 22(2) SSMR and Art. 32 SSM‑FR. Though the right of access is not mentioned in Art. 77 SSM‑FR specifying the procedural rights of the applicant, there is no doubt that the applicant is entitled to have access to the file, since the right of access is guaranteed in all supervisory procedures pursuant to Section 2 of Chapter III SSMR. Access may only be denied in order to protect business secrets of third parties and confidential information.67 Since the right of access to the file is an element of the right to be heard, access has to be granted prior to the decision of the ECB.68 Granting access may be necessary to enable the applicant to comment on the decision envisaged by the ECB. However, the ECB has to keep in mind the time limits set in Art. 14(3) SSMR. Since a decision of the ECB shall be deemed to be adopted by the ECB unless the ECB objects within a maximum period of ten working days,69 29
62 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 200 referring to Art 41(2)(a) CFREU. 63 ECB, Guide to assessments of licence applications (2018), at p. 33, excluding instances where conditions or obligations have been pre-agreed with the applicant, concern statutory provisions with which the application must comply, or qualify as reporting requirements mandated by law. 64 See Lackhoff, Single Supervisory Mechanism (2017), at p. 115 on the criteria how to exercise discretion. 65 Case C-209/78, van Landewyck, ECLI:EU:C:1980:248, para. 18; Case T-199/99, Sgaravatti, ECLI:EU: T:2002:228, para. 58; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 200. 66 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 201; Lackhoff, Single Supervisory Mechanism (2017), at p. 115. 67 See for a comprehensive account of the scope of the right of access Lackhoff, Single Supervisory Mechanism (2017), at pp. 117 et seq.; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 203. 68 Lackhoff, Single Supervisory Mechanism (2017), at p. 117 para. 507: prior to the adoption of a draft decision by the Supervisory Board. The view of ECB, Guide to assessments of licence applications (2019), at p. 33, according to which access to the file is granted following a decision is not compatible with Art. 41(2)(b) CFREU, Art. 32(1) SSM‑FR. 69 See for the internal procedure in the relation of the Supervisory Board to the General Council Art. 13i of ECB’s Rules of Procedure.
202
Elke Gurlit
Art. 14 SSMR
Authorisation
Art. 31(3)(3) sent. 2 SSM‑FR requires a shortening of the time limit to provide comment to three working days. The ECB may prolong the maximum period for a final decision up to 20 days if a meeting is considered necessary or in other comparable cases (Art. 14(3) SSMR in conjunction with Art. 77(2) sent. 1 SSM‑FR). 70 An extension for a final decision may also be used to extend the time period available for the applicant to comment on the envisaged decision.71 The extension of the time limit has to be notified to the applicant according to Art. 77(2) sent. 2 and Art. 35 SSM‑FR in order to prevent an authorisation becoming effective by way of no-objection pursuant to Art. 14(3) SSMR.
3. The ECB’s decision on an application Pursuant to Art. 14(3) SSMR and Art. 78(3) SSM‑FR, a draft authorisation decision proposed by an NCA shall be deemed adopted by the ECB unless the ECB objects within a maximum period of ten working days. By giving a non-objection option, the ECB is provided with an easy and efficient way to decide on an application. The ECB may also expressly grant the authorisation.72 If the ECB rejects the application, the decision necessarily has to be stated expressly. In positive terms, the ECB shall base its decision on its assessment of the application, the draft authorisation decision of the NCA, and any comments provided by the applicant as required by Art. 78(2) SSM‑FR. Thus, corresponding with the right to be heard is the obligation of the ECB to consider the comments of the applicant.73 In negative terms, as a fundamental rule grounded in primary law,74 the ECB may not base its decisions on objections on which the applicant has not been able to comment, as is stipulated in Art. 22(1) sent. 2 SSMR and Art. 31(3) SSM‑FR. However, since the ECB is required to consider the comments of the applicant, a shift in the ECB’s legal assessment due to the hearing of the applicant must not be viewed as a surprise decision not based on objections on which the applicant could not comment.75 According to Art. 22(2)(2) SSMR and Art. 33(1) SSM‑FR, and in line with Art. 41(2) (c) CFREU, the decision of the ECB has to be accompanied by a statement of reasons. As a rule, the statement of reasons shall enable the applicant to consider if he or she should contest the decision. It further serves to enable judicial review of the legality of the decision. 76 Therefore, the requirement of a statement of reasons is to be read strictly, if the ECB rejects the application or attaches conditions and/or restrictions to it. 77 However, the requirement to provide a statement of reasons is not limited to these cases. 78 If the ECB chooses the option to grant an authorisation expressly, the decision has to be accompanied by a statement of reasons as well. For decisions on authorisations, a specific notification procedure applies. According to Art. 88(2)(1) SSM‑FR, the ECB shall notify the relevant NCA on its decision on an application for authorisation. However, following Art. 14(4) SSMR and Art. 88(3)(c) and 70 See Lackhoff, Single Supervisory Mechanism (2017), at p. 116 for a critical account of Art. 31(3)(3) SSM‑FR. 71 Critical account by Lackhoff, Single Supervisory Mechanism (2017), at p. 116 para. 502. 72 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 212. 73 Lackhoff, Single Supervisory Mechanism (2017), at p. 115 para. 499; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 201. 74 Art. 41(2) CFREU, Art. 296(2) TFEU. 75 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 201. 76 C-417/11 P, Council v Bamba, ECLI:EU:C:2012:718, para. 49; Lackhoff, Single Supervisory Mechanism (2017), at p. 120. 77 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 204. 78 See C-413/06, Bertelsmann and Sony v Impala, ECLI:EU:C:2007:790, Opinion of AG Kokott, para. 98.
Elke Gurlit
203
32
33
34
35
Art. 14 SSMR
Authorisation
(d) SSM‑FR, the decision adopted by the ECB shall be notified by the NCA to the applicant. This provision is lex specialis to Art. 35 SSMR stipulating the ways by which the ECB itself shall notify supervisory decisions to a party.79 Arguing that Art. 14(4) SSMR is a case of administrative assistance of the NCA, it could be inferred that the NCAs when notifying the applicant of the decision have to follow the rules of Art. 35 SSM‑FR that apply if the ECB itself would be responsible for the notification.80 On the other hand, the case for a mere administrative assistance is far from clear because according to Art. 88(1)(a) SSM‑FR, a decision on withdrawal of an authorisation has to be notified by the ECB directly to the credit institution. The legislature paid due regard to the fact that an authorisation procedure necessarily starts with an application submitted to the NCA following national procedures. Therefore, the notification of a decision must also comply with the requirements of national law.
4. Scope of authorisation Pursuant to Art. 78(5) SSM‑FR, the decision granting an authorisation shall cover the applicant’s activities as a credit institution as provided for in the relevant national law – without prejudice to any additional requirements for authorisation under national law for other business activities. The meaning of this provision, defining the scope of authorisation, is not quite clear. In the view of some authors, Art. 78(5) SSM‑FR clarifies the ECB’s power to decide upon national provisions requiring specific licensing procedures for the extension of the licence as a credit institution to other activities such as portfolio management or other investment services,81 thereby giving force to the ECB’s stance on this “national power issue”. However, Art. 78(5) SSM‑FR expressly relates the coverage of the authorisation to the provisions in the relevant national law. As far as Member States such as Germany, Austria and France do not automatically provide for a universal licence covering all activities of Annex 1 of CRD IV, but instead require a specific authorisation procedure, the licence granted by the ECB cannot cover these additional activities.82 Therefore, the scope of the authorisation granted by the ECB is dependent on the scope of the authorisation of a credit institution according to the relevant national law. 37 The explicit reference to the relevant national law in Art. 78(5) SSM‑FR explains why the scope of the authorisation is “without prejudice” to any additional requirements for authorisation under national law for other business activities: If Member States provide for additional requirements, these requirements remain valid and have to be enforced by the NCAs. 36
Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 212. See for this argument Lackhoff, Single Supervisory Mechanism (2017), at p. 166. 81 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 210; Raschauer, Finanzmarktaufsichtsrecht (2015), at p. 158; ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, fiche VII, at p. 13; Breitenlechner and Radosavljevic, ZFR 2016, 170, at pp. 175 et seq. arguing that the extension of licence to activities listed in Annex 1 of CRD IVis based on national law transforming Union law and therefore encompassed by the powers of the ECB. 82 Berger, WM 2015, 501, at p. 504 with regard to German law. That Art. 78(5) SSM‑FR serves as a counter argument to the ECB’s position is conceded by Lackhoff, Single Supervisory Mechanism (2017), at p. 160 with fn. 711. 79
80
204
Elke Gurlit
Art. 14 SSMR
Authorisation
D. Withdrawal of authorisation (Art. 14(5) and (6) SSMR) I. Authorisations subject to withdrawal Art. 14(5)(1) SSMR referring to “the” authorisation that may be withdrawn, and 38 Art. 14(5)(2) SSMR referring to the NCA which has proposed the authorisation according to Art. 14(1) SSMR could imply that the scope of Art. 14 SSMR withdrawal procedures are limited to authorisations granted by the ECB, thereby excluding authorisations granted by the NCAs before the ECB assumed its tasks on 4 November 2014. 83 However, according to Art. 33(5) SSMR, credit institutions authorised by participating Member States on 3 November 2013 shall be deemed to be authorised in accordance with Art. 14 SSMR. Therefore, Art. 14 withdrawal procedures are applicable to authorisations granted by NCAs prior to the establishment of the SSM.84 According to the problematic view that Art. 14 SSMR authorisation procedures apply 39 to specific authorisation requirements provided for in national law for additional business activities of credit institutions (supra, → paras. 12 et seq.), Art. 14 SSMR withdrawal procedures would be vice versa applicable if withdrawal of an extension of a licence is at stake.85 However, this seems especially questionable if withdrawal shall be limited to the authorisation of additional business activities required by national law, thereby leaving the authorisation as a credit institution intact. In the constellation of authorisations granted by NCAs prior to the establishment of the SSM, the legal fiction of Art. 33(5) SSMR should be construed as covering only authorisations “as” credit institutions. Therefore, specific authorisations for other business activities of credit institutions granted by the NCAs prior to the establishment of the SSM may only be withdrawn if the basic licence as a credit institution is withdrawn as well.
II. Withdrawal initiated by the NCA According to Art. 14(5) sent. 1 SSMR, the ECB may withdraw the authorisation on its 40 own initiative or on a proposal from the NCA. In practice, withdrawal procedures are initiated by NCAs.86 A proposal can be made only by the NCA where the credit institution is established, as follows from the word “such”.87 Since reasons for withdrawal typically relate to conduct of the supervised credit institutions, it can be assumed that withdrawal procedures initiated by the NCA will in most instances affect less significant institutions directly supervised by the NCAs.88 However, the initiative to withdraw the au-
83 This argument is raised in action brought on Case T-321/17 R, Niemelä et al. v. ECB, OJ C283, 28.8.2017, p. 52. 84 Lackhoff, Single Supervisory Mechanism (2017), at p. 166; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 213; Müller, Fischer and Müller, WM 2015, 1505, at p. 1507; see for this constellation Case T-247/16, Trasta Komercbanka AS et al v ECB, ECLI:EU:T:2017:623: withdrawal of authorisation granted by Latvian authorities in 1991. 85 Lackhoff, Single Supervisory Mechanism (2017), at p. 166. 86 See Case T-247/16, Trasta Komercbanka AS et al v ECB, ECLI:EU:T:2017:623; Case T-321/17 R, Niemelä et al. v. ECB, action brought on 22.5.2017, OJ C 283, 28.8.2017, p. 52; ECB, Annual Report on supervisory activities 2020 (2021), at pp. 57 et seq. 87 With additional systematic and teleological arguments Lackhoff, Single Supervisory Mechanism (2017), at p. 168. 88 Lackhoff, Single Supervisory Mechanism (2017), at p. 170; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 215.
Elke Gurlit
205
Art. 14 SSMR
Authorisation
thorisation may stem from the credit institution itself, as is made clear by Art. 88(1) SSM‑FR.89
1. Assessment of the NCA 41
Pursuant to Art. 14(5)(2) SSMR, the NCA considers withdrawal of the authorisation in accordance with the national law, comprising of autonomous national law and national law transposing Union law, as is made clear by Art. 88(1) SSM‑FR. Since the power to decide on withdrawal is entrusted exclusively to the ECB, reasons for withdrawal based solely on autonomous national law are of special relevance. The NCAs are required to perform a thorough in-depth analysis of the facts and the requirements of national law, thereby enabling the ECB to take full account of the NCA’s justification as provided for in Art. 14(5)(2) SSMR (infra, → para. 44). 90 Since withdrawal of authorisation requires exercise of discretion, the NCA’s assessment has to include considerations on discretion as well. This is made clear by Art. 14(5)(2) SSMR requiring a proposal to the ECB only if the NCA considers that the authorisation “must” be withdrawn. However, as the final decision is vested in the ECB, exercise of discretion by the NCA has to comply with the standards of discretion of Union law irrespective of whether withdrawal is based on Union law or autonomous national law.91
2. Procedure According to Art. 14(5)(2) SSMR, the NCA shall submit a proposal to the ECB if it is of the opinion that the authorisation must be withdrawn. Unlike authorisation procedures, there are no situations left for the NCA to take a final decision. In order to enable the ECB to assess the case and to adopt a decision, the NCA’s draft withdrawal decision has to be accompanied by explanatory documentation. The documentation may contain information about the credit institutions’ history of non-compliance with supervisory standards to ensure that proportionality of a withdrawal decision can be assessed by the ECB.92 43 Since the NCA is not empowered to take a final decision, Union law requires neither a hearing nor a notification to the credit institution by the NCA.93 Nevertheless, a hearing may be available according to national law.94 Pursuant to Art. 80(2) SSM‑FR, the NCA has to coordinate with the national resolution authority (NRA) as regards to any draft withdrawal decision that is relevant to the NRA. This cooperation requirement corresponds with the provisions of the BRRD requiring a close cooperation of the NCA and the NRA especially if there is a justification for withdrawal of the authorisation.95 However, this would also apply if the responsibility for resolution lies with the Single Resolution Board (SRB).96 In practical terms, the need for cooperation between the NCA and the SRB seems to be a hypothetical question: While an NCA will start a with42
89 According to ECB, Guide to assessments of licence applications (2019), at p. 34, in this case, the NCA and the ECB jointly assess if the relevant preconditions have been met, reserving the final decision to the ECB. 90 Berger, WM 2016, 2361, at p. 2367; Lackhoff, Single Supervisory Mechanism (2017), at pp. 170 et seq. 91 Berger, WM 2016, 2361, at p. 2367. 92 Lackhoff, Single Supervisory Mechanism (2017), at p. 170. 93 Lackhoff, Single Supervisory Mechanism (2017), at p. 170. 94 § 28(1) VwVfG (German Administrative Procedure Act) requires a hearing only if an adverse final decision is intended. 95 Arts. 3(4), 32(4)(1) and 82(3)(a) BRRD. 96 See Art. 5 SRMR stipulating that the SRB shall for the application of the BRRD be considered to be the relevant NRA.
206
Elke Gurlit
Art. 14 SSMR
Authorisation
drawal proceeding typically with regard to less significant credit institutions directly supervised by the NCA, the SRB is only responsible for adopting resolution decisions relating to significant institutions, Art. 7(2) SRMR. However, cooperation with the SRB may be useful if a withdrawal decision is initiated by the ECB (infra, → para. 53).
3. Assessment and decision by the ECB a) Assessment According to Art. 14(5)(2) sent. 2 SSMR and Art. 83(2) SSM‑FR, the ECB shall take 44 into account its assessment of the circumstances justifying withdrawal and the NCA’s draft withdrawal decision. There is no doubt that the ECB when taking the final decision has – within the limits of these provisions – full power for an independent judgment of the withdrawal of authorisation if the NCA based its draft withdrawal decision on national law transposing Art. 18 CRD IV. However, the NCA may base its draft withdrawal decision on autonomous national law as provided for in Art. 18, lit. e CRD IV. National justifications for withdrawal of a licence may concern matters not even in the ambit of the SSMR, e.g. non-compliance with anti-money laundering provisions. In this case, the application of Art. 14(5)(2) sent. 2 SSMR requiring the ECB to take full account of the justification for withdrawal put forward by the NCA, has to be modified. Since the ECB is not empowered to make an independent judgment with regard to matters lying outside the realm of the SSMR and within the supervisory competencies of the Member States, it has to consider non-compliance with these national provisions as interpreted and determined by the NCA as a fact.97 If the credit institution claims changes of circumstance requiring a different interpretation, the ECB accordingly has to contact the NCA to consider if a factual change did happen and if it bears on the interpretation of the national provision.98 Finally, the exercise of discretion by the ECB while following standards of Union law has to be based on the facts submitted by the NCA. It follows that a withdrawal decision by the ECB based solely on autonomous national law is to a high degree predetermined by the NCA.99 b) Procedure Pursuant to Art. 81 SSM‑FR, the ECB shall assess the NCA’s draft withdrawal decision 45 without undue delay. The right to be heard, as provided for in Art. 31 SSM‑FR, shall apply. In this respect, the procedural rights of the credit institution subject to a withdrawal of licence correspond with the rights of the applicant for an authorisation the ECB intends to reject (supra, → para. 30).100 As in the case of authorisation, the credit institution is guaranteed a right to comment in writing, leaving a meeting at the discretion of the ECB. Additionally, the right of defence encompasses the right of access to the withdrawal file.101 Art. 31(3) sent. 2 SSM‑FR provides for a shortening of a comment period to three days. Despite the mandatory language of Art. 31(3) SSM‑FR, the ECB should be empowered to extend the hearing period on its discretion since there are – 97 Berger, WM 2016, 2361, at p. 2367; Mersch, EuZW 2020, 781, at p. 786; Lackhoff, Single Supervisory Mechanism (2017), at p. 170. 98 Berger, WM 2016, 2361, at p. 2367; Lackhoff, Single Supervisory Mechanism (2017), at p. 170. 99 Mersch, EuZW 2020, 781, at p. 786: ECB has to determine if non-compliance as stated by NCA is so grave as to warrant withdrawal. 100 However, it could be argued that a hearing must not take place if a withdrawal procedure is started on a credit institutions’ request. In this constellation, the credit institution is not adversely affected by a withdrawal decision. 101 Lackhoff, Single Supervisory Mechanism (2017), at pp. 169, 171.
Elke Gurlit
207
Art. 14 SSMR
Authorisation
other than in the case of authorisation – no time limits for adopting the decision. Relevant factors for the exercise of discretion are issues of financial stability or of equal treatment of creditors and depositors.102 The shareholders of the affected credit institution do not possess a right to be heard since their rights as shareholders of the undertaking are not affected by the withdrawal decision.103 46 It is not quite clear if the ECB’s direct cooperation with the NRA is warranted when a withdrawal procedure was initiated by the NCA. As a result, the objection mechanism provided for in Art. 14(6) SSMR would apply.104 Art. 82(4) SSM‑FR requires active cooperation of the ECB with the NRA only if the withdrawal procedure was initiated by the ECB. On the other hand, Art. 83(2) SSM‑FR mandates the ECB to take the consultation with the NRA into account. Typically, the NRA would intervene in the NCA’s process of drafting a withdrawal decision. Accordingly, Art. 80(2) SSM‑FR stipulates that the NCA shall coordinate with the NRA with regard to any draft withdrawal decision that is relevant for the NRA, and the BRRD provides for cooperation in more detail. 105 Hence, even if Art. 14(6) SSMR objection procedures are applicable, it seems unlikely that the NRA would object to a withdrawal proceeding if it did not intervene when cooperating with the NCA. c) Decision According to Art. 83(1) sent. 2 SSM‑FR, the ECB may accept or reject the NCA’s draft withdrawal decision. In positive terms, the ECB shall base its decision on its assessment of the circumstances justifying withdrawal, the NCA’s draft decision, the consultation with the NRA, and any comments provided by the credit institution. As in the case of an authorisation, the ECB may not base its decisions on objections on which the credit institution has not been able to comment, as is stipulated in Art. 22(1) sent. 2 SSMR and Art. 31(3) SSM‑FR. Pursuant to Art. 22(2)(2) SSMR, Art. 33(1) SSM‑FR, and in line with Art. 41(2)(c) CFREU, the ECB’s decision has to be accompanied by a statement of reasons (supra, → para. 34). The notification procedures are set out in Art. 88 SSM‑FR. According to Art. 88(1)(a) and (2)(b) SSM‑FR, the ECB shall notify the credit institution and the NCA of its decision. The NCA shall notify the relevant NRA of the ECB decision on withdrawal if the authority is not identical with the supervisory authority, Art. 88(4) SSM‑FR. 48 While regularly the withdrawal decision is adopted by the Governing Council of the ECB by way of the non-objection procedure pursuant to Art. 26(8) SSMR, under specific circumstances, the withdrawal decision is delegated to nominated heads of working units within the ECB according to Art. 5 of ECB Decision (EU) 2019/1376. 106 The ECB’s delegation framework aims at preserving the functioning of the decision-making bodies by giving it the inherent power to delegate non-complex decisions, insofar as such mea47
Lackhoff, Single Supervisory Mechanism (2017), at pp. 169, 171 paras. 733, 739. Lackhoff, Single Supervisory Mechanism (2017), at p. 114; see with regard to standing according to Art. 263(4) TFEU Joined Cases C-663/17 P, C-665/17 P, C-669/17 P, Trasta Komercbanka v ECB, ECLI:EU: C:2019:923, paras. 107 et seq.; Case T-457/09, Westfälisch-Lippischer Sparkassen- und Giroverband v Commission, ECLI:EU:T:2014:683, para. 112. 104 For applicability of Art. 14(6) SSMR in this constellation Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 216; Lackhoff, Single Supervisory Mechanism (2017), at pp. 168 et seq., 171; for an analysis of Art. 14(6) SSMR, see infra, → para. 52. 105 Arts. 3(4), 32(4)(1) and 82(3)(a) BRRD. 106 Decision (EU) 2019/1376 on delegation of the power to adopt decisions on passporting, acquisition of qualifying holdings and withdrawal of authorisations of credit institutions, OJ L224, 28.8.2019, p. 1; Decision (EU) 2019/1377 nominating heads of work units on passporting, acquisition of qualifying holdings and withdrawal of authorisations of credit institutions, OJ L224, 28.8.2019, p. 6. 102
103
208
Elke Gurlit
Art. 14 SSMR
Authorisation
sures are justified.107 Hence, the delegation of decision-making power to heads of working units is limited to the case that withdrawal is requested by the supervised entity or due to a merger, no deposits from the public remain after withdrawal, and the withdrawal is linked to a reorganisation within a group.
III. Withdrawal initiated by the ECB 1. Assessment of ECB According to Art. 14(5) sent. 1 SSMR and Art. 82(19) SSM‑FR, the ECB may with- 49 draw the authorisation in the cases set out in Union law. Since Art. 18 lit. e CRD IV leaves it to the Member States to provide for further withdrawal justifications based on national law, justifications provided for in national law do not belong to the cases set out in Union law (supra, → para. 6). Hence, the ECB is not empowered to initiate a withdrawal procedure based on autonomous national law.108 This result cannot be questioned with the argument that withdrawal is only an actus contrarius of authorisation. 109 Typically, the withdrawal decision will concern authorisations granted by the NCA before establishment of the SSM. Moreover, withdrawal procedures initiated by NCAs based solely on national law make use of the supervisory and legal expertise of the NCA on national law issues that is lacking in the ECB. If the ECB is of the opinion that there is reason for withdrawal on the basis of national law, it may instruct the NCA to initiate a withdrawal procedure pursuant to Art. 6(3) sent. 2 SSMR.110 As the ECB is required to exercise discretion according to Art. 18 CRD IV, it has to 50 consider if remedial actions, e.g., measures according to Art. 16(2) SSMR, are available rendering a complete withdrawal of the authorisation inappropriate.111 Additionally, the ECB has to consider if withdrawal of a licence would prejudice financial stability.112 Art. 14(6) sent. 4 SSMR and Art. 84(3) SSM‑FR, empowering the ECB to adopt a decision if no actions necessary to maintain financial stability have been implemented by the NCA and the NRA, does not serve as a counter argument. Instead, the ECB’s determination of inappropriateness of remedial actions and measures to maintain financial stability constitutes the critical date for the ECB’s decision if the authorisation should be withdrawn (infra, → para. 54).
2. Procedure If the ECB intends to withdraw the authorisation on its own initiative, the credit in- 51 stitution has a right to be heard according to Art. 82(3) sent. 2 and Art. 31 SSM‑FR. The right corresponds with the right of the credit institution when confronted with a withdrawal procedure initiated by the NCA (infra, → para. 45). Pursuant to Art. 82(2) sent. 1 SSM‑FR, the ECB may consult at any time with the relevant NCA, referring to the NCA in which the credit institution is established. If the ECB intends to withdraw the authorisation, consultation with the relevant NCA is mandatory according to Art. 14(5) SSMR, Art. 82(2) sent. 2 SSM‑FR. When consulting the NCA, it shall be in107 Decision (EU) 2017/933 on a general framework for delegating decision-making powers, OJ L141, 1.6.2017, p. 14; see also Gurlit, WM 2020, 57, at p. 58. 108 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 215; Berger, WM 2016, 2361, at p. 2366. 109 For this view Lackhoff, Single Supervisory Mechanism (2017), at p. 170 with fn. 779. 110 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 215. 111 Lackhoff, Single Supervisory Mechanism (2017), at p. 170 with fn. 769. 112 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 216.
Elke Gurlit
209
Art. 14 SSMR
Authorisation
formed of any comments provided by the credit institution pursuant to Art. 82(3) SSM‑FR. Hence, consultation with the NCA has to take place after the hearing of the credit institution. However, according to Art. 82(2) sent. 2 SSM‑FR, the ECB shall consult with the NCA at least 25 working days prior to the intended decision. Only in duly justified cases, the time limit may be reduced to five working days. 52 According to Art. 14(5)(1) sent. 2 SSMR, consultation with the NCA shall in particular ensure that the ECB allows sufficient time for the national authorities to decide on the necessary remedial actions, including resolution measure, and takes these into account. The national authorities referred to include the NRAs. Accordingly, Art. 82(4) SSM‑FR requires the ECB to coordinate with the NRAs with regard to a proposal to withdraw a licence. Additionally, the ECB shall inform the NCAs after initiating contact with the NRA. 53 Contacting the NRA serves the purpose of enabling the NRA to duly notify the ECB of their objections to a withdrawal according to Art. 14(6) sent. 1 SSMR; however, the objection mechanism applies only “as long as national authorities remain competent to resolve credit institutions”. Within the institutional framework of the SRM, the SRB is competent to make decisions relating to the resolution of credit institutions that are directly supervised by the ECB (Art. 7(2) SRMR), while the resolution of less significant credit institutions remains in the competence of the participating Member States (Art. 7(3) SRMR). It seems appropriate to exclude the NRAs from withdrawal proceedings in the case of a potential resolution of a significant credit institution because in this situation the NRAs are reduced to the role of executors of the SRB’s decisions (Art. 29(1) SRMR). However, the question arises if instead the SRB should be informed by the ECB and be invited to make objections. Teleological arguments support this view. The ratio of Art. 14(6) SSMR to ensure the necessary actions for resolution and to maintain financial stability is also valid if the ECB intends the withdrawal of the authorisation of a significant credit institution.113 54 The NRA or the SRB may object if they consider that the withdrawal would hamper the adequate implementation of actions necessary for resolution or actions to maintain financial stability. If the risks are explained in detail, the ECB will, according to Art. 14(6) sent. 2 SSMR, Art. 84(1) SSM‑FR, abstain from withdrawal proceedings for a period mutually agreed. If consent on the period of the moratorium is not reached, the ECB will determine the period unilaterally.114 The ECB may extend the period if sufficient progress has been made. To this end, the ECB shall consult with the NCA and the NRA or, respectively, the SRB (Art. 84(2) SSM‑FR). Based on this consultation, the ECB will dispense with a further extension if it determines in a reasoned decision that proper actions to maintain financial stability have not been implemented. Pursuant to Art. 14(6) sent. 4 SSMR, in this case the withdrawal of authorisation shall apply immediately. However, this does not mean that insufficient measures to maintain financial stability automatically result in a withdrawal of the authorisation. Rather, the reasoned decision of the ECB marks the end of the procedural involvement of the NRA and the NCA. As is clarified by reference to Art. 83 SSM‑FR in Art. 84(3) SSM‑FR, the ECB’s determination that proper measures have not been implemented, simply enables the ECB to decide if the authorisation should be withdrawn. Accordingly, the same is true if the NRA or the SRB does not object to the withdrawal of the authorisation.
113 Lackhoff, Single Supervisory Mechanism (2017), at pp. 168 et seq.; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 216. 114 Lackhoff, Single Supervisory Mechanism (2017), at pp. 168 et seq.
210
Elke Gurlit
Art. 14 SSMR
Authorisation
3. Decision The ECB shall base its decision on its assessment of the circumstances justifying 55 withdrawal on the consultation with the NCA and NRA, and any comments provided by the credit institution. For the rest, the same principles apply as in the case of a withdrawal initiated by the NCA (supra, → para. 47).
IV. Lapsing of the authorisation Lapsing of authorisation occurs if an authorisation ceases to exist. The authorisation 56 ceases ipso iure without further constitutive administrative decisions. If the authorisation lapsed, it cannot be withdrawn. While the CRD IV does not mandate constellations of lapsing, national law may do so according to Art. 18 lit. a CRD IV. This provision stipulates that the Member States may provide for lapsing where a credit institution does not make use of the authorisation within 12 months, expressly renounces the authorisation, or has ceased to engage in business for more than six months. According to Art. 79 SSM‑FR, lapsing occurs in the situations of Art. 18 lit. a CRD IV, where the relevant law so provides. If the national law so provides,115 the NCA shall inform the ECB of the individual 57 cases where an authorisation lapses (Art. 79 sent. 2 SSM‑FR). The ECB shall then make public the lapsing of the authorisation in accordance with the relevant national law, Art. 79 sent. 3 SSM‑FR.116 The publication serves to inform the market participants that a credit institution is no longer acting as an authorised institution; however, whether lapsing occurred may be disputed between the NCA and the credit institution. Therefore, national law may provide that the NCA formally declares the authorisation as lapsed. National law may also offer the credit institution an administrative proceeding to declare the authorisation as effective or to seek a declaratory judgment by the courts. 117 In these situations, the NCA should not inform the ECB while administrative or judicial proceedings are still pending. Otherwise, the ECB may publish a lapsing incorrectly resulting in reputational damage of the credit institution. Art. 79 SSM‑FR does not offer a procedure for situations of lapsing not mentioned in 58 Art. 18 lit. a CRD IV but otherwise provided for in national law.118 It can be inferred from Art. 79 sent. 1 SSM‑FR, that the ECB considers only the cases mentioned in Art. 18 lit. a CRD IV as constellations of lapsing. In other cases of lapsing, the national law may provide that a withdrawal procedure according to Art. 14(5) SSMR should apply in order to ensure that the ECB’s power to adopt a decision is maintained.119 However, it is questionable if the SSM‑FR can have the effect of limiting the Member States’ competence to provide for lapsing in light of the minimum harmonisation of the CRD IV. 115 See e.g. section 35(1) sent. 1 KWG (German Banking Act), mandating lapsing if the credit institution does not make use of its licence within 12 months; the case of renouncement of authorisation is viewed as a “natural” case of lapsing not requiring specific statutory authority, see Fischer and Müller, in: Boos/Fischer/Schulte-Mattler (eds), KWG/CRR VO (5th edn, 2016), KWG § 35 para. 12. 116 See e.g. section 38(3) KWG (German Banking Act) requiring the supervisory authority to publish lapsing in the Bundesanzeiger (Federal Register). 117 See with regard to German law Fischer and Müller, in: Boos/Fischer/Schulte-Mattler (eds), KWG/ CRR-VO (5th edn, 2016), KWG § 35 paras. 62 et seq. 118 See e.g. section 35(1) sent. 2 KWG (German Banking Act) providing for lapsing if a bank was excluded from deposit guarantee and investor compensation schemes. 119 See e.g. section 35(1) sent. 3 KWG (German Banking Act); German legislature obviously considered it necessary to provide for withdrawal procedures according to Art. 14(5) SSMR instead of lapsing in constellations not mentioned in Art. 79 SSM‑FR, see BT-Drucks. 18/2575, 197.
Elke Gurlit
211
Art. 14 SSMR
Authorisation
E. Judicial review120 I. Distribution of competences between national and European courts Decisions on authorisation and withdrawal as being adopted in a cooperative arrangement of NCAs and the ECB are especially challenging with regard to the allocation of competences. In principle, competences are not distributed following the origin of the law that has to be applied; instead, the allocation of judicial competence follows the institution that acted or abstained from action required by law. Hence, decisions and other actions executed by the NCA are to be contested before the national courts, while acts performed or abstained from by the ECB can only be challenged in the European courts.121 If the ECB should instruct the NCA pursuant to Art. 9(1)(3) SSMR, the NCA’s decision following the instruction has to be contested in the national courts. Thus, the fact that the NCA acted without discretion does not justify attributing the decision to the ECB.122 However, the instruction itself may be challenged through legal action by the credit institution in the European courts.123 60 In authorisation procedures, a final decision of the NCA to reject an application can only be contested in the national courts irrespective whether the rejection is based on autonomous national law or on law transposing Union law. The same is valid if the NCA fails to act on an application submitted.124 The allocation of competences is more difficult, if the NCA proposes to grant an authorisation subject to conditions and/or restrictions based on autonomous national law. In the view of the CJEU, the European courts have exclusive competence because the draft proposed by the NCA forms a non-binding part of a complex procedure resulting in a final decision by the ECB. If the credit institution claims legal errors of the NCA’s proposal infecting the validity of final decision of the ECB, the European courts will incidentally review the national act as well.125 The 59
120 The following remarks focus on judicial proceedings instituted by private enterprises; see Kämmerer, WM 2016, 1, at pp. 6 et seq. and Lackhoff, Single Supervisory Mechanism (2017), at pp. 256 et seq. analysing proceedings concerning the relation of NCAs and the ECB. 121 Berger, WM 2015, 501, at p. 504; ibid, WM 2016, 2361, at pp. 2367 et seq.; Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 235; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 246; Brescia Morra, Quaderni di Ricerca Guridica, No 81 (2016), 109, at pp. 128 et seq.; Case C-219/17, Berlusconi and Fininvest, ECLI:EU:C: 2018:1023, para. 45; different view expressed by Neumann, EuZW upplement 1 (2014), 9, at pp.11 et seq.: ECB decisions on authorisation are ascribed to the NCA with the consequence of judicial review by national courts, decision to withdraw an authorisation are attributed to the ECB. 122 Kämmerer, WM 2016, 1, at p. 5; Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 236. 123 Legal action in European courts may be required to prevent the instruction becoming definitive, see Case C-188/92, Textilwerke Deggendorf, ECLI:EU:C:1994:90, paras. 17 et seq.; Case C-135/16, Georgsmarienhütte, ECLI:EU:C:2018:582, para. 19; Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 236; Lefterov, ESCB Legal Conference 2020 (2021), p. 286, at pp. 298, 301; Arons, in: Busch and Ferrarini (eds), European Banking Union (2 nd edn, 2020), paras. 3.29 et seq. with regard to standing of credit institutions. 124 Berger, WM 2015, 501, at pp. 505 et seq.; different view expressed by Ruthig, ZHR 2014, 443, at pp. 481 et seq. and Müller, Fischer and Müller, WM 2015, 1505, at p. 1509: action against failure to act before the European courts according to Art. 256 TFEU. 125 Case C-219/17, Berlusconi and Fininvest, ECLI:EU:C:2018:1023, paras. 48 et seq., with regard to proceedings pursuant to Art. 15 SSMR, probably based on an identical suggestion made by Lackhoff, Single Supervisory Mechanism (2017), at pp. 254 et seq.; Case C-414/18, Iccrea Banca, ECLI:EU:C:2019:1036, paras. 37 et seq., with regard to the SRM; evolution of the “preparatory acts doctrine” analysed by Lefterov, ESCB Legal Conference 2020 (2021), 786, at pp. 290 et seq.; analysis of potential legal defects on the national level infecting the ECB decision by Mersch, EuZW 2020, 781, 785 et seq.
212
Elke Gurlit
Art. 14 SSMR
Authorisation
centralisation of judicial review may be seen critical.126 However, the credit institution is spared the necessity to contest both the NCA’s draft and the final decision of the ECB. 127 The identical scheme applies in withdrawal procedures. Since Art. 14(5) and (6) SSMR do not provide for final withdrawal decisions of NCAs, judicial review is concentrated on the European level.
II. Review in the European courts 1. Optional administrative review If an application for an authorisation was finally rejected by the ECB, or if the ECB 61 adopted a decision to withdraw the licence, the applicant or the credit institution, respectively, may request a review of these decisions by the ABoR according to Art. 24(1) and (5) SSMR. However, review by the ABoR is “without prejudice” to the right to bring proceedings before the European courts,128 thereby rendering review by ABoR optional.129 Following a non-binding opinion of the ABoR, the ECB will adopt a new decision abrogating the initial decision, replacing it with a decision of identical content, or replacing it with an amended decision, Art. 24(7) SSMR.130
2. Admissibility of action for annulment Appropriate action for the unsuccessful applicant for an authorisation or for a credit 62 institution contesting conditions or restrictions attached to a decision, or challenging a decision to withdraw the licence is an action for annulment according to Art. 263 TFEU. The action is directed either against the original decision of the ECB or – in the case of a previous review by the ABoR – against the decision replacing that decision after an opinion of the ABoR was delivered. Actions brought by natural or legal persons fall in the jurisdiction of the General Court (Art. 256(1) sent. 1 TFEU in conjunction with Art. 51 Statute of the CJEU) and may be appealed before the CJEU (Art. 256(1)(2) TFEU in conjunction with Art. 56 Statute of the CJEU). Art. 263(4) TFEU grants standing to the addressees of the ECB decisions rejecting or 63 conditioning an authorisation or withdrawing it. A credit institution already in the process of liquidation according to national law as a result of withdrawal of licence may still challenge the ECB decision. Especially, representation of its legal interests may not be exclusively transferred to a liquidator whose sole responsibility is the liquidation of the undertaking.131 Although there is no constellation conceivable of a third-party challeng-
126 For a different view Berger, WM 2015, 501, at p. 506; for the German Law Müller, Fischer and Müller, WM 2015, 1505, at p. 1508. 127 Gurlit, WM 2020, 57, at p. 66. 128 Art. 24(11) SSMR uses the somewhat unclear abbreviation “CJEU”, meaning the “Court of Justice of the European Union”, Recital 48 SSMR, encompassing the General Court (GC), the Court of Justice (ECJ) and specialised courts, Art. 19(1) TEU; see Berger, WM 2015, 501, at p. 505. 129 Berger, WM 2015, 501, at p. 505; Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 240. This is also the view of the ECB, see Decision of the ECB of 14.4.2014 concerning the establishment of the Administrative Board of Review (ECB/2014/16), Recital 4. 130 See for a comprehensive account of ABoR procedures Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 paras. 241 et seq.; Brescia Morra, Quaderni di Ricerca Guridica, No 81 (2016), 109, at pp. 112 et seq. 131 Joined Cases C-663/17 P, C-665/17 P, C-669/17 P, Trasta Komercbanka v ECB, ECLI:EU:C:2019:923, paras. 69 et seq.
Elke Gurlit
213
Art. 14 SSMR
Authorisation
ing the rejection of a licence,132 the situation may be different in the case of withdrawal of licence with regard to shareholders of the credit institution.133 However, in the view of the CJEU, shareholders are not directly concerned by a withdrawal because their rights as members of the undertaking – voting rights and the right to receive dividends – are formally preserved. The economic effects, e.g. the unlikeliness to receive dividends, are not to be considered for matters of standing.134
3. Assessment of the court und judgment Pursuant to Art. 263(2) TFEU, the General Court reviews the legality of the ECB’s decision as regards to complaints of lack of competence, infringement of an essential procedural requirement, infringement of the treaties or of any rule of law relating to their application, or misuse of powers. If the ECB’s interpretation and application of substantial requirements for granting or withdrawing an authorisation is at stake, the plaintiff will raise the issue of infringement of the treaties or of other applicable rules. In the case of a withdrawal decision lying in the discretion of the ECB, the plaintiff may also contend a misuse of power. 65 The General Court has to examine the legality of the ECB’s act with regard to its interpretation of the relevant Union law. However, since Art. 4(3)(1) SSMR requires the ECB to apply the national legislation transposing directives, it follows that review of the court includes the examination of the ECB’s application of national law transposing Union law as well.135 Because the ECB is of the opinion that it is empowered to apply autonomous national law within the tasks of Art. 4 SSMR and underpinning a supervisory function, thereby deciding on extensions of licences to other business activities and on withdrawal of these extensions (→ paras. 12 et seq.), questions about judicial review arise. A competence of the General Court and the CJEU to authoritatively interpret autonomous national law cannot be linked to Art. 4(3)(1) SSMR. Quite to the contrary, Art. 4(3) and Art. 9(1)(3) SSMR indicate that the ECB does not have the power to decide on national provisions not intended to transpose Union law and has to consider autonomous national law as a legal fact.136 On the other hand, barring an effective review by the European courts of the application and validity of autonomous national law is itself highly problematic in the light of Art. 47(1) CFREU, resulting in calls for a reverse referral procedure mirroring Art. 267 TFEU.137 For the time being, the plaintiff may 64
132 One could theoretically conceive the case of a rejection of authorisation based on the assessment that members of the management board are not deemed fit and proper, or that owners of qualifying holdings do not pass muster, these persons bringing action for annulment on grounds of reputational damage. However, in these situations, the principle of proportionality will induce the ECB to act directly against these persons instead of rejecting the authorisation. 133 See for further analysis of third party standing Lackhoff, Single Supervisory Mechanism (2017), at pp. 252 et seq.; Lefterov, ESCB Legal Conference 2020 (2021), 786, at pp. 299 et seq. 134 Joined Cases C-663/17 P, C-665/17 P, C-669/17 P, Trasta Komercbanka v ECB, ECLI:EU:C:2019:923, paras. 107 et seq.; Lefterov, ESCB Legal Conference 2020 (2021), 786, at pp. 299 et seq. 135 Joined Cases T-133/16 to 136/16, Caisse régionale de crédit agricole mutuel Alpes Provence, ECLI:EU: T:2018:219, paras. 47 et seq.; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 180; Arons, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), para. 3.27; Lackhoff, Single Supervisory Mechanism (2017), at pp. 253 et seq.; Kämmerer, WM 2016, 1, at p. 4; Berger, WM 2016, 2325, at p. 2332; crit. assessment by Martini and Weinzierl, NVwZ 2017, 177, at pp. 181 et seq. and Peuker, JZ 2014, 764, at p. 768 for constitutional reasons. 136 Berger, WM 2016, 2361, at p. 2368. 137 Kaufhold, JÖR 66 (2018), 85, at pp. 106 et seq.; Müller-Graff, EuZW 2018, 101, at p. 107; Martini and Weinzierl, NVwZ 2017, 177, at p. 182.
214
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
complain about lack of competence if the ECB transgressed the limits of its competence.138 If an action for annulment is successful, the court will declare the ECB’s decision void. 66 In the case of a void decision on withdrawal, the original authorisation will come to life again.139 However, the court does not have the power to order warranted action of the ECB in case of rejecting or conditioning an authorisation. Instead, Art. 266 TFEU stipulates the obligation of the ECB to take the necessary measures to comply with the judgment. In the case of non-compliance, a new legal action has to be instituted.
Art. 15 SSMR Assessment of acquisitions of qualifying holdings 1. Without prejudice to the exemptions provided for in point (c) of Article 4(1), any notification of an acquisition of a qualifying holding in a credit institution established in a participating Member State or any related information shall be introduced with the national competent authorities of the Member State where the credit institution is established in accordance with the requirements set out in relevant national law based on the acts referred to in the first subparagraph of Article 4(3). 2. The national competent authority shall assess the proposed acquisition, and shall forward the notification and a proposal for a decision to oppose or not to oppose the acquisition, based on the criteria set out in the acts referred to in the first subparagraph of Article 4(3), to the ECB, at least ten working days before the expiry of the relevant assessment period as defined by relevant Union law, and shall assist the ECB in accordance with Article 6. 3. The ECB shall decide whether to oppose the acquisition on the basis of the assessment criteria set out in relevant Union law and in accordance with the procedure and within the assessment periods set out therein. Bibliography Henning Berger, ‘Der einheitliche Aufsichtsmechanismus (SSM) – Bankenaufsicht im europäischen Verbund’, WM 2015, 501; Henning Berger, ‘Rechtsanwendung durch die EZB im Single Supervisory Mechanism (SSM)’, WM 2016, 2325; Karl-Heinz Boos, Reinfrid Fischer and Hermann Schulte-Mattler (eds), KWG/CRR VO, Kommentar (5th edn, C.H. Beck, Munich 2016); Concetta Brescia Morra, ‘The administrative and judicial review of decisions of the ECB in the supervisory field’, in Banca d’Italia, Quaderni di Ricerca Giuridicano 81 (2016), 109; Alexander Glos and Markus Benzing, ‘Institutioneller Rahmen: SSM, EZB und nationale Aufsichtsbehörde’ in Jens-Hinrich Binder, Jan Riepe and Alexander Glos (eds), Handbuch Bankenaufsichtsrecht (2nd edn, RWS Verlag, Cologne 2020), § 2, p. 23; Manfred Heemann, ‘Erwerb und Veräußerung einer qualifizierten Beteiligung an einem Kreditinstitut’ in Simon G. Grieser and Manfred Heemann (eds), Europäisches Bankaufsichtsrecht (Frankfurt School Verlag, Frankfurt 2016), p. 223; Klaus Lackhoff, Single Supervisory Mechanism, European Banking Supervision by the SSM (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Asen Lefterov, ‘Judicial review in a multilevel administrative framework – the case of the SSM’, ESCB Legal Conference 2020 (Frankfurt 2021), p. 286; Yves Mersch, ‘Mehrteilige Verwaltungsverfahren in der Aufsichtspraxis der EZB’, EuZW (2020), 781; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2015); Andreas Steck, ‘Beteiligungskontrolle’, in Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, RWS Verlag, Cologne 2020), § 4, p. 173; Sebastian Tusch, ‘Die ausdrückliche Nichtuntersagung durch die BaFin im Inhaberkontrollverfahren nach § 2c KWG und § 104 VAG’, in WM 2013, 633.
Kämmerer, WM 2016, 1, at p. 4; Lackhoff, Single Supervisory Mechanism (2017), at p. 253. In the constellation of an unlawful rejection of authorisation, this result cannot be affected by the legal fiction of authorisation pursuant to Art. 14(3) SSMR, see Müller, Fischer and Müller, WM 2015, 1505, at p. 1508. 138
139
Elke Gurlit
215
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Basic content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Relevant substantive and procedural law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Substantial provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Procedural rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Practical relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 3 3 6 7
B. Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Credit institutions as acquisition targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Completed acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Disposal of acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exemption for resolution-related acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Territorial scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 9 13 14 15 16
C. Notification of an intended acquisition of a qualifying holding (Art. 15(1) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Point of entry for notifications and relevant law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Persons required to notify a proposed acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Proposed acquirer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Target credit institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Object of notification: acquisition or increase of a qualifying holding . . . . . . . 1. Direct qualifying holding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Indirect qualifying holding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Significant influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Content of notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 17 19 19 21 22 23 24 26 27 29
D. Assessment by the NCA (Art. 15(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Assessment according to Union and national law . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Draft decision of the NCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32 32 34 37
E. Assessment by the ECB (Art. 15(3) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Assessment according to Union law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40 40 41 43
F. Judicial review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Distribution of competences between national and European courts . . . . . . . . II. Review in the European courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Optional administrative review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Admissibility of action for annulment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Assessment of the court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47 47 49 49 50 51
A. Introduction I. Basic content 1
Art. 15 SSMR confers the power to oppose the acquisition of a qualifying holding in a credit institution exclusively on the ECB, thereby giving force to the task to assess the intended acquisition or the disposal of a qualifying holding in a credit institution granted to the ECB by Art. 4(1)(a) SSMR. In the case of an acquisition of shares or voting rights, a prior assessment is deemed necessary to ensure the sound and prudent management of the credit institution. The European legislator considered the ECB to be well placed to carry out the final assessment and decision on the acquisition of qualifying holdings.1
1
216
Recital 22 SSMR.
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
The assessment is part of the direct supervisory powers entrusted to the ECB, irre- 2 spective of the significance of the credit institution. Together with Art. 14 SSMR, Art. 15 SSMR forms the common procedures by providing a complex cooperation arrangement with the relevant NCAs. The concrete arrangement of Art. 15 SSMR differs from the one envisaged by Art. 14 SSMR. Whereas in authorisation procedures, the NCA has a final say to reject the application based on national law, no comparable power was conferred on the NCA when opposing the acquisition of a qualifying holding in a credit institution. Instead, all decision-making powers are vested in the ECB. Whereas this feature makes acquisition procedures comparable to the procedure for withdrawal of an authorisation pursuant to Art. 14(5) SSMR, the procedural arrangement of Art. 15 SSMR deviates in another respect. While a withdrawal procedure may be initiated by the ECB, in acquisition procedures an initiative draft proposal of the NCA is mandatory.2
II. Relevant substantive and procedural law 1. Substantial provisions Substantive rules governing the assessment of the acquisition (and the disposal) of a 3 qualifying holding are embodied in Art. 22 to 27 CRD IV3 and in the national laws transposing these provisions. The CRD IV rules derive from the Directive 2007/44/EC on the acquisition of qualifying holdings in the financial sector.4 According to Art. 22(1) CRD IV, any natural or legal person or persons acting in concert that intend to acquire a qualifying holding in a credit institution, shall notify their intention to the NCA of the credit institution in which they are planning to acquire or increase a qualifying holding. Pursuant to Art. 2 no. 8 SSMR, Art. 4(1) no. 36 CRR, Art. 3(1) no. 33 CRD IV, a proposed holding in a credit institution is considered as qualifying, if the holding directly or indirectly comprises 10 percent or more of the capital or the voting rights of the credit institution, or if the holding makes it possible to exercise a significant influence over the management of the target bank. If an existing qualifying holding exceeds certain higher thresholds of the capital or the voting rights, a further notification is necessary. The assessment criteria are set out in Art. 23(1) CRD IV. Pursuant to this provision, the suitability of the acquirer, and the soundness of the acquisition has to be assessed in accordance with the following criteria: – the reputation of the proposed acquirer with regard to integrity and professional competence; – the fit and proper-criteria pursuant to Art. 91(1) CRD IV, if the acquisition will result in the appointment of new members of the management body; – the financial soundness of the acquirer; – whether the credit institution will be able to comply with relevant Union law, and whether the group of which the credit institution becomes a part has a structure that makes it possible to exercise effective supervision; and – whether there are reasonable grounds to suspect that money laundering or terrorist financing is being committed, or that the intended acquisition could increase the risk thereof. Lackhoff, Single Supervisory Mechanism (2017), at pp. 141 et seq. Directive 2013/36/EU as amended by Directive (EU) 2019/878, OJ L150, 7.6.2019, p. 253. 4 Directive 2007/44/EC of the European Parliament and of the Council of 5.9.2007 amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increases in holdings in the financial sector, OJ L247, 21.9.2007, p. 1. 2
3
Elke Gurlit
217
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
According to Art. 23(2) CRD IV, the list of assessment criteria is exhaustive; therefore, the regulatory framework aims at a maximum harmonisation of the control of the acquisition of qualifying holdings in credit institutions (Art. 22(8) CRD IV).5 The ESAs adopted Joint Guidelines on the acquisition of qualifying holdings, detailing the calculation of thresholds, assessment criteria and procedures to be applied.6 These guidelines are, subject to the comply or explain mechanism of Art. 16(3)(2) ESA-Regulations, binding on the ECB as well, see Art. 4(3)(2) sent. 2 SSMR.7 The RTS and ITS drafted by the EBA under Art. 8(2) and (3) CRD IV, specifying inter alia the requirements applicable to the proposed shareholders and members of qualifying holdings in credit institutions,8 will not apply to acquisition assessment procedures. They are only relevant in authorisation procedures (Art. 14(2) CRD IV).9 5 Insofar as the NCAs and the ECB must assess as part of the Art. 15 SSMR procedure, whether the proposed future members of the management body of the credit institution pass the fit and proper-test, they will apply the Joint Guidelines of EBA and ESMA on the assessment of the suitability of members of the management body.10 Additionally, the ECB adopted a non-binding Guide to fit and proper assessments11 that is applicable in Art. 15 SSMR procedures as well. 4
2. Procedural rules 6
The procedural aspects of the cooperation between NCAs and the ECB are set out in Art. 85 to Art. 87 SSM‑FR. These procedural rules are to be applied within the complex structure of the notification and assessment procedure that is contained in Art. 22(2) to (5), Art. 24 CRD IV, and the national provisions transposing these requirements. These provisions were at the time of their enactment not constructed with the view of SSM common procedures.12 Procedural issues relate to the time period of 60 working days available for the assessment of the proposed acquisition and to the information to be submitted by the proposed acquirer. Since incomplete information does not start the assessment period, these subjects are interconnected. Art. 23(4) CRD IV requires the Member States to publish a list, specifying the information that must accompany the notification, to enable the authority to carry out the assessment. The relevant lists of the Member States typically have the form of a binding regulation stating in detail the infor5 Maximum harmonisation is viewed as a means to prevent protectionism by the Member States, see Recital 6 of Directive 2007/44/EC. 6 EIOPA, EBA, ESMA, Final Report – Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector, 20.12.2016 (JO/GL/2016/01). 7 Lackhoff, Single Supervisory Mechanism (2017), at pp. 97 seq. 8 EBA, Draft regulatory technical standards under Art. 8(2) of Directive 2013/36/EU on the information to be provided for the authorisation of credit institutions, the requirements applicable to shareholders and members with qualifying holdings and obstacles which may prevent the effective exercise of supervisory powers, 14.7.2017 (EBA/RTS/2017/08); Draft implementing technical standards under Art. 8(3) of Directive 2013/36/EU on standard forms, templates and procedures for the provision of the information required for the authorisation of credit institutions, 14.7.2017 (EBA/ITS/2017/05). 9 EBA, Draft regulatory technical standards under Art. 8(2) of Directive 2013/36/EU, 6 states that the RTS closely follows the Joint Guidelines applicable in assessments on the acquisition of qualifying holdings in existing credit institutions; on the other hand, Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 9.5, states that after the date of application of the RTS the information provisions of the RTS shall be relevant for separate acquisition procedures as well. 10 ESMA and EBA, Final report on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU, 2.7.2021 (ESMA 35-36-2319; EBA/GL/2021/06). 11 ECB, Guide to fit and proper assessments, May 2018; to the scope of the guide see pp. 4, 29. 12 Mersch, EuZW 2020, 781, at p. 783.
218
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
mation that has to be submitted.13 In addition, Annex I of the Joint Guidelines on acquisitions of qualifying holdings provides for a recommended list of information required for the assessment.14
III. Practical relevance Decisions of the ECB on the acquisition of qualifying holdings form the major part 7 of the common procedures. In 2020, the ECB adopted 110 decisions.15 The majority of cases related to internal reorganisations of the shareholding structure of supervised institutions, e.g., a change from an indirect holding into a direct holding. However, some assessments involved so-called specific acquirers like private equity funds or sovereign management funds that may have a complex corporate structure, a possibly short-term investment horizon, or that use leveraged funding for the acquisition. Only a very few proposed acquisitions related to cross-border banking sector consolidation.16 So far, only one decision of the ECB to oppose the acquisition of a qualifying holding 8 was contested in the European courts. However, the case Berlusconi and Fininvest did not focus on matters of substantive law; rather, it related to the allocation of judicial competences between the national courts and the European courts. The CJEU decided that national courts are precluded from reviewing the preparatory acts of the NCAs within the framework of Art. 15 SSMR procedures, and that judicial review is concentrated in the European courts (infra, → para. 48).17
B. Scope of application I. Credit institutions as acquisition targets Art. 15 SSMR procedures relate to credit institutions within the meaning of Art. 4(1) 9 no. 1 CRR, Art. 2 no. 3 SSMR as target undertakings of an acquisition. This covers institutions active in the business of taking deposits or other repayable funds from the public and, cumulatively, to grant credits for its own accounts (→ Art. 14 para. 10). As part of the regulatory package for prudential requirements und prudential supervision of investment firms,18 the definition of credit institutions was recently extended. According to Art. 4(1) point 1 lit. b CRR, an investment firm dealing on own accounts and/or engaging in the activity of underwriting financial instruments or placing financial instruments on a firm commitment basis, will qualify as a credit institution if the total value of the consolidated assets of the firm is equal or exceeds EUR 30 billion (→ Art. 14 13 See e.g. for Germany: Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c KWG (German Banking Act) and § 104 VAG (German Insurance Supervision Act), BGBl. 2009, I-562, 688; BGBl. 2017, I-1693; see also BaFin, Guidance Notice on Holder Control (Merkblatt zur Inhaberkontrolle) of 27.11.2015; for Austria: Eigentümerkontrollverordnung 2016, BGBl. II no. 425/2015; BGBl. II No. 255/2017; BGBl. II No. 195/2018. 14 EIOPA, EBA, ESMA, Final Report – Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector, 20.12.2016 (JO/GL/2016/01), Annex I. 15 ECB, Annual Report on supervisory activities 2020 (2021), at p. 56. The decision load is quite stable over the years. 16 ECB, Annual Report on supervisory activities 2020 (2021), at p. 58. 17 Case C-219/17, Berlusconi and Fininvest, ECLI:EU:C:2018:1023. 18 Regulation (EU) 2019/2033 on the prudential requirements of investment firms (IFR), OJ L 314, 5.12.2019, p. 1; Directive (EU) 2019/2034 on the prudential supervision of investment firms (IFD), OJ L 314, 5.12.2019, p. 64.
Elke Gurlit
219
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
para. 11).19 Art. 15 SSMR applies to existing credit institutions already authorised pursuant to Art. 14 SSMR. The assessment of proposed shareholders and members of a credit institution not yet established is a requirement for its authorisation and, therefore, part of Art. 14 SSMR authorisation procedures. 10 According to Art. 4(1)(c) SSMR, the ECB is assigned the task of assessing notifications of the acquisition and disposal of qualifying holdings in credit institutions. Art. 6(4) SSMR excludes the task of assessing the acquisition of qualifying holdings from the work sharing arrangements based on the significance of a credit institution. Hence, the ECB has the exclusive competence and the power to assess and decide on a notification of a proposed acquisition with regard to all credit institutions as targets established in a participating Member State irrespective whether the credit institution is significant or less significant.20 However, this is different with investment firms qualified as credit institutions pursuant to Art. 4(1) point 1 lit. b CRR. Since their status as a credit institution is linked to a total value of consolidated assets of at least EUR 30 billion (→ text para. 9), this threshold is constitutive for the applicability of Art. 15 procedures. Since fit and proper assessments of the proposed members of the management body of the target bank are part of the acquisition requirements (Art. 23(1)(b) CRD IV), the exclusive power of the ECB includes these assessments in acquisition procedures with regard to all credit institutions. This has to be noted because isolated fit and proper decisions as part of the ongoing supervision are entrusted to the ECB only with regard to significant credit institutions (Art. 4(1)(e), Art. 6(4) SSMR). 21 11 Some Member States’ jurisdictions provide for a specific approval procedure if an acquisition in a non-credit institution or a credit institution outside the EU is involved.22 In the view of the ECB, as communicated to the NCAs and the banking industry, these autonomous national powers are to be exercised by the ECB, if the proposed acquirer is itself a significant credit institution.23 This view is based on the general assumption that the ECB may exercise supervisory powers granted under national law but not intended to transpose Union law (autonomous national law) if they fall within the scope of tasks under Art. 4 and 5 SSMR and underpin a supervisory function under Union law (“the national power issue”).24 12 It is highly debatable whether the SSMR entrusts the ECB with powers not explicitly mentioned in the SSMR (→ Art. 14 paras. 12 et seq.). However, even accepting the ECB’s stance, assessments of intended acquisitions by significant credit institutions involving non-credit institutions and/or credit institutions outside the EU are not within the scope of Art. 15 SSMR. The rationale for these assessments is to ensure the sound and prudent management of the acquiring significant credit institution with regard to requirements of own funds, liquidity and leverage.25 Therefore, they are not part of the Art 4(1) CRR as amended by Art. 62 IFR. Lackhoff, Single Supervisory Mechanism (2017), at pp. 171 et seq. 21 Lackhoff, Single Supervisory Mechanism (2017), at pp. 172 et seq. 22 See for the latter § 21(1) lit. 2 Austrian Banking Act. 23 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, Annex 2, fiche I. 24 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, p. 2; see also Lackhoff, Single Supervisory Mechanism (2017), at pp. 27, 31 et seq., 33f., 161. The ECB’s stance is obviously shared by the Commission, see Commission Staff, Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism (SSM) established pursuant to Regulation (EU) No 1024/2013, 11.10.2017, SWD (2017) 336 final, at p. 27; for the evolution of this doctrine see Glos and Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 paras. 59 et seq. 25 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, Annex 2, fiche I. 19
20
220
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
common procedure of Art. 15 SSMR, but elements of the supervision of significant institutions. Accordingly, the significant institutions are required to submit notifications directly to the ECB pursuant to Art. 95(1) SSM‑FR.26
II. Completed acquisitions Art. 15 SSMR provides for the arrangement for the notification and assessment of in- 13 tended acquisitions. It does not confer any powers if the proposed acquirer abstains from a notification and executes the acquisition without prior assessment. 27 Additionally, Art. 15 SSMR is not relevant if the acquirer does not comply with a rejection of the acquisition by the ECB or if the acquirer turns out to operate to the detriment of the prudent and sound management of the acquired credit institution after the acquisition was approved. However, in these instances, Art. 26(2) CRD IV requires the Member States to take appropriate measures, e.g., the suspension of voting rights.28 According to the ECB’s position on the “national power issue”, the ECB is competent to exercise supervisory powers granted by national law vis-à-vis a significant credit institution’s shareholders.29 As with the power relating to the acquisitions by significant credit institutions (supra, → para. 12), the exercise of this power lies outside the ambit of Art. 15 SSMR. In the view of the ECB, the power to act with regard to shareholders of significant credit institutions is part of its direct powers of ongoing supervision.
III. Disposal of acquisitions Art. 4(1)(c) SSMR also confers the task of assessing the disposal of a qualifying hold- 14 ing in a credit institution on the ECB, while Art. 15 SSMR does not provide for any accompanying powers. Art. 25 CRD IV requires the Member States to establish a notification procedure if the acquirer intends to dispose of the acquisition or to reduce it under the relevant thresholds. However, there is no substantive law mandating a supervisory decision on the disposal or the reduction of a qualifying holding.30 It is self-evident that the European legislator did not conceive the need to subject notification procedures for disposals to the SSM; therefore, the application of Art. 25 CRD IV lies outside the realm of Art. 15 SSMR.
IV. Exemption for resolution-related acquisitions According to Art. 4(1)(c) SSMR, the task of assessing the proposed acquisition of 15 qualifying holdings is entrusted to the ECB “except in the case of a bank resolution”, 26 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, at pp. 2 et seq. 27 This was the case with the Chinese HNA Group acquiring 9,9 % of Deutsche Bank by shares and by financial instruments, possibly enabling it to exercise a significant influence. After reducing its holding due to financial distress to 7, 9 %, HNA sold the remaining shares in December 2019. 28 See, for example, § 2c(2) KWG (German Banking Act). 29 ECB, Additional clarification regarding the ECB’s competence to exercise supervisory powers granted under national law, 31.3.2017, SSM/2017/0140, Annex 1; according to newspaper articles, the ECB considered a suspension of the voting rights of HNA Group in Deutsche Bank. 30 According to Lackhoff, Single Supervisory Mechanism (2017), at pp. 171 et seq. with fn. 788, the overreaching of Art. 4(1)(c) SSMR could be seen as argument that tasks with regard to significant credit institutions could go beyond the requirements of CRD IV.
Elke Gurlit
221
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
which is the exemption referred to in Art. 15(1) SSMR. The acquisition of a qualifying holding may occur in the event of a bank resolution if, for example, capital instruments are conversed by way of a bail-in. The requirement to assess the acquisition of a qualifying holding is modified in these cases by the BRRD,31 which provides for specific arrangements if the use of resolution instruments causes the situation of the acquisition of a qualifying holding. In these instances, the NCA, in deviation from Art. 22 to 26 CRD IV, is required to perform the assessment in a timely manner that does not delay the application of the resolution tools.32 Hence, the exemption, resulting in the competence of the NCAs, is intended to ensure smooth cooperation between the NCAs responsible for the assessment of the acquisition and the national resolution authorities of the Member States where the credit institution is established. Considering this purpose, the exemption is limited to the constellation in which the acquisition inevitably occurs because of the use of a resolution instrument.33 This rationale has a limiting effect on the scope of the exemption. If the application of a resolution tool results in a direct qualifying holding in the credit institution that is the subject of resolution measures, and an indirect holding in the credit institution established in a different participating Member State, the ECB will remain competent with regard to the latter.34
V. Territorial scope 16
Pursuant to Art. 15(1) SSMR, the intention to acquire a qualifying holding must be notified to the NCA of the participating Member State where the credit institution is established. Since assessment procedures focus on the effects an acquisition may have on the prudent management of the credit institution, the location of the natural or legal person intending to acquire a qualifying holding is not decisive for the applicability of Art. 15 SSMR procedures. However, the applicability of Art. 15 SSMR can still be challenging in constellations of chain holdings resulting in direct and indirect qualifying holdings in credit institutions. If a person proposes the acquisition of a direct holding in a parent credit institution established in a non-participating Member State, the assessment procedures, pursuant to Art. 22 to 24 CRD IV, are entrusted exclusively to the NCAs located at the establishment of the parent institution. If the direct holding results in indirect qualifying holdings in a number of subsidiaries of the parent undertaking, Art. 15 SSMR will apply with regard to subsidiaries established in participating Member States. Hence, one single acquisition may trigger several Art. 15 SSMR procedures of different NCAs.35
31 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, OJ L173, 12.6.2014, p. 190, as amended by Directive (EU) 2019/879, OJ L150, 7.6.2019, p. 296. 32 See Art. 38(8) and (9) BRRD for the application of the business tool, Art. 47(4) und (5) BRRD for the application of the bail-in instrument. Art. 63(1)(m) BRRD requires the Member States to provide for the national resolution authorities’ power to order a timely assessment of the qualifying holding by the NCA. 33 Lackhoff, Single Supervisory Mechanism (2017), at p. 172; see also Recital 22 of the SSMR, referring to the “context” of bank resolution. 34 Lackhoff, Single Supervisory Mechanism (2017), at p. 172. 35 Lackhoff, Single Supervisory Mechanism (2017), at p. 174; Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 8.5 suggests that in the case of intra-group transactions, only the direct acquirer shall be required to notify.
222
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
C. Notification of an intended acquisition of a qualifying holding (Art. 15(1) SSMR) I. Point of entry for notifications and relevant law Art. 15(1) SSMR stipulates that any notification of an acquisition of a qualifying hold- 17 ing shall be introduced with the NCA of the Member State where the credit institution is established in accordance with the requirements set out in relevant national law based on the acts referred to in Art. 4(3)(1) SSMR. Hence, the location of the establishment of the target bank is decisive for the point of entry. Consequently, the point of entry determines the applicable law governing the notifi- 18 cation. While Art. 15(1) SSMR explicitly names the “national law based on” the acts referred to in Art. 4(3)(1) SSMR as applicable, Art. 15(2) SSMR states that for the assessments of acquisitions by the NCAs the acts referred to in Art. 4(3)(1) SSMR have to be applied. The different wording is due to the fact, that the CRD IV is silent on the content of a notification; Art. 23(4) CRD IV explicitly delegates the designation of information that has to be attached to a notification to the Member States. Art. 15(1) SSMR does not refer to the EBA-Guidelines as applicable notification standards within the meaning of Art. 4(3)(2) SSMR. Insofar as the NCAs opted to comply with the Joint Guidelines on the prudential assessment of qualifying holdings pursuant to Art. 16(3) EBA-Regulation No. 1093/2010, they will apply the recommended list of required information.36
II. Persons required to notify a proposed acquisition 1. Proposed acquirer According to Art. 22 CRD IV and, respectively, the national law transposing this pro- 19 vision, a notification is required by any natural or legal person who has taken a decision to acquire a qualifying holding in a credit institution. The notification requirement encompasses, as legal persons, undertakings that according to national corporate law are able to acquire shares or voting rights, be it directly or indirectly. Hence, an intended acquisition has to be notified regardless of the legal form of the proposed acquirer.37 Additionally, natural and legal persons acting in concert with the intention to acquire a qualifying holding are required to notify their project. If there is an explicit or implicit agreement between persons, each person concerned has to notify the NCA if the intended holding crosses, on an aggregated level, the relevant notification thresholds.38 The Joint Guidelines offer a non-exhaustive list of factors indicating a situation where persons are acting in concert.39
36 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex I; see para. 8.5 with regard to the applicability. 37 Steck in Binder, Glose and Riepe and (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 para. 23; Schäfer, in Boos, Fischer and Schulte-Mattler (eds), KWG/CRR VO (5 th edn, 2016), KWG § 2c KWG para. 7; BaFin, Merkblatt zur Inhaberkontrolle (2015) II.1. 38 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), paras. 4.3 and 4.4; see for Germany BaFin, Merkblatt zur Inhaberkontrolle (2015) II.1 suggesting to submit the notifications in this instance as a package. 39 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), paras. 4.6; see for Germany BaFin, Merkblatt zur Inhaberkontrolle (2015) II.1 with examples.
Elke Gurlit
223
Art. 15 SSMR 20
Assessment of acquisitions of qualifying holdings
Although Art. 15(1) SSMR states that an acquisition has to be notified, the wording of Art. 22(1) CRD IV makes clear that a notification has to be submitted prior to the acquisition in order to enable the authorities to object to the acquisition. The relevant point in time for the notification is “the decision” of the person or the persons to acquire a qualifying holding. A decision triggering the notification requirement can be assumed if concrete negotiations have taken place and/or if the basic elements of the deal with regard to the size of capital or voting rights and the means of financing the acquisition have been decided upon.40 Prior to this point in time, there is no factual basis for an assessment of the proposed acquisition.41
2. Target credit institution 21
According to Art. 26(1) CRD IV and the national laws transposing this provision,42 the target undertaking shall, on becoming aware of any acquisition of holdings that exceed the notification thresholds, inform the NCA of those acquisitions. The obligation shall enable the NCA to examine whether the proposed acquirer complied with the notification requirement.43
III. Object of notification: acquisition or increase of a qualifying holding 22
According to Art. 22(1) CRD IV, the intention to acquire, directly or indirectly, a qualifying holding, must be notified. Art. 4(1) no. 36 CRR defines a holding as qualifying which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise significant influence over the management of that undertaking. While the determination of a direct qualifying holding typically does not pose insurmountable problems, the calculation of an indirect qualifying holding may be challenging. The alternative trigger of a significant influence irrespective of the 10 % threshold needs interpretative guidance as well.
1. Direct qualifying holding 23
A direct qualifying holding is assumed if the proposed acquirer intends to acquire 10 % or more of the capital or of the voting rights of the target credit institution. The alternative trigger is relevant, if the size of shares and voting rights is incongruent. This is the case, if the target bank has emitted special shares not accompanied by voting rights. In this instance, Art. 4(1) no. 36 CRR follows the ratio that ownership of 10 % or
40 According to Steck in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 paras. 68 et seq., a decision on the concrete transaction structure – direct or indirect holding – is not a precondition for an intention to acquire. 41 For Germany Schäfer in: Boos, Fischer and Schulte-Mattler (eds), KWG/CRR VO (5 th edn, 2016), KWG § 2c para. 10; Steck in: Binder, Glos and Riepe and (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 paras. 67 et seq. with examples of hard cases; BaFin, Merkblatt zur Inhaberkontrolle (2015) II.2; Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 7.1. 42 See for Germany § 24(1) lit. 10 KWG (German Banking Act). 43 Braun in: Boos, Fischer and Schulte-Mattler (eds), KWG/CRR VO (5 th edn, 2016), KWG § 24 para. 134; Steck in: Binder, Glos and Riepe and (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 para. 4.
224
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
more of the capital indicates that a significant influence may be exercised.44 According to Art. 27(2) CRD IV and corresponding national law,45 voting rights or shares which credit institutions or financial services may hold as the result of providing the underwriting of financial instruments shall not be taken into account, provided that those rights are not exercised and are disposed of within one year of acquisition.46
2. Indirect qualifying holding An indirect holding is easy to calculate if a holding relates to capital. In this case, the 24 quota is relevant for the determination. If, for example, undertaking A directly holds 30 % of the capital of credit institution B, and undertaking C holds 40 % of the capital of undertaking A, C, in effect, indirectly holds 12 % of the capital of credit institution B (40 % of 30 %).47 In this case, both A and C are required to notify their holding. If a holding has to be determined with regard to voting rights, a different regime has to be applied. According to Art. 27(1) CRD IV, which refers to the aggregation approach of the Transparency Directive 2004/109/EC,48 and national law transposing this provision,49 voting rights may be fully accounted both for a direct holding and the indirect holding if the undertaking acquiring the indirect holding is, for example, the controlling parent undertaking of a subsidiary with a direct holding.50 The Joint Guidelines seem to follow a different approach. Instead of detailing the cri- 25 teria of Art. 27(1) CRD IV in conjunction with Directive 2004/109/EC, the ESAs developed a notion of control as the first step factor that is not derived from these legal requirements.51 If the control criterion does not provide a clear result, the Joint Guidelines recommend as a second step the so-called multiplication criterion.52 The approach of the ESAs is not convincing. It goes beyond the purpose of detailing the legal requirements, and it tends to blur the distinction between a size-based criterion and the alternative criterion of significant influence.53
3. Significant influence If the proposed holding does not amount to 10 %, it nevertheless has to be notified 26 if it will enable the acquirer to exercise a significant influence over the management of 44 Steck in: Binder, Glos and Riepe and (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 para. 25; Heemann in: Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), at pp. 223, 233. 45 See for Germany § 1(9) sent. 3 KWG (German Banking Act). 46 See for further exemptions relating to voting rights Heemann in Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), at pp. 223, 236 et seq. 47 Example taken from BaFin, Merkblatt zur Inhaberkontrolle (2015) IV.3.a (1). 48 Art. 9 to Art. 11 of Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market. The Directive was amended by Directive 2013/50/EU, resulting in minor changes of Art. 9. 49 For Germany: § 1(9) sent. 2 KWG (German Banking Act) together with § 34 WpHG (German Securities Trading Act). 50 Steck in Binder, Glos and Riepe and (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 paras. 41 et seq.; Heemann in Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), at pp. 223, 234 et seq.; BaFin, Merkblatt zur Inhaberkontrolle (2015) IV.3.b. 51 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), paras. 3.1 (ii) and 6.3, referring to Directive 2013/34/EU. 52 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 6.6 and Annex II with examples; see also Steck in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 4 paras. 46 et seq. 53 Critical account by Steck in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 para. 44.
Elke Gurlit
225
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
the target bank. This requirement is not defined by the CRD IV. According to the Joint Guidelines, all relevant facts and circumstances have to be taken into account. Relevant factors are, amongst others, the relationship of the acquirer with the target bank, like additional rights of the acquirer or its membership in the supervisory body. Additionally, the ownership structure of the target undertaking is of particular relevance. For example, if voting rights are distributed across a large number of shareholders, the acquirer would be able to exercise significant influence with a share of less than 10 %.54
IV. Content of notification Pursuant to Art. 15(1) SSMR, any notification shall be introduced to the NCA in accordance with national law based on Union law, detailing the information to be attached to the notification. Additionally, the NCAs will apply the recommended list of required information set out in the Joint Guidelines (→ paras. 6 and 18). Information necessary to make an assessment on the intended acquisition concerns: – the identity and personal and professional circumstances of the acquirer, including criminal records and criminal or administrative investigations against the acquirer or persons that will be appointed to the management body of the target undertaking,55 – the financial situation of the acquirer and his means of financing the transaction,56 – direct and indirect holdings already held by the acquirer,57 – the business plan with regard to the acquisition and further strategic aims, if a controlling holding is intended,58 and – the proposed group structure and its impact on supervision.59 28 The amount of information to be attached to the notification is considerable. However, Art. 23(4) sent. 2 CRD IV stipulates that information required shall be proportionate and adapted to the nature of the proposed acquirer and the proposed acquisition.60 Therefore, certain information may not be necessary in instances where the NCA 27
54 See non-exhaustive list of factors in Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 5.2; see also BaFin, Merkblatt zur Inhaberkontrolle (2015) IV.4. 55 In Germany: §§ 9 and 10 Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c German Banking Act and § 104 German Insurance Supervision Act); Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex I, sections 3 to 5, 6(1)(d). 56 In Germany: §§ 13 and 14 Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c German Banking Act and § 104 German Insurance Supervision Act); Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex I, sections 4(1)(c), 5(1)(i), 9. 57 In Germany: § 11 Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c German Banking Act and § 104 German Insurance Supervision Act); Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex I, sections 4 (1)(f), 5(1)(c) to (g). 58 In Germany: § 15 Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c German Banking Act and § 104 German Insurance Supervision Act); Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex I, sections 7(b) and 10 to 12. 59 In Germany: § 15(1) lit. 6 Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c German Banking Act and § 104 German Insurance Supervision Act); Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex 1, section 8. 60 See also Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 8.2.
226
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
already possesses the relevant information, e.g. in cases of the increase of a recently acquired qualifying holding or if the acquirer is a credit institution.61 On the other hand, additional information may be required in the case of notifications of specific acquirers such as sovereign wealth funds and private equity funds.62
V. Procedure According to Art. 22(2) CRD IV and national law transposing this provision,63 the 29 NCA shall acknowledge receipt of the notification and of all the documents required to the proposed acquirer within two working days following receipt. The acknowledgement of receipt must state the date of expiry of the assessment period. The acknowledgement in writing is a prerequisite for the countdown of the assessment period of 60 working days that starts on the date of the written acknowledgement. Hence, as long as the NCA does not confirm the receipt of all information required, the assessment period will not start. In order to prevent abusive delay of assessment procedures, the Joint Guidelines recommend an acknowledgement of an incomplete notification as well, designating it as incomplete and supplemented by a separate letter specifying the missing information.64 For a smooth process, it is recommended to discuss the content of the information required with the NCA prior to a formal notification.65 If the proposed acquisition results in direct as well as in indirect holdings of different 30 persons established in the same Member State, the assessment period will start only when all notifications have been confirmed by the NCA as complete.66 If an acquisition has to be introduced with different NCAs because several subsidiaries of a parent credit institution are affected, the assessment period may start at different points in time. 67 Pursuant to Art. 85(1) SSM‑FR, the NCA shall notify the ECB of the notification no 31 later than five working days following the acknowledgement of receipt. Art. 15(2) SSMR seems to imply that the notification forwarded to the ECB only has to contain the information that receipt of the complete notification of the proposed acquirer was acknowledged. However, if the notification is viewed as a means of enabling the ECB to initiate a parallel assessment within the strict limits of the assessment period, it could be argued that the notification by the NCA should include all the documents delivered by the proposed acquirer.68 This argument is further enhanced by Art. 85(2) SSM‑FR, requiring the NCA to deliver additional information within 5 working days following receipt thereof. 61 In Germany: § 16 Inhaberkontrollverordnung (Regulation on Notifications in Accordance with § 2c German Banking Act and § 104 German Insurance Supervision Act); Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex 1, section 13. 62 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), Annex 1, sections 5(4) and (5). 63 In Germany: § 2c(1) sent. 9 KWG (German Banking Act). 64 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 9.2; crit. with regard to the handling by the German BaFin Steck in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 4 paras 83 et seq. 65 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 9.3; Steck in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 4 para. 79. 66 BaFin, Merkblatt zur Inhaberkontrolle (2015) V.1.b. 67 Lackhoff, Single Supervisory Mechanism (2017), at p. 174. 68 This is the view of Lackhoff, Single Supervisory Mechanism (2017), at p. 175; suggested as a practical matter by Heemann in Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), at pp. 223, 261.
Elke Gurlit
227
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
D. Assessment by the NCA (Art. 15(2) SSMR) I. Assessment according to Union and national law Pursuant to Art. 15(2) SSMR, the NCA shall assess the proposed acquisition based on the criteria set out in the acts referred to in Art. 4(3)(1) SSMR. This provision states that the ECB shall apply relevant Union law and transposing national law if Union law is composed of Directives. Art. 86(1) SSM‑FR simply refers to the relevant Union and national law. Subject to the direct applicability of the Directive, the national provisions transposing Art. 23 CRD IV69 are relevant. Since Art. 22(8) and Art. 23(2) CRD IV make clear that the assessment criteria set out in Art. 23 CRD IV are exhaustive, a high degree of convergence can be expected. Although Art. 15(2) SSMR does not refer to Art. 4(3)(2) SSMR, stipulating the application of EBA-Guidelines, the NCAs will apply the Joint Guidelines subject to an objection pursuant to Art. 16(3) EBA-Regulation no. 1093/2010 (supra, → para. 4). 33 The assessment criteria of Art. 23 CRD IV and the national provisions transposing them form the primary basis for the proposal of the NCA to oppose or not to oppose the intended acquisition. The NCAs have to examine the proposed acquisition with regard to all of the criteria; however, an objection does not require a negative assessment on all of the criteria. When performing the assessment, NCAs should pay due regard to the proportionality principle. An important factor is whether the proposed acquirer aims to gain influence over the management of the target bank. If the acquisition is solely part of a strategy to diversify investments, a reduced standard having regard to professional competence as an element of the acquirer’s reputation70 may be applied.71 Similarly, when examining the financial soundness of the proposed acquirer, intensity of the assessment depends on the question whether the acquirer intends to take control. 72 A reduced assessment may be carried out, if the acquisition merely is an intra-group transaction. In this instance, a full assessment is only necessary for the new persons and entities.73 32
II. Procedure 34
Pursuant to Art. 22(2) CRD IV and national law transposing this provision, the date of acknowledgement of completeness of information is the beginning of the assessment period of a maximum of 60 working days, adding up to approximately 80 calendar days. The NCA may, according to Art. 22(3) CRD IV, during the assessment period, request further information that is necessary to carry out the assessment. Since the NCA has by this stage acknowledged the completeness of the information delivered, the requested information is additional information. However, for the period between the date of request for further information and the receipt of a response, the assessment period In Germany: § 2c(1b) KWG (German Banking Act). Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 10.1 differentiate between integrity and professional competence. No reduced standards should be applied with regard to integrity concerns, para. 10.2. 71 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), paras. 8.3, 10.3 and 10.28. 72 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), paras. 8.4 and 12.5. 73 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 8.5; see also Lackhoff, Single Supervisory Mechanism (2017), at p. 172. 69
70
228
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
shall be suspended for up to 20 working days. If the proposed acquirer is located in a third country or if he or she is not supervised as a financial institution, the suspension may be extended up to 30 working days, see Art. 22(4) CRD IV. Art. 85(2) SSM‑FR stipulates that the NCA must notify the ECB of a suspension and send the additional information within 5 working days following receipt thereof. Any further requests for additional information will not result in a suspension of the assessment period (Art. 22(3)(2) CRD IV). According to Art. 22(3) CRD IV, a request for information resulting in a suspension 35 of the assessment period may be made no later than on the 50th working day of the assessment period. Since the assessment period includes the assessment carried out by the ECB following a draft proposal of the NCA, this time schedule has to be modified: While Art. 15(2) SSMR requires the NCA to submit a proposal for a decision at least ten working days before the expiry of the assessment period, Art. 86(2) SSM‑FR mandates that a draft decision shall be submitted to the ECB at least 15 working days before the expiry of the assessment period. Therefore, a request by the NCA to deliver further information, resulting in a suspension of the assessment period, must be made prior to the 45th working day of the assessment period.74 Since the NCA is not empowered to take a final decision on the acquisition, Union 36 law does not require a hearing if the NCA intends to propose a decision to oppose the acquisition.75 It could be argued that the NCA’s assessment, being an integral part of an ECB procedure, is not subject to national procedural law.76 The Berlusconi Judgment of the CJEU giving the European courts exclusive competence in Art. 15 SSMR procedures (infra, → para. 48)77 does not expressly preclude administrative hearings pursuant to national law. But even if a hearing should be available according to national law,78 it must be carried out in a manner not conflicting with the strict time limits of the assessment period.79
III. Draft decision of the NCA According to Art. 86(1) SSM‑FR, the NCA shall prepare a draft decision for the ECB 37 to oppose or not to oppose the acquisition. In either instance, the final decision rests with the ECB. In deviation from Art. 14 SSMR procedures, Art. 15 SSMR does not give the NCAs the power to finally reject an intended acquisition. Rather, the NCAs perform an integral step in a procedure of the ECB.80 Pursuant to Art. 23(2) CRD IV and the national law transposing this provision, the 38 intended acquisition may be opposed only if there are reasonable grounds for doing so on the basis of the assessment criteria or if the information provided by the acquirer is incomplete. Reasonable grounds to oppose the acquisition can be assumed if the NCA, on consideration of the facts and the documents provided, is not convinced of the suitability of the acquirer and the financial soundness of the acquisition with regard to the sound and prudent management of the credit institution. Since the proposed acquirer Heemann in Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), at pp. 223, 262. Mersch, EuZW 2020, 781, at p. 785. 76 Lackhoff, Single Supervisory Mechanism (2017), at p. 175. 77 Case C-219/17 – Berlusconi and Fininvest/Banca d’Italia, ECLI:EU:C:2018:1023. 78 This is not the case in Germany. § 28(1) VwVfG (German Administrative Procedure Act) requires a hearing only if an adverse final decision is intended. 79 Lackhoff, Single Supervisory Mechanism (2017), at p. 175. 80 Lackhoff, Single Supervisory Mechanism (2017), at p. 175; Case C-219/17 – Berlusconi and Fininvest/Banca d’Italia, ECLI:EU:C:2018:1023, para. 55. 74
75
Elke Gurlit
229
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
has an evident interest to submit all documents supporting his case, the burden of proof rests with the acquirer.81 The NCA may also propose to oppose the acquisition on the ground of incomplete information. Since the assessment period will only start after acknowledgement of receipt of all documents required by the lists according to national law (formal completeness), the acquisition can be opposed if additional information that was requested by the NCA (Art. 22(3) CRD IV) was not delivered by the proposed acquirer, or if the information does not allow a qualified assessment.82 39 Since the decision to oppose an acquisition requires exercise of discretion, the NCA’s draft decision must also include considerations on discretion. However, as the final decision is entrusted to the ECB, exercise of discretion by the NCA has to comply with the standards of the exercise of discretion according to Union law.83 Pursuant to Art. 15(2) SSMR as modified by Art. 86(2) SSM‑FR, the NCA shall submit the draft decision to the ECB at least 15 working days before the expiry of the assessment period.
E. Assessment by the ECB (Art. 15(3) SSMR) I. Assessment according to Union law 40
According to Art. 15(3) SSMR, the ECB shall decide on the basis of the criteria set out in relevant Union law. Because Art. 23(1) CRD IV is not directly applicable, the ECB has to apply the national law transposing this provision.84 Hence, the assessment must also be based on the legal foundations that are relevant for the NCAs, encompassing Art. 23(1) CRD IV and the detailing factors set out in the Joint Guidelines. The ECB has to carry out an independent assessment that is not bound by the NCA’s prior assessment as is made clear by Art. 87 SSM‑FR stipulating that a decision has to be based on its own assessment and the NCA’s draft decision. In exercising this task, the NCAs are required to assist the ECB.
II. Procedure According to Art. 87 sent. 2 SSM‑FR, the right to be heard as provided for in Art. 31 SSM‑FR shall apply. Since the right to be heard is guaranteed (only) if the decision intended by the ECB adversely affects the rights of the proposed acquirer, 85 a hearing must take place if the ECB intends to oppose the acquisition. 42 The right to be heard guarantees the opportunity to comment in writing as provided for in Art. 31(1) sent. 1 SSM‑FR. Art. 31(1) sent. 2 SSM‑FR gives the ECB broad discretion if a meeting should be held.86 According to Art. 31(1) sent. 3 SSM‑FR, the ECB’s 41
81 Lackhoff, Single Supervisory Mechanism (2017), at p. 174; for Germany: Schäfer in Boos, Fischer and Schulte-Mattler (eds), KWG/CRR VO (5th edn, 2016), KWG § 2c paras. 16, 28; Verwaltungsgerichtshof Kassel, Case 6 A 2227/08, 6.10.2010, BeckRS 2010, 54766: doubts about the source of funds to finance the transaction may constitute reasonable grounds to oppose the acquisition. 82 Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (2016), para. 9.1; Mersch, EuZW 2020, 781, at p. 784. 83 Berger, WM 2016, 2361, at p. 2367 with regard to a draft decision to withdraw the authorisation. 84 Lackhoff, Single Supervisory Mechanism (2017), at p. 175 with fn. 810. 85 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 200, referring to Art. 41(2)(a) CFEU. 86 See Lackhoff, Single Supervisory Mechanism (2017), at p. 115 on the criteria how to exercise discretion.
230
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
notification to give the proposed acquirer the opportunity to comment shall mention the material content of the intended decision and the material facts, objections and legal grounds on which the ECB intends to base its decision. If the ECB intends to substitute the legal grounds or wants to base the decision on different or additional facts, it is required to give the opportunity for a second hearing.87 Finally, the right to be heard encompasses the right of access to the ECB’s acquisition file subject to the conditions set out in Art. 22(2) SSMR, Art. 32 SSM‑FR. Although the right of access is not mentioned in Art. 87 sent. 2 SSM‑FR, there is no doubt that the proposed acquirer is entitled to have access to the file, since the right of access is guaranteed in all supervisory procedures, see Art. 22(2) SSMR. Granting access may be necessary to enable the proposed acquirer to comment on the decision envisaged by the ECB. However, the ECB must keep in mind the time limits relevant for a decision to oppose. According to Art. 22(6) CRD IV and the national law transposing this provision, a proposed acquisition shall be deemed to be approved, if the competent authority – the ECB – does not oppose within the assessment period in writing. In the worst-case scenario, the ECB has to carry out its assessment and adopt a decision in writing within the 15 remaining working days of the assessment period (→ para. 35). Therefore, Art. 31(3)(3) sent. 2 SSM‑FR requires a shortening of the time limit to provide comment to three working days.
III. Decision Pursuant to Art. 87 SSM‑FR, the ECB shall decide on the basis of its own assessment 43 and the NCA’s draft decision. If the ECB decides not to oppose the intended acquisition, it does not need to act, because according to Art. 23(6) CRD IV, the acquisition shall be deemed approved if the ECB does not oppose the proposed acquisition within the assessment period. While regularly the withdrawal decision is adopted by the Governing Council of the ECB by way of the non-objection procedure pursuant to Art. 26(8) SSMR,88 under specific circumstances, the acquisition decision is delegated to nominated heads of working units within the ECB according to Art. 4 of ECB Decision (EU) 2019/1376.89 The ECB’s delegation framework aims at preserving the functioning of the decision-making bodies by giving it the inherent power to delegate non-complex decisions, insofar as such measures are justified.90 Hence, the delegation of decision-making power to heads of working units is limited to the cases that the acquisition is the result of the addition or removal of an intermediate layer in the acquirer’s group structure, the result of a shift of ownership in the target credit institution from one holding entity to another holding entity within the same group, or the result of the increase of an already existing qualifying holding without material changes involved.
87 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 201; Lackhoff, Single Supervisory Mechanism (2017), at p. 115. 88 See Lackhoff, Single Supervisory Mechanism (2017), at p. 176 for the internal procedure: If the Governing Council objects to the draft decision of the Supervisory Board not to oppose, the acquisition will be deemed to be approved because of the lapse of time. 89 Decision (EU) 2019/1376 on delegation of the power to adopt decisions on passporting, acquisition of qualifying holdings and withdrawal of authorisations of credit institutions, OJ L 224, 28.8.2019, p. 1; Decision (EU) 2019/1377 nominating heads of work units to adopt delegated decisions on passporting, acquisition of qualifying holdings and withdrawal of authorisations of credit institutions, OJ L 224, 28.8.2019, p. 6. 90 Decision (EU) 2017/933 on a general framework for delegating decision-making powers, OJ L 141, 1.6.2017, p. 14; see also Gurlit, WM 2020, 57, at p. 58.
Elke Gurlit
231
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
The ECB may inform the proposed acquirer of a positive assessment upon the request of the acquirer.91 The acquirer will be especially interested in a positive statement if the assessment of the NCA and the ECB is completed prior to the end of the assessment period.92 However, it is not quite clear if the ECB may formally decide to approve the acquisition. The open wording of Art. 88(1)(b) SSM‑FR, relating the notification requirement to the “ECB Decision on the acquisition of a qualifying holding”, implies that the ECB may choose to adopt a formal approval decision.93 However, if accepting such a power, the question arises whether the ECB may attach conditions and obligations to the approval.94 Art. 22 CRD IV is silent on this issue. Since conditions and obligations affect the rights of the proposed acquirer, they may only be attached if provided for in the national law.95 Additionally, the imposition of conditions and obligations requires a hearing of the proposed acquirer. 45 If the ECB decides to oppose the intended acquisition, it must adopt a formal decision. The decision will usually be based on the substantive criteria set out in Art. 23(1) CRD IV or in the national law transposing this provision. However, the decision may also be based on grounds of incomplete information, if the potential acquirer fails to provide additional information requested by the NCA.96 Although Art. 87 SSM‑FR does not expressly require the ECB to consider the comments provided by the proposed acquirer,97 a duty to do so corresponds with the right to be heard.98 Additionally, as a fundamental rule grounded in primary law,99 the ECB may not base its decision on objections on which the proposed acquirer has not been able to comment, as is stipulated in Art. 22(1) sent. 2 SSMR, Art. 31(3) SSM‑FR. 46 According to Art. 22(2)(2) SSMR, Art. 33(1) SSM‑FR, and in line with Art. 41(2)(c) CFREU, the decision of the ECB has to be accompanied by a statement of reasons. The statement of reasons shall enable the proposed acquirer to examine if he or she should contest the decision. It further serves to enable judicial review of the legality of the decision.100 Therefore, the requirement of a statement of reasons is to be read strictly. 101 However, the requirement to provide a statement of reasons is not limited to these cases.102 If the ECB chooses the option to formally approve the acquisition, the decision must be accompanied by a statement of reasons as well. Pursuant to Art. 88(1)(b) SSM‑FR, the ECB must notify the proposed acquirer of its decision in accordance with 44
Recital 5 of Directive 2007/44/EC; Tusch, WM 2013, 633, at p. 636. This is the case, for example, if contract clauses link the execution of the proposed transaction to an approval of the relevant authority, Tusch, WM 2013, 633, at p. 635. 93 Tusch, WM 2013, 633, at p. 639 qualifies a formal “non-opposition” as a declaratory administrative act. 94 Lackhoff, Single Supervisory Mechanism (2017), at p. 175 suggesting such a power of the ECB. 95 § 2c (1b) sent. 3 KWG (German Banking Act) empowers German BaFin to impose appropriate measures directed to prevent a rejection of acquisition. 96 Mersch, EuZW 2020, 781, at p. 784: this is to be distinguishes from the constellation of not providing the relevant information for notification in first instance, thereby making it impossible for the NCA to confirm completeness of notification. In this case, the NCA may close the file. 97 Insofar Art. 87 SSM‑FR deviates from Art. 78(2) SSM‑FR requiring that a decision on an application for authorisation has also to be based on the comments received. 98 Lackhoff, Single Supervisory Mechanism (2017), at p. 115; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 201. 99 Art. 41(2) CFREU, Art. 296(2) TFEU. 100 Case C-417/11 P, Council v Bamba, ECLI:EU:C:2012:718, para. 49; Lackhoff, Single Supervisory Mechanism (2017), at p. 120. 101 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 204. 102 Case C-413/06, Bertelsmann and Sony v Impala, ECLI:EU:C:2007:790, Opinion of AG Kokott, para. 98. 91
92
232
Elke Gurlit
Assessment of acquisitions of qualifying holdings
Art. 15 SSMR
Art. 35 SSM‑FR. Additionally, the ECB must inform the relevant NCA, see Art. 88(2)(c) SSM-FR.
F. Judicial review I. Distribution of competences between national and European courts Decisions on acquisitions of qualifying holdings as being adopted in a cooperative 47 arrangement between NCAs and the ECB are challenging with regard to the allocation of judicial competences. In principle, competences are not distributed following the origin of the law that has to be applied; instead, the allocation of judicial competence follows the institution that acted or abstained from action required by law. Hence, decisions adopted and other actions executed by the NCA are to be contested before the national courts, while acts performed or abstained from by the ECB can only be challenged in the European courts.103 Deviating from authorisation procedures pursuant to Art. 14 SSMR, there is no pow- 48 er of the NCAs to adopt final decisions on the acquisition of qualifying holdings, irrespective of whether the acquisition is approved or opposed. Instead, the NCAs prepare non-binding draft decisions, which is a necessary step in a procedure that is finalised by the ECB. The CJEU concluded in the Berlusconi Case that judicial review is exclusively entrusted on the European courts.104 This follows the argument that judicial review should be concentrated on the actor whose decision-making power gives rise to immediate adverse legal effects. The preparatory acts of the NCAs will be reviewed by the European courts incidentally insofar, as the illegality of the preparatory acts could affect the validity of ECB’s final decision.105 Hence, the “preparatory acts doctrine” is aimed at serving procedural economy.106
II. Review in the European courts 1. Optional administrative review If an acquisition was finally opposed by the ECB, the proposed acquirer may request 49 a review of this decision by the Administrative Board of Review (ABoR) according to Art. 24(1) and (5) SSMR. Review by the ABoR is “without prejudice” to the right to bring proceedings before the European courts,107 thereby rendering review by ABoR 103 Berger, WM 2015, 501, at p. 504; WM 2016, 2361, at pp. 2367 et seq.; Glos and Benzing in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 235; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 246; Brescia Morra, Quaderni di Ricerca Guridica, No 81 (2016), 109, at pp. 128 et seq. 104 Case C-219/17, Berlusconi and Fininvest/Banca d’Italia, ECLI:EU:C:2018:1023, paras. 47 et seq.; confirmed in Case C-414/18, Iccrea Banca/Banca d’Italia, ECLI:EU:C:2019:1036, paras. 37 et seq. 105 Case C-219/17, Berlusconi and Fininvest/Banca d’Italia, ECLI:EU:C:2018:1023, paras. 47 et seq.; analysis of the “preparatory acts doctrine” by Lefterov, ESCB Legal Conference 2020 (2021), 286, at pp. 290 et seq.; Lackhoff, Single Supervisory Mechanism (2017), at pp. 254 et seq.; analysis of potential violations of the NCA infecting the ECB’s decision is offered by Mersch, EuZW 2020, 781, at p. 785; composite procedures within to the SRM analysed by Valavanidou, ESCB Legal Conference 2020 (2021), 278, at pp. 279 et seq. 106 Lefterov, ESCB Legal Conference 2020 (2021), 286, at p. 291. 107 Art. 24(11) SSMR uses the somewhat unclear abbreviation “CJEU”, meaning the “Court of Justice of the European Union”, Recital 48 SSMR, encompassing the General Court, Court of Justice (CJEU) and specialised courts, Art. 19(1) TEU; see Berger, WM 2015, 501, at p. 505.
Elke Gurlit
233
Art. 15 SSMR
Assessment of acquisitions of qualifying holdings
optional.108 Following a non-binding opinion of the ABoR, the ECB will adopt a new decision abrogating the initial decision, replacing it with a decision of identical content, or replacing it with an amended decision, Art. 24(7) SSMR.109
2. Admissibility of action for annulment 50
The appropriate action for an unsuccessful acquirer is an action for annulment according to Art. 263 TFEU. The action is directed either against the original decision of the ECB or – in the case of a previous review by the ABoR – against the decision replacing that decision after an opinion of the ABoR was delivered. Actions brought by natural or legal persons fall in the jurisdiction of the General Court (Art. 256(1) sent. 1 TFEU in conjunction with Art. 51 Statute of the CJEU) and may be appealed before the CJEU (Art. 256(1)(2) TFEU in conjunction with Art. 56 Statute of the CJEU). Art. 263(4) TFEU grants standing to the unsuccessful acquirer as addressee of the ECB decision. Questions of third-party standing have so far not come up in the courts with regard to the acquisition of qualifying holdings. However, the target bank may be directly and individually concerned by the ECB’s decision to oppose the acquisition if the transaction is based on a contractual agreement with the acquirer.
3. Assessment of the court Pursuant to Art. 263(2) TFEU, the CFI reviews the legality of the ECB’s decision as regards complaints of lack of competence, infringement of an essential procedural requirement, infringement of the treaties or of any rule of law relating to their application, or misuse of powers. If the ECB’s interpretation and application of the assessment criteria of Art. 23(2) CRD IV is at stake, the plaintiff will raise the issue of infringement of the treaties or of other applicable rules. 52 The General Court has to examine the legality of the ECB’s act with regard to its interpretation of the relevant Union law. Since Art. 4(3)(1) SSMR requires the ECB to apply the national legislation transposing the directives, it follows that review of the European courts include the examination of the ECB’s application of national law transposing Union law as well.110 This construction is viewed as problematic if the European courts have to examine the preparatory act of the NCA incidentally, that may suffer from defects of administrative procedure law not based on Union law.111 However, it is hardly conceivable that violation of procedural requirements according to national law could bear on the validity of the final decision of the ECB.112 51
108 Berger, WM 2015, 501, at p. 505; Glos and Benzing in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2nd edn, 2020), § 2 para. 227. This is also the view of the ECB, see Decision of the ECB of 14.4.2014 concerning the establishment of the Administrative Board of Review (ECB/2014/16), Recital 4. 109 See for a comprehensive account of ABoR procedures Glos and Benzing in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2018), § 2 paras. 240 et seq.; Brescia Morra, Quaderni di Ricerca Guridica, No 81 (2016), 109, at pp. 112 et seq. 110 Cases T-133/16 to 136/16, Caisse régionale de crédit agricole mutuel Alpes Provence, ECLI:EU:T: 2018:219, paras. 47 et seq; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 180; Lackhoff, Single Supervisory Mechanism (2017), at pp. 253 et seq. 111 Steck in Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2 nd edn, 2020), § 4 para. 144. 112 Mersch, EuZW 2020, 781, at p. 785.
234
Elke Gurlit
Art. 16 SSMR
Supervisory powers
Art. 16 SSMR Supervisory powers 1. For the purpose of carrying out its tasks referred to in Article 4(1) and without prejudice to other powers conferred on the ECB, the ECB shall have the powers set out in paragraph 2 of this Article to require any credit institution, financial holding company or mixed financial holding company in participating Member States to take the necessary measures at an early stage to address relevant problems in any of the following circumstances: (a) the credit institution does not meet the requirements of the acts referred to in the first subparagraph of Article 4(3); (b) the ECB has evidence that the credit institution is likely to breach the requirements of the acts referred to in the first subparagraph of Article 4(3) within the next 12 months; (c) based on a determination, in the framework of a supervisory review in accordance with point (f) of Article 4(1), that the arrangements, strategies, processes and mechanisms implemented by the credit institution and the own funds and liquidity held by it do not ensure a sound management and coverage of its risks. 2. For the purposes of Article 9(1), the ECB shall have, in particular, the following powers: (a) to require institutions to hold own funds in excess of the capital requirements laid down in the acts referred to in the first subparagraph of Article 4(3) related to elements of risks and risks not covered by the relevant Union acts; (b) to require the reinforcement of the arrangements, processes, mechanisms and strategies; (c) to require institutions to present a plan to restore compliance with supervisory requirements pursuant to the acts referred to in the first subparagraph of Article 4(3) and set a deadline for its implementation, including improvements to that plan regarding scope and deadline; (d) to require institutions to apply a specific provisioning policy or treatment of assets in terms of own funds requirements; (e) to restrict or limit the business, operations or network of institutions or to request the divestment of activities that pose excessive risks to the soundness of an institution; (f) to require the reduction of the risk inherent in the activities, products and systems of institutions; (g) to require institutions to limit variable remuneration as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base; (h) to require institutions to use net profits to strengthen own funds; (i) to restrict or prohibit distributions by the institution to shareholders, members or holders of Additional Tier 1 instruments where the prohibition does not constitute an event of default of the institution; (j) to impose additional or more frequent reporting requirements, including reporting on capital and liquidity positions; (k) to impose specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities; (l) to require additional disclosures;
Christos V. Gortsos
235
Art. 16 SSMR
Supervisory powers
(m) to remove at any time members from the management body of credit institutions who do not fulfil the requirements set out in the acts referred to in the first subparagraph of Article 4(3). Bibliography Robert Alexy, ‘Constitutional Rights and Proportionality’, Revus – Journal for Constitutional Theory and Philosophy of Law 22 (2014), 51; Tomas Arons, ‘Judicial Protection of Supervised Credit Institutions in the European Banking Union’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 93; Jens-Hinrich Binder, ‘The Banking Union and the Governance of Credit Institutions: A Legal Perspective’, EBOR 16 (2015), 467; Concetta Brescia Morra, ‘From the Single Supervisory Mechanism to the Banking Union. The role of the ECB and the EBA’, Working Paper No. 2, Luiss Guido Carli School of European Political Economy, Luiss University Press, Italy (2014); Danny Busch and Annick Teubner, ‘Fit and Proper Assessments within the Single Supervisory Mechanism’. European Banking Institute Working Paper Series 2019 No. 34 (2019); Michele Cossa and Raffaele D’Ambrosio, ‘Recovery plans, early intervention measures and structural measures’, in: Raffaele D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials), Quaderni di Ricerca Giuridica, Banca d’Italia (Quaderni di Ricerca Giuridica, Number 88 April 2020), 287; Alexander Glos, ‘Laufende Aufsicht, Eingriffsinstrumente und Sanktionen’, in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS-Verlag, Cologne 2018), 609; Alexander Glos and Marcus Benzing, ‘Institutioneller Rahmen: SSM, EZB und nationale Aufsichtsbehörde – Zuständigkeitsverteilung im SSM’, in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS-Verlag, Cologne 2018), 31; Christos V. Gortsos, The Single Supervisory Mechanism (SSM): Legal aspects of the first pillar of the European Banking Union (Nomiki Bibliothiki SA, Athens 2015); Bart Joosen and Matthias Lehmann, ‘Proportionality in the Single Rule Book’ in: Mario Pilade Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, Cham/Switzerland, USA 2019), 65; Klaus Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden/Baden 2017); Marco Lamandini, David Ramos Muñoz and Javier Solana Álvarez, Depicting the limits to the SSM’s supervisory powers: The Role of Constitutional Mandates and of Fundamental Rights’ Protection (Quaderni di Ricerca Giuridica, Banca d’Italia, Number 79, November 2015); Peter Mülbert and Alexander Wilhelm, ‘CRD IV Framework for Bank’s Corporate Governance’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 223; Christoph Ohler, ‘Banking Supervision’, in: Fabian Amtenbrink and Christoph Hermann (eds), The EU Law of Economic and Monetary Union (Oxford University Press, Oxford 2020), 1103; Jürgen Schwarze, Ulrich Becker, Armin Hatje and Johann Schoo (eds), EU-Kommentar (4th edn, Nomos, Baden-Baden 2019); Gunnar Schuster, ‘The banking supervisory competences and powers of the ECB’, EuZW Special Issue (2014), 3; Eddy Wymeersch, ‘The single supervisory mechanism or “SSM”, part one of the Banking Union’, Working Paper Research No 255, National Bank of Belgium, Brussels (2014).
236
A. Objective, field of application and conditions (Art. 16(1) SSMR) . . . . . . . . . . . . I. Objective and field of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Art. 16(1) SSMR within the system of the SSM Regulation . . . . . . . . . . . . . . . 2. Field of application in relation to supervised entities . . . . . . . . . . . . . . . . . . . . . . 3. Use, delimitation and exercise of supervisory powers . . . . . . . . . . . . . . . . . . . . . 4. The measures to be taken by the ECB – principle of proportionality . . . . . II. The conditions – comparison with Art. 102(1) CRD IV . . . . . . . . . . . . . . . . . . . . . . 1. The three conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The provisions of Art. 102(1) CRD IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 1 3 6 12 14 14 15
B. The supervisory powers (Art. 16(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introductory remarks – comparison with Art. 104(1) CRD IV (as in force) 1. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Comparison with Art. 104(1) CRD IV (as in force) . . . . . . . . . . . . . . . . . . . . . . . II. The individual powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The power to require the holding of additional own funds Art. 16(2)(a) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The provisions in force until the application of the CRD V . . . . . . . . . . . . . . b) The provisions in force after the application of the CRD V . . . . . . . . . . . . . . 2. Powers relating to other core supervisory elements Art. 16(2)(b)-(f) and (k) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(b) SSMR: reinforcement of arrangements, processes, mechanisms and strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 17 17 19 22
Christos V. Gortsos
22 22 24 29 29
Art. 16 SSMR
Supervisory powers
Art. 16(2)(c) SSMR: restoration of compliance with supervisory requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(d) SSMR: application of a specific provisioning policy or treatment of assets in terms of own funds requirements . . . . . . . . . . . . . . . . . Art. 16(2)(e) SSMR: restriction or limitation on business, operations or network – divestment of activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(f) SSMR: reduction of the risk inherent in activities, products and systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(k) SSMR: the imposition of specific liquidity requirements . . . 3. Powers relating to governance-related issues Art. 16(2)(g)-(i) and (m) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(g) SSMR: limitation of variable remuneration . . . . . . . . . . . . . . . Art. 16(2)(h) and (i) SSMR: request for distribution of net profits (only) – imposition of restrictions or prohibitions on distributions . . . . . . . . . . . . . Art. 16(2)(m) SSMR: removal of members of the management board . . . 4. Powers relating to reporting and disclosure requirements Art. 16(2)(j) and (l) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(j) SSMR: the imposition of additional or more frequent reporting requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Art. 16(2)(l) SSMR: imposition of additional disclosure requirements . . .
30 31 33 36 37 38 38 39 41 42 42 43
A. Objective, field of application and conditions (Art. 16(1) SSMR) I. Objective and field of application 1. Art. 16(1) SSMR within the system of the SSM Regulation In accordance with Art. 9(1) SSMR, and as discussed in its analysis, for the exclusive 1 purpose of carrying out the tasks conferred on it by Arts. 4(1)-(2) and 5(2) SSMR, the ECB is considered as the national competent authority (NCA) or national designated authority (NDAs) (as appropriate) in the participating Member States as established by the relevant EU. For the same exclusive purposes, it can also use all powers and obligations set out in the SSMR, as well as, in principle, all the powers and obligations granted to NCAs and NDAs under the relevant EU law, including, in particular, the investigatory, supervisory and sanctioning powers set out in Arts. 10-18 SSMR.1 Within this system, Art. 16 SSMR governs the supervisory powers (listed in Art. 16(2) 2 SSMR2) that can be used by the ECB to carry out its specific (supervisory) tasks pursuant to Art. 4(1) SSMR (only). In particular, and in accordance with Art. 16(1) SSMR, 3 the ECB has the powers set out in Art. 16(2) SSMR to require supervised entities established in participating Member States to take the necessary measures, at an early stage, in order to address relevant problems, if any, of the conditions laid down in points (a)(c) of that Article are met; these supervisory powers are without prejudice to other powers conferred upon it.
2. Field of application in relation to supervised entities The phrasing of Art. 16 SSMR is not consistent in relation to its field of application to 3 the supervised entities covered by it. In particular: First, the (above-mentioned) introductory phrase of Art. 16(1) SSMR refers to credit institutions, financial holding companies and mixed financial holding companies, Art. 9(1)(1) and (2) SSMR. See infra, → paras. 17-43. 3 Art. 16(1) SSMR, introductory phrase. 1 2
Christos V. Gortsos
237
Art. 16 SSMR
Supervisory powers
which are established in participating Member States, including those in close cooperation in accordance with Art. 7 SSMR, and namely to significant ones.4 These are the three out of the four categories of supervised entities in accordance with the SSM‑FR; the fourth category, i.e., branches established in a participating Member State by a credit institution incorporated in a non-participating Member State,5 is not mentioned therein. Second, points (a)-(c) of Art. 16(1) SSMR and Art. 16(2) SSMR refer to credit institutions only. In addition, in accordance with the 2018 ECB “SSM Supervisory Manual – European banking supervision: functioning of the SSM and supervisory approach”, significant branches of institutions from non-participating Member States are covered by Art. 16 SSMR as well.6 4 For the sake of consistency, any reference to credit institutions in this Article should be read as a reference to supervised entities, as appropriate.7 5 With regard to less significant credit institutions, within its regulatory powers to issue Regulations, Guidelines or general instructions to NCAs on the performance and adoption of supervisory decisions in relation to the tasks defined in Art. 4(1) SSMR (with the exception of the common procedures under points (a) and (c)), and in order to ensure consistency of supervisory outcomes within the SSM, the ECB has the power (as already discussed when analysing Art. 6 SSMR) to issue instructions, which refer to the specific powers laid down in Art. 16(2) SSMR for groups or categories of such credit institutions.8
3. Use, delimitation and exercise of supervisory powers The ECB can use its supervisory powers under Art. 16 SSMR only to carry out its specific tasks under Art. 4(1) SSMR. Its powers relating to its macro-prudential tasks pursuant to Art. 5(2) SSMR are not covered by Art. 16 SSMR but are laid down in Art. 5(4)-(5) SSMR; in addition, its powers in relation to its task under Art. 4(2) SSMR are laid down in Arts. 40-46 CRD IV.9 7 The ECB supervisory powers are without prejudice to the other powers conferred on it. In this respect, the following deserve attention: First, with regard to its specific tasks relating to the authorisation and the withdrawal of authorisation of credit institutions, as well as to the assessment of the acquisition of qualifying holding therein (in accordance with points (a) and (c) of Art. 4(1) SSMR), its powers are set out in Arts. 14-15 SSMR; Second, with regard to its specific task relating to the supervision, as home supervisor, of the opening up of a branch or the provision of cross-border services in a nonparticipating Member State (in accordance with point (b) of Art. 4(1) SSMR), its powers are laid down in the national laws implementing Art. 35(4) CRD IV; and 6
4 The definition of terms is set out in Art. 2(16)-(18) SSM‑FR. It is since 1 October 2020 for the first time that supervised entities established in two participating non-euro area Member States (Bulgaria and Croatia) are directly supervised by the ECB by virtue of Art. 7 SSMR. 5 Art. 2(20)(1)(a)-(c) and (d) SSM‑FR, respectively. 6 See at p. 98, under 4.11.1; this manual, of March 2018, is available at: . 7 See also Gortsos, The Single Supervisory Mechanism (SSM): Legal aspects of the first pillar of the European Banking Union (2015), at p. 222; Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 206. 8 Art. 6(5)(a) SSMR; see also Art. 9(1)(3) SSMR and Art. 90(1)(c) SSM‑FR. 9 For more details, supra, → Arts. 4 and 5.
238
Christos V. Gortsos
Art. 16 SSMR
Supervisory powers
Third, with regard to its specific tasks relating to recovery plans and early intervention (in accordance with point (i) of Art. 4(1) SSMR), its powers are laid down in national laws implementing Arts. 5-9 and 27 BRRD, respectively.10 Accordingly, and for the sake of preciseness, the supervisory powers of the ECB under Art. 16 SSMR relate only to its tasks referred to in points (d)-(h) of Art. 4(1) SSMR. 11 The ECB supervisory powers are closely related but still distinct from its investigatory powers laid down in Arts. 10-13 SSMR (also covered by Art. 9 SSMR); the ECB can make use of the latter (unlike in the case of the former) with regard to both significant and less significant supervised entities.12 Furthermore, supervisory powers are also distinct from its regulatory powers in accordance with Art. 4(3)(2) SSMR and its powers to impose administrative penalties pursuant to Art. 18 SSMR.13 In exercising its supervisory (as well as the investigatory) powers, the ECB must act in accordance with the acts referred to in Art. 4(3)(1) SSMR, namely the CRR and the national laws transposing the CRD IV (as in force), or any other prudential requirements introduced at national discretion,14 in close cooperation with NCAs.15 By way of exception, the ECB powers in relation to supervised entities established in participating Member States in close cooperation must be exercised in accordance with Art. 7 SSMR. 16 The procedure for the adoption and enforcement of supervisory measures develops (in broad terms) as follows: First, the possible supervisory measures to be adopted are proposed by the JSTs, which evaluate them with respect to their effectiveness (taking into account the degree of awareness, capability and reliability of the corporate bodies and other relevant staff involved), intrusiveness and proportionality, and choose the measure which is most appropriate to ensure within a reasonable timeframe the safety and soundness of the supervised entity.17 Second, the appropriate measures are then adopted by means of an ECB supervisory decision adopted by the Supervisory Board in accordance with the “non-objection procedure” laid down in Art. 26(8) SSMR. This decision must be accompanied by a statement of the reasons underlying it (containing the material facts and legal rea10 Both recovery planning and early intervention are considered as supervisory functions. The enabling clause set out in point (i) on the ECB task in relation to “structural changes” in the cases explicitly stipulated by relevant EU law for competent authorities, is still dormant (see further the analysis of Art. 4 SSMR). 11 See in this respect Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at pp. 195-196, specifically the table contained thereon. 12 Art. 6(5)(d) SSMR and Arts. 138-146 SSM‑FR. Wymeersch, Working Paper Research No 255, National Bank of Belgium, Brussels (2014), at pp. 42-44, distinguishes between “supervisory powers” and “supervisory instruments”, defining the former as relating to the decisions that authorities can impose on supervised entities and the latter as relating to techniques establishing supervised entities’ compliance with the requirements imposed on them. According to this author, the investigatory powers belong to the second group along with the supervisory powers under Art. 16 SSMR, which are labelled as “administrative and enforcement instruments”. 13 In the author’s view, the heading of Section 2 of Chapter III (“specific supervisory powers”), covering Arts. 14-18SSMR, is inaccurate to the extent that the sanctioning powers cannot be considered stricto sensu supervisory powers. Nevertheless, the facts of a particular case may qualify for the exercise of both supervisory and sanctioning powers. 14 See supra, → Art. 4. 15 Art. 9(2) SSMR. 16 Art. 9(3) SSMR. 17 SSM Supervisory Manual (2018), p. 99. The powers of the JSTs are based on Art. 3(2) SSM‑FR. In accordance with the ECB “Guide to banking supervision” of November 2014 (p. 38, para. 78), before making use of its supervisory powers, the ECB may consider first addressing the problems informally, i.e., by holding a meeting with the supervised entity’s management or sending a letter of intervention; this Guide is available at: .
Christos V. Gortsos
239
8 9
10
11
Art. 16 SSMR
Supervisory powers
sons on which the decision is based) and be based, in principle, only on facts and objections on which the entity concerned has been able to comment.18 Finally, the JSTs are responsible for the timely assessment of the compliance of a supervised entity with the supervisory measures imposed by the ECB; in case of non-compliance, additional actions must be considered, including informal communication, the use of additional supervisory powers and enforcement measures or sanctions.19
4. The measures to be taken by the ECB – principle of proportionality According to Art. 16(1) SSMR, the ECB has the powers (set out in Art. 16(2) SSMR) to require supervised entities established in participating Member States to take the necessary measures, at an early stage, to address relevant problems. The type of action taken depends on the seriousness of the deficiencies, the required timeframe, as well as the degree of awareness at the supervised entity, the capability and reliability of corporate bodies, and the availability of its human, technical and capital resources.20 In this respect, it is noted that, even though this provision vests the ECB with powers to require such supervised entities to take (the necessary) measures, in several points of Art. 16(2) SSMR power is given to the ECB to take measures themselves to restrict or limit specific activities, restrict or prohibit distributions, impose specific requirements and remove members of the management board; this aspect is further discussed in Section B below. Furthermore, the ECB is required to take these measures “at an early stage”, which implies that it must take into account during its intervention timing issues as well (avoidance of ‘reaction lags’).21 13 The measures to be taken must be “necessary” in order to address relevant problems; hence, the action of the ECB is subject to a “proportionality test”.22 In particular, the measure to be taken must be necessary to deal with the situation resulting from the fact that any of the conditions laid down in Art. 16(1)(a)-(c) SSMR23 is being met and needs also to be tested by controlling whether this objective can be achieved by resort to a less restrictive measure.24 12
18 Art. 33 SSM‑FR. The general provisions relating to the due process for adopting ECB supervisory decisions (Arts. 25-32 SSM‑FR) must also be met. In particular, in accordance with Art. 31(4) SSM‑FR, if an urgent decision appears necessary to prevent significant damage to the financial system, the ECB may adopt a supervisory decision addressed to a party which would adversely affect its rights without giving it the opportunity to comment on the relevant facts, objections and legal grounds relevant prior to its adoption. 19 ECB, Guide to banking supervision (2014), p. 38, para. 79 sent. 1. 20 SSM Supervisory Manual (2018), p. 100; see also ECB, Guide to banking supervision (2014), p. 38, para. 81. 21 This phrasing also makes quite a direct link to the early intervention measures of the ECB in accordance with Art. 27 BRRD; on this, see infra, → SRMR Art. 13. It is noted in this respect that Cossa and D’Ambrosio, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020), 287, at pp. 296-297, in their analysis of Art. 16 SSMR classify the measures taken thereunder as early intervention ones. 22 See Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), 1103, at p. 1142. 23 See infra, → para. 14. 24 This is one of the three aspects of the proportionality test (suitability/appropriateness, necessity, and proportionality stricto sensu); see Joosen and Lehmann, in: Chiti and Santoro (eds), The Palgrave Handbook of European Banking Union Law (2019), 65, at pp. 73-74 (with reference to Alexy, Revus – Journal for Constitutional Theory and Philosophy of Law 22 (2014), 51). See also Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 210 (para. 894).
240
Christos V. Gortsos
Art. 16 SSMR
Supervisory powers
II. The conditions – comparison with Art. 102(1) CRD IV 1. The three conditions The ECB may apply measures pursuant to Art. 16(2) SSMR only if any of the follow- 14 ing conditions (circumstances) is met:25 The first condition is that a supervised entity does not meet the requirements of the legal acts referred to in Art. 4(3) SSMR, namely there is a breach of the CRR, the national laws implementing the CRD IV or any other national prudential requirements. In addition, the ECB may exercise its supervisory powers if it has evidence (based on existing facts) that a supervised entity is likely to breach the requirements of the above-mentioned legal acts within the next 12 months.26 Finally, supervisory powers can be exercised by the ECB by virtue of Art. 16(2) SSMR if the governance arrangements, strategies, processes and mechanisms implemented by a supervised entity and the own funds and liquidity held by it do not ensure sound management and coverage of risks.27 This condition must be assessed on the basis of a determination made in the framework of a “supervisory review” in accordance with Art. 4(1)(f) SSMR. The predominant form of such a review is that carried out in accordance with the supervisory and evaluation review process (SREP), as specified in the (above-mentioned) EBA Guidelines of 19 July 2018 (EBA/GL/2018/03), adopted on the basis of Art. 107(3) CRD IV, “on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP)”.28 Investigations pursuant to Art. 11 SSMR and on-site inspections pursuant to Art. 12 SSMR are also of relevance.29
2. The provisions of Art. 102(1) CRD IV In accordance with Art. 64(1) CRD IV, NCAs have all supervisory powers to inter- 15 vene in the activity of credit institutions that are necessary for the exercise of their function; these include, in particular, the right to withdraw an authorisation in accordance with Art. 18 CRD IV, and the powers set out in Arts. 18, 102 and 104-105 CRD IV. In this respect: The first two above-mentioned conditions under Art. 16(1) SSMR are similar to those set out in Art. 102(1)(a)-(b) CRD IV, which triggers the supervisory powers of NCAs in accordance with Art. 104 CRD IV.30 Nevertheless, the scope of Art. 102 CRD IV is narrower, since it only refers to a breach of the CRR and the CRD IV; Art. 16(1)(a)-(c) SSMR, respectively. Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 206 (para. 879), who considers “likely” to mean that “according to the assessment, better reasons speak in favour of assuming a breach than against it”. 27 This condition has been discussed in Case T 712/15, Crédit Mutuel Arkéa v ECB, ECLI:EU:T: 2017:900 (on this case, see the literature referred to in the analysis of Article 6 SSMR supra, → Art. 6 para. 66). According to para. 168 of this judgement (in French only), from a joint reading of Art. 16(1)(c) and 16(2)(a) SSMR it follows that, if prudential examinations carried out by the ECB show that the own funds and liquidity held by a credit institution do not ensure sound management and risk coverage, the ECB is entitled to require a credit institution to go beyond these minimum requirements. See also the similar Case T-52/16, Crédit Mutuel Arkéa v ECB, ECLI:EU:T:2017:90, para. 167. 28 See supra, Art. 6. On the application of the SREP by the ECB, see also ECB, Guide to banking supervision (2014), pp. 23-26, paras. 30-43 and the SSM Supervisory Manual (2018), pp. 80-87. 29 See further the analysis of Art. 4(1)(f) SSMR. 30 See infra, → paras. 17-21. 25
26
Christos V. Gortsos
241
Art. 16 SSMR
Supervisory powers
The third condition under Art. 16(1) SSMR has no equivalent in Art. 102(1) CRD IV, even though by virtue of Art. 97(3) CRD IV, NCAs must determine whether this (same) condition is met based on the SREP.31 16 It is also noted that all these conditions resemble those triggering the application of early intervention measures under the BRRD.32
B. The supervisory powers (Art. 16(2) SSMR) I. Introductory remarks – comparison with Art. 104(1) CRD IV (as in force) 1. Introductory remarks The supervisory powers conferred on the ECB are enumerated in a non-exhaustive way (“in particular”) in Art. 16(2)(a)-(m) SSMR. Their objective and intensity vary considerably.33 In accordance with the ECB Guide on banking supervision,34 which highlights their increasing intensity in terms of both content and form, these powers may imply: First, the accurate listing of goals and the timeframe for their achievement, while entrusting the supervised entity, on its own responsibility, with the task of identifying the most effective measures without enforcing limits or rules other than the ones laid down in the legal framework; Second, the adoption of specific measures for prudential purposes, such as requiring the supervised entity to take specific actions concerning regulatory matters 35 or operational limits or prohibitions; Third, the use of other legal powers of intervention intended to correct or resolve irregularities, inaction or specific negligence; and Finally, the obligation for a supervised entity to present a plan for restoring compliance with supervisory requirements. 18 The supervisory powers must be exercised by the ECB for the purposes of Art. 9(1) SSMR,36 which lays down the principles governing both the ECB’s supervisory and investigatory powers. The ECB may also take additional measures by using powers available under national prudential rules and in other directly applicable EU law.37 17
31 See also Glos/Benzing, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS-Verlag, Cologne 2018), 31, at p. 40. 32 See yet again the analysis of Art. 13 SRMR. 33 See Ohler, in: Amtenbrink and Hermann (eds), The EU Law of Economic and Monetary Union (2020), 1103, at p. 1142. The classification of measures in different groups on the basis of their objective (infra, → paras. 22-23) takes due note of this remark. The varying intensity is also highlighted there. 34 ECB, Guide to banking supervision (2014), pp. 37-38, para. 80. 35 E.g., organisation of risk management and internal controls, capital adequacy and disclosures. 36 Art. 16(2) SSMR, first five words. 37 See Brescia Morra, Working Paper No 2, Luiss Guido Carli School of European Political Economy, Luiss University Press, Italy (2014), pp. 18-20, stating examples from Italian (banking) law. As Binder correctly notes in Binder, EBOR 16 (2015), 467 at pp. 474-475 under 2.3, with reference to Schuster, EuZW Special Issue (2014), 3, to the extent that national laws provide for powers not covered by Art. 16(2) SSMR, the ECB can make use of them as well (by virtue of Art. 9(1)(2) SSMR), which may further fill existing loopholes. In this case, the relevant NCA may be asked for support to ensure that all legal prerequisites are covered by application of Art. 6(8) SSMR on the allocation of responsibilities and cooperation between the ECB and NCAs; see ECB, Guide to banking supervision (2014), p. 37, para. 79 sent. 2 and Arons, in: Busch and Ferrarini (eds), European Banking Union (2nd ed, 2020), 93, at. p. 100.
242
Christos V. Gortsos
Art. 16 SSMR
Supervisory powers
2. Comparison with Art. 104(1) CRD IV (as in force) With the exception of Art. 16(2)(m) SSMR, the ECB powers under this SSMR Article 19 are (almost) identical to those conferred upon NCAs by virtue of Art. 104(1) CRD IV. 38 Nevertheless, there are differences as well: First, the field of application ratione personae of the latter is broader since it does not only cover credit institutions, financial holding companies and mixed financial holding companies but also investment firms and mixed activity holding companies;39 and Second, as discussed in more detail under II below, the phrasing in Art. 104(1) CRD IV is either narrower in terms of scope (points (a) and (c)) or contains a qualification (point (b)); and it is also noted that Art. 104(2) CRD IV, as in force before and after the start of application of the rules transposing into national law the CRD V,40 and Art. 105 CRD IV does not have an equivalent in the SSMR.41 This CRD IV Article is mainly of relevance for NCAs in participating Member States 20 with regard to less significant credit institutions and for NCAs in non-participating Member States with regard to all credit institutions. To the extent that, in relation to specific powers, the provisions of the CRD IV are more analytical (as further discussed below, under II), this has also to be taken into account by the ECB when applying its supervisory powers.42 In addition, the ECB must also observe, by virtue of Arts. 4(3)(1) and 9 SSMR, the conditions laid down in national laws transposing the CRD IV when it takes recourse to the powers provided thereunder. Since the start of application of the rules transposing into national law the CRD V,43 21 which has modified three aspects of the powers laid down in Art. 104(1) CRD IV (namely in points (a) (to a significant extent), (f) and (j) of that Article), the identity among the powers under the above-mentioned SSMR and CRD IV Articles does not anymore apply to the same extent. These three amendments are discussed under II below. At this point, it is simply noted that one of the key objectives of CRD V was to bring certain financial holding companies and mixed financial holding companies under the direct scope of supervisory powers, pursuant to the CRD IV and the CRR, for the purposes of consolidated supervision. Hence, even though the CRD V does not subject such holding companies to additional prudential requirements on an individual basis, it established a specific approval procedure and direct supervisory powers over them to
38 Under Art. 104 CRD IV, the powers are conferred upon NCAs for the purposes of Arts. 97 CRD IV (on the SREP), 98(4) (on the technical criteria for the SREP), 101(4) CRD IV (on the ongoing review of the permission to use internal approaches), 102 CRD IV (on supervisory measures) and 103 CRD IV (on the application of such measures to institutions with similar risk profiles), as well as for the application of the CRR. 39 “Mixed activity holding company” means a parent undertaking, other than a financial holding company or an institution or a mixed financial holding company, the subsidiaries of which include at least one institution (Art. 4(1)(22) CRR). 40 See infra, → paras. 22-23, when discussing Art. 16(2)(a) SSMR. 41 Art. 105 CRD IV refers to specific liquidity requirements (see infra, → para. 37, when discussing Art. 16(2)(k) SSMR). 42 According nevertheless to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 206 (para. 877), the ECB does make use of the national powers resulting from the implementation of Art. 104 CRD IV in specific cases only, since they may be subject to more restrictive and different conditions under national law. 43 Pursuant to Art. 2(1) CRD V, this date was 28 December 2020 for the majority of its provisions and (in any case) for the three amendments.
Christos V. Gortsos
243
Art. 16 SSMR
Supervisory powers
make them directly responsible for ensuring compliance with consolidated prudential requirements.44
II. The individual powers 1. The power to require the holding of additional own funds Art. 16(2)(a) SSMR a) The provisions in force until the application of the CRD V The ECB has the power to require a significant supervised entity to hold its own funds in excess of the capital requirements laid down in the acts referred to in the Art. 4(3)(1) SSMR in relation to the elements of risks and risks not covered by the relevant EU acts. Accordingly, such additional own funds requirements (capital add-ons) may relate either to a specific element of risk not covered by the so-called Pillar 1 of the supervisory framework (such as a concentration in exposures to sovereign debtors) or to risks that are not covered at all by the Pillar 1 capital requirements, such as the Pillar 2 (additional capital) requirements (P2R),45 which are imposed by the ECB on significant credit institutions in the course of the SREP.46 23 In this respect, and in accordance with Art. 104(2) CRD IV, as implemented into national law, these additional own funds requirements shall be imposed by NCAs, at least, if any of the following conditions are met: First, an institution does not meet the requirement set out in Arts. 73 (on internal capital) and 74 CRD (on internal governance and recovery and resolution plans47) or in Art. 393 CRR (on the capacity to identify and manage large exposures); Second, risks or elements of risks are not covered by the own funds’ requirements set out in Arts. 128-142 CRD IV (on capital buffers)48 or in the CRR; Third, the application of other administrative measures is unlikely to improve the arrangements, processes, mechanisms and strategies sufficiently within an appropriate timeframe; 22
44 Recital (3) CRD V and point (9) CRD V inserting Arts. 21a and 21b CRD IV. It is also noted that under the amended Art. 104 CRD IV, the supervisory powers are conferred upon NCAs also for the purpose of 101(5) CRD IV (on an additional specific aspect relating to the ongoing review of the permission to use internal approaches) but not anymore for the purposes of Art. 103 CRD IV, which has been deleted. 45 Together with the total capital ratio (8 %), these requirements form the Total SREP Capital Ratio (TSCR), which is variable and determined on a case-by-case basis for each credit institution. On the other hand, the Pillar 2 guidance (P2G), which was established by the ECB, under the SREP as well, as an additional capital buffer and indicates to credit institutions the adequate level of capital to be maintained in order to have sufficient capital as a buffer to withstand stressed situations, in particular as assessed on the basis of the adverse scenario in a stress test, is not legally binding (even though the ECB expects compliance). Hence, its eventual breach is not covered by Art. 16(1)(a)-(b) SSMR. 46 According to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 207 (para. 881), even though such a breach may not per se justify the application of supervisory measures, the facts that resulted in it may also justify the conclusion that a breach of the requirement is likely. On the P2G, see at: . 47 This Article has been replaced by virtue of point (19) CRD V. 48 These Articles govern the capital conservation buffer, the institution-specific countercyclical capital buffer, the “G-SII” buffer, the “O-SII” buffer, the systemic risk buffer and the “combined buffer requirement”; the latter forms together with the just above-mentioned TCSR the Overall Capital Requirement (OCR).
244
Christos V. Gortsos
Art. 16 SSMR
Supervisory powers
Fourth, the review referred to in Arts. 98(4) or 101(4) CRD IV reveals that the noncompliance with the requirements for the application of the respective approach will likely lead to inadequate own funds requirements;49 Fifth, the risks are likely to be underestimated despite compliance with the applicable requirements of the CRD IV and the CRR; or Finally, an institution reports to the NCA in accordance with Art. 377(5) CRR that the stress test results referred to in that Article materially exceed its own funds’ requirement for the correlation trading portfolio.50 b) The provisions in force after the application of the CRD V CRD V modified several aspects of Art. 104 CRD IV. Most importantly, point (a) of 24 Art. 104(1) CRD IV has been amended51 to the effect that NCAs have the power to require institutions to have additional own funds in excess of the requirements set out in the CRR under the conditions (anymore) set out in Art. 104a CRD IV “on additional own fund requirements”.52 This new Article provides that NCAs can impose additional own funds requirements if, on the basis of the reviews carried out in accordance with Arts. 97 and 101 CRD IV, they determine that any of the following situations for an individual institution is met: First, it is exposed to risks or elements of risk that are not covered or not sufficiently covered, as further specified in Art. 104a(2) CRD IV,53 by the own funds’ requirements set out in Arts. 92-403 and 429-430 CRR and in Chapter 2 of Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 “laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (…)”54 (the “Securitisation Regulation”, Sec Reg, as in force). Second, it does not meet the requirements set out in Arts. 73-74 CRD IV or in Art. 393 CRR and it is unlikely that other supervisory measures would be sufficient to ensure that those requirements can be met within an appropriate timeframe; Third, the adjustments referred to in Art. 98(4) CRD IV are deemed to be insufficient to enable the institution to sell or hedge out its positions within a short period without incurring material losses under normal market conditions; Fourth, the evaluation carried out in accordance with Art. 101(4) CRD IV reveals that the non-compliance with the requirements for the application of the permitted approach will likely lead to inadequate own funds requirements;
49 The difference between these two reviews is that, while Art. 98(4) CRD IV governs the technical criteria for the SREP, and in particular with regard to valuation adjustments taken for positions or portfolios in the trading book, as set out in Art. 105 CRR, Art. 101(4) CRD IV deals with the ongoing review of the permission to use internal approaches. 50 Furthermore, Art. 104(3) CRD IV provides that for the purposes of determining the appropriate level of own funds on the basis of the SREP, NCAs must assess whether any imposition of an additional own funds requirement in excess of the own funds requirement is necessary to capture risks to which an institution is or might be exposed, taking into account four elements: the quantitative and qualitative aspects of an institution’s assessment process referred to in Art. 73 CRD IV; its arrangements, processes and mechanisms under Art. 74 CRD IV; the outcome of the SREP (Arts. 97 or 101 CRD IV); and the assessment of systemic risk. 51 Point (32)(a) CRD V. 52 Point (33) CRD V, inserting new Arts. 104a, 104b and 104c to the CRD IV. 53 See infra, → para. 26. 54 OJ L347, 28.12.2017, pp. 35-80.
Christos V. Gortsos
245
Art. 16 SSMR
25
26
27
28
Supervisory powers
Fifth, the institution repeatedly fails to establish or maintain an adequate level of additional own funds to cover the guidance communicated in accordance with Art. 104b(3) CRD IV; and Finally, other institution-specific situations are deemed by the competent authority to raise material supervisory concerns. The imposition of additional own funds requirements is only allowed to cover the risks incurred by individual institutions due to their activities, including those reflecting the impact of certain economic and market developments on the risk profile of an individual institution.55 For these purposes, risks or risk elements are only considered as not or not sufficiently covered by the own funds’ requirements set out in the above-mentioned CRR and Sec Reg Articles if the amounts, types and distribution of capital considered adequate by the NCA, taking into account the supervisory review of the assessment carried out in accordance with Art. 73(1) CRD IV, are higher than the own funds’ requirements set out in these Regulations. In this respect: First, NCAs must assess each individual institution’s risk exposure, including institution-specific risks or elements of such risks that are explicitly excluded from or not explicitly addressed by the own funds requirements or are likely to be underestimated despite compliance with the applicable requirements set out in the above-mentioned Regulations;56 and Second, the capital considered adequate must cover all risks or elements of risks identified as material according to the assessment laid down that are not covered or not sufficiently covered by the own funds’ requirements as set out in the above-mentioned Regulations.57 Specific provisions have also been introduced with regard to the determination of the level of the additional own funds required;58 the conditions that own funds must meet for institutions’ compliance with the additional own funds’ requirement; and the obligation imposed on NCAs to duly justify, in writing, to each institution the decision to impose such a requirement.59 It is also noted that, by virtue of (the new as well) Art. 104c CRD IV, NCAs must also notify the relevant resolution authorities (NRAs) of the additional own funds’ requirement imposed on institutions and of any related guidance communicated to the latter in accordance with Art. 104b(3) CRD IV.60 Taking into account the above-mentioned, it is the author’s view that these quite wide-ranging amendments to the CRD IV also have an impact on the application by the ECB of point (a) of Art. 16(2) SSMR since 2021.
Art. 104a(1) CRD IV, which replaced Art. 104(2) CRD IV. If risks or elements of risk are subject to transitional or grandfathering provisions laid down in the CRD IV or in the CRR, they cannot be considered risks or elements of such risks likely to be underestimated despite compliance with the applicable requirements set out in the above-mentioned Regulations. 57 Art. 104a(2) CRD IV, which also determines the conditions under which interest rate risk arising from non-trading book positions is considered material. 58 Art. 104a(3) CRD IV; this replaced Art. 104(3) CRD IV, which was repealed (Point (32) CRD V, under (b)). 59 Art. 104a(4)-(5) CRD IV. 60 It is reasonable to argue that this provision applies to the Single Resolution Board as well. 55
56
246
Christos V. Gortsos
Art. 16 SSMR
Supervisory powers
2. Powers relating to other core supervisory elements Art. 16(2)(b)-(f) and (k) SSMR Art. 16(2)(b) SSMR: reinforcement of arrangements, processes, mechanisms and strategies The ECB has the power to require a significant supervised entity to reinforce its ar- 29 rangements, processes, mechanisms and strategies, which allows for far-reaching interference with regard to organisational issues.61 Art. 104(1)(b) CRD IV, as in force, further clarifies that these arrangements, processes, mechanisms and strategies must be implemented in accordance with Arts. 73 (on internal capital) and 74 CRD IV (on internal governance and recovery and resolution plans62). Art. 16(2)(c) SSMR: restoration of compliance with supervisory requirements The ECB may also require a significant supervised entity to present a plan to restore 30 compliance with supervisory requirements pursuant to the acts referred to in Art. 4(3) (1) SSMR and set a deadline for its implementation, including improvements to that plan regarding scope and deadline.63 From a stricto sensu point of view, the phrase “restoring compliance” should be interpreted as meaning that a breach of such a supervisory requirement must already exist at the time the ECB requires the measure. 64 It is reasonable to argue that its meaning also covers the enhancement/improvement of incomplete policies on the basis of which compliance with supervisory requirements is pursued by a supervised entity. Art. 16(2)(d) SSMR: application of a specific provisioning policy or treatment of assets in terms of own funds requirements An additional supervisory power of the ECB is to require from a significant super- 31 vised entity the application of a specific provisioning policy or of treatment of assets in terms of own funds requirements. Taking into account that, pursuant to Recital (19) SSMR “nothing in this Regulation should be understood as changing the accounting framework applicable pursuant to other acts of EU and national law”, the following should be noted: The first leg of the power only allows the ECB to ask for a change of the general approach relating to provisioning within the applicable accounting framework, obliging a supervised entity to apply discretions in a certain manner; The second leg allows the ECB to require a supervised entity to treat specific assets in a specific manner for the purposes of calculating own funds in accordance with the CRR, provided it has determined that the entity has classified an asset in the incorrect exposure class (including the power to require deductions from on funds in respect of specific assets).65 It is noted in this respect that the Commission’s Report under Art. 32 SSMR urges the 32 ECB, inter alia, to influence institutions’ provisioning level within the limits of the appliSee Binder, EBOR 16 (2015), 467 at p. 474, under 2.3. As this Article is in force after its amendment by the CRD V. 63 This plan apparently differs from the recovery plan an institution must draw and maintain in accordance with Art. 5 BRRD, since the latter provides for measures to be taken to restore its financial position upon a significant deterioration of its financial situation. 64 Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 207 (para. 883), argues that, to the extent that a breach may potentially exist (in view of the other supervisory powers under Art. 16(2) SSMR), this phrase should be read as meaning “ensuring compliance”. 65 See also Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 208 (para. 884). 61
62
Christos V. Gortsos
247
Art. 16 SSMR
Supervisory powers
cable accounting framework and to apply the necessary adjustments, in particular in the context of tackling non-performing loans, as highlighted by the 2017 Council Action Plan on Non-Performing Loans (NPLs).66 Art. 16(2)(e) SSMR: restriction or limitation on business, operations or network – divestment of activities An additional supervisory power conferred upon the ECB is to restrict or limit the business, operations or network of a significant supervised entity or to request the divestment of activities that pose excessive risks to its soundness. Accordingly, it has the power: First, to restrict or limit of specific business, operations or network of supervised entities; and Second, most importantly, to even prohibit activities of a supervised entity, under the condition that the ECB can reasonably establish that their risk profile poses a threat to its soundness.67 34 This is one of the several (albeit minority) cases in Art. 16(2) SSMR where the ECB is not merely given the power to require a supervised entity to take a specific measure but has the power to take itself or even impose a course of action.68 35 apparent that measures based on this power widely interfere with individual business activities and with the principle that the management body69 of a supervised entity is solely competent to decide on business matters and risks taken,70 provided nevertheless that it complies with the relevant regulatory framework. It may also interfere with specific provisions of national company law. It is also noted in this context that respect to the fundamental rights and observation of the principles recognised in the Charter of Fundamental Rights of the European Union,71 including, inter alia, the freedom to conduct a business (Art. 16 SSMR), is a basic principle governing the operation of the SSM.72 The balancing factor, on the other hand, is the objective to ensure the safety and soundness of credit institutions, which is of primary importance as well. Accordingly, even though the SSMR requires the ECB to have full regard to the different types, business models and sizes of credit institutions when carrying out its specific supervisory tasks, this is without prejudice to the above objective.73 33
See infra, → Art. 32. This is not related to the intervention powers and measures under the MiFID II regarding investment products, the purpose of which is investor protection. 68 The same applies with regard to its powers under Art. 16(2)(i), (k) and (m) SSMR; see, infra, → paras. 39-40, 37 and 41, respectively. 69 This term is defined as an institution’s body or bodies, which are appointed in accordance with national law, are empowered to set its strategy, objectives and overall direction, and oversee and monitor management decision-making; they include persons who effectively direct its business (Art. 3(1)(7) CRD IV). 70 See Binder, EBOR 16 (2015), 467, at p. 474 and Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 208 (para. 885). 71 Consolidated version, OJ C202, 7.6.2016, pp. 389-405. 72 Recital (86) SSMR; on this aspect, see details in Lamandini, Muñoz and Álvarez, Depicting the limits to the SSM’s supervisory powers: The Role of Constitutional Mandates and of Fundamental Rights’ Protection (2015), at pp. 47-61. On Art. 16 CFREU, see by means of mere indication Schwarze/van Vormizeele, in Schwarze, Becker, Hatje and Schoo (eds), EU-Kommentar (4th ed, 2019), CFREU Art. 16, at pp. 3412-3413. 73 Art. 1(3) SSMR; on this, see also Wymeersch, Working Paper Research No 255, National Bank of Belgium, Brussels (2014), at p. 43. 66
67
248
Christos V. Gortsos
Art. 16 SSMR
Supervisory powers
Art. 16(2)(f) SSMR: reduction of the risk inherent in activities, products and systems The ECB has also the power to require a significant supervised entity to reduce 36 the risk inherent in its activities, products and systems; the CRD V has also included outsourced activities.74 The exercise of this power interferes, yet again, with the principle that the management body of the supervised entity is solely competent to decide on risks taken. Accordingly, the ECB must in this case as well establish why the risks taken are not sustainable, e.g., in relation to the level of NPLs.75 Art. 16(2)(k) SSMR: the imposition of specific liquidity requirements The ECB may also impose76 on a significant supervised entity-specific liquidity re- 37 quirement, including restrictions (limitations) on maturity mismatches between assets and liabilities.77 In accordance with Art. 105(1) CRD IV in order to determine the appropriate level of liquidity requirements, NCAs must assess whether the imposition of a specific liquidity requirement is necessary to capture liquidity risks to which an institution is or might be exposed, taking into account its business model, its arrangements, processes and mechanisms referred to in Art. 86 CRD IV, the outcome of the SREP, and systemic liquidity risk that threatens the integrity of the financial markets of the Member State concerned.
3. Powers relating to governance-related issues Art. 16(2)(g)-(i) and (m) SSMR Art. 16(2)(g) SSMR: limitation of variable remuneration The ECB has the (preventive) capital conservation power to require a significant su- 38 pervised entity to limit variable remuneration to a certain percentage of net revenues when it is inconsistent with the maintenance of a sound capital base, and in particular, to implement reservations. It can be exercised on top of the provisions on the maximum distributable amount (MDA),78 as laid down in Art. 141(2) CRD IV, according to which any institution failing to meet the combined buffer requirement79 should calculate the MDA and notify it to the relevant NCA, which must prohibit any such institution from undertaking specific actions before it has calculated the MDA.80 Art. 16(2)(h) and (i) SSMR: request for distribution of net profits (only) – imposition of restrictions or prohibitions on distributions The ECB has the power to require a significant supervised entity to distribute net 39 profits to shareholders in order to strengthen its own funds. This power, which is Point (32)(a) CRD V, amending Art. 104(1)(f) CRD IV. According to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 208 (para. 886), in the presence of several alternatives for risk reduction, the ECB must also carefully choose the specific measure and may even leave the means to achieve a certain risk reduction to the significant supervised entity. 76 In line with the comment above regarding the ECB power under point (c) of Article 16(2) SSMR, in this case it has the power to impose this course of action. 77 The key liquidity requirements are laid down in Arts. 411-428 CRR (which predominantly refer to the liquidity coverage requirement (LCR)) and 428a-az CRR (on the calculation of the net stable funding ratio (NSFR), inserted by the CRR II). 78 See also Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 208 (para. 887). 79 See supra, → para. 22. 80 On the MDA, which is calculated on the basis of a specific formula set out in Art. 141(4)-(6) CRD IV, see Glos, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS-Verlag, Cologne 2018), 609, at pp. 639-640. 74
75
Christos V. Gortsos
249
Art. 16 SSMR
Supervisory powers
directed to capital conservation as well, can be exercised if, on the basis of a reasonably expected future development of the capital situation of the supervised entity, a strengthening of its capital is required.81 40 Furthermore, the ECB has the more intrusive power to restrict82 distributions by a significant supervised entity to shareholders, members, or holders of Additional Tier 1 instruments;83 it can even prohibit such distributions, provided that the prohibition does not constitute an event of default of that entity.84 Art. 16(2)(m) SSMR: removal of members of the management board 41
The final governance-related supervisory power of the ECB (Art. 16(2)(m) SSMR), 85 which, as already mentioned, is not listed in Art. 104(1) CRD IV) consists of removing, 86 at any time, members from the management body of a significant supervised entity who do not fulfil the requirements set out in the acts referred to in Art. 4(3) SSMR, and in particular in Art. 91 CRD IV (on the management body).87 With respect to this power, the following is noted: First, under the single rulebook, this is also an early intervention measure. In particular, by virtue of Art. 27(1)(d) BRRD, NCAs may require one or more members of the management body or senior management to be removed or replaced if those persons are found unfit to perform their duties pursuant to Art. 13 CRD IV or Art. 9 MiFID; similar powers are conferred upon NCAs by virtue of 28 BRRD.88 Second, the reference made to Art. 91 CRD IV can lead to the conclusion that on the basis of this power the ECB has the right to remove a member of a management body based on the fit and proper assessment provided for therein.89
81 According to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 209 (para. 888), the exercise of this power should be carried out in a methodologically sound manner. 82 See the comment above regarding the ECB power under point (c) of Art. 16(2) SSMR. 83 Capital instruments qualify as “Additional Tier 1 instruments” when the conditions laid down in Art. 52(1) CRR (as substantially amended by the CRR II) are met; (some of them) are further specified in Arts. 20-24 of Commission Delegated Regulation (EU) No 241/2014 of 7 January 2014 (OJ L74, 14.3.2014, pp. 8-26). 84 It is noted, however, that, in accordance with Art. 52(1)(l)(iv) CRR, additional Tier 1 instruments qualify as such if, inter alia, the cancellation of distributions do not constitute an event of default. Hence, this “no default” limitation seems to be questionable; see also Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 209 (para. 889). 85 See also Recital (46) SSMR. 86 See the comment above regarding the ECB power under point (c) of Article 16(2) SSMR. 87 The above comment about the ECB power under point (c) of Article 16(2) SSMR applies in this case as well. 88 On this, see the analysis of → SRMR Art. 13. 89 On Art. 91 CRD IV and the fit and proper criteria, see Busch and Teubner, European Banking Institute Working Paper Series 2019 No. 34 (2019), as well as Mülbert and Wilhelm, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, 2020), 223, at pp. 231-235. See also the ECB “Guide to fit and proper assessments” (as last updated in May 2018), Section 6.5, pp. 28-29; this Guide is available at: .
250
Christos V. Gortsos
Powers of host authorities and cooperation on supervision
Art. 17 SSMR
4. Powers relating to reporting and disclosure requirements Art. 16(2)(j) and (l) SSMR Art. 16(2)(j) SSMR: the imposition of additional or more frequent reporting requirements The ECB has the power to impose90 on a significant supervised entity additional or 42 more frequent reporting requirements, including reporting on capital and liquidity positions;91 the CRD V has also included reporting on leverage.92 These reporting requirements are further qualified by virtue of (the totally amended) Art. 104(2) CRD IV, 93 which provides the following: First, NCAs may only impose additional or more frequent reporting requirements on institutions where the relevant requirement is appropriate and proportionate with regard to the purpose for which the information is required and the information requested is not duplicative; Second, for the purposes of Arts. 97-102 CRD IV, any additional information that may be required from institutions shall be deemed as duplicative where the same or substantially the same information has already been otherwise reported to the NCA or may be produced by it; and Third, NCA should not require an institution to report additional information it has previously received in a different format or level of granularity and that difference does not prevent it from producing information of the same quality and reliability as that produced on the basis of the additional information that would be otherwise reported. Art. 16(2)(l) SSMR: imposition of additional disclosure requirements Finally, the ECB powers also include the power to require from a significant super- 43 vised entity additional disclosure to the public, making use of the market discipline mechanism underlying Pillar 3 of the supervisory framework to induce investors to react accordingly.94
Art. 17 SSMR Powers of host authorities and cooperation on supervision on a consolidated basis 1. Between participating Member States the procedures set out in the relevant Union law for credit institutions wishing to establish a branch or to exercise the freedom to provide services by carrying on their activities within the territory of another
This is another case where the ECB has the power to impose a course of action. According to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 209 (para. 890), this ECB supervisory power goes beyond its investigatory powers under Art. 10 SSMR, on the basis of which it has the power to ask for all information relevant to its tasks. The limitation that no reporting obligations in areas conclusively determined by the EU law can be imposed does not apply in this case. 92 Point (32)(a) CRD V, amending Art. 104(1)(j) CRD IV. 93 Point (32)(a) CRD V. 94 According to Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (2017), at p. 209 (para. 892), this power rests on the assumption that the market discipline test will result in corresponding actions, which is doubtful whether is always justified. 90
91
Kern Alexander
251
Arts. 8–17 SSM‑FR
Framework Regulation
Member State and the related competences of home and host Member States shall apply only for the purposes of the tasks not conferred on the ECB by Article 4. 2. The provisions set out in the relevant Union law in relation to the cooperation between competent authorities from different Member States for conducting supervision on a consolidated basis shall not apply to the extent that the ECB is the only competent authority involved. 3. In fulfilling its tasks as defined in Articles 4 and 5 the ECB shall respect a fair balance between all participating Member States in accordance with Article 6(8) and shall, in its relationship with non-participating Member States, respect the balance between home and host Member States established in relevant Union law. Bibliography Byrne Wallace, ‘Regulation of Banking in Ireland: Subsidiary or Branch’ Lexology (10 April 2017); Kern Alexander, ‘The ECB’s macroprudential tasks and home-host supervision in the SSM: tasks, powers and supervisory gaps’ in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, Cheltenham 2019); Eddy Wymeersch, ‘The Single Supervisory Mechanism for Banking Supervision: Institutional Aspects’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020).
Art. 17 SSMR Home-Host Framework (including Arts. 6, 17 SSM Framework Regulation) 1
The SSM regime consists of both the ECB and NCA. Its overall purpose is banking supervision in EU participating Member States and EU non-participating Member States that have opted in. Its overriding objectives are to ensure the safety and soundness of the European banking system and to ensure the unity and integrity of the EU internal market.1 The ECB is responsible for the effective and consistent functioning of the SSM. 2 The rules apply to existing home-host supervisory arrangements, but where the ECB has taken over prudential supervisory tasks under Art. 4 SSMR, it carries out the functions of both the home and host authorities of participating Member States.3 Moreover, the ECB acts as a host supervisor in relation to significant branches operating in participating Member States which have home offices in non-euro area countries and for other branches considered as significant institutions.4
Arts. 8–17 SSM Framework Regulation Introduction 1
The SSM‑FR (Regulation (EU) 468/2014) provides more details about the procedural allocation of powers between the home and host countries where credit institutions or banking groups operate within the Banking Union and also provide rules for allocation of powers between the ECB as a home and host authority and other competent authorities in other EU/EEA States which are outside the Banking Union. As a general matter, where credit institutions exercise their right of establishment or to provide services in another Member State, “Union law provides for specific procedures and for attribution
Art. 1 SSMR. Art. 6(1) SSMR. 3 Art. 4 SSMR. 4 See Commission, Commission Staff Working Document accompanying the document Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013 Com(2017) 591 final, 24. 1
2
252
Kern Alexander
Arts. 8–17 SSM‑FR
Framework Regulation
of competences between the Member States concerned”.1 Under the single passport rules of EU financial services law, the home State authority where the credit institution is established has the competence to ensure the institution’s compliance with prudential regulatory requirements of EU law, including the institution’s branch operations in other EU/EEA Member States. However, the host country would have the competence to supervise the branch 2 operations of the non-host State credit institution for compliance with the liquidity requirements of the CRR and any host country central bank liquidity requirements. Also, the host State authority has the competence to ensure the branch’s compliance with EU and domestic conduct of business laws and regulation (including consumer protection), and compliance with domestic anti-money laundering and counter-terrorist financing requirements (AML/CFT Directives). This means, for example, that the host State authority will need to establish policies and procedures on client acceptance, suspicious transactions, etc.2 Bibliography Christos V. Gortsos, ‘European Central Banking Law: The Role of the European Central Bank and National Central Banks under European Law’ (Palgrave Macmillan, 2020).
Art. 8 SSM Framework Regulation Supervision on a consolidated basis 1. The ECB shall conduct supervision on a consolidated basis as provided for by Article 111 of Directive 2013/36/EU in respect of credit institutions, financial holding companies or mixed financial holding companies that are significant on a consolidated basis, where the parent undertaking is either a parent institution in a participating Member State or an EU parent institution established in a participating Member State. 2. The relevant NCA shall perform the task of the supervisor on a consolidated basis in respect of credit institutions, financial holding companies or mixed financial holding companies that are less significant on a consolidated basis.
Consolidated Supervisor (Art. 8 SSM Framework Regulation) Within the Banking Union, the ECB shall act as the “consolidated supervisor” 1 over credit institutions and financial holding companies (including mixed holding companies) on a consolidated basis. This means the ECB has plenary competence to supervise all the operations of the credit institution and financial holding companies established in participating Member States or in a Member State that has opted into the SSM on a cross-border basis regardless of whether the credit institution is operating through subsidiaries or branches in the participating host State. The ECB has decided to allocate powers of consolidated supervision by direct supervisory oversight of significant institutions that are determined as such on a consolidated basis “where the parent undertaking either parent institution in a participating MS or an EU parent institution established in a participating MS”.1 The relevant NCA in the State where the credit or
Recital (51) SSMR. Byrne Wallace, Regulation of Banking in Ireland: Subsidiary or Branch (10 April 2017), available at: . 1 Art. 8(1) SSM‑FR. 1 2
Kern Alexander
253
Arts. 8–17 SSM‑FR
Framework Regulation
parent institution is established is responsible for supervising the same financial entities that are deemed by the ECB to be less significant.2
Art. 9 SSM Framework Regulation The ECB as chair of a college of supervisors 1. When the ECB is the consolidating supervisor, it shall chair the college established pursuant to Article 116 of Directive 2013/36/EU. The NCAs of the participating Member States where the parent, subsidiaries and significant branches within the meaning of Article 51 of Directive 2013/36/EU, if any, are established, shall have the right to participate in the college as observers. 2. If there is no college established pursuant to Article 116 of Directive 2013/36/EU, and a significant supervised entity has branches in the non-participating Member States that are considered as significant in accordance with Article 51(1) of Directive 2013/36/EU, the ECB shall establish a college of supervisors with the competent authorities of the host Member States.
A. Art. 9(1) SSM Framework Regulation 1
Under EU banking law, the home country supervisor of a credit institution or financial conglomerate that has activities and operations in host Member States is required to form a supervisory college for that particular institution. The formation of supervisory colleges is facilitated by the EBA, but within the euro area where the ECB takes the lead in supervising institutions in participating Member States, the ECB is expected to play a more proactive role in forming supervisory colleges. The NCAs of participating Member States in which the parent companies of financial conglomerates, subsidiary credit institutions and significant branches are established will participate in the college as observers.1
B. Art. 9(2) SSM Framework Regulation 2
The ECB and host Member State competent authorities are to establish a college of supervisors where a significant entity has significant branches in a non-participating Member State for which no college has been created.2
Art. 10 SSM Framework Regulation The ECB and NCAs as members of a college of supervisors If the consolidating supervisor is not in a participating Member State, the ECB and NCAs shall participate in the college of supervisors in accordance with the following rules and with the relevant Union law:
Art. 8(2) SSM‑FR. Art. 9(1) SSM‑FR. 2 Art. 9(2) SSM‑FR; Commission, Commission Staff Working Document accompanying the document Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013 Com (2017) 591 final, 34. 2
1
254
Kern Alexander
Arts. 8–17 SSM‑FR
Framework Regulation
(a) if the supervised entities in participating Member States are all significant supervised entities, the ECB shall participate in the college of supervisors as a member, while the NCAs shall be entitled to participate in the same college as observers; (b) if the supervised entities in participating Member States are all less significant supervised entities, the NCAs shall participate in the college of supervisors as members; (c) if the supervised entities in participating Member States are both less significant supervised entities and significant supervised entities, the ECB and the NCAs shall participate in the college of supervisors as members. The NCAs of the participating Member States where the significant supervised entities are established shall be entitled to participate in the college of supervisors as observers.
Members of supervisory College (Art. 10 SSM Framework Regulation) The rules governing the participation status of Member States as either a “member” 1 or an “observer” in a college are set forth in Art. 10 SSM‑FR. Where the consolidating supervisor is not in a participating Member State, the following rules will apply. For a significant supervised entity, the consolidating supervisor will chair the college and the ECB will be a member, while host NCAs will be observers. For less significant entities, all national competent authorities where they operate will be members of the college. If the supervised entities in a participating Member State are both less significant and significant entities, the ECB and NCAs will be members. The country in which the significant supervised entity is established will be an observer in the college of supervisors. 1
Art. 11 SSM Framework Regulation Right of establishment of credit institutions within the SSM 1. Any significant supervised entity wishing to establish a branch within the territory of another participating Member State shall notify the NCA of the participating Member State where the significant supervised entity has its head office, of its intention. Information shall be provided in accordance with the requirements laid down in Article 35(2) of Directive 2013/36/EU. The NCA shall immediately inform the ECB of the receipt of this notification. 2. Any less significant supervised entity wishing to establish a branch within the territory of another participating Member State shall notify its NCA of its intention in accordance with the requirements laid down in Article 35(2) of Directive 2013/36/EU. 3. Where no decision to the contrary is taken by the ECB within two months of receipt of the notification, the branch referred to in paragraph 1 may be established and commence its activities. The ECB shall communicate this information to the NCA of the participating Member State where the branch will be established. 4. Where no decision to the contrary is taken by the NCA of the home Member State within two months of receipt of the notification, the branch referred to in paragraph 2 may be established and commence its activities. The NCA shall communicate this information to the ECB and to the NCA of the participating Member State where the branch will be established. 1
Art. 10(c) SSM‑FR.
Kern Alexander
255
Arts. 8–17 SSM‑FR
Framework Regulation
5. In the event of a change to any of the information communicated pursuant to paragraphs 1 and 2, the supervised entity shall give written notice of this change to the NCA that received the initial information at least one month before implementing the change. This NCA shall inform the NCA of the Member State where the branch is established. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Notification of NCA and ECB – Art. 11(1)-(2) SSM Framework Regulation
2
C. Decision by the ECB – Art. 11(3)-(5) SSM Framework Regulation . . . . . . . . . .
3
A. Introduction 1
Art. 11 SSM‑FR provides the important principle of communication and exchange of information between the ECB, home State authorities and host State authorities regarding the procedures for the right of cross-border establishment.
B. Notification of NCA and ECB – Art. 11(1)-(2) SSM Framework Regulation 2
Significant supervised entities seeking to establish a branch in another Member State are required to notify about this to their home State authority, which will in turn immediately notify the ECB. A less significant supervised entity that is not directly supervised by the ECB only has to notify its home State authority, which does not have to notify the ECB about the institution’s wish to expand to another Member State.1
C. Decision by the ECB – Art. 11(3)-(5) SSM Framework Regulation 3
If the ECB does not object within two months of the notification, the establishment succeeds and the ECB is required to notify the host Member State that the institution will establish a branch in that host State. Similarly, for a less significant entity that is not directly supervised by the ECB, the home State authority must inform the ECB and the host Member State where the institution is seeking to establish a branch.2
Art. 12 SSM Framework Regulation Exercise of the freedom to provide services by credit institutions within the SSM 1. Any significant supervised entity wishing to exercise the freedom to provide services by carrying on its activities within the territory of another participating Member State for the first time shall notify the NCA of the participating Member State where the significant supervised entity has its head office of its intention. Information shall be provided in accordance with the requirements laid down in 1 Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM‑FR) (ECB/2014/17), Art. 11 (1) and (2) SSM‑FR. The expansion is to be carried out in accordance with Directive 2013/36/EU. 2 Art. 11(4) SSM‑FR.
256
Kern Alexander
Arts. 8–17 SSM‑FR
Framework Regulation
Article 39(1) of Directive 2013/36/EU. The NCA shall immediately inform the ECB of the receipt of this notification. The NCA shall also communicate the notification to the NCA of the participating Member State where the services will be provided. 2. Any less significant supervised entity wishing to exercise the freedom to provide services by carrying on its activities within the territory of another participating Member State for the first time shall notify its NCA in accordance with the requirements laid down in Article 39(1) of Directive 2013/36/EU. The notification shall be communicated to the ECB and to the NCA of the participating Member State where the services will be provided.
Freedom to provide services by credit Institutions (Art. 12 SSM Framework Regulation) Regarding the procedures for the free provision of services by credit institutions on a 1 cross-border basis within SSM participating States, Art. 12 SSM‑FR requires significant institutions providing services in another Member State for the first time to inform the home Member State authority, which will, in turn, inform both the ECB and the host State where the institution is seeking to provide services.1 Regarding less significant institutions, they are required to notify their National NCAs, which will, in turn, notify the ECB and the host State where the institution is seeking to provide services.2
Art. 13 SSM Framework Regulation Notification of the exercise of the right of establishment within the SSM by credit institutions established in non-participating Member States 1. Where the competent authority of a non-participating Member State communicates the information referred to in Article 35(2) of Directive 2013/36/EU in accordance with the procedure laid down in Article 35(3) thereof to the NCA of the participating Member State where the branch is to be established, such NCA shall immediately notify the ECB on the receipt of this communication. 2. Within two months of receipt of the communication from the competent authority of a non-participating Member State, the ECB, in the case of a branch that is significant pursuant to the criteria laid down in Article 6 of the SSM Regulation and in Part IV of this Regulation, or the relevant NCA in the case of a branch which is less significant based on the criteria laid down in Article 6 of the SSM Regulation and in Part IV of this Regulation, shall prepare to supervise the branch in accordance with Articles 40 to 46 of Directive 2013/36/EU, and if necessary, indicate the conditions under which, in the interests of the general good, the branch may carry on its activity in the host Member State. 3. NCAs shall inform the ECB about the conditions under which, under national law and in the interests of the general good, activities can be carried out by a branch in their Member State. 4. A change to any information provided by the credit institution wishing to establish a branch pursuant to points (b), (c) or (d) of Article 35(2) of Directive 2013/36/EU shall be notified to the NCA referred to in paragraph 1. 1 2
Art. 12(1) SSM‑FR. Art. 12(2) SSM‑FR.
Kern Alexander
257
Arts. 8–17 SSM‑FR
Framework Regulation
A. Art. 13(1) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Art. 13(2) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Art. 13(3)-(4) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
A. Art. 13(1) SSM Framework Regulation 1
Where credit institutions are established in the non-participating Member States, their home competent authorities are required to notify the host participating Member State authority, and then the host State authority is required to notify the ECB on the receipt of this communication.1
B. Art. 13(2) SSM Framework Regulation 2
For significant institutions, the ECB has two months to make arrangements to supervise the significant branch and indicate the conditions under national law and in the interests of the general good under which the branch can conduct its activities in the host Member State.2
C. Art. 13(3)-(4) SSM Framework Regulation 3
Similarly, for a less significant branch, the host Member State authority has two months to prepare to supervise the branch and to indicate the conditions under national law and in the general good for the branch to conduct its activities in the host State.3 The host State NCA then must notify the ECB of the conditions under national law that it is prepared to supervise the branch.4
Art. 14 SSM Framework Regulation Competent authority of the host Member State for branches 1. In accordance with Article 4(2) of the SSM Regulation, the ECB shall exercise the powers of the competent authority of the host Member State where a branch is significant within the meaning of Article 6(4) thereof. 2. Where a branch is less significant within the meaning of Article 6(4) of the SSM Regulation, the NCA of the participating Member State where the branch is established shall exercise the powers of the competent authority of the host Member State. Bibliography Kern Alexander, ‘The ECB’s macroprudential tasks and home-host supervision in the SSM’ in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, 2019).
Art. 13(1) SSM‑FR. Art. 13(2) SSM‑FR. 3 Art. 13(3) SSM‑FR. 4 Art. 13(3) SSM‑FR. 1
2
258
Kern Alexander
Arts. 8–17 SSM‑FR
Framework Regulation
A. Art. 14(1) SSM Framework Regulation The exercise of supervisory powers by the competent authority of the host Member 1 State is governed by Art. 14 SSM‑FR. The ECB has supervisory competence over the host Member State where the branch is significant and will supervise the branch directly.
B. Art. 14(2) SSM Framework Regulation Where the institution is less significant, the ECB allocates supervisory powers to the 2 host Member State. Art. 14 (2) SSM‑FR provides that “the NCA of the participating Member State where the branch is established shall exercise the powers of the host MS”. 1
Art. 15 SSM Framework Regulation Notification of the exercise of the freedom to provide services within the SSM by credit institutions established in non-participating Member States 1. In accordance with Article 4(2) and within the scope of Article 4(1) of the SSM Regulation, the ECB shall carry out the tasks of the competent authority of the host Member State in respect of credit institutions established in the non-participating Member States which exercise the freedom to provide services in participating Member States. 2. If the freedom to provide services is in the interest of the general good, subject to certain conditions under the national law of participating Member States, NCAs shall inform the ECB of these conditions.
Art. 15 SSM Framework Regulation Where a credit institution from a non-participating Member State seeks to provide 1 services in a participating Member State, the non-participating NCA is required to notify the host participating Member State which shall then notify the ECB.1
Art. 16 SSM Framework Regulation Competent authority of the host Member State for freedom to provide services 1. In accordance with Article 4(2) and within the scope of Article 4(1) of the SSM Regulation, the ECB shall carry out the tasks of the competent authority of the host Member State in respect of credit institutions established in non-participating Member States which exercise the freedom to provide services in participating Member States.
1 Art. 14(2) SSM Framework Regulation; see also Alexander, ‘The ECB’s macroprudential tasks and home-host supervision in the SSM’ in: Schiavo (ed) The European Banking Union and the Role of Law, 155, at 168-169. 1 Art. 15 SSM‑FR.
Kern Alexander
259
Arts. 8–17 SSM‑FR
Framework Regulation
2. If the freedom to provide services is in the interest of the general good, subject to certain conditions under the national law of participating Member States, NCAs shall inform the ECB of these conditions.
Art. 16 SSM Framework Regulation 1
ECB’s competence to supervise credit institutions in host Member States for the free provision of services where the institution is established in a non-participating Member State raises important legal issues regarding the scope of host Member State authority to impose conditions on the provision of services (i.e., consumer financial services) for the general good or pursuant to other areas of EU or domestic law.1 For instance, the ECB’s supervisory competence does not include the competence of participating host States to use their powers to require significant or less significant credit institutions to comply with the domestic law governing anti-money laundering and counter-terrorist financing that host States must adopt to implement EU directives.
Art. 17 SSM Framework Regulation Right of establishment and exercise of the freedom to provide services in relation to non-participating Member States 1. A significant supervised entity wishing to establish a branch or to exercise the freedom to provide services within the territory of a non-participating Member State shall notify the relevant NCA of its intention in accordance with the applicable Union law. The NCA shall immediately inform the ECB on the receipt of this notification. The ECB shall exercise the powers of the competent authority of the home Member State. 2. A less significant supervised entity wishing to establish a branch or to exercise the freedom to provide services within the territory of a non-participating Member State shall notify the relevant NCA of its intention in accordance with the applicable Union law. The relevant NCA shall exercise the powers of the competent authority of the home Member State. Bibliography Frédéric Allemand, ‘The ECB, the SSM and Differentiated Integration: The Legal Triangle of Incompatibility?’ ECB Legal Conference, ‘From Monetary Union to Banking Union, on the way to Capital Markets Union, New Opportunities for European Integration’ (2015); Eilis Ferran, ‘European Banking Union: Imperfect, But It Can Work’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015).
1
260
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Art. 17(1) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Art. 17(2) SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
D. Principle of fair balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
E. Supervisory gaps in the SSM Framework Regulation . . . . . . . . . . . . . . . . . . . . . . . . .
6
Art. 16(1) SSM‑FR.
Kern Alexander
Arts. 8–17 SSM‑FR
Framework Regulation
A. Introduction Art. 17 SSM‑FR (2013) provides that the procedural aspects of how home and host 1 Member State authorities coordinate and exchange information regarding a credit institution seeking a secondary establishment in a host Member State, or when the institution seeks to provide services in another participating Member State, will remain in the competence of the home and host State authorities, unless the supervisory tasks in question have been conferred on the ECB in Art. 4 SSM.1
B. Art. 17(1) SSM Framework Regulation A significant entity seeking to establish a branch or provide services in a non-partici- 2 pating Member State is required to notify its relevant supervisory authority.2 The home State authority then will be required to inform the ECB, which will gain the powers of the home country supervisor under EU law. A less significant entity is required to inform the “relevant” NCA where it is established. The NCA will then exercise the powers of the home State supervisor. The role of the host Member State therefore depends on the significance of the supervised entity. This influences the host State authority’s right to receive notifications from the ECB and home State authorities. It also influences the role of the host State in participating in the college of supervisors for that particular institution. However, all incoming branches – either as part significant or less significant entities – are subject to the domestic law requirements that implement other EU legislation that impose conditions on the branches in the interests of the general good. Where a branch is established in a host country, the ECB will have the competence 3 to supervise the branch if it is a systemically significant entity. If the branch is less than or not systemically significant, the host country’s national competent authority will have the competence to supervise its compliance with EU bank prudential regulatory requirements.
C. Art. 17(2) SSM Framework Regulation Similarly, cooperation between NCAs for supervision is not required if the ECB is the 4 sole competent authority3, for instance for a significant supervised entity.
D. Principle of fair balance Art. 17 SSM‑FR sets forth the principle of “fair balance” between home and host su- 5 pervisory authorities. Where the ECB has direct supervisory powers, it is expected to respect a fair balance between all participating Member States. For instance, when performing its enumerated tasks under Arts. 4 and 5 SSM‑FR, the ECB is expected to respect a fair balance between all participating Member States.
Art. 17(1) SSM‑FR. Art. 17(1) SSM‑FR. 3 Art. 17(2) SSM‑FR. 1
2
Kern Alexander
261
Arts. 8–17 SSM‑FR
Framework Regulation
E. Supervisory gaps in the SSM Framework Regulation 6
7
8
9
10
The overarching rationale of the SSM was to sever the tie between banking and sovereign debt crises by providing the ECB with supervisory powers over individual banking institutions. However, it does not provide the ECB with oversight responsibility for non-bank financial firms, shadow banks and off-balance sheet entities operating in the financial system. Member State competent authorities retain supervisory responsibility for financial institutions and firms not defined as “credit institutions” (that take deposits and make credit available to borrowers) under the CRD IV and for oversight of the broader financial system. Generally, the ECB does not have legal competence or institutional responsibility to monitor systemic and macro-prudential risks across the financial system, as this is the responsibility of the European Systemic Risk Board – a body comprising all EU Member State central bank governors and a secretariat including technical experts. As discussed above, the EU Treaties provide limited competence of the ECB to act as a bank supervisor under Art. 127(6), which precludes it from engaging in any supervisory activities directed at the broader financial system, including, for instance, the wholesale debt securities markets, securities clearing and settlement systems, or bank resolution and restructuring.4 This means that the ECB would not have the competence to oversee the shadow banking market, which was a source of systemic risk that caused the global banking crisis of 2007-09. Moreover, it would not have the competence to put a credit institution (which it had the competence to supervise) into resolution, nor could it exercise resolution powers, such as transferring the assets of a distressed bank to a private purchaser, or transfer a distressed bank’s assets to a bridge bank, nor even take legal measures to coordinate with resolution authorities. Certain important legal issues seem to arise from the current system. For instance, the supervisory structure builds heavily on strong information exchange and cooperation between the NCAs and the ECB. However, where information exchange and cooperation is weak, the ECB may be unable to act on time due to inadequate oversight where a failing bank has been classified as a less significant institution.5 Moreover, as mentioned above, the ECB does not possess certain supervisory competencies relating to the free provision of services6 that a host country usually enjoys, creating the potential for a supervisory shortcoming. Another prudential supervisory concern with the SSM is that it applies only to banking institutions that are defined under EU law as “credit institutions” – that is, banks that perform traditional intermediary functions of taking deposits and providing credit through commercial and retail lending.7 Indeed, the precise scope of the SSM regime’s enumerated powers of prudential supervision under Art. 4(1) SSMR apply only to institutions defined as a "credit institution" under Art. 4(1)(1) CRD IV, which defines “credit institution” to mean “an undertaking, the business of, which is to take deposits or other repayable funds from the public and to grant credits for its own account, " The SSM’s regulation of credit institutions, however, does not cover the growing number of non-bank financial intermediaries and structured entities that are not defined as “credit institutions” under EU law. These non-bank financial intermediaries or 4 See also Allemand, ECB Legal Conference, From Monetary Union to Banking Union, on the way to Capital Markets Union, New Opportunities for European Integration (2015), arguing: ‘that Article [Article 127(6)] is a too narrow basis for the creation of an independent body’. 5 Ferran, in: Busch and Ferrrarini (eds), European Banking Union (2015), 56, at p. 66. 6 Such as ensuring compliance of national anti-money laundering rules. 7 See Art. 4(1)(1) CRR.
262
Kern Alexander
Arts. 8–17 SSM‑FR
Framework Regulation
“shadow banks” are playing an increasingly important role in the maturity transformation process – borrowing short and lending long – outside the formal banking sector in the European economy, but which are not subject to prudential regulatory controls. It is this type of non-bank credit intermediation and related trading of credit instruments that, although important for the development of the European economy and its capital markets, must nevertheless be regulated carefully to address macro-prudential financial risks. Presently, the ECB does not have the competence to address these risks. Moreover, under the proposal for a Special Resolution Mechanism, the ECB will have 11 only limited powers, merely allowing it to cooperate with the SRM’s Single Resolution Board in conducting an assessment of the extent to which banks and groups under its direct supervision are resolvable without the assumption of extraordinary public financial support,8 and to notify the Single Resolution Board of a supervised entity requiring resolution.9 Also, the ECB will have the authority to review the trading activities of bank holding companies under its supervision,10 and to have the discretion to initiate the separation of deposit-taking banks from the group’s trading entities if it poses a threat to financial stability.11 From a macro-prudential perspective, the SSM should help to mitigate systemic 12 risk at the level of the individual credit institution. However, the ECB/SSM will only have the competence to supervise individual banks or “credit institutions” as defined under EU law.12 As a result, the ECB/SSM will have only limited authority to impose regulation aimed at reducing systemic risk, involving, for example, imposing higher capital and liquidity requirements on individual banks. It will not have the competence to regulate non-bank financial intermediaries – such as shadow banks – nor will it have the competence to regulate the off-balance-sheet entities involved in the securitisation and structured finance markets that are increasingly playing a greater role in channelling large volume of credit and leverage to European businesses and consumers.13 In other words, the ECB will have very limited authority to address macro-prudential systemic risks that can arise in the broader financial system where non-bank financial intermediation is growing along with increased trading and clearing of risky financial instruments such as credit default swaps.
8 Art. 8(1), Commission Proposal of 10 July 2013 for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council (COM(2013) 520 final). 9 Art. 16(1), Commission Proposal of 10 July 2013 for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council (COM(2013) 520 final). 10 Art. 9(1), Proposal for a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions COM/2014/043 final – 2014/0020 (COD). 11 Art. 10(2), Proposal for a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions COM/2014/043 final – 2014/0020 (COD). Once the separation initiated, the ECB will review the separation plan submitted by the entity and can require its amendment (Art. 18 Proposal for a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions COM/2014/043 final – 2014/0020 (COD). 12 See Art. 4(1)(1) CRR. 13 Art. 5 SSMR.
Kern Alexander
263
Art. 18 SSMR
Administrative penalties
Art. 18 SSMR Administrative penalties1 1. For the purpose of carrying out the tasks conferred on it by this Regulation, where credit institutions, financial holding companies, or mixed financial holding companies, intentionally or negligently, breach a requirement under relevant directly applicable acts of Union law in relation to which administrative pecuniary penalties shall be made available to competent authorities under the relevant Union law, the ECB may impose administrative pecuniary penalties of up to twice the amount of the profits gained or losses avoided because of the breach where those can be determined, or up to 10 % of the total annual turnover, as defined in relevant Union law, of a legal person in the preceding business year or such other pecuniary penalties as may be provided for in relevant Union law. 2. Where the legal person is a subsidiary of a parent undertaking, the relevant total annual turnover referred to in paragraph 1 shall be the total annual turnover resulting from the consolidated account of the ultimate parent undertaking in the preceding business year. 3. The penalties applied shall be effective, proportionate and dissuasive. In determining whether to impose a penalty and in determining the appropriate penalty, the ECB shall act in accordance with Article 9(2). 4. The ECB shall apply this Article in accordance with the acts referred to in the first subparagraph of Article 4(3) of this Regulation, including the procedures contained in Regulation (EC) No 2532/98, as appropriate. 5. In the cases not covered by paragraph 1 of this Article, where necessary for the purpose of carrying out the tasks conferred on it by this Regulation, the ECB may require national competent authorities to open proceedings with a view to taking action in order to ensure that appropriate penalties are imposed in accordance with the acts referred to in the first subparagraph of Article 4(3) and any relevant national legislation which confers specific powers which are currently not required by Union law. The penalties applied by national competent authorities shall be effective, proportionate and dissuasive. The first subparagraph of this paragraph shall be applicable in particular to pecuniary penalties to be imposed on credit institutions, financial holding companies or mixed financial holding companies for breaches of national law transposing relevant Directives, and to any administrative penalties or measures to be imposed on members of the management board of a credit institution, financial holding company or mixed financial holding company or any other individuals who under national law are responsible for a breach by a credit institution, financial holding company or mixed financial holding company. 6. The ECB shall publish any penalty referred to paragraph 1, whether it has been appealed or not, in the cases and in accordance with the conditions set out in relevant Union law. 7. Without prejudice to paragraphs 1 to 6, for the purposes of carrying out the tasks conferred on it by this Regulation, in case of a breach of ECB regulations or decisions, the ECB may impose sanctions in accordance with Regulation (EC) No 2532/98.
1 The views expressed in this article are those of the author and do not necessarily reflect the views of the ECB.
264
Chryssa Papathanassiou
Art. 18 SSMR
Administrative penalties
Bibliography Silvia Allegrezza and Ioannis Rodopoulos, ‘Interactions Between Administrative and Criminal Law in the Context of the Enforcement of Bank Prudential Regulations’, University of Luxembourg, Working Paper (2016); Silvia Allegrezza and Ioannis Rodopoulos, ‘Enforcing Prudential Banking Regulations in the Eurozone: A Reading from the Viewpoint of Criminal Law’ in: Katalin Ligeti and Vanessa Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (Hart Publishing, Oxford 2017), 233; Silvia Allegrezza and Olivier Voordeckers, ‘Investigative and Sanctioning Powers of the ECB in the Framework of the Single Supervisory Mechanism. Mapping the Complexity of a New Enforcement Model’, Eurcrim 4 (2015), 151; Oliver Assersohn, ‘The EU’s proposed banking union and the ECB’s power to fine institutions 10 % of annual turnover’, Journal of International Banking and Financial Law 10 (2015), 634; Pascale Bloch, ‘Les sanctions bancaires et financières au sein de l’Union européenne’, Revue internationale des services financiers 4 (2015), 92; Thierry Bonneau, ’Le pouvoir de sanction de la BCE en matiere de surveillance prudentielle’ Banque & Droit 160 (2015), 6; Vittorio di Bucci, ‘Procedural and judicial implications of composite procedures in the Banking Union’ in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 114; Gerard Conway, ‘Ne bis in Idem in International Law’, International Criminal Law Review 3 (2003), 217; Raffaele D’Ambrosio, ‘The legal review of SSM administrative sanctions’ in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 316; Raffaele D’Ambrosio, ‘Due process and safeguards of the persons subject to SSM supervisory and sanctioning proceedings’, Quaderni di Ricerca Giuridica della Consulenza Legale 74 (2013) ; Adrienne De Moor-van Vugt, ‘Administrative Sanctions in EU law’, Review of European Administrative Law 5 (2012); Christina Dede, Sanctions and Human Rights in Banking and Capital Markets Law: An Analysis of the Ne Bis in Idem Principle (London, 2015); Ioannis Dimitrakopoulos, Administrative Sanctions and Fundamental Rights (Nomiki Bibiliothiki Publications, Athens 2014); Giacomo Di Federico, ‘EU Competition Law and the Principle of Ne Bis in Idem’, European Public Law 17 (2011), 255; Einer Elhauge, ‘Disgorgement as an Antitrust Remedy’, Antitrust Law Journal 76 (2009), 79; Martín José María Fernandez and Pedro Gustavo Teixeira, ‘The imposition of regulatory sanctions by the European Central Bank’, ELR 25 (2000), 391; Christos V. Gortsos, ‘The power of the ECB to impose administrative penalties as a supervisory authority: an analysis of Article 18 of the SSM Regulation’, ECEFIL Working Paper Series 11 (2015) ; Christos V. Gortsos, ‘The Powers of the ESMA in Case of Breach of European Union Law: The Particular Case of Breaching the ‘Non Bis in Idem’ Principle’, Chrimatopistotiko Dikaio 29 (2016), 189; Klaus Lackhoff, Single Supervisory Mechanism, 2017; Klaus Lackhoff, ‘The Framework Regulation for the Single Supervisory Mechanism’, ICCLR 26 (2015), 18; Klaus Lackhoff, ‘How will the Single Supervisory Mechanism (SSM) function? An overview’, Journal of International Banking Law and Regulation 29 (2014), 13; Françoise Lefèvre and Stefaan Loosveld, ‘The influence of European law on the powers of financial supervisors’, Journal of International Banking Law and Regulation 25 (2010), 49; Paul Lemmens, ‘The right to fair trial and its multiple manifestations: Art. 6 (1) ECHR’ in: Eva Brems and Gerard Janneke (eds), Shaping Rights in the ECHR (Cambridge University Press, Cambridge 2013), 294; Stefaan Loosveld, ‘The ECB’s investigatory and sanctioning powers under the future Single Supervisory Mechanism’, Journal of International Banking Law and Regulation 28 (2013), 422; Renato Nazzini, ‘Fundamental Rights beyond Legal Positivism: Rethinking the Ne Bis in Idem Principle in EU Competition Law’, Journal of Antitrust Enforcement 2 (2014), 270; Jeanne Poscia, ‘The VTB case: administrative penalties and administrative measures’ in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 571; Georg L. Priest and Benjamin Klein, ‘The Selection of Disputes for Litigation’, Journal of Legal Studies 13 (1984), 1; Carlo Enrico Paliero, ‘The Definition of Administrative Sanctions – General Report’ in: Oswald Jansen (ed), Administrative Sanctions in the European Union (Intersentia Publishing, Cambridge 2013), 1; Judith Resnik, ‘Procedure as Contract’, Notre Dame Law Review 80 (2005), 593; Antonio Luca Riso, ‘The power of the ECB to impose sanctions in the context of the SSM’, Bančni vestnik 4/63 (2014), 32; Sven H. Schneider, ‘Sanctioning by the ECB and national authorities within the Single Supervisory Mechanism’, EuZW Beilage (2014), 18; Petra Senkovic, ‘The role of the European Central Bank in the Single Supervisory Mechanism’ in: Carlos Botelho Moniz and Pedro de Gouveia e Melo (eds), The Economic and Financial crisis in Europe: on the road to recovery? (Bruyland, Brussels 2015), 153; Jonathan Tomkin, ‘Art. 50 – Right not to be Tried or Punished Twice in Criminal Proceedings for the same Criminal Offence’ in: Steve Peers et al. (eds), The EU Charter of Fundamental Rights: A Commentary on the Articles of the EU Charter (Hart Publishing, Oxford 2014), 1373; Marco Ventoruzzo, ‘When Market Abuse Rules Violate Human Rights: Grande Stevens v Italy and the Different Approaches to Double Jeopardy in Europe and the US’, European Business Organization Law Review 16 (2015), 145; Wouter P.J. Wils, ‘The principle of Ne Bis in Idem in EC Antitrust Enforcement: A Legal and Economic Analysis’, World Competition: Law and Economics Review 26 (2003), 131; Laura Wissink, ‘The VQ case T-203/18: administrative penalties by the ECB under judicial scrutiny’ in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 542; Laura Wissink, Ton Duijkersloot and Rob Widdershoven, ‘Shifts in competences between Member States and the EU in the new supervisory system
Chryssa Papathanassiou
265
Art. 18 SSMR
Administrative penalties
for credit institutions and their consequences for judicial protection’, Utrecht Law Review 10 (2014), 92; Georgios Zagouras, ‘EU-Bankenunion’ in: Herbert Schimansky, Hermann-Josef Bunte and Hans Jürgen Lwowski (eds), Bankrechts-Handbuch (5th edn, C.H. Beck, Munich 2017), 2590; Georgios Zagouras, ‘Verwaltungssanktionen der Europäischen Zentralbank: Bußgelder, Kompetenzen, Bemessungsmaßstäbe’, WM (2017), 558. A. General observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Ratio legis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
C. Administrative penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Supervisory measures, enforcement and sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Procedural safeguards for sanctions (Arts. 120–137 SSM Framework Regulation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The ECB’s direct competence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Act violating directly applicable Union law or ECB decisions and regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Addressees are only legal persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Intent or negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. The maximum level of pecuniary penalties and mitigating factors . . . . . . . 5. The right to be heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The ECB’s indirect competence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Sanctions by NCAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. The interplay with the general sanctions regime of the ECB (Regulations (EC) 2532/98 and 2157/1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 8
D. Review of a sanctioning decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 14 15 16 18 19 21 23 24 25 27 29 30
A. General observations 1
The empowerment of the ECB to impose sanctions in the field of banking supervision is a new element even though the ECB was vested with the power to impose sanctions on third parties in the field of its central banking competence, including for noncompliance with statistical reporting requirements.2 By contrast to the sanctioning powers in the field of other central banking functions, there is a strong interplay between Union law and 19 national legislations in the field of the ECB banking supervision depending on the nature of the legal provision breached (i.e. Union law directly applicable versus transposition of a Directive) and the nature of the wrongdoer as a natural person or legal entity. Thus, there is no uniform Union regime for the ECB to impose sanctions for all types of breaches of provisions against all natural and legal persons falling under its tasks. Instead, the European legislator devised a system based on a shared enforcement model for the euro area resting on Union law – composed of Art. 18 SSMR, the
2 Bloch, Revue internationale des services financiers 4 (2015), 94, at p. 103; For the ECB’s power to sanction reporting agents which fail to comply with statistical reporting requirements set out in ECB regulations and decisions see Arts. 7(1) and (2) of Council Regulation (EC) No. 2533/98 of 23 November 1998 concerning the collection of statistical information by the ECB, OJ L318, 27.11.1998, at p. 8 as amended by Council Regulation (EC) No. 951/2009 of 9 October 2009, OJ L 269, 14.10.2009, at p. 1 and Council Regulation (EU) 2015/373 of 5 March 2015, OJ L 64, 7.3.2015, at p. 6. See also Art. 18 of Regulation (EU) 2016/867 of the ECB of 18 May 2016 on the collection of granular credit and credit risk data (ECB/ 2016/13), OJ L 144, 1.6.2016, at p. 44; Art. 1(2) of Decision (EU) 2017/468 of the ECB of 26 January 2017 amending Decision ECB/2010/10 on non-compliance with statistical reporting requirements (ECB/ 2017/5), OJ L 77, 14.3.2017, at p. 1; Notice of the ECB on the imposition of Sanctions for infringements of balance sheet statistical reporting requirements (2004/C 195/10), OJ C 195, 31.7.2004, at p. 8.
266
Chryssa Papathanassiou
Art. 18 SSMR
Administrative penalties
respective provisos of the SSM‑FR, the provisions of Regulation 2532/1998, as amended – as well as the respective national laws in 19 jurisdictions of the euro area.3 Since its inception, on 4 November 2014, the Single Supervisory Mechanism (SSM) 4 has assumed the banking supervision of the banks established in the Member States of the euro area (the participating Member States).5 It is possible for EU Member States to enter into a close cooperation with the SSM. The SSMR6 laid down in a legal way the prudential supervisory architecture which the Council and the European Parliament adopted. Its corollary, the SSM‑FR7 adopted by the ECB, laid down the framework for the division of labour between the ECB and the NCAs. These two Union law acts are the cornerstones for the sanctioning regime of the ECB banking supervision. The novelty of the new banking supervisory architecture in the euro area is characterized by three main elements which have a bearing on the sanctioning powers of the ECB: 1. The two categories of supervised entities: Credit institutions established in the euro area are distinguished in significant institutions if they exceed the thresholds stipulated in Art. 6 SSMR, in particular if their total value of assets exceed EUR 30 billion or are the top three in a participating Member State. The banks, which are characterized as significant institutions (SIs), are published on the ECB website. The ECB supervises directly the SIs. The rest of the credit institutions are less significant institutions (LSIs). The NCAs supervise directly the LSIs under the oversight of the ECB8 which is responsible for the effective and consistent functioning of the SSM. 2. The two categories of tasks: Two types of tasks were transferred to the ECB, namely the ECB is exclusively competent for the tasks of prudential supervisory nature which are enumerated in Arts. 4 and 5(2) SSMR. Art. 4 SSMR tasks comprise wide prudential supervisory tasks ranging from licensing, establishing a branch, acquisition of qualified holdings, ensure compliance with the legal requirements of Union law for own funds, risk management, fit and proper, governance, supervisory review and stress tests, supervision on a consolidated basis and withdrawal of licenses. In addition, the ECB has the specific macro-prudential tasks laid down in Art. 5(2) SSMR which relate to applying higher capital buffers or more stringent requirements to SIs. 3. A single rule book and the nature of the applicable law: The foundations of the three pillars of the Banking Union are the Union legal acts that build the so called single rule book, meaning that the legal requirements which the ECB and the NCAs apply in the SSM are those laid down in the CRR, as well as the national laws transposing Union Directives such as the CRD IV, the BRRD, FICOD in line with Art. 4(3)(1) SSMR. In ad3 Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), 233, at p. 262; Lackhoff, ICCLR 26 (2015), 18, at p. 20. 4 Senkovic, in: Botelho Moniz and de Gouveia e Melo (eds), The Economic and Financial crisis in Europe: on the road to recovery? (2015), 153; Lackhoff, JIBLR 29 (2014), 13, at p. 15. 5 Zagouras, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5 th edn, 2017), § 124b para. 4. 6 Council Regulation (EU) No. 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, OJ L287, 29.10.2013, at p. 63. 7 Regulation (EU) No. 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM‑FR), OJ L141, 14.5.2014, at p. 1. 8 The extent of the exclusive competence of the ECB concerning the classification of SIs and LSIs is elaborated in Case T-122/15, Landeskreditbank Baden-Wüttenberg Förderbank v ECB, ECLI:EU:T: 2017:337, para. 63. An appeal has been lodged before the CJEU – C-450/17 P, OJ C293, 4.9.2017, at p. 27.
Chryssa Papathanassiou
267
2
3
4
5
Art. 18 SSMR
Administrative penalties
dition, the ECB exercises directly powers foreseen under national laws which do not transpose Union law when these powers fall within the tasks of the ECB stipulated in Arts. 4(1) and 5(2) SSMR and those powers underpin prudential supervisory functions. The result of the above considerations is that an EU institution, the ECB as banking supervisor, applies both Union law, as well as national law. This is a paradox compared to jurisdictions with a federal structure, as in the United States, where the federal agencies apply federal law and are subject to the judicial scrutiny of federal courts. It is explained by the fact that Union law is composed of regulations of general application with direct effect and Directives which need transposition into national law. The laws transposing a Directive may differ in terms of deadlines and conditions imposed to reach the desired effect of the Directive’s provisos. That being said, the decisions of the ECB banking supervision are subject to the judicial scrutiny of the CJEU even when the ECB applies national law.
B. Ratio legis In 2009, the de Larosière Report9 emphasized that the banking supervision could not be effective if it were equipped with a weak sanctioning regime. The European Commission noted that competent authorities must be empowered to impose penalties high enough to dissuade large banks from breaching supervisory requirements.10 In an attempt to interpret the appropriate level of penalty, the Commission favoured a regime based on the size of the bank, namely total annual turnover, in order for the penalty to have a dissuasive and proportionate effect on all institutions, despite their size. Sanctions are a development of European administrative law owing to competence issues in the Union.11 7 The ECB was empowered to impose sanctions by primary Union law, in Art. 34.3 ESCB Statute. This general sanctioning power was made concrete by means of Regulation (EC) No. 2532/1998 adopted by the Council of the European Union, as amended in 2015 to cater for the supervisory tasks of the ECB.12 Arts. 4(a)-(c) of this Regulation apply solely to sanctions imposed by the ECB in the exercise of its supervisory tasks. The rules of the Council regulation were made more concrete by the ECB by means of Regulation (EC) No. 2157/1999 adopted by the ECB, as subsequently amended in 2001 and more recently in 201413 in order to reflect the exclusive tasks to carry out prudential supervision in relation to credit institutions established in the euro area which were conferred upon the ECB by means of Arts. 4 and 5(2) SSMR and also Art. 18 SSMR. 6
9 The Report of the High-Level Group on Financial Supervision in the EU chaired by Jacques de Larosière, Brussels, 22 February 2009, at pp. 23, 50. . 10 European Commission, Impact Assessment accompanying the Proposal for the CRD IV, 20 July 2011, SEC(2011) 952 final, at p. 24. 11 Zagouras, WM 2017, 558, at p. 559. 12 Regulation (EU) No. 2015/159 of 27 January 2015 amending Regulation (EC) No. 2532/98 concerning the powers of the ECB to impose sanctions, OJ L27, 3.2.2015, at p. 1. 13 Regulation (EC) No. 2157/1999 of the ECB of 23 September 1999 on the powers of the ECB to impose sanctions (ECB/1999/4), OJ L264, 12.10.1999, at p. 21, as amended by following regulations: (i) Regulation (EC) No. 985/2001 of the ECB of 10 May 2001 amending Regulation ECB/1994/4 on the powers of the ECB to impose sanctions (ECB/2001/4), OJ L137, 19.5.2001, at p. 24 and (ii) Regulation of the ECB of 16 April 2014 amending Regulation (EC) No. 2157/1999 on the powers of the ECB to impose sanctions (ECB/2014/18), OJ L141, 14.5.2014, at p. 51.
268
Chryssa Papathanassiou
Art. 18 SSMR
Administrative penalties
C. Administrative penalties I. Supervisory measures, enforcement and sanctions When detecting that a supervised entity is in breach of a supervisory requirement, the 8 ECB may avail itself of three distinct measures, each with a different aim: – Supervisory measures of Art. 16 SSMR: the ECB may use its supervisory powers under Art. 16(2) SSMR to restore the supervised entity’s compliance with the supervisory requirements. – Enforcement measures: the ECB may impose a measure with a view to compelling the supervised entity to comply with the supervisory requirements. Typical means are periodic penalty payments or make a public statement or a ‘cease and desist’ order. – Sanctions: the ECB may impose sanctions to a supervised entity to punish and deter the supervised entity from breaching supervisory requirements. The typical means are fines, request to an NCA to open proceedings, non-pecuniary sanctions, such as a temporary ban. Art. 18 SSMR refers to administrative pecuniary penalties, however, the terms “sanctions, fines and administrative pecuniary penalties” are used as synonyms. Administrative pecuniary penalties 14 form part of administrative law. However, the coercive character of some of these measures reminds of criminal law sanctions.15 Thus, the distinction in terminology between enforcement and sanctions is justified by the fact that sanctions have a coloration pénale following the Engel16 criteria developed by the ECtHR and the Bonda17 case of the CJEU and, thus, are subject to the same requirements which are found in criminal law, such as an independent investigation unit, as defined in Arts. 123–128 SSM‑FR. According to this distinction, periodic penalty payments have a corrective character 9 because these aim at re-establishing the status quo. They are calculated for each day of infringement (Art. 129(2) SSM‑FR) until the person complies with the ECB regulation or supervisory decision for up to six months (Art. 129(4) SSM‑FR) from the moment specified in the decision imposing the periodic penalty, which can be at the earliest on the date on which the person concerned was notified in writing of the ECB’s reasoning for imposing such a penalty (Art. 129(3) SSM‑FR).18 The upper limits are specified in Regulation (EC) No. 2532/98. The due process requirements in Art. 22 SSMR and Arts. 25–35 SSM‑FR apply to periodic penalty payments under Art. 129 SSM‑FR, in par14 Riso, Bančni vestnik 4/63 (2014), 32, at p. 33; Schuster, Lackhoff and Windthorst, Freshfields Bruckhaus Deringer LLP (2014); de Moor-van Vugt, Review of European Administrative Law 5 (2012), 5, at p. 6; Penalties, sanctions, administrative pecuniary penalties and fines are synonymous. Di Federico, European Public law 17 (2011), 255, at p. 256; Paliero, in: Oswald (ed), Administrative sanctions in the European Union (2013), 1, at p. 9. 15 Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), 233, at p. 247; Schneider, EuZW-Beilage (2014), 18, at p. 19; Wissink, Duijkersloot and Widdershoven, Utrecht Law Review 10 (2014), 92, at p. 100. 16 Case no. 5100/71, Engel and others v the Netherlands, ECLI:CE:ECHR:1976:1123JUD000510071. The criteria are: categorisation of an alleged offence in the domestic law as criminal, punitive nature of the offence, and nature and degree of severity of the maximum penalty in abstracto, i.e. the maximum possible. 17 Case C-489/10, Bonda, ECLI:EU:C:2012:319, paras 38–39; Lemmens, ‘The right to fair trial and its multiple manifestations: Art. 6(1) ECHR’ in Brems and Gerard (eds), Shaping Rights in the ECHR (2013), 294, at p. 300. 18 Zagouras, WM 2017, 558, at p. 560.
Chryssa Papathanassiou
269
Art. 18 SSMR
Administrative penalties
ticular the obligation to state reasons in a decision imposing sanctions, the right of the parties to be heard and to access their file.19 The ECB has a direct competence to impose sanctions under Art. 18(1) SSMR. The ECB has an indirect competence when asking the NCAs to make use of their respective powers under Art. 18(5) SSMR. NCAs retain their sanctioning powers under their own regime, in particular for issues not conferred upon the ECB foreseen in Recital 28 SSMR (anti-money laundering, anti-terrorist financing, markets in financial instruments regulation, and consumer protection, payment systems).
II. Procedural safeguards for sanctions (Arts. 120–137 SSM Framework Regulation) As explained above, following the Engel criteria developed by the ECtHR and the Bonda case of the CJEU, sanctions which have a coloration pénale are subject to the same requirements which are found in criminal law, such as an independent investigation unit, as defined in Arts. 123–128 SSM‑FR. The independent investigating unit20 is composed of ECB staff members who have not been involved for two years prior to being appointed in direct or indirect supervision or authorisation of banks. These staff members are independent of the Supervisory Board and the Governing Council and cannot participate in the deliberations of these bodies (Art. 123 SSM‑FR). In case of a suspected breach of a Union regulation or an ECB regulation or decision, the ECB refers the matter to the investigating unit (Art. 124 SSM‑FR). The independent investigating unit has all powers conferred upon the ECB under the SSMR, as well as access to all documents held by the ECB or NCAs in the course of their supervisory activities (Art. 125 SSM‑FR). 11 The independent investigating unit has to hear the party in line with Art. 126(1) SSM‑FR on the factual results and the objections raised against the supervised entity as well as the provisions allegedly infringed. An oral hearing in private may be conducted and the supervised entity has the right to access its file under Art. 32 SSM‑FR, whereby internal documents of the ECB and NCAs or correspondence between the ECB and an NCA or between NCAs are confidential so that the addressee of a sanction decision cannot access these (Art. 32(5) SSM‑FR). The investigating unit of the ECB is not bound by the written comments of the supervised entity and it may proceed with the draft decision and impose a penalty or may find that there is no breach and suspend the procedure. 12 If the independent investigating unit of the ECB proceeds to impose an administrative penalty on a supervised entity, it submits a draft decision to the Supervisory Board based on facts and objections on which the supervised entity has provided written comments, as well as the complete file (Art. 127(1) SSM‑FR) The Supervisory Board may return the file if it is incomplete (Art. 127(3) SSM‑FR) or approve the draft decision (Art. 127(4) SSM‑FR) or close the case if the breach is not substantiated by the facts provided (Art. 127(5) SSM‑FR). 13 If the Supervisory Board agrees with the determination of the breach but not with the administrative penalty, it will impose the penalty that it deems appropriate (Art. 127(6) SSM‑FR). If the Supervisory Board finds that a different breach was committed it will inform in writing the bank and submits the draft decision with the findings and objec10
D’Ambrosio, ‘Quaderni di Ricerca Giuridica della Consulenza Legale’ 74 (2013), at pp. 69, 79. Lefèvre and Loosveld, JIBLR 25 (2010), 493, at p. 499; Loosveld, JIBLR 28 (2013), 422, at p. 423; Allegrezza and Voordeckers Eucrim 4 (2015), 151, at p. 160. 19
20
270
Chryssa Papathanassiou
Art. 18 SSMR
Administrative penalties
tions for written comments to the supervised entity for the right to be heard (Art. 127(7) SSM‑FR). On the basis of the comments, the Supervisory Board prepares a complete draft on the facts and objections on which the bank had a chance to provide comments in writing and the decision is adopted by the Governing Council under the non-objection procedure laid down in Art. 26(8) SSMR (Art. 127(9) SSM‑FR).21
III. The ECB’s direct competence Arts. 120–137 SSM‑FR specify further Art. 18 SSMR. Art. 120 SSM‑FR defines the 14 term “administrative penalties”, which includes the penalties foreseen in Art. 18 SSMR and the sanctions imposed under Art. 18(7) in conjunction with Art. 2 of Regulation (EC) No. 2532/1998, as amended. For the purposes of the exclusive tasks conferred upon the ECB, Art. 18 SSMR empowers the ECB to impose administrative pecuniary penalties. Art. 18 SSMR extends to administrative pecuniary penalties and other administrative measures imposed by the ECB under directly applicable legal acts of Union law. There are three elements laid down in Art. 18 SSMR which circumscribe the ECB’s power to impose administrative penalties, namely the nature of the infringed legal obligation, the addressee and the degree of intent.
1. Act violating directly applicable Union law or ECB decisions and regulations The act has to violate a provision laid down in a regulation adopted under Art. 288 15 TFEU be it a regulation of the Council and the European Parliament, such as the CRR or the SSMR, or a regulation adopted by the ECB22. The provisions of the CRD IV and BRRD do not qualify as directly applicable legal acts of Union law so that it is the NCAs and not the ECB that impose directly sanctions if the national provisions transposing these directives are infringed upon. In accordance with Art. 122 SSM‑FR, if an SI fails to comply with obligations under ECB regulations or decisions or an LSI fails to comply with ECB regulations or decisions imposing obligations on LSIs towards the ECB, the ECB may impose sanctions under Arts. 4(a)-(c) of Council Regulation (EU) No. 2015/159. These articles stipulate that the statute of limitations is 5 years extendable for the period of time it takes for the Administrative Board of Review (ABoR) or the CJEU to conclude the case if the decision is subject to review by the ABoR or appeal before the CJEU.
2. Addressees are only legal persons The addressees of the ECB’s administrative pecuniary penalties under Art. 18 SSMR 16 are SIs breaching directly applicable Union law, such as the CRR, and SIs and LSIs which breach ECB decisions and regulations.
Zagouras, WM 2017, 558, at p. 564. A few examples are Regulation (EU) 2015/534 of the ECB of 17 March 2015 on reporting of supervisory financial information (ECB/2015/13), OJ L86, 31.3.2015, at p. 13; Regulation (EU) No. 1163/2014 of the ECB of 22 October 2014 on supervisory fees (ECB/2014/41), OJ L311, 31.10.2014, at p. 23. 21
22
Chryssa Papathanassiou
271
Art. 18 SSMR
Administrative penalties
The ECB sanctioning powers extend to the entities in a group and the top parent entity: – Credit institutions – (Mixed) financial holding companies when they breach an obligation imposed on these companies by Union law. 17 As regards the addressees, the ECB’s exclusive tasks of Art. 4 SSMR relate to credit institutions and to carry out supervision on a consolidated basis over parents with the form of (mixed) financial holding companies. The investigatory powers of Arts. 10–12 SSMR can be exercised vis-à-vis (mixed) financial holding companies. As a result, the sanctioning powers of Art. 18 SSMR extend vis-à-vis (mixed) financial holding companies. So far, Union law, in particular the CRR, does not allow the ECB to impose any supervisory or capital requirement on (mixed) financial holding companies as parents of a significant group. This is allowed in some jurisdictions under national law, but in this case the ECB could not sanction the top parent because the breach would not relate to directly applicable Union law but to national law. Similarly to what applies to natural persons, the ECB may require the NCA to open proceedings under the national law or the NCA may open proceedings at its own initiative, as elaborated below in section IV.
3. Intent or negligence 18
One of the elements in determining whether to impose an administrative penalty is the degree of intent. Art. 18 SSMR lays down the standard degree of intent, which is a wilful or negligent act (gross or simple). Wilfulness and negligence23 are judged based on the mental attitude with which an individual acts and are inferred by acts, facts and circumstances of a person. For legal entities, which are the addressees of the administrative penalties, the intent has to be inferred by actions, facts and circumstances surrounding the behaviour of staff authorized to handle on behalf of the legal person or authorized to legally commit the legal person under the applicable national law.
4. The maximum level of pecuniary penalties and mitigating factors 19
Art. 18 SSMR sets the maximum limit up to which the ECB may impose pecuniary penalties to a supervised entity. The ECB has to take into account the annual turnover as defined in Art. 67 of Directive 2013/36/EU according to the most recent annual financial accounts of the bank or, if the bank belongs to a supervised group, according to the total annual turnover resulting from the most recent available consolidated annual financial accounts of the supervised group (Art. 128 SSM‑FR).24 Supervisory discretion is at play when determining the concrete pecuniary penalty to be paid by a supervised institution.25 The ECB takes into account a number of factors 23 Case C-308/06, The Queen on the application of Intertanko and others v Secretary of State for Transport, ECLI:EU:C:2008:312, para. 75: “[…] all those systems [of the Member States] have recourse to the concept of negligence which refers to an unintentional act or omission by which the person responsible breaches his duty of care”. 24 Assersohn, JIBFL 10 (2015), 634, at p. 635. 25 Crédit Agricole SA v European Central Bank, T-576/18, ECLI:EU:T:2020:304, paragraph 133; VQ v ECB, T-203/18, ECLI:EU:T:2020:313, paragraphs 66; ECB, Guide to the method of setting administrative pecuniary penalties pursuant to Article 18(1) and (7) of Council Regulation (EU) No 1024/2013, March 2021, pp. 5-6, available on the Banking Supervision website of the ECB; Raffaele D’Ambrosio, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), at p. 331; Laura Wissink, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), at p. 548; see Case T-150/89, Martinelli v Commission, ECLI:EU:T:1995:70, para. 59.
272
Chryssa Papathanassiou
Art. 18 SSMR
Administrative penalties
laid down in Art. 70 CRD IV in a two-step approach, first determining the base amount and, then, adjusting it to take into account mitigating and aggravating circumstances: – the duration and gravity, – the degree of responsibility, – the financial strength, – the importance of profits gained or losses avoided, – the losses for third parties caused by the breach, – the level of cooperation, – previous breaches26; and – any potential systemic consequences of the breach. Moreover, the ECB has to take into account the actions of NCAs or other public authorities in sanctioning the unlawful act to avoid the ne bis in idem effect.27 The penalties may be up to twice the amount of the profits gained or losses avoided 20 because of the breach where those can be determined.28 The disgorgement of all profits derived from unlawful acts or losses avoided is a concept of restitution remedies traditionally foreseen in competition law. Disgorgement of profits or losses avoided contributes to corrective justice. 29 It aims at fully deterring misconduct by creating a penalty which equals the total harm created by the conduct divided by the ex ante probability of detection and successful adjudication. In competition theory, disgorgement may be used rarely or be seen as too modest a remedy because it fails to provide any adjustment for a misconduct that is not detected.30 In line with Art. 18(3) SSMR, the penalties that the ECB decides to impose have to be effective, proportionate and dissuasive.31 In determining the need and the appropriate penalty, the ECB acts in line with Art. 9(2) SSMR, namely in close cooperation with the NCA in question.
5. The right to be heard According to Arts. 22(1) SSMR and 31 SSM‑FR, any decision addressed to a party 21 which adversely affects the rights of that party has to be submitted to this party for its comments in writing (the right to be heard). This rule reflects the procedural requirements laid down in primary Union law, Art. 296 TFEU and Art. 41(1)(a) CFREU.32 Sanctions affect the legal rights of the addressee. In line with Art. 31 SSM‑FR, the party must be given the opportunity of commenting in writing to the ECB on the facts, objections and provisions breached. If the ECB deems it appropriate it may give the party the opportunity to comment on the facts, objections and legal grounds relevant to the ECB supervisory decision in a meeting. The supervised entity has in principle two weeks to submit comments in writing un- 22 der Art. 31(3) SSMR. This time limit may be shortened to three days in case of particular 26 Looseveld, JIBLR 29 (2013), 422, at p. 424; Dede, Sanctions and Human Rights in Banking and Capital Markets Law: An Analysis of the Ne Bis in Idem Principle (2015), at p. 39. 27 Conway, International Criminal Law Review 3 (2003), 217, at p. 230; Gortsos, Chrimatopistotiko Dikaio 29 (2016), 189, at p. 190. 28 Assersohn, JIBFL 10 (2015), 634, at p. 638 argues that given the size of the penalties that the ECB may impose, the regime might prove controversial. 29 Priest and Klein, Journal of Legal Studies 13 (1984), 1, at p. 50; Nazzini, JAE 2 (2014), 270, at p. 300. 30 Elhauge, Antitrust Law Journal 76 (2009), 79, at p. 95 31 See also Recital 36 of the SSMR; Gortsos, ECEFIL Working Paper Series 11 (2015), at p. 22. 32 Case C-32/95, Commission of the European Communities v Lisrestal and others, ECLI:EU:C:1996:402, para. 42; Case T-125/97, The Coca-Cola Company and Coca-Cola Inc. v Commission of the European Communities, ECLI:EU:T:2000:84, para. 77; Case T-138/89, Nederlandse Bankiersvereniging and Nederlandse Vereniging van Banken v Commission of the European Communities, ECLI:EU:T:1992:95, para. 31.
Chryssa Papathanassiou
273
Art. 18 SSMR
Administrative penalties
circumstances. Particular circumstances may be urgency due to circumstances relating to any legal or operational deadlines applying or circumstances surrounding the supervised entity and its prior knowledge of the facts and legal objections. The right to be heard extends to all facts and the legal grounds of the draft decision imposing sanctions. Subsequently, the Supervisory Board will assess the comments of the supervised entity and if it finds that there is no breach either suspend the breach procedure or if it finds that there is a breach, approve a draft decision imposing a penalty. After the right to be heard, the draft decision approved by the Supervisory Board will be submitted to the Governing Council for adoption under the non-objection procedure of Art. 26(8) SSMR.
6. Statute of limitations 23
Art. 130 SSM‑FR limits the ECB’s sanctioning power to five years from the day on which the breach was committed. For ongoing breaches, the statute of limitations starts anew each time the breach ceases in line with Art. 131 SSM‑FR.
7. Publication 24
The ECB publishes the decision imposing an administrative penalty on its website on banking supervision after the decision has been notified to the supervised entity and the deadline for submitting a notice of review to the ABoR has elapsed. The ECB keeps the information for at least five years. If the party submits a notice of review in accordance with Art. 7 of Decision (EU) No. 2014/360 (ECB/2014/16) (the ABoR Decision) 33, the publication of the decision imposing an administrative penalty is postponed until ABoR concludes its review in line with Arts. 16–18 ABoR Decision. Publication can be anonymized under Art. 132 SSM‑FR if publication would jeopardise the financial stability or an ongoing criminal investigation or if the supervised entity provides evidence that it would cause disproportionate damage to it. If these circumstances are of temporary nature, the publication can be deferred for a later point in time. If the decision is appealed, the ECB will publish information on the status of the appeal and the outcome thereof.34 The ECB informs the EBA on decisions imposing administrative penalties and appeals in the euro area subject to professional secrecy of Art. 27 SSMR and Arts. 53–63 CRD IV if the respective information is not publicly available. The proceeds from penalties imposed under Arts. 18(1)-(7) SSMR are the ownership of the ECB (Art. 137 SSM‑FR).
IV. The ECB’s indirect competence 25
The ECB has the power to require NCAs to open proceedings in case of breaches of national law transposing relevant directives (e.g. CRD IV), penalties on natural persons
OJ L175, 14.6.2014, at p. 49. Crédit Agricole SA v European Central Bank, T-576/18, ECLI:EU:T:2020:304, para. 154; VQ v ECB, T-203/18, ECLI:EU:T:2020:313, paras. 87; see Banking Supervision website of the ECB https://www.bankingsupervision.europa.eu/banking/sanctions/html/index.en.html; Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 255. 33
34
274
Chryssa Papathanassiou
Art. 18 SSMR
Administrative penalties
or non-pecuniary penalties for SIs and LSIs.35 Under Art. 134 SSM‑FR, NCAs can impose sanctions for tasks conferred upon the ECB for non-pecuniary penalties for breaches of regulations by legal and natural persons, for pecuniary penalties imposed on natural persons; for any type of penalties imposed on natural and legal persons by national law transposing Union directives or conferring specific powers to NCAs not required by Union law. An NCA may open proceedings at its own initiative as well. NCAs notify the ECB of the completion of the procedure and the penalty imposed ad hoc for SIs and regularly for LSIs (Arts. 134 and 135 SSM‑FR). For criminal offences, the ECB adopts a decision to ask the NCAs to refer the matter 26 to the appropriate criminal authorities for investigation and prosecution in accordance with national law (Art. 136 SSM‑FR). An interesting question is whether administrative penalties and criminal sanctions can be cumulated in the field of banking supervision. The principle of ne bis in idem laid down in Art. 50 CFREU applies to the ECB as a Union institution and to national authorities when they implement Union law according to Art. 51 CFREU.36 The jurisprudence of the ECtHR requires only unity of facts in order to apply the ne bis in idem principle, while the jurisprudence of the CJEU unity of facts, of offender and of legal interest. Thus, Dede compares extensively the case law of the two courts and finds that the standard of the CJEU is not identical to that applied by the ECtHR and is more restrictive to apply.37
V. Sanctions by NCAs Art. 18(5) SSMR in conjunction with Art. 65(1) CRD IV foresees that the penalties 27 applied by the NCAs must be effective, proportionate and dissuasive. Arts. 66 and 67 CRD IV contain a few more pre-conditions. These sanctions are challenged at the national courts according to national law.38 If the ECB imposed a sanction for a breach, an NCA may see itself prevented following the jurisprudence of national courts from imposing an administrative sanction
35 This NCA decision adopted in line with national law and following an ECB request under Art. 18(5) of the SSMR (composite procedure) is subject to judicial review by national courts, see Vittorio di Bucci, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar 2021), at p. 127; Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 256. 36 The CFREU lays down two criteria for this principle to apply, namely first, two proceedings based on substantially the same historical facts, one of which has become final and second, prohibiting that a person is tried or convicted twice. Dede, Sanctions and Human Rights in Banking and Capital Markets Law: An Analysis of the Ne Bis in Idem Principle (2015), at pp. 20, 38. Dede follows the case law of the ECtHR regarding the ne bis in idem principle in respect of administrative sanctions in general, at p. 41; Zagouras, WM 2017, 558, at p. 560. 37 Dede, Sanctions and Human Rights in Banking and Capital Markets Law: An Analysis of the Ne Bis in Idem Principle (2015), at p. 44, compared the case law of the CJEU in Case C-17/10, Toshiba Corporation and Others v Úřad pro ochranu hospodářské soutěže, ECLI:EU:C:2012:72 and the opinion of AG Kokott with the ECtHR Case no. 14939/03, Sergey Zolotukhin v Russia, ECLI:CE:ECHR: 2005:0908DEC001493903, paras 107–109. The ECtHR following a more liberal approach required only unity of facts to determine the ne bis in idem; Dimitrakopoulos, Administrative Sanctions and Fundamental Rights (2014), at p. 175; Tomkin, in: Peers et al. (eds), The EU Charter of Fundamental Rights: A Commentary on the Articles of the EU Charter (2014), 1373, at p. 1380; Wils, World Competition: Law and Economics Review 26 (2003), 131, at p. 146. 38 Schneider, EuZW-Beilage (2014), 18, at p. 23; Gortsos, ECEFIL Working Paper Series 11 (2015), at p. 19; Lackhoff, Single Supervisory Mechanism, para. 912.
Chryssa Papathanassiou
275
Art. 18 SSMR
Administrative penalties
under national law if the same facts constitute a breach under national law.39 This is a question that has to be scrutinized under each national law. 28 Art. 18 SSMR does not explicitly refer to criminal sanctions. Interestingly enough, Art. 18(5) SSMR specifies in the second subparagraph that the proceedings refer in particular to administrative pecuniary penalties. Nevertheless, a cumulation of criminal sanctions under national law and administrative penalties under Art. 18(1) or Art. (7) SSMR cannot be excluded in conjunction with Art. 64(1) CRD IV and its national transposition.40
VI. The interplay with the general sanctions regime of the ECB (Regulations (EC) 2532/98 and 2157/1999) 29
Art. 18 (7) SSMR refers to the general sanctioning framework applied by the ECB for breach of ECB regulations or decisions.41 In line with Art. 4a of Regulation (EC) 2532/98, as amended by Regulation (EU) 2015/159, these sanctions apply only to legal persons and the fines mentioned are identical with those of Art. 18(1) SSMR. 42 Art. 1 of Regulation (EU) No. 469/2014 inserted a new Art. 1a in Regulation (EC) 2157/1999 clarifying that Regulation (EC) No. 2157/1999 applies only to sanctions related to non-supervisory tasks. In that sense, Art. 18 SSMR has widened the ECB sanctioning powers in relation to supervisory tasks.
D. Review of a sanctioning decision The addressees of a sanctioning decision can request the review from the ABoR within a month from the notification of the decision under Art. 7 ABoR Decision. The ABoR has to deliver its opinion as soon as possible at the latest within two months from the receipt of the notice of review (Art. 16(1) ABoR Decision). The ABoR will examine the legality of the imposed sanction checking the ECB’s competence, the violation of due process requirements, the manifest error or misuse of power as required by Art. 9(2) ABoR Decision. The ABoR cannot substitute the ECB’s judgement and amend the fine because it may only adopt an opinion proposing to the Supervisory Board to replace the contested decision by a decision of identical content or by an amended decision or abrogate the contested decision according to Art. 16(2) ABoR Decision. 31 Sanctioning decisions of the ECB are ECB supervisory decisions in line with number 26 of Art. 2 SSM‑FR and can be challenged at the CJEU under Art. 263 TFEU. The possibility of judicial review reflects the principle of the right to an effective remedy and fair 30
39 Dede, Sanctions and Human Rights in Banking and Capital Markets Law: An Analysis of the Ne Bis in Idem Principle (2015), at p. 9; Lefèvre and Loosveld, JIBLR 2 (2015), 493, at p. 499 citing a case of the ECtHR from June 2009 and a decision by the Belgian financial supervisor in a cross-border investigation by the UK and Belgian supervisors. In the latter, the Belgian supervisor relied on the ne bis in idem principle laid down in the 1990 Schengen Agreement to refrain from imposing a sanction for behaviour that would have otherwise fallen under its jurisdiction. Ventoruzzo, EBOR 16 (2015), 145, at p. 152. 40 Allegrezza and Rodopoulos, University of Luxembourg, Working Paper (2016); Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 255. 41 Bonneau, Banque & Droit 160 (2015), 6, at p. 10. As regards the general sanctioning regime of the ECB, Fernandez and Teixeira, ELR 25 (2000), 391, at p. 400. 42 Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 256.
276
Chryssa Papathanassiou
Art. 19 SSMR
Independence
trial found in Art. 47(1) CFREU. 43 The addressee(s) can challenge these decisions or any legal or natural person to whom the decision is of direct and individual concern according to the Plaumann test.44 The legality check of the CJEU extends to the legal basis, the ECB’s competence, the violation of due process requirements and manifest error or misuse of power, thus, the CJEU cannot amend the amount of the penalty.45 This is a fundamental difference compared to the powers granted by secondary Union law to the CJEU to cancel, reduce or increase the fines which the Commission imposes in the field of competition.46
Art. 19 SSMR Independence 1. When carrying out the tasks conferred on it by this Regulation, the ECB and the national competent authorities acting within the SSM shall act independently. The members of the Supervisory Board and the steering committee shall act independently and objectively in the interest of the Union as a whole and shall neither seek nor take instructions from the institutions or bodies of the Union, from any government of a Member State or from any other public or private body. 2. The institutions, bodies, offices and agencies of the Union and the governments of the Member States and any other bodies shall respect that independence. 3. Following an examination of the need for a Code of Conduct by the Supervisory Board, the Governing Council shall establish and publish a Code of Conduct for the ECB staff and management involved in banking supervision concerning in particular conflicts of interest. Bibliography Alesina and Guido Tabellini, ‘Bureaucrats or Politicians? Part I: A Single Policy Task’ (2007) American Economic Review, 97(1): 169-179; Alesina and Guido Tabellini, ‘Bureaucrats or Politicians? Part II: Multiple Policy Tasks’ (2008) Journal of Public Economics 92(3-4): 426-447; Fabian Amtenbrink and Rosa Maria Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies – A Theoretical Framework’ in: Richard Victor de Mulder (ed), Mitigating Risk in the Context of Safety and Security. How Relevant is a Rational Approach? (Rotterdam: Erasmus School of Law & Research School for Safety and Security (OMV) 2008), 115; Basel Committee on Banking Supervision, ‘Core Principles for Effective Banking Supervision’, Basel, September 2012, ; Christos Gortos, ‘Banking Resolution’, in: Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1138; Balázs Horváthy, ‘The Concept of ‘Union interest’ in EU External Trade Law’, Acta Juridica Hungarica 55 (2014) No. 3, 261; Ann-Katrin Kaufhold, ‘§ 17 Der einheitliche Aufsichtsmechanismus für Banken’, in: Ulrich Hufeld and Christoph Ohler (eds), Europäisches Wirtschafts- and Währungsrecht (Nomos, Baden-Baden 2022), 787; Gijsbert Ter Kuile, Lau43 Case T-576/18, Crédit Agricole v ECB, EU:T:2020:304; Case C-577/18, Crédit Agricole Corporate and Investment Bank v ECB, EU:T:2020:305; Case C-578/18, CA Consumer Finance v ECB, EU:T:2020:306; Jeanne Poscia, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), at 572; Zagouras, WM 2017, 558, at p. 565; Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 256. 44 Case 25/62, Plaumann & Co v Commission, ECLI:EU:C:1963:17, at p. 107; Case C-663/17P, ECB v Trasta Komercbanka, ECLI:EU:C:2019:923, paras. 76, 114. 45 Case T-576/18, Crédit Agricole SA v European Central Bank, ECLI:EU:T:2020:304, para. 133; Case T-203/18, VQ v ECB, ECLI:EU:T:2020:313, paragraphs 94, 117; Recitals 60, 63, 86 SSMR and Art. 47 (1) CFREU, see Assersohn, JIBFL 10 (2015), 634, at p. 637; see Case C-12/03, Commission v Tetra Laval, ECLI: EU:C:2005:87, para. 39; Case C-413/06, Bertelsmann and Sony Corporation of America v Impala, ECLI:EU: C:2008:392, para. 69; Case C-62/14, Gauweiler and others v Deutscher Bundestag, ECLI:EU:C:2015:400, paras. 68, 69 and 75. 46 Art. 31 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Art. 81 and 82 of the Treaty, OJ L1, 4.1.2003 at p. 1.
Fabian Amtenbrink
277
Art. 19 SSMR
Independence
ra Wissink and Willem Bovenschen, ‘Tailor-made Accountability within the Single Supervisory Mechanism’, CMLR 52 (2015), 155; Rosa Maria Lastra, Central Banking and Banking Regulation (Financial Markets Group, London School of Economics, London 1996); Cornelia Manger-Nestler and Robert Böttner, ‘Ménage à trois? – Zur gewandelten Rolle der EZB im Spannungsfeld zwischen Geldpolitik, Finanzaufsicht und Fiskalpolitik‘ EuR 49 (2014), 621; Christoph Ohler, ‘Banking Supervision’, in: Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1103; Paolo Ponzano, Costanza Hermanin and Daniela Corona, The Power of Initiative of the European Commission: A Progressive Erosion? (Notre Europe, 2012; Marc Quintyn, Silvia Ramirez and Michael W. Taylor, ‘The Fear of Freedom: Politicians and the Independence and Accountability of financial Sector Supervisors’, IMF Working Paper WP/07/25; Martin Selmayr, ‘Das Recht der Europäischen Währungsunion’, in: Peter-Christian Müller-Graff (ed), Europäisches Wirtschaftsordnungsrecht (Nomos, Baden-Baden 2015), 1387; Helmut Siekmann, ‘Art. 130 [Weisungsfreiheit und Unabhängigkeit]’, in: Helmut Siekmann (ed), Kommentar zur Europäischen Währungsunion, (Mohr Siebeck, Tübingen 2013), 402; Benedikt Wolfers and Thomas Voland, ‘Level the Playing Field: The New Supervision of Credit Institutions by the European Central Bank’, CMLR 51 (2014), 1463; Chiara Zilioli, ‘The Independence of the European Central Bank and Its new Banking Supervisory Competences’, in: Dominique Ritleng (ed), Independence and Legitimacy in the Institutional System of the European Union (Oxford University Press, Oxford 2016), 126. A. Origin and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Detailed explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Independence of the ECB and the national competent authorities acting within the SSM (Art. 19(1)-(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Institutional independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Functional independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Personal independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Financial independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Ethics Framework and Code of Conduct (Art. 19(3) SSMR) . . . . . . . . . . . . . . . . .
5 5 11 15 19 25 29
A. Origin and development Several factors have arguably contributed to the emphasis on the independence of the ECB, namely its Supervisory Board, and the national competent authorities in carrying out supervisory tasks in the context of the SSM. First, similar to what can be observed in the last two decades of the last century for the position of central banks vis-a-vis political institutions and bodies, also the position of financial market regulators and supervisors within a constitutional system has been the subject of academic debates, set in the broader context of the discourse on functional decentralization and independent agencies, as well as corresponding recommendations by international standard-setting bodies.1 2 As described elsewhere, namely the 1990’s banking crises and the search for a strengthening of the financial system, but also the shift to integrated financial market supervisors (thereby at times moving supervisory tasks outside the often relatively independent central bank) has put the focus on the organizational structure of supervisors and namely on arrangements to reduce or remove political interference.2 Referring to the need for supervisors to be able to pursue their responsibilities and objectives “free from political pressure and with accountability for achieving them”, the 1997 the Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision, 1
1 See e.g. Lastra, Central Banking and Banking Regulation (1996); Quintyn, Ramirez, Taylor, IMF Working Paper WP/07/25; Amtenbrink and Lastra, in: de Mulder (ed), Mitigating Risk in the Context of Safety and Security. How Relevant is a Rational Approach? (2008), at pp. 115-132, with further references. For the economic point of view see Alesina and Tabellini, ‘Bureaucrats or Politicians? Part I: A Single Policy Task’ (2007) and by the same authors ‘Bureaucrats or Politicians? Part II: Multiple Policy Tasks’ (2008). 2 Infra, fn 3-4.
278
Fabian Amtenbrink
Art. 19 SSMR
Independence
identified “operational independence and adequate resources” as the first core principle of effective banking supervision. The current 2012 version of this document refers to the supervisor having to poses “operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources”, and, moreover, states that the legal framework for banking supervision must include “legal protection for the supervisor.”3 Next to this emerging practice of supervisory independence, in assigning supervisory 3 tasks onto the ECB, the existing constitutional position of this Union institution within the EU legal order could not be ignored and namely Arts. 130 and 282(3) TFEU, and Art. 7 ESCB Statute on the independence of the ECB in exercising the powers and carrying out the tasks and duties conferred upon it by primary Union law. In this context, in its opinion on the proposed SSMR the ECB has emphasized that the proposed SSMR should comply with what it refers to as the main principle that “[T]he ECB should remain independent in carrying out all its tasks.”4 While the provision on independence included in the original European Commission 4 proposal (then Art. 16) was rather abridged, referring only in general terms to the independence of the ECB and the obligations of Union and national institutions, bodies, offices and agencies, to respect that independence, in the legislative procedure the European Parliament introduced amendments by which this reference to independence was made more specific. National competent authorities were included in the first sentence of paragraph 1 of today’s Art. 19 SSMR and a second sentence was added specifically referring to the independence of the members of the Supervisory Board. Moreover, the European Parliament proposed an obligation on parts of the ECB’s Supervisory Board to put in place a Code of Conduct, including rules on conflict of interest of staff involved in banking supervision. In the final SSMR this has found its way in Art. 19(3) SSMR, whereby the final decision to establish such a Code of Conduct is placed with the ECB’s Governing Council.5
B. Detailed explanations I. Independence of the ECB and the national competent authorities acting within the SSM (Art. 19(1)-(2) SSMR) Art. 19(1) SSMR stipulates the independence of the ECB and of the national compe- 5 tent authorities acting within the SSM when carrying out the tasks conferred on them by the SSMR. These tasks, which the ECB carries out in cooperation with the national competent authorities, are primarily described in chapter II SSMR and namely Arts. 4–6 SSMR.6 Specific reference is made to the members of the ECB’s Supervisory Board and the Steering Committee, which are obliged to act independently and objectively in the interest of the Union as a whole and are allowed to either seek or take instructions from 3 Basel Committee on Banking Supervision, ‘Core Principles for Effective Banking Supervision’ Basel, September 2012, at . 4 European Central Bank, Opinion of the European Central Bank of 27 November 2012 on a proposal for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposal for a regulation of the European Parliament and of the Council amending Regulation 1093/2010 establishing a European Supervisory Authority (European Banking Authority), OJ C 30, 1.2.2013, p. 6 point 1.4. 5 See further, infra, section B.I.3. and II. 6 With regard to the tasks see supra, → Arts. 4–6.
Fabian Amtenbrink
279
Art. 19 SSMR
Independence
Union institutions or bodies, or from Member States governments or from any other public or private body. Art. 19(2) TFEU adds to this an obligation on the parts of Union institutions, bodies, offices and agencies, as well as Member States governments and any other bodies ‘to respect that independence’. 6 While not being identical, the substance of Art. 19(1)-(2) SSMR has some resemblance with Art. 130 TFEU on the independence of the ECB and the Euro area central banks and also Art. 17(3) TEU on the independence of the members of the European Commission. Yet, when compared to Art. 130 TFEU, the wording of Art. 19(2) SSMR is somewhat less specific, in that it does not explicitly prohibit Union institutions, bodies, offices and agencies, as well as Member States governments and any other bodies from seeking to influence the members of the Supervisory Body, the Steering Committee or the national competent authorities. 7 Whether and to what extent Art. 19(1) SSMR establishes the independence of the ECB for the conduct of its supervisory tasks or only has to be read as a reaffirmation of Art. 130 TFEU and Art. 7 ESCB Statute is debatable.7 This amounts to more than just an academic question, as an exclusion of the SSM-related tasks of the ECB from the scope of primary Union law would have as a consequence that the independence of the ECB as a banking supervisor is only laid down in a secondary Union law act, which does not necessarily have the same scope as Art. 130 TFEU and, moreover, can be amended or removed altogether pursuant to the procedure laid down in Art. 127(6) TFEU. From the outset, the ECB, with reference to the before-mentioned primary Union law provisions, has taken the position that any supervisory tasks conferred upon it by Art. 127(6) TFEU are covered by its “full independence […] including the supervisory board and its members when performing tasks under the proposed SSMR.”8 In this context it has been argued that “neither the TFEU nor the Statutes of the ECB explicitly limit the scope of the ECB’s independence”, thereby excluding supervision-related tasks.9 Yet, against such a broad, all-embracing interpretation of Art. 130 TFEU it can be observed that according to its own wording the scope of this provisions is limited to the powers and the exercise of the tasks and duties conferred upon the ECB by the Treaties and the ESCB Statute. 10 This then refers namely to those tasks listed in Art. 127(2) TFEU, and most prominently the definition and implementation of monetary policy in line with the overriding primary objective of the ECB, i.e. price stability. In contrast, the supervisory-related powers, duties, and tasks of the ECB have been introduced by means of a secondary Union law act, albeit based on Art. 127(6) TFEU.11 Thus rather than to just reaffirm the ECB’s independence provided for in primary Union law, Art. 19 SSMR establishes and defines the scope of the ECB’s independence for the powers and the exercise of the tasks and duties conferred upon it by this Regulation.
See in this regard e.g. Ohler (2020), at pp. 1132-1133. Brackets added. European Central Bank (supra, fn 4), point 1.6. Informative: Zilioli, in: Ritleng (ed), Independence and Legitimacy in the Institutional System of the European Union (2016), 126, at pp. 155 et seq. 9 Selmayr, in: Müller-Graff (ed), Europäisches Wirtschaftsordnungsrecht (2015), § 23 para. 110, who refers to a broad understanding of central bank independence; Wolfers and Voland, CMLR 51 (2014), 1463, at p. 1487, who nevertheless also recognise the fact that the supervisory tasks have not been transferred to the ECB by primary Union law. See also Ter Kuile, Wissink, Bovenschen, CMLR 52 (2015), 155, at p. 165, who refer ‘a confirmation of the existing ECB independence’; in a similar fashion also: Kaufhold, in Hufeld and Ohler (eds), Europäisches Wirtschafts- and Währungsrecht (2022), at pp. 813-814. 10 See also Siekmann, in: Siekmann (ed), Kommentar zur Europäischen Währungsunion, (2013), 404, at pp. 435-436. 11 See e.g. Manger-Nestler and Böttner, EuR 49 (2014), 621, at p. 625, who argue the transfer of supervisory tasks to the ECB may nevertheless be contrary to Art. 130 TFEU. 7
8
280
Fabian Amtenbrink
Art. 19 SSMR
Independence
By referring in general terms to the ECB, thereby including the Governing Council as 8 the main decision-making body for both monetary policy and banking supervision, Art. 19 SSMR can be perceived to reinforce Art. 130 TFEU by reducing the possibility of undermining the scope of this provision through the backdoor of banking supervision. While Art. 19 SSMR covers the independence of the ECB and the national competent authorities acting within the SSM from external interventions, this does not as such also cover the separation of supervisory tasks from the monetary policy tasks of the ECB. The latter is addressed in Art. 25 SSMR.12 Yet, in spite of the introduction the principle of separation of the monetary policy from the supervisory tasks and the establishment of the Supervisory Board as the main forum for the preparation of supervisory decisions, considering the close interconnectedness of monetary policy and banking supervision, these two areas of ECB activities cannot be considered in total isolation from each other. Conflicts of interests may arise and the (bad) performance of the ECB as a European banking supervisor may have negative reputational effects on its monetary policy function.13 The reference in Art. 19(1) SSMR to the observance of “the Union interest as a whole” 9 has some resemblance with what can be found in Art. 17(1) TEU according to which the European Commission must promote the general interest of the Union. Similar to what has been observed for the European Commission this cannot be equated with “the prevailing interest” of one or several Member States or “as a sum of the national interests of the Member States”.14 Instead, it can be understood to refer to “the interest of the EU itself, as an (relatively) independent and specific (supranational) actor”.15 In the context of the SSM, the reference in Art. 19(1) SSMR then arguably primarily refers to the interest of the EU in establishing a single supervisory mechanism and conferring specific tasks onto the ECB, as expressed by the secondary Union law act itself, that is “the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, with full regard and duty of care for the unity and integrity of the internal market”.16 It is the latter, rather than the interest of any Union institutions or bodies, Member State governments, or individual credit institutions or associations, that the members of the Supervisory Board and the Steering Committee first and foremost have to observe when acting. More broadly, both bodies also have to observe any other interests of the EU related to their tasks that can be derived from primary Union law. In defining the obligations deriving from Art. 19(1)-(2) SSMR in more detail and to 10 analyze its implementation in the SSMR and related documentation, it is useful to differentiate several aspects, including institutional, functional, organizational, and financial independence.17
12 See supra, → Art. 25. On the distinction between the external and internal dimension of the independence of the ECB see also Kaufhold, in Hufeld and Ohler (ed), Europäisches Wirtschafts- and Währungsrecht (2022), para. 33. 13 Siekmann (supra, fn 9), at p. 435, in this context refers to the possibility of substantive conflicting objectives. 14 Ponzano, Hermanin and Corona, The Power of Initiative of the European Commission: A Progressive Erosion? (2012), at p. 7, at . 15 Horváthy, Acta Juridica Hungarcia 55 (2014), No. 3, 261, at p. 264. 16 Supra, → Art. 1. 17 A similar differentiation is also referred to by the ECB in its Opinion of 27 November 2013 on the proposed SSMR (supra, fn 4), point 1.6.
Fabian Amtenbrink
281
Art. 19 SSMR
Independence
1. Institutional independence Institutional independence refers to the relationship of the ECB with other Union or national institutions or bodies, whereby an internal and external dimension can be differentiated. 12 Internally, the question arises as to what extent the Supervisory Board as the body in charge of the planning and execution of the tasks conferred on the ECB by the SSMR is independent from other decision-making bodies within the ECB and mainly its Governing Council. In this context Art. 25 SSMR states that the ECB must carry out its SSMrelated tasks “without prejudice to and separately from its tasks relating to monetary policy and any other tasks.”18 At the same time, it becomes clear from Article 26(8) SSMR that the Supervisory Board does not formally take supervisory decisions itself but rather proposes complete draft decisions to the Governing Council, which the latter has to adopt.19 While the Supervisory Board includes four members of the Governing Council, the latter may not perform monetary policy-related tasks. Moreover, the Chair of the Supervisory Board cannot be a member of the Governing Council.20 13 Externally, the Supervisory Board as an integral part of the ECB is separate from other Union institutions, bodies, offices and agencies, as well as from the governments of the Member States and any other bodies. The same applies to the ECB’s Governing Council. According to Art. 26(11) SSMR a representative of the European Commission can be invited by the Chair of the Supervisory Board to participate in the latter’s meetings as observer and Art. 3.5. of the Rules of Procedure of the Supervisory Board 21 extends this option to the European Banking Authority, and moreover to other persons which the former considers “appropriate” to invite.22 However, these invitees have no voting rights. Moreover, any invitation has to be supported by at least three members of the Supervisory Board. Concerning meetings of the ECB’s Governing Council, according to the Rules of Procedure of the ECB, next to its members, attendance at meetings is in principle restricted to the President of the Council of the EU and a member of the European Commission, albeit other persons can be invited to attend meetings if the Governing Council considers this appropriate.23 Only the members of the Governing Council have a voting right subject to the applicable rotation system.24 14 According to Art. 19(1) SSMR when carrying out SSMR-related tasks the national competent authorities acting within the SSM must act independently and the governments of the Member States and any other bodies must respect that independence. Yet, the SSMR itself does not as such determine in any detail the institutional arrangements at the national level relating to the national competent authorities and namely their relationship with other national institutions, bodies, offices and agencies. Namely an institutional separation of ESCB-related tasks and SSM-related tasks, i.e. by requiring that SSM-related tasks are placed outside the national central bank, is not explicitly provided for. Nevertheless, concerning the internal arrangements at the national competent authorities, the measures are foreseen in the SSMR for the organizational separation of the 11
18 For more details on the separation of monetary policy from banking supervisory tasks see infra, → Art. 25 . 19 For more details on the applicable reversed voting procedure see infra, → Art. 26 . 20 Infra, → Art. 26. 21 OJ L182, 21.6.2014, p. 56 (as amended). 22 See also Art. 3 Rules of Procedure of the Supervisory Board on the other attendance at Supervisory Board meetings. 23 Art. 3.1. and 3.5. of Decision ECB/2004/2, OJ L80, 18.3.2004, p. 33 (as amended). 24 Art. 10.4. ESCB Statute and Art. 3a and 4 Rules of Procedure ECB.
282
Fabian Amtenbrink
Art. 19 SSMR
Independence
SSM-related from other tasks, such as in the area of staffing, may be indicative of the kind of arrangements that should exist at national competent authorities.
2. Functional independence Functional independence, also sometimes referred to as instrument or operational 15 independence, is to be understood to refer to the degree to which the ECB can decide on the application of the supervisory instruments at its disposal pursuant to the SSMR autonomously from other Union or national institutions or bodies. Functional independence may moreover also describe the degree to which supervisory decisions are taken independently of (policy) considerations outside those stated in the SSMR. Similar to what can be observed for the independence of the ECB in conducting monetary policy, functional independence does not insinuate that the ECB or any of its decision making bodies can function outside the legal framework provided for by the SSMR, any other relevant secondary Union law act, or primary Union law.25 Particular attention has to be paid in this context to the relationship between the ECB in its function as supervisory authority and the European Banking Authority (EBA), both acting as part of the European system of financial supervision. Already the Preamble to the SSMR states in this regard that the ECB “… should therefore be required to cooperate closely with EBA, ESMA and EIOPA, the European Systemic Risk Board (ESRB), and the other authorities which form part of the ESFS.”26 This is reiterated in Art. 3 SSMR.27 As part of its main tasks, EBA issues guidelines addressed not only to all financial institutions but also all competent authorities, thus including the ECB in its role as banking supervisor. Moreover, EBA can issue recommendations to one or more competent authorities or to one or more financial institutions. It becomes clear from Art. 16 (3) Regulation 1093/2010 that competent authorities and financial institutions must make “… every effort to comply with those guidelines and recommendations.” That this results in a (potential) reduction of the functional independence of the ECB is doubtful. In this context it has been observed that the both EBA and ECB pursue similar objectives in the context of the EFSF, reducing the possibility of unwarranted outside influence. 28 Moreover, it can be argued that the SSMR itself recognizes the above stated arrangements thus effectively defining the room for maneuver within which the ECB can subsequently autonomously from other Union or national institutions or bodies decide on the application of the supervisory instruments at its disposal pursuant to the SSMR. Moreover, functional independence does not shield supervisory decisions from judicial review namely in the shape of action for annulment before the General Court and, on appeal, before the Court of Justice.29 As has been pointed out with regard to the institutional independence, it is the Governing Council rather than the Supervisory Board that formally takes the supervisory decisions foreseen in the SSMR that are prepared by the latter. Hence, the position of both of these bodies within the ECB has to be considered for the functional independence of the ECB.
25 See in this regard also Preamble no. 32 of the SSMR, according to which “The ECB should carry out its tasks subject to and in compliance with relevant Union law including the whole of primary and secondary Union law, Commission decisions in the area of State aid, competition rules and merger control and the single rulebook applying to all Member States.” 26 Preamble No. 31 SSMR. 27 For more details on the cooperation see supra, → Art. 3. 28 Kaufhold (2022), at p. 816. 29 Pursuant to Art. 263 TFEU.
Fabian Amtenbrink
283
Art. 19 SSMR
Independence
With regard to the Supervisory Board, it can first be observed that according to Art. 26(1) SSMR, the planning and execution of the SSM-related tasks conferred on the ECB is “fully undertaken” by the Supervisory Board. As previously described, the latter undertakes the preparatory works for draft decisions to be adopted by the Governing Council. Internally, according to Art. 4.1. of its own Rules of Procedure, the Supervisory Board for each meeting adopts its own agenda and namely the (decision-making) items to be placed on that agenda. While the Governing Council can object to a draft decision, the SSMR does not provide that body, or any EU or national institution or body for that matter, with the right to determine the Supervisory Board’s agenda, or to use instruments at the disposal of the Supervisory Board in preparation for its decision. Moreover, no possibility is provided to override Supervisory Board decisions. 17 As the position of the Governing Council for the conduct of its two main tasks is arguably inseparable, its functional independence in exercising its monetary policy mandate for the euro area must extend to its decision-making powers pursuant to the SSMR.30 To be sure, this does not imply that the monetary and supervisory functions are not treated as separate. In fact, Art. 25(4) SSMR clearly states that within the Governing Council these tasks have to be “completely differentiated”, including namely separate meetings and agendas. In this context, it can be noted that decisions on SSM-related tasks are also communicated separately by the ECB from monetary policy-related and all other decisions. 18 Concerning the functional independence of the national competent authorities of the Member States participating in the SSM, the legal basis of the SSM does not provide any framework beyond the general statement in Art. 19(1) and (2) SSMR, according to which national competent authorities acting within the SSM must act independently and the governments of the Member States and any other bodies must respect that independence. It is presently argued that this reference does rule out any national law provisions that seriously impair the autonomous decision-making by national competent authorities on the application of the supervisory instruments in the context of the SSMR. 16
3. Personal independence The personal independence, sometimes also referred to as organizational independence, refers to arrangements that ensure that members of the decision-making bodies for SSM-related tasks can act free of external influence or pressure. Namely, rules that ensure the freedom of the individuals concerned to act in accordance with the SSMR in the Union interest as a whole, as well as the appointment and even more so dismissal procedures, including the length of the terms of office and compatibility with other occupations, are of relevance. 20 Art. 6 of the Code of Conduct for high-level European Central Bank Officials31 states that members of the Governing Council and the members of the Supervisory Board when exercising their functions as members of a high-level ECB body, as well as to the members of the Executive Board must act independently and objectively in the interest of the Union as a whole, regardless of national or personal interest, and are precluded from seeking or taking instructions from EU institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Code of Conduct 19
30 See Mersch, ‘Central bank independence revisited’, speech held at Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the United States, Frankfurt am Main, 30 March 2017. With further references to relevant literature, at . 31 OJ C89, 8.3.2019, p. 2. This general Code of Conduct has unified the previously specific codes of conduct inter alia for the separate codes the Members of the Supervisory Board (OJ C93, 20.3.2015, p. 2).
284
Fabian Amtenbrink
Art. 19 SSMR
Independence
furthermore namely includes specific rules relating to private activities and official mandates (Art. 10) that are considered incompatible with the membership in one of the above-mentioned decision making bodies of the ECB, as well as general principles of conflict of interest (Art. 11). The general credo of these and related provisions in the Code of Conduct is to ensure members of the decision-making bodies (or their alternates) are not (perceived) to be influenced in the impartial and objective carrying out of their duties and responsibilities, thereby inter alia damaging the reputation of the ECB. Consequently, the Code of Conduct also provides for rules on post-employment, providing for different cooling-off periods for a variety of occupational activities, such as working for a significant or less significant credit institution (Art. 17).32 Next to the Code of Conduct the Ethic Framework that is laid down in the Staff Rules of the European Central Bank applies.33 Part 0.2., entitled ‘Independence’ inter alia lays down rules regarding conflict of interests of members of staff, including from previous occupational activities,34 prohibits the solicitation or acceptance of any gift, hospitality or other benefit of a financial or non-financial nature which objectively improves the financial, legal or personal situation of the staff member in question or any other person and to which the recipient is not entitled by law,35 as well as any payments from third parties in respect of the performance of their professional duties. 36 The Code also obliges staff members to ensure the proper conduct of procurement procedures by maintaining objectivity neutrality and fairness, and ensuring the transparency of their actions.37 Concerning the appointment of Supervisory Board members, as a consequence of the 21 composition of the Supervisory Board, different appointment procedures apply. The Chair and Vice-Chair of the Supervisory Board are appointed by the Council of the EU and thus by the representatives of the Member States by means of an implementing decision that is taken by a qualified majority, excluding Member States not participating in the SSM. Yet, this decision is based on a proposal by the ECB itself, which requires the approval of the European Parliament.38 The SSMR requires the Chair to be a full-time professional, which cannot hold any offices at national competent authorities. At least equally important from the point of view of the personal independence of the Chair, the latter must be chosen based on an open selection procedure, “from among individuals of recognized standing and experience in banking and financial matters.”39 The term of office is fixed by Art. 26(3) SSMR at a non-renewable five years. As the Vice-Chair is chosen from among the members of the ECB’s Executive Board, the corresponding rules of the ESCB Statute apply, according to which members, which have to be EU national, are appointed from among persons of recognized standing and professional experience in monetary or banking matters by the European Council, acting by a qualified majority. The European Council acts on a recommendation from the Council after it has consulted the European Parliament and the ECB’s Governing Council.40 Members of the ECB’s Executive Board serve a non-renewable term of eight years. 32 See Art. 19 of the Code of Conduct for the rather limited consequences attached to a non-compliance with these rules. 33 Available at http:///www.ecb.europa.eu. At the time of writing the latest amended version dated from 24 June 2021. 34 Ibid, Part 0.2.1. 35 Ibid, Part 0.2.2. 36 Ibid, Part 0.2.5. 37 Ibid, Part 0.2.3. 38 Art. 26(3) SSMR. 39 Ibid. 40 Art. 11 ESCB Statute.
Fabian Amtenbrink
285
Art. 19 SSMR
Independence
The SSMR does provide a provision that aligns the Executive Board member’s term as Vice-Chair to that of the Chair. Executive Board members have to work on a full-time basis and are in principle not allowed to engage in any remunerated or unremunerated occupation. The latter arrangement reduces the vulnerability of the Chair and Vice-Chair of the Supervisory Board to outside influence in the face of a possible re-appointment and thus, strengthens the independence of the office. 22 As regards the appointment of the four ECB representatives on the Supervisory Board, Art. 26(1) SSMR refers to Art. 26(5) SSMR, which does not however include any details in this regard. The latter can be found in a ECB Decision on the appointment of representatives of the ECB to the Supervisory Board.41 According to this, similar to the Chair, the ECB representatives are appointed on a full- or part-time basis for a non-renewable term of five years, and are equally prohibited from entering into any other occupation, unless authorized by the Governing Council. Such authorization is excluded if the envisaged activity is liable “to give rise, or may be perceived to give rise to, a conflict of interest”. 42 In practice, ECB representatives have inter alia been recruited from among national central bank governors, former ECB Executive Board members and national supervisory bodies. 23 Concerning the dismissal procedure, first of all, the position of Chair and Vice-Chair of the Supervisory Board have to be differentiated. The Chair can only be dismissed in case he/she no longer fulfils the conditions required for the performance of his/her duties or in case of having been found guilty of serious misconduct, which in principle excludes any dismissal based on political or policy-related considerations. Furthermore, a Council decision in this regard requires the approval of the European Parliament, thus introducing an additional element of checks and balances into the procedure. As the Vice-Chair is chosen from among the members of the ECB’s Executive Board, the withdrawal procedure is governed by the ESCB Statute and namely Art. 11.4. ESCB Statute. While the reasons for dismissal are equal to those applicable to the Chair, compulsory retirements have to be decided by the CJEU, which acts on an application by the ECB’s Governing Council or the Executive Board. The compulsory retirement of a member of the Executive Board in principle must also lead to the compulsory retirement of that person as a Vice-Chair. However, the wording of Art. 26(4) SSMR is somewhat ambiguous in this regard stating that the Council may adopt an implementing decision by qualified majority to remove the Vice-Chair from office. This requires a proposal by the ECB, which has to be approved by the European Parliament. The four representatives of the ECB can only be dismissed for the same reasons as those applicable to the Chair and Vice-Chair. This decision lies in the hands of the Governing Council, based on an application by the Executive Board.43 Overall it can be observed that these dismissal rules ensure that the Chair, Vice-Chair, and the four ECB representatives are shielded from unwarranted dismissal based for example on political considerations. 24 Concerning the appointment and dismissal of the representatives of the national competent authorities of the Member States participating in the SSM, the legal basis of the SSM does not provide any framework beyond the general statements in Art. 19(1) and (2) SSMR referred to above. Yet, the latter cannot be interpreted to provide a specific legal framework for the applicable appointment and dismissal procedures namely conDecision ECB/2014/4, OJ L196, 3.7.2014, p. 38. Ibid, Art. 1. For the first round of appointment the Decision foresaw in staggered terms to ensure continuity of management, see para. 2. Preamble No. 75 to ‘full independence in particular free from undue political influence and from industry interference which would affect its operational independence’. 43 Art. 1(5) Decision ECB/2014/4. Somewhat curiously, the rules on dismissal have been included in the provision entitled ‘Appointment of ECB representatives to the Supervisory Board’. 41
42
286
Fabian Amtenbrink
Art. 19 SSMR
Independence
cerning the question of the length of office and the possibility of reappointment. Thus, similar to what can be observed for national central bank governors, which different to the non-renewable term of the members of the ECB’s Executive Board, may be reappointed, the SSMR does not exclude the possibility in accordance with national law to reappoint representatives of the national competent authorities. At the same time, Art. 19 SSMR does rule out any national law provisions that seriously impair an autonomous functioning of the national competent authority within the SSM, such as the possibility to dismiss members of the authority’s main decision-making board, including namely its Chair, for reasons other than what is explicitly provided for in the legal basis, very short terms of appointment, or the linking of the term of office to the term of the elected government.
4. Financial independence Financial independence refers to the extent to which the ECB is autonomous from outside influence in determining its budget for the SSM-related tasks. The SSM has not been considered to have implications for the EU budget, as it has been assumed already in the European Commission proposal for the SSMR that the SSM related activities form part of the general budget of the ECB, which itself does not form part of the EU budget.44 In the preamble to the SSMR, it is emphasized that in carrying out supervisory tasks “the ECB should dispose of adequate resources”, whereby these resources “should be obtained in a way that ensures the ECB’s independence from undue influence by national competent authorities and market participants, and separation between monetary policy and supervisory tasks.”45 The financial resources required for the tasks of the ECB assigned by the SSMR derive from supervisory cost-covering fees that credit institutions established in a participating Member State and branches of credit institutions that are situated in a non-participating Member State that are subject to the supervision by the ECB have to pay.46 The ECB’s supervisory-related expenditure has to be separately identifiable within the ECB’s budget and the annual account must include the income and expenses related to supervisory tasks.47 Finally, according to Art. 29(3) SSMR in conjunction with Art. 27.1. ESCB Statute, the supervisory section of the annual accounts has to be audited by independent external auditors.48 The SSMR does not include any provisions concerning the budget of national competent authorities for the exercise of SSM-related tasks other than what is stated in Art. 30(5) SSMR that notwithstanding the supervisory fees levied by the ECB, national competent authorities still have the right to levy fees in accordance with national law and, to the extent supervisory tasks have not been conferred on the ECB, or in respect of costs of cooperating with and assisting the ECB and acting on its instructions.49 Similar to what has been observed for the appointment and dismissal procedures applicable for national competent authorities, the reference in Art. 19(1)-(2) SSMR to the independence of national competent authorities acting within the SSM implies that budgetary
44 See European Commission, Proposal for a Council regulation conferring specific tasks on the European central Bank concerning policies relating to the prudential supervision of credit institutions, COM(2012) 511 final, Explanatory Memorandum, p. 8. 45 Recital 77 SSMR. 46 Art. 30 SSMR. 47 Art. 29(1)-(2) SSMR. 48 Ibid. 49 See further infra, → Art. 30.
Fabian Amtenbrink
287
25
26
27
28
Art. 20 SSMR
Accountability and reporting
rules in national law that seriously impair an autonomous functioning of the national competent authority within the SSM have to be considered problematic.
II. Ethics Framework and Code of Conduct (Art. 19(3) SSMR) Art. 19(3) SSMR instructs the ECB Governing Council to establish “a Code of Conduct for the ECB staff and management involved in banking supervision concerning in particular conflicts of interest”, following a study of the necessity thereof by the Supervisory Board. This has resulted in the adoption by the Governing Council on 12 November 2014 of the Code of Conduct for the Members of the Supervisory Board of the ECB50, which has since been replaced by the above-mentioned Code of Conduct for high-level European Central Bank Officials.51 30 In accordance with its Art 1 para. 1.1., the Code of Conduct is applicable to the members of the ECB’s Governing Council and the members of the Supervisory Board when exercising their functions as members of a high-level ECB body, as well as to the members of the Executive Board. It also explicitly covers members of the Governing Council and members of the Supervisory Board when acting as members of the Steering Committee and, where applicable, the Mediation Panel that has been set up pursuant to Art. 25(5) SSMR. The scope of the Code also covers representatives of national central banks, where the national competent authority is not the national central bank, participating in meetings of the Supervisory Board, as well as persons replacing the members in meetings of the Governing Council or the Supervisory Board (so-called alternates).52 With regard to the rules of conduct laid down in the Code of Conduct reference can be made to what has been observed above in section 3 on personal independence, regarding namely the prevention of conflicts of interests. Different to the 2015 Code of Conduct for the Members of the Supervisory Board of the European Central Bank, the current Code of Conduct for high-level European Central Bank Official excludes accompanying persons attending meetings of the Governing Council or the Supervisory Board from its scope. Instead, these persons have to sign a declaration of ethical conduct prior to their first participation in any meetings that has to cover the general principle of avoidance of conflicts of interest, the prohibition from using confidential information, and the rules on professional secrecy.53 Next to the Code of Conduct, the Ethic Framework that is laid down in the Staff Rules of the European Central Bank applies, as has been observed above in section 3 on personal independence.54 29
Art. 20 SSMR Accountability and reporting 1. The ECB shall be accountable to the European Parliament and to the Council for the implementation of this Regulation, in accordance with this Chapter.
OJ C93, 20.3.2015 p. 2. OJ C89, 8.3.2019, p. 2. This general Code of Conduct has unified the previously specific codes of conduct inter alia for the separate codes the Members of the Supervisory Board (OJ C93, 20.3.2015, p. 2). 52 Art. 1.1 (1)-(2) Code of Conduct. 53 Art. 1(3) Code of Conduct. 54 Available at http:///www.ecb.europa.eu. At the time of writing the latest amended version dated from 24 June 2021. 50
51
288
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
2. The ECB shall submit on an annual basis to the European Parliament, to the Council, to the Commission and to the euro Group a report on the execution of the tasks conferred on it by this Regulation, including information on the envisaged evolution of the structure and amount of the supervisory fees mentioned in Article 30. 3. The Chair of the Supervisory Board of the ECB shall present that report in public to the European Parliament, and to the euro Group in the presence of representatives from any participating Member State whose currency is not the euro. 4. The Chair of the Supervisory Board of the ECB may, at the request of the euro Group, be heard on the execution of its supervisory tasks by the euro Group in the presence of representatives from any participating Member States whose currency is not the euro. 5. At the request of the European Parliament, the Chair of the Supervisory Board of the ECB shall participate in a hearing on the execution of its supervisory tasks by the competent committees of the European Parliament. 6. The ECB shall reply orally or in writing to questions put to it by the European Parliament, or by the euro Group in accordance with the its own procedures and in the presence of representatives from any participating Member States whose currency is not the euro. 7. When the European Court of Auditors examines the operational efficiency of the management of the ECB under Article 27.2 of the Statute of the ESCB and of the ECB, it shall also take into account the supervisory tasks conferred on the ECB by this Regulation. 8. Upon request the Chair of the Supervisory Board of the ECB shall hold confidential oral discussions behind closed doors with the Chair and Vice-Chairs of the competent committee of the European Parliament concerning its supervisory tasks where such discussions are required for the exercise of the European Parliament’s powers under the TFEU. An agreement shall be concluded between the European Parliament and the ECB on the detailed arrangements for organizing such discussions, with a view to ensuring full confidentiality in accordance with the confidentiality obligations imposed on the ECB as a competent authority under relevant Union law. 9. The ECB shall cooperate sincerely with any investigations by the European Parliament, subject to the TFEU. The ECB and the European Parliament shall conclude appropriate arrangements on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB by this Regulation. Those arrangements shall cover, inter alia, access to information, cooperation in investigations and information on the selection procedure of the Chair of the Supervisory Board. Bibliography Adina Maricut‐Akbik, ‘Contesting the European Central Bank in Banking Supervision: Accountability in Practice at the European Parliament’ (2020) Journal of Common Market Studies, Vol. 58, Issue 5, pp. 1199-1214; Fabian Amtenbrink and Rosa Maria Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies – A Theoretical Framework’ in: Richard Victor de Mulder (ed), Mitigating Risk in the Context of Safety and Security. How Relevant is a Rational Approach? (Rotterdam: Erasmus School of Law & Research School for Safety and Security (OMV) 2008), 115; Fabian Amtenbrink and Menelaos Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area? A Study of the Interaction between the European Parliament and the European Central Bank in the Single Supervisory Mechanism’, European Law Review 44 (2019), 3; Phoebus Athanassiou, ‘Financial Sector Supervisor’s Accountability. A European Perspective’, ECB Legal Working Paper Series No. 12/August 2011; Basel Committee on Banking Supervision, ‘Core Principles for Effective Banking Supervision’ Basel, September 2012, ; Iris H.-Y. Chiu, ‘Power and Accountability in the EU Financial Regulatory Architecture: Examining Inter-Agency Relations, Agency Independence and Accountability’, in: Mads Andenas and Gudula Deipenbrock (eds), Regulating and Supervising European
Fabian Amtenbrink
289
Art. 20 SSMR
Accountability and reporting
Financial Markets (Springer, Basel 2016), 67; Roberto Cisotta, ‘The Quest for Financial Stability and Democracy in the Banking Union: Promoting Institutional Transformation and Regulatory Evolution Through Unconventional Means’, in: Luigi Daniele, Pierluigi Simone, Roberto Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer, Basel 2017), 283; Paul Craig, ‘The Eurogroup, power and accountability’, Eur Law J. 2017;23:234-249; Deirdre Curtin, ‘“Accountable Independence” of the European Central Bank: Seeing the Logics of Transparency’, European Law Journal 23 (2017), 28; Florin Coman-Kund, Anastasia Karatzia, Fabian Amtenbrink, ‘The Transparency of the European Central Bank in the Single Supervisory Mechanism’, Credit and Capital Markets 50 (2017), 55; Nicolò Fraccaroli, Alessandro Giovannini and Jean-François Jamet, ‘The evolution of the ECB’s accountability practices during the crisis’, ECB Economic Policy Bulletin, Issue 5/2018; Diane Fromage and Renato Ibrido, ‘The “Banking Dialogue” as a model to improve parliamentary involvement in the Monetary Dialogue?’, Journal of European Integration 40 (2018), 295; Diane Fromage, ‘Guaranteeing the ECB’s democratic accountability in the post-Banking Union era: An ever more difficult task?’ Maastricht Journal of European and Comparative Law 2019, 26(1):48-62; Eva Hüpkes, Marc Quintyn, Michael W. Taylor, ‘Accountability of Financial Sector Supervisors: Principles and Practice’, IMF Working Paper WP/05/51; Gijsbert Ter Kuile, Laura Wissink, Willem Bovenschen, ‘Tailor-made Accountability within the Single Supervisory Mechanism’, Common Market Law Review 52 (2015), 155; Marco Lamandini and David Ramos Muñoz, ‘Banking Union’s Accountability System in Practice. A Health Check-Up to Europe’s Financial Heart’, (28 September 2020), available at ; Sabine Lautenschläger, ‘Transparency and accountability in monetary policy and banking supervision’, in European Central Bank, ECB Legal Conference 2017 (Frankfurt a.M. 2017), 25, < https:// www.ecb.europa.eu/pub/pdf/other/ecblegalconferenceproceedings201712.en.pdf>; Menelaos Markakis, Accountability in the Economic and Monetary Union (Oxford University Press, Oxford 2020); Niamh Moloney, ‘European Banking Union: Assessing its Risks and Resilience’, Common Market Law Review 51 (2014), 1609; Ulrike Neyer and Thomas Vieten, ‘Die neue europäische Bankenaufsicht – eine kritische Würdigung‘, Credit and Capital Markets 47 (2014), 341; Christoph Ohler, ‘Banking Supervision’, in: Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1103; Marc Quintyn, Silvia Ramirez, Michael W. Taylor, ‘The Fear of Freedom: Politicians and the Independence and Accountability of financial Sector Supervisors’, IMF Working Paper WP/07/25; Michael Shackleton, ‘The European Parliament’s New Committees of Inquiry: Tiger or Paper Tiger?’, Journal of Common Market Studies 36 (1998), 115; René Smits, ‘SSM and the SRB accountability at European level: room for improvements?’, Study requested by the ECON Committee of the European Parliament, PE 645.726 – April 2020, available at https://www.europarl.europa.eu/RegData/etudes/STU D/2020/645726/IPOL_STU(2020)645726_EN.pdf; Eddy Wymeersch, ‘The single supervisory mechanism or “SSM”, part one of the Banking Union’, National Bank of Belgium Working Paper Research No. 255, April 2014; Jonathan Zeitlin and Filipe Brito Bastos, ‘SSM and the SRB accountability at European level: room for improvements?’ In-Depth Analysis Requested by the ECON Committee, European Parliament, PE 645.747 – May 2020. A. Origin and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Detailed explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. European Central Bank accountability for the implementation of the SSMR (Art. 20(1) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Reporting (Art. 20(2)-(3) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Appearances before the Eurogroup (Art. 20(4) SSMR) . . . . . . . . . . . . . . . . . . . . . . . IV. Appearances before the European Parliament (Art. 20(5) SSMR) . . . . . . . . . . . . V. Questions by the European Parliament or the Eurogroup (Art. 20(6) SSMR) VI. Role of the Court of Auditors (Art. 20(7) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Confidential oral discussions with the European Parliament (Art. 20(8) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Cooperation with European Parliament investigations (Art. 20(9) SSMR) . . .
7 7 12 18 21 23 26 28 33
A. Origin and development 1
The inclusion of an accountability framework in the SSMR is closely linked to the institutional arrangements concerning the independence of the ECB in conducting SSMrelated tasks described in the context of Art. 19 SSMR. Generally, the rationale for legal arrangements in this regard has been widely recognized, inter alia pointing to the func-
290
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
tion of accountability as a counter-balancing force to independence,1 the broad scope of the ECB’s supervisory powers2, as well as to the potentially large implications of the exercise of the powers for the supervisees.3 Moreover, accountability has been described as a way to “briding the gap between markets and the State”.4 Beyond constitutional/institutional legal considerations, accountability is perceived to strengthen agency independence, credibility, and performance.5 The close interconnectedness between agency independence and accountability has 2 also been recognized by main international (informal) standard setters, namely the Basel Committee on Banking Supervision and the IMF. Principle 2 on independence, accountability, resourcing and legal protection for supervisors of the Basel Committee on Banking Supervision’s 2012 Core Principles for Effective Banking Supervision does not only stress the need for “operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources” but also emphasizes that the supervisor must be “accountable for the discharge of its duties and use of its resources.”6 In this context, the Core Principles state that the accountability should be prescribed in legislation and publicly disclosed, and, moreover, that the supervisor “publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.” In a similar vein, the International Monetary Fund’s Code of Good Practices on Transparency in Monetary and Financial Policy states in section VIII entitled ‘Accountability and Assurances of Integrity by Financial Agencies’ that “Officials of financial agencies should be available to appear before a designated public authority to report on the conduct of financial policies, explain the policy objective(s) of their institution, describe their performance in pursuing their objective(s), and, as appropriate, exchange views on the state of the financial system.”7 This general recognition of accountability as a main institutional feature was also 3 embraced by the ECB in the drafting stages of the SSMR, as it was emphasized that the proposed Regulation should comply with what it refers to as a main principle that “the ECB is ready to comply with the highest standards of accountability for the supervisory
1 Ter Kuile, Wissink, Bovenschen, CMLR 52 (2015), 155, at p. 164; Athanassiou, ECB Legal Working Paper Series No. 12 (August 2011), at pp. 5-7; Cisotta, in: Daniele, Simone and Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (2017), 283, at pp. 285-286; Fromage and Ibrido (2018), at p. 302; Ohler (2020), at p. 1133. 2 Markakis (2020) at p. 154. 3 Neyer and Vieten, Credit and Capital Markets 47 (2014), 341, at pp. 355-356; Wymeersch, National Bank of Belgium Working Paper Research No. 255 (April 2014), at p. 57; Moloney, CMLR 51 (2014), 1609, at p. 1636; Maricut-Akbik (2020), at p. 1200. 4 Lamandini and Ramos Muñoz (2020), at p. 3. 5 Hüpkes, Quintyn, Taylor, IMF Working Paper WP/05/51; Quintyn, Ramirez, Taylor, IMF Working Paper WP/07/25, at pp. 11 et seq.; Amtenbrink and Lastra, in: De Mulder, Mitigating Risk in the Context of safety and security. How Relevant is a Rational Approach? (2008), 115; Cisotta, supra, fn 2, at p. 28, referring to ‘trust and credibility’; Fromage and Ibrido, Journal of European Integration 40 (2018), 295, at p. 304, arguing namely that ‘parliamentary oversight capacities can potentially activate fruitful discourse dynamics to make the Banking Union governance more transparent, more open and consequently more legitimate.’ 6 Basel Committee on Banking Supervision, ‘Core Principles for Effective Banking Supervision’ (September 2012). Available at . 7 Available at .
Fabian Amtenbrink
291
Art. 20 SSMR
Accountability and reporting
tasks.”8 At the same time, the ECB did not explain what this standard of accountability entails. 4 Despite its rather limited role in the special legislative process pursuant to Art. 127(6) TFEU, the European Parliament took an active stand in the drafting of the SSMR, as can be seen from a study of the European Parliament’s ECON Committee report on the proposal for the Council Regulation.9 The European Parliament’s Committee on Legal Affairs emphasized that the ECB has to be completely accountable to democratic institutions in carrying out its function in the SSM “though a system of regular reporting, to the European Parliament”.10 Main areas related to accountability in which the European Parliament pushed for amendments included its role in the appointment of the Chair and Vice-Chair of the Supervisory Board (currently Art. 26(3) SSMR), the detailing of the confidentiality requirements in exchanges of the Chair and Vice-Chair of the Supervisory Board with the European Parliament (currently Art. 20(8) SSMR), and the explicit recognition of the European Parliament’s right to start an independent inquiry into the actions or failure to act of the ECB (currently Art. 20(9) SSMR). 11 While falling outside the scope of Art. 20 SSMR, in the context of the accountability framework it is worth noting that the European Parliament also proposed to include a provision into the SSMR to allow for the external audit of the section of the ECB’s budget relating to its supervisory tasks (currently Art. 29(3) SSMR). 5 While participation in the SSM - for the time being - does not include all Member States, the accountability arrangements included in the SSMR are addressed to the European Parliament as a Union institution and as such are not in any way limited to MEPs from the Member States participating in the SSM. Considering Art. 14(2) TEU, according to which MEPs are representatives of the Union’s citizens, rather than of their own national electorates, the limitation of the participatory rights of the European Parliament to euro area MEPs would be very questionable. 6 Art. 20 SSMR has to be read together with the Interinstitutional Agreement between the European Parliament and the ECB on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the SSM (Interinstitutional Agreement),12 as well as the Memorandum of Understanding between the Council of the European Union and the European Central Bank on the cooperation on the procedures related to the Single Su-
8 European Central Bank, Opinion of the European Central Bank of 27 November 2012 on a proposal a for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority, OJ C30, 1.2.2013, p. 7. 9 Amendments adopted by the European Parliament on 22 May 2013 on the proposal for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (COM(2012)0511 – C7-0314/2012 – 2012/0242(CNS)). 10 See the letter from Klaus-Heiner Lehne, Chair of the European Parliament Committee on Legal Affairs, to the Chair of the ECON Committee, Annex II to the ECON Committee Report. 11 On the role of the European Parliament in including national parliaments in the accountability framework see infra, → Art. 21. 12 OJ L320, 30.11.2013, p. 1; For Ter Kuile, Wissink, Bovenschen, supra, fn 2, at p. 169 fn 74, Art. 20(8) SSMR constitutes the legal basis for this agreement. See also Art. 148 Rules of Procedure European Parliament (9th parliamentary term, September 2021 ), according to which: “Parliament may enter into agreements with other institutions in the context of the application of the Treaties, or in order to improve or clarify procedures. Such agreements may take the form of joint declarations, exchanges of letters, codes of conduct or other appropriate instruments. After they have been examined by the committee responsible for constitutional affairs and approved by Parliament, they shall be signed by the President.”
292
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
pervisory Mechanism (SSM MoU).13 Both of these documents provide important details on the actual accountability arrangements in place.
B. Detailed explanations I. European Central Bank accountability for the implementation of the SSMR (Art. 20(1) SSMR) The first paragraph of Art. 20 SSMR states in very general terms that the ECB must 7 be accountable to the European Parliament and to the Council for the implementation of the SSMR. By the direct coupling of the accountability requirement with the SSMR, it becomes clear that the accountability regime for the ECB introduced in chapter IV SSMR applies to SSM-related tasks only and thus, is not applicable to the monetary policy-related tasks of the ECB as defined by primary Union law. Having said that, it has been observed that in practice the lines can become blured in exchanges between MEP’s and the ECB.14 The Preamble of the SSMR explains - albeit somewhat indirectly - the rationale for 8 accountability arrangements, as the European Parliament and the Council are described as “democratically legitimised institutions representing the citizens of the Union and the Member States.”15 Yet, similar to what can be observed for Art. 47 SRMR, no legal definition of the notion of accountability is provided for in the first paragraph or any other parts of Art. 20 SSMR.16 Such a characterization can also not be found in Art. 2 SSMR on “Definitions” or the preamble to the Regulation. Moreover, somewhat varied terminology is applied throughout the SSMR, as a reference is made both to accountability and democratic accountability, whereby these two notions are apparently used interchangeably rather than to refer to different concepts.17 In several places, reference is made to “democratic accountability and oversight”,18 whereby a definition for the latter concept is also absent. In the context of the SSMR it cannot be seen how these notions serve a different purpose. For this reason, the commentary hereafter focuses on the notion of accountability. Generally speaking, as has been observed elsewhere, accountability does not only 9 entail “the continuous control of power and the notion that the accountee takes responsibility for failure and takes steps to prevent their recurrence”, but also the existence of instruments allowing for “the possibility of remedies against abuse of power”.19 In operationalizing this approach to accountability, the presence of several elements is essential to provide for appropriate accountability arrangements, including transparency (access to information), venues for regular exchanges, as well as concrete remedies at the Available at . Amtenbrink and Markakis (2019), at pp. 18 et seq. 15 Preamble No. 55, SSMR. 16 However, Art. 20 SSMR does provide a more detailed framework than the EBAR, which limits itself to simply stating that the three European Supervisory Authorities “shall be accountable to the European Parliament and to the Council”. See Art. 3 EBAR. 17 See e.g. Art. 20(9) SSMR in comparison to Art. 20(1) SSMR. 18 See Preamble No. 66 and Art. 20(9) SSMR. Italics added. 19 Italics added, see Amtenbrink and Lastra, supra, fn 4, at p. 125. Generally on the concept of accountability in the context of the SSM see Zeitling and Brito Bastos (2020), who differentiate between administrative, judicial, and political accountability; Lamandini and Ramos Muñoz (2020), at pp. 4 et seq.; Marikut-Akbik (2020), at pp. 1201-1202; Markakis (2020), at pp. 160 et seq. As regards specifically the function of parliamentary hearings Amtenbrink and Markakis (2019), at 5 et seq. 13
14
Fabian Amtenbrink
293
Art. 20 SSMR
Accountability and reporting
disposal of the party in charge of the accountability mechanism. At the same time, not least to protect the accountee from an abuse of the accountability mechanism, the latter should be based on clear objectives or standards that can function as a yardstick to judge the performance of the accountee.20 This is, however, arguably particularly difficult to achieve in the case of financial market supervision, as it has been observed elsewhere that “…‘the goal constraint’ […] is not as easily definable as in the case of the monetary authority.”21 10 It is notable that while the first paragraph of Art. 20 SSMR refers to the accountability of the ECB as an institution, paragraphs 3-5, and 8 examined hereafter, which describe the reporting requirement vis-à-vis the European Parliament and the Eurogroup, and (confidential) hearings, specifically refer to the Chair of the ECB’s Supervisory Board. With this focus on the Chair of the Supervisory Board, Art. 20 SSMR arguably does not adequately reflect the decision-making procedures both within the ECB and on the Supervisory Board itself. With regard to the ECB, it becomes clear from Art. 26(8) SSMR that it is formally the Governing Council of the ECB that adopts supervisory decisions, albeit based on a complete draft decisions proposed by the Supervisory Board and through the application of a reversed voting procedure. On the Supervisory Board, decisions are as a rule taken by a simple majority of the members of the Board, including not only the Chair and Vice-Chair, as well as the four representatives of the ECB, but also one representative from each of the national competent authorities of the Member States participating in the SSM. It is only in the case of a draw that the Chair has a casting vote.22 Given these decision making structures, organizing key accountability arrangements around the Chair only is not entirely unproblematic. 11 While paragraphs 2-9 of Art. 20 SSMR are geared towards substantiating the accountability obligation set out in paragraph 1, it needs to be recognized that important legal arrangements determining the actual degree of accountability can also be found in other provisions of the SSMR, such as relating to the appointment and dismissal procedure applicable to members of the Supervisory Board, the budget, and judicial review.23
II. Reporting (Art. 20(2)-(3) SSMR) 12
Art. 20(2) SSMR introduces an obligation of the ECB to draft and submit an annual report on the execution of the tasks conferred to it by the SSMR to the European Parliament, the Council, and the European Commission, as well as to the Eurogroup. The report must include information on “the envisaged evolution of the structure and amount of the supervisory fees” referred to in Art. 30 SSMR. Moreover, it becomes clear from Art. 29(2) SSMR that a detailed report on the budget for the supervisory-related tasks of the ECB has to be included. Next to this, Art. 31(5) SSMR calls for the inclusion of detailed information, including statistical data, on the application of the comprehensive and formal procedures including ethics procedures and proportionate periods that the ECB is required to establish to assess in advance and prevent possible conflicts of interest resulting from subsequent employment within two years of members of the Supervisory Board and ECB Staff members engaged in supervisory activities. In this context 20 Amtenbrink and Lastra, supra, fn 4, at pp. 124 et seq. See also Lautenschläger, in: European Central Bank Legal Conference 2017, 25; Chiu, in: Andenas and Deipenbrock (eds), Regulating and Supervising European Financial Markets (2016), 67; Cisotta, supra, fn 2; Ter Kuile, Wissink, Bovenschen, supra, fn 2. 21 Brackets added. Amtenbrink and Lastra, supra, fn 4, at p. 120; Ter Kuile, Wissink, Bovenschen, supra, fn 2, at p. 167, observing that ‘supervisory objectives will be broader and vaguer’. 22 Art. 26(1) and (6) SSMR. See further infra, → Art. 26. 23 Such arrangements are therefore not discussed in this section.
294
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
reference can also be made to the rules laid down in the Code of Conduct for high-level European Central Bank Officials24 and the Ethic Framework that forms part of the Staff Rules of the European Central Bank.25 According to Art. 20(3) SSMR, the Chair of the Supervisory Board is obliged to present the annual report in public to the European Parliament. Moreover, the Chair also has to present the report to the Eurogroup in the presence of representatives from any participating Member State whose currency is not the euro. Section I.1. of the Interinstitutional Agreement reiterates the obligations on parts of the ECB to submit an annual report as far as the European Parliament is concerned, thereby further specifying that a draft version of the report has to be made available to the European Parliament in one of the 24 official language of the EU on a confidential basis four working days in advance of the public hearing. More importantly, the Interinstitutional Agreement provides a non-exhaustive list of topics to be covered in the Annual Report, including not only details on the execution of the supervisory tasks and the sharing of tasks with the national competent supervisory authorities of the ECB, but also, for example, the separation between monetary policy and supervisory tasks, the implementation of the ECB’s Code of Conduct, and – reiterating Art. 29(2) SSMR – the budget for supervisory tasks.26 Similar arrangements are foreseen in the SSM MoU.27 Finally, the Interinstitutional Agreement states that the annual report must be published on the website of the SSM.28 In practice, the “ECB’s annual report on supervisory activities” follows a relatively fixed framework, starting with a foreword by the president of the ECB, followed by a foreword or – in some instances – a so-called “introductory interview” by the Chair of the Supervisory Board. Regular sections include the “supervisory contribution to financial stability”, inter alia focusing on main risks and the general performance of the banking sector, the supervisory activities of the ECB in the banking sector, the latter’s role in the EU’s recovery and resolution framework, as well as details on the authorisations, enforcement and sanctioning procedures conducted by the ECB. In recent years the report has also included a section providing a general overview of what the ECB considers to be accountability-related activities, namely in the shape of appearances of the Chair and Vice-Chair of the Supervisory Board before the competent European Parliament committee, written inquiries by MEPs, and the attending of ECOFIN Council and Eurogroup meetings.29 In line with Art. 20(3) SSMR, the annual report is presented by the Chair of the Supervisory Board in a regular public hearing of the European Parliament’s ECON Committee. The actual presentation of the report is followed by an exchange of views with the MEPs. At the European Parliament, the regular public hearings at the occasion of the annual report are supported by the Economic Governance Support Unit of the Directorate-General for Internal Polices, which prepares a briefing in advance to the hearing highlighting some main issues that become available shortly before the actual hearing OJ C89, 8.3.2019, p. 2 Available at http:///www.ecb.europa.eu. At the time of writing the latest amended version dated from 24 June 2021. See also Art. 19(3) SSMR. 26 During the start-up phase of the SSM regarding the operational implementation of the SSMR, additional reporting requirements applied. See Section 1, second indent of the Interinstitutional Agreement. 27 Section I.1. 28 Available at . 29 See e.g. ECB, ECB Annual Report on supervisory activities 2020, section 5.2 entitled ‘Discharging of accountability reuqirements. Available at https://www.bankingsupervision.europa.eu/press/publications/a nnual-report/html/ssm.ar2020~1a59f5757c.en.html#toc1. 24 25
Fabian Amtenbrink
295
13
14
15
16
Art. 20 SSMR
Accountability and reporting
and is also published on the website of the European Parliament.30 In the past years, a practice has emerged whereby the European Parliament, in line with its internal procedures, adopts a resolution on the ECB’s annual report and more generally on developments surrounding the EBU, thus not only including the supervision of credit institutions, but also banking resolution and depository insurance.31 The ECB in the shape of the Supervisory Board itself then provides what it refers to as “feedback” to comments and suggestions made in the resolution.32 17 Next to the annual report, according to the section I.4. of the Interinstitutional Agreement on “Access to information”, the ECB must provide the ECON Committee “at least with a comprehensive and meaningful record of the proceedings of the Supervisory Board that enables an understanding of the discussions, including an annotated list of decisions.” Moreover, if the Governing Council pursuant to Art. 26(8) SSMR objects to a draft supervisory decision by the Supervisory Board, the ECB President is obliged to inform the Chair of the ECON Committee “of the reasons for such an objection”, thereby taking into account the confidentiality requirements set out in the Interinstitutional Agreement.
III. Appearances before the Eurogroup (Art. 20(4) SSMR) Art. 20(4) SSMR provides the Eurogroup with a right to invite the Chair of the Supervisory Board for a hearing on the execution of its supervisory tasks. The exchanges of Chair of the Supervisory Board are regularly combined with the exchanges with the SRB Chair.33 At the occasion of such meetings, representatives from any non-euro Member States participating in the SSM by means of a close cooperation agreement with the ECB are present as well. Despite the somewhat open wording of this provision (compared to paragraph 3), it has to be assumed that the appearance of the Chair is mandatory. According to Section 2 of the SSM MoU such meetings ought to take place biannually and can cover all aspects of the activity and functioning of the SSM provided for in the SSMR. On occasions the Chair of the Supervisory Board provides the Eurogroup with a written overview of the activities of the ECB banking supervisory tasks ahead of a meeting.34 Next to regular hearings, the Eurogroup can also invite the Chair to additional ad hoc exchanges of views. 19 As a corresponding reference is missing in this provision, it has to be assumed that the SSMR does not provide for an obligation to stage the exchanges with the Eurogroup 18
30 See for example for the 2016 Annual Report . 31 See e.g. European Parliament resolution of 7 October 2021 on the Banking Union – annual report 2020 (2020/2122(INI)). 32 See e.g. Letter by the Chair of the Supervisory Board to the Chair of the EP’s ECON Committee of 30 August 2017. Available at . 33 See e.g. video conference of the Eurogroup of 11 June 2020. Available at . 34 See e.g. ECB, ‘Written overview ahead of the exchange of views of the Chair of the Supervisory Board of the ECB with the Eurogroup on 21 May 2021’, available at ; ECB, ‘Written overview ahead of the exchange of views of the Chair of the Supervisory Board of the ECB with the Eurogroup on 4 October 2021’, available at .
296
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
in a public meeting. Correspondingly, in the SSM MoU, it is stated that the regular hearings and ad hoc exchanges of views are confidential.35 Considering that the SSMR applies first and foremost in the euro area Member States 20 and, moreover, that the integrity of the single currency is considered to be threatened by the fragmentation of the financial sector and banking supervision for that matter, the inclusion of the Eurogroup in Art. 20 SSMR may not be particularly surprising. At the same time, it is somewhat peculiar that an informal meeting of the ministers of the euro area Member States that does not carry any formal decision-making powers is given an explicit role in the accountability of the ECB in this way.36 What is more, given that the impact of the prudential supervision of credit institutions may not be limited to the participating Member States but rather include the whole of the internal market, reference to the (ECOFIN) Council would have seemed more appropriate from an accountability point of view.
IV. Appearances before the European Parliament (Art. 20(5) SSMR) Art. 20(5) SSMR introduces an obligation on parts of the Chair of the ECB’s Supervi- 21 sory Board, upon request of the European Parliament, to take part in hearings dealing with the execution of its supervisory tasks organized by the European Parliament’s competent committee, that is the ECON Committee. Section I.2. of the Interinstitutional Agreement differentiates three types of exchanges, namely “ordinary public hearings”, “ad hoc exchanges” and “confidential meetings”, which may “cover all aspects of the activity and functioning of the SSM” stated in the SSMR. With regard to the first category, the Interinstitutional Agreement calls for the adoption by the European Parliament and the ECB of a calendar for two such meetings per year. The scope of these meetings is defined in broad terms, as according to the Interinstitutional Agreement meetings can cover all “aspects of the activity and functioning of the SSM” covered by the SSMR.37 As has been observed elsewhere, since the coming into operation of the SSM a parlia- 22 mentary practice has established that may – inspired by the practice in the area of monetary policy – be characterized as a supervisory dialogue and which falls into three abovedescribed three types of meetings.38 Details concerning confidential meetings are provided for separately in Art. 20(8) SSMR in conjunction with the Interinstitutional Agreement discussed hereafter.39 The ECB Annual Report on supervisory activities provides an account of the exchanges with the European Parliament. According to this, in 2020 the Chair of the Supervisory Board met (online) with the European Parliament’s ECON Committee four times, two ordinary public hearings and two ad hoc exchanges.40 Internally, the exchanges of the ECON Committee with the ECB’s Supervisory Board are prepared by the Banking Union Working Group (BUWG). Set up in 2014 by the Section 2(3) SSM MoU. Art. 137 TFEU and Protocol (No. 14) on the Euro Group annexed to the TEU and TFEU. On the legal characterisation of the Eurogroup, see case T-327/13, Mallis and Malli, ECLI:EU:T:2014:909, paras. 41-42. Generally on the legal arrangements pertaining to the Eurogroup and its accountability see Craig (2017), at pp. 238 et seq. 37 Interinstitutional Agreement, Section 2, 8th indent. 38 Amtenbrink and Markakis, ELR 44 (2019) 3. Fraccaroli, Giovannini and Jamet, ECB Economic Policy Bulletin, Issue 5/2018, available at https://www.ecb.europa.eu/pub/economic-bulletin/html/eb201805.en.h tml. 39 See section B.VIII. 40 ECB, ECB Annual Report on supervisory activities 2020, section 5.2. Available at https://www.bankin gsupervision.europa.eu/press/publications/annual-report/html/ssm.ar2020~1a59f5757c.en.html#toc1. 35 36
Fabian Amtenbrink
297
Art. 20 SSMR
Accountability and reporting
ECON Committee, it consists of 22 MEPs from the ECON Committee, 41 including its Chair. It describes its own task with monitoring “… the implementation of the SSM, scrutinises the exercise of the task of the European Central Bank (ECB) as bank supervisor and deals with any related matters concerning the SSM.”42 The BUWG inter alia draws up the agenda for the meetings and decides on the commissioning of briefing papers by external experts. Moreover, the European Parliament’s own Economic Governance Support Unit prepares a briefing paper for each regular hearing and ad hoc exchange.43 An analysis of past meetings reveals that already during the relatively short period of existence of the SSM, fixed patterns have emerged for these meetings, namely with regard to the setup of the meeting, as each exchange starts with a short presentation by the Chair of the Supervisory Board, followed by a Q & A session with the MEPs.44 As to types of questions raised by MEPs, it can be observed that in past meetings the choice of topics has not been strictly limited to the tasks of the Supervisory Board under the SSMR, but has also touched upon the tasks of other institutions, agencies or bodies, such as the ECB as a monetary policy authority and the SRB, or fall outside the sphere of the SSM altogether.45 This highlights not only the close link between monetary policy and financial stability, but also the consequences of the concentration of these tasks in one institution.46 It should be noted that neither Art. 20(5) SSMR nor any other part of this provision provides for a full accountability mechanism, namely also providing for concrete sanctioning instruments at the disposal of the national parliaments as the parties at the helm of the accountability mechanism.47
V. Questions by the European Parliament or the Eurogroup (Art. 20(6) SSMR) The ECB is obliged to respond orally or in writing to any questions put to it by the European Parliament or by the Eurogroup in the presence of representatives from any participating Member States whose currency is not the euro. 24 Art. 140 in conjunction with Art. 141 of the Rules of Procedure of the European Parliament, as well as Section I.3. of the Interinstitutional Agreement, provide further details regarding the obligations vis-à-vis the European Parliament.48 Any one MEP can put a maximum of six questions for written answer per month. Questions are channeled to the Chair of the Supervisory Board via the Chair of the ECON Committee, where the 23
As of 11 May 2021. As stated in a document on the composition of the Banking Union Working Group by the ECON Committee. Available at . 43 For more details see Amtenbrink and Markakis, supra, fn 34, at pp. 16 et seq. 44 For an analysis of these meetings and types of questions submitted by MEPs see Fromage and Ibrido (2018), at pp. 303-304; Amtenbrink and Markakis (2019), at pp. 16 et seq; Lamandini and Ramos Muñoz (2020), at pp. 10 et seq.; Zeitling and Brito Bastos (2020), at pp. 18-19; Maricut-Akbik (2020), at pp. 1206 et seq. 45 Based on a detailed analysis, Maricut-Akbik (2020), at p. 1207, concludes that “… more than a fifth of all hearings is wasted on questions that are outside the scope of accountability.” 46 Amtenbrink and Markakis (2019), at pp. 17 et seq. The authors differentiate between three categories of questions. 47 Ohler (2020) at p. 1134, refers to a lack of power ‘to give instructions or to impose sanctions on the ECB. For a detailed analysis see Amtenbrink and Markakis (2019), at pp. 13 et seq. 48 Rules of Procedure of the European Parliament (9th parliamentary term, September 2021). See also Annex III on the criteria for questions. 41 42
298
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
ECB is required to reply in writing “as promptly as possible, and in any event within five weeks of their transmission to the ECB.” If the ECB has not responded within six weeks, the author of the question can request the question to be included on the agenda for the next meeting of the ECON Committee with the Chair of the Supervisory Board. 49 Finally, it is foreseen that both the ECB and the European Parliament make the questions and answers available for the general public in a special section on their website. In this context it should be noted that the ECB in its supervisory-related tasks is subject to strict disclosure and confidentiality requirements, inter alia pursuant to the Capital Requirements Directive.50 In practice, the ECB publishes the written replies to questions submitted by MEPs 25 on supervisory matters on its website, as does the European Parliament.51. The total number of replies to written questions from MEPs on banking supervision matters are moreover reported in the ECB Annual Report on supervision activities52
VI. Role of the Court of Auditors (Art. 20(7) SSMR) Art. 27(2) ESCB Statute limits the role of the Court of Auditors, which according to 26 Art. 287 TFEU is in principle charged with the examination of the accounts of all revenue and expenditure of the Union and of all bodies, office and agencies set up by the Union “in so far as the relevant constituent instrument does not preclude such examination.” Art. 27(2) ESCB Statute provides for such a preclusion by stating that the power of the Court of Auditors vis-à-vis the ECB only covers “an examination of the operational efficiency of the management of the ECB”. Art. 20(7) SSMR extends this somewhat limited role of the Court of Auditors by stating that in examining the operational efficiency of the management of the ECB the former must also include the supervisory tasks of the ECB. The accounts of the ECB are audited by external auditors and the audit report is published together with the annual accounts of the ECB.53 At the time of writing of this contribution, the Court of Auditors has published two 27 special reports on the Single Supervisory Mechanism, namely in 2016 on the starting phase of the system and, more recently, in 2018 on one specific supervisory task, namely the substantial framework for crisis management.54 Next to a critical review of the SSM, the reports also make concrete recommendations. Notably, the 2016 report observes that “the lack of a proper mechanism for assessing and then reporting on supervisory effectiveness” may weaken the transparency and accountability of the ECB. 55 In fact,
Ibid, Art. 140(4). 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, OJ L176, 27.6.2013, p. 338 (as amended), namely section II on ‘Exchange of information and professional secrecy’. 51 For the European Parliament questions can be found via the Parliament’s document search engine. For the ECB such information is provided at . 52 For a total overview of questions and corresponding number of answers in writing and hearings see Maricut-Akbik (2020), at pp. 1206 et seq. 53 Art. 27.1 ESCB Statute. 54 Court of Auditors, ‘Single Supervisory Mechanism – Good start but further improvements needed’, Special Report No 29/2016; Court of Auditors, ‘The operational efficiency of the ECB’s crisis management for banks’, Special Report no 02/2018. 55 Supra, p. 10. 49 50
Fabian Amtenbrink
299
Art. 20 SSMR
Accountability and reporting
both reports take note of the difficulty for the Court of Auditors to get access to information considered necessary for the audit.56
VII. Confidential oral discussions with the European Parliament (Art. 20(8) SSMR) Art. 20(8) SSMR allows confidential oral discussions between the Chair of the Supervisory Board and the Chair and Vice-Chair of the ECON Committee, constituting the “competent committee of the European Parliament”, “behind closed doors” concerning its supervisory tasks.57 Such discussions can take place where they are “required for the exercise of the European Parliament’s powers under the TFEU”. This must then be conducted in a way as to ensure “full confidentiality obligations imposed on the ECB as a competent authority under relevant Union law”.58 29 Art. 20(8) SSMR foresees that the details concerning confidential discussions are provided for in an agreement between the ECB and the European Parliament. Correspondingly, Section 2 of the Interinstitutional Agreement includes such details, first of all, stating that such a request by the Chair of the ECON Committee must be made in writing, providing reasons, and thereafter be held on a mutually agreed date. Upon a reasoned request by the Chair of the ECON Committee or of the Supervisory Board, and by mutual agreement of both parties, the confidential meetings may also be attended by the ECB representatives on the Supervisory Board or senior members of the supervisory staff (Director Generals or their Deputies).59 All participants in the special confidential meetings are subject to confidentiality requirements equivalent to those applying to the members of the Supervisory Board and to the ECB’s supervisory staff. Consequently, the Interinstitutional Agreement also rules out minutes or other recordings of these meetings, as well as the issuing of press statements and the like. Moreover, it is foreseen that participants in confidential meetings on each occasion sign a solemn declaration not to divulge the content of the discussions to any third person.60 30 The Interinstitutional Agreement emphasizes that the primary Union law principle of openness of Union institutions also applies to the SSM, whereby “the discussion in special confidential meetings shall follow the principle of openness and elaboration around the relevant circumstances.” Moreover, it is stated that the disclosure of confidential information regarding the execution of the supervisory tasks can be restricted by confidentiality limits “legally foreseen”. European Parliament and ECB employees cannot disclose information acquired in the course of their activities related to the tasks conferred on the ECB in the context of the SSM, an obligation that extends even beyond the end of the exercise of such activities or the end of the employment for that matter. 61. 31 More generally, according to Art. 27(1) SSMR, the members of the ECB’s Supervisory Board, as well as all ECB staff and staff seconded by participating Member States carry28
See further Lamandini and Ramos Muñoz (2020), at pp. 21-22. Ibid, at p. 15. The authors argue in favour of “a broader understanding of the modalities under which such exchanges can take place as long as they are controlled by the Chair of ECON and authorized by SSM … Chair”. 58 Generally, with regard to the confidentially requirements of the ECB in the light of accountability see Curtin (2017), 28; Zeitling and Brito Bastos (2020), at pp. 20-21. On transparency requirements and restrictions: Coman-Kund, Karatzia, and Amtenbrink (2018). 59 Interinstitutional Agreement, Section 2, 2nd and 3rd indent. According to Section 2, 10th intent, the Chairs may also be accompanied by two members of ECB staff and of the European Parliament’s Secretariat respectively. 60 Ibid, Section 2, 9th indent. 61 Ibid, Section 2, 6th to 7th indent. 56 57
300
Fabian Amtenbrink
Art. 20 SSMR
Accountability and reporting
ing out supervisory duties, are subject to the professional secrecy requirements stated in Art. 339 TFEU, Art. 37 ESCB Statute, and laid down in secondary Union law.62 Moreover, given that all supervisory decisions are de jure taken by the ECB’s Governing Council, Art. 10.4 ESCB Statute applies, according to which the proceedings of its meetings are confidential, whereas the Governing Council can decide to “make the outcome of its deliberations public”. Interestingly, while the ECB publishes summaries of its monetary policy meetings, 32 referred to as ‘Monetary policy accounts’- since 2015, no such publications do not deal with the supervisory task of the ECB. The access to ECB documents is governed by its decision on public access to ECB documents,63 its decision on the access to ECB documents in the possession of the national competent authorities,64 as well as the relevant provisions of Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV). 65
VIII. Cooperation with European Parliament investigations (Art. 20(9) SSMR) Art. 20(8) SSMR introduces an obligation of sincere cooperation of the ECB with 33 European Parliament investigations. Similar to what is stated in Art. 20(8) SSMR, the practical modalities are to be determined in “appropriate arrangements” between the ECB and the European Parliament, covering “the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB”.66 The provision lists in a non-exhaustive manner “access to information, cooperation in investigations and information on the selection procedure for the Chair of the Supervisory Board.” Section III of the Interinstitutional Agreement entitled “Investigations” explicitly 34 refers to the European Parliament’s right to set up a Committee of Inquiry as foreseen in Art. 226 TFEU and further specified in Decision 95/167/EC,67 and introduces an obligation for the ECB to assist such a parliamentary committee “in carrying out its tasks in accordance with the principle of sincere cooperation” within the scope of the beforementioned Decision. The same applies to any other investigation by the European Parliament, whereby the above-mentioned confidentially arrangements provided for in section 2 of the Interinstitutional Agreement are applicable. To be sure, similar to what can be observed for Art. 45(8) SRMR, the duty to cooper- 35 ate with such investigations in principle already derives from Art. 226 TFEU in conjunction with Decision 95/167/EC. Art. 226(1) TFEU provides the European Parliament with the right to set up a temporary Committee of Inquiry for the purpose of investigating “alleged contraventions or maladministration in the implementation of Union law, except where the alleged facts are being examined before a court and while the case is still subject to legal proceedings.” Decision 95/167/EC further details the exercise of this 62 See Ohler (2020), at p. 1127, who refers to a need to balance the obligation to create transparency deriving from Art. 20 SSRM with the obligation to ensure p[rofessional secrecy on a case-by-case basis. 63 ECB/2004/3. 64 ECB/2015/16. 65 OJ L176, 27.6.2013, p. 338. See Arts. 53-62 and 143-144 CRD-IV. Generally, with regard to the (limits of the) disclosure requirements of the ECB and the broader EU legal context, see Coman-Kund, Karatzia and Amtenbrink, Credit and Capital Markets 50 (2017), 55. 66 Section III, third indent, refers to sincere cooperation with any investigation by Parliament referred to in Art. 20(9) SSMR ‘within the framework of that applies to Committees of Inquiry’. 67 Decision 95/167/EC on the detailed provisions governing the exercise of the European Parliament's right of inquiry, OJ L 113, 19.5.1995, p. 1.
Fabian Amtenbrink
301
Art. 21 SSMR
National parliaments
right by the European Parliament by specifying that such a temporary committee can be set up in case of alleged contraventions or maladministration “which would appear to be the act of an institution or a body of the European Communities [now Union], of a public administrative body of a Member State or of persons empowered by Community law [now Union law] to implement that law.”68 What derives from this is that the ECB as a Union institution, regardless of its independent position as a monetary policy authority (Art. 130 TFEU) or as a European supervisor (Art. 19 SSMR), can in principle be subjected to an investigation, unless the alleged facts are examined in ongoing court proceedings.69 Art. 3 of Decision 95/167/EC specifies the conditions under which institutions or bodies of the Union can be invited to appear before a Committee of Inquiry and the exceptional grounds of secrecy or public or national security considerations on which such a request may be refused, as well as the grounds on which a request for documents “necessary” for the performance of the inquiry may be refused by the Union institution or body in question. Moreover, Section III of Decision 95/167 lays down the confidentiality requirements that apply in this context, including those deriving from Decision 2004/258/EC on public access to ECB documents and namely its Art. 4 on the ECB’s right to refuse access to documents, inter alia relating to the public interest as regards the confidentiality of the proceedings of the ECB's decision-making bodies, the Supervisory Board or other bodies established pursuant to the SSMR.70
Art. 21 SSMR National parliaments 1. When submitting the report provided for in Art. 20(2), the ECB shall simultaneously forward that report directly to the national parliaments of the participating Member States. National parliaments may address to the ECB their reasoned observations on that report. 2. National parliaments of the participating Member States, through their own procedures, may request the ECB to reply in writing to any observations or questions submitted by them to the ECB in respect of the tasks of the ECB under this Regulation. 3. The national parliament of a participating Member State may invite the Chair or a member of the Supervisory Board to participate in an exchange of views in relation to the supervision of credit Institutions in that Member State together with a representative of the national competent authority. 4. This Regulation is without prejudice to the accountability of national competent authorities to national parliaments in accordance with national law for the performance of tasks not conferred on the ECB by this Regulation and for the performance of activities carried out by them in accordance with Art. 6. Bibliography Fabian Amtenbrink, ‘The application of national law by the European Central Bank: challenging European legal doctrine?’, in European Central Bank, Building bridges: central banking law in an interconnected world. ECB Legal Conference 2019 (ECB, Frankfurt a.M. 2019), 136; Roberto Cisotta, ‘The Quest for Financial Stability and Democracy in the Banking Union: Promoting Institutional Transformation and Regulatory Evolution Through Unconventional Means’ in: Luigi Daniele, Pierluigi Simone, Brackets added. For a critical review of the European Parliament’s Committee of Inquiry see Shackleton, Journal of Common Market Studies 36 (1998), 115, with further references. 70 Art. 4(1)(a) of Decision 2004/258/EC, OJ L80, 18.3.2004, p. 42 (as amended). 68
69
302
Fabian Amtenbrink
Art. 21 SSMR
National parliaments
Roberto Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer, Basel 2017), 283; Diane Fromage and Renato Ibrido, ‘The “Banking Dialogue” as a model to improve parliamentary involvement in the Monetary Dialogue?’, Journal of European Integration 40 (2018), 295; Diane Fromage, ‘Guaranteeing the ECB’s democratic accountability in the post-Banking Union era: An ever more difficult task?’ Maastricht Journal of European and Comparative Law 2019, 26(1): 48-62; Gijsbert Ter Kuile, Laura Wissink, Willem Bovenschen, ‘Tailor-made Accountability within the Single Supervisory Mechanism’, CMLR 52 (2015), 155; Florin Coman-Kund and Fabian Amtenbrink, ‘On the Scope and Limits of the Application of National Law by the European Central Bank within the Single Supervisory Mechanism’, Banking and Finance Law Review 33 (2018), 133; Marco Lamandini and David Ramos Muñoz, ‘Banking Union’s Accountability System in Practice. A Health Check-Up to Europe’s Financial Heart’ (28, 2020), available at SSRN: https://ssrn.com/abstract=3701117 or http://dx.doi.org/10.2139/ssrn.3701117; Menelaos Markakis, Accountability in the Economic and Monetary Union (Oxford University Press, Oxford 2020); Christoph Ohler, ‘Banking Supervision’, in Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1103. A. Origin and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Detailed explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Reporting (Art. 21(1) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Questions by national parliaments (Art. 21(2) SSMR) . . . . . . . . . . . . . . . . . . . . . . . . III. Appearances before national parliaments (Art. 21(3) SSMR) . . . . . . . . . . . . . . . . IV. Accountability arrangements pursuant to national law (Art. 20(4) SSMR) . . .
4 4 6 9 15
A. Origin and development The inclusion of national parliaments in the accountability arrangements has been 1 considered as ‘noteworthy’, as national parliaments have been considered to ‘not constitute a source of legitimation for the ECB’s supervisory task.’1 The need for the inclusion of national parliaments of the Member States participating in the SSM into the latter’s accountability framework can be explained by the characteristics of the SSM as a “mixed administration”.2 First, as observed in the preamble to the SSMR, a role for national parliaments “[…] is appropriate given the potential impact that supervisory measures may have on public finances, credit institutions, their customers and employees, and the markets in the participating Member States.”3 The involvement of national parliaments can moreover be justified with the application of national law by the ECB in the context of the SSM. Pursuant to Art. 4(3) SSMR, for the purpose of carrying out the tasks under the SSMR, the ECB applies all relevant Union law, which in the case of EU Directives explicitly includes the national legislation transposing those secondary Union law acts.4 The same holds true for any national legislation exercising options granted by secondary Union law in the shape of Regulations.5 Interestingly, the initial European Commission proposal for the SSMR did not pro- 2 vide for any role of national parliaments in the accountability framework that was essentially geared towards the accountability of a supranational institution at the supranational level, i.e. vis-à-vis other Union institutions and bodies. As such, the accountability arrangements vis-a-vis the national parliaments found in today’s SSMR have rightly been described as a novum.6 They are the result of amendments to the European 1 Ohler (2020), at p. 1128, who understands these exchanges as ‘a means for the creation of mutual political understanding.’ 2 Ter Kuile, Wissink, Bovenschen (2015), at p. 166. 3 Preamble No. 56 SSMR. 4 Amtenbrink (2019), at pp. 138 et seq. 5 See further Coman-Kund and Amtenbrink (2018). 6 Cisotta, in: Daniele, Simone, Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (2017), 283, at p. 289.
Fabian Amtenbrink
303
Art. 21 SSMR
National parliaments
Commission proposal initiated by the European Parliament, adding a requirement to submit the annual report on the SSM-related tasks of the ECB also to the national parliaments of the Member States participating in the SSM, as well as providing national parliaments of participating Member States with the right to call upon a representative of the Supervisory Board, together with a representative of the competent national authority to appear before parliament “to answer questions about the performance of supervisory tasks”.7 As will be observed hereafter in Section B.III., the final adopted version of the relevant provision in the SSMR is somewhat more circumscribed. In fact, in the view of some commentators, the treatment of national parliaments in a separate provision is evidence of “a difference in treatment, whereby national parliaments are set in a secondary position” compared to the European Parliament.8 3 It should be noted that the Interinstitutional Agreement between the European Parliament and the ECB on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the SSM (Interinstitutional Agreement)9 solely covers the arrangements between the European Parliament and the ECB and as such neither concerns the arrangements on the accountability of the ECB vis-à-vis other Union institutions, namely the Council, nor does it deal with the accountability of national competent authorities acting in the SSM vis-à-vis national parliaments.10 A similar agreement for national parliaments does not exist.
B. Detailed explanations I. Reporting (Art. 21(1) SSMR) Pursuant to Art. 20(2) SSMR the ECB must annually submit a report on the execution of the tasks conferred on it by the SRMR to the European Parliament, to the Council, to the European Commission and to the Eurogroup. Art. 21(1) SSMR obliges the ECB to submit this very same report simultaneously to the national parliaments of the Member States participating in the SSM. Art. 21(1) SSMR naturally does not determine by which national parliamentary body (e.g. standing committee) and how the ECB’s annual report on its supervisory activities is dealt with, as this is entirely up to the applicable (parliamentary) rules and procedures in each Member State. 5 Different to what can be observed for the European Parliament pursuant to Art. 20(3) SSMR, Art. 21 SSMR does not introduce an obligation on parts of the Chair or any other member of the ECB’s Supervisory Board of the ECB to also present the annual report in public to all national parliaments of the participating Member States. Art. 21(1) SSMR states that national parliaments can address to the ECB their reasoned observations on the annual report. Arguably, this provision is of a rather declaratory, if not superfluous nature, as a secondary EU law act could hardly prevent national parliaments in their field of responsibilities from taking the initiative to approach the ECB with any observations they may have. Art. 21(1) SSMR does not provide any details on how the ECB has to deal with such observations, let alone introduce an obligation on 4
7 Art. 17(7) of the Commission proposal, as amended by the European Parliament. See ECON Committee Report (COM(2012)0511 – C7-0314/2012 – 2012/0242(CNS)). 8 Fromage and Ibrido (2018), at p. 304. 9 OJ L320, 30.11.2013, p. 1. 10 See SSMR, Preamble Q and R.
304
Fabian Amtenbrink
Art. 21 SSMR
National parliaments
parts of the ECB to react (in a certain way). National parliaments can ask the ECB for a written reply, but it would seem that the ECB is not obliged to respond.11
II. Questions by national parliaments (Art. 21(2) SSMR) According to Art. 21(2) SSMR, national parliaments can request from the ECB a writ- 6 ten reply to “observations or questions submitted by them to the ECB in respect of the tasks of the ECB” under the SSMR. This then also covers observations and questions based on the annual report submitted by the ECB pursuant to Art. 21(1) SSMR. From the reference to “the tasks of the ECB under this Regulation” it becomes clear that such observations or questions must be directly related to the powers assigned to the ECB by the SSMR, thus namely excluding the monetary policy tasks of the ECB. Different to what has been observed in the context of Art. 21(1) SSMR, Art. 21(2) SSMR explicitly states that the respective national procedures apply for the formulation/establishment of such a request to the ECB. In contrast to Art. 20(6) SSMR, which states that the ECB “shall reply” to questions 7 put to it by the European Parliament, Art. 21(2) SSMR only refers in a rather non-committal way to a “request” for a reply by the ECB that national parliaments can make. From the plain wording, an obligation of parts of the ECB similar to what can be observed in the context of Art. 20(6) SSMR cannot be derived.12 However, it is presently submitted, that in the spirit of a constructive cooperation between the ECB and the national parliament which arguably forms the foundation of Art. 21 SSMR, it is in the ECB’s very own interest to reply to question that it receives from national parliamentarians. Similar to what has been observed for Art. 20(6) SSMR, the ECB is bound by confidentiality requirements.13 To what extent national parliaments actually make use of the possibility to address 8 questions to the ECB directly cannot be asserted with certainty for all participating Member States without a more extensive study. If the ECB’s practice to systematically publish written replies to questions put by MEPs also applies to questions placed by national parliamentarians, the number of questions submitted by national parliamentarians until 2021 has remained relatively modest, with most letters received and replied to by the ECB originating from members of the German Bundestag.14 Even if this adequately reflects reality, it has to be taken into account that national parliamentarians can also convey these questions via MEP’s participating in the European Parliament’s ECON Committee.
III. Appearances before national parliaments (Art. 21(3) SSMR) Art. 21(3) SSMR provides for the right of national parliaments of the Member States 9 participating in the SSM to invite the Chair or other members of the Supervisory Board
See section B.II. Markakis (2020), at p. 160, explains this difference with reference to the independent position of the ECB, whereby it remains unclear why this should then not also apply in the case of the Single Resolution Board for which Art. 46(1) SRBR however introduces an obligation to reply. See also Art. 46(1) SSRB. 13 For more details, see Art. 20(6) SSMR. 14 Available at . 11
12
Fabian Amtenbrink
305
Art. 21 SSMR
10
11
12
13
National parliaments
together with a representative of the national competent authority for an exchange of views. Similar to what has been observed for the right of national parliaments to submit questions pursuant to Art. 21(2) SSMR, the wording of Art. 21(3) SSMR does not support the view that this provision introduces an obligation on parts of the members of the Supervisory Board to appear before national parliaments. In this context, it is also worth noting the difference in wording with Art. 20(5) SSMR on the appearances of the Chair of the Supervisory Board before the competent committee of the European Parliament (“… shall participate in a hearing …”). In fact, a proposal in the draft European Parliament legislative proposal to include a similar wording into what is now Art. 21(3) SSMR has not made it into the final version of the Regulation.15 This difference in treatment may be explained with the independent position of the ECB and the national competent authorities with regard to their supervisory-related tasks in the SSM and the fact that accountability in this regard is primarily channeled through the European Parliament.16 Still, in the spirit of a constructive cooperation between the ECB and the national parliament, which arguably forms the foundation of Art. 21 SSMR, it will usually be in the own interest of the Supervisory Board to accept such invitations from national parliamentarians. A comparison of the wording of Arts. 21(3) and 20(5) SSMR reveals another important difference related to the scope of such exchanges with national parliaments. Different to the European Parliament committee, which can hold a hearing on any aspect relating to the execution of the supervisory tasks of the Supervisory Board, at least according to the wording Art. 21(3) SSMR, exchanges with national parliaments are limited to aspects of “the supervision of credit institutions in that Member State”, thereby theoretically excluding more general issues linked to the performance of the Supervisory Board in the execution of its supervisory tasks. A similar arrangement can be found in the SRMR concerning the dialogue of the Chair of the Single Resolution Board with national parliaments.17 This may be explained with reference to a division of labor between the national parliaments and the European Parliament resulting from ‘the mixed mechanism in which national and European institutions are called to intervene and cooperate’18, whereby the latter pursuant to Art. 20 SSMR is charged with ensuring the accountability of the ECB as a Union institution for the conduct of its supervisory-related task in the Euro area as a whole.19 Yet, whether national parliamentarians in practice are actually discouraged from addressing such broader questions to the Chair is doubtful. This is even more so the case since Art. 21(2) SSMR provides national parliamentarians with a procedure to request the Chair to reply to any questions in respect of the ECB’s tasks under the SSMR. As Art. 20(3) SSMR does not provide any clarification in this regard, it must be assumed that in the case of a bicameral parliamentary system, each of the two chambers has a right to extend an invitation to members of the Supervisory Board, whereby the allocation of this task within parliament (the competent committee) and the applicable (decision-making) procedures are determined by national (constitutional) law. As to the participation of a representative of the competent national authority in such exchanges it should be noted that the purpose of Art. 21(3) SSMR cannot be viewed as
See Art. 17(7) of the draft Regulation. For more details, see supra, → Art. 19. 17 See infra, → SRMR Art. 46. 18 Fromage and Ibrido (2018), at p. 302. 19 Similar: ibid, at p. 304. 15 16
306
Fabian Amtenbrink
Due process for adopting supervisory decisions
Art. 22 SSMR
the primary legal basis for their accountability vis-à-vis national parliaments, as becomes also clear from the wording of Art. 21(4) SSMR. In practice, as has been observed in the literature, exchanges between members of 14 the Supervisory Board and national parliaments are by far not as frequent as those between the Supervisory Board and the European Parliament,20 whereby exchanges have in the past inter alia taken place including in France (Assemblée Nationale), Germany (Bundestag), Italy (Senato della Repubblica), the Netherlands (Tweede Kamer der StatenGeneraal), and Slovenia (Drźavni Zboru).
IV. Accountability arrangements pursuant to national law (Art. 20(4) SSMR) From Art. 21(4) SSMR it becomes clear that neither Art. 21 SSMR nor any other pro- 15 vision of the SSMR conclusively regulates the accountability arrangements applicable to national competent authorities of the Member states participating in the SSM. This does not only apply to those tasks performed by these authorities outside the SSM framework, but also for those activities that they perform pursuant to Art. 6 SSMR in cooperation with the ECB.21 In these instances, the applicable accountability arrangements are provided for by the relevant national legal framework. While the accountability arrangements may thus differ across the participating Mem- 16 ber State’s jurisdictions, in evaluating such arrangements, and particular any sanction mechanisms, Art. 19(1)-(2) SSMR must be taken into consideration according to which the national competent authorities acting within the SSM must act independently.
Art. 22 SSMR Due process for adopting supervisory decisions 1. Before taking supervisory decisions in accordance with Article 4 and Section 2 of Chapter III, the ECB shall give the persons who are the subject of the proceedings the opportunity of being heard. The ECB shall base its decisions only on objections on which the parties concerned have been able to comment. The first subparagraph shall not apply if urgent action is needed in order to prevent significant damage to the financial system. In such a case, the ECB may adopt a provisional decision and shall give the persons concerned the opportunity to be heard as soon as possible after taking its decision. 2. The rights of defence of the persons concerned shall be fully respected in the proceedings. They shall be entitled to have access to the ECB’s file, subject to the legitimate interest of other persons in the protection of their business secrets. The right of access to the file shall not extend to confidential information. The decisions of the ECB shall state the reasons on which they are based. Bibliography Tomas M. C. Arons, ‘Judicial Protection of Supervised Credit Institutions in the European Banking Union’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford, 2015), 433; Henning Berger, ‘Rechtsanwendung durch die EZB im Single Supervisory Mechanism (SSM)‘, WM (2016), 2325; Grabitz, Eberhard; Hilf, Meinhard and Nettesheim, Martin(eds), Das Recht der Europäischen Union: EUV/AEUV (65th supplement, C.H. Beck, Munich 2018); The European Ombudsman, Code of good administrative behaviour (2005); Hans D. Jarass (ed), Charta der 20 21
Fromage (2019), at p. 56. With regard to Art. 6 SSMR see supra, → Art. 6.
Ann-Katrin Kaufhold
307
Art. 22 SSMR
Due process for adopting supervisory decisions
Grundrechte der Europäischen Union (3rd edn, C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2016); Klaus Lackhoff, ‘The Framework Regulation (FR) for the Single Supervisory Mechanism (SSM) – an overview’, JIBLR 29 (2014), 498; Klaus Lackhoff, ‘The Framework Regulation for the Single Supervisory Mechanism’, ICCLR 26 (2015), 18; Klaus Lackhoff, The Single Supervisory Mechanism (C. H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden 2017); Koen Lenaerts and Jan Vanhamme, ‘Procedural Rights of Private Parties in the Community Administrative Process’, CMLR 34 (1997), 531; Jürgen Meyer (ed), Charta der Grundrechte der Europäischen Union (4th edn, Nomos, Baden-Baden 2014); Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2015); Steve Peers et al. (eds), The EU Charter of Fundamental Rights (Hart, Oxford 2014). A. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Art. 22(1) SSMR: Right to be heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Before taking “supervisory decisions” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. “Persons who are the subject of the proceeding” . . . . . . . . . . . . . . . . . . . . . . . . . . II. Substance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. “Before” taking supervisory decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Written and/or oral hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Subject matter of hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Time frame . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Consequences of failure to comply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 4 4 8 9 9 13 14 16 18
C. Art. 22(2) SSMR: Rights of defence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Art. 22(2)(1) SSMR: Access to files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) “Persons concerned” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) “After the opening of the ECB supervisory procedure” . . . . . . . . . . . . . . . . . . . 2. Substance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) “Files” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) “Access” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) “Legitimate interest of other persons in the protection of their business secrets” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) “Confidential information” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Consequences of failure to comply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Art. 22(2)(2): Duty to give reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 20 21 21 22 23 23 24 25 25 26 27 28
A. General remarks Art. 22 SSMR is the core procedural provision of the SSMR.1 It guides the ECB’s proceedings directed towards the issuance of supervisory decisions and guarantees three fundamental rights to the persons affected by the ECB’s supervisory measures, i.e. the right to be heard (para. 1), the right of access to files (para. 2 subpara.1) and the right to be informed about the reasons on which a decision is based (para. 2 subpara. 2). Art. 22 SSMR thereby implements the right to good administration as recognised under Art. 41 CFREU. The procedural rules laid down in Art. 22 SSMR are developed in more detail by the FR, namely by Arts. 31-33 FR. However, since the FR is based on the enabling powers of the SSMR, it is valid only within the limits of this authorization (Art. 291[1] TFEU analogous).2 Thus, in case of conflict, the provisions of the SSMR supersede the rules of the FR. 2 Art. 22 SSMR applies to the ECB only. In particular, it does not cover administrative proceedings by national authorities. 1
1 See Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 60; cf. Lackhoff, ICCLR 26 (2015), 18, at p. 19; Lackhoff, JIBLR 29 (2014), 498, at p. 503. 2 See Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015), § 5 para. 17.
308
Ann-Katrin Kaufhold
Due process for adopting supervisory decisions
Art. 22 SSMR
B. Art. 22(1) SSMR: Right to be heard Since the enactment of the CFREU with the Treaty of Lisbon in 2009 the right to be 3 heard is expressly laid down in European primary law (see Art. 41(2)(a) CFREU). Beforehand, neither the treaties nor secondary legislation offered a comprehensive set of private procedural rights to be respected during administrative proceedings or, more specifically, an explicit guarantee of the right to a fair hearing.3 However, since the 1970s the Courts have recognized the right to be heard as a fundamental principle of Community law4 which requires that during an administrative procedure the individual concerned is “afforded the opportunity to make known his views on the truth and relevance of the facts, charges and circumstances relied on” by the Community institutions. Accordingly, Art. 22(1)(1) SSMR obliges the ECB to give the persons who are the subject of its proceedings the opportunity of being heard before taking a supervisory decision. The ECB may base its decisions only on those objections on which the parties concerned have been able to comment previously (Art. 22[1][1](2) SSMR). Art. 22[1][1](1) SSMR defines the applicability of the right to a fair hearing in supervisory procedures conducted by the ECB as well as its substance. Both are specified in more detail in the FR, namely in Arts. 25, 26 and 31 FR and both have to be interpreted in the light of Art. 41 CFREU.
I. Applicability 1. Before taking “supervisory decisions” Persons concerned by the ECB proceedings have the right to comment on relevant 4 facts, objections and legal grounds before the ECB takes a “supervisory decision”. Pursuant to Art. 2 (26) FR “ECB supervisory decision” means a legal act adopted by the ECB in the exercise of the tasks and powers conferred on it by the SSMR, which takes the form of an ECB decision, is addressed to one or more supervised entities or supervised groups or one or more other persons and is not a legal act of general application. Thus, pursuant to the SSMR and the FR the ECB seemingly does not have to hear the supervised entity or other persons concerned before taking informal supervisory activities such as on-site inspections or general investigations regardless of whether these measures adversely affect the addressees, unless specific provisions complement the general rules of Art. 22(1) SSMR and Art. 31 FR and provide for a supplementary right to a fair hearing.5 Yet, such limitation of the applicability of the right to be heard would not be in line 5 with Art. 41 CFREU.6 According to the case-law of the European Courts, the right to a fair hearing as a principle of primary law requires “that the addressees of decisions which significantly affect their interests should be placed in a position in which they 3 Only in the field of state aid the treaties in substance guaranteed a right to a fair hearing. Secondary legislation had adopted general rules on administrative procedures including a guarantee of the right to be heard only with respect to a few fields, e.g. for the fields of competition and anti-dumping, for a detailed analysis see Lenaerts and Vanhamme, CMLR 34 (1997), 531, at pp. 531 et seq. 4 Case 17/74, Transocean Marine Paint Association v Commission, ECLI:EU:C:1974:106, para. 15, and Case 85/76, Hoffman-La Roche v Commission, ECLI:EU:C:1979:36, paras. 9 and 11. 5 See Arts. 43-46 FR with regard to the classification of a supervised entity as significant, and Art. 126 FR regarding the imposition of administrative penalties. 6 Doubtful with regard to the compatibility of Art. 22(1) SSMR and Art. 31 FR with Art. 41 CFEU, Lackhoff, ICCLR 26 (2015), 18, at p. 19; Lackhoff, The Single Supervisory Mechanism (2017), at p. 114, para. 495.
Ann-Katrin Kaufhold
309
Art. 22 SSMR
Due process for adopting supervisory decisions
may effectively make known their views”.7 The Courts have not yet expressly stated, that the right to be heard also generally applies to administrative procedures culminating in informal acts. But they have held, that it must be observed not only in the course of proceedings, which may result in the imposition of penalties, but also in investigative proceedings prior to the adoption of penalties, if they directly and individually affect the undertakings concerned and entail adverse consequences for them.8 Accordingly, they focus exclusively on the (adverse) effects of the measures in question when specifying the scope of application of the right to a fair hearing, and do not give relevance to the legal nature of the administrative acts. This interpretation is supported not only by the wording of Art. 41(2)(a) CFREU but also by the twofold function of the right to be heard, i.e. (1) to protect the (material) fundamental rights of the persons concerned by granting them a (procedural) right to participate in the administrative decision-making process and (2) to enable administrative authorities to take the “right” decision. Both objectives require a hearing prior to adverse informal acts just as they do before a legal action is taken. 6 The ECB is thus obliged to give any person adversely affected by a supervisory activity the opportunity of being heard no matter whether the activity results in or includes the issuance of a legal act or is of informal nature.9 The ECB can only do without a prior hearing if, in individual cases, there is a prevailing public interest, in particular, if a prior hearing would impair the effectiveness of the supervisory action, because the measure relies upon a surprise effect10 or because urgent action is needed as described in Art. 22(1)(2) SSRM. The notion of “decision” in Art. 22(1) SSMR and Art. 2 (26) FR needs to be extended accordingly. 7 These findings must also guide the interpretation of Art. 25(1) FR. It may not be interpreted as to exclude the exercise of investigatory powers from the scope of the right to be heard. Rather it has to be read as (merely) emphasising that a prior hearing of the addressees is obligatory in any supervisory procedure leading to the adoption of a legal act without implying that the opposite applies for procedures resulting in informal measures.
2. “Persons who are the subject of the proceeding” 8
While Art. 22(1)(1) sent. 1 SSMR grants the right to a fair hearing to all persons who are subject of the proceedings, Art. 31(1) FR limits the applicability to the parties of a procedure, i.e. to those making an application and to those to which the ECB intends to address its supervisory decision (see Art. 26[1] FR). Again, it is questionable, whether this restriction is compatible with Art. 41(1), (2)(a) CFREU. The Charter does not ensure a general right to everyone interested in a procedure to make known their views, but guarantees the right to a fair hearing only to those who are individually affected by 7 Case 17/74, Transocean Marine Paint Association v Commission, ECLI:EU:C:1974:106, para. 15; Case C-32/95 P, Commission v Lisrestal, ECLI:EU:C:1996:402, para. 21. 8 Case C-49/88, Al-Jubail Fertilizer Company v Council, ECLI:EU:C:1991:276, para. 15. 9 Alike Arons, , in Busch and Ferrarini (eds), European Banking Union (2015), 433, at p. 464 para. 13.70; tentatively Lackhoff, ICCLR 26 (2015), 18, at p. 19; Lackhoff, The Single Supervisory Mechanism (2017), at p. 114 para. 495. 10 Lackhoff, ICCLR 26 (2015), 18, at p. 20, rightly points out, that, in case of a supervisory decision being prepared, the ECB is not necessarily allowed to abstain from hearing the persons concerned, merely because this hearing could impair achieving the purpose of the measure. With respect to the issuance of supervisory decisions (as defined in Art. 2[26] FR), the threshold stipulated by Art. 22(1)(2) SSMR is indeed higher and hence stricter than required for by Art. 41(2) CFREU. However, there is no need and no justification for applying this threshold also to those cases, which fall into the scope of Art. 22(1)(1) SSMR only because of a broad interpretation in the light of Art. 41 CFREU.
310
Ann-Katrin Kaufhold
Due process for adopting supervisory decisions
Art. 22 SSMR
an administrative act, an adverse effect on factual interests (as opposed to legal rights) being sufficient11. Non-addressees are thus to be considered as individually concerned in the sense of the Charter, if only they are affected by an administrative act in a distinct and qualified way which distinguishes them from the general public.12 In these cases, which might, admittedly, not occur too often in supervisory practice13, they have to be given the opportunity to comment, be they party to the procedure or not. Hence, the notion of “persons who are subject of the proceedings” needs to be interpreted broadly as “persons individually affected by the intended act” so as to be in line with European primary law.14 Art. 41 CFREU opposes an application of Art. 31(1) FR insofar as it limits the right to be heard to the parties of the procedure.
II. Substance 1. “Before” taking supervisory decisions If the right to be heard is to fulfil its purposes, the individuals concerned have to be 9 afforded the possibility to comment before any administrative action is taken. Art. 22(1)(1) SSMR consequently stipulates that, in principle, the ECB has to hear the persons expectedly concerned by its measures prior to taking an administrative activity. Since the Supervisory Board undertakes the planning and drafting of all supervisory measures to be taken by the ECB and since the Governing Council can only accept or reject, but not modify the drafts prepared by the Board, the hearing has to be held by the Supervisory Board before it completes a draft and decides to present it to the Governing Council.15 Pursuant to Art. 22(1)(2) SSMR an exception to the rule of a prior hearing applies if 10 urgent action is needed in order to prevent significant damage to the financial system. Art. 31(4) FR clarifies that the need for immediate action has to be assessed from an ex ante point of view (if an urgent decision “appears necessary”). This is imperative since the dispense with the hearing is a preventive measure, that has to be decided upon before the (otherwise expected) damage occurs and that can consequently only be based on prognoses. Grounding the decision as to whether or not there is enough time for a hearing on a projection is, however, not equivalent to hinging it on the subjective perspective of the ECB.16 The decision not to hold a prior hearing is only lawful if from the point of view of an objective observer the hearing could not have been held without causing serious damage to the financial system by delaying the supervisory action. An
11 Case T-450/93, Lisrestal v Commission, ECLI:EU:T:1994:290, para. 42; Case C-32/95 P, Commission v Lisrestal, ECLI:EU:C:1996:402, para. 33; Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 paras. 13 and 31. 12 Cf. Jarass, in: Jarass (ed), Charta der Grundrechte der Europäischen Union (3rd ed., 2016), Art. 41 para. 15; Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 para. 13, and with a view to the interpretation of Art. 22 SSMR, Lackhoff, The Single Supervisory Mechanism (2017), at p. 114para. 494 („singled out based on individual characteristics); cf. also the wording in the The European Ombudsman, Code of good administrative behaviour (2005), Art. 16 para. 1 (“in cases where the rights or interests of individuals are involved”). 13 See Lackhoff, The Single Supervisory Mechanism (2017), at p. 114, para. 494. 14 Cf. Lackhoff, ICCLR 26 (2015), 18, at p. 20, who thus recommends a future clarification in the FR. 15 Lackhoff, ICCLR 26 (2015), 18, at p. 20. 16 See for a slightly different interpretation (“reasonable view of the ECB” is decisive) Lackhoff, ICCLR 26 (2015), 18, at p. 20.
Ann-Katrin Kaufhold
311
Art. 22 SSMR
Due process for adopting supervisory decisions
impairment of the effectiveness of a supervisory measure as such would not be sufficient.17 11 Pursuant to Art. 31(6) FR the exception is not applicable in sanctioning proceedings. The provision is based on the plausible assumption that such proceedings cannot be urgently necessary to prevent significant damage.18 12 If the ECB exceptionally does not hold a hearing prior to taking a supervisory measure, it has to give the persons affected, the opportunity to comment “without undue delay” after the adoption of the decision (Art. 31[5] FR). In principle, the persons concerned shall hand in their comments within two weeks, but the time limit may be extended by ECB to up to six months depending upon the complexity of the case and/or the involvement of representatives on the side of the private individuals.19 The ECB is obliged to review its activities in the light of the comments and has to either confirm, revoke, amend or revoke and replace its decision by a different administrative measure (Art. 31[5] sent. 4 FR).
2. Written and/or oral hearing 13
In principle, the persons concerned by supervisory measures shall be given the opportunity to comment in writing (Art. 31(1) sent. 1 FR). Pursuant to Art. 31(1) sent. 2 FR, the ECB may upon request decide to carry out a meeting (eventually in addition to a written hearing procedure), but neither the FR nor the SSMR or the Charter grant the addressees the right to an oral hearing.20 When deciding upon the way to conduct the hearing, the ECB has to weigh the conflicting interests, i.e. the interest of the supervised credit institutions in presenting relevant facts and arguments face to face on the one hand and the possible negative effects of a personal meeting on the efficiency of the procedure on the other hand.21 However, in a subject matter as complex as banking supervisory law, that is dealt with by professionals only, it is difficult to imagine cases in which an oral presentation is of particular importance to the supervised entities.
3. Subject matter of hearing 14
The hearing shall put the individual concerned in a position to effectively defend his or her rights and “to decide, with full knowledge of the relevant facts, whether there is any point in bringing an action before the Courts of the European Union”22. Art. 31(1) sent. 3 FR consequently obliges the ECB to mention the material content of the intend17 Lackhoff, ICCLR 26 (2015), 18, at p. 20, thus considers the standard of Art. 22(1)(1) SSMR and Art. 31(4) FR to be “extremely high”. However, since the regulatory objective of material banking law regularly consists (at least: also) in the protection of the stability of financial system, any violation has the potential to cause damage to the financial system. Therefore, the exception from the obligation to hold a prior hearing could not reasonably be applicable every time damage to the financial system is to be expected. This would transform the exception into the rule. Rather, the damage has to be expected to occur within a particularly short period of time and it needs to be “significant”. Even with those safeguards being respected the exception is likely to be applied oftentimes in procedures dealing with infringements of material law, since it is difficult to image that the financial system as a whole is concerned without the feared damage being significant. Thus, the obligation to eventually make up for a hearing after a decision has been taken is of paramount importance. 18 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at p. 116 para. 503. 19 See Lackhoff, JIBLR 29 (2014), 498, at p. 503. 20 See Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015) § 5 para. 200; Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 para. 35; General Court, Case T-134/03, Common Market Fertilizers v Commission, ECLI:EU:T:2005:339, para. 108. 21 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at p. 115 para. 500; Lackhoff, JIBLR 29 (2014), 498, at p. 503. 22 Case C-584/10, Commission v Kadi, ECLI:EU:C:2013:518, para. 111.
312
Ann-Katrin Kaufhold
Due process for adopting supervisory decisions
Art. 22 SSMR
ed decision and the material facts, the objections (i.e. violations of the law or in case of an application, the circumstances because of which an application cannot be accepted23) and the legal grounds on which it intends to base the decision in its invitation to a hearing. The ECB regularly provides the banks affected by an administrative procedure with the draft decision, which the Supervisory Board has adopted and is intending to present to the Governing Council.24 The ECB may base its final decision only on those objections, legal grounds and facts, 15 which were subject of the hearing (Art. 22(1)(1) sent. 2 SSMR). If it wants to introduce new facts or objections it has to hear the entities concerned a second time unless the change or omission works only in favour of the institutions affected.25 Nevertheless, the legal characterisation of the facts made in the notification of the hearing “can, by definition, be only provisional” and a subsequent decision “cannot be annulled on the sole ground that the definitive conclusions drawn from those facts do not correspond precisely with that intermediate characterisation”.26 On the contrary, the ECB is required to take account of any observations made in response to its objections and to eventually amend its legal analysis specifically in order to respect the right of defence. 27 It does not have to reply to every single comment made in the course of the hearing, but it has to reflect the main arguments of the supervised entities in the body of the decision itself or in an attached hearing table.28
4. Time frame The regular time frame for a person to comment upon a draft administrative act is 16 two weeks following receipt of a statement setting out the facts, objections and legal grounds on which the ECB intends to base its measure (Art. 31[3][1] FR). Upon request and with a view to the specific circumstances of the individual case (the participation of representatives29), the ECB may prolong the time limit or shorten it to three days if the decision is particularly urgent, but an issuance without a prior hearing pursuant to Art. 22(1)(2) SSMR would not be justified. According to Art. 31(3)(2) FR the shortened time limit of three days shall always 17 apply in the procedures covered by Arts. 14 and 15 SSMR. The FR thereby responds to the limited time frame of ten days within which the ECB itself has to decide upon the (withdrawal of an) authorization or the consent to the acquisition of qualifying holdings after the national competent authorities have transmitted their drafts (see Art. 14[3] SSRM).30 However, as has been rightly pointed out,31 there seems little justification for placing the full burden of the two-step decision-making process of the SSMR with the supervised entities whose rights of defence are significantly impaired by the short time frame. Thus, with a view to Art. 41 CFREU the ECB should not only be allowed, but obliged to extend the time frame also in the proceedings of Arts. 14 and 15 SSMR, whenever and to the extent possible without compromising the procedure as a whole. To Lackhoff, ICCLR 26 (2015), 18, at p. 20. Lackhoff, The Single Supervisory Mechanism (2017), at p. 115, para. 497. 25 Cf. Lackhoff, JIBLR 29 (2014), 498, at p. 504; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015) § 5 para. 201; Lackhoff, The Single Supervisory Mechanism (2017), at p. 115, para. 497. 26 Case T-194/06, 16.06.2011, SNIA v Commission, ECLI:EU:T:2011:279, para. 80. 27 Case T-194/06, 16.06.2011, SNIA v Commission, ECLI:EU:T:2011:279, para. 80. 28 Cf. Case C-584/10, Commission v Kadi, ECLI:EU:C:2013:518, para. 114; Lackhoff, The Single Supervisory Mechanism (2017), at p. 115 para. 499. 29 Lackhoff, ICCLR 26 (2015), 18, at p. 20. 30 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at p. 115 et seq., para. 501. 31 See Lackhoff, JIBLR 29 (2014), 498, at p. 504; Lackhoff, The Single Supervisory Mechanism (2017), at p. 115 et seq., para. 501. 23 24
Ann-Katrin Kaufhold
313
Art. 22 SSMR
Due process for adopting supervisory decisions
this end, it shall eventually also make use of its options to prolong its own time limits vis-à-vis the national authorities (see Art. 14[3] SSMR).
III. Consequences of failure to comply 18
If the hearing was omitted or fell short of the requirements set by Art. 41 CFREU, Art. 22(1) SSMR and Art. 31 FR, the administrative measure taken by the ECB is unlawful. Giving the persons affected the opportunity to comment upon the case after the decision has been taken cannot remedy the defect.32 The individuals concerned can, in principle, bring action against the act before the CJEU according to Art. 263(4) TFEU. However, the Court will only invalidate a decision upon violation of the right to be heard, if there is causal link between the violation and the decision taken, which is to be assumed, if the comments of the persons affected could have influenced the outcome of the administrative proceedings,33 i.e. if the ECB might have decided differently had it held a prior hearing.
C. Art. 22(2) SSMR: Rights of defence 19
Art. 22(2) sent. 1 SSMR guarantees, in general terms, the “rights of defence” of all persons concerned by the proceedings of the ECB. Since the three core procedural rights of defence in administrative procedures – i.e. the right to be heard, the right of access to files and the right to a statement of reasons for decisions – are provided for separately in para. 1 and the subsequent sentences of para. 2, the significance of the provision (which is repeated by Art. 32[1] sent. 1 FR) is not obvious. As the specific provisions are not qualified (by the use of the adverb “especially”) as mere examples of the more general guarantee, the latter does not provide for any further procedural right other than those explicitly spelled out in Art. 22 SSMR. Rather, it is used to clarify, that the right of access to files and the right to a statement of reasons are guaranteed in the interest of the persons concerned and not (primarily) in the public interest in sound proceedings and effective supervision. This explains the systematic position at the beginning of the second paragraph instead of being used as the introductory sentence to the whole Article: While the right to be heard pursuant to Art. 22(1)(1) SSMR has a twofold purpose – i.e. to enable an effective defence in the interest of the individuals concerned and to ensure, in the public interest, that an administrative measure be taken in view of all relevant information34 – Art. 22(2) SSMR guarantees the right of access to files and the duty to state reasons solely in the private interest of the entities concerned.
I. Art. 22(2)(1) SSMR: Access to files 20
Supervised entities have the right to access the ECB’s files from the opening of a supervisory procedure onwards (Art. 22[2][1] sent. 2 SSMR, Art. 32[1] sent. 2 FR). They shall have the opportunity to inform themselves about the proceeding so that they have 32 Cf. Case C-301/87, France v Commission, ECLI:EU:C:1990:67, para. 31; Case C-315/99, Ismeri Europa Srl v Court of Auditors, ECLI:EU:C:2001:391, para. 31; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015) § 5 para. 202; Magiera, in: Meyer (ed), Charta der Grundrechte der Europäischen Union (4th ed., 2014), Art. 41 para. 12. 33 Case C-315/99, Ismeri Europa Srl v Court of Auditors, ECLI:EU:C:2001:391, paras. 32 et seq. 34 See supra, B I. 1.
314
Ann-Katrin Kaufhold
Due process for adopting supervisory decisions
Art. 22 SSMR
a chance to influence its outcome and to prepare their defence. The right of access to files is an essential precondition of an effective use of the right to a fair hearing. 35
1. Applicability a) “Persons concerned” Since an effective exercise of the right to be heard is at least partially depending on 21 the previous possibility to access the ECB’s files the personal scopes of application of the two fundamental rights of defence need to be in line: They both apply to all persons concerned. In the case of the right of access to files this means to all private individuals who are subject to the files, be it as the intended addressee of a proceeding or as a third party affected by the procedure, e.g. by an investigation.36 Art. 32(1) FR is thus neither compatible with the SSRM (see the wording of Art. 22[2][1] sent. 1 SSMR) nor with Art. 41(2)(b) CFREU,37 as far as it reserves the right of access to files to the “parties” of the procedure and consequently must not be applied insofar. The general public, however, can “only” rely on Art. 42 CFREU, and Art. 15(3) TFEU in order to get access to the ECB’s documents. b) “After the opening of the ECB supervisory procedure” According to Art. 32(1) sent. 2 FR, access to files can be requested “after the opening 22 of the ECB supervisory procedure”. Art. 2(24) FR specifies that “ECB supervisory procedure” means any ECB activity directed towards preparing the issuance of an ECB supervisory decision, including common procedures and the imposition of administrative pecuniary penalties. Typically, however, the ECB will decide only on the course of its investigations (and with respect to the arguments and comments put forward by the persons concerned) whether or not to take a decision. Until that point in time, it might already have taken administrative acts, which the supervised entities or third parties would want to and would have the right to defend themselves against either in an administrative hearing or in Court. Thus, with a view to the purpose of the right to consult the files, Art. 32(1) sent. 2 FR needs to be interpreted broadly so that the right arises after the beginning of any proceeding (e.g. by deciding to conduct an on-site inspection), which might possibly lead to a supervisory decision or another administrative act.38 The right ends when the ECB has finally decided whether or not to take an administrative measure and this final decision cannot be annulled or altered anymore, neither by the ECB itself nor by a court.39 35 See Case C-204/00, Aalborg Portland A/S v Commission, ECLI:EU:C:2004:6, para. 68; Case T-161/05, Hoechst GmbH v Commission, ECLI:EU:T:2009:366, para. 160; and Lenaerts and Vanhamme, CMLR 34 (1997), 531, at pp. 541, 545; Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 para. 37. 36 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at pp. 116 et seq. para. 505, and Jarass, in: Jarass (ed), Charta der Grundrechte der Europäischen Union (3rd edn, 2016), Art. 41 para. 20. 37 The English language version of Art. 41(2)(b) CFREU (“his or her files”), might, at first sight, suggest that only the addressees of a procedure have the right to access the respective files. This interpretation would, however, be incompatible with the purpose of the guarantee, which is to increase the effectiveness of the right to be heard in administrative procedures and to challenge administrative acts in court. Both rights apply to all individuals affected, not only to the addressees of a proceeding. Besides, the German and French language versions (“Zugang zu den sie betreffenden Akten”/”dossier qui la concerne”) support a broad interpretation. 38 See Lackhoff, The Single Supervisory Mechanism (2017), at p. 117, para. 506; more restrictive Case T-161/05, Hoechst GmbH v Commission, ECLI:EU:T:2009:366, paras. 163 et seq. 39 Cf. Case C-365/12 P, Commission v EnBW, ECLI:EU:C:2014:112, para. 99; Lackhoff, The Single Supervisory Mechanism (2017), at p. 117 para. 508.
Ann-Katrin Kaufhold
315
Art. 22 SSMR
Due process for adopting supervisory decisions
2. Substance a) “Files” 23
The persons concerned have the right to access all documents obtained, produced or assembled by the ECB during the ECB supervisory procedure, irrespective of the storage medium, Art. 32(2) FR. A document belongs to a file if, from the perspective of an objective observer, it relates to an activity that the ECB conducted in order to eventually prepare a supervisory measure.40 The ECB is obliged to disclose the complete file and may not limit the access to those documents on which its final decision is founded.41 It must give the supervised entities concerned the opportunity to examine all the documents which may be of relevance for their defence.42 Consequently, the minutes of the Supervisory Board and the Governing Council have to be made accessible as well insofar as the supervisory measures in question were subject to the discussions.43 b) “Access”
24
Pursuant to Art. 32(4)(a)-(c) FR access can be granted by means of CD-ROMs or any other electronic data storage device including any that may become available in future (lit. a),through copies of the accessible file in paper form sent by mail (lit. b) and/or by inviting the persons concerned to examine the accessible file in the offices of the ECB (lit.c). When determining the means the ECB has to take account of the technical capabilities of the applicant (Art. 32[4] FR). Most commonly the ECB chooses to send an electronic data storage device to the applicant.44
3. Exceptions a) “Legitimate interest of other persons in the protection of their business secrets” 25
The application of the right of access to files is particularly difficult, where the procedure affects more than one or even a multiplicity of entities.45 In such cases, the right of access is restricted pursuant to Art. 22(2) sent. 2 SSMR and Art. 32(1) sent. 2 FR so as to protect the legitimate interest of legal or natural persons other than the relevant party in the protection of their business secrets.46 The ECB has to weigh the conflicting interests. “The right of undertakings […] to protect their business secrets must be balanced against the safeguarding of the right to have access to the file” of the applying institution.47 b) “Confidential information”
26
Apart from the exception of business secrets, the right of access to files is also limited if confidential information is involved (Art. 22[2] sent. 3 SSMR, Art. 32[1] sent. 3 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at pp. 117 et seq. para. 509. Cf. Case T-5/02, Tetra Laval BV v Commission, ECLI:EU:T:2002:264, paras. 89 et seq; Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 para. 39. 42 Case C-204/00, Aalborg Portland A/S v Commission, ECLI:EU:C:2004:6, para. 68; Case T-161/05, Hoechst GmbH v Commission, ECLI:EU:T:2009:366, para. 161. 43 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at pp. 117, para. 509. 44 Lackhoff, The Single Supervisory Mechanism (2017), at p. 119, para. 520. 45 See for a more detailed analysis Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 paras. 39 et seq. 46 With a view to the right of access to files as a general principle of Union law Case C-204/00, Aalborg Portland A/S v Commission, ECLI:EU:C:2004:6, para. 68. 47 Case T-25/95 and T‑104/95, CimenteriesCBRv Commission, ECLI:EU:T:2000:77, para. 147; Case T-410/03, HoechstGmbH v Commission, ECLI:EU:T:2008:211, para. 153. 40
41
316
Ann-Katrin Kaufhold
Due process for adopting supervisory decisions
Art. 22 SSMR
FR).48 Neither the SSMR nor the FR define the notion of confidential information. According to Art. 32(5) FR internal documents of the ECB and national competent authorities and correspondence between the ECB and a national competent authority or between two or more national competent authorities “may” be, but not necessarily are confidential. Thus, the ECB has to decide on the confidentiality of a document on a case by case basis and separately for every element of a file.49 It may not make a general reference to confidentiality to justify a total refusal to disclose documents in its file. 50 If the ECB refuses access to documents with respect to their confidentiality, it still has to provide the applicant with a comprehensible, non-confidential version of the classified documents or at least a summary so that he or she is in a position to eventually contest the qualification in a court proceeding.51
4. Consequences of failure to comply Infringement of the right of access to files cannot be remedied by granting access 27 during judicial proceedings.52 However, failure to grant access constitutes a breach of the rights of the defence and will lead to the annulment of the decision only if the administrative procedure might have led to a different outcome had the applicant been able to consult all relevant documents.53 In a judicial proceeding, according to Art. 263(4) TFEU the claimant and former applicant has to show, that the non-disclosed documents could have been useful for his defence, but he is not obliged to prove that the ECB decision would have been different in content, if he had had full access.54
II. Art. 22(2)(2): Duty to give reasons Art. 22(2)(2) SSMR and Art. 33 FR, establish the ECB’s duty to give reasons for its de- 28 cision. They reiterate the obligation to state reasons by which the EU institutions and bodies are bound under Art. 296(2) TFEU and under Art. 41(2)(c) CFTEU 55 and have to be interpreted so as to be in accord with the aforementioned provisions of primary law. Unlike the right to be heard and the right of access to files, the right to a statement of reasons only applies to ECB decisions, which take the form of legal acts, not to informal supervisory measures. The obligation to state reasons “is an essential procedural requirement as distinct 29 from the question whether the reasons given are correct, which goes to the substantive legality of the contested measure”.56 It shall enable the addressee to decide whether to
48 Cf. Case C-204/00, Aalborg Portland A/S v Commission, ECLI:EU:C:2004:6, para. 68; Case T-161/05, Hoechst GmbH v Commission, ECLI:EU:T:2009:366, para. 161. 49 See Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015) § 5 para. 203; Lackhoff, The Single Supervisory Mechanism (2017), at p. 118, para. 513. 50 Case T-161/05, Hoechst GmbH v Commission, ECLI:EU:T:2009:366, para. 153. 51 Case T-161/05, Hoechst GmbH v Commission, ECLI:EU:T:2009:366, paras. 153 et seq.; Craig, in: Peers et al. (eds), The EU Charter of Fundamental Rights (2014), Art. 41 para. 45. 52 Case 109/10 P, Solvay SA v Commission, ECLI:EU:C:2011:686, para. 56; Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2015) § 5 para. 203. 53 Case C-204/00, Aalborg Portland A/S v Commission, ECLI:EU:C:2004:6, para. 71. 54 Case 109/10 P, Solvay SA v Commission, ECLI:EU:C:2011:686, para. 57, thereby slightly modifying Case C-204/00, Aalborg Portland A/S v Commission, ECLI:EU:C:2004:6, paras. 73 et seq. 55 Case T-122/15, L-Bank v ECB, ECLI:EU:T:2017:337, para. 121. 56 Case T-122/15, L-Bank v ECB, ECLI:EU:T:2017:337, para. 122.
Ann-Katrin Kaufhold
317
Art. 23 SSMR
Reporting of violations
seek judicial review57 and the competent court to carry out its review.58 Therefore the ECB must disclose “in a clear and unequivocal fashion” the reasoning it followed. “The statement of the reasons […] must be logical and contain no internal inconsistency that would prevent a proper understanding of the reasons underlying the measure.”59 The statement shall contain the material facts and legal grounds on which the decision is based (see Art. 33[2] FR). “Furthermore, the requirements to be satisfied by the statement of reasons depend on the circumstances of each case, in particular the content of the measure in question, the nature of the reasons given and the interest which the addressees of the measure or other parties to whom it is of direct and individual concern, may have in obtaining explanations. “It is not necessary for the statement of reasons to specify all the relevant matters of fact and law, since the question whether the statement of reasons meets the requirements of Article 296 TFEU must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question.”60 The ECB will regularly be obliged to specify the provisions of the SSMR, the applicable secondary law and eventually the provisions of national law, on which it grounds its decision.61 Yet, a statement that amounts to no more than a reference to the applicable law does not constitute a sufficient motivation.62 30 The duty to state the reasons for a decision knows no exception. 31 A failure to comply cannot be cured by stating the reasons for a decision during court proceedings.63 A decision that is not sufficiently motivated can be contested according to Art. 263 TFEU. It will be invalidated by the Court64 unless the ECB would instantly have to issue an identical measure since in this case the addressee has no interest in the annulment that is worth protecting.65
Art. 23 SSMR Reporting of violations The ECB shall ensure that effective mechanisms are put in place for reporting of breaches by credit institutions, financial holding companies or mixed financial holding companies or competent authorities in the participating Member States of the legal acts referred to in Article 4(3), including specific procedures for the receipt of reports of breaches and their follow-up. Such procedures shall be consistent with relevant Union legislation and shall ensure that the following principles are applied: appropriate protection for persons who report breaches, protection of personal data, and appropriate protection for the accused person.
57 Case T-122/15, L-Bank v ECB, ECLI:EU:T:2017:337, para. 123 (It shall „provide the person concerned with sufficient information to know whether the decision may be vitiated by an error enabling its validity to be challenged”). 58 Case T-122/15, L-Bank v ECB, ECLI:EU:T:2017:337, para. 123. 59 Case T-122/15, L-Bank v ECB, ECLI:EU:T:2017:337, para. 131. 60 Case T-122/15, L-Bank v ECB, ECLI:EU:T:2017:337, para. 124. 61 See Berger, WM 2016, 2325, at p. 2366. 62 Cf. Case C-378/00, Commission v Parliament and Council, ECLI:EU:C:2003:42, para. 68. 63 Jurisprudence is heterogenous, see for an overview Krajewski and Rösslein, in: Grabitz, Hilf and Nettesheim (eds), Das Recht der Europäischen Union: EUV/AEUV (65th supplement, 2018), TFEU Art. 296 para. 43. 64 Differently and with an overview of the current opinions Magiera, in: Meyer (ed), Charta der Grundrechte der Europäischen Union (4th edn, 2014), Art. 41 para. 12. 65 See Krajewski and Rösslein, in: Grabitz, Hilf and Nettesheim (eds), Das Recht der Europäischen Union: EUV/AEUV (65th supplement, 2018), TFEU Art. 296 para. 36.
318
Ann-Katrin Kaufhold
Art. 23 SSMR
Reporting of violations
Bibliography ECB, Annual Report on supervisory activities 2015 (ECB, Frankfurt 2016); ECB, Annual Report on supervisory activities 2016 (ECB, Frankfurt 2017); Klaus Lackhoff, The Single Supervisory Mechanism (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017). A. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Duty to establish an effective mechanism for reporting of breaches of relevant EU law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Protection of whistleblowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Breaches of relevant EU law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Means to report breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Follow-up of a report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Practical experience with ECB breach reporting system . . . . . . . . . . . . . . . . . . . . . .
3 3 4 5 6 9
A. General remarks In order to guarantee the safety and soundness of credit institutions and the stabil- 1 ity of the financial system, the ECB shall ensure that all supervised entities and all supervisors are fully complying with their obligations under EU law. However, the ECB can investigate and eventually cure or sanction a violation of the applicable law only, if it finds out about malpractices. Typically, the employees of financial institutions are the ones who know best about possible offences of the institutions or its supervisor. Therefore, an effective mechanism for reporting breaches of the law, which protects the identity of the whistleblower, can contribute significantly to the success of the ECB’s supervisory activities. Consequently, Art. 23 SSMR, which is specified in more detail in Arts. 36-38 FR, 2 obliges the ECB to put in place an effective mechanism to report breaches by supervised entities, by competent authorities in the Member States or by the ECB itself (see Art. 36 FR) of legal acts referred to in Art. 4(3) SSMR. Art. 71 CRD IV establishes an equivalent obligation for the Member States and the national authorities with respect to potential or actual breaches of the CRR or the national law transposing the CRD IV.
B. Duty to establish an effective mechanism for reporting of breaches of relevant EU law I. Protection of whistleblowers The protection of the identity of potential whistle-blowers is an essential pre-condi- 3 tion of an effective breach reporting mechanism. Employees will only be willing to submit information on possible malpractices if they do not have to fear negative personal consequences. Art. 23 SSMR thus requires an “appropriate protection” for persons who report breaches. According to Art. 37 FR the ECB shall not reveal the identity of a person who has reported a breach without that person’s explicit consent unless a court orders otherwise, provided that the person acted in good faith. This is to be assumed if he or she drew a reasonable conclusion based on all information available to him or her. Requiring good faith as a prerequisite for the protection of the identity shall prevent the misuse of the reporting mechanism in order to harm competing institutions.1 However, going beyond what is required by Art. 23 SSMR, the ECB also accepts anonymous reports, but reserves the right to refrain from the follow-up, “if a report contains unsub1
Cf. Lackhoff, The Single Supervisory Mechanism (2017), at p. 124, para. 541.
Ann-Katrin Kaufhold
319
Art. 23 SSMR
Reporting of violations
stantiated allegations and/or the ECB cannot gather further information because the report was submitted anonymously”.2
II. Breaches of relevant EU law 4
In principle, the ECB is competent for reports on breaches of such Union laws which it applies when carrying out the tasks conferred on it by the SSMR (i.e. for reports on breaches of the relevant regulations, especially the CRR, and of the national laws implementing relevant directives or options granted by a regulation, see Art. 4(3)(1) SSMR) only if the violation is committed by a significant entity (Art. 38(1) sent. 1 FR). If a less significant entity is accused of malpractice, the ECB is responsible for follow-up of the report only, if the alleged infringement concerns an ECB regulation or an ECB decision (Art. 38(1) sent. 1 FR), since in this case, the ECB may as an exception, impose a sanction on the less significant entity itself (see Art. 18(7) SSMR). Finally, it follows from Art. 38(6) FR that the ECB shall also assess reports on breaches of the law possibly committed by the national competent authorities.3
III. Means to report breaches 5
Reports can be submitted by the pre-structured web platform accessible on the ECB’s banking supervision website4 or by any other appropriate means of communication.
IV. Follow-up of a report If the ECB receives a report on a breach of law, which falls into its competences, it needs to pursue the case if it considers the report to be sufficiently substantiated. 5 When assessing the allegations and determining the actions to be taken, the ECB shall use reasonable discretion (Art. 38(4) FR). The entities accused of wrongdoings have to provide the ECB any information requested for the inquiry (Art. 38(5) FR). If national authorities are concerned, they shall comment upon the facts brought forward by the report (Art. 38(6) FR). 7 Any report concerning a less significant entity filed with the ECB shall be forwarded to the national competent authorities (Art. 38(2) FR) with which the ECB shall coordinate efforts to assess the report and to eventually remedy the violation (Art. 38(3) FR). 8 While the follow-up of reports concerning the supervised entities and the national authorities is structured in great detail, the assessment of violations of the law that the ECB is accused of remains unregulated. This is unsatisfying, especially since it is the ECB itself, who is responsible for the procedure and because the efficiency of self-control is particularly dependent on precise procedural rules. 6
2 See , under „How to report a breach – Step 2: Submit supporting documents”. 3 Cf. Lackhoff, The Single Supervisory Mechanism (2017), at pp. 124 et seq., para. 542. 4 . 5 See Lackhoff, The Single Supervisory Mechanism (2017), at p. 125, para. 543.
320
Ann-Katrin Kaufhold
Art. 24 SSMR
Administrative Board of Review
V. Practical experience with ECB breach reporting system The ECB annually provides detailed information about the reports it receives. In 9 2016, for example, 100 breach reports were received, the vast majority of which (76 %) concerned internal governance issues of supervised entities. In 18 % of the reports, financial institutions were accused of an inadequate calculation of their own funds and capital requirements.6 The main supervisory actions taken by the ECB as follow-up to the breach of law reports were on-site inspections, requests for an internal audit or internal investigation and requests for documents or explanations.7
Art. 24 SSMR Administrative Board of Review 1. The ECB shall establish an Administrative Board of Review for the purposes of carrying out an internal administrative review of the decisions taken by the ECB in the exercise of the powers conferred on it by this Regulation after are quest for review submitted in accordance with paragraph 5. The scope of the internal administrative review shall pertain to the procedural and substantive conformity with this Regulation of such decisions. 2. The Administrative Board of Review shall be composed of five individuals of high repute, from Member States and having a proven record of relevant knowledge and professional experience, including supervisory experience, to a sufficiently high level in the fields of banking or other financial services, excluding current staff of the ECB, as well as current staff of competent authorities or other national or Union institutions, bodies, offices and agencies who are involved in the carrying out of the tasks conferred on the ECB by this Regulation. The Administrative Board of Review shall have sufficient resources and expertise to assess the exercise of the powers of the ECB under this Regulation. Members of the Administrative Board of Review and two alternates shall be appointed by the ECB fora term of five years, which may be extended once, following a public call for expressions of interest published in the Official Journal of the European Union. They shall not be bound by any instructions. 3. The Administrative Board of Review shall decide on the basis of a majority of at least three of its five members. 4. The members of the Administrative Board of Review shall act independently and in the public interest. For that purpose, they shall make a public declaration of commitments and a public declaration of interests indicating any direct or indirect interest which might be considered prejudicial to their independence or the absence of any such interest. 5. Any natural or legal person may in the cases referred to in paragraph 1 request a review of a decision of the EC Bunder this Regulation which is addressed to that person or is of a direct and individual concern to that person. Are quest for a review against a decision of the Governing Council as referred to in paragraph 7 shall not be admissible. 6. Any request for review shall be made in writing, including a statement of grounds and shall be lodged at the ECB within one month of the date of notification of the decision to the person requesting the review, or, in the absence thereof, of the day on which it came to the knowledge of the latter as the case may be. 6 7
ECB, Annual Report on supervisory activities 2016, 2017, at pp. 40 et seq. ECB, Annual Report on supervisory activities 2015, 2016, at pp. 52 et seq.
René Smits
321
Art. 24 SSMR
Administrative Board of Review
7. After ruling on the admissibility of the review, the Administrative Board of Review shall express an opinion within a period appropriate to the urgency of the matter and no later than two months from the receipt of the request and remit the case for preparation of a new draft decision to the Supervisory Board. The Supervisory Board shall take into account the opinion of the Administrative Board of Review and shall promptly submit a new draft decision to the Governing Council. The new draft decision shall abrogate the initial decision, replace it with a decision of identical content, or replace it with an amended decision. The new draft decision shall be deemed adopted unless the Governing Council objects within a maximum period of ten working days. 8. A request for review pursuant to paragraph 5 shall not have suspensory effect. However, the Governing Council, on a proposal by the Administrative Board of Review may, if it considers that circumstances so require, suspend the application of the contested decision. 9. The opinion expressed by the Administrative Board of Review, the new draft decision submitted by the Supervisory Board and the decision adopted by the Governing Council pursuant to this Article shall be reasoned and notified to the parties. 10. The ECB shall adopt a decision establishing the Administrative Board of Review’s operating rules. 11. This Article is without prejudice to the right to bring proceedings before the CJEU in accordance with the Treaties. Bibliography Concetta Brescia Morra,‘The Experience and the case law of the Administrative Board of Review of the SSM, 7 September 2015’, ; Concetta Brescia Morra, ‘The Administrative and Judicial Review of Decisions of the ECB in the Supervisory Field, Banca d’Italia’, No 81, July 2016; Concetta Brescia Morra, René Smits and Andrea Magliari, ‘The Administrative Board of Review of the European Central Bank, Experience After 2 Years’, European Business Organization Law Review 18 (2017), 567; European Commission, ‘Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013{SWD(2017) 336 final}‘, Brussels, 11.10.2017, COM(2017) 591 final, ; European Central Bank, ‘ECB Annual Report on supervisory activities 2017’, March 2018, ; René Smits, ‘Reflections on Euro Area Banking Supervision: Context, Transparency, Review and Culture – A Contribution to the Conversation on the SSM after Three Years’, London, 23 October 2017, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3092657; René Smits, ‘Interplay of Administrative Review and Judicial Protection in European Prudential Supervision – Some Issues and Concerns’, 19 November 2017, ; René Smits, ‘Short note on the Arkéa judgments’, ; Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’, Journal of Financial Regulation 1 (2015), 226.
322
A. Administrative review and judicial review of ECB decisions . . . . . . . . . . . . . . . . .
1
B. The place of the ABoR in the ECB’s decision-making process . . . . . . . . . . . . . . . .
3
C. Commentary on Art. 24 SSMR and ECB decision 2014/16 (ABoR decision) I. Appointment of Members and Alternates; required qualifications . . . . . . . . . . . II. Independence, ethical standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Expertise, secretarial support, training and expert advice . . . . . . . . . . . . . . . . . . . . IV. Proceedings: admissibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Proceedings: suspension of the contested decision . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Proceedings: rapporteur, hearing, evidence, directions . . . . . . . . . . . . . . . . . . . . . . . VII. Proceedings: opinion and follow-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Proceedings: timing, access to file and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 6 8 16 19 24 25 30 33
D. Practice thus far – ABoR in earlier case law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
René Smits
Art. 24 SSMR
Administrative Board of Review
A. Administrative review and judicial review of ECB decisions Like all EU legal acts which affect the position of a natural or a legal person,1 deci- 1 sions taken by the ECB in the field of prudential supervision are subject to review. Such an act can be challenged by its addressee(s) and by those who are directly and individually concerned by that act even if it is not addressed to them.2 A challenge may be directed against the ECB before the CJEU, first at the General Court and then on points of law, at the Court of Justice.3 Applicants may choose to request an administrative review before going to Luxembourg for judicial review or to limit themselves to administrative review. There is no requirement to first apply for administrative review before going to the CJEU.4 An administrative review is performed by an independent panel, the ABoR. The ABoR was established in 2014 by Decision ECB/2014/16 (the ABoR decision) 5 which implemented Art. 24 SSMR. The ABoR is to review “the procedural and substantive conformity” of the CB decisions with the SSMR,6 “while respecting the margin of discretion left to the ECB to decide on the opportunity to take those decisions”.7 After discussing the position of the ABoR in the decision-making process at the ECB 2 (section 2), the rules applying to the ABoR will be commented on (section 3) in the light of practice thus far and the case law referring to the ABoR Opinions (section 4).
B. The place of the ABoR in the ECB’s decision-making process ABoR’s role is that of an independent review body within the decision-making pro- 3 cess of the ECB. The prudential decisions taken by the ECB are adopted by the Governing Council on the basis of a proposal by the Supervisory Board.8 This arrangement results from the treaty-given status of the ECB as having two (temporarily three) decisionmaking bodies:9 the Executive Board10, consisting of the President, the Vice-President and four other Members; and the Governing Council, consisting of the Members of the Executive Board and the Governors of the National Central Banks (NCBs) of the Member States that have adopted the euro11 (as well as the General Council, which groups together the President, the Vice President and the Governors of all ESCB central banks, 1 All measures intended to have legal effects are actionable: “an action for annulment must be available in the case of all measures adopted by the institutions, whatever their nature or form, which are intended to have legal effects (see Case 22/70, Commission v Council, ECLI:EU:C:1971:32, para. 42, and Case C-316/91, Parliament v Council, ECLI:EU:C:1994:76, para. 8”, as the Court of Justice held in its judgment of 13 July 2004 in Case C-27/04, Commission v Council, ECLI:EU:C:2004:436, case on the non-pursuit of German and French government deficits under the Stability and Growth Pact. 2 Art. 263(4) TFEU. 3 Art. 256 TFEU. 4 Art. 19 ABoR Decision: “This Decision is without prejudice to the right to bring proceedings before the Court of Justice in accordance with the Treaties.” 5 Decision of the European Central Bank of 14 April 2014 concerning the establishment of an Administrative Board of Review and its Operating Rules (ECB/2014/16) (2014/360/EU), OJ L175, 14.6.2014, p. 47, as amended by Decision (EU) 2019/1378 of the European Central Bank of 9 August 2019 amending Decision ECB/2014/16 concerning the establishment of an Administrative Board of Review and its Operating Rules (ECB/2019/27), OJ L 224, 28.8.2019, p. 9. 6 Art. 24(1) SSMR. 7 Recital 64 SSMR. 8 Art. 26(2) and (8) SSMR. 9 Art. 282(2) sent. 1 TFEU and Art. ESCB Statute: “The ESCB shall be governed by the decision-making bodies of the [ECB]”. 10 Art. 283(2) TFEU and Art. 11 ESCB Statute. 11 Art. 283(1) TFEU and Art. 10 ESCB Statute.
René Smits
323
Art. 24 SSMR
Administrative Board of Review
including those from Member States with a derogation12 or an opt-out13). The ECB’s decision-making bodies were established with a view to the adoption and implementation of acts in the area of monetary policy14 as the language of Art. 12 ESCB Statute seems to imply. With the conferral of prudential tasks on the ECB, pursuant to the Art. 127(6) TFEU, the ECB was to perform new tasks in the field of financial stability,15 to be distinguished from the monetary stability.16 A new organ was introduced to prepare and execute tasks in this area of prudential supervision: the Supervisory Board.17 It brings together a Chair and Vice Chair and four representatives of the ECB, plus one representative of the National Competent Authority (NCA) of each ‘participating’18 Member State. The nineteen Member States participating in the SSM coincide with the Member States which have adopted the euro: i.e. Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland., with Bulgaria and Croatia having entered into close collaboration with the ECB19 which implies, under Article 7 of the SSM Regulation, that the ECB exercises micro- and macro-prudential functions in respect of Bulgarian and Croatian credit institutions and that and the central banks of these two States joined the SSM20. 12 Art. 139(1) TFEU. On 6 March 2018, the following seven States had the status of a ‘derogation State’: Sweden, Poland, Hungary, the Czech Republic, Romania, Bulgaria and Croatia. 13 Denmark (Protocol No. 16 on certain provisions relating to Denmark) and the United Kingdom (Protocol No. 15 on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland). The UK’s withdrawal from the European Union (‘Brexit’) ended this opt-out. 14 In the widest sense of the word, i.e. encompassing all the basic and other tasks of the ESCB set out in Arts. 127(2) and 128(1) TFEU and of Arts. 3, 4, 5, 6 and 16 ESCB Statute. 15 As the Court of Justice held in its judgment of 2 October 2019, Crédit mutuel Arkéa v ECB, C‑152/18 P and C‑153/18 P, EU:C:2019:810, para. 55: “to help safeguard the stability of the EU financial system as a whole”. See, also, the Order of the General Court of 12 March, Case T‑50/20, PNB Banka AS v ECB, ECLI: EU:T:2021:141, para. 50: “to limit specific risks connected to economic and financial stability within the euro area by avoiding, in particular, the failure of a credit institution”. 16 The distinction was emphasised in the judgments of the Court of Justice in the Pringle and OMT (Gauweiler) cases, which concerned the differences between monetary policy measures (for which the ECB is exclusively competent: Art. 3(1)(c) TFEU) and economic policy measures (where Member State competences are predominant: Arts.2(3) and 5 TFEU). See, notably, Case C-370/12, Pringle v Government of Ireland, ECLI:EU:C:2012:756, paras. 56 and 96-97 and Case C-62/14, Gauweiler v Deutscher Bundestag, ECLI:EU:C:2015:400, para. 64. 17 Art. 26 SSMR. 18 Note that Art. 2(1) SSMR defines ‘participating Member State’ as referring to a Member State whose currency is the euro (i.e., a Member State of the Euro Area or, in other words: a Member State which does not have a derogation or an opt-out) and to a Member State which has entered into ‘close collaboration’ in the sense of Art. 7 SSMR. Such ‘close collaboration’ would bring the State within the SSM. 19 ECB Press Release, ECB lists Bulgarian and Croatian banks it will directly supervise as of October 2020, 11 September 2020, at: https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ ssm.pr200911~882a53b229.en.html; ECB Press Release, ECB establishes close cooperation with Bulgaria’s central bank, 10 July 2020, at: https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ ssm.pr200710~ae2abe1f23.en.html; ECB Press Release, ECB establishes close cooperation with Croatia’s central bank, 10 July 2020, at: https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ ssm.pr200710_1~ead3942902.en.html. See, also, the FAQs on the ECB’s website, at: https://www.bankingsupervision.europa.eu/press/pr/date/2019/html/ssm.pr190807_annex~1dd851a696.en.html, and the press release of the Single Resolution Board of 13 July 2020, Bulgaria and Croatia set to join the Single Resolution Mechanism, at: https://www.srb.europa.eu/en/content/bulgaria-and-croatia-set-join-single-resolution-mechanism. 20 Decision (EU) 2020/1015 of the European Central Bank of 24 June 2020 on the establishment of close cooperation between the European Central Bank and Българска народна банка (Bulgarian National Bank) (ECB/2020/30), OJ L 224I, 13.7.2020, p. 1; Decision (EU) 2020/1016 of the European Central Bank of 24 June 2020 on the establishment of close cooperation between the European Central Bank and Hrvatska Narodna Banka (ECB/2020/31), OJ L 224I, 13.7.2020, p. 4.
324
René Smits
Art. 24 SSMR
Administrative Board of Review
Before the Supervisory Board submits a proposal for a decision to the Governing 4 Council, which can object to the proposal within ten working days, due process guarantees must have been upheld.21 These guarantees include the right to be heard, access to the file and proper motivation of the ECB’s decision. This should ensure that the parties concerned have been heard and a dialogue between the supervised entity and the supervisory authority has taken place. The discussion between the ECB and the entity is reflected in the ‘Comments Table’, an annex to a decision that sets out the issues discussed and the adjustments made, if any, to the draft decision which has been the subject of the right to be heard.22 The ABoR introduces another guarantee: an independent review. The review by 5 ABoR results in an Opinion to the Supervisory Board which the latter may adopt or reject. The ABoR is to suggest one of three options: (1) to abrogate the original decision; (2) to replace it with a decision of identical content; or (3) to replace it with an amended decision.23 This is the ECB’s implementation of the legislator’s mandate to ABoR to “express an opinion (…) and remit the case for a new draft decision to the Supervisory Board”.24 Whilst the ABoR is bound by the grounds relied on by the applicant in its notice of review,25 the Supervisory Board, although bound to take into account ABoR’s Opinion,26 “shall not be limited to examination of the grounds relied upon by the applicant as set forth in the notice of review, but may also take other elements into account in its proposal for a new draft decision”.27 The role of the ABoR is graphically depicted on the ECB’s Banking Supervision website28 as follows:
Arts. 25 et seq. SSM‑FR. Note that the ABoR considers this ‘Comments Table’ a part of the decision and may rely on its contents to assess the adequacy of the motivation of the decision. 23 Art. 16(2) ABoR Decision. The second decision by the ECB, post ABoR review, is not contestable before ABoR but only before the Court: Art. 11(2) ABoR Decision. 24 Art. 24(7) SSMR. 25 Art. 10(2) ABoR Decision. 26 Art. 24(7) SSMR. 27 Art. 17(1) ABoR Decision. 28 At . 21
22
René Smits
325
Art. 24 SSMR
Administrative Board of Review
C. Commentary on Art. 24 SSMR and ECB decision 2014/16 (ABoR decision) I. Appointment of Members and Alternates; required qualifications The SSMR mandates the ECB to establish ABoR “for the purposes of carrying out an internal administrative review” of ECB decisions adopted under the powers the SSMR gives the ECB. 7 The ABoR is composed of five Members and two Alternates. They are required to be “of high repute”, “[have] a proven record of relevant knowledge and professional experience, including supervisory experience, to a sufficiently high level in the fields of banking or other financial services”, and be nationals of one of the Member States.29 Staff members of NCAs and EU or State bodies “involved in the carrying out of the tasks conferred on the ECB by this Regulation”, i.e. engaged micro– or macroprudential supervision of credit institutions, are excluded.30 The ABoR Decision adds that “an appropriate geographical and gender balance across the Member States” should “to the extent possible” be ensured.31 Members, including Alternates, are appointed for a five-year period, once renewable.32 The appointment procedure starts with a public call for expressions of interest in the Official Journal. The Executive Board hears the Supervisory Board and submits nominations to the Governing Council, allowing the latter one-month reflection on the candidates.33 The Governing Council lays down the terms and conditions of appointment of ABoR Members and Alternates.34 6
II. Independence, ethical standards ABoR Members and Alternates are expected to comply with the highest standards of independence, impartiality and avoidance of conflicts of interest. These requirements derive from various legal sources. 9 First and foremost, the SSMR instructs ABoR Members, in Art. 24(4) SSMR , to “act independently and in the public interest” and “[f]or that purpose, [to] make a public declaration of commitments and a public declaration of interests indicating any direct or indirect interest which might be considered prejudicial to their independence or the absence of any such interest.”35 Art. 24(2) SSMR specifies that ABoR’s Members and Alternates “shall not be bound by any instructions.” 10 The same requirements of independence and acting in the public interest and of a public declaration of commitments and possibly conflicting interests are included in Art. 4(4) of the ABoR Decision, which specifically includes the Alternates among its addressees and likewise adds that ABoR Members and Alternates “shall not be subject to any instructions”. 8
29 Note that it is not participating Member States but Member States that the ABoR Members should be nationals. So, in principle, a British, Polish or Swedish national could qualify for membership of ABoR. 30 Art. 24(2) SSMR. 31 Art. 4(1) ABoR Decision. 32 Art. 24(2) SSMR; Art. 4(3) ABoR Decision. 33 Art. 4(2) ABoR Decision. 34 Art. 4(5) ABoR Decision. 35 For the declarations of interest by the current Members and Alternates of the ABoR, see .
326
René Smits
Art. 24 SSMR
Administrative Board of Review
Further ethical guidelines have been adopted. ECB Guideline 2015/856,36 which sets 11 out the Ethics Framework for the SSM instructs37 the ECB and NCAs to extend this framework, in as far as possible, to other persons than staff members who are involved in the performance of supervisory tasks.38 The SSM Ethics Framework consists of Guideline 2015/86, laying down the principles, best practices on how to implement these principles, and internal rules and practices adopted by the ECB and each NCA.39 The Ethics Framework for the SSM Implementation practices,40 also adopted on 12 12 March 2015, contains recommendations for the implementation of the Ethics Framework, both to the ECB itself and NCAs, also in order to orient them to a harmonisation of local rules and practices. Finally, upon appointment, ABoR Members and Alternates are instructed to avoid 13 conflicts of interest in line with Art. 0.2.1 of The Ethics Framework of the ECB. 41 Under the heading “Independence”, which also includes issues such as gifts and hospitality, procurement, gainful occupation of a spouse or recognised partner, external activities and cooling-off periods, 42 this staff regulation on ethics interprets what constitutes a conflict of interest43 and how one should respond to any such conflict arising. These staff rules should be applied in so far as applicable and reasonable (ceteris paribus) to the – different – situations of ABoR Members and Alternates. The injunction to avoid conflicts of interests encompasses any potential advantage for a Member or Alternate and the circle of her or his relatives, friends and acquaintances, notably in connection with supervised entities. Each ABoR Member and Alternate is to be mindful of the need to safeguard his or her independence in managing their personal finances (notably investments in securities) so as to avoid (the appearance of) being influenced by confidential information. In case of doubt, an ABoR Member or Alternate is to notify the Chair44 who may, in turn, approach the ECB Ethics Committee45 which can advise in individual cases. Notifications to the Chair, his assessment and any follow-up (advice from the ECB Ethics Committee, action undertaken by a Member or an Alternate to remedy a conflict) are entered into a register for continuous monitoring of adherence to ethical standards. Ac36 Guideline (EU) 2015/856 of the European Central Bank of 12 March 2015 laying down the principles of an Ethics Framework for the Single Supervisory Mechanism (ECB/2015/12), OJ L 135, 2.6.2015, p. 29. 37 In Art. 2(2): “The ECB and the NCAs shall aim to the extent legally feasible, to extend the obligations defined in implementation of the provisions of this Guideline to persons involved in the performance of supervisory tasks who are not staff members.” 38 A discussion of whether the ABoR is a ‘body’ of the ECB and, as such, subject to Guideline (EU) 2015/856 by virtue of its Art. 2(1) is beyond the scope of this chapter. Professor Brescia Morra has taken a public stance on this issue, insisting that the ABoR is a ‘body’ of the ECB. See slide 16 of her presentation The Experience and the case law of the Administrative Board of Review of the SSM, in Bologna on 7 September 2015, at . 39 Recital 2 Guideline 2015/86. 40 At . 41 At . 42 Elements which are by their nature not directly applicable to ABoR Members who are not employed by the ECB, the NCAs or any EU or Member State body involved in prudential supervision pursuant to the SSMR; see Art. 24(2) SSMR and Art. 3(2) ABoR Decision. 43 Art. 0.2.1.2 Ethics Framework of the ECB: “A ‘conflict of interest’ means a situation where members of staff have personal interests that may influence or appear to influence the impartial and objective performance of their professional duties. ‘Personal interests’ means any benefit or potential benefit, of a financial or non-financial nature, for members of staff, their family members, their other relatives or their circle of friends and close acquaintances.” 44 Or the Vice-Chair, if the conflict concerns the Chair himself. 45 Established according to Decision (EU) 2015/433 of the European Central Bank of 17 December 2014 concerning the establishment of an Ethics Committee and its Rules of Procedure (ECB/2014/59), OJ L70, 14.3.2015, p. 58.
René Smits
327
Art. 24 SSMR
Administrative Board of Review
tion undertaken may include refraining from certain activities (investments, other professional activities) or the replacement of a Member by an Alternate. Although the ABoR members and alternates are not the addressees of the Code of Conduct for high-level European Central Bank Officials adopted on 5 December 2018 and effective as of 1 January 201946, they are expected to abide by its Article 11 on the avoidance of conflicts of interest. The definition of such a conflict in Article 11 warrants full citation: “A conflict of interest concern arises where a member or alternate has personal interests that may influence, or may be perceived as influencing, the impartial and objective carrying out of their duties and responsibilities and also extends to, but is not limited to, their direct family members (any parent, child, brother or sister), spouses or partners of the member or the alternate. In particular, members and alternates may not use their involvement in a decision-making process, or the professional information they possess, to gain personal advantage of any kind. A conflict of interest does not exist where a member or alternate is only concerned as part of the general public or a broad class of persons.” As already mentioned above in relation to the ECB’s Ethics Framework, when a (potential) conflict of interest arises, the ABoR member or alternate is to disclose such, in writing, to the Chair of the ABoR and to the Ethics Committee. In cases of doubt, the involvement of the latter is usually preceded by consultation of the ECB’s Compliance Officer. 14 Mitigation of an actual conflict or the appearance of a conflict, of interests is paramount to the independent functioning of administrative review. It is one of the reasons for the appointment of Alternates: “justified reasons for serious concern as to the existence of a conflict of interest” are among the incidences in which an Alternate is to replace an ABoR member47: Art. 3(3) ABoR Decision defines the circumstances for such temporary replacement48 and includes a definition of a conflict of interest which is materially similar to the one included in the staff rules.49 15 In view of the importance of distinguishing between ‘Members’ and ‘Alternates’, also in respect of the avoidance of conflicts of interest when an Alternate is to replace a Member, it is remarkable that the legal provisions do not systematically distinguish between them. Some provisions refer to ‘Members’ when it is clear from the context that Alternates are to be included; other provisions mention the two categories separately. In Arts. 3(1), 3(2), 4(1), 4(2), 4(5), and 22(1) of the ABoR Decision, Members and Alternates are mentioned but in Arts. 8 (rapporteur), 12 (consultations on Chair directions to the parties) and 16(3) (3-member majority for voting an Opinion), Members only are mentioned. In these three instances, the term should be read as including Alternates when acting as a voting Member (i.e., when replacing a Member). Similarly, Art. 24 SSMR is somewhat imprecise in its distinctions: appointment requirements (repute, experience, exclusion of current SSM staff) are specified in respect of the five Members on46 The Single Code of Conduct for High-Level ECB Officials, OJ C 89, 8.3.2019, p. 2, applies to the members of the Governing Council, the Executive Board and the Supervisory Board. 47 Art. 3(3) ABoR Decision. 48 “In case of temporary incapacity, death, resignation or removal from office or if, in the context of a particular request for review, there are justified reasons for serious concern as to the existence of a conflict of interest”. 49 “A conflict of interest arises where a member of the Administrative Board has a private or personal interest which may influence, or appear to influence, the impartial and objective performance of their duties.” The main difference with the definition in Art. 0.2.1.2 of The Ethics Framework of the ECB is that Art. 3(3) of the AboR Decision speaks of “private or personal interests”. I do not consider this difference material.
328
René Smits
Art. 24 SSMR
Administrative Board of Review
ly and not in respect of the Alternates, with “sufficient resources and expertise” seemingly applying to the five Members only, whereas the terms of appointment (five years, once renewable) extend to Members and Alternates. It is clear that the same requirements for appointment are to be applied to Members and Alternates,50 and are so applied as the Call for expressions of interest for external experts to be appointed as Members and Alternates51 makes clear in consequence of the ABoR Decision which, also, extends the reputation and expertise requirements to Alternates. Art. 24(3) SSMR speaks of ‘Members’ in respect of the majority for voting an Opinion; again: voting Members, i.e. ‘regular’ Members and Alternates sitting in for a Member are meant. Art. 24(4) SSMR (on independence and serving the public interest) again mentions ‘Members’ but is clearly intended to apply to Alternates, as well as Art. 4(4) ABoR Decision makes clear. Any future redrafting of the SSMR or the ECB’s tertiary legislation on the ABoR should aim at eliminating these imprecisions for the sake of consistency and legal certainty.
III. Expertise, secretarial support, training and expert advice One requirement of appointment and composition of the ABoR has not yet been 16 mentioned: “The Administrative Board of Review shall have sufficient resources and expertise to assess the exercise of the powers of the ECB under this Regulation.” 52 This proviso is meant to ensure that sufficient variation and depth of expertise is available to exercise independent review. Moreover, it seeks to ensure that the ABoR is given sufficient resources, namely funding and support to exercise its functions independently. Thus, the appointing authority (ultimately, the Governing Council but the process starts with the Executive Board and includes the Supervisory Board) should ensure that the Members and Alternates together command sufficient expertise in supervision, as well as in economic, accounting and legal matters to exercise their mandate and that they can rely on expertise from ‘within’ if that should prove necessary. Also, adequate and sufficiently funded support for the ABoR should be provided, again with a view to the independent exercise of its review function. Finally, there should be sufficient budget for compensation of the services of the ABoR Members and Alternates and for such (secretarial and further) support. In the ABoR Decision, the ECB instructs itself to provide such support: the Secretary 17 of the Supervisory Board is to act as ABoR Secretary, “responsible for preparing the efficient examination of reviews, organising the Administrative Board's pre-hearings and hearings, drafting the respective proceedings, maintaining a register of reviews and otherwise providing assistance in relation to the reviews”.53 Also, the ECB auto-instructs to “provide the [ABoR] with appropriate support including legal expertise to assist in the assessment of the exercise of the powers of the ECB under [the SSMR]”. 54 This provision forms the basis for the possibility for the ABoR to request expert knowledge on complex areas of prudential supervision. By way of example: specific issues that are relevant 50 Similarly, Morra, Quaderni di Ricerca Giuridica 81 (July 2016): “The members of the Administrative Board and the two Alternates must be individuals of high repute who are Member State nationals and have a proven record of relevant knowledge and professional experience, including supervisory experience, to a sufficiently high level in the fields of banking or other financial services.” 51 Call for expressions of interest for external experts to be appointed as Members and Alternates of the Administrative Board of Review of the European Central Bank (Frankfurt am Main, Germany) (2014/C 133 A/01), OJ C133A, 1.5.2014, p. 1. See a similar recent call ((2021/C 290 A/01), OJ C 290 A/1, 20.7.2021. 52 Art. 24(2) SSMR. 53 Art. 6(2) AboR Decision. 54 Art. 6(3) AboR Decision.
René Smits
329
Art. 24 SSMR
Administrative Board of Review
in an ongoing review case may need elucidation, like procedures for adopting decisions by a college of supervisors after the SREP,55 the procedures for adopting FAP decisions56 or a complex legal issue on the intersection of EU and national law. Art. 6(3) ABoR Decision also forms the legal basis for continuous training of ABoR Members and Alternates in the methodology of supervision and the specificities of the operation of the newly established SSM. As the provision makes clear, the ABoR may also request expert advice from the ECB’s Legal Services on the interpretation of the SSMR.57 Such advice is to be provided separately from the usual managerial authority for ECB legal advice as it is to underpin the independent review by outsiders and not the ECB’s own position in (administrative and potentially subsequent judicial) review. It goes without saying that, upon the receipt of such advice from the ECB’s Directorate General Legal Services, the ABoR may follow it or adopt a different stance.58 18 The ‘separation’ of ABoR support from the usual functioning of supervision and provision of legal advice is an important extra guarantee for the independence of the review and comes on top of the separation between the monetary and prudential tasks that Art. 25 SSMR imposes.
IV. Proceedings: admissibility 19
Review proceedings may be initiated by any person concerning an ECB prudential decision addressed to him or her or affected by this decision in the meaning of Art. 263(4) TFEU.59 The admissibility of a review hinges upon a number of formal issues but may also be determined by the standing and interest requirements of the European Courts, which ABoR applies. The Trasta case60 has resulted on a clear stance on standing61 when a banking license is withdrawn. Even if the withdrawal of the authorisation to operate as a credit institution leads to the entity being put into liquidation and the powers of the former management are taken over by the liquidator, the management can still ask for the license-withdrawal decision to be reviewed by the ABoR (and, subsequently, in court). The inadmissibility of shareholders as applicants has recently been confirmed by the General Court in another case.62
Arts. 4(1)(f), 16(1)© and (2) SSMR; Arts. 97-110 CRD IV. Decisions as to whether directors of credit institutions are ‘fit and proper’ (FAP): Arts. 4(1)(a) and 16(2)(g) and (m) SSMR and Arts. 13(1) and 92-96 CRD IV. 57 This expertise is different from expert evidence that an applicant may wish to adduce: Art. 15 ABoR Decision. 58 The requirement that ‘[t]he [ABoR] shall have sufficient resources and expertise to assess the exercise of the powers of the ECB under [the SSM] Regulation” (Art. 24(2) SSMR) seeks to ensure an independent view of the Board on such legal issues. 59 Art. 24(5) SSMR; Art. 7 ABoR Decision. 60 For the history of the case before the CJEU judgment, see the blogpost Challenging a bank’s license withdrawal by the ECB: can the bank act or can its shareholders?, René Smits, 2 May 2019 at: . For a summary of the Court judgment see: Shareholder standing when a bank license is withdrawn, at:. 61 Judgment of 5 November 2019 in joined cases C‑663/17 P, C‑665/17 P and C‑669/17, ECB v Trasta Komercbanka and Others, ECLI:EU:C:2019:923. 62 Judgment of 6 October 2021 in Cases T‑351/18 and T‑584/18, Ukrselhosprom and Versobank v ECB, ECLI:EU:T:2021:669, para. 100. 55 56
330
René Smits
Art. 24 SSMR
Administrative Board of Review
As to the formal requirements: the notice of review is
20
writing;63
1) to be in 2) to be submitted in one of the official languages64 of the EU;65 3) to be “filed within one month of the notification of the decision to the applicant or, in the absence of such notification, of the day on which it came to the applicant's knowledge”;66 4) to identify the decision against which the applicant proceeds;67 5) which is to be annexed to the review request;68 6) to state the grounds on which the review request is based;69 7) to state the grounds for a request for the suspensory effect of the review, if this is requested;70 8) to “have attached to it copies of any documents on which the applicant intends to rely”;71 and 9) “if the notice of review exceeds 10 pages, include a summary of items [(4)-(6)] 72.” A further formal requirement is that 10) “[t]he notice of review shall clearly indicate the applicant’s full contact details”, allowing the Secretary to communicate with the applicant or its representative. 73 The Secretary is required to submit the documents forthwith to the ABoR Members 21 and Alternates (an instruction which I consider implied in the task of efficiently organising ABoR’s functioning, set out in Art. 6(2) ABoR Decision) 74 and is explicitly instructed as follows: “Once filed with the Secretary, the notice of review, together with the attached documents, shall be transmitted internally without delay to allow the ECB to be represented in the proceedings.”75 The material requirements of admissibility that the ABoR takes into account derive 22 from the case-law of the Court of Justice because according to Art. 24(5) SSMR, the conditions for filing a request for review of an ECB decision before the ABoR are the same as Art. 263 TFEU sets for lodging an appeal before the Court of Justice.76 The ABoR will thus determine whether, in its view, the applicant is directly and individually concerned, in case the decision is not addressed to her or him and will assess his or her interest in bringing administrative review proceedings. The ‘direct and individual con-
Art. 7(1) ABoR Decision. Regulation No 1 determining the languages to be used by the European Economic Community, OJ No. 17, 6.10.58, p. 385/58. Most banks communicate with the ECB in English. 65 Art. 7(1) AboR Decision. 66 Art. 7(3) AboR Decision. 67 Art. 7(1) AboR Decision. 68 Art. 7(4) AboR Decision. 69 Art. 7(4)(a) AboR Decision. 70 Art. 7(4)(b) AboR Decision. 71 Art. 7(4)© ABoR Decision. 72 Art. 7(4)(d) ABoR Decision. 73 Art. 7(5) ABoR Decision. 74 Art. 6(2) ABoR Decision’s instruction of the Secretariat to support the ABoR is quoted above. 75 Art. 7(7) ABoR Decision. 76 According to Art. 24(5) SSMR: “Any natural or legal person may in the cases referred to in paragraph 1 request a review of a decision of the ECB under this Regulation which is addressed to that person, or is of a direct and individual concern to that person.” 63
64
René Smits
331
Art. 24 SSMR
Administrative Board of Review
cern’ requirement has been elaborated in the original case law (Plaumann)77 that was followed by numerous decisions.78 The interest requirement demands that the applicant prove his or her interest in annulment of the contested act, an interest that must continue until the end of the proceedings.79 23 The ABoR is to determine the admissibility of the request for review first and then, whether it is legally founded, while noting its assessment of whole or partial admissibility in its Opinion.80 As earlier remarked, requests for review of a second ECB decision adopted after an ABoR opinion are inadmissible81: the only recourse then open is to the Court.82
V. Proceedings: suspension of the contested decision 24
As the legality of the legal act under review is presumed, suspensory effect is not automatic: a review request does not suspend the contested decision but the applicant may request suspension upon which the ABoR adopting an independent opinion on this request, may propose to the Governing Council to suspend the decision.83 The ABoR should first have established that “the request for review is admissible and not obviously unfounded” and may also opine on whether “the immediate application of the contested decision may cause irreparable damage”. These are the three elements that the Governing Council is to consider.84 I consider that ABoR should give its opinion on the admissibility and the obvious ‘unfoundedness’ of the review request to the Governing Council and should opine on the irreparable damage continued application of the decision may cause. This approach is underscored by the reference to hearings and Chairman’s directions in the provision on suspensory effect85: these references imply that these elements of the proceedings may be applied in opining on suspension. Any decision to suspend is completely up to the Governing Council, after
77 Case 25/62, Plaumann & Co. v Commission, ECLI:EU:C:1963:17: “Persons other than those to whom a decision is addressed may only claim to be individually concerned if that decision affects them by reason of certain attributes which are peculiar to them or by reason of circumstances in which they are differentiated from all other persons and by virtue of these factors distinguishes them individually just as in the case of the person addressed.” 78 See, among others, Joined Cases 41-44/70, International Fruit Company v Commission, ECLI:EU:C: 1971:53, paras. 15-29; and Case C-386/96 P, Dreyfus v Commission, ECLI:EU:C:1998:193, para. 43: “for a person to be directly concerned by a Community measure, the latter must directly affect the legal situation of the individual and leave no discretion to the addressees of that measure who are entrusted with the task of implementing it, such implementation being purely automatic and resulting from Community rules without the application of other intermediate rules.” More recently, see the judgment of 25 March 2021 in Case C‑565/19 P, Armando Carvalho and Others v Council and Parliament; ECLI:EU:C:2021:252, also known as the People’s Climate Case (), in which the plaintiffs argued that their “individual concern” requirement should be considered met in view of the reality of climate change, where the CJEU held to the Plaumann criteria. 79 See, among other case law, Case 206/89 R, S. v Commission, ECLI:EU:C:1989:333, para. 8: “The applicant must also prove that he has an interest in making his application, which is an essential and fundamental prerequisite for any legal proceedings.” Also, Morra, supra, footnote 48. See, extensively, Witte, JFR 1(2015), at pp. 226–262. 80 Art. 11(1) ABoR Decision. 81 Art. 11(2) ABoR Decision. 82 Art. 24(11) SSMR. 83 Art. 24(8) SSMR; Art. 9 ABoR Decision. See the ECB Annual Report on supervisory activities 2020, paragraph 5.4.2, for reporting a case in which suspension was requested during the review process. 84 Art. 9(2) ABoR Decision. 85 Art. 9(3) ABoR Decision.
332
René Smits
Art. 24 SSMR
Administrative Board of Review
having heard the Supervisory Board “as appropriate”.86 I can hardly imagine a situation where consultation of the Supervisory Board, or its Steering Committee87 or, at the very least, its Chair or Vice-Chair, would not be “appropriate”, except in case of extreme urgency. The COVID-19 pandemic, which had led the ECB to suspend enforcement of supervisory decisions, induced the publication by the ABoR, on the ECB’s banking supervision website, of an announcement on similarly suspending time-limits in case of a review request.88
VI. Proceedings: rapporteur, hearing, evidence, directions When a notice of review has been received, the Chair will initiate a check of any conflicts of interest, determine the voting members and appoint a rapporteur and then the discussion among Members and Alternates begins. The Alternates participated in the review until the hearing but, since an amendment to the ABoR Decision are more fully involved.89 The role of the rapporteur is to be the central figure among the ABoR team, drafting, with the assistance of the Secretariat, a preliminary version of the opinion and coming with options for the course to take. With the assistance of the ABoR Secretariat, documents are made accessible for research and submission of first impressions or opinions among the body and decisions are taken on the proceedings. Such decisions may be reached through teleconference in between physical meetings in Frankfurt. During the COVID-19 pandemic and since, teleconferencing has been the method of discussing a review request and even hearings have been held on-line, naturally with the consent of the applicant.90 In most cases, a hearing is organised in which the applicant and its representatives (attorney) can make their case before the ABoR and the ECB can argue its own. The ‘oral hearing’91 is the forum for questions from ABoR to the applicant and the ECB and for possible rapprochement between the parties. Hearings are taped for the production of a transcript which both parties receive. Information gathered from the hearing may substantiate the opinion of the ABoR which will refer to any document submitted or to evidence produced during the hearing in its opinion. Evidence may be adduced by the applicant in the form of a witness or an expert who produces written statements92 which may be supported by giving oral evidence at the hearing.93 The ECB may also call a witness or an expert to give oral evidence at Art. 9(2) ABoR Decision. Art. 26(10) SSMR. 88 This announcement read as follows: “Adjustments to the working arrangements of the ABoR in light of the coronavirus (COVID-19) Owing to the outbreak and rapid spread of the coronavirus (COVID-19), the ABoR needs to temporarily adjust its working arrangements. In particular, where the ECB has decided to suspend the application of a supervisory decision, the ABoR will generally also suspend the corresponding proceedings before it, if any, for the duration of that suspension. Moreover, and in the interests of due process, the ABoR may adapt its procedures, which may include an extension of the review period in those cases where an oral hearing is deemed necessary.” See: https://www.bankingsupervision.europa.eu/organisation/whoiswho/administrativeboardofreview/html/index.en.html (website visited 11 October 2021). 89 Article 3(5) ABoR Decision: “The alternates shall fully participate in the review proceedings, either temporarily replacing the members of the Administrative Board or as observers.” 90 The ECB and the applicant may waive, in the interest of health or other pressing considerations, the requirement, in Article 14(3) of the ABoR Decision that “[t]he hearing shall take place at the ECB's premises”. Hearings may, in my view, also be held on-line for other pressing reasons (saving CO 2). 91 Art. 14 ABoR Decision. 92 Art. 15(1) ABoR Decision. 93 Art. 15(2) ABoR Decision. 86
87
René Smits
333
25
26
27
28
Art. 24 SSMR
Administrative Board of Review
the hearing. The production of evidence is subject to ABoR’s permission. The wording of the ABoR Decision seems to suggest that evidence be produced cautiously, namely only when considered “necessary for the just determination of the review”94. Similarly, cross-examination of a witness or an expert called by the ECB by the applicant is only allowed “where this is necessary for the just determination of the review.”95 Time considerations seem predominant: “evidence shall be served within the time permitted” 96. The two-months period within which the ABoR needs to deliver its opinion97 requires the process to be gone through in a brisk tempo. 29 On any matter relating to the proceedings, including on the production of documents and the provision of information, the Chair has a general power to give directions, on which he may consult the other Members on the ABoR team.98
VII. Proceedings: opinion and follow-up 30
In ABoR proceedings, three phases can be distinguished: (a) the preparatory phase, which includes the assessment of the admissibility of the request, (b) the examination phase, which may also entail an oral hearing and the collection of the relevant evidence, and (c) the deliberative phase, ending with the adoption of the opinion and its submission to the Supervisory Board.99 Until the revision of the ABoR Decision, Alternates participated in the first two phases until the hearing to ensure smooth functioning of the review body while making use of all expertise assembled around the table (or through the handset during the teleconferences) and to allow them to readily step in future cases if a Member should be unable to participate. Since, all seven members of the ABoR participate in the entire process, with only five members voting. Following the deliberation phase, during which an Opinion is finalised, the ABoR concludes its review by expressing an opinion to the Supervisory Board, thus remitting the case to the latter for the preparation of a new draft decision.100 The ABoR Decision specifies that the ABoR “shall propose whether the initial decision should be either abrogated, replaced with a decision of identical content or replaced with an amended one.”101 Thus, there is a trifurcation: ABoR is to propose the complete abrogation of the contested decision, the confirmation in toto of the original decision or, as a third way, the adoption of an amended decision. This is in line with the mandate that the SSMR gives the Supervisory Board after an ABoR Opinion: it is to “promptly submit a new draft decision to the Governing Council”, adding that this draft: “shall abrogate the initial decision, replace it with a decision of identical content, or replace it with an amended decision”. In view of the ECB’s discretionary power which ABoR is to respect,102 the ABoR will in many instances suggest enhancing the motivation of a decision. The Opinion is sent to the applicant together with the ECB’s new decision.103 The ABoR Chair will present the Opinion in a meeting of the Supervisory Board. The ABoR may wish to draw attention Art. 15(3) ABoR Decision. Art. 15(4) ABoR Decision. 96 Art. 15(4) ABoR Decision. 97 Article 16(1) ABoR Decision: “not later than two months from the date of receipt of the complete notice of review”. 98 Art. 12 ABoR Decision. 99 Morra, Smits and Magliari, EBOR 18 (2017), 567, at p. 578. 100 Art. 24(7) SSMR. 101 Art. 16(2) ABoR Decision. 102 Recital 64 SSMR: “while respecting the margin of discretion left to the ECB to decide on the opportunity to take those decisions”. 103 Art. 18 ABoR Decision. 94
95
334
René Smits
Art. 24 SSMR
Administrative Board of Review
to general issues that its review may have brought up. The ABoR has publicly drawn attention to general issues by reporting on its activities. See the ECB Annual Report on supervisory activities 2015,104 in which the ABoR noted diversity in the Single Rulebook and emphasised the importance of good internal governance, and the ECB Annual Report on supervisory activities 2016,105 when it noted that regulatory fragmentation and national discretions made review challenging. In the latest Annual Report,106 the ABoR noted that more intrusive measures require deeper motivation. As indicated, in its re-examination of the case, the Supervisory Board is not limited 31 to the grounds contained in the notice of review.107 Nor can it be considered bound to follow the ABoR’s advice: it is mandated to “take into account” the ABoR’s Opinion when preparing a new draft for the Governing Council. As this Opinion is notified to “the parties”,108 i.e. to the applicant and to the person(s) responsible within the ECB for the supervision of the relevant entity, one may expect the Supervisory Board to include arguments derived from the review proceedings when drafting the new decision. Moreover, the General Court has held that the ABoR Opinion is to be taken into account when assessing the reasoning of the second decision,109 thus emphasising the importance of the review panel’s findings for appraising the motivation of the ECB’s follow-up decision. ABoR Opinions contain confidential supervisory information and are thus not 32 made public; they moreover are part of the internal SSM decision-making process. As the ABoR Decision110 makes clear: “The proceedings of the [ABoR] Board shall be confidential unless the Governing Council authorises the President of the ECB to make the outcome of such proceedings public”. The lack of transparency of ABoR opinions is partially remedied by subsequent litigation. The General Court may include elements of the ABoR Opinion in its judgment, and has begun to cite, and endorse, ABoR views on the contested ECB decision in its case law. Calls for more transparency have been made. The Commission, taking into account the specifics of the ABoR has called for
104 At . Specifically, the ABoR noted: “the Administrative Board has observed a lack of harmonisation in the implementation of European law at national level in areas such as bank consolidation or fit and proper requirements. In examining the requests for review, the Board noted that, in allowing a broad range of interpretation among the credit institutions, these differences make it challenging to review ECB decisions in a consistent manner. Finally, the Administrative Board of Review had the opportunity to underline the importance of good internal governance of credit institutions, particularly as regards the responsibility of the management body in building a first line of control within the credit institution.” (p. 15). 105 At . Specifically, the ABoR noted that “review of ECB decisions was challenging particularly due to regulatory fragmentation (diverse transposition of European law at national level) and the remaining wide scope for national discretions.” (p. 56). 106 ECB Annual Report on supervisory activities 2017, at : “the Administrative Board considered that the more intrusive the measures imposed, the greater the level of reasoning that is called for.” (p. 90). 107 Art. 17(1) ABoR Decision. 108 Art. 18 ABoR Decision. 109 Case T-122/15, Landeskreditbank Baden-Württemberg — Förderbank v ECB, ECLI:EU:T:2017:337, para. 125: “the Administrative Board of Review’s Opinion is part of the context of which the contested decision forms a part and may, therefore, be taken into account for the purpose of determining whether that decision contained a sufficient statement of reasons”. 110 Art. 22(2) ABoR Decision.
René Smits
335
Art. 24 SSMR
Administrative Board of Review
more openness.111 This author did likewise.112 Yet, the position of the ABoR in the decision-making process provides hurdles which are not as easily overcome as by its fellow review panel at the Single Resolution Board, which does provide excerpts of its findings and sometimes redacted versions of the full decisions.113
VIII. Proceedings: timing, access to file and costs These administrative proceedings are subject to strict timing constraints: after the filing of a complete notice of review, the ABoR has two months but is exhorted to go faster if needed,114 whereas the Supervisory Board had a mere ten working days from the receipt of the ABoR’s opinion to submit a new draft decision to the Governing Council in case the ABoR suggests to re-enact the decision,115 and twenty days when the ABoR has opined that the contested decision be abrogated or amended.116 This very strict time limit has been extended to thirty days117 with the revision of the ABoR Decision in August 2019. This means that administrative review is fast: one month at the most for the submission of the notice of review, two months at the most for the review by the ABoR and ten or twenty working days at the most for the new draft decision from the Supervisory Board and ten working days for the Governing Council to object.118 Thus, in roughly 4 months the applicant has a new decision after review. 34 Administrative review is also cheap: a flat fee of € 5,000 for legal persons and of € 500 for natural persons is levied.119 These lump sums have been laid down in the form of a Guide to the costs of the review, adopted by the ABoR on the basis of Art. 23(3) ABoR 33
111 In its SSM Review Report “It would be useful to take advantage of the growing jurisprudence developed by the ABoR by ensuring more transparency over the work undertaken by the ABoR, for instance through publication on the ECB's website of summaries of ABoR decisions and with due observance of confidentiality rules.” Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013, {SWD(2017) 336 final}, COM(2017) 591 final, p. 5, at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=C ELEX:52017DC0591&from=EN. And in the supporting staff document in a section on the “internal recourse mechanism”: “It is considered important that the ECB strikes the right balance when labelling documents as confidential, so as to thereby avoid any undue restrictions to the right of information of parties concerned by its decisions.” See pp. 14-15 of the Staff Working Document on what it refers to as the “internal recourse mechanism”. Document SWD(2017) 336 final, available at: https://ec.europa.eu/info/business-economy-euro/bankin g-andfinance/banking-union/single-supervisory-mechanism_en. 112 Smits, Conference, London (UK), 23 October 2017, at . 113 See . 114 “within a period appropriate to the urgency of the matter and no later than two months from the receipt of the request”: Art. 24(7) SSMR. Almost identical wording can be found in the ABoR Decision: “within a time period appropriate to the urgency of the matter and not later than two months from the date of receipt of the notice of review” (Art. 16(1) ABoR Decision). 115 “The Supervisory Board's new draft decision replacing the initial decision with a decision of identical content shall be submitted to the Governing Council within 10 working days of receipt of the Administrative Board's opinion.” (Art. 17(2)sent. 1 ABoR Decision). 116 “A new draft decision by the Supervisory Board abrogating or amending the initial decision shall be submitted to the Governing Council within 20 working days of receipt of the Administrative Board's opinion.” (Art. 17(2), sent. 2, ABoR Decision). 117 Article 17(4) ABoR Decision now reads as follows: “The Supervisory Board's new draft decision replacing the initial decision with a decision of identical content or abrogating or amending the initial decision shall be submitted to the Governing Council within 30 working days following receipt of the Administrative Board's opinion.” 118 Art. 26(8) SSMR, and Art. 13g.2 of the ECB’s Rules of Procedure. 119 Guide to the costs of the review, at .
336
René Smits
Art. 24 SSMR
Administrative Board of Review
Decision which permits the review body to adopt “supplementary rules, forms and guides” which are reported to the Supervisory Board and published on the ECB’s website. Actually, for an applicant ‘winning’ his or her case, there are no costs as reasonable costs will be reimbursed by the ECB on the basis of Art. 21 ABoR Decision and the Guide to the costs of the review.120 A procedural issue that has not yet been discussed concerns access to files. The 35 ABoR Decision makes clear that, in the context of full respect for the rights of defence of the applicant, he or she has access to the file. The file includes “all documents obtained, produced or assembled by the ECB during the ECB supervisory procedure, irrespective of the storage medium”121 but excludes confidential information.122 Excluded confidential elements of the file “may include internal documents of the ECB or a [NCA] and correspondence between the ECB and a [NCA] or between [NCAs].” 123 The position of the ECB is protected by the proviso that “[n]othing in this Art. shall prevent the ECB from disclosing and using information necessary to prove an infringement.”124
D. Practice thus far – ABoR in earlier case law In its first 7 years of functioning, the ABoR has reviewed 30 cases until the end of 36 2020.125 The issues the ABoR has dealt with concern almost the entire field of supervisory activities: the withdrawal of an authorisation, the determination of the ‘significance’ of a supervised entity, the outcome of the Supervisory Review and Evaluation Process (SREP), the fit and proper assessment of members of the management body, other corporate governance issues, the imposition of an administrative sanction and the ECB’s powers under Art. 16 SSMR, as well as anonymising the publication of a sanction imposed, the admissibility of review of a failing or likely to fail (FOLTF) finding, the interpretation of joint guidelines by EBA, ESMA and EIOPA on assessing a qualifying holding, especially the integrity of a proposed acquirer, the ECB’s TRIM (targeted review of internal models) project, and, finally, an on-site inspection not concluded by a follow-up letter or a supervisory decision. The Court has been accessed in a number of cases that previously have been reviewed 37 by the ABoR. Previous ABoR review may only become transparent once a judicial decision has been pronounced as not in all pending cases a previous role of the ABoR is mentioned in the information available online.126 A number of cases have proceeded to the judgment phase, while some are pending and others are subject to appeal proceedings. In the L-Bank judgment,127 the General Court gave a surprising interpretation of the 38 division of competences in the SSM: all prudential competences covered by Art. 127(6) TFEU have been allocated exclusively to the ECB, with NCAs acting by the delegation when executing their ‘own’ powers, hitherto considered ‘reserved’. The case revolved 120 Which states: “No costs are to be borne by the applicant in cases in which the ECB’s Governing Council abrogates or amends the initial decision as a consequence of the notice of review. In such cases, the ECB will reimburse the costs incurred by the applicant in submitting written or oral evidence, including costs incurred in respect of legal representation, excluding any disproportionate costs.” 121 Art. 20(2) ABoR Decision. 122 Art. 20(3) ABoR Decision. 123 Art. 20(4) ABoR Decision. 124 Article 20(5) ABoR Decision. 125 ECB Annual Report on supervisory activities 2020, Table 5, at . 126 At the Curia website (https://curia.europa.eu/) or in the Official Journal of the EU. 127 Case T-122/15, Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:T:2017:337.
René Smits
337
Art. 24 SSMR
Administrative Board of Review
around the German special credit institution, Landeskreditbank Baden-Württemberg – Förderbank (L-Bank) which requested a review of the ECB’s decision determining it to be significant. L-Bank was unsuccessful at the ABoR and challenged its classification as a significant entity before the Court. The General Court found that for a request to be classified as less significant to be successful, the applicant needs to prove that direct ECB supervision is less able to ensure achievement of the SSMR’s objectives than national supervision; a significant entity cannot escape supervision by the ECB if it merely demonstrates that national supervision is just as able to achieve the SSMR’s objectives, identified as: consistent application of high prudential standards. The Court based itself on the wording of Art. 4(1) SSMR which it quoted: “that, ‘[w]ithin the framework of Art. 6, the ECB shall (…) be exclusively competent to carry out, for prudential supervisory purposes, the following tasks in relation to all credit institutions established in the participating Member States’, followed by a list of nine tasks”128 in order to find “that it is apparent from the examination of the interaction between Art. 4(1) and Art. 6 of the [SSM] Regulation (…) that the logic of the relationship between [ECB and NCAs] consists in allowing the exclusive competences delegated to the ECB to be implemented within a decentralised framework, rather than having a distribution of competences between the ECB and the national authorities in the performance of the tasks referred to in Art. 4(1) of that regulation.”129 The Court read the ECB’s second decision, adopted after the ABoR opinion, in the light of this opinion,130 which had endorsed the ECB’s qualification of L-Bank as significant and the rejection of ‘particular circumstances’ that might have justified a different outcome. Especially when assessing the motivation of the ECB’s postABoR decision, the Court relied on the ABoR Opinion: “In the present case, the Administrative Board of Review’s Opinion is part of the context of which the contested decision forms a part and may, therefore, be taken into account for the purpose of determining whether that decision contained a sufficient statement of reasons (...)”.131 On appeal, the Court of Justice upheld the General Court’s views as it sided with its view on the exclusive nature of the ECB’s competences. It held: “it follows from the wording of Article 4(1) of [the SSM Regulation] that the ECB is exclusively competent to carry out the tasks stated in that provision in relation to all those institutions”132. Also, it approached the role of the NCAs just like the General Court as an auxiliary one: “The national competent authorities thus assist the ECB in carrying out the tasks conferred on it by [the SSM Regulation], by a decentralised implementation of some of those tasks in relation to less significant credit institutions, within the meaning of the first subparagraph of Article 6(4) of that regulation.”133 Subsequently, the German Constitutional Court gave its own twist to the L-Bank judgment of the CJEU in a ruling on the compatibility of banking union with the German constitution.134
Para. 20 of the L-Bank judgment, supra, fn. 127. Para. 54 of the L-Bank judgment, supra, fn. 127. 130 Paras. 31, 34 (“a reading of the contested decision, read in the light of the Administrative Board of Review’s Opinion, shows that (…)”) and 125 of the L-Bank judgment, supra, fn. 100. 131 Para. 125 of the L-Bank judgment, supra, fn. 127. 132 Judgment of the Court of 8 May 2019 in Case C‑450/17 P (Landeskreditbank Baden-Württemberg – Förderbank v ECB); ECLI:EU:C:2019:372, para. 38. 133 Para. 41 of the L-Bank judgment on appeal, supra, fn. 132. 134 If interpreted strictly, the framework for the European Banking Union does not exceed the competences of the European Union, Press Release No. 52/2019 of 30 July 2019, at: ; see the judgment of 30 July 2019 in Cases 2 BvR 1685/14 and 2 BvR 2631/14, at . 128
129
338
René Smits
Art. 24 SSMR
Administrative Board of Review
The Arkéa cases concerned a SREP decision adopted by the ECB vis-à-vis the Cred- 39 it Mutuel Group which also included Crédit Mutuel Arkéa (Arkéa). The main issue raised by Arkéa against the ECB is the latter’s indirect supervision of Arkéa through the central body of this French cooperative banking group. Arkéa claimed it should be supervised directly and separately from the Crédit Mutuel Group. The ABoR had extensively addressed the issues raised by the applicant and concluded in favour of the ECB’s approach. The General Court gave two judgments135 in these cases136 which I have summarised elsewhere.137 The Court strongly confirms the role of ABoR: it imputes to the ECB the reasoning in ABoR’s Opinion when the second decision is in line with this Opinion and assesses the ECB’s motivation for this second decision also on the basis of the ABoR Opinion. The Court extensively quotes138 and confirms the lines of reasoning and the arguments developed in the ABoR’s opinion.139 Notably, when referring to the ECB’s reasons to effect consolidated supervision of the Crédit Mutuel group through the central body, the Court notes: “that, if the reasons for which the ECB decided to organize consolidated supervision of the Crédit Mutuel group through the [central body] are not explicitly stated in the contested decision, the [ABoR] provided grounds on this point, which have been transcribed in paragraphs 8 to 10 [of the judgment] above.” These judgments have been confirmed on appeal.140 The Trasta case concerned the standing of a bank and its shareholders to contest the 40 revocation of the authorisation of the credit institution. According to the Order of the General Court141 on admissibility, which was subject to threefold appeal,142 the ABoR had issued an opinion confirming the ECB’s decision to withdraw its banking license.143 As indicated before, admissibility was a core issue in these proceedings. The General Court found that the shareholders did have standing but the management of the bank did not as it upheld Latvian law and the revocation of the power of attorney by the liquidator appointed at the behest of the Latvian NCA. The Court of Justice reversed this outcome, considering that the shareholders of Trasta were not directly concerned 144 but the management was admissible as plaintiff against the withdrawal of the authorisation as a credit institution. In a Union based on the rule of law, effective judicial protection of On 13 December 2017; see infra, fn. 136. Case T‑712/15, Crédit mutuel Arkéa v ECB, ECLI:EU:T:2017:90, under appeal: Case C-152/18 P; and Case T-52/16, Crédit mutuel Arkéa v ECB,ECLI:EU:T:2017:902, under appeal: Case C-153/18 P. 137 See: Smits, Short note on the Arkéa judgments, for publication, at , and Smits, Interplay of administrative review and judicial protection in European prudential supervision –Some issues and concerns (2017), at . 138 Case T-712/15, supra, fn 136, paras. 8-11 and Case T-52/16, supra, fn. 136, paras. 8-11. 139 Case T-712/15, supra, fn. 136, paras. 51, 71, 131-132, 148-149, 158-159 and Case T-52/16, supra, fn. 136, paras. 50, 70, 120, 130-131, 147-148, 157-158. 140 Judgment of 2 October 2019 in Joined cases C-152/18 P and C-153/18 P (Crédit Mutuel Arkéa v ECB); ECLI:EU:C:2019:810. 141 Case T-247/16, Trasta Komercbanka AS v ECB, ECLI:EU:T:2017:623. Case T-247/16 was renamed: Fursin and Others v ECB. A later case was instituted by Trasta, Case T-698/16, Trasta Komercbanka a.o. v ECB. 142 By the bank and its shareholders, Case C-669/17 P, Trasta Komercbanka and Others v ECB, OJ C 42, 5.2.18, p. 8; by the ECB, Case C-663/17 P, ECB v Trasta Komercbanka, ECLI:EU:C:2019:323; and by the Commission, Case C-665/17 P, Commission v Trasta Komercbanka, OJ C42, 5.12.18, p. 6. 143 Para. 7 of the Order of 12 September 2017: “On 3 April 2016, the ECB’s administrative board of review received a request for review from the lawyer who had previously acted during the administrative proceedings on behalf of TKB and the other applicants. By a decision of 30 May 2016, the board of review held that the allegations of procedural and substantive breaches entailed by the contested decision were unfounded and that that decision was sufficiently reasoned and proportionate, while recommending that the governing body of the ECB clarify certain elements.” 144 Trasta judgment, supra, fn. 61, paras. 114-115. 135
136
René Smits
339
Art. 24 SSMR
Administrative Board of Review
a legal person is ensured by the right of that person to bring an action for annulment of the withdrawal decision before the Court and national law can only be applied in so far as it does not infringe the right to effective judicial protection, enshrined in Article 47 of the Charter.145 The relationship of trust between the national authority that appointed the liquidator and the latter’s task to liquidate the bank, not to challenge the decision which resulted in its task of resolving a credit institution that had lost its banking license were also considered relevant.146 41 The most recent judgment in post-ABoR proceedings concerns a ruling of the General Court in the Versobank case.147 In a 54-page long judgment which pedagogically sets out the competences within the SSM and the SRM and elucidates on various issues, the General Court reaffirmed the case law on the exclusive nature of the ECB’s powers, focused on the cooperation between NCAs and the ECB when withdrawing a banking authorisation.148 The Court sets out the competences of the ECB when an NCA has previously issued a FOLTF declaration without following up with a resolution decision and dedicates extensive considerations to support the ECB’s powers to withdraw a banking license when there are serious issues concerning a bank’s compliance with anti-money laundering and counter-terrorist financing (AML/CTF) rules. In the context of the present chapter, the main takeaway from this judgment is the retroactive effect to a second, post-ABoR decision. In these two cases (which were initiated by the shareholders and the bank itself, whose licence had been withdrawn by the ECB at the proposal of the NCA for several serious reasons mainly focusing on continued lack of compliance with AML/CTF rules), the bank and its majority shareholders proceeded against the ECB’s initial decision to withdraw the authorisation (Case T‑351/18) and, subsequently, against the decision of identical content adopted after review by the ABoR (Case T-584/18). The Court declared the first action ‘devoid of purpose’ as the first decision had disappeared from the EU’s legal sphere. The Court held that “it is not possible to withdraw the same authorisation a second time” so that the Governing Council when considering that the decision subject to review was valid, at a proposal from the Supervisory Board, “adopts a decision that is identical to the one subject to that review”. “A decision identical in content to the reviewed decision can therefore only replace the latter with retroactive effect to the time at which the reviewed decision took effect.” The resulting legal situation is sketched in stark wording: “the replacement of the initial decision by an identical or amended decision at the end of the review procedure results in the definitive disappearance of the original decision from the legal order”. The Court’s reasoning seems to apply beyond the instance at hand of the withdrawal of an authorisation: also in respect of other supervisory measures, a replacement of the initial decision with one of identical content must work retroactively and only the second decision can be challenged in court. 42 At this stage, the main takeaway from these follow-up procedures is the prominence given to the ABoR opinions in the Court’s judgments. The Court will assess an ECB decision in the light of the ABoR Opinion,149 calling “the contested decision (…) an extension [of the Administrative Board of Review’s Opinion]”,150 and appraising the Trasta judgment, supra, fn. 61, paras. 56, 59 and 70. Trasta judgment, supra, fn. 61, para. 60. 147 Cases T 351/18 and T 584/18, Ukrselhosprom and Versobank v ECB, 6 October 2021; ECLI:EU:T: 2021:669. 148 Paras. 114-139, notably 131, 135 -138, Versobank judgment, supra, fn. 147. 149 “a reading of the contested decision, read in the light of the Administrative Board of Review’s Opinion, shows that (…)”, para. 34 of the L-Bank judgment, supra, fn. 127. 150 Para. 34 of the L-Bank judgment, supra, fn. 127. 145
146
340
René Smits
Separation from monetary policy function
Art. 25 SSMR
motivation of the ECB’s second decision, in so far as it follows the ABoR’s views, on the basis of the latter: “the Administrative Board of Review’s Opinion is part of the context of which the contested decision forms a part and may, therefore, be taken into account for the purpose of determining whether that decision contained a sufficient statement of reasons”.151 In the L-Bank judgment on appeal, the entwinement of the ABoR opinion and the post-ABoR decision was clarified as follows: “that opinion, that new draft decision and that decision originate from the same institution, namely the ECB, and are part of the same internal administrative review procedure in relation to decisions taken by that institution in the exercise of the powers conferred on it by [the SSM Regulation] and that, consequently, they are, as the Advocate General noted in point 98 of his Opinion, inherently linked.”152 The reasoning in the ABoR opinion can be taken into account when assessing the motivation of the ECB’s post-ABoR decision: “in so far as that decision had ruled in conformity with that opinion, it was an extension of that opinion and the explanations contained therein could be taken into account for the purposes of determining whether the decision at issue contained a sufficient statement of reasons.”153
Art. 25 SSMR Separation from monetary policy function 1. When carrying out the tasks conferred on it by this Regulation, the ECB shall pursue only the objectives set by this Regulation. 2. The ECB shall carry out the tasks conferred on it by this Regulation without prejudice to and separately from its tasks relating to monetary policy and any other tasks. The tasks conferred on the ECB by this Regulation shall neither interfere with, nor be determined by, its tasks relating to monetary policy. The tasks conferred on the ECB by this Regulation shall moreover not interfere with its tasks in relation to the ESRB or any other tasks. The ECB shall report to the European Parliament and to the Council as to how it has complied with this provision. The tasks conferred by this Regulation on the ECB shall not alter the ongoing monitoring of the solvency of its monetary policy counterparties. The staff involved in carrying out the tasks conferred on the ECB by this Regulation shall be organisationally separated from, and subject to, separate reporting lines from the staff involved in carrying out other tasks conferred on the ECB. 3. For the purposes of paragraphs 1 and 2, the ECB shall adopt and make public any necessary internal rules, including rules regarding professional secrecy and information exchanges between the two functional areas. 4. The ECB shall ensure that the operation of the Governing Council is completely differentiated as regards monetary and supervisory functions. Such differentiation shall include strictly separated meetings and agendas. 5. With a view to ensuring separation between monetary policy and supervisory tasks, the ECB shall create a mediation panel. This panel shall resolve differences of views expressed by the competent authorities of participating Member States concerned regarding an objection of the Governing Council to a draft decision by the Supervisory Board. This panel shall include one member per participating Member State, chosen by each Member State among the members of the Governing Council Para. 125 of the L-Bank judgment, supra, fn. 127. Para. 92 of the L-Bank judgment on appeal, supra, fn. 132. 153 Para. 95 of the L-Bank judgment on appeal, supra, fn. 132. 151
152
Christos V. Gortsos
341
Art. 25 SSMR
Separation from monetary policy function
and the Supervisory Board, and shall decide by simple majority, with each member having one vote. The ECB shall adopt and make public a regulation setting up such mediation panel and its rules of procedure. Bibliography Thorsten Beck and Daniel Gros, ‘Monetary Policy and Banking Supervision: Coordination Instead of Separation’, CEPS Policy Brief No. 286 (2013), ; Central Bank Governance Group, ‘Central Bank Governance and Financial Stability, Report, Bank for International Settlements’ (Basel 2011), Howard Davies and David Green, ‘Global Financial Regulation. The Essential Guide’ (Polity Press, Cambridge/Malden 2010); Carmine Di Noia and Giorgio Di Giorgio, ‘Should Banking Supervision and Monetary Policy Tasks be Given to Different Agencies’, Economics Working Paper No. 411 (Universitat Pompeu Fabra 1999), ; Sylvester Eijffinger and Rob Nijskens, ‘Monetary Policy and Banking Supervision, European Parliament’, Directorate General for Internal Policies (2012), ; European Central Bank, ‘The Monetary Policy of the ECB’, (3rd edn, 2011); Eilis Ferran and Kern Alexander, ‘Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board’, University of Cambridge Faculty of Law Research Papers No. 36 (2011), ; Tatyana Filipova, ‘The Concept of Integrated Financial Supervision and Regulation of Financial Conglomerates in Germany and the United Kingdom’, (Nomos, Baden-Baden 2012); Francois Gianviti, ‘The Objectives of Central Banks’, in: Mario Giovanoli and Diego Devos (eds), International Monetary and Financial Law: The Global Crisis (Oxford University Press, Oxford – New York 2010), 449; Charles Albert Eric Goodhart, ‘The Organizational Structure of Banking Supervision’, Financial Stability Institute Occasional Paper No 1 (November 2000), ; Charles Albert Eric Goodhart and Dirk Schoenmaker, ‘Institutional Separation between Supervisory and Monetary Agencies’, in: Charles Albert Eric Goodhart (ed), The Central Bank and the Financial System (Macmillan Press, London 1995); Christos V. Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (Palgrave Macmillan, Springer Nature, Cham, Switzerland 2020); Christos V. Gortsos, ‘Chinese walls’ within the Single Supervisory Mechanism’, in: Gabriella Gimigliano (ed), Money, Payment Systems and the European Union: The Regulatory Challenges of Governance (Cambridge Scholars Publishing, United Kingdom 2016), 185, ; Group of Thirty, ‘Τhe Structure of Financial Supervision – Approaches and Challenges in a Global Marketplace’ (Washington D.C., 2008); Christos Hadjiemmanuil, ‘Institutional Structure of Financial Regulation, A Trend towards “Megaregulators”?’, Yearbook of International Financial and Economic Law (2004), 127; Hans-Jürgen Haubrich, Combining Bank Supervision and Monetary Policy, Economic Commentary (Federal Reserve Bank of Cleveland 1996); Ronald J. Herring and Jacopo Carmassi, ‘The Structure of Cross-Sector Financial Supervision’, FMIR (2008), 51; Klaus Lackhoff, Single Supervisory Mechanism: A Practitioner’s Guide (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden, 2017), 73; Rosa M. Lastra and Jean-Victor Louis, ‘European Economic and Monetary Union: History, Trends, and Prospects’, Yearbook of Economic Law (2013), 1; Jean-Victor Louis, ‘L’Union européenne et sa monnaie’, in: Commentaire J. Megret: Integration des marchés financiers (Institut d’ Etudes Européennes, Editions de l’ Université de Bruxelles, Bruxelles, 3rd edn 2007); Tommaso Padoa-Schioppa, ‘EMU and Banking Supervision’, in: Charles Albert Eric Goodhart (ed), Which lender of last resort for Europe? (Central Banking Publications, London 1999) 15; Chryssa Papathanassiou and Georgios Zagouras, ‘The European Framework for Macro-Prudential Oversight’, in: Eddy Wymeersch, Klaus J. Hopt and Guido Ferrarini (eds), Financial Regulation and Supervision – A Post-Crisis Analysis (Oxford University Press, Oxford 2012), 159; Steven Seelig and Alicia Novoa, ‘Governance Practices at Financial Regulatory and Supervisory Agencies’, IMF Working Paper WP/09/135 (2009), ; René Smits, The European Central Bank – Institutional Aspects, Kluwer Law International (The Hague 1997); Alexander Thiele, Finanzaufsicht (Jus Publicum 229, Mohr Siebeck, Tübingen 2014); Eddy Wymeersch, ‘The Structure of Financial Supervision in Europe. About Single, Twin Peaks and Multiple Financial Supervisors’, EBOR 8 (2007), . A. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. General provisions on the separation between the ECB’s monetary policy and supervisory functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The provisions of the SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The rules: Art. 25(1)-(2) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Compliance with the rules: Art. 25(3)-(5) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . II. The provisions of ECB decision 2014/723/EU (ECB/2014/39) on the implementation of the separation between the ECB’s two policy functions . . 1. Organisational separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
342
Christos V. Gortsos
1 3 3 3 11 15 15
Separation from monetary policy function
Art. 25 SSMR
2. Professional secrecy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Access to information between policy functions and classification . . . . . . . 4. Exchange of confidential information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 20 21
C. In particular: the Mediation Panel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The provisions of the SSMR: Art. 25(5) SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The provisions of the ECB Regulation (EU) No 673/2014 (ECB/2014/26) . . . 1. Membership and internal organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The mediation procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Request for mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Case Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Decision-making process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Confidentiality and professional secrecy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24 24 26 26 30 30 32 34 36
A. Introductory remarks Financial stability has historically been a major objective of central banks.1 Even 1 though the tasks assigned upon several (but not all) central banks also include, in this respect, the micro-prudential supervision of credit institutions, since the 1980s an ever-increasing number of countries around the world assigned banking supervision to independent authorities other than the central bank,2 on the basis of the argument that the exercise of direct supervisory powers by the central bank might give rise to conflicts of interest that would undermine its efficiency in achieving its monetary policy objectives (especially the maintenance of price stability).3 This trend has been reversed in the aftermath of the recent (2007-2009) international 2 financial crisis as a result of the relevant failures attributed to independent supervisory authorities in many states across the world.4 The Bank of England, since 1 April 2013, and the ECB, since November 2014, are striking examples in this respect. Nevertheless, in order to ensure the adequate separation of monetary policy and other tasks from supervisory tasks, the creation of “Chinese walls” within the central bank is in such a case an essential element.
1 For an overview, see Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), at pp. 14-19, with extensive further references. 2 See indicatively Herring and Carmassi, FMIR 17 (2008), 51, and Central Bank Governance Group, Central Bank Governance and Financial Stability, Report, Bank for International Settlements (2011). On the trend towards integrating sectoral financial supervisory authorities (for banking, capital markets and insurance/reinsurance) into a single body, see Hadjiemmanuil, Yearbook of International Financial and Economic Law 9 (2004), 127; Wymeersch, EBOR 8 (2007), 237 (specifically for Europe), Filipova, The Concept of Integrated Financial Supervision and Regulation of Financial Conglomerates in Germany and the United Kingdom (2012); Group of Thirty, Τhe Structure of Financial Supervision – Approaches and Challenges in a Global Marketplace (2008); and Seelig and Novoa, IMF Working Paper WP/09/135 (2009). 3 On this aspect, see Goodhart and Schoenmaker, in: Goodhart (ed), The Central Bank and the Financial System (1995), 333; Haubrich, Economic Commentary (Federal Reserve Bank of Cleveland 1996), Di Noia and Di Giorgio, Economics Working Paper No. 411 Universitat Pompeu Fabra (1999); Goodhart (2000), at pp. 1-33; Gianviti, in: Gianvanoli/Devos (eds), International Monetary and Financial Law: The Global Crisis (2010), at pp. 480-482; Eijffinger and Nijskens, Directorate General for Internal Policies (2012); and Beck and Gros, CEPS Policy Brief No. 286 (2013). 4 See Davies and Green, Global Financial Regulation: The Essential Guide (2010), at pp. 187-213.
Christos V. Gortsos
343
Art. 25 SSMR
Separation from monetary policy function
B. General provisions on the separation between the ECB’s monetary policy and supervisory functions I. The provisions of the SSMR 1. The rules: Art. 25(1)-(2) SSMR 3
The principle of separation of monetary policy and micro-prudential supervisory tasks of the ECB, due to the difference of their objectives, by creating “Chinese walls” within it, is laid down in recital 65 SSMR, which reads as follows: “The ECB is responsible for carrying out monetary policy functions with a view to maintaining price stability in accordance with Art. 127(1) TFEU. The exercise of supervisory tasks has the objective to protect the safety and soundness of credit institutions and the stability of the financial system. They should therefore be carried out in full separation, in order to avoid conflicts of interests and to ensure that each function is exercised in accordance with the applicable objectives. The ECB should be able to ensure that the Governing Council operates in a completely differentiated manner as regards monetary and supervisory functions. Such differentiation should at least include strictly separated meetings and agendas.” In this respect, Art. 25(1)-(2) SSMR lays down two key rules:
4
First, in accordance with Art. 25(1) SSMR, when carrying out the specific supervisory tasks conferred upon it by virtue of the SSMR, the ECB must pursue only the objectives set out therein. It is reminded that, according to Art. 1(1) SSMR, the Regulation’s objective is to confer on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions “with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State”, with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage. On the other hand, the primary objective of the Eurosystem is to maintain price stability.5
5
Second, pursuant to Art. 25(2) SSMR the ECB must carry out these tasks without prejudice to and “separately” from its tasks within the Eurosystem relating to the definition and implementation of the single monetary policy in the euro area (pursuant to Art. 127(2), first indent, TFEU)6 and any other tasks. The specific supervisory tasks should neither interfere with, nor be determined by, its tasks relating to monetary policy and they should also not interfere with its (specific tasks) in rela-
5 Art. 127(1) sent. 1 TFEU. See also Art. 3(3) TEU as well as Arts. 119(2)-(3), 219(1)-(2) and 282(2) TFEU. 6 On the euro area single monetary policy, see details in Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), at pp. 281-301, with extensive further references.
344
Christos V. Gortsos
Separation from monetary policy function
Art. 25 SSMR
tion to the European Systemic Risk Board (ESRB),7 according to the provisions of Council Regulation (EU) No 1096/2010,8 or any other tasks.9 It is also noted that, in accordance with Arts. 13k.1-13k.2 of the Rules of Procedure of the ECB (hereinafter the “ECB Rules of Procedure”), the ECB must carry out the tasks conferred on it by the SSMR without prejudice to and separately from its tasks relating to monetary policy and from any other tasks and take all necessary measures to ensure separation between the monetary policy and the supervisory functions.10 The “other tasks” referred to in Art. 25(2) SSMR, apart from the (already mentioned) specific tasks relating to the ESRB, can be classified in two groups: The first comprises the ECB’s other “basic tasks” within the Eurosystem as set out in Art. 127(2), second to fourth indents, TFEU (under the primary objective of pursuing the maintenance of price stability), namely the conduct of foreign-exchange operations consistent with the provisions of Art. 219 TFEU, the holding and management of Member States’ official foreign reserves, and the promotion of the smooth operation of payment systems. The second group contains the other (non-basic) ECB tasks set out in the TFEU, such as the exclusive right to authorise the issue of banknotes denominated in euro according to Art. 128(1) TFEU; the approval of the volume of euro coins issued by Member States (Art. 128(2) TFEU); and the contribution to the smooth conduct of policies pursued by the (national) competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system according to Art. 127(5) TFEU. 11 The separation principle laid down in Art. 25(2) SSMR is further specified as follows: First, for the sake of accountability, the ECB must report to the European Parliament and to the Council with regard to its compliance with this provision.12 7 The ESRB was established by virtue of Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 (OJ L 331, 15.12.2010, pp. 1-11). 8 OJ L331, 15.12.2010, pp. 1-11. The legal basis of this legal act is the enabling clause of Art. 127(6) TFEU as well. On the work of the ESRB and the specific tasks of the ECB therein, see Ferran and Alexander, University of Cambridge Faculty of Law Research Papers No. 36 (2011); Papathanassiou and Zagouras, in: Wymeersch/Hopt/Ferrarini (eds), Financial Regulation and Supervision - A Post-Crisis Analysis (2012), 159, and Thiele, Finanzaufsicht (2014), at pp. 501-514. 9 Art. 25(2)(1) sent. 1 – 3 SSMR. The phrasing of the first sentence “its tasks relating to monetary policy” is not precise, since the definition and implementation of the single monetary policy is a task of the Eurosystem. 10 These Rules of Procedure are included in ECB Decision of 19 February 2004 (ECB/2004/2) (OJ L 80, 18.3.2004, pp. 33-41), as in force; they were adopted on the basis of Art. 12.3 ESCB Statute. The most recent unofficial consolidated version, of 24 September 2016, is available at: . Arts. 13k.1-13k.2 ECB Rules of Procedure were inserted by ECB Decision 2014/179/EU of 22 January 2014 “amending Decision ECB/2004/2 adopting the Rules of Procedure of the ECB” (ECB/2014/1), which was adopted on the basis of Arts. 25(2) and 26(12) SSMR and entered into force on 24 January 2014 (OJ L 95, 29.3.2014, pp. 56-63). This amendment was necessary in order to adjust the internal organisation of the ECB and its decision-making bodies to the new requirements arising from the SSMR and clarify the interaction of the bodies involved in the process of preparing and adopting supervisory decisions. 11 For more details on all these tasks, see Smits, The European Central Bank – Institutional Aspects (1997), at pp. 193-221, Louis, L’Union européenne et sa monnaie (2009), at pp. 152-173; Lastra and Louis, Yearbook of Economic Law (2013), 1, at pp. 79-95 and Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), at pp. 107-109 and 302-326. See also the seminal article of Padoa-Schioppa, in: Goodhart (ed), Which lender of last resort for Europe? (2000), 13, discussing the situation (apparently before the establishment of the SSM) where the euro area’s central banking architecture provided for a single monetary policy but not for single banking supervision. It is finally noted that Art. 127(5) TFEU is based on ex Art. 105(5) TEC, which was taken over verbatim in the TFEU. 12 Art. 25(2)(1) sent. 4 SSMR.
Christos V. Gortsos
345
6
7 8
9
10
Art. 25 SSMR
Separation from monetary policy function
In addition, the tasks should not alter the ongoing monitoring of the solvency of its monetary policy counterparties.13 Third, the staff involved in carrying out these tasks must be organisationally separated from, and subject to, separate reporting lines from the staff involved in carrying out other tasks conferred on the ECB.14 According to recital 66, “organisational separation of staff should concern all services needed for independent monetary policy purposes and should ensure that the exercise of the tasks conferred by this Regulation is fully subject to democratic accountability and oversight as provided for by this Regulation. The staff involved in carrying out the tasks conferred on the ECB (…) should report to the Chair of the Supervisory Board.” Within this framework, the ECB established a structure of four Directorates-General for the performance of supervisory tasks and a Secretariat to the Supervisory Board, functionally reporting to the Chair and Vice Chair of the Supervisory Board.15
2. Compliance with the rules: Art. 25(3)-(5) SSMR In order to comply with the above-mentioned two rules (i.e., for the purposes of Art. 25(1)-(2) SSMR), the ECB should adopt and make public any necessary internal rules, including rules regarding professional secrecy and information exchanges between the ECB’s two functional areas (“policy functions”).16 The relevant rules are set out in the ECB Decision 2014/723/EU of 17 September 2014 “on the implementation of separation between the monetary policy and supervision functions of the European Central Bank” (ECB/2014/39),17 which was adopted on the basis of Art. 25(1)-(3) SSMR and entered into force on 18 October 2014.18 The main provisions of this Decision are presented below.19 12 It is also noted that, Art. 5 of the Code of Conduct for high-level ECB officials, of December 2018,20 on “separation of the supervisory function from the monetary policy function” lays down the following rules: First, Members and alternates (as defined in Arts 1.1 and 1.2 of that Code, respectively21) must respect the separation of the ECB’s specific tasks concerning policies relating to prudential supervision from its tasks relating to monetary policy, as well 11
13 Art. 25(2)(1) sent. 5 SSMR. On the ECB counterparties for the conduct of monetary policy operations, see European Central Bank, The Monetary Policy of the ECB (2011), at pp. 96-97. 14 Art. 25(2)(2) SSMR. 15 ECB Decision 2014/723/EU, Recital 11 sent. 3 (on this legal act, see infra, → para. 11). See also Recital O of the Interinstitutional Agreement between the European Parliament and the ECB of October 2013 “on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the SSM” (2013/694/EU) (OJ L320, 30.11.2013, pp. 1-6), and Recital G of the Memorandum of Understanding of December 2013 between the Council of the European Union and the ECB “on the cooperation on procedures related to the SSM”. 16 Art. 25(3) SSMR. 17 OJ L300, 18.10.2014, pp. 57-62. 18 Art. 9 ECB Decision 2014/723/EU. 19 See infra, → paras. 15-23. 20 This code, which replaced three previous codes on related aspects, is available at: . 21 The term ‘members’ covers the members of the Governing Council and the members of the Supervisory Board when exercising their functions as members of a high-level ECB body, the members of the Executive Board, members of the Governing Council and members of the Supervisory Board when acting as members of the Steering Committee and the Mediation Panel where applicable, as well as representatives of national central banks, where the national competent authority is not the national central bank, participating in Supervisory Board meetings.
346
Christos V. Gortsos
Separation from monetary policy function
Art. 25 SSMR
as other tasks, and comply with ECB Decision 2014/723/EU and any other rules adopted by the ECB pursuant to Art. 25(3) SSMR; and Second, in carrying out their duties and responsibilities, members of the Supervisory Board and their alternates must take into account the objectives of the SSMR and not interfere with ECB’s non-supervisory tasks, while duly respecting the specific duties and responsibilities of the Vice-Chair of the Supervisory Board. The ECB should also ensure that the operation of the Governing Council (GC) 13 is completely differentiated as regards monetary and supervisory functions (including strictly separated meetings and agendas).22 In this respect, the ECB Rules of Procedure provide for the following:23 First, the GC meetings regarding the supervisory tasks must take place separately from its regular meetings and have separate agendas. Second, on a proposal from the Supervisory Board, the Executive Board must draw up a provisional agenda and send it, together with the relevant documents prepared by the Supervisory Board, to the members of the GC and other authorised participants at least 8 days before the relevant meeting. Exceptionally, in case of emergency, the Executive Board must act appropriately having regard to the circumstances. Third, the GC must consult with the Governors of the national central banks of the non-area participating Member States before objecting to any draft Decision prepared by the Supervisory Board that is addressed to the national competent authorities (NCAs) in respect of credit institutions established in such Member States. The same applies where the NCAs concerned inform the GC of their reasoned disagreement with such a draft decision. Fourth, in principle, the general provisions pertaining to GC meetings laid down in Chapter I (Articles 2-5a) of the ECB Rules of Procedure apply also to GC meetings as far as the ECB’s supervisory tasks are concerned. Finally, the ECB should establish a “Mediation Panel”.24 This panel is discussed in 14 more detail below.25
II. The provisions of ECB decision 2014/723/EU (ECB/2014/39) on the implementation of the separation between the ECB’s two policy functions 1. Organisational separation The organisational separation of monetary policy and supervisory functions is based 15 on four rules laid down in Art. 3 of ECB Decision 2014/723/EU: First, the ECB must maintain autonomous decision-making procedures for its monetary policy and supervisory functions. Second, all ECB work units must be placed under the managing director of the Executive Board, whose competence in respect of the ECB’s internal structure and staff must encompass the supervisory tasks.
Art. 25(4) SSMR. Art. 13l.1-13l.4 ECB Rules of Procedure, respectively; this Article was inserted as well by the abovementioned ECB Decision 2014/179/EU. 24 Art. 25(5) sent. 1 SSMR. 25 See infra, → paras. 24-36. 22 23
Christos V. Gortsos
347
Art. 25 SSMR
Separation from monetary policy function
Third, ECB staff involved in carrying out supervisory tasks must be organisationally separated from the staff involved in carrying out other tasks conferred on the ECB. This staff must report to the Executive Board in respect of organisational, human resources and administrative issues, but is subject to functional reporting to the Chair and Vice Chair of the Supervisory Board. Finally, and by way of exception, the ECB may establish “shared services” providing support to both the monetary policy and the supervisory function in order to ensure that the exercise of these support functions is not duplicated. Such services are not subject to Art. 6 ECB Decision 2014/723/EU26 as regards information exchanges with the relevant policy functions.27
2. Professional secrecy The obligation of professional secrecy for members of the governing bodies and the staff of the ECB and the national central banks is laid down in Art. 37 ESCB Statute.28 Art. 27 SSMR extended this obligation also to Supervisory Board members and to staff seconded by participating Member States carrying out supervisory duties. Art. 4 of ECB Decision 2014/723/EU provides in this respect the following: 17 Members of the Supervisory Board, the Steering Committee and any sub-structures established by the Supervisory Board, ECB staff and staff seconded by participating Member States carrying out supervisory duties are required not to disclose any information covered by the obligation of professional secrecy and are subject to the ECB Confidentiality Regime,29 even after their duties have ceased. In addition, persons having access to data covered by EU legislation imposing an obligation of secrecy are also subject to such legislation. The ECB must subject individuals, who provide any service, directly or indirectly, permanently or occasionally, related to the discharge of supervisory duties, to equivalent professional secrecy requirements by means of contractual arrangements.30 18 The Decision’s Annex contains an excerpt from the ECB Confidentiality Regime listing, inter alia, the ECB’s five security classifications with their access rights: ECBSECRET: access within the ECB limited to those with a strict “need to know”, approved by an ECB senior manager of the originating business area, or above; ECB-CONFIDENTIAL: access within the ECB limited to those with a “need to know” broad enough to enable staff to access information relevant to their tasks and take over tasks from 16
See infra, → para. 22. According to Recital 11 sent. 4 and 5 of ECB Decision 2014/723/EU, the ECB has further identified several business areas to provide support to both its monetary policy and supervisory functions, where such support will not lead to conflicts of interest between its supervisory and monetary policy objectives. Divisions dedicated to supervisory tasks have been established within several ‘shared service’ business areas. 28 This Statute is included in Protocol (No 4) annexed to the Treaties (OJ C202 (Consolidated version), 7.6.2016, pp. 230-250). 29 The term ‘ECB Confidentiality Regime’ is defined in Art. 2 point (4) ECB Decision 2014/723/EU as the ECB regime which defines how to classify, handle and protect ‘confidential ECB information’. In turn, the term ‘confidential information’ is defined in Art. 2, point (1) ECB Decision 2014/723/EU to mean the following: information classified as “ECB-CONFIDENTIAL” or “ECB-SECRET” under the ECB’s Confidentiality Regime, other confidential information, including information covered by data protection rules or by the obligation of professional secrecy, created within the ECB or forwarded to it by other bodies or individuals, any confidential information falling under the professional secrecy rules of the CRD IV, as well as confidential statistical information in accordance with Council Regulation (EC) No 2533/98 of 23 November 1998 “concerning the collection of statistical information by the [ECB]” (OJ L 318, 27.11.1998, pp. 8-19). 30 Art. 4(1)-(3) and (7) ECB Decision 2014/723/EU. 26
27
348
Christos V. Gortsos
Separation from monetary policy function
Art. 25 SSMR
colleagues with minimal delay; ECB-RESTRICTED: can be made accessible to ECB staff and, if appropriate, ESCB staff with a legitimate interest; ECB-UNRESTRICTED: can be made accessible to all ECB staff and, if appropriate, ESCB staff; and ECB-PUBLIC: authorised to be made available to the general public. Applicable to the above persons are the rules on professional secrecy laid down in 19 the CRD IV. In particular, “confidential information” received in the course of their duties may be disclosed only in summary or aggregate form in such a way that individual credit institutions cannot be identified, without prejudice to cases covered by criminal law. Nevertheless, if a credit institution has been declared insolvent or is being compulsorily wound up, confidential information not concerning third parties involved in attempts to rescue it may be disclosed in civil or commercial proceedings. These rules do not prevent the supervisory function from exchanging information with other EU or national authorities in accordance with applicable EU law.31
3. Access to information between policy functions and classification Art. 5 ECB Decision 2014/723/EU lays down general principles for access to informa- 20 tion between the ECB’s two policy functions and classification. In particular: First, information may be exchanged between them (if this is permitted under relevant EU law and notwithstanding Art. 4 ECB Decision 2014/723/EU) and must be classified in accordance with the ECB’s Confidentiality Regime by the ECB policy function owning the information. Exceptionally, “raw data” must be classified separately.32 In addition, the exchange of confidential information between the two policy functions is subject to the governance and procedural rules set out for this purpose and a “need to know” requirement33 to be demonstrated by the requesting policy function.34 Finally, access to confidential information by any policy function from the respective other must be determined by the policy function owning the information in accordance with the ECB’s Confidentiality Regime, unless otherwise stated in the Decision. In case of conflict between the two ECB policy functions, access to confidential information must be determined by the Executive Board in compliance with the principle of separation. Consistency of decisions on access rights and adequate recording of such decisions must be ensured.
4. Exchange of confidential information According to Art. 37.2 ESCB Statute, persons having access to data covered by EU 21 legislation imposing a secrecy obligation are subject to such legislation. Hence, recital 13 of ECB Decision 2014/723/EU provides that the exchange of information should be organized in strict compliance with the limits established by EU law, taking into account Art. 4(4)-(6) ECB Decision 2014/723/EU. The term ‘raw data’ is defined in Art. 2 point (3) ECB Decision 2014/723/EU as meaning data transmitted by reporting agents, after statistical processing and validation, or data generated by the ECB through the execution of its functions. 33 The term ‘need to know’ is defined in Art. 2 point (2) ECB Decision 2014/723/EU as meaning the need to have access to confidential information necessary for the fulfilment of a statutory function or task of the ECB. In the case of information labelled as ECB-CONFIDENTIAL this must be broad enough to enable staff both to access information relevant to their tasks and take over tasks from colleagues with minimal delays. 34 On the exchange of confidential information under Art. 6 ECB Decision 2014/723/EU, see infra, → para. 22. 31 32
Christos V. Gortsos
349
Art. 25 SSMR
Separation from monetary policy function
the principle of separation. In this respect, applicable are the obligations protecting confidential information, such as those contained in Council Regulation (EC) No 2533/98 of 23 November 1998 “concerning the collection of statistical information by the European Central Bank”35 and in the CRD IV relating to the sharing of supervisory information, since the disclosure of information related to the prudential supervision of credit institutions is not at the free disposal of the ECB but subject to limits and conditions as established by that legal act.36 22 Arts. 6-8 of ECB Decision 2014/723/EU govern the exchange of confidential information between the ECB’s two policy functions as follows: First, unless otherwise provided in EU law, the policy functions may disclose confidential information in the form of non-anonymised common reporting (COREP) and financial reporting (FINREP) data,37 as well as other raw data to the respective other ECB’s policy function upon request on a “need to know” basis, subject to Executive Board approval. The ECB’s supervisory function may also disclose confidential information in the form of anonymised COREP and FINREP data to the ECB’s monetary policy function upon request on a “need to know” basis.38 The policy functions must not disclose confidential information containing assessments or policy recommendations to the respective other policy function, except upon request on a “need to know” basis, and ensuring that each policy function is exercised in accordance with the applicable objectives, and where such disclosure has been expressly authorised by the Executive Board. On the other hand, they may disclose confidential aggregated information containing neither individual banking information nor policy-sensitive information related to the preparation of decisions to the respective other policy function upon request on a “need to know” basis as well, and ensuring that each policy function is exercised under the applicable objectives. Analysis of any received confidential information must be conducted autonomously by the receiving policy function in accordance with its objective; any subsequent decision must be taken solely on that basis.39 Second, notwithstanding the above, in an emergency situation, as defined in Art. 114 CRD IV, a policy function must communicate, without delay, confidential information to the respective other policy function, if that is relevant for the exercise of its tasks in respect of the emergency at hand.40 Finally, the exchange of information involving personal data is subject to applicable EU law on the protection of individuals with regard to the processing of personal data and on the free movement of such data41 and, in particular the GDPR and Regulation (EC) No 45/2001 of the same institutions of 18 December 2000 “on
OJ L318, 27.11.1998, pp. 8-19. See also Recital (H) of the Interinstitutional Agreement. 37 See Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 “laying down implementing technical standards with regard to supervisory reporting of institutions according to [the CRR]” (OJ L191, 28.6.2014, pp. 1-1861). 38 Art. 6(1) ECB Decision 2014/723/EU. 39 Art. 6(2)-(3) ECB Decision 2014/723/EU. 40 Art. 8 ECB Decision 2014/723/EU. Art. 114(1) CRD IV classifies a situation as an emergency, if it has the potential to jeopardise market liquidity and the financial system’s stability in any Member State where entities of a group have been authorised or significant branches are established, including: a situation as described in Art. 18 EBAR (adverse developments which may seriously jeopardise the orderly functioning and integrity of financial markets or the financial system’s stability in the EU), or a situation of adverse developments in markets. 41 Art. 7 ECB Decision 2014/723/EU. 35 36
350
Christos V. Gortsos
Separation from monetary policy function
Art. 25 SSMR
the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data”.42 It is worth noting in this respect that there are some limitations to the prohibitions on 23 the exchange of information between the ECB’s two policy functions. In particular, Art. 13k.3 of the ECB Rules of Procedure provides that the separation between the ECB’s monetary policy and supervisory functions should not exclude the exchange of information necessary for the achievement of the tasks of the ECB and of the Eurosystem. In addition, according to recital 74 SSMR, the requirements for the exchange of information with the staff not involved in supervisory activities should not prevent the ECB from exchanging information within the limits and under the conditions set out in the relevant EU legislation, including with the Commission for the purposes of its tasks under Arts. 107-108 TFEU and under EU law on enhanced economic and budgetary surveillance. In the same vein, recital 14 sent. 4 and 5 of ECB Decision 2014/723/EU considers that effective separation “should not prevent the reaping, wherever possible and desirable, of all the benefits to be expected as a result of combining these two policy functions in the same institution, including drawing on the ECB’s extensive expertise in macroeconomic and financial stability issues and reducing double work when gathering information. It is therefore necessary to put in place mechanisms that allow an adequate flow of data and other confidential information between the two policy functions”.
C. In particular: the Mediation Panel I. The provisions of the SSMR: Art. 25(5) SSMR The rationale for the creation of the Mediation Panel as one of the new bodies set up 24 within the ECB is laid down in recital 73: “With a view to ensuring separation between monetary policy and supervisory tasks, the ECB should be required to create a mediation panel. The setting up of the panel, and in particular its composition, should ensure that it resolves differences of views in a balanced way, in the interest of the Union as a whole.” According then to Art. 25(5) SSMR, the task of this Panel is the resolution of differences of views on the part of NCAs of interested participating Member States regarding an objection of the GC to a draft Decision by the Supervisory Board. It is composed of one member per participating Member State, chosen by each of the members of the GC and the Supervisory Board deciding by simple majority (each member having one vote).43 (2) The ECB should adopt and make public a Regulation setting up the Mediation 25 Panel and laying down its Rules of Procedure.44 The relevant Regulation (EU) No 673/2014 (ECB/2014/26)45 was adopted by the ECB on 2 June 2014, entered into force on 20 June 2014 and supplements the ECB Rules of Procedure.46
OJ L8, 12.1.2001, pp. 1-22. Art. 25(5) sent. 2 and 3 SSMR. 44 Art. 25(5) sent. 4 SSMR. 45 OJ L179, 19.6.2014, pp. 72-76. 46 Arts. 1 sent. 1 and 13 sent. 1 ECB Regulation (EU) No 673/2014. 42 43
Christos V. Gortsos
351
Art. 25 SSMR
Separation from monetary policy function
II. The provisions of the ECB Regulation (EU) No 673/2014 (ECB/2014/26) 1. Membership and internal organisation As already mentioned, the Mediation Panel is composed of one member per participating Member State. Its Chair is the incumbent Vice-Chair of the Supervisory Board, who is not a member of the Panel,47 but was considered to be best placed to act as a Chair, since he/she is both a GC and a Supervisory Board member.48 The members are appointed by each participating Member State from among the members of the GC and the Supervisory Board, the Chair having to facilitate the achievement of a balance between the two. Their mandate expires when they cease to be members of the body by which they were appointed. When acting as a member of the Mediation Panel, each member must act in the interest of the EU as a whole.49 27 In principle, attendance at Mediation Panel meetings is restricted to its members, its Chair and its Secretary. Experts may attend specific meetings upon invitation if their expertise is required.50 28 The Chair convenes Mediation Panel meetings whenever he/she deems it necessary. Meetings are held at the premises of the ECB or, at the request of the Chair, by means of teleconferencing, unless at least three members object. The Supervisory Board’s Secretary acts as Secretary of the Mediation Panel as well; in that function, he/she must assist the Mediation Panel’s Chair in preparing for Mediation Panel and Case Committee meetings,51 is responsible for drafting their proceedings and must also assist the GC’s Secretary in preparing for GC meetings regarding any issues in which the Mediation Panel has been involved and is responsible for drafting the respective part of the minutes of the proceedings.52 The proceedings of Mediation Panel meetings are submitted to the members for approval at their next meeting or before that by written procedure; once approved, they are signed by the Chair and are made available to the GC and the Supervisory Board.53 29 In order for the Mediation Panel to vote, there must be a quorum of two-thirds of its members. If the quorum is not met, the Chair may convene an extraordinary meeting at which members may vote without regard to it. Each member has one vote. The Mediation Panel decides by a simple majority of its members. In the event of a tie, the most senior member of the Mediation Panel in terms of office in the first instance, and by age in the event of two or more members having equal standing in terms of office, has the casting vote. The Panel proceeds to vote at the request of the Chair, who must also initiate a voting procedure upon request from three Panel members. At the request of the Chair, decisions may also be taken by written procedure.54 26
Art. 3(2) ECB Regulation (EU) No 673/2014. Fourth Recital ECB Regulation (EU) No 673/2014. 49 Art. 4 and second Recital ECB Regulation (EU) No 673/2014. 50 Art. 5(1)-(2) ECB Regulation (EU) No 673/2014. 51 On this Committee, see infra, → para. 32. 52 Art. 6(1)-(3) and (5) ECB Regulation (EU) No 673/2014. 53 Art. 6(4) ECB Regulation (EU) No 673/2014. 54 Art. 7(1)-(4) ECB Regulation (EU) No 673/2014. 47
48
352
Christos V. Gortsos
Separation from monetary policy function
Art. 25 SSMR
2. The mediation procedure a) Request for mediation Mediation is initiated when a participating Member State’s NCA is concerned by 30 and has different views regarding an objection by the GC to a draft Decision of the Supervisory Board; such an objection may be subject to mediation only once.55 In procedural terms, the NCA concerned must submit to the Supervisory Board’s Secretariat a notice requesting mediation in order to resolve differences, with a view to ensuring separation between monetary policy and supervisory tasks.56 The Supervisory Board’s Secretariat must then file the notice requesting mediation with the GC’s Secretariat within 10 working days from receipt of the GC’s objection, annexing thereto both the relevant Supervisory Board’s draft Decision and the relevant objection by the GC. The notice must be communicated to the GC and Supervisory Board members.57 The above provisions are without prejudice to the procedure according to which a 31 non-euro area participating Member State (which is not represented in the Supervisory Board) notifies the ECB of its reasoned disagreement with an objection of the GC to a draft Decision of the Supervisory Board under Art. 7(7) SSMR.58 In particular, if such a Member State’s NCA notifies the ECB of its reasoned disagreement pursuant to Art. 7(7) SSMR, it may not request mediation on the same objection.59 Vice versa, if such an NCA has requested a mediation regarding a GC’s objection and then notifies the ECB of its reasoned disagreement with the same objection according to Art. 7(7) SSMR, the request for mediation is deemed withdrawn.60 b) The Case Committee The Mediation Panel’s Chair must immediately forward to its members a notice re- 32 questing mediation, which is filed with the GC’s Secretariat in accordance with Art. 8(5) Regulation (EU) No 673/2014. For each duly filed notice, the Panel must then set up a Case Committee within 5 working days of the filing, which is composed of the Mediation Panel’s Chair (acting as its Chair) and 4 other members appointed by the Panel from among its members, seeking to achieve a balance between GC and Supervisory Board members. Excluded is the member appointed by the participating Member State whose NCA has expressed different views pursuant to Art. 8(1) Regulation (EU) No 673/2014 or the member appointed by the participating Member State whose NCA joined an existing request for mediation pursuant to Art. 8(2) Regulation (EU) No 673/2014.61 Within 15 working days from receipt by the Mediation Panel of the notice requesting 33 mediation, the Case Committee must submit to the Mediation Panel’s Chair a draft opinion containing an analysis of whether the request for mediation is admissible and legally founded (in urgent cases, the draft opinion must be delivered within a shorter Art. 8(3) ECB Regulation (EU) No 673/2014. This notice must be submitted within 5 working days from receipt of the reasoned objection by the GC, identify that objection, and include a statement on the reasons for requesting mediation. The Secretariat must notify it to the Supervisory Board members. Any other participating Member State’s NCA concerned by and having different views regarding the same objection may give a separate notice requesting mediation or join an existing request for mediation, within 5 working days of the notification of the first request for mediation, and state its different view. 57 Art. 8(1)-(2) and (5) ECB Regulation (EU) No 673/2014. 58 Third Recital ECB Regulation (EU) No 673/2014. 59 Art. 8(4) ECB Regulation (EU) No 673/2014; see also Art. 13g.4 ECB Rules of Procedure. 60 Art. 8(6) ECB Regulation (EU) No 673/2014; see also Art. 26(8) sent. 7 SSMR. 61 Art. 9(1)-(3) ECB Regulation (EU) No 673/2014. 55
56
Christos V. Gortsos
353
Art. 26 SSMR
Supervisory board
period to be set by the Chair). The Chair must then immediately submit this draft opinion to the Mediation Panel and call a meeting.62 c) Decision-making process After considering the draft opinion of the Case Committee, the Mediation Panel must submit its own opinion to the Supervisory Board and the GC, in principle within twenty 20 working days from receipt of the notice requesting mediation (in urgent cases, the opinion must be delivered within a shorter period to be set by the Chair). This opinion must be reasoned and in writing but it is not binding either on the Supervisory Board or on the GC.63 35 (2) Upon submission of this opinion and after having taken it into consideration, the Supervisory Board may submit a new draft Decision to the GC, within 10 working days from the submission (in urgent cases, the Chair of the Supervisory Board may decide to shorten this period). A request for mediation concerning an objection by the GC to such a new draft Decision is not admissible.64 34
3. Confidentiality and professional secrecy 36
Even though in principle the Mediation Panel’s proceedings are confidential, the GC may authorise the ECB President to make their outcome public. All relevant documents drawn up, used or held by the Mediation Panel are considered ECB documents and are classified and handled in accordance with Art. 23.3 of the ECB Rules of Procedure, i.e., in accordance with the organisational rules regarding professional secrecy, as well as management and confidentiality of information.65
Art. 26 SSMR Supervisory board1 1. The planning and execution of the tasks conferred on the ECB shall be fully undertaken by an internal body composed of its Chair and Vice Chair, appointed in accordance with paragraph 3, and four representatives of the ECB, appointed in accordance with paragraph 5, and one representative of the national competent authority in each participating Member State (‘Supervisory Board’). All members of the Supervisory Board shall act in the interest of the Union as a whole. Where the competent authority is not a central bank, the member of the Supervisory Board referred to in this paragraph may decide to bring a representative from the Member State’s central bank. For the purposes of the voting procedure set out in paragraph 6, the representatives of the authorities of any one Member State shall together be considered as one member. 2. The appointments for the Supervisory Board in accordance with this Regulation shall respect the principles of gender balance, experience and qualification. 3. After hearing the Supervisory Board, the ECB shall submit a proposal for the appointment of the Chair and the Vice-Chair to the European Parliament for approval. Art. 9(4)-(5) ECB Regulation (EU) No 673/2014. Art. 10 ECB Regulation (EU) No 673/2014. 64 Art. 11 ECB Regulation (EU) No 673/2014. 65 Art. 12 ECB Regulation (EU) No 673/2014. 1 This contribution should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the author and do not necessarily reflect those of the ECB. 62
63
354
Georg Gruber
Art. 26 SSMR
Supervisory board
Following the approval of this proposal, the Council shall adopt an implementing decision to appoint the Chair and the Vice-Chair of the Supervisory Board. The Chair shall be chosen on the basis of an open selection procedure, on which the European Parliament and the Council shall be kept duly informed, from among individuals of recognised standing and experience in banking and financial matters and who are not members of the Governing Council. The Vice Chair of the Supervisory Board shall be chosen from among the members of the Executive Board of the ECB. The Council shall act by qualified majority without taking into account the vote of the members of the Council which are not participating Member States. Once appointed, the Chair shall be a full-time professional and shall not hold any offices at national competent authorities. The term of office shall be five years and shall not be renewable. 4. If the Chair of the Supervisory Board no longer fulfils the conditions required for the performance of his duties or has been guilty of serious misconduct, the Council may, following a proposal by the ECB, which has been approved by the European Parliament, adopt an implementing decision to remove the Chair from office. The Council shall act by qualified majority without taking into account the vote of the members of the Council which are not participating Member States. Following a compulsory retirement of the Vice-Chair of the Supervisory Board as a member of the Executive Board, pronounced in accordance with the Statute of the ESCB and of the ECB, the Council may, following a proposal by the ECB, which has been approved by the European Parliament, adopt an implementing decision to remove the Vice-Chair from office. The Council shall act by qualified majority without taking into account the vote of the members of the Council which are not participating Member States. For those purposes the European Parliament or the Council may inform the ECB that they consider that the conditions for the removal of the Chair or the Vice Chair of the Supervisory Board from office are fulfilled, to which the ECB shall respond. 5. The four representatives of the ECB appointed by the Governing Council shall not perform duties directly related to the monetary function of the ECB. All the ECB representatives shall have voting rights. 6. Decisions of the Supervisory Board shall be taken by a simple majority of its members. Each member shall have one vote. In case of a draw, the Chair shall have a casting vote. 7. By derogation from paragraph 6 of this Article, the Supervisory Board shall take decisions on the adoption of regulations pursuant to Article 4(3), on the basis of a qualified majority of its members, as defined in Article 16(4) TEU and in Article 3 of Protocol No. 36 on transitional provisions attached to the TEU and to the TFEU, for the members representing the participating Member State’s authorities. Each of the four representatives of the ECB appointed by the Governing Council shall have a vote equal to the median vote of the other members. 8. Without prejudice to Article 6, the Supervisory Board shall carry out preparatory works regarding the supervisory tasks conferred on the ECB and propose to the Governing Council of the ECB complete draft decisions to be adopted by the latter, pursuant to a procedure to be established by the ECB. The draft decisions shall be transmitted at the same time to the national competent authorities of the Member States concerned. A draft decision shall be deemed adopted unless the Governing Council objects within a period to be defined in the procedure mentioned above but not exceeding a maximum period of ten working days. However, if a participating Member State whose currency is not the euro disagrees with a draft decision of the Georg Gruber
355
Art. 26 SSMR
Supervisory board
Supervisory Board, the procedure set out in Article 7(8) shall apply. In emergency situations the aforementioned period shall not exceed 48 hours. If the Governing Council objects to a draft decision, it shall state the reasons for doing so in writing, in particular stating monetary policy concerns. If a decision is changed following an objection by the Governing Council, a participating Member State whose currency is not the euro may notify the ECB of its reasoned disagreement with the objection and the procedure set out in Article 7(7) shall apply. 9. A secretariat shall support the activities of the Supervisory Board, including preparing the meetings on a full time basis. 10. The Supervisory Board, voting in accordance with the rule set out in paragraph 6, shall establish a steering committee from among its members with a more limited composition to support its activities, including preparing the meetings. The steering committee of the Supervisory Board shall have no decision-making powers. The steering committee shall be chaired by the Chair or, in the exceptional absence of the Chair, the Vice-Chair of the Supervisory Board. The composition of the steering committee shall ensure a fair balance and rotation between national competent authorities. It shall consist of no more than ten members including the Chair, the Vice-Chair and one additional representative from the ECB. The steering committee shall execute its preparatory tasks in the interest of the Union as a whole and shall work in full transparency with the Supervisory Board. 11. A representative of the Commission may participate as an observer in the meetings of the Supervisory Board upon invitation. Observers shall not have access to confidential information relating to individual institutions. 12. The Governing Council shall adopt internal rules setting out in detail its relation with the Supervisory Board. The Supervisory Board shall also adopt its rules of procedure, voting in accordance with the rule set out in paragraph 6. Both sets of rules shall be made public. The rules of procedure of the Supervisory Board shall ensure equal treatment of all participating Member States. Bibliography Edoardo Chiti and Fabio Recine, ‘The Single Supervisory Mechanism in Action: Institutional Adjustment and Reinforcement of the ECB Position’, European Public Law 24, no. 1 (2018), 101; Deutsche Bundesbank, ‘Monthly Report – October 2014’, Volume 66 No. 10 (2014); European Court of Auditors, ‘Single Supervisory Mechanism – Good for start but further improvements needed’, Report No. 29 (2016), ; Christos V. Gortsos, The Single Supervisory Mechanism (SSM) (Nomiki Bibliothiki, Athens 2015); Georg Gruber and Martin Benisch, ‘Privileges and Immunities of the European Central Bank’, Legal Working Paper Series No. 4 (1997); Klaus Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Concetta Brescia Morra, René Smits and Andrea Magliari, ‘The Administrative Board of Review of the European Central Bank: Experience after 2 years’, EBOR 18 (2017), 567; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2015); Christy Ann Petit, ‘The SSM and the ECB decision-making governance’, in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Elgar Financial Law 2019), 108; Antonio Luca Riso and Georgios Zagouras, ‘Single Supervisory Mechanism (SSM)’ in: Simon G. Grieser and Manfred Heemann (eds), Europäisches Bankenaufsichtsrecht (Frankfurt School Verlag, Frankfurt 2016), 106; Pedro Gustavo Teixeira, ‘The Legal History of the Banking Union’, EBOR 18 (2017), 535; Stijn Verhelst, ‘Assessing the Single Supervisory Mechanism: Passing the Point of No Return for Europe’s Banking Union’, Egmont Paper 58 (2013); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht (7th edn, Nomos, Baden-Baden 2015); Paul Weisman, ‘The ECB’s Supervisory Board Under the Single Supervisory Mechanism (SSM): A Comparison with European Agencies’, European Public Law 24, no. 2 (2018), 311.
356
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The governance structure of the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 6
Georg Gruber
Art. 26 SSMR
Supervisory board 1. 2. 3. 4.
Tasks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Status of the members of the Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . Appointment and dismissal of the members of the Supervisory Board . . . a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Appointment and term of office of the Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Appointment and term of office of the Vice-Chair . . . . . . . . . . . . . . . . . . . . . . . d) Appointment and term of office of the ECB representatives . . . . . . . . . . . . . 5. Functioning of the Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Written procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Secretariat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Steering Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Executive Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Governing Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 10 12 18 18 20 25 29 34 35 40 42 44 49 51
C. The decision-making process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The non-objection procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Approval of draft decisions by the Supervisory Board . . . . . . . . . . . . . . . . . . . b) Submission of the draft decision to the Governing Council . . . . . . . . . . . . . . c) Adoption of decisions by the Governing Council . . . . . . . . . . . . . . . . . . . . . . . . d) Publication or notification of legal acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Involvement of participating Member States whose currency is not the euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The procedure for the adoption of macroprudential decisions . . . . . . . . . . . . . . . III. The decision-making procedure under Art. 6(7) SSMR . . . . . . . . . . . . . . . . . . . . . . IV. The standard decision-making procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Delegated decision-making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54 57 57 61 62 68 69 74 75 76 77 78 79
D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
A. Introduction Art. 26 SSMR is one of the cornerstones of the governance structure of the SSM. It 1 defines in its first para. the tasks and composition of the newly established Supervisory Board which is fully responsible for the planning and execution of the supervisory tasks conferred on the ECB. Moreover, paras. 2 to 5 of Arts. 26(2)-(5) SSMR lay down rules on the appointment and dismissal of the Chair, the Vice-Chair and the four ECB representatives to the Supervisory Board. In addition, Art. 26 SSMR defines the decision-making process (paras. 6 to 8), namely the so-called non-objection procedure under which the ECB Governing Council adopts decisions taken in the performance of supervisory tasks. Furthermore, Art. 26 SSMR provides for the establishment of a steering committee (para. 10) and of a secretariat (para. 9) supporting the Supervisory Board and addresses the participation of third parties in meetings of the Supervisory Board (para. 11). Finally, in para. 12 it empowers the Governing Council to adopt internal rules setting out in detail its relation with the Supervisory Board and the latter to adopt its own rules of procedure. Art. 26 SSMR must be read and interpreted in conjunction with the relevant provi- 2 sions of the TFEU, ESCB Statute, the ECB Rules of Procedure2 and other relevant provi2 Decision 2004/257/EC of the ECB of 19 February 2004 adopting the Rules of Procedure of the ECB (ECB/2004/2), OJ L 80, 18.3.2004, at p. 33; consolidated version available on the ECB’s webpage. The ECB Rules of Procedure were amended by Decision 2014/179/EU of 22 January 2014 (ECB/2014/1), OJ L 95, 29.3.2014, at p. 56, in line with Art. 26(12) SSMR to set out in detail the relations between the Governing Council and the Supervisory Board.
Georg Gruber
357
Art. 26 SSMR
Supervisory board
sions which together define the ECB’s governance structure. Of particular relevance in this respect are the Interinstitutional Agreement between the European Parliament and the ECB3, the Memorandum of Understanding between the Council of the European Union and the ECB4, and the Rules of Procedure of the Supervisory Board5 which the Supervisory Board has adopted in accordance with Art. 26(12) SSMR. Finally, the ECB has adopted further rules for the implementation of Art. 26 SSMR such as Decision of the ECB 2014/427/EU of 6 February 2014 on the appointment of representatives of the ECB to the Supervisory Board6. 3 The governance structure of the SSM was one of the most controversial issues during the preparation of the SSMR. The main challenge was to reconcile the ECB’s existing governance structure defined in the TFEU and the ESCB Statute for the performance of the ECB’s monetary policy tasks with two main objectives: First, the European legislator, in particular some Member States, wanted to ensure a strict separation of the ECB’s monetary policy from its new supervisory tasks to avoid potential conflicts of interest between the objectives of monetary policy and prudential supervision.7 The second objective was to allow non-euro Member States which are not represented in the ECB Governing Council to join the SSM through close cooperation and to participate in the decision-making.8 To achieve these objectives, the Commission’s proposal of 12 September 20129 foresaw a strict separation of the ECB’s monetary policy tasks from its supervisory tasks and the establishment of a supervisory board responsible for all preparatory and executing activities including the preparation of decisions on supervisory matters. 10 Art. 19(3) of the draft regulation also foresaw the possibility for the Governing Council to delegate clearly defined supervisory tasks and related decisions to the Supervisory Board, subject to the oversight and responsibility of the Governing Council. By way of this delegation, the Supervisory Board would have become a third decision-making body of the ECB.11 4 Art. 19(3) of the draft regulation was deleted in the subsequent discussions based on an opinion from the Council Legal Service according to which the Supervisory Board could only be entrusted with preparatory tasks but not with decision-making powers.12 According to the Council Legal Service, the ECB’s governance structure set out in primary law13, which provides only for the establishment of two decision-making bodies (Governing Council and the Executive Board), could not be amended by way of sec3 Interinstitutional Agreement between the European Parliament and the ECB on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the Single Supervisory Mechanism, OJ L 320, 30.11.2013, at p. 2. 4 Memorandum of Understanding between the Council of the European Union and the ECB on the cooperation on procedures related to the Single Supervisory Mechanism (SSM) of 11 December 2013, available under . 5 Rules of Procedure of the Supervisory Board of the ECB, OJ L 182, 21.6.2014, at p. 56. 6 OJ L 196, 3.7.2014, at p. 38. 7 See Teixeira, EBOR 18 (2017), 535, at p. 548; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at pp. 130–134 with an overview of alternative governance models; on the separation principle in general Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 paras. 53 et seq.; Weisman, European Public Law 24, no. 2 (2018), 311, at pp. 314-315 and pp. 322-323. 8 Verhelst, Egmont Paper 58 (2013), at p. 21. 9 Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (COM(2012) 511 final), . 10 See p. 7 of the Commission’s proposal and Recital 36 of the draft regulation. 11 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 60. 12 The opinion is not publicly available but summarised by Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 60. 13 Arts. 129(1) and 283 TFEU and Arts. 8–12 ESCB Statute.
358
Georg Gruber
Art. 26 SSMR
Supervisory board
ondary legislation.14 A different governance structure would have required a change to the TFEU which Member States were not willing to embark on at the time and which was not realistic because of the time constraints.15 Accordingly, the SSMR recognises the Governing Council as the ultimate decision-making body also for supervisory matters and does not foresee a possibility to delegate decision-making powers to the Supervisory Board. However, in order to strengthen the role of the Supervisory Board and to ensure, to the extent possible, the implementation of the separation principle, a new decisionmaking process was introduced, namely the non-objection procedure.16 Art. 26(8) SSMR, which is modelled on the Union’s economic governance structure17, foresees that a draft decision proposed by the Supervisory Board is deemed to be adopted unless the Governing Council objects within a period not exceeding ten working days. Hence, the Governing Council may only approve or object to a draft decision prepared by the Supervisory Board but may not amend it. Moreover, provisions on the establishment of a mediation panel were introduced to settle, in case of an objection, the conflict between the Supervisory Board and the Governing Council.18 The governance structure of the SSM is thus a compromise between the legislator’s wish to clearly separate the ECB’s supervisory tasks from its monetary policy tasks with a strong role for the Supervisory Board and the legal constraints arising from primary law.
B. The governance structure of the SSM At the heart of the SSM’s governance structure is the Supervisory Board (see 5 Section I. below) as an “essential body”19 to perform the supervisory tasks conferred upon the ECB. The Supervisory Board is supported by a secretariat and the Steering Committee (see Section II. below). In addition, the governance structure comprises the Executive Board (see Section III. below), which is not directly involved in the performance of supervisory tasks but maintains its responsibilities for organisational and administrative issues, and the Governing Council (see Section IV. below) as the ultimate decision-making body for supervisory matters. The governance structure is complemented by two specialised bodies, namely the Mediation Panel, which is responsible for resolving differences of views between the Supervisory Board and the 14 See Commission Staff working document accompanying the Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No. 1024/2013 (SWD(2017) 336 final), 17; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at pp. 136–138; Weisman, European Public Law 24, no. 2 (2018), 311, at p. 320; Petit, in: Lo Schiavo (ed), The European Banking Union and the Role of Law (2019), 108, at pp. 111 and 113. Similar the ECB’s reply to the report of the European Court of Auditors entitled “Single Supervisory Mechanism – Good start but further improvements needed”, p. 122, ; Deutsche Bundesbank, Monthly Report October 2014, at pp. 43, 47–48. Of a different view: Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 60–61, based on the argument that Art. 127(6) TFEU would have been a sufficient legal basis to establish a new decision-making body for supervisory matters. 15 Gortsos, The Single Supervisory Mechanism (SSM) (2015), at p. 240; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at p. 136. 16 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 61; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at pp. 138–139; Verhelst, Egmont Paper 58 (2013), at p. 21; Teixeira, EBOR 18 (2017), 535, at p. 549. 17 The Fiscal Compact foresees that decisions under the Excessive Deficit Procedure are taken by reverse qualified majority voting, which means that fines are deemed to be approved by the Council unless a qualified majority of Member States overturns them. 18 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 72–73. On the mediation panel, see supra, → Art. 25. 19 Recital 69 SSMR.
Georg Gruber
359
Art. 26 SSMR
Supervisory board
Governing Council,20 and the Administrative Board of Review which is responsible for carrying out, on request of an applicant, an internal administrative review of supervisory decisions taken by the ECB21; these two bodies cannot be presented here and are only mentioned to provide the full overview of the governance structure of the SSM.
I. Supervisory Board 1. Tasks Pursuant to Art. 26(1)(1) SSMR, the planning and execution of the supervisory tasks conferred on the ECB shall be fully undertaken by the Supervisory Board. By using the terms “fully undertaken” the legislator wanted to assign a key role to the Supervisory Board as regards the performance of the ECB’s supervisory tasks. 22 The Supervisory Board’s competence extends to all tasks conferred on the ECB under Arts. 4 and 5 SSMR, unless explicitly assigned to another body23 and without prejudice to the competences of the ECB decision-making bodies24. 7 The terms “planning” and “execution” are not defined in the SSMR. It is though clear from the purpose of the provision that these terms cover the entire supervisory cycle including the development of supervisory practices (policies, methodologies and standards), organisational measures like the definition of processes, the planning of supervisory measures (off-site and on-site), supervisory reviews including stress tests, the oversight of the day-to-day supervision by the joint supervisory teams, preparation of supervisory decisions, and the preparation of enforcement and sanctioning measures.25 While legal instruments with external effects require approval by the Governing Council as the ultimate decision-making body, the other planning and execution activities are undertaken under the sole responsibility of the Supervisory Board.26 8 The Supervisory Board’s tasks are specified further in Art. 26(8)(1) SSMR. According to this provision, the “Supervisory Board shall carry out preparatory works regarding the supervisory tasks conferred on the ECB and propose to the Governing Council complete draft decisions to be adopted by the latter …”. Thus, the Supervisory Board plays a crucial role in the preparation of supervisory decisions. In practice, supervisory decisions are prepared by the joint supervisory teams or by horizontal units and then submitted to the Supervisory Board for approval before they are submitted to the Governing Council for final adoption. As explained in further detail below in Section C.I., under the non-objection procedure the Governing Council may only approve or object to a draft decision proposed by the Supervisory Board, but can neither amend it nor force the Supervisory Board to submit a specific decision. This means that the Supervisory Board, although 6
20 See Art. 25(5) SSMR and Regulation (EU) No. 673/2014 of the ECB of 2 June 2014 concerning the establishment of a Mediation Panel and its Rules of Procedure (ECB/2014/26), OJ L 179, 2.6.2014, at p. 72. For further details see supra, → Art. 25. 21 See Art. 24 SSMR and Decision 2014/360/EU of the ECB of 14 April 2014 concerning the establishment of an Administrative Board of Review and its Operating Rules (ECB/2014/16), OJ L 175, 14.6.2014, at p. 47. For further details see supra, → Art. 24 and Morra, Smits and Magliari, EBOR 18 (2017), 567, at p. 589. 22 Deutsche Bundesbank, Monthly Report October 2014, at pp. 43, 48. Weisman, European Public Law 24, no. 2 (2018), 311, at p. 312: “central nexus of the SSM”. See also supra, → para. 1 et seq. 23 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 44. 24 Petit, in: Lo Schiavo (ed), The European Banking Union and the Role of Law (2019), 108, at p. 113; see also supra, → paras. 1 et seq. and Art. 13a ECB Rules of Procedure. 25 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 66. 26 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 66.
360
Georg Gruber
Art. 26 SSMR
Supervisory board
not a decision-making body, has a strong role in the decision-making process with the exclusive competence to initiate supervisory decisions.27 To facilitate its work, the Supervisory Board, in agreement with the Executive Board, 9 may establish and dissolve substructures of a temporary nature, such as working groups or task forces. 28 These substructures shall support the Supervisory Board in its work and report to it.
2. Composition Pursuant to Art. 26(1)(1) SSMR, the Supervisory Board is composed of its Chair, 10 Vice-Chair, four representatives of the ECB and one representative of the national competent authority (NCA) in each participating Member State. Hence, the Supervisory Board is currently composed of up to 27 members 29. The composition of the Supervisory Board mirrors the composition of the Governing Council which is composed of the six members of the Executive Board and the governors of the 19 national central banks (NCBs) of the Member States whose currency is the euro.30 For cases where the NCA is not an NCB, Art. 26(1)(3) SSMR specifies that the re- 11 spective member of the Supervisory Board may bring a representative from the Member State’s central bank. In such cases, the representatives are together considered as one member for the purposes of voting.31 This provision is relevant for the seven Member States where currently the NCB is not the NCA but still involved in banking supervision (Germany, Estonia, Latvia, Luxembourg, Malta, Austria and Finland). The interaction between the NCA representatives and the NCB representatives, in particular the coordination of their positions, depends on national law arrangements. In any case, the NCB representatives, even if not full members of the Supervisory Board, are entitled to participate in all meetings and receive all documentation submitted to the Supervisory Board and may raise questions or comments. In return, they are basically subject to the same obligations as the members in terms of confidentiality and ethical conduct.
3. Status of the members of the Supervisory Board According to Art. 26(1)(2) SSMR, all members of the Supervisory Board shall act in 12 the interest of the Union as a whole. This applies not only to the Chair, the Vice-Chair and the four ECB representatives but also to the NCA representatives who, despite the term used, should not represent the interests of their NCAs or their Member States but 27 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 47; Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 61 calls the Supervisory Board therefore a “Decision preparing body”. Verhelst, Egmont Paper 58 (2013), at p. 22 calls the Supervisory Board a “de facto decision-making body”; Weisman, European Public Law 24, no. 2 (2018), 311, at p. 320 concludes that the Supervisory Board “is de facto taking the supervisory decisions of the ECB”; Petit, in: Lo Schiavo (ed), The European Banking Union and the Role of Law (2019), 108, at p. 115 refers to a “balanced relationship” between the Governing Council and the Supervisory Board. 28 Art. 13m.2 ECB Rules of Procedure. 29 In addition to the NCAs of the 19 Member States whose currency is the euro, the NCAs of Bulgaria and Croatia are also represented in the Supervisory Board following the establishment of close cooperation in 2020. The actual number of members may be below 27 in case not all members are appointed. The current composition of the Supervisory Board is available on the ECB’s webpage under . 30 Chiti and Recine, European Public Law 24, no. 1 (2018), 101, at p. 113; Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 35; Weisman, European Public Law 24, no. 2 (2018), 311, at p. 317. 31 Last sentence of Art. 26(1) SSMR and Art. 6(1) Rules of Procedure of the Supervisory Board. Unless explicitly indicated otherwise in writing by the NCA, the voting right shall be exercised by the NCA representative or his/her alternate.
Georg Gruber
361
Art. 26 SSMR
13
14
15
16
Supervisory board
the Union’s interests.32 They are members of an ECB internal body and therefore jointly responsible for the planning and execution of the supervisory tasks conferred on the ECB in line with the objectives set out in Art. 1 SSMR. Similar to the members of the Governing Council33, the members of the Supervisory Board are appointed as independent experts responsible for the supervision of all significant supervised entities in the euro area. Art. 26(1)(2) SSMR is mirrored and supplemented by the second sentence of Art. 19(1) SSMR, according to which the “members of the Supervisory Board … shall act independently and objectively in the interest of the Union as a whole and shall neither seek nor take instructions from the institutions or bodies of the Union, from any government of a Member State or from any other public or private body”. The personal independence of the members of the Supervisory Board enshrined in this provision ensures that the members can act exclusively in the interest of the Union and are shielded from national interests.34 The members of the Supervisory Board also need to comply with the principle of separation set out in Art. 25 SSMR and perform their tasks exclusively in line with the objectives set out in this Regulation. The principle of separation translates into a number of incompatibilities: For instance, the Chair of the Supervisory Board shall not be a member of the Governing Council and the four ECB representatives in the Supervisory Board must not perform duties directly related to the ECB’s monetary function. 35 Since the Supervisory Board is responsible for the supervision of all significant supervised entities, its members must have access to all relevant information about such entities.36 In return, all members of the Supervisory Board are subject to strict rules on professional secrecy and may not disclose confidential information concerning supervised entities.37 In addition to these general provisions, all members are subject to the Code of Conduct for high-level European Central Bank Officials38 which the Governing Council has adopted in 2019.39 The Code of Conduct requires the members of the Supervisory Board to observe the “highest standards of ethical conduct and integrity” and to act, in the performance of their duties, “honestly, independently, impartially, with discretion and without regard to self-interest”. More specifically, the members are required to act independently and objectively in the interest of the Union as a whole, regardless of national or personal interest, and in strict compliance with the relevant provisions of the TFEU, the ESCB Statute, the SSMR, the ECB Rules of Procedure and the Rules of Procedure of the Supervisory Board. Moreover, the Code of Conduct recalls the need 32 See Section 2.5 of the Opinion of the ECB of 7 September 2016 on the role of the Financial Supervisory Authority’s representative on the ECB’s Supervisory Board, and on supervision fees (CON/2016/43); critical Chiti/Recine, European Public Law 24, no. 1 (2018), 101, at pp. 113-116 stressing that the link of the members to their NCAs ensure that the national perspective is also represented in the Supervisory Board. 33 Zilioli and Gruber, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht (7 th edn, 2015), Art. 10 ESZB/EZB-Satzung para. 4. 34 See Section 2.2.2 of the Opinion of the ECB of 7 September 2016 (CON/2016/43) stressing that any national body, including the board of an NCA, is prohibited from giving instructions to a member of the Supervisory Board. For further details see supra, → Art. 19 para. 1. 35 See Art. 26(3)(3) SSMR and Art. 26(5) SSMR. Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 39. 36 Art. 5 Rules of Procedure of the Supervisory Board. 37 Art. 37(1) ESCB Statute, Art. 27(1) SSMR; Art. 23a(1) ECB Rules of Procedure. 38 OJ C 89, 8.3.2019, p. 2. 39 On the previous Code of Conduct adopted by the Supervisory Board in 2015 see Gortsos, The Single Supervisory Mechanism (SSM) (2015), at pp. 252–254.
362
Georg Gruber
Art. 26 SSMR
Supervisory board
to comply with the separation principle and the principle of independence and lays down detailed rules on private financial transactions, cooling-off periods, avoidance of conflicts of interest, the acceptance of gifts or other benefits, the acceptance of invitations and related payments, activities undertaken in a personal capacity and professional secrecy.40 To sum up, the Code of Conduct ensures that the members of the Supervisory Board act exclusively in the interest of the Union as a whole, free from undue political influence and commercial interference. Finally, the members of the Supervisory Board enjoy privileges and immunities in 17 accordance with Protocol No. 7 on the privileges and immunities of the European Union which is part of the TFEU. While the Protocol does not explicitly mention the Supervisory Board, one can argue that the Supervisory Board is an organ of the ECB within the meaning of Art. 22 of the Protocol. Therefore, the Chair, the Vice-Chair and the four ECB representatives enjoy in the performance of their duties the same privileges and immunities as ECB staff, in particular immunity from legal proceedings.41
4. Appointment and dismissal of the members of the Supervisory Board a) General Art. 26(2) SSMR establishes a general requirement that the appointments for the Su- 18 pervisory Board in accordance with the SSMR shall respect the principles of gender balance,42 experience and qualification. Moreover, Arts. 26(3) to (5) SSMR lay down more detailed rules on the appointments and the terms of office of the Chair, the Vice-Chair and the ECB representatives. The SSMR is however silent on the appointments and the terms of office of NCA 19 and NCB representatives in the Supervisory Board.43 They are appointed by the NCAs/ NCBs in an independent manner44 and the procedure depends on national law arrangements45. General principles of Union law require NCA representatives to have sufficient knowledge and experience. 46 In practice, NCAs have appointed as member of the Supervisory Board either the head of the NCA or a senior official responsible for banking supervision. b) Appointment and term of office of the Chair Pursuant to Art. 26(3) SSMR, the Chair shall be chosen on the basis of an open se- 20 lection procedure, about which the European Parliament and the Council shall be kept duly informed, from among individuals of recognised standing and experience in banking and financial matters and who are not members of the Governing Council. Based on For further details see supra, → Art. 19 para. 3. See in particular Art. 11 of the Protocol; for further details see Gruber and Benisch, Legal Working Paper Series No. 4 (1997). 42 As rightly pointed out by Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), fn. 249, gender balance is only one of the relevant criteria and does not require a fixed proportion; critical Gortsos, The Single Supervisory Mechanism (SSM) (2015), at p. 244. 43 The SSMR does in particular not include a provision similar to Art. 14(2) ESCB Statute, which requires that the term of office of a governor of an NCB shall be no less than five years and that a governor may only be relieved from office in exceptional cases (with the possibility to refer it to the Court of Justice to the European Union). The personal independence of NCA and NCB representatives in the Supervisory Board is therefore not safeguarded in the same manner. 44 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 40 with reference to Art. 19 SSMR. 45 See Section 2.1 of the Opinion of the ECB of 7 September 2016 (CON/2016/43). 46 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 64; Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 40 even requires managerial experience. 40
41
Georg Gruber
363
Art. 26 SSMR
Supervisory board
this selection procedure and after hearing the Supervisory Board, the ECB47 shall submit a proposal for the appointment of the Chair to the European Parliament for approval. Following the approval of this proposal, the Council shall adopt an implementing decision to appoint the Chair. The procedure defined in Art. 26(3) SSMR is specified further in Section II of the Interinstitutional Agreement between the European Parliament and the ECB and Section II of the Memorandum of Understanding between the Council of the European Union and the ECB. The strong involvement of the European legislator in the appointment procedure aims at strengthening the democratic legitimation of the appointment and is the result of a critical discussion concerning the appointment of the members of the Executive Board on which the European Parliament is only consulted. In line with these provisions, the ECB conducted in 2013 and 2018 open selection procedures which resulted in the appointment of Ms Danièle Nouy as the first Chair of the Supervisory Board48 and of Mr Andrea Enria as the current Chair.49 21 The last two sentences of Art. 26(3) SSMR provide that the Chair shall be a full-time professional and shall not hold any offices at NCAs. The term of office shall be five years and shall not be renewable. These provisions aim at safeguarding the Chair’s personal independence50 and at avoiding conflicts of interest. The terms and conditions of employment of the Chair, in particular his/her salary, pension and other social security benefits, are the subject of a contract with the ECB and fixed by the Governing Council.51 22 To safeguard the Chair’s personal independence52, Art. 26(4) SSMR subjects the removal of the Chair from office to strict conditions. Similar to the members of the Executive Board and other EU senior officials53, the Chair may only be removed from office if he or she “no longer fulfils the conditions required for the performance of his duties or has been guilty of serious misconduct”. Moreover, Art. 26(4) SSMR lays down procedural safeguards: It is up to the Council to decide to remove the Chair but the decision requires a qualified majority without taking into account the vote of the members of the Council which are not participating Member States. Moreover, the Council may only act upon a proposal of the ECB Governing Council, which has been approved by the European Parliament54. The Council and Parliament may inform the ECB that they consider that the conditions for the removal of the Chair from office are fulfilled and the ECB has to respond to such a request within four weeks.55 But neither the Council nor
47 Pursuant to Art. 13b(3) ECB Rules of Procedure, the Governing Council shall adopt the proposal after hearing the Supervisory Board. The competence of the Governing Council is based on Art. 12.1 ESCB Statute, see Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 36. 48 Council Implementing Decision of 16 December 2013 implementing Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (2013/797/EU), OJ L 352, 24.12.2013, at p. 50. 49 Council Implementing Decision (EU) 2018/1958 of 6 December 2018 on the appointment of the Chair of the ECB Supervisory Board, OJ L 315, 12.12.2018, at p. 25. 50 Gortsos, The Single Supervisory Mechanism (SSM) (2015), at p. 243. 51 Art. 13b(4) ECB Rules of Procedure. 52 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 65; Gortsos, The Single Supervisory Mechanism (SSM) (2015), at p. 246; Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 37. 53 See Art. 247 TFEU for the members of the European Commission and Art. 286(6) TFEU for the members of the European Court of Auditors. 54 Section II of the Interinstitutional Agreement foresees a vote in the Parliament’s competent committee on a draft resolution and a vote in plenary, for approval or objection, on that resolution. 55 See the last para. of Section II of the Interinstitutional Agreement between the European Parliament and the ECB and Section II, para. 6 of the Memorandum of Understanding between the Council of the European Union and the ECB.
364
Georg Gruber
Art. 26 SSMR
Supervisory board
the Parliament can force the ECB to submit a proposal to remove the Chair if it does not consider that the conditions are fulfilled.56 The role and responsibilities of the Chair of the Supervisory Board are not specified 23 in Art. 26 SSMR but are reflected in various provisions of the SSMR. First, the function as Chair includes the responsibility for preparing and steering the meetings of the Supervisory Board as well as the implementation of the decisions taken by the Supervisory Board. This function of the Chair is further specified in the Rules of Procedure of the Supervisory Board which specify the Chair’s prerogative to convene the meetings of the Supervisory Board (Arts. 2 and 7), to propose a provisional draft agenda (Art. 4.1), to initiate the voting (Art. 6) and to invite other persons to attend the meetings (Art. 3.3). The Rules of Procedure also foresee in Art. 8 the possibility to delegate to the Chair the power to adopt clearly defined management or administrative measures or to finalise decisions taken by the Supervisory Board. Second, the Chair represents the ECB externally as regards the performance of its supervisory tasks, in particular vis-à-vis the European Parliament and the Council but also in other fora.57 For instance, Art. 20 SSMR concerning the ECB’s accountability obligations specifies in its para. 3 that the Chair shall present the ECB’s annual report in public to the European Parliament and to the Eurogroup. Moreover, the Chair may at the request of the Eurogroup or the European Parliament be heard on the execution of the ECB’s supervisory tasks. The Chair also replies to written questions of members of the European Parliament or of the Eurogroup. Third, all ECB business areas directly involved in the performance of the ECB’s super- 24 visory tasks report in functional terms to the Chair and the Vice-Chair.58 This reflects a requirement set out in Art. 25(2) SSMR according to which staff involved in the performance of the ECB’s supervisory tasks shall be organisationally separated from, and subject to, separate reporting lines from the staff involved in carrying out other tasks conferred on the ECB.59 These separate functional reporting lines are without prejudice to the responsibility of the Executive Board for the current business of the ECB, in particular its responsibility to decide on the ECB’s internal structure and on staff issues. 60 The Executive Board must nevertheless consult the Chair and the Vice-Chair of the Supervisory Board on the internal structure of the business areas in charge of banking supervision.61 c) Appointment and term of office of the Vice-Chair Art. 26(3) SSMR also defines the procedure for the appointment of the Vice-Chair. 25 It differs to some extent from the procedure for the appointment of the Chair since the Vice-Chair must be chosen from among the six members of the Executive Board of the 56 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 65 who stresses though that any such request may damage the Chair’s reputation in a way that it may need to step down. 57 See Arts. 20(3), (4), (5), (6) and (8) SSMR and Art. 21(3) SSMR; Section I of the Interinstitutional Agreement between the European Parliament and the ECB; Section I of the Memorandum of Understanding between the Council and the ECB. For further details see supra, → Art. 20 and Gortsos, The Single Supervisory Mechanism (SSM) (2015), at pp. 271 et seq. 58 See Recital 66 SSMR and Art. 3(3) Decision 2014/723/EU of the ECB of 17 September 2014 on the implementation of separation between the monetary policy and supervision functions of the European Central Bank (ECB/2014/39), OJ L 300, 18.10.2014, at p. 57. 59 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 43. 60 See Art. 11.6 ESCB Statute and Arts. 10, 11 and 13m.1 ECB Rules of Procedure, Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 43 stresses that the competence of the Executive Board to decide on the internal structure cannot extend to substantive issues. 61 Art. 13m.1 (2) ECB Rules of Procedure.
Georg Gruber
365
Art. 26 SSMR
Supervisory board
ECB. This makes it impossible to conduct an open selection procedure as for the Chair. But for the rest, the appointment procedure is the same as for the appointment of the Chair. The ECB62 shall submit a proposal for the appointment of the Vice-Chair to the European Parliament for approval. Following the approval of this proposal, the Council shall adopt an implementing decision to appoint the Vice-Chair. In accordance with this procedure, the Council appointed in 2014 Ms Sabine Lautenschläger as Vice-Chair of the Supervisory Board63, in 2019 Mr Yves Mersch64 and in 2021 Mr Frank Elderson.65 26 The Vice-Chair’s term of office is not specified in the SSMR but in the ECB Rules of Procedure. Art. 13b.5. of the latter states that the term of office of the Vice-Chair shall be five years and shall not be renewable. It shall not extend beyond the end of his/her mandate as member of the Executive Board. 27 The procedure for the removal of the Vice-Chair from office also differs from the one applying to the Chair since a member of the Executive Board may only be removed from office in accordance with Art. 11.4 ESCB Statute.66 According to this provision only the Court of Justice of the European Union may, on application by the Governing Council, compulsorily retire a member of the Executive Board if he/she no longer fulfils the conditions required for the performance of his/her duties or if he/she has been guilty of serious misconduct.67 Consequently, Art. 26(4) SSMR makes the removal of the ViceChair from office subject to a compulsorily retirement of the Vice-Chair from his/her function as member of the Executive Board. Only then may the Council, following a proposal by the ECB which has been approved by the European Parliament, adopt by qualified majority an implementing decision to remove the Vice-Chair from office. As with for the Chair, the Council and European Parliament may inform the ECB that in their view the conditions for the removal of the Vice-Chair are fulfilled. But the final decision remains with the ECB. 28 The role of the Vice-Chair is first to substitute for the Chair in case of absence and to fulfil all the duties incumbent upon the Chair. But the Vice-Chair’s role goes beyond this. As member of the Executive Board and of the Governing Council, the Vice-Chair plays a key role in ensuring a proper exchange of information between the Supervisory Board and the ECB’s decision-making bodies and in representing the supervisory perspective in the Governing Council. The fact that the Vice-Chair is a member of all three bodies also suggests that the principle of separation as set out in Art. 25 SSMR does not exclude an exchange of information and interaction between the ECB’s monetary arm and its supervisory arm.68
62 Pursuant to Art. 13b.3. ECB Rules of Procedure, the Governing Council shall adopt the proposal after hearing the Supervisory Board. 63 Council Implementing Decision of 11 February 2014 implementing Regulation (EU) No 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (2014/77/EU), OJ L 41, 12.2.2014, at p. 19. 64 Council Implementing Decision (EU) 2019/1671 of 4 October 2019 on the appointment of the Vice-Chair of the Supervisory Board of the European Central Bank, OJ L 256, 7.10.2019, at p. 8. 65 Council Implementing Decision (EU) 2021/325 of 22 February 2021 on the appointment of the Vice-Chair of the Supervisory Board of the European Central Bank, OJ L 64, 24.2.2021, at p. 6. 66 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 65. 67 For further details see Zilioli and Gruber, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht (7th edn, 2015), Art. 11 ESZB/EZB-Satzung paras. 7–9. 68 Critical Weisman, European Public Law 24, no. 2 (2018), 311, at p. 323 who considers that “the Vice-Chair’s obligatory belonging to the ECB’s Executive Board sits oddly with the separation paradigm”.
366
Georg Gruber
Art. 26 SSMR
Supervisory board
d) Appointment and term of office of the ECB representatives According to Art. 26(5) SSMR, the four representatives of the ECB in the Supervisory Board shall be appointed by the Governing Council. Furthermore, they shall not perform duties directly related to the monetary function of the ECB; the purpose of this requirement is to avoid potential conflicts of interests and to ensure a proper separation of the ECB’s monetary function from its supervisory function in line with the principle of separation. For the implementation of this provision, the ECB has adopted Decision 2014/427/EU on the appointment of representatives of the ECB to the Supervisory Board. According to Art. 1(1) of this Decision, the “four ECB representatives shall be appointed […] from among persons of recognised standing and experience in banking and financial matters”. Apart from these general criteria, the Governing Council enjoys discretion in the selection of the four ECB representatives. The ECB representatives’ terms of office shall be five years and shall not be renewable.69 This is in line with the Chair’s and Vice-Chair’s terms of office and safeguards the ECB representatives’ personal independence. For the appointment of the first ECB representatives, Decision 2014/427/EU allowed for a staggered approach, i.e. terms of offices between three and five years, in order to avoid that the Chair, the Vice-Chair and all four ECB representatives leave the Supervisory Board at the same time. On that basis, the terms of office of some of the first ECB representatives were limited to three years. The terms and conditions of employment of the four ECB representatives, in particular their salary, pension and other social benefits, are the subject of a contract with the ECB, and are fixed by the Governing Council following a proposal from the Executive Board.70 ECB representatives may perform their duties on either a full-time or a parttime basis but shall not be engaged in any occupation, whether gainful or not, unless authorised by the Governing Council. In order to safeguard the ECB representatives’ personal independence, it is specified further that “[n]o authorisation can be given for activities which are liable to give rise, or may be perceived to give rise to, a conflict of interest with their positions as members of the Supervisory Board”. In particular, they shall not perform any duty for an NCA or the ECB’s monetary policy function. Like the Chair and the Vice-Chair, ECB representatives may only be removed from office in exceptional cases, i.e. if they no longer fulfil the conditions required for the performance of their duties, or if they have been guilty of serious misconduct. In such a case, the Governing Council may, on application of the Executive Board and after having heard the ECB representative, decide to remove him or her from office.
29
30
31
32
33
5. Functioning of the Supervisory Board Since the ECB is responsible for the direct supervision of about 115 significant 34 banking groups with more than 900 individual supervised entities and the oversight of about 3500 less significant institutions, the Supervisory Board is confronted with a high number of supervisory issues. In 2019, the Supervisory Board approved 2,356 draft supervisory decisions addressed to individual institutions and 2,643 such decisions in 2020.71 These decisions are often preceded by discussions about the situation of the Art. 1(2) Decision 2014/427/EU of the ECB. Arts. 1(3) and (4) Decision 2014/427/EU of the ECB. 71 ECB Annual Reports on supervisory activities 2019, at p. 85 and 2020, at p. 88, available under . Commission Staff working document accompanying the Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No. 1024/2013 (SWD(2017) 336 final), 17. 69 70
Georg Gruber
367
Art. 26 SSMR
Supervisory board
credit institutions concerned. In addition to institution specific issues, the Supervisory Board discusses and decides on a broad variety of policy and organisational issues which may lead to the adoption of a legal instrument or a supervisory practice. The Supervisory Board considers these issues either in meetings or by written procedure. a) Meetings The meetings of the Supervisory Board may take place as physical meetings, usually held on the ECB’s premises in Frankfurt72, or, at the request of the Chair, by means of teleconferencing unless at least three members object 73. During the pandemic most meetings were held via videoconference.74 The Supervisory Board shall decide on the dates of its meetings following a proposal from the Chair. It shall meet regularly following a schedule to be determined in good time before the start of each calendar year. 75 In addition, the Chair shall convene a meeting of the Supervisory Board if so requested by at least three members or if deemed necessary.76 36 The attendance of the meetings of the Supervisory Board is in principle restricted to its members and the representatives of NCBs that are not NCAs.77 NCA representatives may be accompanied by one person;78 these accompanying persons have, however, no voting rights and do not usually participate in the discussions. If an NCA or an NCB representative is unable to attend a meeting, he or she may appoint in writing an alternate to attend and to exercise their voting rights as applicable, unless otherwise stipulated in the written communication which shall be sent to the Chair prior to the meeting.79 The representatives of NCBs that are not NCAs and alternates are also subject to the Code of Conduct for high-level ECB Officials; the participation of accompanying persons in the meetings is subject to them signing a declaration of ethical conduct with the Code of Conduct.80 In addition to the regular participants, the Chair may invite representatives of the European Commission or of the European Banking Authority to attend (parts of) a meeting as observers.81 Observers should not have access to confidential information about individual institutions.82 Moreover, the Supervisory Board 35
Art. 13f(1) ECB Rules of Procedure. Art. 2.4 Rules of Procedure of the Supervisory Board. In emergencies, members may not object to the meeting being held by means of teleconferencing, see Art. 7.1 Rules of Procedure of the Supervisory Board. 74 ECB Annual Reports on supervisory activities 2020 at p. 86, available under . 75 Art. 2.1 Rules of Procedure of the Supervisory Board. 76 Arts. 2.2 and 2.3 Rules of Procedure of the Supervisory Board. 77 Art. 3.1 Rules of Procedure of the Supervisory Board. 78 Art. 3.2 Rules of Procedure of the Supervisory Board. 79 Art. 3.3 Rules of Procedure of the Supervisory Board. There is no equivalent provision for the Chair, the Vice-Chair and the ECB representatives. This means that they cannot transfer their voting rights if they are unable to attend a meeting. 80 Art. 13e.2 ECB Rules of Procedure and Article 1 of the Code of Conduct. 81 Art. 26(11)(1) SSMR, which mentions only the European Commission. This does, however, not exclude the invitation of other third persons as observers. The Rules of Procedure of the Supervisory Board, Art. 3.5. mention as well EBA representatives. 82 Art. 26(11)(2) SSMR. 72
73
368
Georg Gruber
Art. 26 SSMR
Supervisory board
may invite other persons such as representatives of the Single Resolution Board 83 or ECB staff members to participate in the meetings as observers. For the preparation of the meetings, the Chair shall draw up a provisional agenda 37 and send it, together with the related documents, to the members of the Supervisory Board at least five working days prior to the relevant meeting except in emergencies. 84 The agenda is subject to the approval of the Supervisory Board and it may decide to remove items from or add items to the provisional agenda on a proposal from the Chair or any of its members.85 Except in emergencies, an item must be removed from the provisional agenda at the request of at least three members if the related documents were not submitted in due time.86 The meetings are chaired by the Chair or, in his/her absence, by the Vice-Chair. If both are absent, the Supervisory Board shall be chaired by the most senior member in terms of the length of his/her membership or in terms of age.87 The meetings of the Supervisory Board are minuted. The draft proceedings are 38 submitted to the members for their approval at the subsequent meeting or by written procedure, signed by the Chair and submitted for information to the Governing Council.88 The proceedings are kept confidential, unless the Governing Council authorises the ECB President, after having consulted the Chair of the Supervisory Board, to make the outcome of the deliberations public.89 Notwithstanding the confidential nature of the proceedings, the ECB, in view of its accountability obligations, must provide the competent committee of the European Parliament with a comprehensive and meaningful record of the proceedings of the Supervisory Board that enables an understanding of the discussions, including an annotated list of decisions.90 For reasons of professional secrecy, these records of proceedings do not, however, include confidential information about individual supervised entities. In 2020, the Supervisory Board held 24 meetings; due to pandemic only two meetings 39 were held in Frankfurt and the remaining ones via videoconference.91 At these meetings, the Supervisory Board discussed a wide range of issues, regarding both individual banks and more general policy issues. b) Written procedures The Supervisory Board may also take decisions by written procedure unless at least 40 three members with the right to vote object to the voting by written procedure; in such a case, the item must be put on the agenda of the subsequent Supervisory Board meeting.92 In a written procedure, the draft decision is submitted for the consideration of the members of the Supervisory Board for a period of normally not less than five 83 According to Art. 5.1 Memorandum of Understanding between the SRB and the ECB in respect of cooperation and information exchange (published under ), the Supervisory Board will invite the Chair of the SRB to participate as an observer in its meetings for items relating to the tasks and responsibilities of the SRB. The SRB may also get access to confidential information about individual institutions since the ECB and the SRB need to exchange such information to perform their tasks. 84 Art. 4.1(2) Rules of Procedure of the Supervisory Board. 85 Arts. 4.1(1) and (3) Rules of Procedure of the Supervisory Board. 86 Art. 4.1(4) Rules of Procedure of the Supervisory Board. 87 Art. 3.4 Rules of Procedure of the Supervisory Board. 88 Art. 4.2 Rules of Procedure of the Supervisory Board and Art. 13f(2) ECB Rules of Procedure. 89 Art. 23.1 ECB Rules of Procedure. 90 Section I.4 Interinstitutional Agreement between the European Parliament and the ECB. 91 ECB Annual Report on supervisory activities 2020, at p. 86. 92 Arts. 6.7(1) and (2) Rules of Procedure of the Supervisory Board.
Georg Gruber
369
Art. 26 SSMR
Supervisory board
working days. The draft decision is deemed to be approved by the Supervisory Board at the end of the given period unless a majority of its members explicitly objects to the draft decision; the absence of an explicit vote is deemed as approval.93 The outcome of the written procedure is recorded in the proceedings of the subsequent Supervisory Board meeting. 41 In 2020, 1388 written procedures were conducted (sometimes covering several supervisory decisions).94 The high number of written procedures indicates that the Supervisory Board approves most standard supervisory decisions by written procedure95 and only discusses more complex decisions or policy issues at a meeting.
6. Secretariat Pursuant to Art. 26(9) SSMR, a secretariat shall support the activities of the Supervisory Board, including preparing the meetings on a full-time basis. For the implementation of this provision, the ECB has established the Directorate General SSM Governance and Operations with the SSM Secretariat Division which is one of the seven ECB business areas that are directly involved in the performance of the ECB’s supervisory tasks. 96 43 The Secretary to the Supervisory Board, i.e. the Director General of the Directorate General SSM Governance and Operations, is appointed by the ECB President from the members of ECB staff, after having consulted the Chair of the Supervisory Board. 97 The Secretary shall assist the Chair and the Vice-Chair in preparing and conducting the Supervisory Board meetings and shall be responsible for drafting the proceedings of these meetings.98 This responsibility includes the review of the documentation submitted to the Supervisory Board, the coordination of the decision-making process with a view to ensure its institutional quality and the follow-up to decisions taken by the Supervisory Board including the registration and notification of supervisory decisions.99 The Secretary shall also liaise with the Secretary of the Governing Council for preparing the meetings of the Governing Council concerning supervisory tasks and is responsible for drafting the proceedings of these meetings.100 The Secretary of the Supervisory Board also acts as Secretary of the Steering Committee101 and as Secretary of the Administrative Board of Review102. 42
II. Steering Committee 44
Pursuant to Art. 26(10)(1) SSMR the Supervisory Board shall establish a steering committee from among its members with a more limited composition to support its ac-
Arts. 6.7(3) and (4) Rules of Procedure of the Supervisory Board. ECB Annual Report on supervisory activities 2020, at p. 88. 95 This concerns in particular routine decisions. Commission Staff working document accompanying the Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No. 1024/2013 (SWD(2017) 336 final, 19–20. 96 See the organigram on the ECB’s webpage . 97 Art. 13m.3(1) ECB Rules of Procedure. 98 Art. 13m.3(2) ECB Rules of Procedure. 99 For further details see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 58–59. 100 Art. 13m.4 ECB Rules of Procedure. 101 Art. 13m.3 ECB Rules of Procedure. 102 Art. 6(1) Decision of the ECB 2014/360/EU. 93
94
370
Georg Gruber
Art. 26 SSMR
Supervisory board
tivities, including preparing the meetings. The Steering Committee is thus not a separate body but a substructure of the Supervisory Board with a limited number of members. 103 According to the third and fourth sentences of Art. 26(10) SSMR, the composition of 45 the steering committee shall ensure a fair balance and rotation between national competent authorities. It shall consist of no more than ten members including the Chair, the Vice-Chair and one additional representative from the ECB. For the implementation of these provisions, the Supervisory Board has specified in Art. 11 of its Rules of Procedure that the Steering Committee shall be composed of eight members of the Supervisory Board: the Chair and the Vice-Chair of the Supervisory Board, one ECB representative and five representatives of the NCAs. The latter are appointed by the Supervisory Board on the basis of a rotation system in accordance with which the NCAs are allocated to four groups, according to a ranking based on the total consolidated banking assets in the relevant participating Member State, with each group having as a minimum one member on the Steering Committee.104 The terms of office of the NCA representatives as members of the Steering Committee shall be one year. The ECB representative in the Steering Committee is appointed by the ECB President who also determines the term of office. The current list of members of the Steering Committee is published in the ECB Annual Report on supervisory activities and the ECB’s webpage in accordance with Art. 11.6 Rules of Procedure of the Supervisory Board. The Steering Committee is chaired by the Chair of the Supervisory Board or, in the exceptional absence of the Chair, by the Vice-Chair.105 The mandate of the Steering Committee is to support the activities of the Superviso- 46 ry Board which includes in particular the preparation of the meetings of the Supervisory Board.106 The Steering Committee must execute its preparatory tasks in the interest of the Union as a whole and shall work in full transparency with the Supervisory Board.107 Art. 26(10) SSMR also clarifies that the Steering Committee shall have no decision-making powers. The meetings of the Steering Committee may take place as physical meetings or, 47 at the request of the Chair, by means of teleconferencing, unless at least two members object.108 The dates of the meetings shall be decided by the Steering Committee on a proposal from the Chair. In addition to the regular meetings, the Chair may also convene a meeting whenever deemed necessary.109 The agenda for each meeting shall be proposed by the Chair and adopted by the Steering Committee at the beginning of the meeting; all members may propose items to the Chair for consideration by the Steering Committee.110 The meetings of Steering Committee are minuted. As for the Supervisory Board, the proceedings are confidential, unless the Governing Council authorises the ECB President, after having consulted the Chair of the Supervisory Board, to make the outcome of the deliberations public.111 However, to ensure transparency vis-à-vis the 103 Slightly different Weisman, European Public Law 24, no. 2 (2018), 311, at p. 319 who qualifies the Steering Committee as “a separate internal body of the ECB which is subordinate to and only works for the Supervisory Board”. 104 Art. 11.3 and the Annex to the Rules of Procedure of the Supervisory Board. The rotation scheme is similar to the one applying to the members of the Governing Council in accordance with Art. 10.2 ESCB Statute. 105 Art. 26(10)(3) SSMR and Art. 11.2 Rules of Procedure of the Supervisory Board. 106 Art. 26(10)(1) SSMR and Art. 10.1 Rules of Procedure of the Supervisory Board. 107 Art. 26(10) last sentence SSMR and Art. 10.2 Rules of Procedure of the Supervisory Board. 108 Art. 12.1(3) Rules of Procedure of the Supervisory Board. 109 Arts. 12.2(1) and (2) Rules of Procedure of the Supervisory Board. 110 Art. 12.2 Rules of Procedure of the Supervisory Board. 111 Art. 23.1 ECB Rules of Procedure.
Georg Gruber
371
Art. 26 SSMR
Supervisory board
members of the Supervisory Board that are not members of the Steering Committee, the agenda and the proceedings are made available to all members of the Supervisory Board.112 Moreover, following a proposal by the Chair, the Steering Committee may decide to invite one or more other members of the Supervisory Board to attend all or part of one of its meetings, for instance if the issues are of particular interest for them. 113 48 In 2020, the Steering Committee held seven meetings in its standard composition and seven additional meetings with a focus on digitalisation and simplification of SSM processes for which participation was open to all Supervisory Board members who expressed an interest114. Due to the pandemic most meetings were held via videoconference.
III. Executive Board The Executive Board is not explicitly mentioned in the SSMR, but plays a role for the SSM, in particular as regards organisational and administrative issues. The Executive Board’s composition, its responsibilities and functioning are defined in Art. 283 TFEU, Art. 11 ESCB Statute and the ECB Rules of Procedure. The Executive Board is responsible for preparing and implementing measures related to the ECB’s tasks as central bank, for preparing the meetings of the Governing Council and for the ECB’s current business;115 any involvement in the performance of the supervisory tasks conferred on the ECB is not foreseen. 50 As explained in Section A above, the SSMR could not change the overall governance structure of the ECB as set out in the TFEU and the ESCB Statute with the Governing Council and the Executive Board as the decision-making bodies. While the Executive Board is not directly involved in the decision-making on supervisory matters, it remains responsible for the management of the ECB and its internal organisation, including budgetary and human resources issues concerning the supervisory function.116 For instance, the Executive Board is responsible for deciding on the internal structure of the supervisory function (number and responsibilities of the business areas in charge of banking supervision) after having consulted the Chair and the Vice-Chair.117 When deciding on the internal structure, the Executive Board nevertheless has to respect the organisational separation of staff involved in the performance of supervisory tasks and their functional reporting lines to the Chair and the Vice-Chair.118 Moreover, the Executive Board is responsible for preparing the ECB’s budget for all of its tasks and 49
Art. 12.3 Rules of Procedure of the Supervisory Board. Art. 12.4 Rules of Procedure of the Supervisory Board. When specific issues related to an individual credit institution are discussed, the representative of the NCA of the Member State where the credit institution is located must be invited to the meeting. 114 ECB Annual Report on supervisory activities 2020, at p 87. 115 Arts. 12.1(2), 12.2 and 11.6 ESCB Statute. For further details see Zilioli and Gruber, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht (7th edn, 2015), Art. 11 ESZB/EZB-Satzung paras. 14–15. 116 Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at p. 138; Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 75. See the report of the European Court of Auditors entitled “Single Supervisory Mechanism – Good start but further improvements needed”, pp. 22 (fn. 14) and 32–33 and the ECB’s reply on p. 122, . In its reply, the ECB also stresses that the involvement of the Executive Board in budgetary and human resources issues is compatible with the principle of separation since this principle requires a functional separation of the two functions but does not require the Supervisory Board to have full control over the supervisory budget and the ECB’s or the NCAs’ human resources. 117 Arts. 13m.1. and 10 ECB Rules of Procedure. 118 Art. 25(2)(2) SSMR and Art. 3(3) Decision of the ECB 2014/723/EU. 112 113
372
Georg Gruber
Art. 26 SSMR
Supervisory board
for submitting the proposal to the Governing Council for approval.119 The Chair and the Vice-Chair of the Supervisory Board are to be consulted on the expenditure for the supervisory tasks, thereby ensuring that the views of the supervisory function are taken into account.120
IV. Governing Council As explained above, the Governing Council is the ECB’s ultimate decision-making 51 body also for supervisory matters.121 In principle any legal instrument with external legal effects which the ECB takes in the performance of its supervisory tasks requires adoption by the Governing Council. The composition of the Governing Council, its responsibilities and functioning are 52 defined in Art. 283TFEU, Arts. 10 and 12 ESCB Statute and the ECB Rules of Procedure. The Governing Council is composed of the ECB President, the Vice-President, the other four members of the Executive Board and the 19 governors of the NCBs of the Member States whose currency is the euro.122 NCAs that are not NCBs are thus not represented in the Governing Council. In principle the Governing Council takes decisions by the simple majority of its members with a voting right in line with the rotation scheme set out in Art. 10.2 ESCB Statute.123 While the SSMR has to respect the Governing Council’s competences set out in 53 the TFEU and ESCB Statute, it requires the ECB to ensure that the operation of the Governing Council is completely differentiated as regards monetary and supervisory functions in line with the principle of separation.124 Accordingly, the Governing Council meetings dedicated to supervisory matters have to take place separately from regular Governing Council meetings with separate agendas. 125 In practice, the Governing Council takes most decisions on supervisory matter by written procedure. Only if at least five members object to decision-making by written procedure the issue is brought to a meeting.126
C. The decision-making process Art. 26(8) SSMR specifies that decisions on supervisory matters are to be taken un- 54 der the non-objection procedure. In short, Art. 26(8) SSMR foresees that the Supervisory Board is responsible for proposing complete draft decisions which it submits to the Governing Council for adoption. The decision is deemed to be adopted unless the Governing Council objects within a period to be defined but not exceeding ten working days. Art. 26(8) SSMR is supplemented by the rules of voting within the Supervisory Board set out in Arts. 26(6) and (7) SSMR, and the more detailed rules laid down in the ECB Rules of Procedure and the Rules of Procedure of the Supervisory Board. Art. 15.1 ECB Rules of Procedure. See the ECB’s reply to the ECA report, at pp. 122 and 129. 121 Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankenaufsichtsrecht (2016), 106, at p. 136; Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 71. Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 paras. 47–48. 122 Art. 10.1 ESCB Statute. 123 For further details on the voting rules see Zilioli and Gruber, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht (7th edn, 2015), Art. 10 ESZB/EZB-Satzung paras. 3 et seq. 124 Art. 25(4)(1) SSMR. 125 Art. 25(4)(2) SSMR and Art. 13l.1 ECB Rules of Procedure. 126 Art. 4.8 ECB Rules of Procedure. 119
120
Georg Gruber
373
Art. 26 SSMR
Supervisory board
The non-objection procedure (infra, Section I) is, however, not the only decisionmaking procedure of relevance for the SSM. In addition to the non-objection procedure, the legal framework applicable to the ECB provides for three additional decision-making procedures, namely the decision-making procedure for the adoption of macro-prudential decisions under Art. 5 SSMR (infra, Section II), the procedure under Art. 6(7) SSMR for legal instruments concerning the general framework specifying the arrangements for carrying out supervisory tasks (infra, Section III) and the standard ECB decision-making procedure according to the TFEU and the ESCB Statute for legal acts relating to the institutional framework of the ECB (infra, Section IV). 127 These procedures are governed by different legal provisions and cannot be presented here in full detail. Their main features are summarised below in order to provide an overview of the decision-making process and the involvement of the Supervisory Board. Finally, decisions may also be taken by means of delegation under the newly established delegation schemes (infra, Section V). 56 For the sake of clarity, it is to be mentioned that the decision-making process only concerns legal instruments with external effects and public communications on supervisory practices. In addition, the ECB’s joint supervisory teams take on a daily basis supervisory measures through so-called operational acts which are informal and legally not binding.128 Moreover, the Supervisory Board takes internal decisions on the planning and execution of supervisory activities which are not subject to the below decision-making procedures.129 55
I. The non-objection procedure 1. Scope Pursuant to Art. 26(8) SSMR, the non-objection procedure applies to “draft decisions”. A literal reading of this term could suggest that the scope of the non-objection procedure is limited to ECB decisions within the meaning of TFEU130 or even to “ECB supervisory decisions” within the meaning of Art. 2(26) of Regulation (EU) No. 468/2016 of the ECB.131 Such a narrow interpretation would limit the scope of the nonobjection procedure to individual supervisory decisions addressed to one or more supervised entities and exclude other legal instruments or non-binding supervisory practices. 58 There are, however, good arguments to define the scope of the non-objection procedure more broadly.132 A systematic reading of Art. 26 SSMR suggests that the term “decision” is used in a non-technical, broader manner and covers also other legal acts. This becomes clear from Arts. 26(6) and (7) SSMR which specify the voting rules for the approval of decisions by the Supervisory Board which are then submitted to the Governing Council for adoption under the non-objection procedure. Art. 26(6) SSMR refers to the approval of “decisions” by simple majority without establishing separate voting rules for other legal acts. Art. 26(7) SSMR refers to “decisions on the adoption of ECB regula57
127 Commission Staff working document accompanying the Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No 1024/2013 (SWD(2017) 336 final), at p. 19. 128 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 106. 129 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 66 and 88. 130 Arts. 132(1) second indent and Art. 288(3) TFEU and Art. 34.1, second indent ESCB Statute. 131 Regulation (EU) No. 468/2014 of the ECB of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated authorities (SSM‑FR) (ECB/2014/17), OJ L 141, 14.5.2014, at p. 1. 132 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 88.
374
Georg Gruber
Art. 26 SSMR
Supervisory board
tions” by qualified majority which means that the approval of a draft regulation is also considered as a “draft decision”. The systematic interpretation is supported by a teleological interpretation. As ex- 59 plained above in Section A, the European legislator introduced the non-objection procedure to strengthen the role of the Supervisory Board and to ensure a proper implementation of the separation principle. This purpose can only be achieved by a broader interpretation of Art. 26(8) SSMR covering all legal acts taken by the ECB in the performance of its tasks under the SSMR. The narrower interpretation would entail that legal acts other than supervisory decisions would be adopted by the Governing Council upon a proposal from the Executive Board with limited involvement of the Supervisory Board which would hardly be in line with what the European legislator had in mind when setting up the SSM. To sum up, the non-objection procedure applies to all ECB legal acts and other in- 60 struments with external effects adopted by the ECB in the performance of its supervisory tasks under Art. 4 SSMR.133 This includes in particular (1) ECB supervisory decisions134, (2) ECB regulations135, (3) ECB decisions of general application 136, (4) ECB recommendations137, (5) legal instruments addressed to NCAs such as guidelines, general instructions and recommendations138 with the objective of achieving supervisory convergence or harmonised treatment of less significant credit institutions, and (6) nonbinding public communications concerning supervisory practices139.
2. Procedure The non-objection procedure involves the following procedural steps: (a) approval of 61 a complete draft decision by the Supervisory Board, (b) submission of the draft decision to the Governing Council for adoption within a specified deadline and simultaneous transmission to the NCAs concerned, (c) adoption of the decision by the Governing Council, and (d) publication or notification to the addressee(s), where necessary. Art. 26(8) SSMR also includes provisions on the involvement of non-participating Member States (e). a) Approval of draft decisions by the Supervisory Board Pursuant to Art. 26(8)(1) SSMR the Supervisory Board shall propose to the Govern- 62 ing Council “complete draft decisions” as part of the preparatory works entrusted to it. 133 For further details see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 88–90. For an overview of the ECB instruments see Bax and Witte, ‘The taxonomy of ECB instruments available for banking supervision’, ECB Economic Bulletin, Issue 6/2019, available under www.ecb.europa.eu. 134 As defined in Art. 2 para. 26 Regulation (EU) No. 468/2016 of the ECB. 135 ECB regulations adopted on the basis of Art. 132(1) first indent TFEU, Art. 34.1, first indent ESCB Statute and Art. 4(3) SSMR. See for instance Regulation (EU) 2016/445 of the ECB of 14 March 2016 on the exercise of options and discretions available in Union law (ECB/2016/4), OJ L 78, 24.3.2016, at p. 60. 136 ECB Decisions adopted on the basis of Art. 132(1) second indent TFEU, Art. 34.1 second indent ESCB Statute and Art. 4(3) SSMR. See for instance Decision (EU) 2015/2218 of the ECB of 20 November 2015 on the procedure to exclude staff members from the presumption of having a material impact on a supervised credit institution’s risk profile (ECB/2015/38), OJ L 314, 1.12.2015, at p. 66. 137 Art. 132(1) third indent TFEU. 138 Art. 6(5)(a) SSMR. See for instance Guideline (EU) 2017/697 of the ECB of 4 April 2017 on the exercise of options and discretions available in Union law by national competent authorities in relation to less significant institutions (ECB/2017/9), OJ L 101, 13.4.2017, at p. 156. 139 These communications are published on the ECB’s webpage under ‘supervisory practices’.
Georg Gruber
375
Art. 26 SSMR
63
64
65
66
Supervisory board
The term “complete” implies that the Supervisory Board has completed all other procedural steps (e.g. consultation of third parties; submission to supervised entities to give them the opportunity to comment) before submitting the proposed draft decision to the Governing Council.140 Pursuant to Art. 26(6) SSMR141 the Supervisory Board approves draft decisions142 by a simple majority of its members. Each member shall have one vote and in case of a draw, the Chair shall have a casting vote. As mentioned in Section B.I.2 above, in cases where two authorities of the same Member State are represented in the Supervisory Board (NCA and NCB), they shall be considered as one member and the voting right shall be exercised by the NCA representative (or his/her alternate) unless explicitly indicated otherwise by the NCA.143 The “one member one vote” principle and the voting by simple majority reflect the fact that the Supervisory Board is an internal ECB body. As explained above in Section B.I.3, its members must act as independent experts in the interest of the Union as a whole and not as representatives of their Member State or NCA. A weighted voting system for all supervisory matters where the votes of NCA representatives would be weighted depending for instance on the size of the respective banking sector would be incompatible with this general principle. As an exception to the simple majority voting, Art. 26(7) SSMR requires a qualified majority in the Supervisory Board for the approval of draft regulations taken on the basis of Art. 4(3) SSMR. The rationale underlying this provision is that the Supervisory Board, when approving draft regulations that apply to all supervised entities in all participating Member States, acts as a kind of legislator/regulator so that the same voting rules as for the Council should apply. As an exception to the general rule, the requirement of a qualified majority has to be applied restrictively and cannot be applied by analogy to other decisions of a general nature.144 For the definition of the term “qualified majority”, Art. 26(7) SSMR refers to the voting rules applying to the Council as set out in Art. 16(4) TEU and Art. 238(2) TFEU which the ECB has implemented in Art. 13c para. (ii) ECB Rules of Procedure.145 According to this provision, “decisions shall be deemed adopted when at least 55 % of the Supervisory Board members representing at least 65 % of the total population, cast a vote in favour. A blocking minority must include at least the minimum number of Supervisory Board members representing 35 % of the total population, plus one member, failing which the qualified majority shall be deemed attained”. The rules on voting in the Council can by nature only apply to the NCA representatives in the Supervisory Board. For the four ECB representatives, the last sentence of Art. 26(7) SSMR and Art. 13c para. (iv) ECB Rules of Procedure determine that they shall have a vote equal to the median vote of the other members. The method for calculating this median weighting is laid down in an annex to the ECB Rules of Procedure. While Art. 26(7) SSMR is silent on the votes of the Chair and the Vice-Chair of the SuLackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 92. Replicated in Art. 6.5 Rules of Procedure of the Supervisory Board. 142 The wording of Art. 26(6) SSMR (“Decisions shall be taken …”) is not fully precise since the Supervisory Board is not a decision-making body and cannot take final decisions. The term “decision” thus means “approval of a draft decision”. 143 Arts. 6.1. and 6.2 Rules of Procedure of the Supervisory Board. 144 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at p. 69. 145 Art. 26(7) SSMR also refers to the transitional provisions set out in Art. 238 TFEU and Protocol No. 36 on transitional provisions attached to the TEU and the TFEU which the ECB has implemented in Art. 13c ECB Rules of Procedure. These transitional provisions expired on 31 March 2017 and are therefore not relevant anymore. 140
141
376
Georg Gruber
Art. 26 SSMR
Supervisory board
pervisory Board, Art. 13c para. (v) ECB Rules of Procedure clarifies that their votes are weighted zero and count only towards the definition of the majority as far as the number of the members of the Supervisory Board is concerned. Any voting in the Supervisory Board requires a quorum of two-thirds of its mem- 67 bers having a voting right.146 If the quorum is not met, the Chair may convene an extraordinary meeting at which members of the Supervisory Board may vote without regard to the quorum.147 The voting may be initiated by the Chair or upon request from three members.148 The Chair may also initiate a secret ballot if requested by at least three members having a voting right.149 b) Submission of the draft decision to the Governing Council Following the approval of a draft decision by the Supervisory Board, the draft deci- 68 sion (together with explanatory notes outlining the background to and the main reasons underlying the draft decision) is transmitted to the Governing Council for adoption within ten working days.150 In emergencies, the Supervisory Board may define in its transmission letter a shorter deadline. The draft decision is also transmitted simultaneously to the NCAs concerned together with information on the deadline given to the Governing Council.151 This transmission is for information purposes only and does not provide NCAs with an additional possibility to intervene in the decision-making process.152 c) Adoption of decisions by the Governing Council Pursuant to Art. 26(8)(3) SSMR, “a draft decision shall be deemed adopted unless the 69 Governing Council objects within a period to be defined … but not exceeding a maximum period of ten working days.” Art. 13g.2 ECB Rules of Procedure specifies that the period shall be ten working days but may be shortened by the Supervisory Board in case of emergencies. An objection requires that a majority of Governing Council members object to the 70 decision within the given deadline. The Governing Council may take such a decision by simple majority of its members having a voting right in accordance with the rotation scheme set out in Art. 10.2 ESCB Statute. The simple majority voting rule laid down in Art. 10.2 ESCB Statute applies to all legal acts including regulations. The SSMR could not introduce a qualified majority requirement for the Governing Council since the ESCB Statute is part of primary Union law which could not be amended by way of secondary legislation. If the Governing Council objects to a draft decision, it shall state the reasons for 71 doing so in writing, in particular stating monetary policy concerns.153 The term “in particular” indicates that the Governing Council may not only object for reasons of
Art. 6.3(1) Rules of Procedure of the Supervisory Board. Arts. 6.3(2) and 7.1 Rules of Procedure of the Supervisory Board. In case of emergencies, the quorum is 50 % and an extraordinary meeting may take place immediately after the closure of the first meeting. 148 Art. 6.4 Rules of Procedure of the Supervisory Board. 149 Art. 6.6 Rules of Procedure of the Supervisory Board. 150 Art. 13g.1(1) ECB Rules of Procedure. In practice, the SSM Secretariat transmits the draft decision to the Secretary of the Governing Council that initiates the non-objection procedure. 151 Art. 26(8)(2) SSMR and Art. 13g.1(2) ECB Rules of Procedure. 152 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 50. 153 Art. 26(8)(6) SSMR and Art. 13g.2(3) ECB Rules of Procedure. 146
147
Georg Gruber
377
Art. 26 SSMR
Supervisory board
monetary policy but also for other reasons including supervisory concerns.154 In case of an objection, the Supervisory Board as well as the European Parliament are to be informed155. Following an objection, an NCA may request the Supervisory Board to initiate a mediation process and to activate the Mediation Panel to resolve the differences of views.156 72 The nature of the non-objection procedure implies that the Governing Council may only object to a decision proposed by the Supervisory Board (veto right). The Governing Council may neither request the Supervisory Board to propose a certain decision nor may it amend the decision proposed by the Supervisory Board. In case of an objection, it is up to the Supervisory Board to propose a modified decision or not. The right of initiative remains thus with the Supervisory Board. 73 All in all, the non-objection procedure fully respects the role of the Governing Council as the ultimate decision-making body since it takes the final decision and is not bound by the proposal made by the Supervisory Board. The Governing Council’s decision-making power is however limited in three respects:157 the time limit of ten working days, the exclusion of amendments and the duty to motivate any objection. d) Publication or notification of legal acts 74
ECB legal acts of general application like regulations or decisions without addressees are signed by the ECB President and usually published in the Official Journal of the European Union.158 Legal instruments addressed to NCAs like guidelines and instructions are signed by the ECB President and notified to the NCA(s) concerned; guidelines may also be published. ECB supervisory decisions are signed by the Secretary of the Governing Council and notified by the SSM Secretariat to the addressees.159 e) Involvement of participating Member States whose currency is not the euro
75
Art. 26(8) SSMR also includes specific rules on the involvement of Member States whose currency is not the euro but which have entered into a close cooperation with the ECB in accordance with Art. 7 SSMR. These provisions are relevant for Bulgaria and Croatia following the establishment of close cooperation with the ECB in 2020. The NCAs of these two Member States are represented in the Supervisory Board but not in the Governing Council. Art. 26(8) SSMR aims at counterbalancing this lack of representation by establishing a special procedure: If a Member State in close cooperation disagrees with a draft decision proposed by the Supervisory Board, it shall inform the Governing Council within five working days of receiving the draft decision of its reasoned disagreement and the Governing Council shall decide on the matter within five working days and notify its reasoned decision to the Member State concerned.160 If the Member State concerned is not satisfied with this decision, it may request the ECB to terminate the close cooperation. A Member State may initiate a similar escalation procedure in case it disagrees with an objection of the Governing Council against a draft decision proposed by the Supervisory Board.161 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 48. Section I.4 Interinstitutional Agreement between the European Parliament and the ECB. 156 Art. 25(5) SSMR and Art. 8 Regulation (EU) No. 673/2014 of the ECB. For further details see supra, → Art. 25 SSMR. 157 Ohler, Bankenaufsicht und Geldpolitik (2015), § 5 para. 48. 158 For further details see Arts. 17 and 17a ECB Rules of Procedure. 159 Art. 17.4 ECB Rules of Procedure. 160 Arts. 26(8)(4) and 7(8) SSMR and Art. 13g.3 ECB Rules of Procedure. 161 Arts. 26(8) last sentence and 7(7) SSMR and Art. 13g.4 ECB Rules of Procedure. 154
155
378
Georg Gruber
Art. 26 SSMR
Supervisory board
II. The procedure for the adoption of macroprudential decisions The procedure for the adoption of macro-prudential decisions which the ECB may 76 take on the basis of the SSMR is laid down in Art. 13h ECB Rules of Procedure. In simplified terms, the Governing Council is competent to take such decisions upon a proposal prepared by the Supervisory Board based on the initiative and taking into account the input of the relevant committee and of the relevant internal structure. Contrary to the non-objection procedure, the Governing Council may amend proposals submitted by the Supervisory Board and also may take a decision in the absence of a proposal from the Supervisory Board.162
III. The decision-making procedure under Art. 6(7) SSMR A different decision-making procedure applies to legal instruments concerning the 77 general framework specifying the arrangements for carrying out supervisory tasks which are based on Arts. 6(1) and (7) SSMR.163 Such legal instruments concerning the organisation of and cooperation within the SSM are to be adopted by the Governing Council, in consultation with the NCAs164 and on the basis of a proposal from the Supervisory Board outside the scope of the non-objection procedure.165 This means that the Governing Council is neither bound by a specific deadline nor limited to a veto right; it may amend by majority voting the draft proposal submitted by the Supervisory Board.
IV. The standard decision-making procedure The ECB standard decision-making procedure set out in the TFEU and the ESCB 78 Statute applies to legal instruments relating to the institutional framework of the ECB. As explained above, the SSMR did not affect the general competence of the Governing Council and the Executive Board to decide on the institutional framework of the ECB. Usually, such decisions are taken by the Governing Council based on a proposal by the Executive Board166. Decisions concerning the institutional framework are for instance the ECB Rules of Procedure or the Decision of the ECB of 14 April 2014 concerning the establishment of an Administrative Board of Review and its Operating Rules.
V. Delegated decision-making Soon after the establishment of the SSM the question arose whether the Governing 79 Council may delegate certain types of decisions to other bodies or to ECB manage-
Art. 13h.3 ECB Rules of Procedure. On this basis, the ECB has adopted Regulation (EU) No. 468/2014 (SSM‑FR) but also other legal instruments concerning the organisation of and cooperation within the SSM. See for instance Guideline (EU) 2015/856 of the ECB of 12 March 2015 laying down the principles of an Ethics Framework for the Single Supervisory Mechanism (ECB/2015/12), OJ L 135, 2.6.2015, at p. 29. 164 The consultation of NCAs is necessary since legal arrangements concerning the organisation of and cooperation within the SSM may affect the organisational status of NCAs. The submission of the proposal to the Supervisory Board is not sufficient since the NCA representatives in the Supervisory Board are not supposed to represent their NCA but to act in the interest of the Union as a whole, see supra, → para. 13. 165 Art. 13j ECB Rules of Procedure. 166 Art. 12.2 ESCB Statute and Art. 5 ECB Rules of Procedure. 162
163
Georg Gruber
379
Art. 26 SSMR
Supervisory board
ment.167 In view of the complexity of the decision-making process and the high number of decisions to be taken, a delegation of routine decisions was considered necessary to ensure that the Supervisory Board and the Governing Council can focus on important or more complex decisions.168 While the SSMR does not provide for a delegation of decision-making powers it does at the same time not exclude such delegation in accordance with the general principles established by the Court of Justice of the European Union.169 According to the well-known Meroni judgment170 concerning the delegation of policy decisions to another body established under private law, institutions may only delegate “clearly defined executive powers” but not “discretionary power, implying a wide margin of discretion”. In more recent judgments concerning the delegation of powers within an institution, the Court considered that a delegation of “measures of management or administration” is possible and may even be necessary to cope with a considerable increase in the number of decisions.171 The Court stressed that the need to ensure that the decision-making body is able to function corresponds to a principle inherent in all institutional systems. 80 In accordance with this case law, the ECB has established in 2017 a delegation scheme for certain types of supervisory decisions.172 The decisions that may be delegated to heads of ECB work units are by definition administrative measures involving only limited discretion. The delegation scheme comprises three layers. The first layer consists of a decision, adopted by the Governing Council based on a proposal from the Executive Board, laying down the general framework for delegation173. The general framework clarifies the procedural requirements for adopting a delegation decision, the transparency requirements attached to the exercise of delegation and the revocability of delegations. The second layer consists of delegation decisions adopted under the non-objection procedure by which the Governing Council delegates the power to adopt specific types of supervisory decisions to heads of work units. These delegation decisions set out the perimeter of delegation and the substantive criteria for exercising delegated powers, thereby limiting supervisory discretion and ensuring that the procedural rights of the concerned parties are safeguarded. So far, certain types of supervisory decisions have 167 For an analysis of the different options see Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 81 et seq. 168 ECB Annual Reports on supervisory activities 2016, at p. 54. See the Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No. 1024/2013, COM(2017) 591 final, 6 and accompanying Commission Staff working document (SWD(2017) 336 final, 18 et seq. See the critical remarks and recommendations of the European Court of Auditors in its Report “Single Supervisory Mechanism – Good start but further improvements needed”, at pp. 28 and 79–80, . 169 Lackhoff, Single Supervisory Mechanism – A Practitioner’s Guide (2017), at pp. 82–83. The opinion of the Council Legal Service only raised concerns as regards the establishment of the Supervisory Board as third decision-making body but did not exclude such a form of intra-institutional delegation. 170 Case 9/56, Meroni v High Authority, ECLI:EU:C:1958:7; Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras 41 et seq. 171 Case 5/85, Akzo Chemie v Commission, ECLI:EU:C:1986:328, para. 37 concerning the delegation of powers from the College of Commissioners to one Commissioner. Similar Case C-301/02 P, Tralli v ECB, 2005, ECLI:EU:C:2005:306, para. 42: “... a Community institution or body must be entitled to lay down a body of measures of an organisational nature, delegating powers to its own internal decision-making bodies.” 172 For an overview see Commission Staff working document accompanying the Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism pursuant to Regulation (EU) No 1024/2013 (SWD(2017) 336 final), at pp. 20–21; Petit, in: Lo Schiavo (ed), The European Banking Union and the Role of Law (2019), 108, at pp. 117 et seq. 173 Decision (EU) 2017/933 of the ECB of 16 November 2016 on a general framework for delegating decision-making powers for legal instruments related to supervisory tasks (ECB/2016/40), OJ L 141, 1.6.2017, at p. 14.
380
Georg Gruber
Professional secrecy and exchange of information
Art. 27 SSMR
been delegated, namely decisions on the suitability of members of management bodies174, decisions amending significance decisions175, own funds decisions176, so-called national powers decisions177, decisions concerning common procedures178 and some internal model decisions179 but the scheme may be extended to other types of routine supervisory decisions. The third layer consists of nomination decisions 180 by which the Executive Board appoints the heads of work units to whom decision-making powers are delegated. The delegation scheme reflects the complex governance structure of the SSM, reconciling the competences of the Executive Board for organisational issues and the competences of the Governing Council and Supervisory Board for supervisory matters. But the delegation of more than 50 % of all supervisory decisions has entailed a considerable relief of the decision-making bodies which allows them to focus on more complex or critical cases.
D. Conclusion The SSMR has established in its Art. 26 a complex governance structure for the SSM 81 which aims at reconciling the wish of the legislator to separate the ECB’s monetary policy tasks from its supervisory tasks and the ECB’s existing governance structure set out in the TFEU and the ESCB Statute. Despite this complexity, the governance structure seems to function properly since the ECB managed to adopt a huge number of decisions, often within very tight deadlines.
Art. 27 SSMR Professional secrecy and exchange of information* 1. Members of the Supervisory Board, staff of the ECB and staff seconded by participating Member States carrying out supervisory duties, even after their duties are 174 Decision (EU) 2017/935 of the ECB of 16 November 2016 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/2016/42), OJ L 141, 1.6.2017, at p. 21. 175 Decision (EU) 2017/934 of the ECB of 16 November 2016 on the delegation of decisions on the significance of supervised entities (ECB/2016/41), OJ L 141, 1.6.2017, at p. 18. 176 Decision (EU) 2018/546 of the European Central Bank of 15 March 2018 on delegation of the power to adopt own funds decisions (ECB/2018/10), OJ L 90, 6.4.2018, at p. 105. 177 Decision (EU) 2019/322 of the European Central Bank of 31 January 2019 on delegation of the power to adopt decisions regarding supervisory powers granted under national law (ECB/2019/4), OJ L 55, 25.2.2019, at p. 7. 178 Decision (EU) 2019/1376 of the European Central Bank of 23 July 2019 on delegation of the power to adopt decisions on passporting, acquisition of qualifying holdings and withdrawal of authorisations of credit institutions (ECB/2019/23), OJ L 224, 28.8.2019, at p. 1. 179 Decision (EU) 2021/1442 of the European Central Bank of 3 August 2021 on delegation of the power to adopt decisions on internal models and on extension of deadlines (ECB/2021/38), OJ L 314, 6.9.2021, p. 22. 180 See for instance Decision (EU) 2020/1331 of the European Central Bank of 15 September 2020 nominating heads of work units to adopt delegated fit and proper decisions and repealing Decision (EU) 2017/936 (ECB/2020/39), OJ L 312, 25.9.2020, at p. 34 and Decision (EU) 2020/1334 of the European Central Bank of 15 September 2020 nominating heads of work units to adopt delegated decisions regarding supervisory powers granted under national law and repealing Decision (EU) 2019/323 (ECB/2020/42), OJ L 312, 25.9.2020, at p. 40. * This commentary is written in the private capacity of the author and should not be reported as representing the views of the ECB. The author would like to thank Dr. Alexander Karpf, LL.M. and Dr. Axel-Johannes Korb for their valuable input.
Martina Almhofer
381
Art. 27 SSMR
Professional secrecy and exchange of information
ceased, shall be subject to the professional secrecy requirements set out in Article 37 of the Statute of the ESCB and of the ECB and in the relevant acts of Union law. The ECB shall ensure that individuals who provide any service, directly or indirectly, permanently or occasionally, related to the discharge of supervisory duties are subject to equivalent professional secrecy requirements. 2. For the purpose of carrying out the tasks conferred on it by this Regulation, the ECB shall be authorised, within the limits and under the conditions set out in the relevant Union law, to exchange information with national or Union authorities and bodies in the cases where the relevant Union law allows national competent authorities to disclose information to those entities or where Member States may provide for such disclosure under the relevant Union law. Bibliography Basel Committee on Banking Supervision, ‘Core Principles for Effective Banking Supervision’ (September 2012); Pieter Van Cleynenbreugel, ‘Confidentiality behind transparent doors: The European Central Bank and the EU law principle of openness’, MJ 25(I) (2018), 52; Paul Craig and Gráinne de Búrca, EU law (7th edn, Oxford University Press, Oxford 2020); ECB, ‘ECB Annual Report on supervisory activities 2016’ (March 2017); ECB, ‘ECB Annual Report on supervisory activities 2017’ (March 2018); ECB, ‘ECB Annual Report on supervisory activities 2020’ (March 2021); ECB, ‘ESCB Legal Conference 2020’ (February 2021); Carla Farinhas, ‘Access to confidential information in the financial and banking sectors: judgements of the Court of Justice in Altmann, Baumeister, UBS and Buccioni’, Law and Financial Markets Review 13:4 (2019), 203; Eberhard Grabitz, Meinhard Hilf and Martin Nettesheim (eds), Das Recht der Europäischen Union: EUV/AEUV (72nd supplement, C.H. Beck, Munich 2021); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht (7 th edn, Nomos, Baden-Baden 2015); Benjamin Herz, ‘Neue Rechtsprechung zum Zugang zu Informationen von Finanzaufsichtsbehörden’, NJW 2018, 2601; Klaus Lackhoff, Single Supervisory Mechanism (C.H. Beck/ Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Adiana Maricut-Akbik, ‘Holding the Supervisor to Account: The European Parliament and the European Central Bank in Banking Supervision’ (November 2018), available at ; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck, Munich 2014); Helmut Siekmann (ed), Kommentar zur Europäischen Währungsunion (Mohr Siebeck, Tübingen 2013); René Smits and Nikolai Badenhoop, ‘Towards a Single Standard of Professional Secrecy for Financial Sector Supervisory Authorities: A Reform Proposal’, ELR 44 (2019), 295.
382
A. Purpose of professional secrecy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Professional secrecy and the ECB public access regime . . . . . . . . . . . . . . . . . . . . . .
5
C. Professional secrecy and right of access to the file . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
D. Different layers of the ECB’s professional secrecy obligations . . . . . . . . . . . . . . . .
13
E. Scope of application of the professional secrecy regime . . . . . . . . . . . . . . . . . . . . . . I. Personal scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Material scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Non-public information of a supervisory nature . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Interest in maintaining confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 19 22 22 27
F. Professional secrecy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Prohibition of unlawful disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Time aspect of professional secrecy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Exceptions to professional secrecy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Principles of lawful disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Information in summary or aggregate form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Criminal law cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Civil or commercial proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Consent of the persons adversely affected by disclosure . . . . . . . . . . . . . . . . . . 6. Exchange of information with other authorities or bodies . . . . . . . . . . . . . . . . a) Application of CRD rules on information exchange by the ECB . . . . . . . . . b) Information exchange with EU authorities and bodies . . . . . . . . . . . . . . . . . . c) Information exchange with third-country authorities or bodies . . . . . . . . .
39 39 41 44 44 47 49 53 56 58 58 67 75
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
G. Procedural requirements for lawful disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
H. Consequences of unlawful disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90
A. Purpose of professional secrecy obligations Information is one of the most important assets of the ECB in order to fulfill its statu- 1 tory tasks efficiently and autonomously. In particular, for the purpose of exercising its supervisory tasks pursuant to Art. 4 SSMR, the ECB is relying on a wide array of granular financial information related to the supervised entities as well as personal information on natural persons (such as information about the board members of a credit institution1) or relevant third parties (such as the providers of outsourcing services). A significant amount of this information is gathered by the ECB as a prudential2 2 supervisory authority either on a recurring basis with regard to supervisory reporting obligations of the supervised entities,3 by means of ad hoc information requests,4 in the course of general investigations5, or during on-site inspections6 at the premises of the supervised entities. In addition, a frank and comprehensive supervisory dialogue with the supervised entities as well as the exchange of information with EU and third-country authorities and bodies form an important and integral part of the ECB’s information sources. On the basis of the collected information, the ECB then constantly produces supervisory assessments, which may be followed by supervisory action. In order to protect the supervised entities, other legal or natural persons concerned 3 as well as the normal functioning of the financial markets in the SSM, EU law imposes strict professional secrecy obligations on the ECB when carrying out the tasks conferred on it by the SSMR.7 More precisely, in the absence of a professional secrecy regime or under too lenient professional secrecy obligations, where sensitive information could be easily disclosed, the supervised entities or other authorities may not have confidence in the ECB that it will treat their sensitive information appropriately.8 Hence, they will only communicate the relevant information with reluctance or even resistance to the
1 The ECB is supervising credit institutions. According to Art. 4(1)(1) CRR, “credit institution” means an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account. In the following, the terms “bank” and “credit institution” are used as synonyms. 2 In the following, “prudential supervision” refers to the exercise of the ECB’s supervisory tasks under Art. 4 SSMR. 3 Also involving the NCAs; see, in particular, Art. 10 SSMR and Art. 140 SSM‑FR. 4 Art. 10 SSMR and Art. 139 SSM‑FR. 5 Art. 11 and Art. 142 SSM‑FR. 6 Art. 12 SSMR and Arts. 143–146 SSM‑FR. 7 See also Case C-140/13, Altmann and others v Bundesanstalt für Finanzdienstleistungsaufsicht, ECLI: EU:C:2014:2362, para. 33, and Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2018:464, para. 33, as regards the purposes of professional secrecy under MiFID I; see also Case C-594/16, EnzoBuccioni v Banca d’Italia, ECLI:EU:C:2018:717, paras. 27–29 with regard to banking supervision. For further observations on the purposes of the professional secrecy requirements enshrined in Art. 37 ESCB/ECB Statute, see Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 37, para. 4. 8 Cf. Danielè Nouy, Letter to Mr Hayes (MEP) regarding Professional Secrecy Requirements, June 2017, available at ; see also Directorate-General for Library, Research and Documentation of the CJEU, Research Note on access to information held by national financial supervisory authorities, June 2017, available at , at p. 11.
Martina Almhofer
383
Art. 27 SSMR
Professional secrecy and exchange of information
ECB.9 This does particularly apply to information relating to business secrets of banks, which have a high economic value and may be abused by their competitors.10 Similar considerations apply to the cooperation between authorities: If an authority does not trust in the handling of information by its counterparty, it will also be very careful in sharing sensitive information.11 4 In all of these cases, a lack of complete, honest and reliable information might have repercussions over the effectiveness of prudential supervision and ultimately, the financial stability in the SSM and each participating Member State.12
B. Professional secrecy and the ECB public access regime The professional secrecy obligations of the ECB may cause tensions with the general public access regime, which – in principle – grants any citizen of the EU as well as any natural or legal person residing or having its registered office in a Member State access to documents of the ECB. To this end, the relevant provisions of the public access regime aim at striking a balance between the principle of confidentiality and the principle of transparency as enshrined in EU law (see, in particular, Art. 11 and Art. 15(3)TEU). 13 6 The conditions and limits for public access to ECB documents are mainly governed by Decision ECB/2004/3, which does not differentiate between the ECB’s monetary and supervisory function. There are, however, several exceptions to the public access regime in this Decision, which may be deemed relevant or even specifically calibrated for supervisory information: Pursuant to Art. 4(1)(a), the ECB shall refuse access to a document where disclosure would undermine the protection of the public interest as regards, inter alia, the Union’s or a Member State’s policy relating to the prudential supervision or credit institutions and other financial institutions as well as the purpose of supervisory inspections. The same applies to situations where disclosure would undermine the privacy and integrity of the individual, in particular, in accordance with Union legislation regarding the protection of personal data. What is more, Art. 4(1)(c) refers to the confidentiality of information that is protected as such under EU law. This exception may also be applicable to information covered by the professional secrecy rules enshrined in Art. 37.1 of Protocol No 4 ESCB/ECB Statute as well as in Art. 27 SSMR read in conjunction with Arts. 53–61 CRD14. Furthermore, Art. 4(2) first indent of Decision 5
9 Similarly, Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU: C:2017:958, Opinion of AG Bot, para. 38. 10 See also the reasoning of Advocate General Kokott in her Opinion on the Case C-358/16, UBS Europe ea, ECLI:EU:C:2017:606, AG Kokott, para. 87. 11 In this regard, Smits and Badenhoop identify three levels of trust that would be central to professional secrecy: trust by the general public and individual counterparties, trust by the supervised entities and trust by the other supervisory authorities (Smits and Badenhoop, ELR 44 (2019), 298); see also Case C-110/84, Gemeente Hillegom v Hillenius, ECLI:EU:C:1985:495, para. 27. 12 Cf. also the general objectives of the SSM as specified in Art. 1 SSMR as well as Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2017:958, Opinion of AG Bot, para. 47; similarly, the CJEU in Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2018:464, para. 32 as well as in Case C-594/16, Enzo Buccioni v Banca d’Italia, ECLI:EU:C:2018:717, paras. 27 and 28. 13 See Art. 1 of Decision ECB/2004/3; see also Urban, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th edn, 2015), ESZB/EZB Satzung Art. 37, paras. 6 and 7 as well as Case C-594/16, Enzo Buccioni v Banca d’Italia, ECLI:EU:C:2018:425, Opinion of AG Bobek, para. 33. Further on the principle of transparency in EU law, see Craig and de Búrca, EU law (7th edn, 2020), at pp. 600–608 as well as Ioannidis, in: ECB, ESCB Legal Conference 2020 (February 2021) 223 et seq. 14 On the CRD, see infra, → para. 17.
384
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
ECB/2004/3 protects documents whose disclosure could pose a risk to, inter alia, the commercial interests of a natural or legal person, including intellectual property.15
C. Professional secrecy and right of access to the file Besides public access rights, there is also a tension between professional secrecy obligations and the right to access a supervisory file in order to make use of the right of defence. In general, pursuant to Art. 51 CFREU, the ECB as an EU institution is subject to the provisions of the Charter. Therefore, when exercising its supervisory powers in banking supervision, it also needs to respect the right to good administration as enshrined in Art. 41(1)(b) CFREU, which includes the right of access to files. This implies that a person who is adversely affected by a supervisory measure of the ECB may invoke protection under the Charter. More precisely, the right of access to the relevant supervisory file is a necessary corollary of the effective exercise of the rights of defence. Hence, the persons concerned must have the opportunity to examine all of the documents in the investigation that might be relevant for their defence.16 In the area of banking supervision, these rights are implicitly reaffirmed by Art. 54(c) CRD17, permitting those competent authorities receiving confidential information under Art. 53 CRD shall use it only, inter alia, in an appeal against a decision of the competent authority including court proceedings pursuant to Art. 72 CRD (which establishes that prudential decisions and measures shall be subject to a right of appeal). Moreover, Art. 22(2) SSMR explicitly confirms that the rights of defence of the persons concerned shall be fully respected in the proceedings, including their entitlement to have access to the ECB’s file. However, as also laid down in Art. 52(1) CFREU and as confirmed and further developed in settled case-law, the Charter rights do not constitute unfettered prerogatives and may under certain circumstances be restricted. 18 In this vein, the CJEU clarified that the right of access to file excludes business secrets concerning other persons, internal documents of the authority that adopted the measure and other confidential information.19 This is in line with Art. 41(2)(b) CFREU, confirming that as regards the right of access to file, the legitimate interests of confidentiality as well as of professional and business secrecy need to be respected. As regards specifically the field of banking supervision, Art. 22(2) SSMR also states that the right of access to file is subject to the legitimate interest of other persons in the protection of their business secrets and the right of access to file shall not extend to confidential information. The ECB then further clarified in Art. 32(5) SSM‑FR that (as regards the right of access to files) confidential information may include internal docu-
15 For a more detailed analysis of the exceptions to the public access regime applicable to the ECB see Van Cleynenbreugel, MJ 25(I) (2018), 64 et seq. 16 Case C-358/16, UBS Europe ea, ECLI:EU:C:2018:715, paras. 59 and 66 with regard to the right of access to file enshrined in Art. 47 CFREU, which – by contrast to Art. 41 – is also applicable to national authorities when implementing EU law. 17 For further details on the relevance of CRD for the ECB’s professional secrecy regime, see infra, → para. 17. 18 Confirmed by the CJEU in Case C-358/16, UBS Europe and others v DV and others, ECLI:EU:C: 2018:715, para. 62. 19 See Case C-358/16, UBS Europe and others v DV and others, ECLI:EU:C:2018:715, para. 66 and the case law cited.
Martina Almhofer
385
7
8
9
10
11
Art. 27 SSMR
Professional secrecy and exchange of information
ments of the ECB and the NCAs and correspondence between the ECB and such authorities or between such authorities. 12 Nevertheless, in this context, the confidentiality of documents may not be considered as an unfettered principle either. Rather, according to the CJEU, the obligation of professional secrecy has to be implemented in such a way as to reconcile it with the rights of defence. This means that the rights of the person are adversely affected and the interests in maintaining the confidentiality of information protected by professional secrecy need to be balanced on a case-by-case basis.20
D. Different layers of the ECB’s professional secrecy obligations Already the Basel Principles for Effective Banking Supervision recognise the importance of cooperation and collaboration among supervisors, but also expressly mention the need to protect confidential information in banking supervision.21 Even though these principles are recommendations and hence, legally non-binding acts for the EU institutions, they are to be considered as de facto minimum standards for sound prudential regulation and supervision of banks. They are also used (inter alia, by the IMF and the World Bank in the context of the Financial Sector Assessment Programme) as a benchmark for assessing the quality of supervisory systems and for identifying future work to achieve a baseline level of sound supervisory practices.22 14 The legally binding effect for the ECB, however, comes only with the implementation of professional secrecy obligations into legal provisions; and indeed, there are different layers of the ECB’s professional secrecy regime in EU law: 15 The general professional secrecy requirements for the EU institutions are codified in Art. 339 TFEU. This provision stipulates that the members of the EU institutions, the members of committees, and the officials and other servants of the Union shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy, in particular information about undertakings, their business relations or their cost components.23 As also clarified by the General Court, the confidentiality of information for which professional secrecy requires protection under Art. 339 TFEU may also stem from other provisions of primary or secondary EU law.24 16 In this regard, specific professional secrecy obligations of the ECB are laid down in Art. 37 ESCB/ECB Statute. According to the explicit wording of this provision, which has the legal quality of EU primary law, it applies to all members of the governing bodies and the staff of the ECB as well as the staff of the national central banks. These persons shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy. Furthermore, persons having access to data covered by Union legislation which imposes an obligation of secrecy shall be 13
Case C-358/16, UBS Europe and others v DV and others, ECLI:EU:C:2018:715, para. 69. Basel Committee on Banking Supervision (September 2012), Principle 3 on Cooperation and Collaboration. 22 Ibid, at p. 1. 23 As regards the relationship between Art. 339 TFEU and Art. 37 ESCB/ECB Statute, see Urban, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th ed., 2015), ESZB/EZB Satzung Art. 37, para. 2, who explains the additional professional secrecy provisions in the Statute with, inter alia, the particularities of the ESCB’s monetary policy; see also Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB SatzungArt. 37, paras. 3 and 26–30. 24 Case T-474/04, Pergan Hilfsstoffe für industrielle Prozesse v Commission, ECLI:EU:T:2007:306, para. 64. 20
21
386
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
subject to such legislation. Beside the general professional secrecy rule in Art. 37, the proceedings of the meetings of the Governing Council are specifically protected by Art. 10(4) ESCB/ECB Statute. At the level of EU secondary law, Art. 27 SSMR further specifies the professional se- 17 crecy regime in Art. 37 ESCB/ECB Statute with regard to the ECB’s supervisory tasks. According to Art. 27(1) SSMR, members of the Supervisory Board, staff of the ECB and staff seconded by participating Member States carrying out supervisory duties, even after their duties have ceased, shall be subject to the professional secrecy requirements set out in Art. 37 ESCB/ECB Statute and in the relevant acts of Union law. In this respect, in the field of banking supervision, CRD is of particular relevance, which provides for specific professional secrecy obligations.25 As Art. 37.2. ESCB/ECB Statute refers to “Union legislation”, it may be assumed that this provision does not provide for any different scope of protection for supervisory information that is already subject to the strict nondisclosure obligations under CRD. In addition, professional secrecy obligations are laid down in the ethics framework 18 for ECB staff, which has been incorporated into the ECB staff rules and has thereby become of a binding nature.26 The staff rules also refer to the ECB’s internal rules on management and confidentiality of documents, as included in the ECB’s Business Rule Book, published on the ECB intranet and available to all ECB staff.27 The latter ensures the internal protection of information covered by professional secrecy, by means of categorizing information by its required level of protection and by establishing the consequences for its handling within the ECB. In addition, the members of the Governing Council, the Executive Board as well as the Supervisory Board are subject to a code of conduct including professional secrecy requirements.28 As regards the external contractors, adequate professional secrecy standards are ensured via contractual obligations.
E. Scope of application of the professional secrecy regime I. Personal scope of application Art. 37 ESCB/ECB Statute, Art. 27 SSMR as well as Art. 53 CRD clarify the personal 19 scope of the ECB’s professional secrecy regime in its supervisory function: Whereas Art. 37 ECSB/ECB Statute applies to all members of the governing bodies 20 and the staff of the ECB as well as the staff of the national central banks, Art. 27(1)(1) SSMR additionally refers to the members of the Supervisory Board, supervisory staff as well as staff seconded carrying out supervisory tasks. Moreover, Art. 27(1)(2) SSMR re25 See also the professional secrecy requirements in the field of recovery planning and resolution as laid down in the BRRD. 26 Cf. ECB, The Ethics Framework of the ECB, OJ C104, 20.6.2015, p. 4. For the ECB staff rules, see infra fn. 60; see also ECB, Guideline (EU) 2015/856 of the European Central Bank of 12 March 2015 laying down the principles of an Ethics Framework for the SSM (ECB/2015/12), OJ L 135, 2.6.2015, p. 29; as regards the professional secrecy obligations in the staff rules, see also Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 37 para. 7. 27 See the report on the audit of risk management of the ECB for the financial year 2010, available under , at p. 12. 28 See Art. 4 of the Code of Conduct for high-level European Central Bank Officers, OJ C 89, 8.3.2019, p. 2; see also Urban, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th edn, 2015), ESZB/EZB Satzung Art. 37, paras. 3 and 9 as well as Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 37, paras. 8–10, who mentions that it is questionable whether these codes are indeed legally binding instruments. Still, it should be noted that Art. 19(3) SSMR explicitly requires a code of conduct.
Martina Almhofer
387
Art. 27 SSMR
Professional secrecy and exchange of information
quires the ECB to ensure that individuals, who provide any service directly or indirectly, permanently or occasionally, related to the discharge of supervisory duties, are subject to equivalent professional secrecy obligations. 21 Similarly, also Art. 53 CRD establishes that the Member States need to provide that all persons working for or who have worked for the competent authorities and auditors or experts acting on behalf of the competent authorities are bound by the obligation of professional secrecy.
II. Material scope of application 1. Non-public information of a supervisory nature As regards the material scope of application of the ECB’s professional secrecy regime, there is no explicit statutory definition of confidential information covered by professional secrecy, neither in Art. 339 TFEU nor in Art. 37 ESCB/ECB Statute nor in Art. 27 SSMR. In the absence of a precise definition in EU law, different concepts of confidentiality have emerged in the EU Member States.29 However, the CJEU clarified that the notion of confidentiality in EU law must be interpreted autonomously from that in the EU Member States.30 23 In this regard, Art. 27(1) SSMR refers to the professional secrecy requirement in Art. 37 ESCB/ECB Statute. The latter provision explicitly mentions “information”. In the absence of any further clarification of this term or limitation of its scope, it may cover any type of information, irrespective of its medium or format, obtained, drawn up or assembled by the ECB.31 In a slightly more precise manner, Art. 53(1) CRD refers to information that the addressees of the professional secrecy obligations “receive in the course of their duties”. This may cover bank-specific information obtained by the ECB, including received information which the ECB then transforms into summary or aggregate form (even though the latter types of information may be lawfully disclosed, see infra, → paras. 47 and 48)32. In addition, it may also cover information drawn up by the ECB itself, such as internal supervisory methodologies or ECB internal templates. 24 What is more, an indication of the scope of professional secrecy is provided for in Art. 53(1)(2) CRD, which refers to “confidential information” under the general heading “professional secrecy”. Hence, the confidentiality of information may be considered as a prerequisite for professional secrecy obligations.33 However, there is no definition of confidential information in CRD either. 22
29 See Directorate-General for Library, Research and Documentation of the CJEU, Research Note on access to information held by national financial supervisory authorities, June 2017, available at . 30 Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, para. 24. 31 See the ECB’s definition of information contained in a supervisory file subject to the right of access to file according to Art. 32(2) SSM‑FR. 32 By contrast, Benjamin Herz seems to be of the view that such information is generally not covered by professional secrecy (Herz, NJW 2018, 2602). 33 However, it seems that in practice, there is not always a strict differentiation between confidentiality and professional secrecy; therefore, the former may not always be understood as a prerequisite of the latter, but the terms are rather used as synonyms. For instance, Advocate General Bot does not see any substantive difference between the concept of “professional secrecy” and “confidentiality”, arguing that both denote a single purpose and the same idea (see Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2017:958, Opinion of AG Bot, para. 55).
388
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
With regard to the CJEU case-law on the scope of professional secrecy obligations in 25 Art. 339 TFEU,34 it can be assumed that the criterion for information to be classified as confidential is that it is not public.35 This means that the information is only known to a limited number of persons,36 implying that information may also be non-public if it is already known to the person requesting disclosure, but not to an unlimited number of persons. In addition, from the telos of the professional secrecy regime, it may be concluded that such information should not be easily accessible to further persons either in order to be considered as non-public.37 Finally, the professional secrecy obligations in Art. 27 SSMR explicitly refer to the car- 26 rying out of supervisory duties. From a systematic-teleological perspective, taking into account the general provision on the ECB’s powers and obligations in Art. 9(1) SSMR, such duties are limited by the supervisory tasks of the ECB as laid down in Arts. 4 and 5 SSMR. In this respect, also Art. 53(1)(2) CRD explicitly refers to information that the addressees of the respective professional secrecy obligations received “in the course of their duties”. Consequently, the professional secrecy regime in the field of banking supervision does only apply to non-public information which the addressees have obtained in the course of exercising prudential supervisory tasks. This means, for instance, that the specific provisions in Art. 27 SSMR do not apply to information that members of ECB staff have received in their capacity as private persons or which they have obtained in the course of exercising their monetary policy tasks (as the latter is protected by Art. 37 ESCB/ECB Statute, but not under CRD). Hence, another authority may not invoke the exceptions to professional secrecy for information exchange in CRD either (as explained in more detail below)38 in order to receive non-public information from the monetary policy side of the ECB.
2. Interest in maintaining confidentiality Looking at the criteria explained above, every type of non-public supervisory infor- 27 mation received by the ECB, and hence, also every little piece of information contained in a supervisory file would be confidential and as such covered by professional secrecy under CRD. Consequently, this information could, in principle, not be disclosed to third parties.39 Even though the CJEU has not yet ruled on the scope of professional secrecy in the 28 context of banking supervision, such a wide interpretation of professional secrecy in Art. 54 MiFID I with respect to financial markets supervisory authorities is supported by Advocate General Bot in his Opinion on Case C-15/16. More precisely, the Advocate General argues that “all information, including correspondence and statements, relating to a supervised undertaking and received or drawn up by a national financial markets supervisory authority is included, without any other requirement, in the concept of ‘confidential information’”.40 As regards the precise obligations following from professional secrecy, see infra, → paras. 39 et seq. See also Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU: C:2018:464, para. 46. 36 Cf., for example, the judgment of the General Court in Case T-198/03, Bank Austria Creditanstalt AG v Commission, ECLI:EU:T:2006:136, para. 71. 37 Similarly, Jaeckel, in: Grabitz, Hilf and Nettesheim (eds), Das Recht der Europäischen Union: EUV/ AEUV (72nd supplement, 2021), AEUV Art. 339, para. 21. 38 See infra, → paras. 44 et seq. 39 On the non-disclosure obligation arising from the professional secrecy regime see infra, → para. 39. 40 Cf. Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2017:958, Opinion of AG Bot, paras. 64 and 65. 34
35
Martina Almhofer
389
Art. 27 SSMR
Professional secrecy and exchange of information
However, the CJEU did not follow the Advocate General in his broad reading of Art. 54 of MiFID I and clarified that “it cannot be inferred from the wording of Art. 54 of Directive 2004/39, or from the context of that article, or from the objectives pursued by that directive, that it is mandatory that all information relating to the supervised entity and communicated by it to the competent authority, and all statements of that authority in its supervision file, including its correspondence with other bodies, be deemed to be confidential”.41 Rather, the Court seems to follow a narrow reading by stating that professional secrecy only covers “information held by the competent authorities (i) which is not public and (ii) the disclosure of which is likely to affect adversely the interests of the natural or legal person who provided that information or of third parties, or the proper functioning of the system for monitoring the activities of investment firms that the EU legislature established in adopting Directive 2004/39”.42 30 Drawing an analogy between the above case law on MiFID and banking supervision43, particularly by taking into account the similar wording of Art. 53 CRD, it may be concluded that in order to be covered by professional secrecy under CRD, the disclosure of the non-public information concerned must also be likely to affect adversely the interests of the natural or legal person who provided that information or of third parties or the proper functioning of the system for monitoring the activities of credit institutions. 44 This is also in line with previous case law delivered by the CJEU more than three decades earlier, where professional secrecy obligations in banking supervision were already justified with the need to protect the interests of the credit institutions directly concerned as well as the banking system in general.45 Consequently, determining the scope of professional secrecy in banking supervision requires an assessment of the underlying interests in maintaining confidentiality,46 presupposing an element of judgment, on which opinions and views might differ. 31 From a dogmatic perspective, it may be argued that this interest-related criterion establishes an exception to the professional secrecy obligations permitting disclosure (where such information is in principle covered by professional secrecy), rather than a limitation to the material scope of professional secrecy. However, the result would insofar be the same as in both cases disclosure of non-public supervisory information not adversely affecting the mentioned interests would be permitted under CRD. 32 Furthermore, the wording of the CJEU also indicates that not every hypothetical or indirect effect on the relevant interests would lead to the professional secrecy regime being applicable. Rather, a “likely” effect presupposes that there is at least a certain probability that disclosure would cause an adverse impact on those interests. In this 29
41 Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, para. 34. It seems that also Advocate General Bobek is in favour of a less restrictive approach (see for example Case C-594/16, Enzo Buccioni v Banca d’Italia, ECLI:EU:C:2018:425, Opinion of AG Bobek, para. 44). 42 Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, paras. 35 and 46. 43 Cf. the analogy drawn by the CJEU in Case C-594/16, Enzo Buccioniv Banca d’Italia, ECLI:EU:C: 2018:717, para. 30; see also Smits and Badenhoop, who speak of an “holistic approach” of the CJEU on professional secrecy standards for financial supervision (Smits and Badenhoop, ELR 44 (2019), 296 and 314). On the extension of this case law to Art. 53 CRD, see also Farinhas, although the latter also refers to relevant differences in those legal provisions (Farinhas, Law and Financial Markets Review 13:4 (2019), 204 and 208). 44 Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, para. 46. 45 Case C-110/84, Gemeente Hillegom v Hillenius, ECLI:EU:C:1985:495, para. 27. 46 Further on the interests underlying the professional secrecy obligations and the purposes of the regime, supra, para. 3.
390
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
regard, while it may appear rather likely that disclosure of bank-specific information may at least harm the interests of the bank concerned, a more elaborate assessment will be needed as regards aggregate information that is not bank-specific47. Moreover, the standard to be applied in this impact assessment will vary depending on the requesting third party. For instance, if the information is requested by another authority that is also subject to legally binding professional secrecy requirements equivalent to CRD,48 there might be a lower impact on the relevant interests than if the information would be disclosed to a third party that is not subject to a comparable professional secrecy regime (thereby increasing the risk that the onward-sharing of the information can neither be anticipated nor controlled). To sum up, it can be implied from the case law that supervisory information included in a supervisory file is not per se protected by professional secrecy under CRD. As a result, it may also be concluded that the CJEU has opted for a more lenient interpretation of the professional secrecy regime in banking supervision.49 Nonetheless, as the Court has further set out, this interpretation is without prejudice to other EU laws imposing stricter protection on certain information.50 In principle, the approach of the CJEU also mirrors to a certain extent the existing case law on the scope of application of professional secrecy as enshrined in Art. 339 TFEU, which is applicable to all EU institutions. In this regard, in order to be considered as protected as confidential under the latter provision, first, the respective information is to be known only by a limited number of persons (hence, it had to be non-public); second, it has to be information whose disclosure is liable to cause serious harm to the person who had provided it or to third parties; and third, the interests liable to be harmed by disclosure have to be objectively worthy of protection. The third criterion means that the assessment as to the confidentiality of a piece of information requires the legitimate interests opposing disclosure of the information to be weighed against the public interest that the activities of the EU institutions take place as openly as possible. 51 While the first two criteria also reflect the prerequisites for the protection of supervisory information, CRD does not require the weighing of certain interests as provided for under the third criterion. Rather, with a view to the above-mentioned case law on MiFID, it may be concluded that the EU legislator has already conducted such weighing,52 with the result that there is a general assumption under the CRD professional secrecy regime that non-public supervisory information is protected and may not be disclosed unless one of the exceptions exhaustively listed in CRD applies.53 For disclosure of aggregate information, infra, → paras. 47–48. On this equivalence requirement, see infra, → para. 79. 49 Similarly, Smits and Badenhoop, ELR 44 (2019), 295. 50 Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, para. 36. 51 Case T-198/03, Bank Austria Creditanstalt AG v Commission, ECLI:EU:T:2006:136, para. 71. 52 Cf. Case T-198/03, Bank Austria Creditanstalt AG v Commission, ECLI:EU:T:2006:136, para. 72. This weighing of interests underpinning the confidentiality of supervisory information against the interest in transparency by the EU legislator, however, does not encompass the right of access to file. Hence, in those cases, the interest in holding information confidential and, in particular, the rights of defence of the requester need to be balanced by the relevant supervisory authority and ultimately, the court (see also supra, → paras. 7–12 and the case law quoted therein, as well as Farinhas, Law and Financial Markets Review 13:4 (2019), 205 and 208). For the list of exceptions to professional secrecy, see infra, → paras. 44 et seq. 53 See also the reasoning of the CJEU in Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2018:464, paras. 38 f. as regards similar provisions in MiFID, as well as Case C-422/18 P, ECB v Espírito Santo Financial, ECLI:EU:C:2019:811, Opinion of AG Pikamäe, paras. 64 et seq. 47
48
Martina Almhofer
391
33
34
35
36
Art. 27 SSMR
Professional secrecy and exchange of information
Finally, supervisory information not covered by CRD may still be protected under the general professional secrecy regime of Art. 37 ESCB/ECB Statute, which specifies the scope of Art. 339 TFEU for the ECB54. As regards the material scope of Art. 37 ESCB/ECB Statute, it merely stipulates that it applies to “information of the kind covered by the obligation of professional secrecy”. Considering the similar wording of Art. 339 TFEU, relevant case law and doctrine related to the latter provision may be taken into account when interpreting Art. 37 ESCB/ECB Statute. It may therefore be generally concluded that Art. 37 leg cit applies to non-public information of the ECB, which is not subject to the non-disclosure requirement in Art. 53 CRD. This could, for example, be the case with respect to supervisory information in summary or aggregate form, which does not allow for the identification of individual credit institutions pursuant to Art. 53(1)(2) CRD.55 It may also relate to other supervisory information, whose disclosure would not adversely affect any of the above-mentioned interests, such as ECB internal general supervisory methodologies or policies, provided that their publication would not harm the functioning of the SSM but there would still be an objective interest in keeping the information confidential under Art. 37.56 38 While at first sight, these criteria seem to be comparable to the CRD criteria developed by the CJEU, the latter criterion may be wider. In other words, a teleological interpretation may allow the conclusion that Art. 37 ESCB/ECB Statute not only protects non-public supervisory information whose disclosure could adversely affect the interests listed in Case C-15/16, but also information whose disclosure could adversely affect other public interests. Such additional interests may, for instance, be the interests of the ECB in its monetary policy function, or general interests of the EU and its Member States. As a result, it would need to be decided under the general regime of Art. 37 ESCB/ECB Statute whether disclosure of confidential supervisory information (not covered by CRD) is legally permitted. Nevertheless, it may be assumed that there will only be exceptional cases where disclosure of non-public supervisory information with no or a minor adverse bearing on the banks or the proper functioning of the SSM would still significantly impair other public interests. In other words, in most cases where CRD does not protect a piece of supervisory information, the ESCB/ECB Statute will not protect it either. Still, it will depend on the internal rules of the ECB whether and under which conditions only the ECB itself or individual staff members may disclose such information.57 37
F. Professional secrecy obligations I. Prohibition of unlawful disclosure 39
Once information is to be qualified as confidential supervisory information protected under the ECB’s professional secrecy regime, disclosure of such information is, in princiAs regards the different layers of the ECB’s professional secrecy regime, see supra, → paras. 13–18. For the permitted disclosure of such information under CRD, see also infra, → paras. 47 and 48. 56 See, for instance, Jaeckel, in: Grabitz, Hilf and Nettesheim (eds), Das Recht der Europäischen Union: EUV/AEUV (72nd supplement, 2021), AEUV Art. 339, para. 22. According to a different view, it is not relevant for Art. 37 ESCB/ECB Statute whether there is an objective interest in maintaining confidentiality, but rather what the decision-making bodies of the institution qualify as being covered (Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 37, paras. 11 and 12). 57 On the ECB’s Business Rule Book see supra, → para. 18; on the ECB’s internal procedural requirements for lawful disclosure see infra, → paras. 85–90. 54
55
392
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
ple, prohibited. This follows from Art. 27(1) SSMR, read in conjunction with Art. 37 ESCB/ECB Statute and Art. 53(1)(2) CRD. Hence, the professional secrecy obligations prevent unlawful disclosure by its addressees to third parties.58 Such third parties may be the general public or another person other than the one that originally provided or produced the information.59 It also includes unlawful disclosure of confidential supervisory information to ECB staff working for the monetary policy function of the ECB.60 In addition, the non-disclosure obligations for information protected under CRD also apply to the ECB itself as an institution. This follows e contrario from Art. 27(2) SSMR and Art. 53(2) CRD as well as Arts. 55–61 CRD, which (in line with case law of the CJEU) exhaustively list the exceptions to the general rule of non-disclosure.61 In addition to the prohibition of unlawful disclosure, pursuant to Art. 54 CRD, confi- 40 dential supervisory information covered by professional secrecy may only be used by the ECB in the course of its duties and only for the specific purposes listed in that provision.
II. Time aspect of professional secrecy obligations As regards the appropriate point in time for determining whether the information is 41 covered by professional secrecy obligations, it should be considered that the need to protect information may change with time. Thus, with regard to MiFID I, the CJEU clarified that the prohibition of disclosure “applies to information held by the competent authorities that must be classified as ‘confidential’ at the time of their examination of a request for disclosure, irrespective of how that information was classified at the time when it was communicated to those authorities.”62 For example, confidential supervisory information which the ECB received from a 42 bank some time ago, and which has in the meantime been made public by the bank, is no longer confidential and thus, does no longer fall under the scope of professional secrecy. Also, the underlying interests in confidentiality may vary over time. That is why a piece of confidential supervisory information may no longer be protected by professional secrecy if it can legitimately be argued that its disclosure would no longer affect any of the relevant underlying interests in maintaining confidentiality. In this regard, by reflecting its previous case-law in the field of competition law,63 43 the Court even established a general assumption that specific information is no longer protected after the passage of a specific period of time. More precisely, it stated that “where information that could constitute business secrets at a certain moment in time is at least five years old, that information must, as a rule, on account of the passage of time, be considered historical and therefore as having lost its secret or confidential nature unless, exceptionally, the party relying on that nature shows that, despite its age, that information still constitutes an essential element of its commercial position or that 58 With respect to unlawful disclosure under Art. 37 ESCB/ECB Statute, see also Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 37, paras. 17 and 18. 59 Similarly, the General Court in the context of Art. 339 TFEU in Case T-353/94, Postbank NV v Commission, ECLI:EU:T:1996:119, para. 87. 60 This is also confirmed by the ECB staff rules (from 24 June 2021), which are publicly available on the career website of the ECB under . On the principle of separation between the ECB’s supervisory and monetary function, see also supra, → Art. 25. 61 See also infra, → para. 46 and fn 68. 62 Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, paras. 47–57. 63 Cf. the judgement of the CJEU in the Case C-162/15 P, Evonik Degussa GmbH v Commission, ECLI: EU:C:2017:205, para. 64.
Martina Almhofer
393
Art. 27 SSMR
Professional secrecy and exchange of information
of interested third parties”. Hence, after the lapse of five years, the burden of proof is with the addressee of an information request relying on professional secrecy obligations. However, the CJEU also held that in the context of supervision, this rule on burden of proof depending on the passage of time does only cover business secrets concerning the commercial position of individual undertakings, but it does not apply to general supervisory information such as internal supervisory strategies and methodologies of the supervisory authority (“prudential secrecy”)64.65
III. Exceptions to professional secrecy obligations 1. Principles of lawful disclosure EU law does not establish an absolute professional secrecy regime: Even though the information is qualified as confidential supervisory information, there are codified exceptions to the prohibition of disclosure, either explicitly allowing or even requiring disclosure. This means that the EU legislator has determined that there are certain interests in providing information that may prevail over other interests that could be adversely affected by disclosure. In particular, in times of internationalisation of financial activities and the emergence of cross-border banking groups, the disclosure of certain information may not only hamper but also enhance effective banking supervision and contribute to higher supervisory convergence at the EU and international levels.66 45 However, in line with the well-established case-law of the CJEU, exceptions are derogations from the general codified principle not to disclose and must therefore be interpreted strictly.67 Moreover, such derogations need an explicit legal basis in EU law.68 In this regard, relevant exceptions are not only laid down in Arts. 53 to 61 CRD, but also provided for in other legal acts, such as in Art. 90 BRRD with respect to recovery and resolution matters. In the following, the focus will be on the most important exceptions in CRD, which are of particular relevance in banking supervision. 46 Finally, it should also be noted that several of these exceptions are explicitly addressed to the competent authorities, which (with a view to Art. 27 SSMR) include the ECB. Therefore, individual members of ECB staff or its decision-making bodies covered by the respective professional secrecy obligations may only make use of these exemptions on behalf of the ECB. This also means that they must act in line with the organisational rules of the ECB and hence, on the basis of an internal authorisation.69 Moreover, as mentioned above, even though supervisory information may exceptionally be disclosed under CRD, it may still be protected under the general professional secrecy regime of Art. 37 ESCB/ECB Statute.70 44
See also Farinhas, Law and Financial Markets Review 13:4 (2019), 206. Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C: 2018:464, para. 56. 66 See also Recital 29 CRD. For similar observations, see Commission, ‘Report from the Commission to the EP and the Council on the SSM established pursuant to Regulation (EU) No 1024/2013’, COM(2017) 591 final, at p. 15. 67 Cf. Case C-594/16, Enzo Buccioni v Banca d’Italia, ECLI:EU:C:2018:717, para. 37 and the case law cited therein. 68 In this regard, the exceptions in CRD may be considered as exhaustive. This may also be inferred from Recital 29 CRD. Furthermore, also the CJEU considers the exceptions to the professional secrecy regime listed in Art. 54 MiFID I as exhaustive (Case C-15/16, Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, ECLI:EU:C:2018:464, para. 38); see also Van Cleynenbreugel, MJ 25(I) (2018), 57. 69 See also infra, → para. 85–90 and supra, para. 18. 70 See supra, → para. 37. 64
65
394
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
2. Information in summary or aggregate form Pursuant to Art. 53(1)(2) CRD, confidential supervisory information may be dis- 47 closed only in summary or aggregated form, such that individual credit institutions cannot be identified. Hence, even though such information may be covered by the material scope of professional secrecy, the obligations followed by professional secrecy do not apply so that disclosure is permitted under CRD. From the wording of Art. 53 CRD, it may be concluded that this exception is ad- 48 dressed to the individual persons explicitly mentioned in para 1, sub para 2, rather than to the ECB itself. Nevertheless, as also set out previously,71 such information may still be protected under Art. 37 ESCB/ECB Statute and the internal organisational framework of the ECB may therefore require staff members to seek authorisation of the ECB decisionmaking bodies before making such disclosure.
3. Criminal law cases From a literal reading of Art. 53(1)(3) CRD, it can be derived that disclosure of confidential supervisory information covered by professional secrecy may be disclosed in criminal law cases. There is no further definition of criminal law cases in CRD. However, the CJEU has clarified that this exception “covers the communication or use of confidential information to conduct proceedings or impose sanctions in accordance with national criminal law”.72 This also means that it does not apply to a situation in which the authorities established in a Member State for the purpose of fulfilling the functions set out in the relevant supervisory law73 adopt a measure or a sanction covered by national administrative law.74 Moreover, in criminal law cases, the ECB may even need to share information on its own initiative: According to Art. 136 SSM‑FR, in the cases where the ECB has a reason to suspect that a criminal offence may have been committed, it shall request the relevant NCA to refer the matter to the appropriate authorities for investigation and possible criminal prosecution, in accordance with national law. Finally, the exchange of confidential information in the context of criminal investigations is further specified in Decision ECB/2016/19. This Decision, inter alia, also allocates the coordination of such exchanges to a specific internal business area of the ECB (Governance and Compliance Office).
49
50
51
52
4. Civil or commercial proceedings Pursuant to Art. 53(1)(3) CRD, where a credit institution has been declared bankrupt 53 or is being compulsorily wound up, confidential information which does not concern third parties involved in attempts to rescue that credit institution may be disclosed in civil or commercial proceedings. This exception has been interpreted rather widely by the CJEU in the context of a 54 compulsory liquidation of banks: According to the Court, it is not only applicable in situations where civil or commercial proceedings have already been initiated. Rather, competent authorities would not be precluded from disclosing confidential supervisory information to a person in order for the latter to bring civil or commercial proceedings See supra, → para. 37. Case C-358/16, UBS Europe and others v DV and others, ECLI:EU:C:2018:715, para. 44. 73 The case at hand referred to the specific provisions in MiFID I. 74 Case C-358/16, UBS Europe and others v DV and others, ECLI:EU:C:2018:715, paras. 47 and 71. 71 72
Martina Almhofer
395
Art. 27 SSMR
Professional secrecy and exchange of information
with a view to protect proprietary interests which were prejudiced as a result of the compulsory liquidation of a credit institution (i.e., even if legal actions have not yet been initiated).75 55 However, this does only apply where the request for disclosure relates to information in respect of which such a person puts forward precise and consistent evidence, which plausibly suggests that it is relevant for the purposes of civil or commercial proceedings underway or to be initiated. Moreover, the subject matter of the proceedings must be specifically identified by the applicant and the latter has to show that without such proceedings, the information in question cannot be used.76 From these conditions, it may therefore be inferred that the entitled persons are not allowed to use that information for any other purposes. As a result, the information does not lose its confidential nature towards any other third parties.
5. Consent of the persons adversely affected by disclosure Moreover, confidential supervisory information may be lawfully disclosed with the consent of the relevant third parties or the persons originally providing the information, whose interests could be adversely affected by disclosure.77 Yet, in line with the abovementioned case law, this does only apply where such disclosure would not undermine the functioning of banking supervision either.78 57 Even though this exception is neither explicitly mentioned in the SSMR nor in CRD,79 it may be understood as the recognition of a broader concept in EU law, which is not only enshrined in Art. 84(3) BRRD, but also reflected in the EU legal framework on data protection,80 as well as indirectly in the ECB’s public access regime.81 56
6. Exchange of information with other authorities or bodies a) Application of CRD rules on information exchange by the ECB Art. 27(2) SSMR explicitly permits the ECB the exchange of confidential information with other authorities or bodies. More precisely, the ECB, for the purpose of carrying out its supervisory tasks, shall be authorised, within the limits and under the conditions set out in the relevant Union law, to exchange information with national or Union authorities and bodies in the cases where the relevant Union law allows NCAs to disclose information to those entities or where Member States may provide for such disclosure under the relevant Union law. 59 In the field of banking supervision, the exceptions for the exchange with other authorities or bodies listed in Arts. 53–61 CRD are particularly relevant. They mention a wide array of EU and third-country authorities or bodies with which information exchange is permitted. However, as an EU Directive in the meaning of Art. 288(3) TFEU, the CRD is addressed to the Member States rather than to the EU institutions. It, therefore, needs to be implemented into national law, which may then be applied by the ECB pursuant to Art. 4(3) SSMR. Nevertheless, it may be argued that by virtue of Art. 27 SSMR, the EU legislator has provided for the direct application of the professional secre58
Case C-594/16, Enzo Buccioni v Banca d’Italia, ECLI:EU:C:2018:717, paras. 33 and 34. Case C-594/16, Enzo Buccioni v Banca d’Italia, ECLI:EU:C:2018:717, para. 38. 77 Similarly, Lackhoff, Single Supervisory Mechanism (2017), para. 567. 78 See supra, → para. 30. 79 With the exception of the need to seek prior consent of the originating EU authorities/bodies in case the information shall be onward shared with other authorities (pursuant to Arts. 55, 57, 60 and 61 CRD). 80 See Art. 6(1)(a) GDPR. 81 Art. 4(4) of Decision ECB/2004/3. 75
76
396
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
cy obligations enshrined in the relevant Union law by the ECB, including disclosure rights and obligations in CRD: First, such understanding of Art. 27 SSMR may be derived from a literal reading of Art. 27(2) SSMR, which entails an explicit authorisation of the ECB to disclose information. Second, this reading could also be derived from a systematic interpretation of the SSMR: Without the explicit authorisation in Art. 27(2) SSMR, the general rule in Art. 4(3) SSMR would become relevant, according to which the ECB may only apply national law transposing the CRD professional secrecy obligations. Thus, there is no need for a provision merely repeating that this general rule also applies to the professional secrecy obligations as enshrined in EU law and transposed into national law. That is why Art. 27 SSMR could rather be interpreted as establishing an exception to Art. 4(3) SSMR. As a result, in the situations where CRD explicitly permits the exchange of information (as it is, for instance, the case in Art. 53(1)(3) CRD) or where it does not prevent/ preclude disclosure (see, for example, Arts. 53(2) and 56 CRD), the ECB may directly rely on the Directive to exchange confidential information with the authorities or bodies mentioned in the respective CRD provision. In addition, whereas Art. 4(3) SSMR explicitly refers to the application of national law transposing directives, this element is not mentioned in Art. 27 SSMR. Third, also teleological arguments plead in favor of a direct application of the CRD professional secrecy provisions by the ECB. In particular, without such direct application, the ECB would be bound by 21 national professional secrecy regimes, which may considerably differ in substance.82 Such differences would run counter the objective of the SSM as laid down in Art. 1 SSMR, according to which the conferral of supervisory tasks on the ECB shall “contribute to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to prevent regulatory arbitrage”. Finally, such understanding of Art. 27(2) SSMR does not necessarily constitute an exception to the general rule enshrined in Art. 288(3) TFEU, read in conjunction with Art. 4(3) SSMR, according to which the ECB may only apply the national law transposing directives. Rather, it could be argued that the EU legislator has merely applied a certain legislative technique, namely the use of a dynamic reference to other legal sources in order to render its content applicable to the ECB, instead of duplicating the exact wording of the Directive. Hence, the criteria for direct application of directives as set out in the CJEU case-law (such as that the Directive has not been implemented into national law within the period for its transposition or that the relevant provision is sufficiently clear and unconditional) do not need to be fulfilled.83 At the same time, Art. 27(2) SSMR also provides for a restriction in the direct application of the exceptions to professional secrecy: According to the explicit wording of this provision, the ECB may exchange information with other authorities or bodies where the relevant Union law also allows competent authorities to disclose. By contrast, where the Member States rather than the competent authorities have discretion under Union 82 Smits and Badenhoop mention similar arguments (Smits and Badenhoop, ELR 44 (2019), 303). However, they seem to favor an amendment of the SSMR in order to include a similar wording as in the CRD, which may imply that in their views, the ECB currently needs to apply the national transposition of the CRD professional secrecy obligations. 83 As regards the criteria for the direct application of directives, see e.g. Case 8/81, Ursula Becker v Finanzamt Münster-Innenstadt, ECLI:EU:C:1982:7 or Case 152/84, M. H. Marshall v Southampton and South-West Hampshire Area Health Authority, ECLI:EU:C:1986:84.
Martina Almhofer
397
60
61
62
63
64
Art. 27 SSMR
Professional secrecy and exchange of information
law to permit disclosure, the ECB may only exchange where Member States have indeed provided for such disclosure in their national laws. This does, for example, apply to both Art. 57 and Art. 59(1) CRD, which state that “Member States may […] authorise […]”.84 Consequently, in those cases, CRD provides discretion to the national legislators, which cannot be exercised by the ECB instead. 65 Once the ECB makes lawful use of the exceptions listed in CRD and exchanges information with other authorities and bodies, two requirements applying to all of the exceptions in Arts. 55–61 CRD have to be fulfilled: First, the receiving authority or body must be subject to professional secrecy requirements equivalent to the relevant CRD provisions.85 Second, the exchange takes place in the exercise of the authorities’ respective supervisory tasks (or the tasks specified in the relevant CRD provision). In addition, for several receiving authorities CRD also requires that where the information originally stems from another Member State, the originating authority needs to consent to the onward sharing. 66 Furthermore, by virtue of Art. 62 CRD, the general framework on data protection applies to the ECB when processing personal data. This means that the ECB also needs to take into account the EU data protection requirements when exchanging information with other authorities or bodies. b) Information exchange with EU authorities and bodies The exceptions of the professional secrecy regime under CRD allow for the exchange of information with other EU authorities and bodies. In this regard, it should be noted that the term “exchange” denotes a form of disclosure implying reciprocity. Hence, information exchange would normally include disclosing information to an authority and in return the receipt of information from that authority.86 68 Whereas Arts. 53 to 61 CRD permits the exchange of confidential supervisory information with specific EU authorities and bodies, other provisions in EU law provide for further exceptions to the professional secrecy obligations or even establish an explicit obligation to exchange information with certain EU authorities and bodies. Such statutory obligation is, for example, enshrined in Art. 117 CRD as regards the cooperation between EU competent authorities in supervisory colleges, in Art. 58 (read in conjunction with Art. 114 CRD) with respect to the cooperation between EU competent authorities and ESCB central banks in emergency situations, or in Art. 35 EBAR as regards the exchange between EU competent authorities and the EBA. 69 Within the SSM, far-reaching obligations of cooperation and information exchange between the ECB and the NCAs of the participating Member States may also be derived from Art. 6(2) SSMR, as further specified in the SSM‑FR (see, in particular, the general obligations laid down in Art. 20 and Art. 21 SSM‑FR as well as other specific obligations, such as in Art. 139(3) SSM‑FR). 70 What is more, with respect to its accountability and reporting requirements, the ECB, by virtue of Arts. 20 and 21 SSMR, may be obliged to provide information to the EP, the Council, the Commission, the Euro Group, the European Court of Auditors (ECA) as well as the national parliaments of the SSM participating Member States. Regarding the ECB’s reporting requirements in its supervisory function, Recital (55) SSMR 67
Cf. Lackhoff, Single Supervisory Mechanism (2017), para. 566. See Art. 55(1); Art. 56(3); Art. 57(2)(b); Art. 57(3)(b); Art. 58(3); Art. 58a(2)(e), Art. 59(2)(c); Art. 59(2)(c) and Art. 61(1) CRD. 86 Cf. the similar definition of “exchange” in the Cambridge online dictionary, available under . 84
85
398
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
clarifies that these obligations should be subject to the relevant professional secrecy requirements. This implies that the accountability requirements need to be balanced with the professional secrecy requirements on a case-by-case basis, which may justify that the ECB only provides limited information to the above-mentioned EU institutions or bodies.87 By contrast to the information exchange with third-country authorities,88 the exchange with EU bodies or authorities does, in principle, not require any cooperation agreement with the ECB, but may be based directly on the relevant EU law. This does not exclude that with regard to specific EU authorities or bodies, EU law nevertheless allows or even explicitly provides for the conclusion of cooperation agreements. For instance, the ECB has concluded the Inter-institutional Agreement (EU), No 2013/694 with the EP, which (inter alia) specifies the confidentiality rules applying to information provided by the ECB to the EP. Moreover, pursuant to Art. 3(1)(1) and Art. 3(5) SSMR, the ECB shall cooperate closely with the EBA, the ESMA, the EIOPA, the ESRB and the other authorities which form part of the ESFS, as well as with any public financial assistance facility including the EFSF and the ESM. Art. 3(1)(2) and Art. 3(6) SSMR further stipulates that the ECB shall enter into agreements with the competent authorities in Member States responsible for markets in financial instruments as well as with the competent authorities of the non-participating EU Member States. As regards resolution matters, Art. 3(4) SSMR provides that the ECB shall cooperate closely with the authorities empowered to resolve credit institutions, including in the preparation of resolution plans. This cooperation is further specified in the SRMR. In particular, Art. 30(2) SRMR establishes that the SRB, the Council, the Commission, the ECB, the NRAs and the NCAs shall cooperate closely and provide each other with all the information necessary for the performance of their tasks. For this purpose, Art. 30(7) SRMR clarifies that the SRB shall conclude an MoU with the ECB, the national resolution authorities and the NCAs, specifying how they will cooperate. The provisions on cooperation and information exchange within the EU also reflect the principle of sincere cooperation between the EU institutions as laid down in Art. 13(2) TEU as well as between the EU and the Member States in general as enshrined in Art. 4(3) TEU. At the same time, this principle may be interpreted as also allowing the requested institution to consider the additional efforts and the resources needed to satisfy the request for information.89
87 For further reference, see Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (2014), paras. 87–89; as regards the ECB’s accountability towards the EP and the interplay with the ECB’s professional secrecy regime, see also Maricut-Akbik, ‘Holding the Supervisor to Account: The European Parliament and the European Central Bank in Banking Supervision’ (November 2018), available at , at pp. 13 et seq. As regards the disclosure of confidential supervisory information to the ECA, the latter criticised the ECB for not having disclosed sufficient information in the course of its recent audit of the ECB (see the special report of the ECA, ‘The operational efficiency of the ECB’s crisis management for banks’ (February 2018), inter alia, at p. 11). In this regard, the Commission emphasised the obligation of the ECB to provide the relevant information to the ECA (see Commission, ‘Report from the Commission to the EP and the Council on the SSM established pursuant to Regulation (EU) No 1024/2013’, COM(2017) 591 final, at p. 5). Following that, in 2019, the ECB and the ECA concluded an agreement with information-sharing arrangements to facilitate ECA’s audits. 88 See infra, → paras. 75–84. 89 In this regard, see also the balancing under the proportionality test as referred to below in → para. 86.
Martina Almhofer
399
71
72
73
74
Art. 27 SSMR
Professional secrecy and exchange of information
c) Information exchange with third-country authorities or bodies One of the exceptions to the professional secrecy obligations in CRD pertains to the exchange of information with third-country authorities or bodies: Pursuant to Art. 55 CRD, Member States and the EBA may conclude cooperation agreements, providing for the exchange of information with supervisory authorities as well as with authorities or bodies in accordance with Art. 56 and Art. 57(1) CRD. From this provision, it can be inferred that the ECB may only exchange confidential supervisory information with thirdcountries, if (i) a cooperation agreement has been concluded with the ECB and (ii) the requesting authority is among the authorities listed in Art. 56 or Art. 57(1) CRD. Moreover, Art. 55(2) CRD clarifies that if information originally stems from another Member State, it shall only be onward shared with a third-country if the originating EU authority consents to the disclosure. Yet, with the amendment of CRD in 2019, a separate legal basis for information exchange with four international organisations has been created with Art. 58a CRD, which applies to the International Monetary Fund, the World Bank, the Bank for International Settlements as well as the Financial Stability Board. Art. 58a CRD also provides for specific criteria for such exchange, which partly deviate from the general ones mentioned in Art. 55 CRD. For example, Art. 58a CRD does not require concluding a cooperation agreement for exchanging with those international organisations. At the same time, also stricter requirements are established, such as that information which is not aggregate or anonymised may only be shared at the premises of the competent authority. 76 In principle, cooperation agreements with other authorities or bodies may take the form of general agreements (in the following referred to as MoUs). Such general MoUs typically provide for structural cooperation and do not only cover the principles of information exchange, but also cooperation in ongoing supervision, on-site inspections (with internal models investigations) and emergency situations.90 By contrast, cooperation agreements may also be tailored to a specific supervised institution and are either concluded on an ad hoc basis pursuing specific supervisory purposes, which are normally unilateral agreements that do not provide for reciprocity (ad hoc letters), or follow longer negotiations and cover a wide array of cooperation aspects, such as written coordination and cooperation arrangements for supervisory colleges (WCCAs), which are mentioned in Art. 115 CRD and also include the terms of third-country authorities’ participation in the respective college. Since the negotiations of MoUs or bank-specific general agreements may take a longer period of time before they can be concluded, ad hoc letters are also an important tool in the ECB’s international cooperation.91 77 In addition to Art. 55 CRD, which is addressed to all EU NCAs, Art. 8 SSMR explicitly authorises the ECB to conclude administrative arrangements with supervisory authorities, international organisations and the administrations of third countries. Such authorisation also empowers the ECB to conclude arrangements with third-country authorities that provide for the exchange of confidential information.92 This becomes apparent when reading Art. 8 SSMR in conjunction with Art. 27 SSMR, which (as set out above)93 may be interpreted as providing for the direct application of the disclosure rights and obligations enshrined in CRD. Insofar, Art. 8 SSMR (read in conjunction with Art. 27(2) SSMR and Art. 55 CRD) authorises the ECB to conclude agreements with 75
Cf. ECB Annual Report on supervisory activities 2016 (2017), at pp. 42 and 43. See the SSM Supervisory Manual of the ECB from March 2018, at p. 32. 92 On the interpretation of Art. 8 SSMR, see also Lackhoff, Single Supervisory Mechanism (2017), para. 583. 93 See supra, → para. 59–64. 90
91
400
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
third-country authorities which also cover the exchange of confidential supervisory information. The ECB seems to share this understanding, considering that it already concluded cooperation agreements with 18 third-country supervisory authorities, also or particularly covering the exchange of confidential supervisory information.94 Apart from this power to conclude its own cooperation agreements, the ECB, by virtue of Art. 152 SSMR, may also decide to step into existing agreements concluded by the NCAs of the participating Member States before the establishment of the SSM. Based on this provision, the ECB has not only stepped into NCAs’ agreements with third-country authorities, but also with other competent authorities of non-participating Member States.95 However, since in the step-in cases the ECB becomes an additional party to the relevant agreements, the explicit consent of the other parties, at least of those from thirdcountries not being bound by Art. 152 SSMR, is needed as well. What is more, Art. 55 CRD requires that the information disclosed is subject to a guarantee that the professional secrecy regime of the third-country authority is at least equivalent to that established by CRD. To this end, the ECB participates in the EBA Network on Equivalence, which conducts the relevant equivalence assessments of thirdcountry authorities’ professional secrecy regimes.96 The results of those assessments are then published by the EBA in the form of recommendations. The assessment methodology used by the Network focuses on the notion of confidential information, professional secrecy requirements, restrictions on the use of confidential information, restrictions on further disclosure of confidential information and the consequences if the professional secrecy obligations are breached.97 It should be considered that the EBA conducts these assessments on the basis of Art. 116(6) CRD for the purpose of third-country authorities’ participation in supervisory colleges.98 While Art. 116(6) CRD refers to all the provisions in CRD on professional secrecy and exchange of information, Art. 55 CRD merely refers to equivalence with the general professional secrecy obligations in Art. 53(1) CRD. However, the latter provision only establishes the professional secrecy regime as such, whereas the exceptions to it (permitting the use and exchange of confidential information by the competent authorities) are then explicitly listed in other provisions of CRD. Consequently, this limited reference in Art. 55 CRD could be interpreted in the following ways: First, it could be concluded that in order to exchange confidential supervisory information on the basis of MoUs with third-country authorities, the latter needs to be subject to absolute professional secrecy obligations, which do not provide for the possibility to exchange information with other authorities. Though, this would be an unrealistic requirement preventing international supervisory cooperation, since most of the third-country authorities will also be legally permitted or even obliged to disclose information under certain circumstances. Second, Art. 53(1) CRD could be interpreted as requiring only that there is a professional secrecy regime in place, without caring about the legal permissions or obligations of the third-country authority to exchange with other authorities at all. Such interpretation does, however, not seem reasonable either since the general professional secrecy ECB Annual Report on supervisory activities 2020 (2021), at p. 72. ECB Annual Report on supervisory activities 2017 (2018), at p. 63. 96 ECB Annual Report on supervisory activities 2017 (2018), at pp. 64 and 65. For the recommendations of the EBA on third-country authorities’ equivalence of confidentiality regimes see . 97 See EBA, ‘Final report on recommendations on the equivalence of confidentiality regimes’ (November 2018), EBA/REC/2018/03, at p. 8. 98 Cf., for example, EBA, ‘Final report on recommendations on the equivalence of confidentiality regimes’ (November 2018), EBA/REC/2018/03, at p. 3. 94
95
Martina Almhofer
401
78
79
80
81
82
Art. 27 SSMR
Professional secrecy and exchange of information
obligations would be of minor value if they could be easily undermined by the national legislators. 83 As a result, from a teleological perspective, the third interpretation may be perceived as the most reasonable one: The reference in Art. 55 CRD to Art. 53(1) leg cit may be read as also encompassing the provisions on the permitted use and exchange of information in Arts. 54–62 CRD. 84 Following the latter interpretation, it may be concluded that the ECB can fully rely on the EBA equivalence assessments conducted for college purposes. However, the ECB could also decide to conduct its own equivalence assessments. Alternatively, the ECB could rely on existing assessments, in particular, on those conducted by NCAs. These alternatives will be of particular relevance in cases where the EBA has not yet conducted an assessment. By contrast, having regard to Art. 16(3) EBAR, which urges the ECB to strive for full compliance with EBA recommendations, a certain justification effort by the ECB will be necessary if there is already an existing EBA assessment, but the ECB decides to be non-compliant.
G. Procedural requirements for lawful disclosure So far, the above considerations have focused on the question whether from an external perspective, the ECB as an institution or the individual addressees of the professional secrecy obligations in Art. 27 SSMR and Art. 53 CRD are legally prevented from disclosing confidential supervisory information to third parties. However, in the cases where there is no such absolute non-disclosure obligation but rather a permission or even obligation to disclose, there may still be certain internal procedural requirements within the ECB which need to be fulfilled prior to external disclosure. 86 In principle, as also mentioned above,99 the sharing of confidential supervisory information with other authorities requires that the exchange takes place in the exercise of the authorities’ respective supervisory tasks. With a view to the general principle of proportionality applicable to the ECB when exercising its supervisory tasks,100 the ECB may only transmit such information if (i) it is appropriate for attaining the legitimate objectives pursued by the legislation at issue, (ii) it does exceed the limits of what is necessary in order to achieve those objectives, (iii) it is the least onerous measure, and (iv) the disadvantages caused are not disproportionate to the aims pursued. In the context of information exchange, this assessment is also commonly referred to as the determination of the receiving authority’s “need-to-know”.101 Especially the last element of the proportionality test also requires the ECB to conduct a balancing of interests and to consider whether there are any overriding reasons (“disadvantages”) for refusing disclosure, such as the need to safeguard the interests of the Union or to avoid any interference with the functioning and independence of the ECB, in particular, if disclosure would jeopardise the accomplishment of its tasks. 87 With regard to its prudential supervisory function, the determination of the need-toknow of the receiving supervisory authority and the weighing of interests may be considered as an assessment exercising discretion that is connected to the carrying out of 85
See supra, → para. 65. Case T-122/15, Landeskreditbank Baden-Württemberg - Förderbank v ECB, ECLI:EU:T:2017:337, para. 67, as confirmed by the CJEU in Case C-450/17 P, Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:C:2019:372. 101 On this concept in the context of the general professional secrecy obligations in Art. 339 TFEU, see Bruehann, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th edn, 2015), AEUV Art. 339, paras. 19 and 23. 99
100
402
Martina Almhofer
Professional secrecy and exchange of information
Art. 27 SSMR
the tasks conferred on the ECB by the SSMR. Hence, where disclosure of protected supervisory information is legally permitted or even required, in principle, an approval by the Governing Council upon the proposal of the Supervisory Board under the non-objection procedure pursuant to Art. 26(8) SSMR would be needed.102 Nonetheless, a non-objection procedure is not necessary if the ECB has concluded 88 a sufficiently precise cooperation agreement with the requesting authority, which undoubtedly covers the transmission of the requested information and which has already been approved under the non-objection procedure. Such agreement may then be considered as a manifestation of the relevant internal bodies’ confirmation of the receiving authorities need-to-know and the preferred modalities of the exchange. The disclosure would then rather constitute a mere operational act on the basis of the agreement, as long as it takes place within the boundaries of the agreement. In the same vein, a non-objection procedure is not needed if there is a legal obligation of the ECB to share the relevant information. Such obligation, if sufficiently clear and precise, may be considered as a statutory pre-determination of the conditions for the exchange by, inter alia, establishing the requesting authority’s need-to-know and the modalities of the disclosure. By contrast, if there is a mere legal authorisation of the ECB to disclose certain infor- 89 mation, and in the absence of a (precise) cooperation agreement, the Supervisory Board and the Governing Council would need to decide in each and every case how such discretion is to be exercised and hence, whether and how information shall be disclosed. In this regard, since there may be a high number of disclosure requests and hence, an enormous operational burden on the relevant internal bodies, a streamlined process for handling such requests or a delegation of decisions may be worth considering in order to ensure an efficient and legally sound release of information.
H. Consequences of unlawful disclosure There is no specific rule in EU law governing the consequences of unlawful disclosure of confidential information. In general, ECB staff members cannot be held directly liable in national proceedings by third parties for damages resulting from the breach of professional secrecy obligations, since they enjoy immunity from legal proceedings under Protocol No. 7 on the privileges and immunities of the EU. Such immunity is, however, restricted to acts performed by them in their official capacity. Having caused the damage in such an official capacity, the ECB staff member may not be sued at the CJEU either. Instead, pursuant to Art. 340(3) TFEU, third parties are legally permitted to claim damages from the ECB as an institution. Nevertheless, by virtue of Art. 340(4) TFEU, members of ECB staff may be held personally liable to the ECB if the latter was liable towards a third party, but – taking into account Art. 6 of the Conditions of Employment of the ECB103 – only if the damage was incurred due to gross negligence or willful misconduct of the respective staff member. Apart from the potential personal liability towards the ECB, an undue disclosure could also qualify as a breach of the professional duties of staff members, which may
For further details on the non-objection procedure, see Art. 26(8) SSMR. The Conditions of Employment as of 1 June 2021 are publicly available at the career website of the ECB under . 102
103
Martina Almhofer
403
90 91
92
93
Art. 28 SSMR
Resources
trigger the disciplinary measures provided for in Art. 44 of the ECB’s Conditions of Employment.
Art. 28 SSMR Resources* The ECB shall be responsible for devoting the necessary financial and human resources to the exercise of the tasks conferred on it by this Regulation. Bibliography Martina Almhofer, Die Haftung der EZB für rechtswidrige Bankenaufsicht (Mohr Siebeck, Tübingen 2018); Basel Committee on Banking Supervision, ‘Core Principles for Effective Banking Supervision’ (September 2012); ECB, ‘ECB Annual Report on supervisory activities 2014’ (March 2015); ECB, ‘ECB Annual Report on supervisory activities 2017’ (March 2018); ECB, ‘ECB Annual Report on supervisory activities 2018’ (March 2019); ECB, ‘ECB Annual Report on supervisory activities 2019’ (March 2020); ECB, ‘ECB Annual Report on supervisory activities 2020’ (March 2021); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht (7th edn, Nomos, Baden-Baden 2015); European Court of Auditors, ‘Single Supervisory Mechanism – Good start but further improvements needed’ (November 2016); European Court of Auditors, ‘The operational efficiency of the ECB’s crisis management for banks’ (February 2018); European Commission, ‘Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013’, COM(2017) 591 final; International Monetary Fund, ‘Euro Area Policies, Financial System Stability Assessment’, Country Report no. 18/226 (June 2018); Michel Tison, ‘Do not attack the watchdog! Banking supervisor’s liability after Peter Paul’, CMLR 25 (2005), 644. A. Interaction with other provisions and principles in EU law . . . . . . . . . . . . . . . . . .
1
B. Criteria to assess the “necessity” of resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Necessary financial resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Necessary human resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Staffing of the ECB’s supervisory function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Use of NCAs’ staff and external consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 8 10 11 11 16
C. Legal consequences of an improper allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
A. Interaction with other provisions and principles in EU law Effective and consistent functioning of the Single Supervisory Mechanism (SSM) requires an adequate allocation of resources within the ECB.1 To this end, Art. 28 SSMR explicitly states that the ECB is responsible for devoting the necessary financial and human resources to the exercise of the tasks conferred on it by the SSMR. 2 Art. 28 SSMR also reflects the principle of financial independence of the ECB, 2 according to which the ECB is free to manage its own finances and ensures that it has sufficient capital, staff and income to perform its tasks independently. 3 Hence, following the principle of financial independence as enshrined in the EU Treaties, primary law prevents the EU legislator to decide on the allocation of resources within the ECB and 1
* This commentary is written in the private capacity of the author and should not be reported as representing the views of the ECB. 1 See Art. 6(1) SSMR. 2 On this principle, see Art. 282(3) TFEU; see also Zilioli, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th edn, 2015), AEUV Art. 130 para. 16. 3 Case C-11/00, Commission of the European Communities v ECB, ECLI:EU:C:2003:395, paras. 116 and 132; see also Art. 314(1) TFEU.
404
Martina Almhofer
Art. 28 SSMR
Resources
rather requires the ECB itself to determine the resources needed for achieving its objectives. The importance of adequate resources is also highlighted in the Core Principles for Effective Banking Supervision of the BCBS.4 Even though these Principles are recommendations and thus, legally non-binding acts for the EU institutions, they are to be considered as de facto minimum standards for sound prudential regulation and supervision of banks. They are also used (inter alia, by the IMF and the World Bank in the context of the Financial Sector Assessment Programme [FSAP]) as a benchmark for assessing the quality of supervisory systems and for identifying future work to achieve a baseline level of sound supervisory practices.5 More precisely, according to these principles, the supervisors shall be financed in a manner that does not undermine their autonomy or operational independence. Thereby, the Core Principles reflect the link between adequate resources and the independence of supervisors, the latter being explicitly provided for in Art. 19 SSMR with respect to the ECB’s supervisory function.6 Moreover, the notion of “necessary” resources in Art. 28 SSMR relates to further general principles enshrined in EU primary law: First of all, it mirrors the general principle of proportionality of the EU administration, a principle developed in EU case law and laid down in Art. 5(4) TEU. Pursuant to the relevant case law, “[…] the acts adopted by EU institutions must be appropriate for attaining the legitimate objectives pursued by the legislation at issue and must not exceed the limits of what is necessary in order to achieve those objectives […]”. 7 In the light of the above, it may be argued that the administrative acts by which resources are allocated to the ECB’s business areas must take into account the principle of proportionality. As a consequence, the notion of “necessary” requires an adequate balancing of the resources deployed and the objectives to be achieved. By preventing an excessive as well as an insufficient allocation of resources, Art. 28 SSMR also contributes to ensuring an efficient administration as provided for in Art. 298(1) TFEU and as further reinforced by the right to good administration laid down in Art. 41 CFREU.
3
4
5 6
7
B. Criteria to assess the “necessity” of resources I. General observations By referring to “necessary” resources, Art. 28 SSMR does not only indicate the floor 8 but also the ceiling for the allocation of resources within the ECB. However, the criteria to assess the “necessity” of resources are difficult to grasp and come with a wide margin of interpretation.
4 Basel Committee on Banking Supervision (September 2012), Principle 2 Essential Criterion 6, at pp. 22 et seq. 5 Ibid, at p. 1. 6 As regards the independence of the ECB in the field of banking supervision, see also Zilioli, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th edn, 2015), AEUV Art. 130. 7 Case T-122/15, Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:T:2017:337, paras. 66 and 67 (see also the case law quoted therein), as confirmed by the CJEU in Case C-450/17 P, Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:C:2019:372.
Martina Almhofer
405
Art. 28 SSMR 9
Resources
In this regard, the Core Principles of the BCBS may provide a rough indication8 of the various aspects that may be relevant for ensuring that the necessary resources are deployed. For example, the BCBS requires a budget that provides for staff in sufficient numbers and with skills commensurate with the banks’ risk profile and systemic importance, or the ability to commission external experts with the necessary professional skills and independence.
II. Necessary financial resources 10
It also follows from Art. 28 SSMR that the ECB needs to ensure the adequate allocation of financial means to its supervisory tasks. With a view to Art. 29 as well as Art. 30 SSMR, it can be concluded that the principle of separation9 between the monetary and supervisory function of the ECB also applies to the ECB’s finances, requiring that the expenditures of the ECB in the field of banking supervision are financed by supervisory fees levied from the supervised entities.10 In this regard, it may be inferred from Art. 28 SSMR that the ECB must not levy a higher amount of fees than necessary. Taking into account that levying fees interfere with the supervised institutions’ right to conduct business as enshrined in Art. 16 CFREU, 11 the safeguards in Art. 28 SSMR related to the use of resources could also be considered as contributing to the proportionality and thereby to the justification of such interference.
III. Necessary human resources 1. Staffing of the ECB’s supervisory function Also regarding the human resources of the ECB, Art. 28 SSMR implies that the staffing of the ECB in the field of banking supervision shall neither be excessive nor insufficient. 12 After the operational start of the SSM in November 2014, the sufficient staffing of the ECB for exercising its new supervisory tasks seemed to be particularly challenging. However, since the ECB could make use of existing internal structures already established for its monetary function, more precisely, of the business areas supporting supervisory activities such as administration, human resources, internal audit or legal services (the so-called “shared services”)12, it was able to set up the relevant internal supervisory structures within a short period of time.13 13 To this end, the ECB budgeted 1,073.5 full-time equivalents (FTEs) within the first year,14 with a total headcount amounting to 1,1189 of FTEs for the core SSM business 11
8 Basel Committee on Banking Supervision (September 2012), Principle 2 Essential Criterion 6, at pp. 22 et seq. Even though the Core Principles are issued in the form of recommendations and are hence not binding for its members, they may nevertheless be taken into account when interpreting the relevant EU law (see Tison, CMLR 25 (2005), 644). 9 As regards the principle of separation, see also Recital (65) SSMR. 10 On the levying of supervisory fees, see infra, → Art. 30. 11 See also Almhofer, Die Haftung der EZB für rechtswidrige Bankenaufsicht (2018), at p. 321. 12 As regards the use of the shared services for both functions of the ECB, see Decision ECB/2014/39; see also the list of business areas comprised by the “shared services” in ECB, ECB Annual Report on supervisory activities 2018 (2019), at p. 88. 13 On the successful staffing, see, in particular, the special report of the European Court of Auditors (November 2016), at p. 24: “In the run-up to assuming its supervisory responsibilities, the ECB took steps to resource the new functions – with considerable success given the narrow time-frame”. 14 ECB Annual Report on supervisory activities 2014(2015), at p. 39.
406
Martina Almhofer
Art. 28 SSMR
Resources
areas and another 471 of FTEs devoted to the SSM-related tasks in the shared services in 2019.15 Nevertheless, after around four years of operations in the SSM, it had become evident 14 that the ECB would need to further increase its human resources in order to adequately perform its supervisory tasks.16 Especially the United Kingdom’s withdrawal from the EU, but also the internalisation of resources for stress-testing formerly provided by external consultants required further staffing.17 In the same vein, the European Court of Auditors (ECA) stressed the additional staff needs in its special report published in November 2016, resulting from its first audit of the “operational efficiency of the management of the ECB” under Art. 20(7) SSMR.18 This particularly applied for on-site inspections teams, as has also been highlighted by the Commission in its report from October 2017 (assessing the setting up and functioning of the SSM pursuant to Art. 32 SSMR) as well as by the ECA in its special audit of the operational efficiency of the ECB’s crisis management for banks.19 However, sufficient staffing may not only be attained by creating additional FTEs, 15 but also by striving for higher operational efficiency in the exercise of supervisory tasks. In this regard, the ECB has, for instance, streamlined its internal decision-making processes via templates, written procedures or bundling of decisions.20 It also adopted a delegation framework for certain routine decisions with limited discretion, avoiding the involvement of the Supervisory Board and Governing Council in all supervisory decisions.21 Furthermore, it has established an alternative fit and proper process, allowing that decisions are taken by the ECB on the basis of the assessments of the NCAs. 22 It remains to be seen whether these measures indeed decrease the operational burden for the ECB or merely redistribute the workload among the various ECB business areas.
2. Use of NCAs’ staff and external consultants Even though the reference to human resources in Art. 28 SSMR may be read as only 16 applying to ECB staff (hence, persons subject to the ECB’s conditions of employment) 23, the ECB may also make use of NCAs’ resources. In this regard, NCAs particularly contribute to the ECB’s supervisory tasks by participating in the JST and, as indicated above, in on-site inspection teams. In addition, Art. 31 SSMR, in general, requires an appropriate exchange and secondment of staff with NCAs. This does also include the use of the NCAs’ expertise through the establishment of informal support structures with an advisory role of the NCAs on policy issues.24 However, at the same time, reliance on NCAs’ resources should not be excessive. In 17 this respect, Recital (77) SSMR states that the resources of the ECB in the SSM “should 15 ECB Annual Report on supervisory activities 2018(2019), at p. 81 and ECB Annual Report on supervisory activities 2019(2020), at pp. 89 and 90. 16 ECB Annual Report on supervisory activities 2017(2018), at pp. 91–92. 17 Ibid, pp. 91, 92, and 102. 18 European Court of Auditors (November 2016), at pp. 11 and 25. 19 Report from the Commission on the SSM, COM(2017) 591 final, at p. 10; European Court of Auditors (February 2018), paras. 98 and 127. 20 Report from the Commission on the SSM, COM(2017) 591 final, at p. 6. 21 See Decision ECB/2016/40, Decision ECB/2016/41, Decision ECB/2016/42, Decision ECB/2017/16, Decision ECB/2017/17 as well as Decision ECB/2018/546. 22 ECB Annual Report on supervisory activities 2017(2018), at p. 86. 23 The Conditions of Employment as of 1 June 2021 are publicly available on the career website of the ECB under ; as regards to their scope of application, see para. 1 of the Conditions of Employment. 24 Report from the Commission on the SSM, COM (2017) 591 final, at p. 10.
Martina Almhofer
407
Art. 28 SSMR
Resources
be obtained in a way that ensures the ECB’s independence from undue influences by national competent authorities and market participants […]”. In particular, as regards the staffing of on-site inspection teams, most heads of missions and team members in 2017 came from the NCAs. More precisely, as of 31 December 2017, more than 90 % of the inspections had been led by the NCAs.25 Therefore, as also mentioned above, the ECA recommended the ECB to devote further human resources to on-site inspections. 26 In the same vein, following the euro area FSAP in 2018, the IMF highlighted that the ECB lacks sufficient control of supervisory resources since “most supervisory staff are provided by NCAs, whose deployment on behalf of the SSM may compete with the fulfilment of national commitments”.27 18 The ECB has reacted to this criticism and now provides for the possibility that inspectors coming from the NCAs may opt to be seconded to the ECB for the duration of the mission. This implies that the salary, travel and accommodation costs are covered by the ECB rather than by the NCA budget and that they work under equal employment conditions as ECB staff.28 19 Besides using resources of NCAs, the ECB also relies on external consultants, especially for matters that require specific technical know-how such as for the targeted review of internal models (TRIM) – which was a large-scale multi-annual project spanning 2016 to 2020, aimed at assessing the adequacy and appropriateness of internal models used by significant institutions. This exercise incurred costs related to external support in the amount of 45.7 million EUR in 2018 and 34.9 million in 2019, respectively. For comparison, the overall expenditure for the salaries and benefits of ECB supervisory staff and staff of the shared services amounted to 246 million EUR in 2018 and 272.6 million EUR in 2019, respectively.29 Meanwhile, in particular due to the conclusion of the TRIM project, the ECB could decrease expenditure for external consultants in 2020 significantly.30
C. Legal consequences of an improper allocation 20
A failure of the ECB to devote the necessary resources to the exercise of its supervisory tasks may be considered as a violation of its general duty of care. Hence, if the ECB in the course of exercising its supervisory tasks infringes an applicable provision of EU law due to such improper allocation of resources and thereby causes damage to a supervised institution or a third party, such infringement may not only be considered as a mere breach of the applicable law. It may even constitute a “sufficiently serious” breach in the light of the CJEU’s case law on the non-contractual liability of EU institutions.31 Consequently, the affected legal or natural person may be entitled to damages payable by the ECB under its non-contractual liability pursuant to Art. 340(3) TFEU. 32
ECB Annual Report on supervisory activities 2017(2018), at p. 33. See supra, fn. 19. 27 Cf. IMF Country Report no. 18/226 (June 2018), Recommendation no. 30, at p. 17; see also supra, → para. 3. 28 ECB Annual Report on supervisory activities 2018(2019), at pp. 81 and 82. 29 Ibid, at p. 90; ECB Annual Report on supervisory activities 2019(2020), at p. 100. 30 ECB Annual Report on supervisory activities 2020(2021), at p. 97. 31 As regards the criterion of a “sufficiently serious breach” of EU law in the light of Art. 340(2) TFEU, see the judgement of the CJEU on the Case C-352/98 P, Bergaderm and Goupil v Commission, ECLI:EU:C: 2000:361, para. 42. 32 For further details on the implications regarding the ECB’s non-contractual liability, see Almhofer, Die Haftung der EZB für rechtswidrige Bankenaufsicht (2018), at pp. 208 and 209. 25
26
408
Martina Almhofer
Art. 29 SSMR
Budget and annual accounts
Art. 29 SSMR Budget and annual accounts* 1. The ECB’s expenditure for carrying out the tasks conferred on it by this Regulation shall be separately identifiable within the budget of the ECB. 2. The ECB shall, as part of the report referred to in Article 20, report in detail on the budget for its supervisory tasks. The annual accounts of the ECB drawn up and published in accordance with Article 26.2 of the Statute of the ESCB and of the ECB shall include the income and expenses related to the supervisory tasks. 3. In line with Article 27.1 of the Statute of the ESCB and of the ECB the supervisory section of the annual accounts shall be audited. Bibliography Martina Almhofer, Die Haftung der EZB für rechtswidrige Bankenaufsicht (Mohr Siebeck, Tübingen 2018); ECB, ‘ECB Annual Report on supervisory activities 2017’ (March 2018); ECB, ‘ECB Annual Report on supervisory activities 2018’ (March 2019); ECB, ‘ECB Annual Report on supervisory activities 2019’ (March 2020); ECB, ‘ECB Annual Report on supervisory activities 2020’ (March 2021); European Court of Auditors, ‘Single Supervisory Mechanism – Good start but further improvements needed’ (November 2016); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht (7th edn, Nomos, Baden-Baden 2015); Helmut Siekmann (ed), Kommentar zur Europäischen Währungsunion (Mohr Siebeck, Tübingen 2013). A. Separation of supervisory costs in the ECB budget . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Supervisory budget as part of the ECB reports on supervisory activities . . . . .
8
C. Supervisory income and expenses included in the ECB annual accounts . . . .
10
D. Audit of the ECB annual accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
A. Separation of supervisory costs in the ECB budget In general, following the principle of financial independence1, the ECB has and 1 manages its own resources and budget, which is distinct from the general EU budget.2 In this regard, Art. 29(1) SSMR ensures that the expenditure incurred by the ECB for exercising its supervisory tasks is separately identifiable within the ECB’s budget. Thereby, the provision is part of the set of rules in the SSMR which reflect the principle of separation between the ECB’s monetary policy and its supervisory function.3 Furthermore, a separate determination of the expenditure incurred by the ECB for exercising its supervisory tasks also forms the basis for calculating the permitted total amount of the annual supervisory fees levied on credit institutions by virtue of Art. 30 SSMR. The essence of Art. 29(1) SSMR is repeated in Art. 15.1 sent. 2 of the ECB Rules of 2 Procedure4. The latter provision also stipulates that before the end of each financial year, the Governing Council (acting upon a proposal from the Executive Board) shall adopt the budget of the ECB for the subsequent financial year. Furthermore, the Chair and the Vice-Chair of the Supervisory Board shall be consulted on the expenditure for
* This commentary is written in the private capacity of the author and should not be reported as representing the views of the ECB. 1 On this principle, see Art. 282(3) TFEU; see also Zilioli, in: von der Groeben, Schwarze and Hatje, Europäisches Unionsrecht (7th edn, 2015), AEUV Art. 130 para. 16. 2 Case C-11/00, Commission of the European Communities v ECB, ECLI:EU:C:2003:395, paras. 116 and 132; see also Art. 314(1) TFEU. 3 On the principle of separation see, in particular, supra, → Art. 25. 4 See Decision ECB/2004/2 of 19 February 2004.
Martina Almhofer
409
Art. 29 SSMR
Budget and annual accounts
the ECB’s supervisory tasks.5 In line with Art. 15.2 of the ECB Rules of Procedure, a Budget Committee (BUCOM) – consisting of members from all national central banks of the Eurosystem as well as the ECB –6 assists the ECB internal bodies in the matters related to the budget. 3 However, in respect of the Budget Committee and the principle of separation, the European Court of Auditors (ECA) has stressed that the Committee advises the Governing Council on the resourcing of both functions, without any further organisational separation. Furthermore, the ECA pointed out that the Supervisory Board is only consulted, but does not have the power to decide about the necessary resources in the Single Supervisory Mechanism (SSM).7 Nonetheless, with regard to the latter concern, it should be considered that the Supervisory Board is formally not in charge of decision-making in the SSM. Even though it has an important role in preparing supervisory decisions (in the non-objection procedure pursuant to Art. 26(8) SSMR), which may even amount to a de facto decision-making role, the final decisions need to be taken by the Governing Council, as provided for in EU primary law. 4 In general, the ECB distinguishes between the following categories of supervisory expenditure: i) the type of expenditure (“for what”) and ii) the task for which the expenditure has been spent (“what for”). With respect to the first category, the expenditure categories comprise salaries and benefits, rent and building, services and other operating expenditure (consultancy, IT services, statistical services, depreciation for fixed assets other than premises-related, business travel and training). Regarding the second category, the ECB differentiates between direct supervision of significant banks or banking groups (mostly comprising costs of the ECB’s participation in JSTs and on-site inspections, the multi-annual TRIM8 and the micro-prudential activities related to stress tests), oversight of the supervision of less significant banks or banking groups (including the costs of oversight activities and authorisation tasks) as well as the performance of horizontal tasks and specialised services (such as the costs of the work of the Secretariat to the Supervisory Board, macro-prudential tasks, supervisory policymaking, statistical services and dedicated legal services).9 Moreover, in order to provide for more transparency and accountability, as of 2020 the ECB also provides more granular information on the expenditure based on the activities performed.10 5 According to the annual reports of the ECB on its supervisory activities, the total expenditure related to the exercise of its supervisory tasks has been increasing since the start of the SSM. This increase has been particularly due to the increase in staff working in the SSM,11 especially considering the United Kingdom’s withdrawal from the EU and the comprehensive assessments conducted.12 Only in 2020, there has been a slight decrease in expenditure for the first time. This has not at least been due to the
ECB Annual Report on supervisory activities 2018 (2019), at p. 88. See Art. 9.3. of the ECB Rules of Procedure. 7 Special report of the European Court of Auditors (November 2016), at p. 33. 8 This acronym stands for “Targeted review of internal models”, a multi-year project of the ECB in cooperation with National Competent Authorities, in order to review internal models used by supervised entities to determine the minimum amount of capital to absorb unexpected losses. 9 On these categories, see the ECB Annual Report on supervisory activities 2017 (2018), at pp. 102–105 as well as the ECB Annual Report on supervisory activities 2018 (2019), at pp. 89–90. 10 ECB Annual Report on supervisory activities 2020 (2021), at p. 96. 11 ECB Annual Report on supervisory activities 2017 (2018), at p. 102; ECB Annual Report on supervisory activities 2019(2020), at p. 100; as regards the increase in ECB staff, see also Almhofer, Art. 28 SSMR, in the same commentary. 12 ECB Annual Report on supervisory activities 2018 (2019), at p. 88. 5
6
410
Martina Almhofer
Art. 29 SSMR
Budget and annual accounts
COVID-19 pandemic, which led to a reduction in regular supervisory activities, such as reduced business travel for one-site activities.13 Moreover, with a view to the growing amount of pending proceedings against the 6 ECB at the EU Courts in the field of banking supervision, including claims for damages due to an alleged infringement of EU law by the ECB, it could be argued that damages payable by the ECB may also be taken into account as a supervision-related expenditure. Hence, such damages would also increase the basis for calculating the supervisory fees. However, as clarified by the ECB in its annual report, such damages payable to third parties would not have any influence on supervisory fees.14 Nonetheless, from a legal perspective, it is questionable how such damages would then be financed, considering the financial independence of the ECB from the general EU budget as well as the required separation between the ECB’s monetary and supervisory function.15 Finally, even though the ECB extensively relies on NCAs’ resources when exercising 7 its supervisory tasks, the ECA expressed concerns with regard to the fact that the current legal framework does not provide for the consolidated disclosure of the total supervisory costs incurred by the SSM.16
B. Supervisory budget as part of the ECB reports on supervisory activities Pursuant to Art. 20(2) SSMR, the ECB shall submit on an annual basis to the EP, to 8 the Council, to the Commission and to the Eurogroup a report on the execution of its supervisory tasks. These reports on supervisory activities, which are also published on the ECB’s website,17 ensure transparency in the ECB’s activities and finances towards the aforementioned EU institutions and bodies as well as vis-à-vis the public as a whole. What is more, the publication of the reports contributes to ensuring the accountability and control of the ECB.18 In this context, Art. 29(2) sent. 1 SSMR stipulates that the ECB shall, as part of the 9 report referred to in Art. 20 SSMR, report in detail on the budget for its supervisory tasks. So far, the ECB has met this requirement by introducing a chapter on “Reporting on budgetary consumption” in those reports, which includes information on the expenditure and income of the ECB in its supervisory function.
ECB Annual Report on supervisory activities 2020 (2021), at pp. 95 and 96. ECB Annual Report on supervisory activities 2020 (2021), at p. 102. 15 For further details on the financing of damages by the ECB, see Almhofer, Die Haftung der EZB für rechtswidrige Bankenaufsicht (2018), at pp. 314–328. 16 See the Special report of the European Court of Auditors (November 2016), at p. 25. By contrast, as regards the ECB’s monetary policy function, Art. 26(3) of the ESCB/ECB Statute stipulates that a consolidated balance sheet of the ESCB shall be drawn up, comprising those assets and liabilities of the national central banks that fall within the ESCB. 17 See . 18 Cf. the title of Art. 20 SSMR “Accountability and reporting”; on the reporting of the ECB with regard to its monetary policy, see Helmut Siekmann, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 15. 13
14
Martina Almhofer
411
Art. 29 SSMR
Budget and annual accounts
C. Supervisory income and expenses included in the ECB annual accounts Furthermore, Art. 29(2) sent. 2 SSMR also requires that the ECB’s annual accounts include the income and expenses related to its supervisory tasks. Following this requirement, the income and expenses related to the ECB’s supervisory tasks are described in a separate section19 of the ECB’s annual accounts. These accounts are then not only published on the ECB’s website20, but also form a part of the ECB’s general annual report on the tasks and activities of the ESCB.21 11 As mentioned above under point A, in addition to Art. 29(2) SSMR, the separate identification of supervisory expenditure in the ECB’s budget is already ensured by Art. 29(1) SSMR. What is more, it follows from Art. 29(2) SSMR that there are no separate annual accounts for the banking supervision function of the ECB. The supervisory income and expenses are rather included in the general annual accounts of the ECB, as drawn up by the Executive Board and approved by the Governing Council, in accordance with Art. 26.2 of Protocol No 4 on the ESCB/ECB Statute. 12 There is neither a definition of the annual accounts in the SSMR nor in the ESCB/ECB Statute. However, it could be argued that the definition in other EU legal acts applies, in particular, the definition laid down in Art. 4(1) of Directive (EU), No 2013/34 on the annual financial statements of certain types of undertakings.22 In line with this Directive, Art. 2 of Decision ECB/2016/35 further specifies that the annual accounts of the ECB comprise the balance sheet, items recorded in the books of the ECB off-balance-sheet, the profit and loss account and the notes to the annual accounts. 10
D. Audit of the ECB annual accounts Pursuant to Art. 29(3) SSMR, the supervisory section in the annual accounts of the ECB (covering the supervisory income and expenses) shall be audited, which may be considered as being part of the ECB’s general accountability obligations.23 14 The audit shall be conducted in line with Art. 27.1 of the ESCB/ECB Statute, which requires an audit by independent external auditors. This means that members of the internal ECB auditing business areas may not be appointed for the purpose of the external audit.24 What is more, the audit required under Art. 29(3) SSMR must not be conducted by the ECA, since Art. 20(3) SSMR, read in conjunction with Art. 27.2 of the ESCB/ECB Statute, restricts the mandate of the ECA to the examination of the operational efficiency of the ECB’s management. 15 Finally, pursuant to Art. 27.1 ESCB/ECB Statute, the external auditors are recommended by the Governing Council and approved by the Council. 13
19 See, in particular, the section “income and expenses related to supervisory tasks” in the annual accounts of the ECB. 20 See . 21 As regards these general reports, see (thus, these are not the specific ECB annual reports on supervisory activities as mentioned, supra, → para. 8). 22 Similarly, Christof Freimuth, in: Siekmann, Kommentar zur Europäischen Währungsunion (2013), ESZB/EZB Satzung Art. 27, paras. 32 and 33. 23 Ibid., para. 9. 24 Ibid., para. 16.
412
Martina Almhofer
Art. 30 SSMR
Supervisory fees
Art. 30 SSMR Supervisory fees* 1. The ECB shall levy an annual supervisory fee on credit institutions established in the participating Member States and branches established in a participating Member State by a credit institution established in a non-participating Member State. The fees shall cover expenditure incurred by the ECB in relation to the tasks conferred on it under Articles 4 to 6 of this Regulation. These fees shall not exceed the expenditure relating to these tasks. 2. The amount of the fee levied on a credit institution or branch shall be calculated in accordance with the arrangements established, and published in advance, by the ECB. Before establishing those arrangements, the ECB shall conduct open public consultations and analyse the potential related costs and benefits, and publish the results of both. 3. The fees shall be calculated at the highest level of consolidation within participating Member States, and shall be based on objective criteria relating to the importance and risk profile of the credit institution concerned, including its risk weighted assets. The basis for calculating the annual supervisory fee for a given calendar year shall be the expenditure relating to the supervision of credit institutions and branches in that year. The ECB may require advance payments in respect of the annual supervisory fee which shall be based on a reasonable estimate. The ECB shall communicate with the national competent authority before deciding on the final fee level so as to ensure that supervision remains cost-effective and reasonable for all credit institutions and branches concerned. The ECB shall communicate to credit institutions and branches the basis for the calculation of the annual supervisory fee. 4. The ECB shall report in accordance with Article 20. 5. This Article is without prejudice to the right of national competent authorities to levy fees in accordance with national law and, to the extent supervisory tasks have not been conferred on the ECB, or in respect of costs of cooperating with and assisting the ECB and acting on its instructions, in accordance with relevant Union law and subject to the arrangements made for the implementation of this Regulation, including Articles 6 and 12. Bibliography Maria Abascal et al., ‘A banking union for Europe: Making a virtue out of necessity’, The Spanish Review of Financial Economics 13 (2015), 20; Karl-Heinz Boos, Reinfrid Fischer and Hermann Schulte-Mattler (eds), Kommentar zu Kreditwesengesetz, VO (EU) Nr. 575/2013 (CRR) und Ausführungsvorschriften (5th edn, C.H. Beck, Munich 2016); Eilis Ferran and Valia S.G. Babis, ‘The European Single Supervisory Mechanism’, University of Cambridge Faculty of Law Legal Studies Research Paper Series, Paper No. 10 (2013) ; Maximilian Fuchs and Rob Cornelissen, EU Social Security Law (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2015); Charlotte Gaitanides, Das Recht der Europäischen Zentralbank (Mohr Siebeck, Tübingen 2005); Alexander Glos and Janina Heinz, ‘Regulation of the ECB on Supervisory Fees’, Freshfields Bruckhaus Deringer LLP (2014); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht (7 th edn, Nomos, Baden-Baden 2015); Elke Gurlit, ‘Die Entwicklung des Banken- und Kapitalmarktaufsichtsrechts in den Jahren 2015/16’, WM 2016, 2053; Reinhard Laars, Finanzdienstleistungsaufsichtsgesetz (4 th edn, Nomos, Baden-Baden 2017); Christofer Lenz, ‘Wem nützt eigentlich die Bankenaufsicht?’, NVwZ 2010, 29; Donata Masciandaro, Maria Nieto and Henriëtte Prast, ‘Who pays for banking supervision? Principles and practices’, DNB Working Paper No. 141 (2007), ; Niamh Moloney, ‘European Banking Union: Assessing its risks and resilience’, CMLR 51 (2014), 1609; Bodil S. Nielsen, ‘Main Features of the European Banking Union’, EBLR 26 (2015), 805; Antonio Luca Riso, ‘The power of the ECB to impose sanctions in the context of the SSM’, Bančni vestnik 4/63 (2014), 32; Antonio Luca Riso and Georgios Zagouras, ‘Europäische Aufsichtsbehörden’ in: Simon G. Grieser and Manfred Heemann (eds), Europäisches Bankaufsichtsrecht (Frankfurt School Verlag, Frankfurt 2016), 106; Hanspeter K. Scheller, The European Central Bank, History, Role and Function (2nd edn, European Central Bank, Frankfurt 2006); Gunnar Schuster, ‘The banking supervisory powers and competences of the ECB’, EuZW-Beilage 2014, 3; Martin Weber, ‘Die Entwicklung des Kapitalmarktrechts im zweiten Halbjahr 2015’, NJW 2016, 992; Martin Will, Europarecht (C.H. Beck, Munich 2013); Benedikt Wolfers and Thomas Voland, ‘Level the playing field: The new supervision of credit institutions by the European Central Bank’, CMLR 51 (2014), 1463; Georgios Zagouras, ‘Verwaltungssanktionen der Europäischen Zentralbank: Bußgelder, Kompetenzen, Bemessungsmaßstäbe’, WM 2017, 558; Georgios Zagouras, ‘EU-Bankenunion’ in: Herbert Schimansky, Hermann-Josef Bunte and Hans Jürgen Lwowski (eds), Bankrechts-Handbuch (5th edn, C.H. Beck, Munich 2017), 2590; Georgios Zagouras, ‘Aufsichtsgebühren der Europäischen Zentralbank nach Art. 30 SSM‑VO BKR 2020, 330’. A. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Scope of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Adressees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
D. Calculation basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Overall costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Calculation of individual fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Invoicing and notifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 5 10 15
E. Right of NCAs to levy fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
F. Cooperation with NCAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
A. Background 1
Supervising the most important banks in the participating Member States is intense in terms of costs and resources, especially in view of the cooperation between the ECB and the NCAs of the participating Member States. Given the division of tasks and responsibilities between the Union and national levels, the different authorities involved need to coordinate their activities. At least in normal times, the institutional and operational setup of the Single Supervisory Mechanism require travelling, not only on an operational level when assessing the supervised entities and groups, e.g. in the terms of on-site inspections or sanctioning procedures, but also on an institutional level. The expenditures related to the SSM tasks of the ECB are not covered by the ECB’s normal budget. Rather, the institutional architecture of the SSM requires the banks to cover the costs of their own supervision.1 This burden is not shared symmetrically amongst them. How much a particular bank has to contribute to the costs of the SSM first depends on the question whether it is classified as significant or less significant. 2 Second, the importance and the risk exposure of the bank are of relevance. Art. 30 SSMR reflects this primarily political decision on a legal level.3 The provision stems from the idea that the industry should pay for the costs of the SSM. Art. 30
1 The views expressed in this publication are the personal views of the author and not necessarily the ones of the ECB. Cf. Recital 77 of the SSMR. 2 See König, Single Supervisory Mechanism: “Direct effects on smaller institutions will be limited”. 3 In the view of Wolfers and Voland, CMLR 51 (2014), 1463, at p. 1479, Art. 30 SSMR does not explicitly state any specific ECB competence to levy supervisory fees, whereas Ferran and Babis, University of Cambridge Faculty of Law Legal Studies Research Paper Series, Paper No. 10 (2013), at p. 10 share the view that Art. 30 SSMR does provide a sufficient legal basis.
414
Georgios Zagouras
Art. 30 SSMR
Supervisory fees
SSMR is flanked by the ECB’s lately amended Supervisory Fees Regulation (SFR).4 Its main purpose is to specify the modalities of the supervisory fees, in particular the actual calculation of the annual fees, procedural aspects and rules concerning the cooperation of the ECB and the National Competent Authorities (NCAs).5 The SFR establishes the methodology for determining the total amount of the annual supervisory fee, calculating the amount to be paid by each supervised bank and collecting the annual supervisory fee.6
B. Scope of the provision According to Art. 30(1) SSMR, the ECB is obliged to levy an annual supervisory fee 2 on supervised entities.7 The provision does not offer any discretion to the ECB on whether or not such fees are charged. Neither Art. 30 SSMR nor the SFR offer any form of leeway in that perspective. The provision has to be read in conjunction with Art. 29 SSMR which states that the expenditure for carrying out SSM-related tasks has to be identifiable separately in the budget of the ECB.8 In particular, para. 2 of the said provision states that the annual accounts of the ECB have to be drawn up and published in accordance with Art. 26.2 of the Statute of the ESCB and of the ECB.9 They need to include any income and expenses related to the supervisory tasks. The reason for the separation of budgets is that the ECB has to be able to identify which costs are related to the task of banking supervision. These costs are passed on to the supervised entities, but at the same time the ECB may not include any costs in its calculation which are solely related to monetary policy tasks.10 According to Art. 30(1) SSMR supervisory fees cover any expenditure incurred by the ECB in relation to the tasks conferred on it under Arts. 4 to 6 SSMR. The provision also confirms that such fees may not exceed the expenditure relating to these SSM tasks.11 Hence, the ECB may not generate any profit out of the supervisory fees which could then be shared amongst National Central Banks (NCBs) and allocated according to the standards stipulated in Art. 33.1 of the Statute of the ESCB and of the ECB.12
4 Regulation of 22 October 2014 on supervisory fees (ECB/2014/41), OJ L311, 31.10.2014, at p. 23 as amended by of 5 December 2019 amending Regulation (EU) No 1163/2014 on supervisory fees (ECB/ 2019/37), OJ L 327, 17.12.2019, at p. 70. 5 Schulte, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 132 AEUV para. 105. 6 ECB, Annual Report on Supervisory Activities March 2016, at p. 70. 7 See also Zagouras, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5 th edn, 2017), § 124b paras. 64 et seq. 8 See Almhofer, Art. 29 SSMR for further details; Abascal and others, (2015) 13 The Spanish Review of Financial Economics, 20 at p. 28. 9 Cf. Scheller, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 26 AEUV, paras. 7 et seq. 10 One could argue that this is an aspect of the separation principle which has its foundations in Art. 25 SSMR and aims at separating the policy areas of monetary policy and banking supervision. Cf. Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), 106, at pp. 130 et seq. 11 Cf. Glos and Heinz, ‘Regulation of the ECB on supervisory fees’ (2014), at p. 3 who include any shared services. 12 See Gaitanides, Das Recht der Europäischen Zentralbank (2005), at p. 62; Scheller, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 33 AEUV, paras. 15 et seq.
Georgios Zagouras
415
Art. 30 SSMR
Supervisory fees
C. Adressees According to Art. 30(1) SSMR, credit institutions established in the participating Member States13 and branches established in a participating Member State by a credit institution established in a non-participating Member State have to pay supervisory fees. This obligation is consequently not limited to Significant Institutes (SI) under the direct supervision of the ECB.14 It also extends to Less Significant Institutes (LSI) which remain under the supervision of the NCAs.15 However, this does not mean that a Global Systemically Important Financial Institution (G-SIFI) would pay the same supervisory fees as a small savings bank. Art. 8 SFR splits the annual costs of banking supervision between SIs and LSIs. According to Art. 8(1) SFR, the annual costs are divided into two parts, one for each category of supervised entities and supervised groups, in order to calculate the annual supervisory fee payable in respect of each supervised entity and supervised group.16 One part of the annual costs needs to be recovered from SIs and the other from LSIs. Art. 8(2) SFR defines which costs are covered by each part: The proportion depends on the costs allocated to the relevant functions which perform the direct supervision of significant supervised entities and the indirect supervision of less significant supervised entities. As a consequence, the ECB has to identify the costs of indirect supervision, i.e. the costs of its business areas in charge of the oversight of LSIs, individually.17 4 In addition to the so called SSM credit institutes, supervisory fees are also charged to SSM branches of credit institutes which are established in a non-SSM EU-Member State. The purpose is to cover the expenditure incurred by the ECB when carrying out its tasks as a host supervisor over these branches.18 The SFR, in particular Art. 3 thereof, further clarifies to which extent branches have to pay supervisory fees to the ECB. According to Art. 3(3) SFR, two or more fee-paying branches established by the same credit institution in the same participating Member State are deemed to be one branch. However, feepaying branches of the same credit institution established in different participating Member States do not qualify as one branch.19 Further to that, Art. 3(4) SFR clarifies that fee-paying branches are considered to be separate from subsidiaries of the same credit institution established in the same participating Member State for supervisory fee purposes. 3
13 According to definition in Art. 2(1) SSMR participating Member State means a Member State whose currency is the euro or a Member State whose currency is not the euro which has established a close cooperation in accordance with Art. 7 SSMR. 14 With regard to the distinction between SI and LSI see Schuster, EuZW-Beilage (2014), 3, at p. 4; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), 106, at pp. 114 et seq. 15 The supervision of LSI in the SSM is described in the Monthly Report of the Bundesbank, January 2016, at pp. 51 et seq. . 16 Cf. Glos and Heinz, ‘Regulation of the ECB on supervisory fees’ (2014), at p. 3. 17 See with regard to the organisational setup of the banking supervision policy area of the ECB . 18 Recital 77 SSMR. In the case a credit institution or a branch is supervised on a consolidated basis, the fee should be levied on the highest level of a credit institution within the involved group with establishment in participating Member States. 19 See Art. 3(3) SFR.
416
Georgios Zagouras
Art. 30 SSMR
Supervisory fees
D. Calculation basis I. Overall costs In general terms, the ECB calculates its supervisory tasks expenses to define the total amount of the annual supervisory fees. At the end of 2015 the ECB’s expenditure for supervisory tasks stood at EUR 277.1 million. This included expenses for salaries and benefits (EUR 141.3 million), for rent and building maintenance (EUR 25.5 million) and other operating expenditure, including training and travel expenses (EUR 110.3 million). 20 The overall costs are then split into two categories: first, the costs of direct supervision are levied on significant banks, which are directly supervised by the ECB according to Art. 6 SSMR.21 The second category relevant for the calculation of costs is indirect supervision. This affects costs which have to be levied on LSIs being directly supervised by the relevant national supervisors. This distinction follows the principle that the supervisory responsibilities of the ECB and each NCA are allocated on the basis of the significance of the supervised entities within the SSM.22 Art. 8(2) SFR further specifies that the annual costs are split on the basis of the costs allocated to the relevant functions which perform the direct supervision of significant supervised entities and the indirect supervision of less significant supervised entities. Based on this methodology, the costs for significant entities or significant groups amounted to EUR 245.6 million whereas the costs occurred from less significant entities or less significant groups sum up to EUR 31.5 million in 2015.23 The SFR defines in Art. 2(2) ‘annual costs’ as “the amount, as determined in accordance with the provisions of Art. 5 [SFR] to be recovered by the ECB via the annual supervisory fees for a specific fee period.” Art. 5 SFR sets the legal framework for the calculation of these annual costs.24 The latter are the basis for determining the individual supervisory fees which have to be paid by the debtors of supervisory fees according to Art. 5(1) SFR. The actual costs are to be determined based on the amount of the total expenditure of the SSM, i.e. the expenses incurred by the ECB in the relevant fee period that are directly or indirectly related to its supervisory tasks.25 This total amount of the annual supervisory fees has to cover the expenditure incurred by the ECB in relation to its supervisory tasks in the relevant fee period, without exceeding it. The ECB has to be accurate when calculating the cost. It may not generate any profit which could be shared according to the general provisions of the ESCB-Statute nor may it bear any costs by itself under its general budget.26 The ECB may calculate the annual costs only on the basis of its own expenditures. Expenditures which occur to the NCAs do not form part of the annual costs pursuant to
20 ECB, Annual Report on Supervisory Activities March 2016, at pp. 68 et seq. . 21 See Schuster, EuZW-Beilage 2014, 3, at p. 4; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), 106, at pp. 114 et seq. 22 Cf. Recitals 5 and 8 of the initial version of the SFR. 23 ECB, Annual Report on Supervisory Activities March 2016, at p. 71. 24 See also also Zagouras, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5 th edn, 2017) § 124b para. 64. 25 The relevant fee period is defined in Art. 2(8) SFR as a calendar year. 26 Art. 33.1.b. of the ESCB Statute foresees that net profits are distributed to the shareholders of the ECB in proportion to their paid-up shares. See Scheller, The European Central Bank, History, Role and Function (2nd edn, 2006) at p. 117 as well as Scheller, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 33 ESZB-Satzung, para. 15.
Georgios Zagouras
417
5
6
7
8
Art. 30 SSMR
Supervisory fees
Art. 5(1) SFR.27 Art. 5(3) SFR stipulates further criteria for the determination of the annual costs. The ECB has to consider any fee amounts related to previous fee periods that were not collectible. Such unpaid items, which may occur due to e.g. the resolution of a bank, are in other words shifted to the annual costs of the next fee period. On the other side, Art. 5(3)(b) SFR clarifies that any interest payments received in accordance with Art. 14 SFR are deducted from the actual costs. Finally, the provision clarifies that any amounts received or refunded in accordance with Art. 7(3) SFR also need to be considered. The total amount of the annual supervisory fees for each category of supervised entities and supervised groups for this respective fee period have to be published on the ECB’s website within four months after the end of each fee period.28 9 The SFR does not answer the question if the ECB may count any damages it might have to pay to supervised entities or third parties into the annual costs according to Art. 5 SFR. Such costs could occur e.g. as the result of court proceedings. On the one hand, the ECB would make the industry pay for damages which result from a breach of law by the ECB. On the other side such damages could be counted into the expenditures which wouldn’t have occurred to the ECB without the SSM-related tasks. Comparable pre-SSM cases in the Member States, namely Germany, would also speak for such an interpretation.29
II. Calculation of individual fees According to Art. 30(3) SSMR, the actual supervisory fees are calculated at the highest level of consolidation within participating Member States.30 When credit institutions are part of a supervised group established in the participating Member States, one fee is calculated and needs to be paid at group level.31 The calculation of the fees should exclude any subsidiaries established in non-participating Member States.32 In order to achieve this and to determine the relevant fee factors of a supervised group, sub-consolidated information for all subsidiaries and operations controlled by the parent undertaking in the participating Member States needs to be provided.33 As the costs of producing such sub-consolidated data could be remarkable, supervised entities may opt for a fee calculated on the basis of data provided at the highest level of consolidation within the participating Member States including subsidiaries established in non-participating Member States, even if this might result in a higher fee.34 11 Supervisory fees have to be calculated individually. At bank level, the fees are calculated according to a bank’s importance and risk profile,35 using annual fee factors 10
See infra, Section E. Art. 5(4) SFR. 29 In this perspective, the German constitutional court ruled that the German constitution does not prevent the BaFin to include costs in its annual expenses which are the basis for the NCA to levy supervisory fees which stem from an obligation of the BaFin to pay damages to a supervised entity. Cf. BVerfG, 2 BvR 355/12, 24. November 2015, BaFin-Umlage, ECLI:DE:BVerfG:2015:rk20151124.2bvr035512. The court decided that costs which result from a negligent breach of law by the BaFin can be shifted to the supervised entities by means of supervisory fees as long as such damages do not have a material impact on the expenses of the BaFin. This is so in Germany because according to German case law the task of banking supervision is exercised in the public interest. See also Gurlit, WM 2016, 2053, at p. 2061; Weber, NJW 2016, 992, at p. 993. 30 Glos and Heinz, ‘Regulation of the ECB on supervisory fees’ (2014), at p. 2. 31 See Recital 11 SFR in its original version. 32 Recital 77 SSMR. 33 Cf. Recital 12 SFR in its original version. 34 Recital 12 SFR in its original version. 35 Abascal et al., The Spanish Review of Financial Economics 13 (2015), 20, at p. 29. 27 28
418
Georgios Zagouras
Art. 30 SSMR
Supervisory fees
supplied by all supervised banks with a reference date of 31 December of the preceding year.36 The starting point for such a calculation is the total amount of the annual supervisory fees to be levied by the ECB.37 The individual fee for each fee debtor is calculated according to the bank’s impor- 12 tance and risk profile.38 In principle, bigger banks with a higher risk profile pay higher fees. The details of the methodology are stipulated in Art. 10 SFR. In a first step, the fee factors for each bank have to be identified. According to Art. 10(3)(a) SFR, the fee factors are used to determine the annual supervisory fee payable in respect of each supervised entity or supervised group; they are the amount at the reference date of the total assets as well as the total risk exposure.39 The relative weighting used in respect of the fee factors is according to Art. 10(3) (e) SFR 50 % of total assets as well as 50 % of total risk exposure. Besides these general aspects there are still a few particularities which need to be con- 13 sidered when calculating the individual fee. The ECB published a decision on the methodology and procedure for the collection of the relevant data which also contains templates the supervised entities as well as supervised groups should use.40 Any breach of these reporting obligations is considered a breach of the SFR. Hence, the ECB is empowered to sanction such breaches in line with Art. 15 SFR. 41 With regard to less significant supervised entities or groups Art. 10(3)(d) SFR limits the fee factor to a maximum of €30 billion. The actual amount consists of a minimum and a variable fee component pursuant 14 to Art. 10(6) SFR. The SFR distinguishes between SIs and LSIs. For both categories of supervisory fees, the minimum fee component is calculated as a fixed percentage of the total amount of the annual supervisory fees for each category of supervised entities and supervised groups. Art. 8 SFR serves as the reference in this regard according to which the ECB distinguishes between SI and LSI related expenses. Once these costs for the two categories are identified, one has to further distinguish between SIs and LSIs.42 Art. 10(6)(b)(i) SFR defines a fixed percentage of 10 % for the category of significant supervised entities and significant supervised groups. The ECB has to split this amount equally among all fee debtors belonging to this category. From a proportionality perspective, Art. 10(6)(b)(i) SFR does make a concession to significant supervised entities Art. 10(3) (ba) SFR. See also ECB, Annual Report on Supervisory Activities March 2016, at p. 71. Initially, Art. 9(1) SFR defined the sum of the estimated annual costs for the current fee period based on the approved budget for the fee period on the one hand and any surplus or deficit from the previous fee period determined by deducting the actual annual costs incurred in respect of the previous fee period from estimated annual costs levied for the previous fee period on the other hand as relevant. According to Art. 9(2) SFR the ECB had to decide the total amount to be levied via the annual supervisory fees for each category of supervised entities and supervised groups. However, these provisions lost their relevance after the 2019 amendment of the SFR. 38 Cf. Zagouras, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5 th edn, 2017) § 124b para. 64. 39 According to Art. 2(13)(b) SFR, the total risk exposure in case of a fee-paying branch is considered zero. 40 Decision (EU) 2015/530 of the ECB of 11 February 2015 on the methodology and procedures for the determination and collection of data regarding fee factors used to calculate annual supervisory fees (ECB/ 2015/7), OJ L84, 28.3.2015, at p. 67 replaced by Decision (EU) 2019/2158 of the ECB of 5 December 2019 on the methodology and procedures for the determination and collection of data regarding fee factors used to calculate annual supervisory fees (ECB/2019/38). 41 Art. 15 SFR refers to Council Regulation (EC) No 2532/98 complemented by Regulation (EU) No 468/2014 (ECB/2014/17). See with regard to the sanctioning possibilities of the ECB Papathanassiou, Art. 18 SSMR; Riso, Bančni vestnik 4/63 (2014), 32, at p. 33, as well as Zagouras, WM 2017, 558, at p. 559 and Zagouras, J.I.B.L.R 34 (2019), 437, at p. 438. 42 Initially, the approach followed by Art. 10(6)(b) SFR was slightly different with regard to LSIs. 36
37
Georgios Zagouras
419
Art. 30 SSMR
Supervisory fees
and significant supervised groups with total assets of EUR 10 billion or less. In these cases, the minimum fee component is reduced by 50%. A similar approach is followed in case of LSIs. Art. 10(6)(b)(ii) SFR requires the ECB to also apply a fixed percentage of 10 % for the category of less significant supervised entities and less significant supervised groups which needs to be split equally among all fee debtors. However, the minimum fees are reduced by 50 % for less significant supervised entities and less significant supervised groups with total assets of EUR 1 billion or less. Art. 10(6)(c) SFR defines the variable fee component as the difference between the total amount of the annual supervisory fees for each category of supervised entities, i.e. SIs and LSIs, and the minimum fee component for the same category. The variable fee component is allocated to individual fee debtors in each category (i.e. SIs and LSIs) according to each fee debtor's share in the sum of all fee debtors' weighted fee factors. The latter have to be identified on the basis of Art. 10(3) SFR.
III. Invoicing and notifications 15
Based on the outcome of the calculation of individual supervisory fees, the ECB issues a fee notice to each fee debtor43 specifying the means of payment according to Art. 12 SFR. The fee debtor has to comply with the requirements set out in the fee notice with respect to the payment of the annual supervisory fee. The amount is due within 35 calendar days of the date of issuance of the fee notice.44 If the fee debtor does not comply, the ECB may initiate enforcement measures and sanctions pursuant to Council Regulation (EC) No 2532/98 complemented by Regulation (EU) No 468/2014 (ECB/ 2014/17).45 In order to ensure a smooth interaction between the ECB and the supervised entities and groups, the latter are required by Art. 13(1) SFR to keep their contact information up to date. Art. 13(2) SFR offers the ECB various possibilities to notify the fee notice such as: electronic or comparable means of communication, by fax, courier service, registered mail with a form for acknowledgement, service or delivery by hand. Art. 30(3) sub-para. 2 SSMR clarifies that the ECB may require advance payments in respect of the annual supervisory fee. The ECB, however, decided to move from an ex ante to an ex post invoicing of actual costs in 2020.46
E. Right of NCAs to levy fees 16
Art. 30(5) SSMR clarifies that the supervisory fees charged by the ECB do not affect the right of NCAs to levy fees in accordance with national law and in accordance with relevant Union law.47 However, the right of the NCAs to levy fees is limited to the cases in which supervisory tasks have not been conferred on the ECB within the framework of the SSMR. Such costs are already covered by the ECB’s supervisory fees. Further to that, the NCAs may levy fees in accordance with Union law in respect of costs of cooperating 43 To enable the ECB to start levying the annual supervisory fee, each group of fee-paying entities has to nominate the ‘fee debtor’ for the group in accordance with Art. 4(2) SFR. 44 Art. 12(3) SFR does not speak of ECB working days. 45 This is established by Art. 16 SFR. See with regard to the sanctioning regime of the SSM Papathanassiou, Art. 18 SSMR; Riso, Bančni vestnik 4/63 (2014), 32, at p. 33, as well as Zagouras, WM 2017, 558. 46 Such advance payments have to be based on a reasonable estimate. Cf. also the ECB, Annual Report on Supervisory Activities March 2016, at p. 72 with regard to the year 2015. With regard to the move to ex post invoicing see ECB, Annual Report on Supervisory Activities March 2021, at p. 100. 47 Cf. Glos and Heinz, ‘Regulation of the ECB on supervisory fees’ (2014), at p. 4.
420
Georgios Zagouras
Art. 31 SSMR
Staff and staff exchange
with and assisting the ECB and acting on its instructions.48 The NCAs have to apply their own respective legal framework for fees in the area of banking supervision, e.g. in Germany the rules foreseen in the German Act Establishing the Federal Financial Supervisory Authority.49 In case of a conflict of law, Art. 30(5) SSMR prevails over any national rules.
F. Cooperation with NCAs A good cooperation between the ECB and the NCAs is essential for the SSM.50 This 17 fundamental principle of the Single Supervisory Mechanism is not only reflected in Art. 6(2) SSMR which stipulates that both the ECB and national competent authorities are subject to a duty of cooperation in good faith, and an obligation to exchange information.51 In addition to this general obligation, the SFR establishes a particular duty of the NCAs to assist the ECB in levying fees if the ECB so requests.52 Pursuant to Art. 11(1) SFR, the ECB has to consult the NCAs before deciding on the final fee level. This is done in order to ensure that supervision remains cost-effective and reasonable for all credit institutions and branches concerned. Further to that, Art. 11(3) SFR contains special rules for credit institutions in a participating non-euro area Member State in close cooperation according to Art. 7 SSMR.53 In line with Art. 7(1) sub-para. 2 SSMR, the ECB may issue instructions to the respective NCA in close cooperation regarding the collection of fee factors and invoicing of the annual supervisory fee.
Art. 31 SSMR Staff and staff exchange* 1. The ECB shall establish, together with all national competent authorities, arrangements to ensure an appropriate exchange and secondment of staff with and among national competent authorities. 48 See with regard to supervisory fees in the Netherlands Masciandaro, Nieto and Prast, DNB Working Paper No. 141 (2007), passim. 49 Gesetz über die Bundesanstalt für Finanzdienstleistungsaufsicht (Finanzdienstleistungsaufsichtsgesetz – FinDAG). The German solution is based on a mixture of general fees related to the overall costs of supervision on the one hand and fees which are levied with regard to particular supervisory actions or measures. See with regard to constitutional law aspects Lenz, NVwZ 2010, 29, at pp. 29 et seq. See with regard to the legal framework for levying supervisory fees in Germany Lindemann, in: Boos, Fischer and Schulte-Mattler (eds), KWG, CRR-VO, § 51 KWG paras. 11 et seq.; Laars, in: Finanzdienstleistungsaufsichtsgesetz, § 16 para. 1. 50 A general obligation of sincere cooperation between institutions and agencies on a Union and Member State level is established in Art. 4(3) TEU. See Will, Europarecht (2013), at p. 181; Obwexer, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 4 EUV para. 59; Cornelissen, in: Fuchs and Cornelissen, EU Social Security Law, Regulation (EC) No 883/2004 Article 76 Cooperation para. 2. 51 In addition to Art. 6 SSMR the principle of sincere cooperation as established by Art. 4(3) TEU forms the foundation of the cooperation between the ECB and NCAs as well as other authorities in the Member States. The principle of sincere cooperation obliges both the ECB being an EU-institution as well as the Member States to cooperate with each other in good faith and to support each other actively in fulfilling their tasks. See Will, Europarecht (2013), at p. 181; Obwexer, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 4 EUV para. 59. 52 See Zagouras, BKR 2020, 330, at p. 334. 53 With regard to close cooperation see Moloney, CMLR 51 (2014), 1609, at p. 1662; Nielsen, EBLR 26 (2015), 805, at p. 815. * The views expressed in this publication are the personal views of the author and not necessarily the ones of the ECB.
Georgios Zagouras
421
Art. 31 SSMR
Staff and staff exchange
2. The ECB may require as appropriate that supervisory teams of national competent authorities taking supervisory actions regarding a credit institution, financial holding company or mixed financial holding company located in one participating Member State in accordance with this Regulation also involve staff from national competent authorities of other participating Member States. 3. The ECB shall establish and maintain comprehensive and formal procedures including ethics procedures and proportionate periods to assess in advance and prevent possible conflicts of interest resulting from subsequent employment within two years of members of the Supervisory Board and ECB staff members engaged in supervisory activities, and shall provide for appropriate disclosures subject to applicable data protection rules. Those procedures shall be without prejudice to the application of stricter national rules. For members of the Supervisory Board who are representatives of national competent authorities, those procedures shall be established and implemented in cooperation with national competent authorities, without prejudice to applicable national law. For the ECB staff members engaged in supervisory activities, those procedures shall determine categories of positions to which such assessment applies, as well as periods that are proportionate to the functions of those staff members in the supervisory activities during their employment at the ECB. 4. The procedures referred to in paragraph 3 shall provide that the ECB shall assess whether there are objections that members of the Supervisory Board take paid work in private sector institutions for which the ECB has supervisory responsibility after they have ceased to hold office. The procedures referred to in paragraph 3 shall apply as a rule for two years after the members of the Supervisory Board have ceased to hold office and may be adjusted, on the basis of due justification, proportionate to the functions performed during that term of office and the length of time that office was held. 5. The Annual Report of the ECB in accordance with Article 20 shall include detailed information, including statistical data on the application of the procedures referred to in paragraphs 3 and 4 of this Article. Bibliography Ida-Maria Weirsøe Fallesen, ‘The Challenges of the EU Banking Union – will it succeed in dealing with the next financial crisis?’, BEEP 36 (2015); Christos V. Gortsos, ‘Competence Sharing Between the ECB and the National Competent Supervisory Authorities Within the Single Supervisory Mechanism (SSM)’, EBOR 16 (2015), 401; Rishi Goyal et al., ‘A Banking Union for the Euro Area’, IMF Staff Discussion Note 1 (2013); Eberhard Grabitz, Meinhard Hilf and Martin Nettesheim (eds), Das Recht der Europäischen Union (62nd supplement, C.H. Beck, Munich 2017); Hans von der Groeben, Jürgen Schwarze and Armin Hatje (eds), Europäisches Unionsrecht (7th edn, Nomos, Baden-Baden 2015); Tor-Inge Harbo, ‘The Function of the Proportionality Principle in EU Law’, ELJ 16 (2010), 158; Christoph Henkel, ‘The Allocation of Powers in the European Union: A Closer Look at the Principle of Subsidiary’, Berkley Journal of International Law 20 (2002), 359; Cornelia Manger-Nestler and Robert Böttner, ‘Ménage à trois? – Zur gewandelten Rolle der EZB im Spannungsfeld zwischen Geldpolitik, Finanzaufsicht und Fiskalpolitik’, EuR 49 (2014), 621; Chryssa Papathanassiou, ‘Das Europäische System der Zentralbanken und die Europäische Zentralbank’ in: Herbert Schimansky, Hermann-Josef Bunte and Hans Jürgen Lwowski (eds), Bankrechts-Handbuch (5th edn, C.H. Beck, Munich 2017), 2852; Antonio Luca Riso and Georgios Zagouras, ‘Europäische Aufsichtsbehörden’ in: Simon G. Grieser and Manfred Heemann (eds), Europäisches Bankaufsichtsrecht (Frankfurt School Verlag, Frankfurt 2016), 106; Gunnar Schuster, ‘The banking supervisory powers and competences of the ECB’, EuZW-Beilage 25 (2014), 3; Ilias Triantafyllakis, ‘Italienische Banken: Wenn nicht alle Wege zum Bail-in führen’, WM 2016, 2248; Jörn Winterfeld and Dietrich Rümker, ‘Finanzmarktstabilisierungsgesetze’ in: Herbert Schimansky, Hermann-Josef Bunte and Hans Jürgen Lwowski (eds), Bankrechts-Handbuch (5th edn, C.H. Beck, Munich 2017), 2535; Georgios Zagouras, ‘EU-Bankenunion’ in: Herbert Schimansky, Hermann-Josef Bunte and Hans Jürgen Lwowski (eds), Bankrechts-Handbuch (5th edn, C.H. Beck, Munich 2017), 2590.
422
Georgios Zagouras
Art. 31 SSMR
Staff and staff exchange
A. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Secondment and staff exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Conflicts of interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Ratio legis and general considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Supervisory Board related provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Cooling-off periods for Staff Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 5 7 12
D. Accountability Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
A. Background Art. 31 SSMR deals primarily with special obligations for decision-makers and staff 1 working in the area of banking supervision and the avoidance of possible conflicts of interest which might result from subsequent employment in the financial industries. In addition, it offers a legal basis for the secondment and exchange of staff of National Competent Authorities (NCAs). In general terms, Art. 31 SSMR sets the legal framework for the ECB and – to a certain extent – NCA staff working in the area of banking supervision. However, the main topic of Art. 31 SSMR remains the ECB’s obligation to prevent conflicts of interest in the area of banking supervision. An important aspect is the establishment of an ethics framework. It defines cooling-off periods for subsequent employment of ECB staff members and managers. Its purpose is to prevent persons working for the ECB from taking decisions which might be influenced by certain career opportunities or incentives offered by the banking and financial industry.1
B. Secondment and staff exchange Art. 31(1) SSMR offers a legal basis for the contribution of NCA staff members and 2 managers to the joint supervision of significant institutions.2 Such an involvement of NCA staff members and managers has always been of particular importance for the establishment of the SSM as well as the early stages of the Banking Union, since a lot of the know-how on the supervised entities lies traditionally with the NCAs.3 They know their banks for decades and, as an institution, the ECB has to be prepared to cooperate closely with the carriers of such know-how. Art. 31 SSMR offers two possibilities for integrating NCAs staff into the SSM. On the one hand, Art. 31(1) SSMR allows incorporating NCA staff in an organisational manner by means of secondments to the ECB and staff exchange. On the other hand, Art. 31(2) SSMR forms the legal basis for the integration of NCA staff in the so called Joint Supervisory Teams (“JST”) of the ECB which conduct the day-to-day supervision and comprise staff from both NCAs and the ECB.4 Art. 31(1) SSMR requires the ECB to establish arrangements with the NCAs to ensure 3 an appropriate exchange and secondment of staff with and among NCAs. Although such exchange and secondment possibilities existed already between the National Cen1 Since the addressees of the provision are people working at or for the ECB, the primary objective of Art. 31 SSMR is not to prevent the industry from trying to influence supervisory decisions by offering supervisors lucrative career opportunities in return of favourable supervisory decisions. The financial sector is not the addressee of the provision. 2 With regard to the categorisation of significant institutes see Schuster, EuZW-Beilage 25 (2014), 3, at p. 4; Riso and Zagouras, in: Grieser and Heemann (eds), Europäisches Bankaufsichtsrecht (2016), 106, at pp. 114 et seq. 3 Cf. Gortsos, EBOR 16 (2015), 401, at p. 409. 4 See ECB, Guide to Banking Supervision, 2014, at p. 11 .
Georgios Zagouras
423
Art. 31 SSMR
Staff and staff exchange
tral Banks (“NCBs”)5 and the ECB before the SSM was established, Art. 31 SSMR institutionalises this possibility in various manners. NCAs can send members of staff to the ECB for a limited period of time, e.g. one year, without forcing them to give up their current status as a staff member of the NCA. Nevertheless, seconded staff members are fully integrated in the ECB. The idea behind the secondment is that the NCAs can offer their staff members a possibility to develop and to get to know the ECB as an EU-institution.6 On the other hand, the ECB benefits from the knowledge which is brought to the SSM by secondees. In a legal context, such know-how can be of particular importance for the application and interpretation of national laws implementing relevant Union law in the context of Art. 4(3)(1) SSMR.7 Secondment played also an important role in the establishment of the ECB from November 2013 until November 2014. 4 The second aspect Art. 31 SSMR deals with is probably less relevant for the organisational setup of the SSM. Art. 31(2) SSMR provides the ECB with the power to require that supervisory teams of NCAs taking supervisory actions regarding a credit institution, financial holding company or mixed financial holding company located in one participating Member State also involve staff from NCAs of other participating Member States. The practical relevance of Art. 31(2) SSMR is rather limited, but in case of a dispute concerning the participation of staff members of another NCA, the ECB has the last word.
C. Conflicts of interest I. Ratio legis and general considerations 5
The credibility of the Banking Union8 in general and the SSM9 in particular does not only heavily depend on the operational and institutional setup of the SSM. It is also related to the integrity of the people who give the Single Supervisory Mechanism a face. The integrity and independence of the persons supervising the most significant credit institutions in the Eurozone is of paramount importance for (re-)establishing trust in both, the European financial industries as well as the European Union and everything it stands for as a supranational political organisation. 10 Against this background, Art. 31(3) SSMR obliges the ECB to establish and maintain rules and procedures for the avoidance of conflicts of interest. The ECB has to create comprehensive and formal procedures including ethics procedures and proportionate periods to assess in advance and prevent 5 Such NCBs can be NCAs in some EU Member States, but they don’t have to. E.g. in Germany, the Bundesbank is the NCB with certain competences also in the area of banking supervision whereas the BaFin is the NCA. 6 The status of the ECB as an EU-institution is defined in Art. 13 TEU. See Jacqué, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 13 TEU para. 9; Selmayr, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 282 TFEU para. 69. 7 See Zagouras, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5 th edn, 2017) § 124b para. 42. 8 With regard to the general setup of the Banking Union Winterfeld and Rümker, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5th edn, 2017), § 124a para. 79; Fallesen, BEEP 36 (2015); Goyal et al., IMF Staff Discussion Note 1 (2013). 9 In the Mission Statement of the SSM, the ECB emphasises the importance of credibility. The respective part reads as follows: “In pursuing our objectives, we in the SSM attach utmost importance to credibility and accountability.” . Cf. also Triantafyllakis, WM 2016, 2248, at p. 2249 on the criterion of credibility in a bail-out context. 10 Cf. Recital 76 SSMR.
424
Georgios Zagouras
Art. 31 SSMR
Staff and staff exchange
possible conflicts of interest resulting from subsequent employment. 11 The provision foresees different “cooling-off periods” for members of the Supervisory Board 12 and ECB staff members engaged in supervisory activities within two years.13 The ECB implemented the obligations of Art. 31(3) SSMR in two different legal 6 acts.14 In a first stage, it adopted a Code of Conduct for the Members of the Supervisory Board15 which is the internal decision-making body for the ECB’s area of banking supervision.16 In a second stage, the ECB amended its internal rules, i.e. the Conditions of Employment as well as the Staff Rules, in order to avoid conflicts of interest resulting from supervising particular banks. Both legal acts address only ECB employees respectively the members of the Supervisory Board. NCA staff does not belong to the addressees of these rules. Nevertheless, the ECB issued a Guideline which aims e.g. to ensure that the members of their bodies and their staff members are prohibited from misusing inside information and to extend the conflict of interest obligations to persons involved in the performance of supervisory tasks who are not staff members. 17
II. Supervisory Board related provisions Especially the Code of Conduct must be understood in the context of Art. 19(3) 7 SSMR. As a consequence, Art. 2.1 of the Code of Conduct requires members of the Supervisory Board18 and other participants in its meetings to observe the highest standards of ethical conduct.19 In the performance of their duties, they are expected to act with honesty, independence, impartiality, discretion and regardless of self-interest. Art. 8 of the Code of Conduct deals with the avoidance of conflicts of interest which might result from subsequent employments. In particular, Art. 8.1 of the Code of Conduct requires members of the Supervisory Board to report any intention to engage in any occupational activity, regardless whether this is gainful or not, to the President of the ECB. 20 See Recital 76 SSMR. The role and function of the Supervisory Board is explained by Zagouras, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 129 TFEU para. 10. 13 The two years standard is based on Art. 31(4)(2) SSMR which foresees that the respective procedures apply as a rule for two years after the members of the Supervisory Board have ceased to hold office and may be adjusted, on the basis of due justification, proportionate to the functions performed during that term of office and the length of time that office was held. 14 This differentiation is based on the fact that the legal status of members of the Supervisory Board is not identical with the one of ECB staff members. Most of the members of the Supervisory Board are representatives of the NCAs. Hence, Art. 31(3) SSMR could not be established based on the employment relationship with the ECB and respective staff rules. 15 Code of conduct for the members of the Supervisory Board of the ECB 12.12.2014, . 16 With regard to the decision-making in the SSM see ECB, Guide to Banking Supervision, at p. 12. 17 Guideline (EU) 2015/856 of the European Central Bank of 12 March 2015 laying down the principles of an Ethics Framework for the Single Supervisory Mechanism (ECB/2015/12) . 18 The role of the Supervisory Board as the internal decision-making body of the ECB is described by Manger-Nestler and Böttner, EuR 49 (2014), 621 at p. 627; Zagouras, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5th edn, 2017), § 124b para. 12. 19 Pursuant to Art. 31(3)(2) SSMR these procedures have to be established and implemented in cooperation with NCAs, without prejudice to applicable national law. 20 With regard to the role of the president of the ECB see Papathanassiou, in: Schimansky, Bunte and Lwowski (eds), Bankrechts-Handbuch (5th edn, 2017), § 134 para. 48; Selmayr and Zilioli, in: von der Groeben, Schwarze and Hatje (eds), Europäisches Unionsrecht, Art. 13 ESCB Statute para. 7 as well as Palm, in: Grabitz, Hilf and Nettesheim (eds), Das Recht der Europäischen Union, Art. 112 TFEU para. 29. 11 12
Georgios Zagouras
425
Art. 31 SSMR
8
9
10
11
Staff and staff exchange
This reporting obligation applies for the period of two years starting from the date of their ceasing to hold office. The actual cooling-off periods for Supervisory Board members are defined in Art. 8.1 of the Code of Conduct. Within the period of one year, Supervisory Board Members are not allowed to engage in an occupational activity with a credit institution which is directly supervised by the ECB or not directly supervised by the ECB, but where a conflict of interest exists or could be perceived as existing.21 In addition to that, an occupation activity is not permitted in an institution other than a credit institution, if a conflict of interest exists or could be perceived to exist. This last category is rather broad and leaves the ECB remarkable room for interpretation.22 Hence it could also cover occupational activities as a consultant or at a law firm.23 Given the rather broad scope of the provision and the assumption that conflict of interests might also materialise outside of a credit institution, such activities are only forbidden for the period of six months from the date of cessation of their membership of the Supervisory Board. Other participants in Supervisory Board meetings24 have similar obligations with shorter deadlines.25 It should be mentioned, though, that the cooling-off periods foreseen for the Supervisory Board only oblige the addressees of Art. 31 SSMR, e.g. the Supervisory Board members. They do not have a legal effect inter omnes. As a consequence, the obligations do not directly affect the contractual relation between a Supervisory Board member and his/her future employer. A respective contract would not be automatically null and void. Art. 8.3 of the Code of Conduct foresees a possibility of a waiver or reduction of the cooling-off period upon recommendation by the ECB Ethics Committee if the possibility of conflicts of interest resulting from subsequent occupational activities can be excluded. On the other side, the ECB Ethics Committee may also recommend an extension of the cooling-off periods up to a maximum of two years for Supervisory Board Members and one year for other participants in Supervisory Board meetings where the possibility of conflicts of interest resulting from subsequent occupational activities cannot be excluded for longer periods.26 Cooling-off periods are important for the credibility of the SSM. At the same time the impact on the addressees of Art. 8 of the Code of Conduct is quite remarkable. Engaging in a new occupational activity after an employment has ended ― is the most natural thing under normal circumstances. By default, there is nothing wrong in leaving one’s employer and chasing new opportunities with the knowledge and qualifications one obtained in the old employment relationship. From the perspective of Supervisory Board 21 Whether a conflict of interest could be perceived needs to be assessed considering all relevant aspects of the case. Naturally, such an assessment needs to consider how a certain occupational activity would be perceived by the general public. It should not leave the impression that the Supervisory Board member takes advantage of his or her particular knowledge obtained, e.g. with regard to the supervised entity or its competitors, in the internal decision-making body of the ECB. 22 Since the scope of the provision is very broad and could apply to any possible employer the standards for the interpretation are not as strict as in case of the other two categories covered by Art. 8.1 Code of Conduct. 23 The provision does, however, not determine whether representing a supervised entity before court e.g. as an independent lawyer who is not employed by a law firm would fall under the scope of the provision. Domestic professional laws remain applicable in addition. 24 I.e. natural persons who were physically or virtually present at a Supervisory Board Meeting, regardless whether they contributed actively to the meeting or not. 25 According to Art. 8.2 of the Code of Conduct new engagements have to be reported within one year. The cooling-off period lasts six respectively three months. 26 The ECB Ethics Committee has to consider the proportionality principle in this perspective. For further details on this fundamental principle of Union law see e.g. Harbo, ELJ 16 (2010), 158; Henkel, Berkley Journal of International Law 20 (2002), 359.
426
Georgios Zagouras
Art. 31 SSMR
Staff and staff exchange
members and other participants, the cooling-off periods practically mean that they are not allowed to exploit their own abilities and qualifications. This is why Art. 8.5 of the Code of Conduct foresees a compensation for Members and other participants.
III. Cooling-off periods for Staff Members The cooling-off periods for ECB Staff Members are subject to a different legal regime. They fall under Art. 4b of the ECB’s Conditions of Employment. The provision stipulates that, under the conditions laid down in the Staff Rules, certain members of staff who intend to engage in a new occupational activity after the end of their employment with the ECB have to refrain for a specified period from engaging in an occupational activity that could lead to a conflict with the interests of the ECB.27 Further details can be found in the ECB’s Staff Rules,28 in particular Section 0.2.8.3 thereof defines different cooling-off periods for various levels of employees. As indicated by Art. 31(4) (1) SSMR, in general, the cooling-off period increases, the more senior the status of the ECB employee is. E.g. if staff members on management level want to start working on a direct competitor of the bank(s) they supervised, the cooling-off period would be six months, whereas it would amount to three months in case of an expert. In special circumstances, staff members may ask the Executive Board to waive or reduce these cooling-off periods, if the particularities of the case would exclude conflicts of interest resulting from the subsequent occupational activity.29 On the other hand, a cooling-off period can be exceptionally increased by the Executive Board upon proposal from the ECB’s Compliance and Governance Office (CGO) if ECB managers intend to work for a credit institution they supervised directly. Especially with regard to Members of the Supervisory Board who are technically not ECB staff, 30 Art. 31(3)(2) SSMR clarifies that the ECB rules implementing Art. 31 SSMR are without prejudice to the application of stricter national rules. Under Art. 19(3) SSMR, the ECB is required to have a Code of Conduct that governs ECB staff and management involved in banking supervision and that addresses in particular any concerns regarding conflicts of interest. The relevant provisions are contained in the ECB’s Ethics Framework, which is implemented by the CGO.
12
13
14
15
D. Accountability Requirements Finally, Art. 31(5) SSMR contains an accountability obligation. The ECB is required 16 to report in detail on the application of the procedures referred to in Arts. 31(3) and (4)
27 The rule must be understood in the context of Art. 31(3)(3) SSMR which clarifies that for the ECB staff members engaged in supervisory activities, the relevant procedures determine different categories of positions and cooling-off periods that are proportionate to the functions of those staff members in the supervisory activities during their employment at the ECB. 28 . 29 Such circumstances could be e.g. the establishment of Chinese walls which ensure that the staff member does not work in a business area of a bank where the particular knowledge he/she obtained would not be of benefit for the new employer. The burden of prove that a conflict of interest will not occur lies with the staff member. 30 Pursuant to Art. 26(1) SSMR, the Supervisory Board Members who are appointed by the NCAs are employed by respective NCA. They are not ECB staff members.
Georgios Zagouras
427
Art. 32 SSMR
Review
SSMR in its annual report on the SSM.31 In particular, the ECB has to include statistical data on the application of the respective procedures. In lack of any specification, the ECB has discretion on how it complies with the obligation. The reporting obligation contained in Art. 31(5) SSMR implies that the ECB may monitor the activities of former members of the Supervisory Board and members of staff in order to ensure the compliance with both, the ECB’s reporting obligation as well as the compliance of former staff and Supervisory Board members with their obligations under the relevant laws.
Art. 32 SSMR Review By 31 December 2015, and subsequently every three years thereafter, the Commission shall publish a report on the application of this Regulation, with a special emphasis on monitoring the potential impact on the smooth functioning of the internal market. That report shall evaluate, inter alia: (a) the functioning of the SSM within the ESFS and the impact of the supervisory activities of the ECB on the interests of the Union as a whole and on the coherence and integrity of the internal market in financial services, including its possible impact on the structures of the national banking systems within the Union, and regarding the effectiveness of cooperation and information sharing arrangements between the SSM and competent authorities of non-participating Member States; (b) the division of tasks between the ECB and the national competent authorities within the SSM, the effectiveness of the practical arrangements of organisation adopted by the ECB, and the impact of the SSM on the functioning of the remaining supervisory colleges; (c) the effectiveness of the ECB’s supervisory and sanctioning powers and the appropriateness of conferring on the ECB additional sanctioning powers, including in relation to persons other than credit institutions, financial holding companies or mixed financial holding companies; (d) the appropriateness of the arrangements set out respectively for macroprudential tasks and tools under Article 5 and for the granting and withdrawal of authorisations under Article 14; (e) the effectiveness of independence and accountability arrangements; (f) the interaction between the ECB and the EBA; (g) the appropriateness of governance arrangements, including the composition of, and voting arrangements in, the Supervisory Board and its relation with the Governing Council, as well as the collaboration in the Supervisory Board between Member States whose currency is the euro and the other participating Member States in the SSM; (h) the interaction between the ECB and the competent authorities of non-participating Member States and the effects of the SSM on these Member States; (i) the effectiveness of the recourse mechanism against decisions of the ECB; (j) the cost effectiveness of the SSM; (k) the possible impact of the application of Article 7(6), 7(7) and 7(8) on the functioning and integrity of the SSM; 31 .
428
Christos V. Gortsos
Art. 32 SSMR
Review
(l) the effectiveness of the separation between supervisory and monetary policy functions within the ECB and of the separation of financial resources devoted to supervisory tasks from the budget of the ECB, taking into account any modifications of the relevant legal provisions including at the level of primary law; (m) the fiscal effects that supervisory decisions taken by the SSM have on participating Member States and the impact of any developments in relation to resolution financing arrangements; (n) the possibilities of developing further the SSM, taking into account any modifications of the relevant provisions, including at the level of primary law, and taking into account whether the rationale of the institutional provisions in this Regulation is no longer present, including the possibility to fully align rights and obligations of Member States whose currency is the euro and other participating Member States. The report shall be forwarded to the European Parliament and to the Council. The Commission shall make accompanying proposals, as appropriate. Bibliography European Commission, ‘Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013’, COM(2017) 591 final; European Commission, ‘Communication to the European Parliament, the Council, the European Central Bank, The European Economic and Social Committee and the Committee of the Regions’, COM(2017) 592 final; European Court of Auditors, ‘Single Supervisory Mechanism – Good start but further improvements needed’, Special Report No. 29, 2016: ; Christos V. Gortsos, The Evolution of European (EU) Banking Law under the Influence of (Public) International Banking Law: A Comprehensive Overview (2nd edn 2019): . A. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Content of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Assessment of the application of the SSMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The governance of the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Accountability, due process and independence arrangements . . . . . . . . . . . . b) Decision-making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Separation between supervisory and monetary functions . . . . . . . . . . . . . . . d) Division of tasks and responsibilities between the ECB and the NCAs . . . 3. Key supervisory tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Categorisation of supervised entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) JSTs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Horizontal functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) On-site inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Colleges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Options and discretions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Performance of specific supervisory tasks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Common procedures for authorisations and assessment of acquisitions b) Ongoing supervision of significant institutions: Fit and proper assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Ongoing supervision of significant institutions: Own funds’ approval and waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Ongoing supervision of significant institutions: Internal models . . . . . . . . . e) Ongoing supervision of significant institutions: SREP . . . . . . . . . . . . . . . . . . . f) In particular: Possibility to influence credit institutions’ provisioning for non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Ongoing supervision of significant institutions: Enforcement and sanctioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Oversight of NCAs’ supervision of LSIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i) Performance of macro-prudential functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 3 5 5 7 7 13 15 17 21 21 22 23 24 25 26 27 27
Christos V. Gortsos
28 31 33 34 35 36 37 39
429
Art. 32 SSMR
Review
5. Relationship with other relevant bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Interaction with the EBA – supervisory convergence and stress tests . . . . b) Cooperation with the ESRB – macro-prudential convergence . . . . . . . . . . . c) Cooperation with the SRB – early intervention and triggering of resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Participation in the BCBS and the FSB – international regulatory convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Cost-effectiveness of the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40 40 42 43 46 47 51
A. Introductory remarks According to Art. 32 SSMR, by 31 December 2015, and subsequently every three years thereafter, the Commission must publish a Report on the application of the SSMR, with a special emphasis on monitoring the potential impact on the smooth functioning of the internal market. The Report, which indicatively must evaluate 14 aspects, must be forwarded to the European Parliament and to the Council and be accompanied by proposals, as appropriate. 2 The Report was submitted on 11 October 2017.1 It briefly analyses the central aspects of the SSMR and its application, listing the main findings and is accompanied by a Commission Working Document,2 which gives more insight in relation to the topics discussed. Given the early stage of the SSM, not all the aspects listed in the Commission’s review mandate enshrined in Art. 32 SSMR could be assessed to the same level of detail. Due to the scope of the review mandate in the SSMR, the Report focused on the legislative, institutional and procedural framework of the SSM.3 1
B. Content of the Report I. Introduction4 3
The Report provides an assessment of the setting up and the functioning of the SSM, in view of determining its effectiveness as the first pillar of the Banking Union (BU). It is part of a broader assessment of the progress achieved in relation to the BU and represents the first Commission’s review of the application of the SSMR pursuant to its Art. 32. In this respect, the Commission: First, welcomes other assessments which are currently being carried out, such as the ongoing Financial Sector Assessment Program (FSAP) of the International Monetary Fund and the World Bank,5 the convergence checks by the EBA and the various 1 European Commission, COM (2017), 591 final (hereinafter: ‘Report (2017)’), available at: . 2 European Commission, COM (2017), 591 final, accompanying the document, available at: . 3 The purpose of the following analysis is to systematically present the content of the Commission’s Report, without discussing in details aspects raised on the content of the SSMR Articles reviewed (since they were already discussed supra). Nevertheless, where necessary, some key updates and developments are indicated in footnotes. 4 European Commission, Report (2017), Section I. 5 On this program, which was launched in 1999 in the wake of the Asian financial crisis, see by means of mere indication Gortsos, The Evolution of European (EU) Banking Law under the Influence of (Public) International Banking Law: A Comprehensive Overview (2019), at pp. 65-69, available at: .
430
Christos V. Gortsos
Art. 32 SSMR
Review
reviews by the European Court of Auditors (ECA), 6 which are complementary to the Report and contribute to a comprehensive assessment of the SSM involving different aspects and perspectives; Second, comes to an overall positive assessment of the application of the SSMR and the first years of the ECB acting in its supervisory capacity and acknowledges that the supervisory pillar of the BU has been successfully put in place and is fully functional with clear added benefits in terms of financial stability and market integration; Third, assesses that this is an important premise for preceding with the completion of the BU before the end of 2019 as set out by the Commission Communication of 11 October 2017 “on completing the Banking Union”7 (adopted concurrently with the Report), and in line with the “Five Presidents Report” of 22 June 2015 on “Completing Europe’s Economic and Monetary Union”,8 and the Reflection paper “on the deepening of the Economic and Monetary Union” of 31 May 2017.9 In order to address some of the identified problems, the Report provides interpreta- 4 tions of the regulatory framework, refers to ongoing discussions of amendments to relevant EU law or suggests how the ECB could reflect this in its operation. At the current juncture, the Commission does not consider it necessary to propose amendments to the SSMR.
II. Assessment of the application of the SSMR 1. General overview10 The Review focuses on five broad themes that cover the key topics listed in its 5 mandate and constitutes the most important aspects of the functioning of the SSM. A number of overarching issues cut across these five themes and are therefore taken into account across the Report to give an overall view of the functioning of the SSM; these include: First, the viability of the SSM construction and the effectiveness of the safeguards embedded in the SSMR; Second, the balance between the tasks and responsibilities conferred to the various parties within the SSM; Third, the impact of the SSM on the internal market; Finally, the adequacy of the tools and powers available to the ECB to perform its tasks. Several aspects in the Commission’s review mandate could not be assessed in detail, 6 as at this stage there was no sufficient information available to draw substantial conclusions: 6 See e.g., European Court of Auditors, ‘Single Supervisory Mechanism – Good start but further improvements needed’, Special Report No. 29, 2016, available at: . 7 European Commission, COM (2017) 592 final, available at: . 8 Available at: . 9 Available at: . As already (and repeatedly) noted, the related “banking package” was adopted, indeed, in 2019. 10 European Commission, Report (2017), Section II.
Christos V. Gortsos
431
Art. 32 SSMR
Review
First, given that no close cooperation arrangements were concluded with Member States outside the euro area, it is not possible to assess the impact of those Articles; Second, in relation to the potential impact on national banking systems, although some emerging trends may be noticed, it is too early to attribute this to a possible impact of the SSM and to identify other possible impacts on these systems’ structures; and Finally, the mandate to assess the fiscal effects that supervisory decisions may have on participating Member States and the impact of developments in relation to resolution financing arrangements has been affected significantly by the subsequent establishment of the SRM and therefore should more appropriately be considered once the SRM is reviewed.
2. The governance of the SSM11 a) Accountability, due process and independence arrangements The Report assesses as effective the ECΒ’s accountability arrangements within the SSM (as laid down in Articles 20-21 SSMR), taking into account its political, judicial and administrative dimensions, and noting, in particular, the processes and procedures in place for ensuring accountability towards political bodies such as the European Parliament, the Council, the Eurogroup, and national parliaments, which are frequently used in practice. The same applies to the judicial accountability arrangements in place, in respect to which the Report notes that, given the liability regime applicable to the ECB and the CJEU’s mandate to review the legality of its decisions, the ECB offers broader opportunities for judicial review than many NCAs. 8 It also notes that, as to this aspect of accountability, the ECB is subject to extensive complimentary reviews by the Commission, the ECA, the EBA and the European Ombudsman and stresses that the ECB has demonstrated that it takes recommendations issued pursuant to such reviews seriously, often translating them into adaptations of its own rules or behaviour. In addition, it is remarked that the ECB actively contributes to the surveillance exercises carried out by the IMF in euro area Member States. 9 The Report also reviews the effectiveness of the external audit applicable to the ECB, considering that the scope of ECA’s audit mandate over the ECB should be looked at in the context of the overall accountability arrangements applicable to the ECB in its supervisory capacity and in light of the fact that the mandates of national audit bodies over NCAs are very divergent. At the same time, it should be highlighted that in accordance with the TFEU, the ECB is subject to an obligation to provide the ECA with any document or information necessary for the ECA to carry out the task corresponding to its legal mandate. It would be welcomed if the ECB and the ECA conclude an inter-institutional agreement to specify the modalities of information exchange in view of permitting the ECA access to all information necessary for performing its audit mandate.12 10 The Report also notes that, even though the EBA’s convergence reports constitute an (additional) effective review tool for ensuring compliance by the ECB with the single rulebook, and based on anecdotal evidence, its competences to act in cases of breach of EU law (in accordance with Art. 17 EBAR) appear less effective with respect to the ECB 7
European Commission, Report (2017), Section II.A. A Memorandum of Understanding (MoU) establishing practical information-sharing arrangements between the ECB and the ECA was agreed on 28 August 2019 (available at: . 11
12
432
Christos V. Gortsos
Art. 32 SSMR
Review
given that its decision-making procedure requires a double majority from NCAs in both participating and in non-participating Member States, whereas a majority of NCAs from participating Member States would have already supported the ECB’s decision when adopted by the Supervisory Board and the Governing Council. It also notes that adequate independence arrangements are in place and, hence, there is no evidence calling their effectiveness in question. The establishment by the ECB of consultation mechanisms, due process rules (backed 11 by a solid framework) and internal recourse mechanisms based on detailed frameworks, which lead to the development of a consultation culture beyond its formal obligations, are as well positively assessed. The Report recommends that the ECB should make use of consultations wherever it intends to further contribute to the harmonisation of rules and practices and considers that it should strike the right balance when setting timelines or labelling documents as confidential, in order to avoid undue restrictions to the procedural rights of parties concerned by its decisions. Finally, the Report notes that the available recourse mechanism against decisions of 12 the ECB – the Administrative Board of Review (ABoR), set up in accordance with Article 24 SSMR – is actively used by those concerned and ECB maintains that its opinions have had an influence in its supervisory practice broader than the individual cases to which they relate to, finding no evidence of shortcomings. It suggests, however, that it would be useful to take advantage of the growing jurisprudence developed by the ABoR by ensuring more transparency (e.g., by publishing on the ECB website summaries of its decisions with due observance of confidentiality rules). b) Decision-making The Report notes that the Commission scrutinised the governance arrangements on 13 the ECB decision-making in relation to supervisory activities and that, given the high number of decisions and their varied typology, the involvement of the ECB Supervisory Board and Governing Council in every decision appears to be an important strain on the resources of these two bodies, involving all NCAs and national central banks. It also remarks the important diversity across supervisory decisions, in terms of complexity, impact and relevance for supervised entities, both across types of decisions (e.g., SREP decisions compared to approvals of CET1 instruments) and within the same category of decisions (e.g., fit and proper decision for the Board of a major parent company compared to such a decision for an integrated subsidiary’s management). In this respect, it is noted that: First, such differences were not taken into account in the decision-making process, which led to the disproportionate use of ECB resources in case of routine decisions or decisions with a lower overall impact; Second, this situation prevented its decision-making bodies from focusing on important supervisory matters, and often required a disproportionate amount of efforts and resources from both the ECB and the NCAs in preparing the formal decision-making process (NCAs having complained about the resources they need to dedicate for preparing their position for the Supervisory Board and the Governing Council on issues which are not at all relevant from their point of view and which used to be dealt with at middle management level within their organisations); and Third, in order to address these issues, the ECB has streamlined decision-making via templates, written procedures, bundling of decisions, and adopted a delegation framework for certain routine decisions or decisions with reduced potential impact.
Christos V. Gortsos
433
Art. 32 SSMR 14
Review
The Report concludes on this aspect with the consideration that it is still to be tested whether the delegation framework will strike an adequate balance between decisions that are delegated and those that are not, and ultimately lead to better use of resources. c) Separation between supervisory and monetary functions
In relation to the principle of separation between the ECB’s supervisory tasks, on the one hand, and monetary policy and all its other tasks exercised, on the other hand, in order to prevent conflicts of interest, which was established by virtue of Art. 25 SSMR, the Report notes that the ECB implemented this through a set of procedural rules, ensuring organisational separation of staff, differentiated meetings and decision-making procedures for the Governing Council, differentiated reporting lines, confidentiality rules and mediation of conflicts of interest. This principle is not undermined even in the case of certain services (e.g., the legal service, internal audit or human resources) which are “shared” by the two functions, to the extent that they only perform support functions; nevertheless, it is remarked that, when such shared services provide advice that is key for the ECB’s policy decision-making, reinforced safeguards should be considered. 16 The Report also notes that the preparatory work for the macro-prudential tasks conferred upon the ECB by Art. 5(2) SSMR is carried out by the ECB’s department responsible for financial stability, which is involved in both supervisory and other ECB tasks, while the specific procedure dedicated to the adoption of macro-prudential decisions based on Art. 5 SSMR gives the Governing Council a more prominent role throughout the decision-making process, than its role in adopting micro-prudential supervisory decisions. While the Commission understands the ECB’s decision to leverage on the expertise and capacity of its existing department for anchoring its new supervisory tasks related to macro-prudential powers, it highlights the importance of ensuring that the Supervisory Board is appropriately involved in the decision-making process and that all decisions pursuant to Art. 5 SSMR are based on a complete draft proposed by the Supervisory Board. 15
d) Division of tasks and responsibilities between the ECB and the NCAs 17
After briefly presenting the provisions of Art. 6 SSMR on the division of tasks and responsibilities between the ECB and the NCAs within the SSM, also through the lens of the CJEU Judgment in the case of Landeskreditbank Baden-Württemberg - Förderbank v European Central Bank,13 the Report assesses that this division seems balanced and “apparently working well in practice”. Even though the Report does not find any evidence of any existing conflict or intrusive intentions by the ECB, it highlights two concerns: First, some NCAs call for predictability over the extent to which the ECB may influence LSI supervision or eventually take it over in accordance with Art. 6(5)(b) SSMR; provisions in the SSMR conferring responsibilities in relation to LSIs to the ECB should be interpreted as providing the ECB with sufficient flexibility to intervene when necessary for performing its tasks; and Second, while the possibility to give guidance and instructions to NCAs is a key tool for the ECB to ensure a coherent and effective implementation of prudential supervision throughout the BU, equally important is the ECB’s capacity to take over LSI supervision where needed for warranting the consistent application of high supervisory standards and its unconstrained flexibility to use these tools. 13 Case T-122/15, Landeskreditbank Baden-Württemberg – Förderbank v European Central Bank, ECLI: EU:T:2017:337. See on this the analysis of Art. 6 SSMR infra, → SSMR Art. 6 paras. 56-63.
434
Christos V. Gortsos
Art. 32 SSMR
Review
The Report also addresses the regulatory arbitrage concerns arising in relation to the 18 remaining competencies of NCAs, and the way they may be used for circumventing the distribution of responsibilities within the SSM, since recent structural market developments show a trend for third-country groups to have increasingly complex structures in the EU, operating through entities that escape ECB supervision. A specific concern arises in relation to the largest investment firms, which provide key wholesale market and investment banking services across the EU, are “bank-like” in nature and present a clear risk to financial stability, given their size and interconnectedness. These are not authorised and supervised by the same authorities as credit institutions, which might create an un-level playing field in the application of the CRD IV and CRR. The Report concludes on this that the ongoing reviews of the CRD IV and the CRR 19 (namely, by the CRD V and the CRR II), as well as of the prudential treatment of investment firms14 may provide a good opportunity to address this aspect. The Report also acknowledges the specificity of the ECB’s duty to apply national leg- 20 islation transposing relevant EU Directives, in accordance with Art. 4(3) SSMR, and its capacity to derive concrete powers from such national legislation, remarking that: First, clear principles are needed to underpin such unprecedented situations; Second, the ECB’s supervisory powers under the SSMR should be construed broadly enough to include powers given to national authorities by national law for carrying out supervisory functions under the CRD and the CRR in relation to credit institutions; Third, as the ECB’s powers can be exercised only within the limits of its specific tasks, it needs to be ascertained on a case-by-case basis whether a specific power given under national law is within the remit of the specific tasks conferred on the ECB or not; and Finally, given that a case-by-case analysis is cumbersome and not always predictable, it is suggested that future relevant EU legislation spells out explicitly supervisory powers in directly applicable provisions.
3. Key supervisory tools15 a) Categorisation of supervised entities Even though the Report notes that the ECB has mainly used the quantitative criteria 21 for the classification of supervised entities are SIs or LSIs, in accordance with Article 6 SSM and the more detailed provisions of the SSM‑FR, the need for more transparency as regards the rationale for re-classification decisions based on possible “particular circumstances” that would justify a deviation is also remarked. In addition, noting that the ECB also frequently uses further sub-classifications of supervised entities for various purposes (such as determining the extent of its engagement, exercising day-to-day supervision, applying proportionality, ensuring peer comparison and determining what information should be transmitted by NCAs), it remarks that the interplay between the different classifications and their relevance for various supervisory activities is not always straightforward and recommends that the ECB should improve its communication both on the methodologies underlying these classifications and on the implications of the various categories in terms of supervisory action. 14 As already noted (supra, → SSMR Art. 2 para. 2), on 27 November 2019 the European Parliament and the Council adopted Regulation (EU) 2019/2033 (IFR) and Directive (EU) 2019/2034 (IFD), which apply from 26 June 2021. 15 European Commission, Report (2017), Section II.B.
Christos V. Gortsos
435
Art. 32 SSMR
Review
b) JSTs 22
Turning to the significant role of the JSTs within the SSM, the Report notes the following: on the one hand, the development of the framework governing them has been a learning-by-doing process, which still undergoes adaptations, the challenges relating to the fact that JSTs represent a genuine form of supervisory cooperation that requires an integration of resources within a new institutional setup; and on the other hand, since there are some concerns in relation to certain structural aspects of this framework (such as uncoordinated reporting lines, language problems and insufficient staff allocation), the Report proposes that the ECB should deal timely with them to ensure JSTs’ efficient functioning. c) Horizontal functions
23
Since an objective of the SSM is to ensure harmonised supervision in the BU, a dedicated Directorate-General hosts the so-called “horizontal functions”, which define the ECB’s supervisory policies, ensure convergence of supervisory approaches among JSTs and coordinate the execution of other essential specialised tasks. The setting up of the horizontal functions is welcomed by the Commission, as it is essential in ensuring consistency in the application of high-quality supervisory standards to all the credit institutions in the BU. In this respect, the Report stresses the following: First, in terms of effectiveness, the balanced cooperation with NCAs, which needs to be promoted by the horizontal functions, has been largely achieved in the area of supervisory policy development, especially through the establishment of informal support structures with an advisory role (e.g., expert networks); Second, it welcomes the ECB’s use of networks to request NCA’s input on policy issues as a flexible tool of cooperation within the SSM; even though the formalisation of all such structures is not necessary, a clearer status for stable and influential networks could give a better overview of their mandate, governance and reporting lines; Third, the proliferation of networks should be avoided by streamlining existing structures and identifying areas that would most benefit from the output of such cooperative structures; and Finally, since some NCAs expressed criticism as regards cooperation with the horizontal functions, especially in relation to the way the horizontal work influences the output of JSTs, for the sake of increased transparency towards NCAs and to prevent bottlenecks in decision-making, the ECB could envisage to report more systematically and timely to the relevant JST coordinators and sub-coordinators on changes proposed by its horizontal functions to draft decisions coming from JSTs. d) On-site inspections
24
Acknowledging that on-site inspections are an essential tool for supervisors to examine compliance and gather information necessary for performing their duties, directly at the place where the supervised entity is located, the Report notes the following: First, it assesses that the ECB has made good progress in setting up its on-site inspection function and harmonising rules and procedures of supervisory practices in this area; Second, it considers that in view of its further reinforcement in the near future by a common SSM training curriculum for on-site inspectors, the ECB should cooperate
436
Christos V. Gortsos
Art. 32 SSMR
Review
closely with the EBA on such training in order to avoid duplications and ensure synergies for inspectors throughout all Member States; Third, it notes that the implementation of harmonised procedures still shows divergences, especially in relation to the quantification of the findings from inspections by investigation teams and JST's reactions to those findings and calls the ECB to foster a consistent implementation of its common procedures for on-site inspections, ensuring that also the outcome of such inspections is duly harmonised; and Fourth, it considers that further improvement is still necessary with regard to the staffing of on-site inspection teams, by increasing the proportion of ECB staff and creating predictability as to the availability of NCAs’ staff for on-site inspections, and remarks that, even though it is acceptable for the ECB to occasionally rely on external consultants, especially where specific technical knowledge is required, the use of such experts in on-site inspections should be limited and accompanied by appropriate safeguards. e) Colleges The Report discusses the importance of colleges as the forum to coordinate super- 25 vision of cross-border banking groups with activities outside the euro area, assessing that the ECB has proved to be a credible, well-organised Chair of these colleges and has contributed with high-quality input to discussions. It also highlights the role of colleges as an important tool for the ECB to perform its tasks in relation to significant branches of credit institutions from non-euro area Member States, for which it acts as a host supervisor, welcomes the cooperation arrangements concluded by the ECB in a short period of time and encourages the finalisation of remaining negotiations with all relevant authorities. f) Options and discretions After noting that the ECB has successfully managed to issue harmonised rules on the 26 exercise of options and discretions by NCAs, which contributed to the improvement of the level playing field in the euro area, for both SIs and LSIs, the Report: On the one hand, positively assesses that the ECB does not take a broad-brush approach towards harmonisation but considers each option and discretion individually in the context of different starting points in the participating Member States and different needs of national banking sectors and aims to achieve a level playing field by extending the harmonisation exercise to the supervision of LSIs, while taking due account of proportionality; On the other hand, regrets that for some options and discretions (e.g., regarding the transitional arrangements for own funds calculations under CRR) the goal of issuing a fully harmonised standard has not been reached, with the ECB accepting the co-existence of different regimes.
4. Performance of specific supervisory tasks16 a) Common procedures for authorisations and assessment of acquisitions After listing the three tasks which have been conferred upon the ECB with regard to 27 all credit institutions in the BU (SIs and LSIs) in accordance with Article 4(1)(a) and (c), namely granting and withdrawal of authorisation and assessment of acquisitions 16
European Commission, Report (2017), Section IIC.
Christos V. Gortsos
437
Art. 32 SSMR
Review
and qualifying holdings (referred to as “common procedures”), the Report makes three remarks in that respect: First, these procedures intrinsically rely on close cooperation between the ECB and the NCAs, which is an obligation within the SSM and should be pursued by all parties, in good faith and at all stages (i.e., the initial approval stage as well as the ongoing verification of compliance); Second, the ECB and NCAs have done a remarkable job and managed to create tools and procedures that help the ECB deliver on its tasks within the applicable constraining timeframe; and Third, the evolution of common procedures shows that mutual trust between the ECB and the NCAs is increasing, thus constructively supporting the functioning of the SSM. b) Ongoing supervision of significant institutions: Fit and proper assessment Regarding this aspect, two remarks are made in the Report: It first noted that the task conferred upon the ECB to assess each member of a SI’s management as to whether he or she is fit and proper to carry out their tasks has caused a remarkably high operational burden for the ECB Supervisory Board and the Governing Council, mainly due to the high number of proceedings and the diverging procedural timelines foreseen in national regimes. For this reason, this area was chosen for the first trial of the upcoming delegation framework to accelerate the decision-making and reduce backlogs, even though it will not simplify the complexity of the analysis for the ECB if the details of substantial rules were to develop in a non-harmonised way. 30 The Report also notes that the ECB has been actively involved in the development by the EBA of its consultation document on revised Guidelines on fit and proper assessments and has issued in parallel its own consultation on a Guide on fit and proper assessment, which it finalised and published before the finalisation of the EBA Guidelines, and positively remarks that there is a clear commitment from the ECB to revise its own Guide in light of eventual changes to the finalised EBA Guidelines so as to ensure full alignment in terms of content.17 28 29
c) Ongoing supervision of significant institutions: Own funds’ approval and waivers Given that the approval of capital instruments is a core supervisory responsibility, an area particularly scrutinised by the EBA which has a general mandate to review the quality of own funds, as well as the EBA’s extensive expertise in scrutinising the compatibility of capital instruments issued throughout the EU with the CRR eligibility criteria for own funds purposes, the Report remarks that it is important that competent authorities cooperate closely with the EBA in this area and encourages the ECB to set-up a framework ensuring: on the one hand, the internal horizontal scrutiny of all own funds’ instruments issued by institutions supervised by the ECB, and on the other hand, effective and consistent cooperation with the EBA as regards the quality assessment of such instruments, in line with the tasks conferred to the EBA. 32 The Report notes that the ECB has applied for some waivers relatively frequently following the definition of conditions for such waivers in the ECB Guide on options 31
17 This happened in March 2018 with the adoption of the ECB “Guide to fit and proper assessments” (available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.fap_guide_201705_rev_201805 .en.pdf).
438
Christos V. Gortsos
Art. 32 SSMR
Review
and discretions, positively assesses the prudent application of waivers provided for in legislation and recommends to the ECB to further pursue that, including by further facilitating the conditions for their exercise (especially in the case of cross-border liquidity waivers) within the limits of the CRR. It also remarks that the harmonised conditions for the application of waivers developed by the ECB could be built upon in the context of ongoing efforts to further develop the BU that consider the possibility of applying for waivers on a cross-border basis when this leads to more efficient capital or liquidity management without raising prudential concerns. d) Ongoing supervision of significant institutions: Internal models With regard to the ongoing supervision of significant institutions’ internal models, 33 the Report: First, acknowledges that the ECB has successfully set up a robust procedure to assess, approve and review credit institutions’ internal models, which could further improve the credibility of such models and, consequently, the trust of investors in the adequacy of credit institutions’ capital requirements and ultimately in their resilience; Second, views the Targeted Review of Internal Models (TRIM project) as a good supervisory investment that could lead to an enhanced level playing field and greater harmonisation of supervisory practices; Third, highlights that the ECB provides real added value in terms of quality of model supervision, given the depth of its expertise in particular compared to some smaller NCAs and, in comparison to larger NCAs, it can also provide improved supervision due to its larger peer group size, allowing for more detailed benchmarking of models; and Finally, recommends that the SSM should engage with the EBA with a view to share good practices with non-euro area competent authorities, thereby contributing to the supervisory convergence not only in the euro area but in the whole EU single market. e) Ongoing supervision of significant institutions: SREP While positively assessing the ECB’s success in applying within a short timeframe 34 a unitary SREP to all SIs, based on a common methodology that incorporates best practices, the Report remarks the following: First, the ECB should continue to engage constructively with the Commission and the EBA when further developing its methodologies and processes, especially as regards the application of the Pillar 2 guidance (P2G);18 Second, the ECB is invited to incorporate in its SREP methodology the feedback given by the EBA in the context of its convergence assessment work; Third, since the review of SREP decisions by the horizontal functions of the ECB allows for a consistent application of the SREP and contributes to achieving similar SREP outcomes for similar institutions, the right balance should be maintained and the quest for consistency should not lead to outcomes being constrained into a very narrow band that would de facto ignore the bank-specific nature of the SREP; and
18 On the P2G see at: .
Christos V. Gortsos
439
Art. 32 SSMR
Review
Finally, the ECB should improve the communication with NCAs as regards the methods employed to adjust the SREP decisions proposed by JSTs at a horizontal level. f) In particular: Possibility to influence credit institutions’ provisioning for non-performing loans 35
The Report encourages the ECB to apply the whole panoply of supervisory powers to allow risks to be addressed through the most suitable supervisory tools, including (by virtue of Art. 16(2)(d) SSMR) the possibility to influence credit institutions’ provisioning level within the limits of the applicable accounting framework and to apply the necessary adjustments (such as deduction, if, for example, accounting provisioning is not sufficient from a supervisory perspective. This is deemed particularly important in the context of tackling non-performing loans, as highlighted by the Council Action Plan “on Non-Performing Loans” of July 2017.19 g) Ongoing supervision of significant institutions: Enforcement and sanctioning
36
The Report notes that, during its start-up phase, the ECB focused on gaining knowledge of the prudential situation of supervised entities, exercising on relatively few occasions its sanctioning and enforcement powers, remarking then that the effectiveness of the related must be assessed more closely once the more extensive practical experience is accumulated. Given that the effective implementation of the sanctioning framework requires continuous cooperation between the ECB and the NCAs, some obvious asymmetries (such as the different scope of sanctioning powers as opposed to supervisory powers), the lack of a common set of enforcement and sanctioning measures, as well as a wide margin in interpreting existing EU sanctioning rules are already noted. h) Oversight of NCAs’ supervision of LSIs
The Report notes that the LSI sector is remarkably diverse and, even though it was deliberately left to the direct supervision of NCAs, the ECB’s oversight role is instrumental in shaping the conduct of supervision by NCAs to the extent that it would ensure coherent and consistent implementation of prudential rules, including by taking over the direct supervision of LSIs. Accordingly, the ECB must strike a balance between: On the one hand, harmonisation, by ensuring a sufficient level of convergence with regard to the supervisory approach applied to LSIs across participating Member States and between LSIs and SIs within participating Member States, by developing common approaches for LSI supervision on core NCA competencies; On the other hand, supervisory flexibility and proportionality, meaning that NCAs are able to adapt their supervisory activities to the size, complexity and riskiness of the respective institutions. 38 The Report positively assesses the ECB’s efforts to develop an SREP methodology for LSIs, which is based on the SREP methodology for SIs but also embeds features that allow for proportionality and supervisory flexibility. 37
19 The conclusions of this Action Plan are available at: . It is (merely) noted that developments in this field have been constant, and in particular after the outbreak of the pandemic crisis.
440
Christos V. Gortsos
Art. 32 SSMR
Review
i) Performance of macro-prudential functions Noting that the macro-prudential powers and tools in the regulatory framework 39 (CRD IV/CRR) are relatively new, with limited experience acquired by NCAs and designated authorities as regards their application), the Report assesses that the following: First, the ECB’s additional macro-prudential powers under Article 5(2) SSMR can only be assessed properly in the context of a more extensive analysis of the use of such powers by national authorities; Second, at this stage there do not appear to be major obstacles for its participation in the coordination of macro-prudential measures within the BU, nor in exercising its top-up powers; and Third, certain open questions as regards the scope of macro-prudential tools, as well as the interaction between the various tools that can be used for macro-prudential purposes and the corresponding competencies of the relevant authorities, must be dealt with.
5. Relationship with other relevant bodies20 a) Interaction with the EBA – supervisory convergence and stress tests The Report notes that the SSMR did not alter the role and powers of the EBA, 40 which remains the regulatory agency responsible for completing and managing the single rulebook of the EU banking sector (that the ECB has to comply with), as well as for ensuring its consistent application. However, since the ECB implements EBA rules through its own instruments, which may affect the EBA given the extended application of ECB instruments to 21 Member States, the Report recommends that the ECB should: First, regularly refer its own rules to the corresponding EBA rules or to the relevant ongoing EBA work streams; Second, closely coordinate its own implementation initiatives in terms of both content and timeline with those of the EBA; and Third, closely cooperate with the EBA and make every effort to avoid that its own Q&A tool covers issues that should be dealt by the EBA or contradicts answers already given by it, in order to ensure consistency in the interpretation of the single rulebook. 41 Furthermore, the Report touches upon the following related aspects: First, it positively assesses the ECB’s intention to ensure full compliance of the SSM with EBA Guidelines and Recommendations, urging it to continue to strive for full compliance with these EBA acts, including with feedback from EBA’s convergence work; Second, it encourages the ECB to remain consistently proactive in all EBA work streams, especially where this is explicitly called for by the EBA; and Third, given that the EU-wide stress test is a joint exercise where responsibilities are clearly distributed, it proposes that all competent authorities involved (including the ECB) and the EBA should cooperate closely with each other.
20
European Commission, Report (2017), Section II.D.
Christos V. Gortsos
441
Art. 32 SSMR
Review
b) Cooperation with the ESRB – macro-prudential convergence 42
Noting that cooperation between the ECB and the ESRB21 is necessary to ensure coherence between the ECB’s supervisory tasks and the overall EU macro-prudential coordination within the ESRB, the Report assesses that the interaction and cooperation between the ESRB and SSM technical committees have improved over time, notably as regards information sharing and the avoidance of work duplication, but their scope and focus remains different. The review of the ESRB Regulation proposes to formalise the institutional representation of the ECB in its supervisory capacity in the ESRB governance structure and further enhance the coordination of their activities. 22 c) Cooperation with the SRB – early intervention and triggering of resolution
The Report notes that, since its establishment in January 2016, the (Single Resolution) Board, as the BU resolution authority, and the SSM cooperate closely and effectively, on the basis of an MoU signed for the exchange of information necessary for the former to prepare and take resolution actions. This was manifested by the actions in 2017 concerning several failing credit institutions, the experience from which can further improve the practical application of the rules and the functioning of the system. The Commission committed to continue coordinating with the SSM and the Board for these purposes, with regard to the overall functioning of the resolution mechanism, including from the perspective of the EU State aid framework. 44 The Report also notes that, when early intervention measures are planned to be taken by the ECB regarding a supervised institution for which the Board is the resolution authority, such measures must be notified to the latter, which may prepare for the resolution of the institution concerned and, together with the ECB, must closely monitor the compliance with the early intervention measures. In this respect: First, it highlights that some inconsistencies in the legal framework for early intervention measures have been observed and could be addressed by clarifying the use of early intervention powers where they overlap with supervisory powers; Second, it suggests envisaging to enshrine early intervention powers directly in the SRMR, in order to allow the ECB to use powers provided for indirectly applicable EU law; and Third, until such clarifications are made in the law, including on the instances triggering early intervention, recommends that the ECB develops its crisis management strategy, especially defining the circumstances that require early intervention measures, and clearly communicates to the SRB all measures addressed to institutions whose financial situation is deteriorating, to enable more effective cooperation. 45 Finally, the ECB, as the competent supervisory authority, is empowered to make the determination whether an institution under its supervision is failing or likely to fail, which (in accordance with the BRRD and SRMR) is the first resolution for resolution. The way the power is exercised should be further examined in future reviews of the SRMR. 43
21 The ESRB was established by virtue of Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 (OJ L331, 15.12.2010, pp. 1-11). 22 On the basis of the Commission’s legislative proposal of 20 September 2017, the role of the ECB’s Supervisory Board in the ESRB was further formalised by virtue of Regulation (EU) 2019/2176 of 18 December 2019 (OJ L334, 27.12.2019, pp. 146-154), which amended Regulation (EU) 1092/2010.
442
Christos V. Gortsos
Art. 32 SSMR
Review
d) Participation in the BCBS and the FSB – international regulatory convergence The Report positively assesses that the ECB has obtained (and actively uses its) mem- 46 bership status in the FSB and the Basel Committee on Banking Supervision (BCBS), which allows it to actively contribute to the setting of international financial standards relating to banking regulation in a more influential way than the EBA or the Commission, which only have observer status in the BCBS. It also highlights the challenge to achieve full alignment of European members’ input, noting the importance of the ECB’s efforts in this respect, in cooperation with the Commission.
6. Cost-effectiveness of the SSM In assessing the developments in the effectiveness of the supervisory process and in the cost of supervision in the first years of existence of the SSM, the Report notes the following: Even though a longer observation period would be required for a more fundamental analysis of the SSM’s contribution to the smooth functioning of the single market and despite the challenges inherent in the first years of its functioning, a vast majority of credit institutions under the ECB’s direct supervision noticed both an improvement in the quality of supervision, particularly in terms of supervisory consistency across entities of a banking group, and improved interactions with it. This was also confirmed by NCAs, which observed marked improvements in the functioning of the supervisory colleges. Supervisory fees have increased since the start of the SSM’s operation, as the contributions to build-up resources at the ECB level are not offset by a reduction of contributions for resources and costs in NCAs. The current framework for supervisory fees provides for a clear, transparent and simple way of distributing fees to supervised institutions and the current ECB fee methodology provides for proportionality by splitting the budget for SIs and LSIs depending on the cost allocation. The Commission proposes that, in its upcoming review of the fee methodology, the ECB should consider the introduction of additional elements of proportionality, e.g., by differentiating between high priority and other LSIs. Finally, after welcoming the ECB’ initiative to put in place a functional performance measurement system, which enables to track progress achieved in different supervisory and other internal processes and provides a necessary basis for assessing cost efficiency and effectiveness, the Report proposes its further improvement to encompass all aspects of ECB’s supervisory activities and eventually also include NCAs.23
47
48
49
50
III. Conclusions 51 In its concluding Section the Report makes the following remarks:24 The establishment of the SSM was overall successful, while and the ECB and the 52 NCAs have managed to deal effectively with certain organisational challenges observed in the initial stage. The SSM represents a solid reliable element of the BU that could prove its full potential in the context of a completed BU. The ECB, with the support of the NCAs, has set up the necessary procedures and 53 tools that enabled the smooth transfer of supervisory competencies over SIs and the exercise of its coordinating and oversight functions. Accordingly, the ECB has fully 23 24
European Commission, Report (2017), Section II.E. European Commission, Report (2017), Section III.
Christos V. Gortsos
443
Art. 32 SSMR
54
55
56
57
58
59
Review
taken up its supervisory role and has managed to establish a good reputation as an effective and rigorous supervisory authority, an achievement which is remarkable given the extremely challenging timelines and the fact that “the underlying supervisory realities of the 19 participating Member States were very diverse”.25 No major issues have been detected in relation to the ECB’s independence. As regards the separation principle, the ECB should ensure that all safeguards are in place and applied, especially in relation to services underpinning both its supervisory function and all its other functions, while it is also invited to ensure the appropriate involvement of the Supervisory Board in macro-prudential decision-making. In addition, with a view to establishing the trust of all relevant stakeholders, the ECB in its supervisory capacity was repeatedly assessed and held accountable by political, judicial and administrative bodies. The use of mechanisms for holding it accountable was intense and regular and did not demonstrate major shortcomings in the way it pursues its supervisory tasks. The Report stresses that certain disagreements arose concerning the scope of ECA’s mandate to review the ECB, an issue expected to be solved through the declared commitment to better cooperation in the context of further reviews to be conducted by the ECA. In relation to the interaction between the ECB and the NCAs, apart from some initial uncertainties as regards the supervisory powers enshrined in national law, no major problems have been identified as affecting the distribution of tasks and responsibilities within the SSM. In practice, cooperation has been gradually evolving, with NCAs demonstrating a willingness to efficiently cooperate with the ECB and assist it in developing supervisory policies and implementing supervisory acts. As regards the relationship between the ECB and the EBA, the Report identifies a positive dynamic of interaction, which is mutually beneficial and encourages the ECB to continue cooperating and coordinating with the EBA, especially as regards the implementation of the single rulebook. The effectiveness of supervision of euro area credit institutions has improved already in the first years of SSM functioning. For SIs, the regulatory framework is more harmonised, supervision is based on common methodologies applied consistently and its quality is perceived as having increased in relation to several core supervisory areas, especially the SREP, internal models, fit and proper assessments and the functioning of colleges. The ECB also took important steps in harmonising supervisory practices for LSIs, but more time is required to increase the level of harmonisation and promote the use of common best practices in this field. Overall, there is a positive impact on the level playing field between SIs in the participating Member States, as well as between SIs and LSIs in participating Member States. Furthermore, given the positive appraisal of the ECB’s role in the supervisory colleges and its substantial contributions to the discussions at the EBA, there are positive spillover effects throughout the internal market. Overall, the application of the SSMR appears to work well in practice, with no major changes needed to the legal framework at this stage. The shortcomings noted in this report may be corrected mainly through actions to be taken by the ECB or through amendments to relevant EU law that are currently discussed by the European Parliament and the Council in the context of the proposals made by the Commission in November 2016. Certain aspects of the application of the SSMR will need to be further monitored and assessed in more detail once more experience with the SSM is acquired. 25 As already (repeatedly) noted, since October 2020, the participating Member States are 21, also including Bulgaria and Croatia, which joined the SSM and the SRM by virtue of the close cooperation arrangements laid down in Article 7 SSMR.
444
Christos V. Gortsos
Art. 33 SSMR
Transitional provisions
The Commission concludes that the supervisory pillar of the BU has been successfully established, functions well and proves its effectiveness.
Art. 33 SSMR Transitional provisions 1. The ECB shall publish the framework referred to in Article 6(7) by 4 May 2014. 2. The ECB shall assume the tasks conferred on it by this Regulation on 4 November 2014 subject to the implementation arrangements and measures set out in this paragraph. After 3 November 2013, the ECB shall publish by means of regulations and decisions the detailed operational arrangements for the implementation of the tasks conferred on it by this Regulation. From 3 November 2013, the ECB shall send a quarterly report to the European Parliament, to the Council and to the Commission on progress in the operational implementation of this Regulation. If on the basis of the reports referred to in the third subparagraph of this paragraph and following discussions of the reports in the European Parliament and in the Council, it is shown that the ECB will not be ready for exercising in full its tasks on 4 November 2014, the ECB may adopt a decision to set a date later than the one referred to in the first subparagraph of this paragraph to ensure continuity during the transition from national supervision to the SSM, and based on the availability of staff, the setting up of appropriate reporting procedures and arrangements for cooperation with national competent authorities pursuant to Article 6. 3. Notwithstanding paragraph 2, and without prejudice to the exercise of investigatory powers conferred on it under this Regulation, from 3 November 2013, the ECB may start carrying out the tasks conferred on it by this Regulation other than adopting supervisory decisions in respect of any credit institution, financial holding company or mixed financial holding company and following a decision addressed to the entities concerned and to the national competent authorities concerned. Notwithstanding paragraph 2, if the ESM unanimously requests the ECB to take over direct supervision of a credit institution, financial holding company or mixed financial holding company as a precondition for its direct recapitalisation, the ECB may immediately start carrying out the tasks conferred on it by this Regulation in respect of that credit institution, financial holding company or mixed financial holding company, and following a decision addressed to the entities concerned and to the national competent authorities concerned. 4. From 3 November 2013, in view of the assumption of its tasks, the ECB may require the national competent authorities and the persons referred to in Article 10(1) to provide all relevant information for the ECB to carry out a comprehensive assessment, including a balance-sheet assessment, of the credit institutions of the participating Member State. The ECB shall carry out such an assessment at least in relation to the credit institutions not covered by Article 6(4). The credit institution and the competent authority shall supply the information requested. 5. Credit institutions authorised by participating Member States on 3 November 2013 or, where relevant, on the dates referred to in paragraphs 2 and 3 of this Article shall be deemed to be authorised in accordance with Article 14 and may continue to carry out their business. National competent authorities shall communicate to the ECB before the date of application of this Regulation or, where relevant, before
Christos V. Gortsos
445
Art. 33 SSMR
Transitional provisions
the dates referred to in paragraphs 2 and 3 of this Article, the identity of those credit institutions together with a report indicating the supervisory history and the risk profile of the institutions concerned, and any further information requested by the ECB. The information shall be submitted in the format requested by the ECB. 6. Notwithstanding Article 26(7), until 31 December 2015, qualified majority voting and simple majority voting shall be applied together for the adoption of the regulations referred to in Article 4(3). Bibliography European Central Bank, ‘Aggregate Report on the Comprehensive Assessment’ (2014); Christos Hadjiemmanuil, ‘Bank Resolution Financing in the Banking Union’, LSE Legal Studies Working Paper No. 6 (2015); Bart Joosen, ‘Legal Aspects of the ECB Asset Quality Review as part of the Comprehensive Assessment’ in: Franklin Allen, Elena Carletti and Joanna Gray (eds), Bearing the losses from bank and sovereign default in the Eurozone (FIC Press, Philadelphia 2014), Chapter 3, 13; Jürgen Schwarze, Ulrich Becker, Armin Hatje and Johann Schoo (eds), EU-Kommentar (4th edn, Nomos, Baden-Baden 2019); Dimitris Vovolinis, ‘The European Stability Mechanism Direct Recapitalisation Instrument: An element for a complete European Banking Union’, ECEFIL Working Paper Series, No. 13 (March 2013). A. Provisions that have been activated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The individual provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Art. 33(1) SSMR: publication of the SSM Framework Regulation . . . . . . . . . 2. Art. 33(2) SSMR: assumption by the ECB of its specific supervisory tasks and related implementation arrangements and measures . . . . . . . . . . . . . . . . . 3. Art. 33(5) SSMR: Authorised credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Art. 33(6) SSMR: Transitional arrangement for voting in the Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. In particular: The Comprehensive Assessment (Art. 33(4) SSMR) . . . . . . . . . . .
1 1 1 2 7 8 9
B. Provisions that have not been activated (Arts. 33(2), fourth sub-paragraph and 33(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
C. Grandfathering clauses (Arts. 149-152 of the SSM Framework Regulation) I. Actions by national competent authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Continuation of existing cooperation arrangements . . . . . . . . . . . . . . . . . . . . . . . . . III. Member States with a derogation whose currency becomes the euro . . . . . . . .
15 15 16 18
A. Provisions that have been activated I. The individual provisions 1. Art. 33(1) SSMR: publication of the SSM Framework Regulation 1
The ECB should publish the “SSM‑FR” referred to in Art. 6(7) SSMR by 4 May 2014. 1 This legal act was adopted on 16 April 2014.
2. Art. 33(2) SSMR: assumption by the ECB of its specific supervisory tasks and related implementation arrangements and measures 2
Subject to the implementation arrangements and measures (see infra, → paras. 4-6), the ECB had to assume its specific supervisory tasks under the SSMR on 4 November 2014 and has indeed done so.2 Recital (83) provides the relevant rationale: “In order to ensure that credit institutions are subject to the supervision of the highest quality, unfettered by other, non-prudential considerations, and that the negative mutually reinforcing impacts of market developments which concern credit institutions and Member States 1 2
446
Art. 33(1) SSMR. Art. 33(2)(1) SSMR.
Christos V. Gortsos
Art. 33 SSMR
Transitional provisions
are addressed in a timely and effective way, the ECB should start carrying out specific supervisory tasks as soon as possible. However, the transfer of supervisory tasks from national supervisors to the ECB requires a certain amount of preparation. Therefore, an appropriate phasing-in period should be provided for.”3 According to the Press Release of the ECB:4“The European Central Bank (ECB) today assumed responsibility for the supervision of euro area banks, following a year-long preparatory phase which included an in-depth examination of the resilience and balance sheets of the biggest banks in the euro area. The Single Supervisory Mechanism (SSM) is a new system of banking supervision, comprising the ECB and the national competent authorities of the participating countries. Its main aims are to contribute to the safety and soundness of credit institutions and the stability of the European financial system and to ensure consistent supervision. The ECB will directly supervise 120 significant banking groups, which represent 82 % (by assets) of the euro area banking sector. For all other 3,500 banks, the ECB will also set and monitor the supervisory standards and work closely with the national competent authorities in the supervision of these banks.” After 3 November 2013, the date into force of the SSMR in accordance with Art. 34 SSMR, the ECB should publish by means of Regulations and Decisions the detailed operational arrangements for the implementation of its tasks under the SSMR. 5 In this respect, Recital (84) makes the following point: “When adopting the detailed operational arrangements for the implementation of the tasks conferred on the ECB by this Regulation, the ECB should provide for transitional arrangements which ensure the completion of ongoing supervisory procedures, including any decision and/or measure adopted or investigation commenced prior to the entry into force of this Regulation.” All these legal acts were adopted as already mentioned in the analysis of previous Articles of the SSMR. For the period of 3 November 2013 to 3 November 2014, the ECB had to send (and has indeed done so) a “Quarterly Report” to the European Parliament, to the Council and to the Commission on progress in the operational implementation of the SSMR.6 At least two months before 4 November 2014, the ECB was under the obligation to address a Decision to each supervised entity in respect of which it would assume the tasks conferred on it by the SSMR confirming that it is a significant supervised entity. For entities that are members of a significant supervised group, the ECB should notify its Decision to the supervised entity at the highest level of consolidation within the participating Member States and ensure that all supervised entities within the significant supervised group are duly informed. These Decisions have, indeed, been adopted and took effect from 4 November 2014. Prior to adopting them, the ECB should provide the relevant supervised entity with an opportunity to make submissions in writing.7
3
4
5
6
3. Art. 33(5) SSMR: Authorised credit institutions Credit institutions authorised by participating Member States on 3 November 2013 7 (or, where relevant, on the dates referred to in paragraphs 2-3 of this Article) were deemed to be authorised in accordance with Art. 14 SSMR and could continue to carry out their business.8 National competent authorities (NCAs) were required to communi3 It is noted that, according to the Commission’s proposal for the SSMR, the ECB should assume “in full” its tasks on 1 January 2014 at the latest (Art. 27(2) SSMR). 4 Available at: . 5 Art. 33(2)(2) SSMR. 6 Art. 33(2)(3) SSMR. The four issues of this Report are available at: . 7 Arts. 147(1) and 147(3) SSM‑FR. 8 Art. 33(5) sent. 1 SSMR.
Christos V. Gortsos
447
Art. 33 SSMR
Transitional provisions
cate to the ECB before the date of application of the SSMR and in particular by 4 August 2014 (and have done so) the identity of those credit institutions, and a report indicating the supervisory history and the risk profile of the institutions concerned, as well as any further information requested by the ECB. The information should be submitted in the format requested by the ECB.9
4. Art. 33(6) SSMR: Transitional arrangement for voting in the Supervisory Board 8
Notwithstanding Art. 26(7) SSMR on voting in the Supervisory Board, until 31 December 2015 qualified majority voting and simple majority voting were applied together for the adoption of the Regulations referred to in Art. 4(3) SSMR.10 In this context, it is worth recalling the following: Firstly, according to Art. 26(7) SSMR, by derogation from Art. 26(6) SSMR (which requires a simple majority), Decisions on the adoption of Regulations pursuant to Art. 4(3) SSMR are taken by the Supervisory Board on the basis of a qualified majority of its members, for the members representing the participating Member State’s authorities. Each of the four representatives of the ECB appointed by the Governing Council has a vote equal to the median vote of the other members. Secondly, according to Art. 4(3) SSMR, for the purpose of carrying out the tasks conferred on it by this Regulation, and with the objective of ensuring high standards of supervision, the ECB is empowered to adopt Guidelines and recommendations and take Decisions and may also adopt Regulations only to the extent necessary to organise or specify the arrangements for the carrying out of the tasks conferred on it by that Regulation.
II. In particular: The Comprehensive Assessment (Art. 33(4) SSMR) In view of the assumption of its tasks, the ECB was given the power to ask NCAs and the persons referred to in Art. 10(1) SSMR (on request for information) to provide it, from 3 November 2013, with all relevant information necessary to carry out a “Comprehensive Assessment”, including a balance-sheet assessment, of the credit institutions of the participating Member States. Such an assessment could be carried out at least in relation to less significant credit institutions. Credit institutions and competent authorities should supply (and did so) the information requested.11 10 The ECB, in collaboration with the NCAs and supported by the private company Oliver Wyman Consultants, conducted since January 2014 the Comprehensive Assessment of the credit institutions and supervised groups to be directly supervised by it, 12 consisting of three components: a “Supervisory Risk Assessment” to review, quantitatively and qualitatively, key risks, including liquidity, leverage and funding; an “Asset Quality Review” to enhance the transparency of bank exposures by reviewing the quality of banks’ assets, including the adequacy of asset and collateral valuation and related provisions;13 and a “stress test”, in collaboration with the European Banking Authority 9
Art. 33(5) sent. 2 and 3 SSMR and Art. 148(1) sent. 2 and 3 SSM‑FR. Art. 33(6) SSMR. 11 Art. 33(4) SSMR. 12 These credit institutions were identified in the ECB Decision 2014/123/EU of 4 February 2014 (ECB/ 2014/3) (OJ L 69, 08.03.2014, pp. 107-111). 13 On the legal aspects of this review, see Joosen, in: Allen, Carletti and Gray (eds), Bearing the losses from bank and sovereign default in the Eurozone (2014), 13, at 21-24. 9
10
448
Christos V. Gortsos
Art. 33 SSMR
Transitional provisions
(EBA), to examine the resilience of banks’ balance sheet to stress scenarios. The results of this exercise were published on 26 October 2014 and are contained in the ECB’s “Aggregate Report on the Comprehensive Assessment”.14
B. Provisions that have not been activated (Arts. 33(2), fourth sub-paragraph and 33(3)) As already mentioned, for the period of 3 November 2013 to 3 November 2014, the ECB had to send a “‘Quarterly Report” to the European Parliament, to the Council and to the Commission on progress in the operational implementation of the SSMR. If, based on these reports, and following discussions thereof in the European Parliament and in the Council, it was shown that the ECB would not be ready for exercising in full its tasks on 4 November 2014, the ECB could adopt a Decision to set a later date in order to ensure continuity during the transition from national supervision to the SSM, and based on the availability of staff, the setting up of appropriate reporting procedures and arrangements for cooperation with NCAs pursuant to Art. 6 SSMR. 15 This provision has not been activated. Without prejudice to the exercise of the investigatory powers conferred on it by Arts. 10-13 SSMR, the ECB could have started, from 3 November 2013, carrying out the specific tasks conferred on it, other than adopting supervisory Decisions, in respect of any credit institution, financial holding company or mixed financial holding company, following a Decision addressed to the entities and the NCAs concerned.16 No use has been made of this option. In this respect, it is noted that, if the ECB would have started carrying out the tasks conferred on it before 4 November 2014, it should have addressed a Decision to the entity concerned and to the relevant NCA, which, unless otherwise provided for therein, would have taken effect on the notification. The relevant NCA should have been informed in advance of the intention to issue such a Decision as soon as possible.17 In addition, the ECB could have requested NCAs to communicate to it the identity of the relevant credit institutions, as well as a report in a format specified by it within a reasonable time limit, which would have been stated in the request.18 In addition, if the European Stability Mechanism (ESM) would have unanimously requested the ECB to take over direct supervision of a credit institution, financial holding company or mixed financial holding company as a precondition for its direct recapitalisation, the ECB could immediately start carrying out its tasks under the SSMR in respect of that supervised entity, following a Decision addressed to it and the NCAs. 19 No use has been made of this option either, since the ESM framework for the “Direct Recapitalisation Instrument” (the “DRI”) was not in place yet. This instrument entered into operation on 8 December 2014, after the requisite national procedures were completed by the euro area Member States, by means of a unanimous resolution of the ESM Board of Governors.20 On the same day, the ESM Board of Directors adopted a detailed Guideline on the modalities, including, inter alia, the eligibility criteria for the See on this European Central Bank, Aggregate Report on the Comprehensive Assessment (2014). Art. 33(2)(4) SSMR. 16 Art. 33(3)(1) SSMR. 17 Art. 147(2) SSM‑FR. 18 Art. 148(2) SSM‑FR. 19 Art. 33(3)(2) SSMR. 20 Available at: . 14
15
Christos V. Gortsos
449
11
12
13
14
Art. 33 SSMR
Transitional provisions
requesting ESM Member and the institution concerned and the allocation of specific tasks to the Managing Director of the ESM, the Commission, the ECB and, wherever appropriate, the International Monetary Fund, for providing financial assistance in the form of DRI.21 It is noted, however, that the DRI has never been activated.
C. Grandfathering clauses (Arts. 149-152 of the SSM Framework Regulation) I. Actions by national competent authorities 15
Unless the ECB would have decided otherwise, if an NCA had initiated supervisory procedures for which the ECB became competent under the SSMR before 4 November 2014, any “pending procedures” were governed by Art. 48 of the SSM‑FR (in this case, also being applicable, by derogation from that Art. of the SSM‑FR, the “common procedures” in accordance with Arts. 73-88 thereof).22 In addition, supervisory Decisions taken by NCAs before 4 November 2014 remained unaffected, without prejudice to the exercise by the ECB its powers under the SSMR.23
II. Continuation of existing cooperation arrangements All existing cooperation arrangements with other authorities entered into by an NCA before 4 November 2014 and covering at least in part tasks transferred to the ECB by the SSMR continued to apply. The ECB could decide either to participate in such existing cooperation arrangements in accordance with the procedure applicable to them, or to establish new ones with third parties for the tasks conferred on it by the SSMR. 17 NCAs were allowed to continue to apply existing cooperation arrangements only to the extent they were not replaced by ECB ones. If considered necessary for the execution of existing cooperation arrangements, they were required to assist the ECB, in particular by exercising its rights and performing its responsibilities under the arrangements, in coordination with the ECB.24 16
III. Member States with a derogation whose currency becomes the euro 18
If a derogation pursuant to Art. 139 TFEU is abrogated for a Member State in accordance with Art. 140(2) TFEU,25 the above-mentioned Arts. 148-150 of the SSM‑FR apply
21 Available at: . On this new ESM instrument, see details in Hadjiemmanuil, Bank Resolution Financing in the Banking Union, LSE Legal Studies Working Paper No. 6 (2015), at pp. 29-34 and Vovolinis, The European Stability Mechanism Direct Recapitalisation Instrument: An element for a complete European Banking Union, ECEFIL Working Paper Series, No. 13 (March 2013). 22 Art. 149 SSM‑FR. 23 Art. 150 SSM‑FR. 24 Art. 152 SSM‑FR. 25 On Art. 140(2) TFEU (former Art. 122(2) sent. 2 TEC), see indicatively Potacs, in: Schwarze et al. (eds), EU-Kommentar (4th edn, 2019), TFEU Art. 140 pp. 2098-2101.
450
Christos V. Gortsos
Art. 34 SSMR
Entry into force
accordingly in respect of supervisory procedures or Decisions initiated or taken by the NCA of such a Member State.26
Art. 34 SSMR Entry into force This Regulation shall enter into force on the fifth day following that of its publication in the Official Journal of the European Union. This Regulation shall be binding in its entirety and directly applicable in all Member States. The SSMR was adopted by the Council, on the basis of Art. 127(6) TFEU, on 15 Octo- 1 ber 2013. It was published in the Official Journal on 29 October 20131 and entered into force the fifth day following that of its publication, i.e., on 3 November 2013.2 It is binding in its entirety and is directly applicable in all the Member States, not only in participating ones.3 On the other hand, the SSM‑FR (ECB/2014/17) was adopted by the ECB, on the basis 2 of Art. 6(7) SSMR, on 16 April 2014, was published in the Official Journal almost one month later (on 14 May)4 and entered into force the following day, i.e., on 15 May 2014.5 It is binding in its entirety and is directly applicable in all Member States as well, in accordance with the TEU and the TFEU.6
Art. 151 SSM‑FR. OJ L287, 29.10.2013, pp. 63-89. 2 Art. 34(1) SSMR. 3 Art. 34(2) SSMR. 4 OJ L141, 14.5.2014, pp. 1-50. 5 Art. 153(1) SSM‑FR. 6 Art. 153(2) SSM‑FR. 26
1
Christos V. Gortsos
451
Single Resolution Mechanism Regulation Art. 1 SRMR Subject matter This Regulation establishes uniform rules and a uniform procedure for the resolution of the entities referred to in Article 2 that are established in the participating Member States referred to in Article 4. Those uniform rules and that uniform procedure shall be applied by the Single Resolution Board established in accordance with Article 42 (the ‘Board’), together with the Council and the Commission and the national resolution authorities within the framework of the single resolution mechanism (‘SRM’) established by this Regulation. The SRM shall be supported by a single resolution fund (‘the Fund’). The use of the Fund shall be contingent upon the entry into force of an agreement among the participating Member States (‘the Agreement’) on transferring the funds raised at national level towards the Fund as well as on a progressive merger of the different funds raised at national level to be allocated to national compartments of the Fund. Bibliography Kern Alexander, ‘European Banking Union: A Legal and Institutional Analysis of the Single Supervisory Mechanism and the Single Resolution Mechanism’, European Law Review 40 (2015), 154; id., ‘European Banking Union: Effectiveness, Impact, and Future Challenges’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), p. 27; Jens-Hinrich Binder, ‘The European Banking Union – Rationale and Key Policy Issues’, in: Jens-Hinrich Binder and Christos V. Gortsos (eds), The European Banking Union – A Compendium (C. H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden 2015), 1; Giuseppe Boccuzzi, The European Banking Union – Supervision and Resolution (Palgrave Macmillan, Basingstoke 2016); Claudia Buch, Tobias Körner and Benjamin Weigert, ‘Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute’, German Council of Economic Experts Working Paper 2/2013; Commission, Communication to the European Parliament and the Council, ‘A Roadmap towards a Banking Union’, 12 September 2012, COM(2012) 510 final; Commission, Communication ‘A blueprint for a deep and genuine economic and monetary union – Launching a European debate‘, 30 November 2012, COM(2012) 777 final/2; Federico Fabbrini, ‘On Banks, Courts and International Law – The Intergovernmental Agreement on the Single Resolution Fund in Context’, Maastricht J. of Eur. & Comp. L. 21 (2014), 444; Eilís Ferran, ‘European Banking Union: Imperfect, But It Can Work’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 56; Wim Fonteyne et al., ‘Crisis Management and Resolution for a European Banking System’, IMF Working Paper WP/10/70, March 2010; Christos Hadjiemmanuil, ‘Bank Resolution Financing in the Banking Union’ in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, Oxford 2016), Ch. 9; Christos Hadjiemmanuil, ‘Financial Stability and Integration in the Banking Union’, in: Franklin Allen, Elena Carletti and Joanna Gray (eds), The New Financial Architecture in the Eurozone (European University Institute, Florence 2015), 55; IMF, Country Report no. 12/182, June 2012, ‘Euro Area Politics: 2012 Article IV Consultation – Selected Issues Paper’; David Howarth and Lucia Quaglia, ‘The Steep Road to European Banking Union: Constructing the Single Resolution Mechanism’, JCMS 52 (2015), 125; Hannes Huhtaniemi, Mario Nava and Emiliano Tornese, ‘The Establishment of a EU-Wide Framework for the Resolution of Banks and Financial Institutions’ in: Luis Hinojosa-Martínez and Jose Beneyto (eds), European Banking Union (Wolters Kluwer, Alphen aan den Rijn 2015), 99; President of the European Council, Herman Van Rompuy, ‘Towards a genuine economic and monetary union‘, Report, EUCO 120/12, 26 June 2012; Jean Pisani-Ferry et al., ‘What Kind of European Banking Union?’, 25 June 2012 ; Dirk Schoenmaker, ‘Banking Supervision and Resolution: The European Dimension’, Law & Fin. Markets Review 6 (2012), 52; Diego Valiante, ‘Last Call for a Banking Union in the Union Area’, Applied Economics Quarterly 58 (2012), 153; George S. Zavvos and Stella Kaltsouni, ‘The Single Resolution Mechanism in the European Banking Union: Legal Foundation, Governance Structure and Financing’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar Publishing, Cheltenham, Northampton 2015).
Jens-Hinrich Binder
453
Art. 1 SRMR
Subject matter
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Background, legal base and legislative process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legal base and legislative procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Art. 114 TFEU as legal base and its implications for the institutional design of the SRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The legislative procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 4 9 9 14
C. The core elements of the SRM as defined in Art. 1 SRMR . . . . . . . . . . . . . . . . . . . . I. ‘Uniform rules and a uniform procedure’: SRMR and BRRD . . . . . . . . . . . . . . . . . II. Inter-agency cooperation (overview) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Institutional provisions and general powers (overview) . . . . . . . . . . . . . . . . . . . . . .
15 15 18 19
A. Introduction Art. 1 SRMR, in very broad terms and by reference to more specific provisions of the Regulation, defines the subject matter – ‘uniform rules and a uniform procedure for the resolution’ of the relevant credit institutions – and, at the same time, the key institutional elements of the SRM. The ‘uniform rules’ referred to in Art. 1(1) and 1(2) SRMR are, essentially, those first introduced by the BRRD in 2014, which were adapted for implementation in a ‘uniform procedure’ with regard to significant banks within the Eurozone by the SRMR (para. 16). In order to ensure consistent application within the Banking Union, these rules have been complemented with a centralised decision making process – the ‘uniform procedure’ referred to, again, in Art. 1(1) and 1(2) SRMR. Jointly with Arts. 2, 4 and 42 SRMR, Art. 1 SRMR – in a preliminary way – thus delineates both the scope ratione materiae and the scope ratione personae of the Regulation (see, respectively, commentary to Art. 2 and 4 SRMR). With the allocation of responsibilities to the SRB on the one hand and the Council and resolution authorities of the participating Member States on the other hand, Art. 1(2) SRMR then indicates the core principles relating to the distribution of powers within the SRM, details of which are laid down in Art. 7, which is not referenced in Art. 1(2) SRMR. Finally, Art. 1(3) SRMR complements these provisions with a fundamental condition for the use of the SRF, namely the entry into force of the Inter-governmental Agreement relating to the funding of the SRF. 2 Art. 1(1) SRMR is identical to the initial Commission Proposal.1 Art. 1(2) SRMR, by contrast, differs from that proposal in that the original wording placed greater emphasis on the Commission’s role,2 whereas the final wording clearly stresses the dominant role of the SRB. Art. 1(3) SRMR was not included in the initial Commission Proposal and was adopted only towards the end of the Trilogue proceedings, when agreement on the nature and funding of the SRF had been reached. Implicitly, Art. 1 SRMR, along with Recitals 1–14, thus reflects the complicated negotiating process, during which parts of the Regulation were substantially redrafted. 3 In contrast to Art. 1 SSMR, which expressly refers to the need to protect ‘the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State’ (see supra, → SSMR Art. 1 paras. 19–20), Art. 1 SRMR does not define the policy considerations or technical objectives that have inspired the 1
1 Proposal for a Regulation of the European Parliament and of the Council 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 1093/32010 of the European Parliament and of the Council, 10 July 2013, COM(2013) 520 final. 2 Pursuant to the wording of Art. 1(2) SRMR in the COM Proposal, it was conceived that the uniform rules and procedures “shall be applied by the Commission together with a Board and the resolution authorities of the participating Member States”.
454
Jens-Hinrich Binder
Art. 1 SRMR
Subject matter
centralisation of decision-making powers for the resolution of credit institutions and other relevant entities under the auspices of the SRM. While relevant aspects are discussed in the Preamble, especially in Recitals 1–3, Art. 1 SRMR thus fails to provide a programmatic introduction to the underlying policies, and does not expressly refer to those provisions that do define general principles3 either. One of the reasons for that may well be the character of the SRM as a complementary element to the SSM, yet another the existence of the detailed catalogues of objectives and general principles in Arts. 14 and 15 SRMR, where the relevant policy objectives and the implications for resolution actions (as well as for preventive measures) are stipulated in a very comprehensive manner. For the avoidance of repetitions, objectives and general principles will be discussed in the commentaries to these two provisions, respectively.
B. Background, legal base and legislative process I. General background The SRM was part of the original concept for the creation of the Banking Union, 4 as conceived in the Commission’s ‘Roadmap towards a Banking Union’,4 the Commission’s ‘Blueprint for a deep and genuine economic and monetary union’,5 and the Four Presidents’ Report ‘Towards a genuine economic and monetary union’,6 all of which stressed the need to ensure timely and effective responses to cases of bank failures within the Banking Union and the need to allocate resolution powers to a centralised, supra-national body with sufficient financial resources to that end. Similar proposals had also been presented by other policy makers7 and in the academic literature8 prior to the publication of the official proposals at the EU level. In very broad terms, the underlying rationale is in parallel with that of the SSM, 5 namely to remove obstacles to effective regulation (and, for that matter, resolution) rooting in either technical shortcomings in the institutional design of national authorities, or indeed in the incentives for officeholders within national authorities. In this respect, the SRM, with its focus on centralised decision-making by a supranational agency, can be interpreted also as an attempt to address problems and shortcomings in the cross-border coordination of bank resolution, by cutting back on the discretion of national authorities in the process and reducing the leeway for supervisory forbearance. 9 In fact, the lack of predictability of the outcomes of resolution action administered solely under the auspices of national authorities, along with its implications for cross-border competition among market participants and, ultimately, funding and borrowing costs, In particular, Art. 6 SRMR and, in particular, Arts. 14 and 15 SRMR. Communication from the Commission to the European Parliament and the Council, 12 September 2012, COM(2012) 510 final, at pp. 9–10. 5 Communication from the Commission, 30 November 2012, COM(2012) 777 final/2, at pp. 12, 18–19. 6 Report by President of the European Council, Herman Van Rompuy, EUCO 120/12, 26 June 2012, at pp. 6–7. 7 See, in particular, Fonteyne et al., IMF Working Paper WP/10/70, at p. 58 (proposing a “European Resolution Authority” as part of a broader concept for the reform of the substantive and institutional frameworks for the regulation of European banking markets); IMF, Country Report no. 12/182, June 2012, para. 27. 8 E.g., Schoenmaker, Law & Fin. Markets Rev. 6 (2012), 52, at p. 56; Pisani-Ferry et al., ‘What Kind of European Banking Union?’, 25 June 2012, at p. 12; Valiante, Applied Economics Quarterly 58 (2012), 153, at pp. 161–164. 9 E.g., Buch, Körner and Weigert, ‘Towards Deeper Financial Integration in Europe’, at pp. 25–26. See, for further discussion, Binder, ECFR 2016, 575, at pp. 578 and 590–592. 3 4
Jens-Hinrich Binder
455
Art. 1 SRMR
Subject matter
has been identified as one of the key policy concerns to be addressed by the SRM.10 This is reflected in its core remit, namely to ensure the uniform application of the procedural and substantive framework harmonised by the BRRD in 2014 in order to prevent diverging and potentially inconsistent resolution actions by the authorities in Participating Member States with potentially detrimental effects for the stability of financial markets within the Eurozone and beyond.11 In this respect, the SRM can be described as reinforcing the SSM, and vice versa.12 6 In institutional terms, the creation of the SRB as a new European agency is the result of a particular controversial debate, in which, specifically, the allocation of resolution powers to the ECB was discussed as a potential alternative13 (but was rejected, not least, on the grounds that the available legal base – Art. 127(6) TFEU or Art. 352 TFEU – was considered to be insufficient in this respect, see infra, → para. 10). 7 At the same time, in rather a strong contrast to the initial policy debate, the envisaged role of mutualised arrangements for the funding of bank resolution actions within the Eurozone backed by national budgets (known as the ‘common fiscal backstop’) has taken some time to mature. At a rather early stage, the Commission started an initiative to foster that debate by proposing a future European Monetary Fund – the successor to the ESF – as a backstop for the SRF.14 While it was not mirrored in the wording of Art. 1 SRMR in the Commission Proposal, the assumption that such burden-sharing arrangements, complemented with direct recapitalisation of banks under the auspices of the ESM, would facilitate the swift clean-up of national banking systems that had suffered from the economic downturn during the Eurozone crisis clearly played a formative role as one of the drivers towards the creation of the Banking Union in the first place.15 Against this backdrop, already the creation of the SRF, complemented by the intergovernmental arrangement envisaged by Art. 1(3) SRMR, represented an initial compromise that was reached against a rather strong resistance against the mutualisation of banking risks at the expense of the economically stronger participating Member States (see further, → Introduction to Arts. 67–74).16 Only in 2021, participating Member States finally agreed on the creation of a ‘common backstop’ by designating a formal role to the ESM as an ultimate ‘lender of last resort’ in this context (see → Introduction to Arts. 67– 74 paras. 11–15). 8 All in all, with the focus on the centralisation of decision-making powers and financial arrangements for the resolution of banks, the role of the SRMR in the restructuring of those European banking systems that suffered particularly during, and as a result of, Recitals 2–4 and 9 SRMR. Cf. Recitals 10–12 and 15 SRMR. 12 Ferran, in: Busch and Ferrarini (eds.), European Banking Union (2015), 56, at pp. 71–72, para. 3.28. 13 E.g., Fonteyne et al., IMF Working Paper WP/10/70, at p. 59. 14 See Communication from the Commission to the European Parliament, the European Council, the Council and the European Central Bank, ‘Further steps towards completing Europe’s Economic and Monetary Union: A roadmap’, 6 December 2017, COM(2017) 821 final, at pp. 5–6 and 11; Commission, Proposal for a Council Regulation on the establishment of a European Monetary Fund, 6 December 2017, COM(2017) 827 final. 15 Cf., for further discussion, Hadjiemmanuil, in: Binder and Singh (eds), Bank Resolution (2016), paras. 9.26–9.33; id., in: Allen, Carletti and Gray (eds), The New Financial Architecture in the Eurozone (2015), 55, at p. 73. And cf., for illustration, Fonteyne et al., IMF Working Paper WP/10/70, at p. 58 (envisaging that the proposed ‘European Resolution Authority’ would ‘need access to financing’ and should, as a Lender of Last Resort, ‘be positioned between supervisors and Ministries of Finance’); IMF, Country Report no. 12/182, June 2012, paras. 5, 18–20 and 27–28. 16 Hadjiemmanuil, in: Binder and Singh (eds), Bank Resolution (2016), paras. 9.30–9.31. And see, for a detailed analysis of the policy debates during the legislative process, Howarth and Quaglia, JCMS 52 (2015), 125. 10
11
456
Jens-Hinrich Binder
Art. 1 SRMR
Subject matter
the sovereign crises in Southern European Member States has been rather weak so far. The underlying tensions among Member States continue to be of relevance to date. Similar political reservations against cross-border burden-sharing on the part of Northern European Member States have shaped the ongoing debate on the Commission’s proposal for the creation of a European Deposit Insurance Scheme as the third pillar of the Banking Union (see infra, → Art. 69 para. 3).
II. Legal base and legislative procedure 1. Art. 114 TFEU as legal base and its implications for the institutional design of the SRM Unlike the SSMR (see supra, → SSMR Art. 1 paras. 11–17), the SRMR is based on 9 Art. 114 TFEU (allowing ‘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’), i.e., the core basis for the harmonisation of laws in the internal market. In contrast to the BRRD, the scope of the Regulation obviously is not confined to the harmonisation of national regimes for the resolution of credit institutions as such, although this aspect – and the need to go beyond mere harmonisation of procedural frameworks within the Banking Union – was emphasised in the Commission Proposal so as to support the choice of Art. 114 TFEU as the legal base.17 In fact, it is the creation of the new institutional framework for the centralisation and coordination of resolution actions within the Eurozone – and, in particular, the creation of the SRB as a new European agency with that remit – what distinguishes the SRMR from the BRRD. Although this aspect, in the Commission Proposal, was characterised merely as a further step towards enhanced harmonisation, 18 the choice of Art. 114 TFEU proved controversial and played a formative role with regard to the institutional structure of the SRM in a number of respects. First, it shaped the design of the SRM as a separate framework coordinated with, but 10 independent from, the SSM. As Art. 127(6) TFEU (the legal base for the conferral of ‘specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions’) was ruled out as a potential alternative, it was clear that resolution powers could not be allocated to the ECB. This might have increased substantially the ECB’s capacity to protect systemic stability within the Eurozone, but was highly controversial amid concerns given the ECB’s independence. Irrespective of these political concerns, the classification of resolution powers as ‘specific tasks (…) relating to the prudential supervision of credit institutions’ within the meaning of Art. 127(6) TFEU would have stretched the interpretation of that provision to the outer limits, if not beyond, and clearly would have expanded the scope originally envisaged. For similar policy considerations, the allocation of resolution powers to the ECB on the basis of Art. 352 TFEU (measures of the Council, requiring unanimous consent, for the attainment of the general objectives of the Union) was rejected. 19
Commission Proposal, supra, fn. , pp. 6–7. Ibid.: “To ensure that all participating Member States have full confidence in the quality and impartiality of the bank resolution process notably as regards local economic implications, resolution decisions will be prepared and monitored centrally by a Single Resolution Board to ensure a coherent and uniform approach (…)”. 19 Cf. Boccuzzi, Banking Union (2016), at p. 118; Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook (2015), 117, at p. 122. 17 18
Jens-Hinrich Binder
457
Art. 1 SRMR
Subject matter
Secondly, the choice of Art. 114 TFEU gave rise to substantial controversy over whether that provision was a sufficient basis for the creation of the SRB as a European agency (Art. 42(1) SRMR), or whether Art. 352 TFEU would have been more appropriate in this respect.20 Ultimately, the choice of Art. 114 TFEU appears to have been vindicated by the CJEU decision in case C-270/12 (the Short Selling case), which held that powers for the implementation of harmonised regulation could be allocated to Union agencies in circumstances where the relevant harmonising measures require a high degree of professional and technical expertise and the ability to accomplish swift and appropriate responses to urgent cases.21 This reasoning is frequently cited as authority also in the present context.22 As emphasised in the Commission Proposal,23 it is important to note that the application of the Regulation as such is not restricted to the Eurozone, although the SRB, pursuant to Art. 2 SRMR, is responsible only for firms (and groups of firms) licensed in participating Member States. Given, in particular, (a) the SRB’s role in the preparation of group resolution plans (Art. 7(2) and (3) and Arts. 8–10 SRMR) and (b) the coordination obligations under Art. 32 SRMR, the Regulation clearly has an impact on the resolution of firms in non-participating Member States. This supports the case that the Regulation can indeed be interpreted as an instrument of relevance for the EU as a whole (whereas it would have been questionable if Art. 114 TFEU could be invoked as a basis for the harmonisation of laws only within a restricted group of Member States).24 12 Thirdly (and related to the foregoing), the choice of Art. 114 TFEU, also in view of the restrictions under the doctrine developed in the landmark Meroni case (which prohibits, in particular, the delegation of policy discretion to agencies),25 has played a formative role in the allocation of the decision-making powers and the design of the decision-making processes between the SRB, the Commission, and the Council. As specified by Art. 18(7) SRMR, the SRB, when initiating resolution action, is not entirely free but operates within a rather complex procedure involving the control of the Commission and the Council, both of which retain a right to raise objections (see infra, → Art. 18 paras. 99-115). This procedure clearly addresses concerns with regard to the limits under the Meroni doctrine as well as political reservations about an all too powerful SRB (or, for that matter, an unrestricted discretion on the part of the Commission). 26 On balance, the compromise as to the checks and balances between the relevant actors – the SRB, the Commission and the Council – appears to satisfy the requirements for the creation of agencies under European law as defined in Meroni, although the issue, given the differ11
20 See, for discussion, also Council, Opinion of the Legal Service, 2013/0253 (COD), 13524/13, LIMITE, JUR 458, ECOFIN 787. 21 Case C-270/12, UK v European Parliament and Council, ECLI:EU:C:2014:18, paras. 103, 105, 112 and 114–115. 22 See, for a detailed analysis, Ferran, in: Busch and Ferrarini (eds), European Banking Union (2015), 56, at pp. 77–83, paras. 3.34–3.45; Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook (2018), 117, at pp. 122–123; see also Boccuzzi, Banking Union (2016), at pp. 118–119. 23 Commission Proposal, supra, fn. , at p. 6. 24 See, for further discussion, Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook (2018), 117, at pp. 123–124; and see, to the same effect, Huhtaniemi, Nava and Tornese, in: HinojosaMartínez and Beneyto (eds), European Banking Union (2015), 99, at p. 109. 25 Cases C-9/56 and C-10/56, Meroni v High Authority, ECLI:EU:C:1958:7 and ECLI:EU:C:1958:8. 26 As to the latter aspect, see Alexander, E.L. Rev. 40 (2015), 154, at pp. 175, 177–178; id., in: Busch and Ferrarini (eds), European Banking Union (2nd edn, 2020), 27, at 55–57, paras. 2.57–2.59; cf. also Howarth and Quaglia, JCMS 52 (2015), 125, at p. 134 (analysing the legislative process in this regard).
458
Jens-Hinrich Binder
Art. 1 SRMR
Subject matter
ences between the SRM and the role of ESMA as addressed in the Short Selling case, can ultimately be settled only in future CJEU decisions.27 Fourthly, although considered as sufficient also in this regard in the Commission 13 Proposal,28 Art. 114 TFEU was ultimately only in part relied on as base for the financial arrangements for the funding of resolution action within the SRM. The decision to split the relevant framework into the institutional provisions laid down in Arts. 67–77 SRMR on the one hand and the funding arrangements in the SRF-IGA on the other hand, while controversial, reflected a pragmatic compromise in the light of concerns on the part of some Member States as to the viability of Art. 114 TFEU as base for the mutualisation of financial resources within the SRF.29
2. The legislative procedure The Commission Proposal for the SRMR was formally released on 10 July 2013. The 14 Economic and Social Committee and the ECB released their opinions on 17 October 201330 and 6 November 2013,31 respectively. Addressing the concerns with regard to the legal base for the constitution and funding of the SRF, the ECOFIN Council then adopted its own proposals for the Terms of Reference for the development of the IGA. 32 Political agreement between the European Parliament and the Council was reached on 20 March 2014.33
C. The core elements of the SRM as defined in Art. 1 SRMR I. ‘Uniform rules and a uniform procedure’: SRMR and BRRD With the ‘uniform rules and a uniform procedure’ referred to in Art. 1(1) SRMR, 15 core elements of the SRM are adaptations of the substantive and procedural framework for the resolution of credit institutions, groups of financial companies and investment firms laid down in the BRRD, the official Proposal for which had been released on 6 June 2012 and was adopted on 15 May 2014. The parallels between the two legal instru27 See, reaching the same conclusion, also Ferran, in: Busch and Ferrarini (eds), European Banking Union (2015), 56, at pp. 82–83, para. 3.45. 28 Commission Proposal, supra fn. , at p. 6. 29 See, for further discussion, Ferran, in: Busch and Ferrarini (eds), European Banking Union (2015), 56, at pp. 83–85, paras. 3.47–3.48; Huhtaniemi, Nava and Tornese, in: Hinojosa-Martínez and Beneyto (eds), European Banking Union (2015), 99, at pp. 109–110; Alexander, E.L. Rev. 40 (2015), 154, at pp. 176–177. And see, for further critical analysis of the legal foundations of the SRF, Fabbrini, Maastricht J. Eur. & Comp. L. 21 (2014), 444. 30 Opinion of the European Economic and Social Committee on the ‘Proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council’ COM(2013) 520 final, OJ C 67/58 of 6 March 2014. 31 Opinion of the European Central Bank of 6 November 2013 on a proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council (CON/2013/76), OJ C 109/2 of 11 April 2014. 32 Council of the European Union, ‘Single Resolution Mechanism – Texts agreed at ECOFIN on 18 December 2013’, Brussels, 20 December 2013 (18137/13); see, further, Huhtaniemi, Nava and Tornese, in: Hinojosa-Martínez and Beneyto (eds), European Banking Union (2015), 99, at p. 111. 33 See ibid. for a more detailed timeline. For a detailed account of the negotiations and the relevant controversies, see, again, Howarth and Quaglia, JCMS 52 (2015), 125, at pp. 132–137.
Jens-Hinrich Binder
459
Art. 1 SRMR
Subject matter
ments are also clearly visible in the structure of the SRMR. The relevant provisions are to be found in Part II (Arts. 8–41 SRMR, ‘Specific Provisions’), which contains only one Title (‘Functions within the SRM and Procedural Rules’), subdivided into 6 Chapters: – Ch. 1 – ‘Resolution Planning’ (Arts. 8–12 SRMR); – Ch. 2 – ‘Early Intervention’ (Art. 13 SRMR); – Ch. 3 – ‘Resolution’ (Arts. 14–29 SRMR); – Ch. 4 – ‘Cooperation’ (Arts. 30–33 SRMR); – Ch. 5 – ‘Investigatory Powers’ (Arts. 34–37 SRMR), and – Ch. 6 – ‘Penalties’ (Arts. 38–41 SRMR). 16 In terms of ‘uniform rules’, the preventive provisions on resolution planning (Arts. 8, 9 and 11 SRMR, Arts. 10–14 BRRD), the assessment of resolvability and corresponding powers of the resolution authority (Art. 10 SRMR, Arts. 15–18 BRRD), the imposition of minimum requirements for own funds and eligible liabilities (Art. 12 SRMR, Art. 45 BRRD) in the SRMR essentially replicate the corresponding provisions in the BRRD. The same applies with regard to the framework for early intervention (Art. 13 SRMR, Arts. 27–30 BRRD) and the resolution of credit institutions (Ch. 3, Arts. 14–29 SRMR, Title IV, Arts. 31–86 BRRD). In this sense, the SRM can be characterised as a uniform framework for the implementation of both preventive measures and resolution actions as prescribed by the BRRD, with centralised decision-making replacing, to some extent, the dominant role of national resolution authorities and reducing the scope for differences in the national interpretation of the Directive. The decision to replicate provisions broadly identical with the BRRD for application in the SRM, rather than merely to centralise decision-making procedures and implementation powers, reflects the rationale to further reduce the scope for national discretion in the interpretation of the BRRD (see, further, infra, → Art. 5 paras. 4, 6 and 7 and → Art. 7 paras. 33–35). 17 It has to be noted, however, that the SRMR is not confined to a (repetitious) adaptation of the BRRD. By comparison, the introduction of a ‘uniform [resolution] procedure’, in the words of Art. 1(1) SRMR, is arguably the most important element of the Regulation, in that it substitutes the principle of decentralised powers and responsibilities for bank resolution (which is in line with the concept of home country supervision and continues to apply for banks not covered by Art. 2 SRMR) with a more centralised approach, where core decisions are taken not by national authorities but at a European level. In this respect, the most relevant provisions are to be found in (a) Art. 18 SRMR, which defines the procedural framework for the initiation and the design of resolution actions by the SRB and the role of the Commission and the Council in this regard, (b) Arts. 23 and 29 SRMR and (c) Art. 28 SRMR, which prescribe the framework for cooperation between the SRB and National Resolution Authorities and the monitoring of the implementation process by the SRB, respectively. The core element is the preparation of a ‘Resolution Scheme’ (Art. 18(6) SRMR in conjunction with Art. 23 SRMR), which marks the formal entry into resolution and defines the proposed action, i.e., the use of the resolution tools as stipulated in Arts. 24–27 SRMR, and the use of the SRF. Pursuant to Art. 29(1) SRMR, the responsibility for the implementation of the Resolution Scheme is allocated to National Resolution Authorities. While these operate, in principle, under the national laws transposing the BRRD, national legislation has been superseded, to a substantial extent, by the direct application of the SRMR (infra, → Art. 5 paras. 33–37 and Art. 29 paras. 4–14). As a result, resolution actions taken within the SRM framework will be the result of fully centralised decision-making. Their implementation, however, will require not just a procedural coordination between the SRB and national authorities, but, as a rule, also reflect a complex mix of substantive SRMR provisions (as applied by the SRB and national authorities), and national law (as applied 460
Jens-Hinrich Binder
Art. 2 SRMR
Scope
by national authorities in implementing the SRB’s decisions, subject to monitoring by the SRB pursuant to Art. 28 SRMR). In case national authorities fail to comply with the SRB’s decision, the latter retains direct enforcement rights vis-à-vis the institution in resolution pursuant to Art. 29(2) SRMR (infra, → Art. 29 paras. 34–39).
II. Inter-agency cooperation (overview) In addition to the complex framework for the coordination of resolution actions 18 within the SRM, the Regulation also stipulates procedural requirements on the cooperation between the SRB, the Commission, the Council, the ECB and other authorities (Art. 30 SRMR), between the SRB and national authorities (Art. 31 SRMR) and authorities in non-participating Member States and third countries (Art. 32 SRMR), as well as with regard to the recognition and enforcement of third-country resolution proceedings (Art. 33 SRMR).
III. Institutional provisions and general powers (overview) The core institutional provisions with regard to the SRB are to be found in Part III 19 of the SRMR, whose Title I (Arts. 42–48 SRMR) defines the institutional foundations of the SRB. Titles II and III (Arts. 49–52 and 53–55 SRMR, respectively) then stipulate the institutional and procedural framework for Plenary Sessions and Executive Sessions of the SRB, whereas Title IV (Art. 56 SRMR) lays down requirements for the role and appointment of the Chair. Title V stipulates the financial foundations of the SRB (Chapter 1, Arts. 57–66 SRMR) and the institutional and procedural arrangements relating to the SRF (Chapter 2, Arts. 67–79 SRMR). The Board’s investigatory powers and the sanctions regime are set out not as part of the institutional provisions, but separately in Chapters 5 and 6 of Title II, respectively (see supra, → para. 15). Additional provisions of relevance with regard to the institutional arrangements are to be found in Title VI of Part III (Arts. 80–92 SRMR), which includes, inter alia, details on the role and function of the Appeal Panel (Art. 85 SRMR).
Art. 2 SRMR Scope This Regulation shall apply to the following entities: (a) Credit institutions established in a participating Member State; (b) Parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Article 4(1)(g) of Regulation (EU) No. 1024/2013; (c) Investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Article 4(1)(g) of Regulation (EU) No. 1024/2013. Bibliography Danny Busch, ‘Governance of the Single Resolution Mechanism’, in: Busch and Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2015), 343; George S. Zavvos and Stella Kaltsouni, ‘The Single Resolution Mechanism in the European Banking Union: Legal Founda-
Jens-Hinrich Binder
461
Art. 2 SRMR
Scope
tion, Governance Structure and Financing’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar Publishing, Cheltenham, Northampton 2015), 117. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Covered entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Credit institutions established in Participating Member States (Art. 2(a) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Parent undertakings, including financial holding and mixed financial holding companies subject to consolidated supervision by the ECB (Art. 2(b) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Investment firms and financial institutions subject to consolidated supervision by the ECB (Art. 2(c) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 2 3 4
A. Introduction 1
Art. 2 SRMR defines the scope ratione personae of the Regulation in full consistency with the scope of the SSMR (on which, see supra, → SSMR Art. 4 paras. 9-13), reflecting the functional interdependence between the SSM and the SRM in general and the need to reconcile resolution actions with the centralisation of decision-making powers for the prudential supervision of banks within the Eurozone in particular.1 The provision, which is almost identical to the initial Commission Proposal,2 lists the types of entities whose resolution is governed by the Regulation.
B. Covered entities I. Credit institutions established in Participating Member States (Art. 2(a) SRMR) 2
The Regulation applies to all credit institutions established in a Participating Member State (as defined in Art. 4 SRMR) and thus covers both institutions under direct supervision by the ECB and institutions under the supervision of National Competent Authorities pursuant to Arts. 4 and 6 SSMR (see supra, → SSMR Art. 4 paras. 9-13, SSMR Art. 6 paras. 25-55). Just as with the SSMR and the allocation of powers to the ECB, the scope of the Regulation as such is not identical with the responsibility of the SRB, however. In parallel with the delineation of powers within the SSM (as defined by Art. 6 SSMR), Art. 7(2) SRMR effectively allocates full responsibility for the drawing up of resolution plans and all resolution actions with regard to entities subject to direct supervision to the SRB, whereas National Resolution Authorities retain responsibility for other entities pursuant to Art. 7(3) SRMR.
1 Recital 15 SRMR; see also Busch, in: Busch and Ferrarini, European Banking Union (2015), 281, at p. 347, para. 9.08; Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook (2018), 117, at pp. 118-120. 2 Proposal for a Regulation of the European Parliament and of the Council 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 1093/32010 of the European Parliament and of the Council, 10 July 2017, COM(2013) 520 final.
462
Jens-Hinrich Binder
Art. 3 SRMR
Definitions
II. Parent undertakings, including financial holding and mixed financial holding companies subject to consolidated supervision by the ECB (Art. 2(b) SRMR) In addition to credit institutions, the SRMR also applies to resolution planning and 3 resolution decisions involving those parent undertakings, including financial holdings and mixed financial holding companies, that are subject to consolidated supervision by the ECB pursuant to Art. 4(1)(g) SSMR (see infra, → Art. 4 paras. 36-39). Although the relevant entities are not themselves licensed as credit institutions and therefore are not supervised by the ECB on a solo basis, their inclusion into the scope of both the SSM and the SRM is necessary in order to ensure effective supervisory and resolution decisions adequate to the risk structure of the relevant group of companies.3 Specifically, in group scenarios neither preventive resolution planning nor actual resolution actions will be possible without due consideration for (a) the impact of an insolvency in one or more group entities on the remainder of the group and (b) the dependency of effective resolution action on other parts of the group, including group financing arrangements.4 The inclusion of parent undertakings is thus essential for the effectiveness of resolution actions, and is an integral part of the overall strategy pursued by the Regulation.
III. Investment firms and financial institutions subject to consolidated supervision by the ECB (Art. 2(c) SRMR) Pursuant to Art. 2(c) SRMR, the Regulation also applies to those investment firms 4 and financial institutions whose parent undertakings are subject to consolidated supervision by the ECB under Art. 4(1)(g) SSMR. The rationale is identical with the rationale for the inclusion of the relevant parent undertakings by Art. 2(b) SRMR (see supra, → para. 3).
Art. 3 SRMR Definitions 1. For the purposes of this Regulation the following definitions apply: (1) ‘national competent authority’ means any national competent authority as defined in Article 2(2) of Regulation (EU) No 1024/2013; (2) ‘competent authority’ means a competent authority as defined in Article 4(2)(i) of Regulation (EU) No 1093/2010; (3) ‘national resolution authority’ means an authority designated by a participating Member State in accordance with Article 3 of Directive 2014/59/EU; (4) ‘relevant national resolution authority’ means the national resolution authority of a participating Member State in which an entity or a group's entity is established; (5) ‘conditions for resolution’ means the conditions referred to in Article 18(1); (6) ‘resolution plan’ means a plan drawn up in accordance with Article 8 or 9;
Cf. Recital 22 SRMR. See also Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook (2018), 117, at p. 121. 3
4
Christos V. Gortsos
463
Art. 3 SRMR
Definitions
(7) ‘group resolution plan’ means a plan for group resolution drawn up in accordance with Articles 8 and 9; (8) ‘resolution objectives’ means the objectives referred to in Article 14; (9) ‘resolution tool’ means a resolution tool referred to in Article 22(2); (10) ‘resolution action’ means the decision to place an entity referred to in Article 2 under resolution pursuant to Article 18, the application of a resolution tool or the exercise of one or more resolution powers; (11) ‘covered deposits’ means deposits as defined in Article 2(1)(5) of Directive 2014/49/EU; (12) ‘eligible deposits’ means eligible deposits as defined in Article 2(1)(4) of Directive 2014/49/EU; (13) ‘institution’ means a credit institution, or an investment firm covered by consolidated supervision in accordance with Article 2(c); (14) ‘institution under resolution’ means an entity referred to in Article 2 in respect of which a resolution action is taken; (15) ‘financial institution’ means a financial institution as defined in Article 4(1)(26) of Regulation (EU) No 575/2013; (16) ‘financial holding company’ means a financial holding company as defined in Article 4(1)(20) of Regulation (EU) No 575/2013; (17) ‘mixed financial holding company’ means a mixed financial holding company as defined in point (21) of Article 4(1) of Regulation (EU) No 575/2013; (18) ‘Union parent financial holding company’ means an EU parent financial holding company as defined in point (31) of Article 4(1) of Regulation (EU) No 575/2013; (19) ‘Union parent institution’ means an EU parent institution as defined in point (29) of Article 4(1) of Regulation (EU) No 575/2013; (20) ‘parent undertaking’ means a parent undertaking as defined in Article 4(1)(15) (a) of Regulation (EU) No 575/2013; (21) ‘subsidiary’ means a subsidiary as defined in Article 4(1)(16) of Regulation (EU) No 575/2013; (22) ‘branch’ means a branch as defined in Article 4(1)(17) of Regulation (EU) No 575/2013; (23) ‘group’ means a parent undertaking and its subsidiaries that are entities as referred to in Article 2; (24) ‘cross-border group’ means a group that has entities as referred to in Article 2 established in more than one participating Member State; (25) ‘consolidated basis’ means the basis of the consolidated situation as defined in Article 4(1)(47) of Regulation (EU) No 575/2013; (26) ‘consolidating supervisor’ means consolidating supervisor as defined in Article 4(1)(41) of Regulation (EU) No 575/2013; (27) ‘group-level resolution authority’ means the resolution authority in the participating Member State in which the institution or parent undertaking subject to consolidated supervision at the highest level of consolidation within participating Member States in accordance with Article 111 of Directive 2013/36/EU is established; (28) ‘institutional protection scheme’ or ‘IPS’ means an arrangement that meets the requirements laid down in Article 113(7) of Regulation (EU) No 575/2013; (29) ‘extraordinary public financial support’ means State aid within the meaning of Article 107(1) TFEU or any other public financial support at supra-national level, which, if provided at national level, would constitute State aid, that is 464
Christos V. Gortsos
Art. 3 SRMR
Definitions
(30)
(31)
(32) (33) (34) (35) (36) (37) (38) (39) (40) (41) (42) (43) (44) (45) (46) (47) (48)
provided in order to preserve or restore the viability, liquidity or solvency of an entity referred to in Article 2 of this Regulation or of a group of which such an entity forms part; ‘sale of business tool’ means the mechanism for effecting a transfer by a resolution authority of instruments of ownership issued by an institution under resolution, or assets, rights or liabilities of an institution under resolution, to a purchaser that is not a bridge institution, in accordance with Article 24; ‘bridge institution tool’ means the mechanism for transferring instruments of ownership issued by an institution under resolution, or assets, rights or liabilities of an institution under resolution, to a bridge institution, in accordance with Article 25; ‘asset separation tool’ means the mechanism for effecting a transfer of assets, rights or liabilities of an institution under resolution to an asset management vehicle in accordance with Article 26; ‘bail-in tool’ means the mechanism for effecting the exercise of the write-down and conversion powers in relation to liabilities of an institution under resolution in accordance with Article 27; ‘available financial means’ means the cash, deposits, assets and irrevocable payment commitments available to the Fund for the purposes listed under Article 76(1); ‘target level’ means the amount of available financial means to be reached under Article 69(1); ‘Agreement’ means the agreement on the transfer and mutualisation of contributions to the Fund; ‘transitional period’ means the period from the date of application of this Regulation as determined under Article 99(2) and (6) until the Fund reaches the target level or 1 January 2024, whichever is earlier; ‘financial instrument’ means financial instrument as defined in point (50) of Article 4(1) of Regulation (EU) No 575/2013; ‘debt instruments’ means bonds and other forms of transferable debt, instruments creating or acknowledging a debt, and instruments giving rights to acquire debt instruments; ‘own funds’ means own funds as defined in Article 4(1)(118) of Regulation (EU) No 575/2013; ‘own funds requirements’ means the requirements laid down in Articles 92 to 98 of Regulation (EU) No 575/2013; ‘winding up’ means the realisation of assets of an entity referred to in Article 2; ‘derivative’ means a derivative as defined in Article 2(5) of Regulation (EU) No 648/2012; ‘write-down and conversion powers’ means the powers referred to in Article 21; ‘Common Equity Tier 1 instruments’ means capital instruments that meet the conditions laid down in Article 28(1) to (4), Article 29(1) to (5) or Article 31(1) of Regulation (EU) No 575/2013; ‘Additional Tier 1 instruments’ means capital instruments that meet the conditions laid down in Article 52(1) of Regulation (EU) No 575/2013; ‘Tier 2 instruments’ means capital instruments or subordinated loans that meet the conditions laid down in Article 63 of Regulation (EU) No 575/2013; ‘aggregate amount’ means the aggregate amount by which the resolution authority has assessed that eligible liabilities are to be written down or converted, in accordance with Article 27(13); Christos V. Gortsos
465
Art. 3 SRMR
Definitions
(49) ‘eligible liabilities’ means the liabilities and capital instruments that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments of an entity referred to in Article 2 that are not excluded from the scope of the bail-in tool pursuant to Article 27(3); (50) ‘deposit guarantee scheme’ means a deposit guarantee scheme introduced and officially recognised by a Member State pursuant to Article 4 of Directive 2014/49/EU; (51) ‘relevant capital instruments’ means Additional Tier 1 instruments and Tier 2 instruments; (52) ‘covered bond’ means an instrument as referred to in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council; (53) ‘depositor’ means a depositor as defined in Article 2(1)(6) of Directive 2014/49/EU; (54) ‘investor’ means an investor within the meaning of Article 1(4) of Directive 97/9/EC of the European Parliament and of the Council. (55) ‘combined buffer requirement’ means combined buffer requirement as defined in point (6) of Article 128 of Directive 2013/36/EU. 2. In the absence of a relevant definition in paragraph 1 of this Article, the definitions referred to in Article 2 of Directive 2014/59/EU apply. In the absence of a relevant definition in paragraph 1 of this Article or in Article 2 of Directive 2014/59/EU, the definitions referred to in Article 3 of Directive 2013/36/EU apply. Article 1 SRMR II (1) Article 3(1) is amended as follows: (a) point (21) is replaced by the following: ‘(21) “subsidiary” means a subsidiary as defined in point (16) of Article 4(1) of Regulation (EU) No 575/2013, and for the purpose of applying Article 8, Article 10(10), Articles 12 to 12k, 21 and 53 of this Regulation to resolution groups referred to in point (b) of point (24b) of this paragraph, include, where and as appropriate, credit institutions that are permanently affiliated to a central body, the central body itself, and their respective subsidiaries, taking into account the way in which such resolution groups comply with Article 12f(3) of this Regulation; (21a) “material subsidiary” means a material subsidiary as defined in point (135) of Article 4(1) of Regulation (EU) No 575/2013;’; (b) the following points are inserted: ‘(24a) “resolution entity” means a legal person established in a participating Member State, which, in accordance with Article 8, is identified by the Board as an entity in respect of which the resolution plan provides for resolution action; (24b) “resolution group” means: (a) a resolution entity, together with its subsidiaries that are not: (i) resolution entities themselves; (ii) subsidiaries of other resolution entities; or (iii) entities established in a third country that are not included in the resolution group under the resolution plan, and their subsidiaries; or (b) credit institutions that are permanently affiliated to a central body, and the central body itself when at least one of those credit institutions or the central body is a resolution entity, and their respective subsidiaries; (24c) “global systemically important institution” or “G-SII” means a G-SII as defined in point (133) of Article 4(1) of Regulation (EU) No 575/2013;’; (c) the following point is inserted: ‘(45a) “Common Equity Tier 1 capital” means Common Equity Tier 1 capital as calculated in accordance with Article 50 of Regulation (EU) No 575/2013;’; (d) in point (48) the words ‘eligible liabilities’ are replaced by the words ‘bail-inable liabilities’; (e) point (49) is replaced by the following: ‘(49) “bail-inable liabilities” means the liabilities and capital instruments that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments of an entity referred to in
466
Christos V. Gortsos
Art. 3 SRMR
Definitions
Article 2 and that are not excluded from the scope of the bail-in tool pursuant to Article 27(3);’; (f) the following points are inserted: ‘(49a) “eligible liabilities” means bail-inable liabilities that fulfil, as applicable, the conditions of Article 12c or point (a) of Article 12g(2) of this Regulation, and Tier 2 instruments that meet the conditions of point (b) of Article 72a(1) of Regulation (EU) No 575/2013; (49b) “subordinated eligible instruments” means instruments that meet all of the conditions referred to in Article 72a of Regulation (EU) No 575/2013 other than paragraphs (3) to (5) of Article 72b of that Regulation;’; (g) the following point is added: ‘(55) “combined buffer requirement” means combined buffer requirement as defined in point (6) of Article 128 of Directive 2013/36/EU.’
A. The definitions of the SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introductory remarks – link to definitions already presented . . . . . . . . . . . . . . . . II. Financial firms and groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. In particular: own funds – own funds instruments – own funds requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Resolution-specific terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. In particular: resolution tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Definitions relating to the Single Resolution Fund (SRF) . . . . . . . . . . . . . . . . . . . . VIII. Deposit guarantee-related terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Other terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 5 14 21 21 28 34 43 48 52 57
B. The definitions of the SRMR II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Amendments to existing definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. New definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59 59 60 62
A. The definitions of the SRMR I. Introductory remarks – link to definitions already presented The definition of several terms in Art. 3 SRMR were already presented when analysing Art. 2 SSMR, due to the overlapping with those of the SSMR and the SSM‑FR. This applies to the terms: national competent authority, financial holding company, mixed financial holding company, branch, parent undertaking and subsidiary.1 It is worth noting that unlike the term SSM, which is defined in Art. 2(9) SSMR, the term “Single Resolution Mechanism” (SRM) is not defined in the SRMR. Art. 1(2) SRMR refers to it as a “framework” consisting of the Single Resolution Board (SRB or Board) established in accordance with Art. 42 SRMR, the Council, the Commission and the national resolution authorities (of participating Member States) and supported by a Single Resolution Fund (SRF). According to Art. 3(2) SRMR, in the absence of a relevant definition in Art. 3(1) SRMR, applicable are the definitions referred to in Art. 2 BRRD; and in the absence of a relevant definition therein, applicable are the definitions referred to in Art. 3 CRD IV (which all further refer to the relevant points of Art. 3(1) CRR). From a systematic point of view, the terms defined in the SRMR can be classified in seven categories (see infra, → paras. 5-58). 1 Art. 3(1)(1) and (16)-(17) and (20)-(22) SRMR; on these definitions, see supra, → paras. 18, 15, 16, 9, 10 and 11 (respectively) on the analysis of Art. 2 SSMR.
Christos V. Gortsos
467
1
2
3
4
Art. 3 SRMR
Definitions
II. Financial firms and groups “Institution” means2 either a credit institution, or an investment firm covered by the consolidated supervision of the parent undertaking carried out by the ECB under Art. 4(1)(g) SSMR in accordance with Art. 2(c) SRMR. The term “investment firm” is defined in Art. 4(1)(1) MiFID II as meaning (in principle) any legal person whose regular occupation or business is the provision of one or more “investment services” to third parties, and/or the performance of one or more “investment activities” on a professional basis.3 6 “Financial institution” means4 an undertaking, other than an institution,5 whose principal activity is to acquire holdings or to pursue any of the activities listed in points (2)-(12) and (15) of Annex I to the CRD IV. This includes: investment firms; financial holding companies and mixed financial holding companies;6 payment institutions within the meaning of Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 “on payment services in the internal market (…)”, 7 (PSD II); and asset management companies within the meaning of Art. 4(1)(19) CRR.8 Excluded are insurance holding companies and mixed-activity insurance holding companies as defined in points (f)-(g) of Art. 212(1) of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 “on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)”.9 7 It is noted that the use of the term “financial institution” is not consistent in EU law. Indicatively, in Art. 127(6) TFEU, which is the legal basis of the SSMR, it is provided that the Council may confer specific tasks upon the ECB concerning policies relating to the prudential supervision of credit institutions and other financial institutions (with the exception of insurance undertakings), which contradicts to the above definition of financial institutions, which are defined as explicitly not being credit institutions. The same applies in the case of Art. 4(1) EBAR, where the term is defined as including credit institutions. It is the author’s opinion that the appropriate term to be used in such cases is “financial firms”. 5
Art. 3(1)(13) SRMR. Art. 4(1)(1)(1) MiFID II. At national discretion, the definition of investment firms may also include undertakings which are not legal persons if their legal status ensures a level of protection for third parties’ interests equivalent to that afforded by legal persons and they are subject to equivalent prudential supervision appropriate to their legal form. However, natural persons providing services involving the holding of third party funds or transferable securities may be considered to be an investment firm for the purposes of MiFiD II and of Regulation (EU) No 600/2014 (OJ L 173, 12.6.2014, pp. 84-148, ‘MiFIR’) only if they comply with specific conditions in addition to the other requirements imposed in MiFID II, MiFIR and CRD IV (Art. 4(1)(1)(2)-(3) MiFID II). The term “investment services and activities” is defined in Art. 4(1)(2) MiFID II. 4 Art. 3(1)(15) SRMR, with reference to Art. 4(1)(26) CRR. 5 Under Art. 4(1)(26) CRR, as amended by the CRR II, excluded are also the so-called ‘pure’ industrial holding companies. 6 On the definition of these terms, see supra, → SSMR Art. 2. 7 OJ L 337, 23.12.2015, pp. 35-127. This Directive repealed with effect from 13 January 2018 Directive 2007/64/EC of the same EU institutions of 13 November 2007 “on payment services in the internal market (...)” (OJ L 319, 5.12.2007, pp. 1-36) (PSD I). 8 According to this point of that Article, the term ‘asset management company’ is defined either with reference to of Art. 2(5) FICOD I or as an alternative investment fund manager (AIFM) as defined in Art. 4(1)(b) Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 “on Alternative Investment Fund Managers (...)” (OJ L 174, 1.7.2011, pp. 1-73). Unless otherwise provided, included are third-country entities, which carry out similar activities and are subject to the laws of a third country, which applies supervisory and regulatory requirements at least equivalent to those applied in the EU. 9 OJ L 335, 17.12.2009, pp. 1-155. 2
3
468
Christos V. Gortsos
Art. 3 SRMR
Definitions
“Union parent financial holding company” means10 a “parent financial holding company in a Member State” which is not a subsidiary of an institution authorised in any Member State, or of another financial holding company or mixed financial holding company set up in any Member State. In this respect, “parent financial holding company in a Member State” means, under the CRR,11 a financial holding company which is not itself a subsidiary of an institution authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in the same Member State. For a schematic presentation of all these (complex) groups (as well as of the “EU parent mixed financial holding companies” and the “parent mixed financial holding company in a Member State” mentioned infra, → paras. 18-19), see the summary Table (see infra, → para. 75). “Union parent institution” means12 a parent institution in a Member State which is not a subsidiary of another institution authorised in any Member State, or of a financial holding company or mixed financial holding company set up in any Member State. “Group” means13 a parent undertaking and its subsidiaries that are “entities” as referred to in Art. 2 SRMR. “Cross-border group” means14 a group that has entities as referred to in Art. 2 SRMR established in more than one participating Member State. Hence, this definition does not cover groups with entities established in non-participating Member States or in third countries. “Consolidated basis” means15 the basis of the “consolidated situation” as defined in Art. 4(1)(47) CRR, according to which “consolidated situation” means the situation that results from applying the requirements of this legislative act pursuant to Part One, Title II, Ch. 2 (Arts. 11-24 CRR) to an institution as if that institution formed, together with one or more other entities, a single institution.
8
9
10
11 12
13
III. Authorities (1) The term “competent authority” is defined16 with reference to Art. 4(2)(i) EBAR, 14 which further refers to Art. 4(1)(40) CRR. Accordingly, it means a public authority or body officially recognised by national law, which is empowered to supervise institutions as part of the supervisory system of the Member State concerned, including (inter alia) the ECB with regard to matters relating to the tasks conferred on it by the SSMR. 17 The inclusion of the ECB in the definition of “competent authority” was effected by virtue of Art. 1(4) of Regulation (EU) No 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending the EBAR “(…) as regards the conferral of specific tasks on the [ECB] pursuant to [the SSMR]”.18
Art. 3(1)(18) SRMR, with reference to Art. 4(1)(31) CRR. Art. 4(1)(30) CRR. 12 Art. 3(1)(19) SRMR, with reference to Art. 4(1)(29) CRR. 13 Art. 3(1)(23) SRMR. 14 Art 3(1)(24) SRMR. 15 Art. 3(1)(25) SRMR. 16 Art. 3(1)(2) SRMR. 17 In Art. 4(2)(i) EBAR reference is also made to the definition of the term in the PSD II and in Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 “on the taking up, pursuit and prudential supervision of the business of electronic money institutions (…)” (OJ L 267, 10.10.2009, pp. 7-17). 18 OJ L 287, 29.10.2013, pp. 5-14. 10
11
Christos V. Gortsos
469
Art. 3 SRMR 15
16 17
18
19
20
Definitions
(2) “National resolution authority” (NRA) means19 an authority designated by a participating Member State in accordance with Art. 3(1)-(3) BRRD. This provides that the resolution authority must be a public administrative authority, or an authority entrusted with public administrative powers. It may be a national central bank, a competent ministry, another public administrative authority or authority entrusted with public administrative powers, or (exceptionally) the competent authority for supervision for the purposes of the CRR and the CRD IV. (3) “Relevant national resolution authority” means20 the national resolution authority of a participating Member State in which an entity or a group’s entity is established. (4) “Consolidating supervisor” means21 a competent authority responsible for the exercise of supervision on a consolidated basis of EU parent institutions and of credit institutions or investment firms controlled by a parent financial holding company in a Member State, a parent mixed financial holding company in a Member State, an EU parent financial holding company or an EU parent mixed financial holding company. In this respect: “EU parent mixed financial holding company” means a “parent mixed financial holding company in a Member State” which is not a subsidiary of an institution authorised in any Member State or of another financial holding company or mixed financial holding company set up in any Member State; and “parent mixed financial holding company in a Member State” means a mixed financial holding company which is not itself a subsidiary of an institution authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in that same Member State.22 (5) “Group-level resolution authority” (GLRA) means23 the resolution authority in a participating Member State in which the institution or parent undertaking subject to consolidated supervision (at the highest level of consolidation within participating Member States in accordance with Art. 111 CRD IV) is established.
IV. Instruments 1. General “Financial instrument” means24 any of the following: a contract giving rise to both a financial asset of one party and a financial liability or equity instrument of another; an instrument specified in Sec. C of Annex I to MiFID II; a derivative financial instrument; a primary financial instrument; and a cash instrument. The first three above instruments are only considered as “financial instruments” if their value is derived from the price of an underlying financial instrument or another underlying item, a rate or an index. 22 The instruments specified in Sec. C of Annex I to the MiFID II include the following: transferable securities, money-market instruments and units in collective investment undertakings (points (1)-(3)), derivative financial instruments (points (4)-(10)) and 21
Art. 3(1)(3) SRMR. Art. 3(1)(4) SRMR. 21 Art. 3(1)(26) SRMR, with reference to Art. 4(1)(41) CRR. The latter was amended by the CRR II to the effect that it means a competent authority responsible for the exercise of supervision on a consolidated basis in accordance with Art. 111 CRD IV, as this was replaced by the wording in Art. 1(37) CRD IV. 22 Art. 4(1)(32) and (33) CRR, respectively. 23 Art. 3(1)(27) SRMR. 24 Art. 3(1)(38) SRMR, with reference to Art. 4(1)(50) CRR. 19
20
470
Christos V. Gortsos
Art. 3 SRMR
Definitions
emission allowances consisting of any unit is recognised as compliant with the requirements of the “Emissions Trading Scheme” Directive 2003/87/EC of the European Parliament and of the Council of 13 October 200325 (point (11)). Since derivative financial instruments are explicitly covered by Sec. C of Annex I to MiFID II, which is manifested by the definition of the term “derivative” in Art. 3(1)(43) SRMR (see infra, → para. 25), in the author’s view, their separate mentioning in point (50) of Art. 4(1) CRR is redundant. “Debt instruments” means26 bonds and other forms of transferable debt, instruments creating or acknowledging a debt and instruments giving rights to acquire debt instruments. “Covered bond” means27 an instrument as referred to in Art. 52(4) UCITS IV Directive. According to this Article, sums deriving from the issue of those bonds must be invested in accordance with the law in assets which, during the whole period of validity of the bonds, are capable of covering claims attaching to the bonds and which, in the event of failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest. “Derivative” means28 a derivative as defined in Art. 2(5) EMIR, according to which “derivative” or “derivative contract” means a financial instrument as set out in Sec. C, points (4)-(10) of Annex I to MiFID II. “Relevant capital instruments” means29 Additional Tier 1 instruments and Tier 2 instruments.30 It is noteworthy that deposits, regardless of the amount, do not fall within the definition of this term. “Eligible liabilities” means31 the liabilities and capital instruments that do not qualify as Common Equity Tier 1 (CET 1), 32 Additional Tier 1 or Tier 2 instruments of an entity referred to in Art. 2 SSMR, which are not excluded from the scope of the bail-in tool according to Art. 27(3) SSMR.
23
24
25
26
27
2. In particular: own funds – own funds instruments – own funds requirements “Own funds” means33 the sum of Tier 1 capital (i.e., CET 1 and Additional Tier 1), 28 and Tier 2 capital. The capital instruments issued by credit institutions and qualifying as CET 1, Additional Tier 1 or Tier 2 instruments are defined in the CRR as “own funds instruments”.34 “Own funds requirements” means35 the requirements laid down in Arts. 92-98 29 CRR.36 In principle, credit institutions must continuously satisfy the following minimum
OJ L 275, 25.10.2003, pp. 32-46. Art. 3(1)(39) SRMR. 27 Art. 3(1)(52) SRMR. 28 Art. 3(1)(43) SRMR. 29 On the definition of these 2 instruments, see infra, → paras. 31-32. 30 Art. 3(1)(51) SRMR. 31 Art. 3(1)(49) SRMR. 32 Art. 3(1)(51) SRMR. On the definition of this term, see infra, → para. 30. 33 Art. 3(1)(40) SRMR, with reference to Art. 4(1)(118) CRR. 34 Art. 4(1)(119) CRR. 35 Art. 3(1)(41) SRMR. 36 Arts. 92 and 94 CRR have been substantially amended, respectively, by Arts. 1(46) and 1(48) CRR II, while two new Articles, Art. 92a CRR (requirements for own funds and eligible liabilities for G-SIIs) and Art. 92b CRR (requirements for own funds and eligible liabilities for non-EU G-SIIs), have also been inserted (Art. 1(47) CRR II). 25
26
Christos V. Gortsos
471
Art. 3 SRMR
30
31 32 33
Definitions
own funds requirements: a CET 1 capital ratio of 4.5 %; a Tier 1 capital ratio of 6 %; and a total capital ratio of 8 %.37 “Common Equity Tier 1 instruments” means38 capital instruments that meet the conditions laid down in Arts. 28(1)-(4), 29(1)-(5) or 31(1) CRR. In this respect: Art. 28 CRR contains the general provisions;39 Art. 29 CRR refers to the capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions; and Art. 31 CRR refers to the capital instruments subscribed by public authorities in emergency situations. “Additional Tier 1 instruments” means40 capital instruments meeting the conditions laid down in Art. 52(1) CRR.41 “Tier 2 instruments” means42 capital instruments or subordinated loans meeting the conditions laid down in Art. 63 CRR.43 For the sake of clarity, the following is noted in relation to the (complex) structure of the relevant CRR provisions, which refer to credit institutions’ capital, items, instruments, own funds and own funds requirements: First, the CRR distinguishes between Tier 1 and Tier 2 capital, the first consisting of two elements: CET 1 capital and Additional Tier 1 capital.44 Second, CET 1, Additional Tier 1 and Tier 2 capital consist of various items.45 Third, CET 1, Additional Tier 1 and Tier 2 instruments constitute the first element of these items;46 as an example, CET 1 items of institutions consist of capital instruments meeting the conditions laid down in Arts. 28 or 29 CRR; share premium accounts related to the above instruments; retained earnings; accumulated other comprehensive income; other reserves; and funds for general banking risk. Fourth, credit institutions’ own funds consist of the sum of their Tier 1 capital and Tier 2 capital.47 Finally, credit institutions must continuously satisfy specific own funds requirements.48
V. Resolution-specific terms 34
“Resolution action” means any of the following:49 the decision to place a designated entity under resolution in accordance with Art. 18 SRMR; the application of a resolution tool;50 or the exercise of one or more resolution powers (as laid down in Arts. 63-72 BRRD).
Art. 92(1) CRR. Art. 3(1)(45) SRMR. 39 Art. 52(1) CRR has been substantially amended by Art. 1(23) CRR II. 40 Art. 3(1)(46) SRMR. 41 Arts. 28(1) and 28(3) CRR have been amended by Art. 1(16) CRR II. 42 Art. 3(1)(47) SRMR. 43 Art. 63 CRR has been substantially amended by Art. 1(27) CRR II. 44 Arts. 25, 50, 61 and 71 CRR. 45 Arts. 26-27, 51 and 62 CRR, respectively. 46 Arts. 26(1)(a), 51(a) and 62(a) CRR. 47 Art. 72 CRR. 48 Arts. 92-98 CRR. 49 Art. 3(1)(10) SRMR. 50 On the resolution tools, see infra, → paras. 43-47. 37
38
472
Christos V. Gortsos
Art. 3 SRMR
Definitions
“Conditions for resolution” means51 the (three) conditions referred to in Art. 18(1) SRMR namely: First, an entity is failing or is likely to fail; Second, having regard to timing and other relevant circumstances, there is no reasonable prospect that any alternative private sector measures, including measures by an institutional protection scheme (IPS),52 or supervisory action, including early intervention measures or the write-down or conversion of relevant capital instruments in accordance with Art. 21 SRMR, taken in respect of the entity, would prevent its failure within a reasonable timeframe; and Third, a resolution action is necessary for the public interest pursuant to Art. 18(5) SRMR. “Resolution plan” means53 a plan drawn up by the Board in accordance with Art. 8 SRMR or by national resolution authorities in accordance with Art. 9 SRMR. “Group resolution plan” means54 a plan for group resolution drawn up in accordance with Arts. 8-9 SRMR. “Resolution objectives” means55 the objectives referred to in Art. 14 SRMR; these are: First, ensure the continuity of critical functions; Second, avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline; Third, protect public funds by minimising reliance on extraordinary public financial support; and Finally, protect depositors covered by the DGSD, investors covered by Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 “on investor-compensation schemes”,56 and client funds and client assets. “Institution under resolution” means57 an entity referred to in Art. 2 SRMR in respect of which a resolution action is taken. “Winding up” means58 the realisation of assets of an entity referred to in Art. 2 SRMR. The use of this term is made in four SRMR Articles in the context of “winding up of an entity under normal insolvency proceedings”.59 In this respect it is noted that, pursuant to Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 “on the reorganisation and winding up of credit institutions”60 (as in force after its amendment, inter alia, by Art. 117 BRRD), “winding up proceedings” means collective proceedings opened and monitored by a Member State’s administrative or judicial authorities with the aim of realising assets under the supervision of those authorities, including where the proceedings are terminated by a composition or other, similar measure.61
Art. 3(1)(5) SRMR. On the definition of this term, see infra, → para. 53. 53 Art. 3(1)(6) SRMR. 54 Art. 3(1)(7) SRMR. 55 Art. 3(1)(8) SRMR. 56 OJ L 84, 26.3.1997, pp. 22-31. On the definition of the term investor, see infra, → para. 57 57 Art. 3(1)(14) SRMR. 58 Art. 3(1)(42) SRMR. 59 Arts. 11(3)(d), 18(5), 76(1)(e) and 79(5)(3) SRMR. 60 OJ L 125, 5.5.2001, pp. 15-23. 61 Art. 2(9) Directive 2001/24/EC. 51
52
Christos V. Gortsos
473
35
36 37 38
39 40
Art. 3 SRMR
Definitions
“Write-down and conversion powers” means62 the powers referred to in Art. 21 SRMR. In accordance with that Article, the Board can exercise these powers, acting under the procedure laid down in Art. 18 SRMR, when it assesses that one or more of the conditions laid down in Art. 21(1) SRMR are met. 42 “Aggregate amount” means63 the aggregate amount by which the resolution authority has assessed that eligible liabilities must be written down or converted in accordance with Art. 27(13). 41
VI. In particular: resolution tools 43 44
45
46
47
“Resolution tool” means64 a resolution tool referred to in Art. 22(2) SRMR (the definition of the four resolution tools referred to therein follow infra, → paras. 44-47). “Sale of business tool” means65 the mechanism for effecting a transfer by a resolution authority of instruments of ownership issued by an institution under resolution, or assets, rights or liabilities of an institution under resolution, to a purchaser that is not a bridge institution, in accordance with Art. 24 SRMR. “Bridge institution tool” means66 the mechanism for transferring instruments of ownership issued by an institution under resolution, or assets, rights or liabilities of an institution under resolution, to a bridge institution, in accordance with Art. 25 SRMR. “Asset separation tool” means67 the mechanism for affecting a transfer of assets, rights or liabilities of an institution under resolution to an asset management vehicle in accordance with Art. 26 SRMR. “Bail-in tool” means68 the mechanism for affecting the exercise of the write-down and conversion powers in relation to liabilities of an institution under resolution in accordance with Art. 27 SRMR.
VII. Definitions relating to the Single Resolution Fund (SRF) “Available financial means” means69 the cash, deposits, assets and irrevocable payment commitments available to the SRF for the purposes listed under Art. 76(1) SRMR. 49 “Target level” means70 the amount of available financial means to be reached in accordance with Art. 69(1) SRMR. 50 “Agreement” means71 the agreement on the transfer and mutualisation of contributions to the SRF. 51 “Transitional period” means 72 the period from the date of application of the SRMR as determined under Art. 99(2) and (6) SRMR until the SRF reaches the target level (under Art. 69(1) SRMR) or 1 January 2024, whichever is earlier. 48
Art. 3(1)(44) SRMR. Art. 3(1)(48) SRMR. 64 Art. 3(1)(9) SRMR. 65 Art. 3(1)(30) SRMR. 66 Art. 3(1)(31) SRMR. 67 Art. 3(1)(32) SRMR. 68 Art. 3(1)(33) SRMR. 69 Art. 3(1)(34) SRMR. 70 Art. 3(1)(35) SRMR. 71 Art. 3(1)(36) SRMR. 72 Art. 3(1)(37) SRMR. 62
63
474
Christos V. Gortsos
Art. 3 SRMR
Definitions
VIII. Deposit guarantee-related terms “Deposit guarantee scheme” (DGS) means73 a DGS introduced and officially recognised by a Member State in accordance with Art. 4 DGSD. This covers three types of DGSs: “statutory DGSs” set up by law and usually administered by a public entity, “contractual DGSs” to the extent that they are officially recognised as DGSs, by complying with the requirements imposed by the DGSD and “institutional protection schemes” also to the extent that they are officially recognised as such. “Institutional protection scheme” (IPS) means74 an agreement meeting the requirements laid down in Art. 113(7) CRR, namely a contractual or statutory liability arrangement which protects institutions and (in particular) ensures their liquidity and solvency to avoid bankruptcy where necessary. “Depositor” means75 the holder or (for joint accounts), each of the holders of a deposit. “Covered deposits” means76 the part of “eligible deposits” that does not exceed the coverage level laid down in Art. 6(1) DGSD (i.e., 100,000 euros per depositor per credit institution77). The (broader) term “eligible deposits” means78 deposits that are not excluded from protection pursuant to Art. 5 DGSD.
52
53
54 55
56
IX. Other terms (1) “Investor” means79 any person who has entrusted money or instruments to an in- 57 vestment firm in connection with investment business within the meaning of Art. 1(4) of Directive 97/9/EC. (2) “Extraordinary public financial support” means80 State aid within the meaning of 58 Art. 107(1) TFEU, or any other public financial support at the supra-national level, which, if provided at the national level, would constitute State aid, and which is provided in order to preserve or restore the viability, liquidity or solvency of a designated entity or of a group of which such an entity forms part.
B. The definitions of the SRMR II I. Introductory remarks On 20 May 2019, the European Parliament and of the Council adopted Regulation 59 (EU) 2019/877 “amending the SRMR as regards loss-absorbing and recapitalisation capacity for credit institutions and investment firms”81 (SRMR II). This new legislative act, which applies from 28 December 2020, amended specific definitions of the Art. 3(1)(50) SRMR. Art. 3(1)(28) SRMR. 75 Art. 3(1)(53) SRMR, with reference to Art. 2(1)(6) DGSD. 76 Art. 3(1)(11) SRMR. 77 In the case of joint accounts, when calculating this limit into account is taken the share of each depositor therein (Art. 7(2)(1) DGSD). 78 Art. 3(1)(12) SRMR. 79 Art. 3(1)(54) SRMR. 80 Art. 3(1)(29) SRMR. 81 OJ L 150, 7.6.2019, pp. 226-252. 73
74
Christos V. Gortsos
475
Art. 3 SRMR
Definitions
SRMR (see infra, → paras. 60-61), while also introducing some new ones (see infra, → paras. 62-67).
II. Amendments to existing definitions The definition of the term “subsidiary” has been amended. Even though, in principle, it continues to have the meaning pursuant to Art. 4(1)(16) CRR, 82 for the purpose of application of specific SRMR Articles (namely, 8, 10(10), 12-12k, 21 and 53) to the resolution groups referred to in point (b) of new point (24b) of Art. 3(1) SRMR,83 it also includes, where and as appropriate, credit institutions permanently affiliated to a central body, the central body itself, and their respective subsidiaries, taking into account the way in which such resolution groups comply with Art. 12f(3) SRMR (on the application of the minimum requirement for own funds and eligible liabilities (MREL) to resolution entities).84 61 The definition of the term “eligible liabilities”85 has been amended more radically. In particular: First, the (new) term “bail-inable liabilities” has been introduced as an overarching one; it means86 the liabilities and capital instruments, which do not qualify as CET 1, Additional Tier 1 or Tier 2 instruments of an entity and are not excluded from the scope of the bail-in tool pursuant to Art. 27(3) SRMR. Second, the term “eligible liabilities” has been redefined to mean:87 bail-inable liabilities (as defined above) that fulfil, as applicable, the conditions of Arts. 12c or 12g(2) (a) SRMR (on eligible liabilities for resolution entities and on the application of the MREL to entities that are not themselves resolution entities, respectively); and Tier 2 instruments meeting the conditions of Art. 72a(1)(b) CRR.88 Finally, another new term, that of “subordinated eligible instruments”, has been introduced, meaning89 (eligible liabilities) instruments that meet all the conditions referred to in Art. 72a CRR (which refers to “eligible liabilities items”), other than the instruments referred to in Art. 72b(3)-(5) (this Article refers to “eligible liabilities instruments”).90 60
III. New definitions 62
“Material subsidiary” means91 a subsidiary that on an individual or consolidated basis meets any of the following conditions: holds more than 5 % of the consolidated riskweighted assets of its original parent undertaking; generates more than 5 % of the total See supra, → para. 11 on the analysis of Art. 2 SSMR. See infra, → para. 64. 84 Art. 1(1)(a) SRMR II, replacing Art. 3(1)(21) SRMR; on the definition of the term ‘resolution entity’, see infra, → para. 63. 85 Art. 3(1)(49) SRMR; see supra, → para. 27. 86 Art. 1(1)(e) SRMR II, replacing Art. 3(1)(49) SRMR. The term bail-inable liabilities also replaced the term eligible liabilities in Art. 3(1)(48) SRMR, which defines the term aggregate amount (Art. 1(1)(d) SRMR II). 87 Art. 1(1)(f) SRMR II, inserting new point (49a) in Art. 3(1) SRMR. 88 Art. 72a CRR was introduced by Art. 1(31) CRR II. 89 Art. 1(1)(f) SRMR II as well, inserting new point (49b) in Art. 3(1) SRMR. 90 Art. 72b CRR was also introduced by Art. 1(31) CRR II. 91 Art. 1(1)(a) SRMR II, inserting new point (21a) in Art. 3(1) SRMR, with reference to Art. 4(1)(135) CRR; the latter was introduced by Art. 1(2)(15) CRR II. 82
83
476
Christos V. Gortsos
Art. 3 SRMR
Definitions
operating income of its original parent undertaking; or its total exposure measure, referred to in Art. 429(4) CRR (which governs the calculation of the leverage ratio) is more than 5 % of the consolidated total exposure measure of its original parent undertaking. For the purpose of determining a material subsidiary, when Art. 21b(2) CRD IV on “intermediate EU parent undertakings” applies,92 the two intermediate EU parent undertakings count as a single subsidiary on the basis of their consolidated situation. “Resolution entity” means93 a legal person established in a participating Member State, which, in accordance with Art. 8 SRMR, is identified by the Board as an entity in respect of which the resolution plan provides for resolution action. “Resolution group” means either of the following:94 a resolution entity, together with its subsidiaries that are not: resolution entities themselves; subsidiaries of other resolution entities; or entities established in a third country that are not included in the resolution group under the resolution plan, and their subsidiaries; or credit institutions that are permanently affiliated to a central body, and the central body itself when at least one of those credit institutions or the central body is a resolution entity, and their respective subsidiaries. “Global systemically important institution” (G-SII) means95 a G-SII identified as such in accordance with Art. 131(1)-(2) CRD IV. “Common Equity Tier 1 capital” means96 CET 1 capital as calculated in accordance with Art. 50 CRR. “Combined buffer requirement” means97 the total CET 1 capital required to meet the requirement for the capital conservation buffer (laid down in Art. 129 CRD IV) extended by the following, as applicable: an institution-specific countercyclical capital buffer; a G-SII buffer; an O-SII buffer; and a systemic risk buffer. This combined buffer requirement is governed by Art. 128(6) CRD IV. In this respect, the following should be noted: (1) As already mentioned,98 credit institutions must continuously satisfy the following minimum own funds requirements:
63
64
65 66 67
68 69
(a) a CET 1 capital ratio of 4,5 %; (b) a Tier 1 capital ratio of 6 %; and (c) a total capital ratio of 8 %.99 These capital ratios must be calculated as a percentage of their total risk exposure 70 amount.100 (2) Under the SREP framework, the Total Supervisory Review and Evaluation Process 71 (SREP) Capital Ratio (TSCR) consists of: (a) the total capital ratio (8 %), and (b) the Pillar 2 (additional capital) requirements (P2R).
92 This Article was introduced by Art. 1(9) CRD V. According to it, a single intermediate EU parent undertaking must be established in the EU, when two or more EU institutions are part of the same thirdcountry group (Art. 21b(1) CRD IV). 93 Art. 1(1)(b) SRMR II, inserting new point (24a). 94 Art. 1(1)(b) SRMR II, inserting new point (24b). 95 Art. 1(1)(b) SRMR II as well, inserting new point (24c), with reference to Art. 4(1)(133) CRR; the latter was introduced by Art. 1(2)(15) CRR II. 96 Art. 1(1)(c) SRMR II, inserting new point (45a). 97 Art. 1(1)(g) SRMR II, inserting new point (55). 98 See supra, → para. 33. 99 Art. 92(1) CRR. 100 Art. 92(2) CRR; total risk exposure amounts are calculated pursuant to Art. 92(3) CRR.
Christos V. Gortsos
477
Art. 3 SRMR 72 73
Definitions
Accordingly, it is variable and is determined on a case-by-case basis.101 (3) Under the SREP framework as well, the Overall Capital Requirement (OCR) consists of: (a) the TSCR, and (b) the combined buffer requirement, i.e.: the total CET 1 capital required to meet the requirement for the capital conservation buffer; the institution-specific countercyclical buffer (0-2.5 %); and the higher of the other buffers (G-SIII vs. systemic risk or O-SII vs. systemic risk).
74
75
(4) Finally, the Pillar 2 Guidance (P2G) was established by the ECB under the SREP as well as an additional capital buffer: it indicates to credit institutions the adequate level of capital to be maintained in order to have sufficient capital as a buffer to withstand stressed situations, in particular as assessed on the basis of the adverse scenario in a stress test. The P2G, which is on top of the OCR, is not binding but the ECB expects compliance.102 SUMMARY TABLE Presentation of financial groups under the SRMR Financial holding company
Mixed financial holding company
– – –
–
Union (or EU) parent institution
– –
A financial institution (as parent undertaking) which is not a mixed financial holding company Its subsidiaries are exclusively or mainly institutions or financial institutions A parent undertaking which is not a credit institution, an insurance undertaking, a reinsurance undertaking, an investment firm, an asset management company or an alternative investment fund manager (i.e., a regulated entity) Along with its subsidiaries – at least one of which is a regulated entity which has its registered office in the EU – and other entities, it constitutes a financial conglomerate (according to the FICOD I) A parent institution in a Member State It is not a subsidiary of another institution authorised in any Member State, or of a financial holding company or mixed financial holding company set up in any Member State
Parent financial – holding company – in a Member State
A financial holding company It is not itself a subsidiary of an institution authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in the same Member State
Union (or EU) parent financial holding company
A parent financial holding company in a Member State It is not a subsidiary of an institution authorised in any Member State, or of another financial holding company or mixed financial holding company set up in any Member State
– –
101 For the P2Rs of significant credit institutions determined during the 2020 SREP cycle, see at: . 102 See at: .
478
Christos V. Gortsos
Art. 4 SRMR
Participating Member States
SUMMARY TABLE Presentation of financial groups under the SRMR Parent mixed financial holding company in a Member State
– –
A mixed financial holding company It is not itself a subsidiary of an institution authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in that same Member State
Union (or EU) parent mixed financial holding company
– –
A parent mixed financial holding company in a Member State It is not a subsidiary of an institution authorised in any Member State or of another financial holding company or mixed financial holding company set up in any Member State
Art. 4 SRMR Participating Member States 1. Participating Member States within the meaning of Art. 2 of Regulation (EU) No. 1024/2013 shall be considered to be participating Member States for the purposes of this Regulation. 2. Where close cooperation between a Member State and the ECB is suspended or terminated in accordance with Art. 7 of Regulation (EU) No. 1024/2013, entities established in that Member State shall cease to be covered by this Regulation from the date of application of the decision to suspend or terminate close cooperation. 3. In the event that the close cooperation with the ECB of a Member State whose currency is not the euro is terminated in accordance with Art. 7 of Regulation (EU) No. 1024/2013, the Board shall decide within three months after the date of adoption of the decision to terminate close cooperation, in agreement with that Member State, on the modalities for the recoupment of contributions that the Member State concerned has transferred to the Fund and any conditions applicable. Recoupments shall include the part of the compartment corresponding to the Member State concerned not subject to mutualisation. If during the transitional period, as laid down in the Agreement, recoupments of the non-mutualised part are not sufficient to permit the funding of the establishment by the Member State concerned of its national financial arrangement in accordance with Directive 2014/59/EU, recoupments shall also include the totality or a part of the part of the compartment corresponding to that Member State subject to mutualisation in accordance with the Agreement or otherwise, after the transitional period, the totality or a part of the contributions transferred by the Member State concerned during the close cooperation, in an amount sufficient to permit the funding of that national financial arrangement. When assessing the amount of financial means to be recouped from the mutualised part or otherwise, after the transitional period, from the Fund, the following additional criteria shall be taken into account: (a) the manner in which termination of close cooperation with the ECB has taken place, whether voluntarily, in accordance with Art. 7(6) of Regulation (EU) No. 1024/2013, or not; (b) the existence of ongoing resolution actions on the date of termination; (c) the economic cycle of the Member State concerned by the termination.
Christoph Ohler
479
Art. 4 SRMR
Participating Member States
Recoupments shall be distributed during a limited period commensurate to the duration of the close cooperation. The relevant Member State's share of the financial means from the Fund used for resolution actions during the period of close cooperation shall be deducted from those recoupments. 4. This Regulation shall continue to apply to resolution proceedings which are ongoing on the date of application of a decision as referred to in paragraph 2. Bibliography See → SSMR Art. 7. A. The concept of “participating Member States” in the SRMR . . . . . . . . . . . . . . . . . I. Limited geographical and personal scope of the Banking Union . . . . . . . . . . . . . II. Decision by the ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Legal effects of close cooperation within the SRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Relationship to non-participating Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 4 5 6
B. Suspension or termination of a close cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
A. The concept of “participating Member States” in the SRMR I. Limited geographical and personal scope of the Banking Union Art. 4 SRMR provides that the geographical and personal scope of the SSM and the SRM are identical at any time, by referring to the definition of “participating Member States” in Art. 2(1) SSMR also for the purposes of the SRMR. 2 These Member States either belong to the euro area or have established a close cooperation with the ECB in accordance with Art. 7 SSMR. This distinction reflects a fundamental principle of the architecture of the Economic and Monetary Union (EMU), where the so-called Member States with a derogation under Art. 139 (2) TFEU (“PreIns” and “Outs”) are excluded from rights and obligations within the framework of the Eurosystem.1 A close cooperation in accordance with Art. 7 SSMR does not lead to an extension of the territorial reach of the ECB’s powers but establishes a system under which the credit institutions in that Member State are at least indirectly supervised by the ECB.2 Other EU Member States which have not established a close cooperation with the ECB remain “Outs” not only in respect of the Eurosystem but also in respect of both “pillars” of the Banking Union. 3 The rationale for the parallelism between SSM and SRM is that the resolution mechanism applied by the Single Resolution Board (Board) and the financial resources administered through the Fund (Art. 60 SRMR) should become available only to those credit institutions (or groups of credit institutions) which are supervised by the ECB in accordance with the SSMR. 1
II. Decision by the ECB 4
The legal basis of close cooperation is a decision taken by the ECB in accordance with Art. 7(2) SSMR.3 This provision, however, reflects exclusively the legal requireCf. Art. 139(3) TFEU. Cf. supra, → SSMR Art. 7 para. 3; Lackhoff, Single Supervisory Mechanism (2017), at p. 227. 3 Cf. with respect to Bulgaria: Decision (EU) 2020/1015 of the European Central Bank of 24 June 2020, OJ L 224 I, p. 1; with respect to Croatia: Decision (EU) 2020/1016 of the European Central Bank of 24 June 2020, OJ L 224 I, p. 4. 1
2
480
Christoph Ohler
Art. 4 SRMR
Participating Member States
ments a participating Member States must comply with under the SSMR, before the ECB may adopt such decision, whereas it is silent with respect to the legal requirements under the SRMR.4 The lacuna is problematic insofar as the decision by the ECB to establish a close cooperation extends automatically to the SRM. It leads to the question of whether the ECB has the power to scrutinize the notification of a Member State under Art. 7(2) SSMR also with respect to the conditions that must be met under the SRMR. The proper functioning of the SRM depends, inter alia, on the accession to the Intergovernmental Agreement (IGA) referred to in Art. 67 SRMR by the Member State concerned. However, in order to safeguard the inner cohesion between the two pillars of the Banking Union it is necessary that the ECB also has the power to assess these aspects. 5 This need for coherence between the SSM and the SRM constitutes the justification of an analogous application of Art. 7(2)(c) SSMR with respect to the requirements of the SRMR.
III. Legal effects of close cooperation within the SRM As a result of close cooperation entered into under Art. 7 SSMR, credit institutions 5 established in the relevant jurisdiction will also be subject to the uniform rules and procedures for the resolution of entities under the SRMR.6 However, in contrast to the ECB under the SSMR, the Board will have the same powers vis-à-vis all credit institutions, regardless of the Member State in which they were established and where they operate in the internal market.7
IV. Relationship to non-participating Member States The internal market covers all Member States, cf. Art. 26 TFEU, contrary to the limi- 6 ted territorial scope of the Banking Union. Accordingly, Art. 4 SRMR results in a mismatch between the territorial scope of the SRM and the one of the internal market. This cleavage is aggravated by the fact that the legal basis of the SRM Regulation, Art. 114 TFEU, applies to all Member States without any exemption and is commonly used to remove obstacles to the free movement of goods, persons, services, and capital between them. According to consistent case law of the CJEU, the object of measures adopted on the basis of Art. 114 TFEU must genuinely be to improve the conditions for the establishment and functioning of the internal market.8 Both SSM and SRM are directly linked to the internal market as both systems may affect the competition among credit institutions which provide cross-border services in the EU. Different legal and administrative standards in participating and non-participating Member States could cause different competitive conditions in the internal market. 4 Binder, ‘Participation of non-euro area Member States in the SRM: centralised decision-making, decentralised implementation – shared responsibilities’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 318. 5 Binder, ‘Participation of non-euro area Member States in the SRM: centralised decision-making, decentralised implementation – shared responsibilities’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 319. 6 Binder, ‘Participation of non-euro area Member States in the SRM: centralised decision-making, decentralised implementation – shared responsibilities’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 317. 7 Binder, ‘Participation of non-euro area Member States in the SRM: centralised decision-making, decentralised implementation – shared responsibilities’ in ECB (ed), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 317. 8 Case C-58/08, Vodafone Ltd, ECLI:EU:C:2010:321, para. 32 (with further references).
Christoph Ohler
481
Art. 4 SRMR
Participating Member States
In order to address this problem, the EU legislator – in a very formalistic way – distinguished between the territorial validity (“Geltungsbereich”) of the SRMR that, as can be seen from its final provisions, is binding in its entirety and directly applicable in all Member States, and its substantial application ratione personae as provided by its Arts. 2 and 4(1). 8 The EU legislator’s decision to confine the territorial scope of the SRM, in parallel to the SSM, to the participating Member States in the meaning of Art. 2 SSMR can be justified, however. The SRM constitutes a system of financial burden sharing to which only those Member State have access which participate also in the SSM. Insofar, the legislator considered that “supervision and resolution are two complementary aspects of the establishment of the internal market for financial services whose application at the same level is regarded as mutually dependent”.9 Accordingly, Art. 4 SRMR aims at safeguarding the inner coherence between all elements of the Banking Union, the SSM and the SRM. This objective forms an appropriate reason to restrict the participating Member States to those which have conferred their supervisory competences to the ECB. The prudential supervision of the credit institutions in those Member States was established in order to reduce the risks of bank failures and, accordingly, the need to resolve banks at all. 9 In addition, the SRMR stresses that the BRRD provides mechanisms for cooperation10 regarding institutions established in both participating and non-participating Member States that should be clear, and that no Member State or group of Member States should be discriminated against, directly or indirectly, as a venue for financial services.11 Under Art. 32 SRMR, the Board is responsible for consultation and cooperation with non-participating Member States. 7
B. Suspension or termination of a close cooperation The suspension or termination of a close cooperation depends exclusively on a decision taken by the ECB in accordance with Art. 7 SSMR.12 It has various legal effects on the SRM. As regards the entities in the meaning of Art. 2 SRMR that are established in the Member State concerned, they will cease to be covered by the regulation from the date of application of the decision to suspend or terminate close cooperation.13 Art. 4(4) SRMR clarifies that the regulation shall continue to apply to resolution proceedings which are ongoing on the date of application of that decision. 11 As regards the recoupment of contributions that the Member State concerned has transferred to the Fund, the Board shall decide within three months after the date of adoption of the decision to terminate close cooperation, in agreement with that Member State, on the modalities for this transaction and any conditions applicable.14 In its decision, the Board must distinguish (a) whether the transitional period is still applicable or not, and (b) whether the monies are subject to mutualisation or not. Both criteria have their legal basis in the Intergovernmental Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund of 21 May 2014. Hereunder, the Fund will initially consist of ‘national compartments’. These will gradually be mutualised (or 10
Cf. Recital 11 SRMR. Cf. Arts. 88 to 92 BRRD. 11 Cf. Recital 12 SRMR. 12 Binder, ‘Participation of non-euro area Member States in the SRM: centralised decision-making, decentralised implementation – shared responsibilities’ in ECB (ed.), Building bridges: central banking in an interconnected world, ECB Legal Conference (2019), at p. 317. 13 Art. 4(2) SRMR. 14 Art. 4(3) SRMR. 9
10
482
Christoph Ohler
Relation to Directive 2014/59/EU and applicable national law
Art. 5 SRMR
merged) over an 8-year transitional phase starting on 1 January 2016 and ending on 31 December 2023. This means that, prior to the end of the transitional period, recoupments under Art. 4(3) SRMR include in any event the part of the compartment corresponding to the Member State concerned that, so far, is not subject to mutualisation. If these amounts are not sufficient to permit the funding of a Member State’s national financial arrangement in accordance with BRRD, recoupments shall also include the totality or a part of the part of the national compartment that already has become subject to mutualisation. After the end of the transitional period, recoupments include the totality or a part of the contributions transferred by the Member State concerned during the close cooperation, in an amount sufficient to permit the funding of that national financial arrangement. In both cases, the Board must take into account, when assessing the amount of financial means to be recouped from the mutualised part or otherwise, after the transitional period, from the Fund, the following additional criteria: (a) the manner in which termination of close cooperation with the ECB has taken place; (b) the existence of ongoing resolution actions on the date of termination; (c) the economic cycle of the Member State concerned by the termination. To the extent the Board must consider these political and economic aspects it enjoys a wide degree of discretion. However, its decisionmaking power is also restricted by the principle of proportionality in accordance with Art. 5(4) TEU when determining the effects of its decision on the Member State concerned and the financial situation of the Fund. The Board may also specify conditions applicable to the recoupments of contributions. The SRMR does not provide that the Board pays interest on the amounts recouped. Recoupments shall be distributed during a limited period commensurate to the duration of the close cooperation. The relevant Member State's share of the financial means from the Fund used for resolution actions during the period of close cooperation shall be deducted from those recoupments.
Art. 5 SRMR Relation to Directive 2014/59/EU and applicable national law 1. Where, pursuant to this Regulation, the Board performs tasks and exercises powers, which, pursuant to Directive 2014/59/EU are to be performed or exercised by the national resolution authority, the Board shall, for the application of this Regulation and of Directive 2014/59/EU, be considered to be the relevant national resolution authority or, in the event of cross-border group resolution, the relevant group-level resolution authority. 2. The Board, the Council and the Commission and, where relevant, the national resolution authorities, shall take decisions subject to and in compliance with the relevant Union law and in particular any legislative and non-legislative acts, including those referred to in Articles 290 and 291 TFEU. The Board, the Council and the Commission shall be subject to binding regulatory and implementing technical standards developed by EBA and adopted by the Commission in accordance with Articles 10 to 15 of Regulation (EU) No 1093/2010 and to any guidelines and recommendations issued by EBA under Article 16 of that Regulation. They shall make every effort to comply with any guidelines and recommendations of EBA which relate to tasks of a kind to be performed by those bodies. Where they do not comply or do not intend to comply with such guidelines
Jens-Hinrich Binder
483
12
13
14
15
Art. 5 SRMR
Relation to Directive 2014/59/EU and applicable national law
or recommendations EBA shall be informed thereof in accordance with Article 16(3) of that Regulation. The Board, the Council and the Commission shall cooperate with EBA in the application of Articles 25 and 30 of that Regulation. The Board shall also be subject to any decisions of EBA in accordance with Article 19 of Regulation (EU) No 1093/2010 where Directive 2014/59/EU provides for such decisions. Bibliography Valia Babis, ‘Single Rulebook for Prudential Regulation of EU Banks: Mission Accomplished?’, EBLR 26 (2015), 779; Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements and Tools’, in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, Oxford 2016), Ch. 2; id., ‘Cross-border coordination of bank resolution in the EU: All problems resolved?’, ECFR 4 (2016), 575; Andreas Dombret and Patrick Kenadjian (eds), The Bank Recovery and Resolution Directive (de Gruyter, Berlin, Boston 2013); Niamh Moloney, ‘Resetting the Location of Regulatory and Supervisory Control over EU Financial Markets: Lessons from Five Years on’, ICLQ 62 (2013), 955; Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017); Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (Oxford University Press, Oxford 2016); id., ‘Bank Resolution Regimes in Europe – Part I: Recovery and Resolution Planning, Early Intervention’, EBLR 24 (2013), 751; id., ‘Bank Resolution Regimes in Europe – Part II: Resolution Tools and Powers’, EBLR 25 (2014), 67; id., ‘The EU resolution toolbox’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar Publishing, Cheltenham, Northampton 2015), 81; Roel Theissen, EU Banking Supervision (Eleven International Publishing, Utrecht 2013). A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The BRRD and the SRM – General introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The BRRD and international best practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The relation to the BRRD: Relevant procedural and substantive provisions
4 4 5 6
C. The SRB and NRAs within the BRRD framework – Technical content of Art. 5 SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. SRB to assume the functions of NRAs under the BRRD (Art. 5(1) SRMR) . . II. The SRM within the European System of Financial Supervision (Art. 5(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 10 11
A. Introduction 1
While the SRMR (in Part II, infra, → Arts. 8–29) itself defines core procedural and substantive rules for resolution planning and resolution actions within the SRM, the prevention and management of bank failures and bank crises under its auspices is by no means governed by a fully integrated, exclusively supra-national legal framework. The Regulation does not, in fact, fully substitute the existing national institutional, procedural and substantive frameworks for bank crisis management in Participating Member States, which were substantially harmonised, in line with emerging international standards on bank recovery and bank resolution, by the enactment of the BRRD in 2014 (see infra, → para. 5). Instead, in order to ensure the uniform application of the harmonised regime for bank resolution,1 it establishes a rather complex and intricate framework not just for the coordination of administrative actions by the SRB and the NRAs – aspects that could broadly be summarised as an institutional framework for enhanced interagency cooperation –, but also for the interplay between directly applicable European law on the one hand and the national laws transposing the BRRD on the other hand (see infra, → paras. 6–10). The first aspect – enhanced inter-agency cooperation – is addressed, in particular, in Arts. 7 (“Division of tasks within the SRM”), 18 (“Resolution 1
484
Cf. Recital 11 BRRD. And see, further, supra, → Art. 1 paras. 15–17.
Jens-Hinrich Binder
Relation to Directive 2014/59/EU and applicable national law
Art. 5 SRMR
procedure”) and 29 SRMR (“Implementation of decisions under this Regulation”), as well as in the provisions of Part II, Ch. 4, in particular, Art. 30 SRMR (“Obligation to cooperate and information exchange within the SRM”). Art. 5 SRMR, by contrast, addresses the interplay between the Regulation, the BRRD and the applicable national laws (i.e., national legislation transposing the BRRD). The article forms part of the fundamental organisational provisions of the SRMR. 2 Art. 5(1) SRMR in the present form is broadly identical to the Commission Proposal of 2013 (whose wording reflected the greater role for the Commission envisaged in that proposal).2 Art. 5(2) SRMR in the wording of that Proposal, which required the Commission’s authorisation for actions of the Board taken in its capacity as ‘national resolution authority’, was dropped in view of the changes to the original concept for decisionmaking between Board and Commission. Art. 5(2) SRMR in the present wording builds on Art. 5(3) SRMR of the Commission Proposal, but was expanded significantly in order to provide for the integration of the institutional arrangements for resolution planning and resolution actions into the European System of Financial Supervision (see infra, → paras. 11–16). Significantly, while Art. 5 SRMR, in the Commission Proposal, originally was con- 3 ceived as the only general provision relating to the functional relationship between the Regulation and the BRRD, it has subsequently lost that status with the introduction of what is now Art. 7 SRMR. In addition to delineating the powers of the SRB and NRAs, respectively, that provision also defines the general principles governing the application of the SRMR on the one hand and the national laws transposing the BRRD on the other hand (infra, → Art. 7 paras. 34–35). As enacted, despite the general (and, to some extent, misleading) wording of the official title (“Relation to Directive 2014/59/EU and applicable national law”), Art. 5 SRMR therefore provides no comprehensive, let alone exhaustive definition of the conceptual basis for the interplay between European and national law (see further infra, → paras. 6–10). It is only in conjunction with Art. 7 SRMR and the technical provisions of Part II of the Regulation – which add to the more general principles stipulated by Art. 7 SRMR and specify further the extent to which national laws transposing the BRRD shall be invoked in order to implement resolution actions within the SRM – that the full picture with regard to the functional relationship between the BRRD and the SRM can be properly assessed.
B. The BRRD and the SRM – General introduction I. Overview The functional relationship between the BRRD on the one hand and the SRMR on 4 the other, although explicitly mentioned in the official title of Art. 5 SRMR, is not defined in this provision and can only be established from a synopsis of both legal instruments in their entirety. In very general terms (and subject to many qualifications), the SRMR can be described as an integrated institutional framework ensuring the uniform application of the BRRD in order to prevent diverging resolution actions by NRAs that could trigger negative implications for financial stability within the Eurozone and beyond. From a policy perspective, the creation of the SRM thus can be perceived as com2 Proposal for a Regulation of the European Parliament and of the Council 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 1093/32010 of the European Parliament and of the Council, 10 July 2013, COM(2013) 520 final.
Jens-Hinrich Binder
485
Art. 5 SRMR
Relation to Directive 2014/59/EU and applicable national law
plementing the BRRD with institutional features designed so as to facilitate, and enhance, effective implementation of resolution actions by cutting back the discretion of participating Member States and their respective resolution authorities (supra, → Art. 1 para. 5). Moreover, the BRRD has also served as a blueprint for the procedural and substantive provisions of Part II of the SRMR, which define the tasks of the SRB and NRAs with regard to resolution planning and the design and implementation of resolution actions and which have been adapted, to some extent verbatim, from the corresponding provisions in the BRRD (see infra, → para. 7). While the implementation of resolution actions – pursuant to Art. 7(3) SRMR and the technical provisions of Part II of the Regulation, in particular, Art. 29 SRMR – will be carried out, to some extent, within the frameworks defined by, and according to, the national laws transposing the BRRD (infra, → Art. 7 paras. 33–35), Part II of the Regulation, as noted before, replicates parts of the substantive and procedural provisions of the BRRD in the SRMR for application under the auspices of the SRM. This substitution of parts of the corresponding national frameworks with directly applicable, uniform European law based on the BRRD reflects, again, the rationale to ensure a maximum level of uniformity and, thereby, to reduce the risk that diverging national interpretations could cause negative implications for effective and consistent resolution actions especially in cross-border scenarios within the Eurozone (cf. also supra, → Art. 1 para. 16 and → Art. 7 para. 34). Just as the BRRD, the SRMR is thus, at the same time, an emanation of accepted best practice recognised by international standard setting bodies (see infra, → para. 5).
II. The BRRD and international best practice 5
The adoption of the BRRD on 15 May 2014, overlapping with the legislative procedure for the SRMR, marked the end of almost four years of negotiations over the initial Commission Proposal of 2012.3 With the BRRD, the Union legislator aimed at providing the resolution authorities in all EU Member States with ‘a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the institution’s critical financial and economic functions, while minimising the impact of an institution’s failure on the economy and financial system’4 or, in other words, with mechanisms that could ‘minimize negative repercussions by preserving the systemically important functions of the institution concerned’, when a credit institution (or investment firm) comes close to insolvency. 5 With preventive provisions (on recovery and resolution planning), provisions on early intervention, as well as a complex set of resolution tools and corresponding powers, the BRRD takes up, and is modelled after, international standards developed in response
3 Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010, 6 June 2012, COM(2012) 280 final. 4 Recital 5 BRRD. 5 Recital 1 BRRD. On the BRRD, see generally, e.g., Binder and Singh (eds), Bank Resolution – The European Regime (2016); Dombret and Kenadjian (eds), The Bank Recovery and Resolution Directive (2013); Haentjens, Commentary to the BRRD, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), Ch. 5–9; Schillig, ‘Bank Resolution Regimes in Europe – Part I’, EBLR 24 (2013), 751; id., Part II, EBLR 25 (2014), 67.
486
Jens-Hinrich Binder
Relation to Directive 2014/59/EU and applicable national law
Art. 5 SRMR
to the global financial crisis by the Basel Committee on Banking Supervision and the Financial Stability Board, respectively.6
III. The relation to the BRRD: Relevant procedural and substantive provisions With the replication of parts of the substantive and procedural provisions of the 6 BRRD, the SRMR establishes, in a way, a separate, supra-national regime in addition to the 19 national laws within the Eurozone or the 28 resolution regimes in all EU Member States as a whole (as harmonised by the BRRD). However, as tasks and powers allocated under the national resolution regimes in Participating Member States are activated and relied on for implementation of decisions under the auspices of the SRM, the two levels are deeply intertwined. The relationship between both levels is clearly motivated by what can be interpreted as a combination of political compromises and the insight that effective resolution requires not just centralised decision-making, but also effective implementation in the Participating Member States. The following table, structured according to the order of provisions in the SRMR, 7 illustrates the details of the relationship between the different regimes for resolution planning and resolution actions by way of a synopsis of the relevant provisions of the BRRD and the SRMR, respectively, with additional explanations on the role of national laws transposing the BRRD:7
6 Basel Committee on Banking Regulation, ‘Report and Recommendations of the Cross-border Bank Resolution Group’ (March 2010) ; Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2011) . An updated version has been released in October 2014 . See, for an extensive discussion of the historic background, Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), paras. 2.05–2.19. 7 Early intervention measures pursuant to Arts. 27–29 BRRD and similar measures under Art. 16 SSMR are allocated to national competent authorities and, within the SSM, to the ECB and are therefore not listed below. In this respect, Art. 13 SRMR merely stipulates general requirements with regard to the coordination of such measures with resolution action taken by the SRB.
Jens-Hinrich Binder
487
Art. 5 SRMR Original provision(s) in BRRD8
Relation to Directive 2014/59/EU and applicable national law
Corresponding provision(s) in SRMR
Relevance of national laws transposing the BRRD
Preventive measures Art. 4 BRRD: Simplified obligations for certain institutions Art. 10 BRRD: Resolution plans Art. 11 BRRD: Information for the purpose of resolution plans and cooperation from the institution Art. 12 BRRD: Group resolution plans Art. 13 BRRD: Requirements and procedure for group resolution plans Art. 14 BRRD: Transmission of resolution plans to competent authorities
Art. 8 SRMR: Resolution planning Art. 8(1)-(9) SRMR: general requirements Art. 8(10)-(12) SRMR: group resolution plans Art. 8(12)-(14) SRMR: ancillary provisions Art. 9 SRMR: Resolution plans drawn up by national resolution authorities Art. 11 SRMR: Simplified obligations for certain institutions
Within the scope of the SRMR, national laws transposing the BRRD are substituted by the provisions of Art. 8 SRMR; cf., for institutions not subject to supervision planning by the SRB, Art. 9(1) SRMR.
Art. 15 BRRD: Resolvability Art. 16 BRRD: Assessment of resolvability for groups Art. 17 BRRD: Powers to address or remove impediments to resolvability Art. 18 BRRD: Powers to address or remove impediments to resolvability: group treatment
Art. 10 SRMR: Assessment of resolvability
SRB to give instructions to NRAs pursuant to Art. 10(10) and (11) SRMR; NRAs to implement such instructions in accordance with national laws transposing the BRRD, cf. Art. 10(12) in conjunction with Art. 29(1)(2) SRMR.
Art. 45 BRRD: Application of the minimum requirement
Art. 12 SRMR: Minimum requirement for own funds and eligible liabilities9
Within the scope of the SRMR, national laws transposing the BRRD are substituted by the provisions of Art. 12 SRMR for institutions covered by Art. 9 SRMR; cf. Art. 12(2) in conjunction with Art. 12(4) SRMR.
8 Note that, in order to highlight the parallels and differences, only the core elements of relevant provisions for present purposes are recorded, and that the table should not be misread as an exhaustive account, and interpretation, of the scope and content of the provisions cited. 9 Note that, in the SRMR, minimum requirements are located, convincingly, as parts of the provisions on preventive resolution planning, whereas in the BRRD, they are part of the resolution framework.
488
Jens-Hinrich Binder
Relation to Directive 2014/59/EU and applicable national law
Original provision(s) in BRRD8
Corresponding provision(s) in SRMR
Art. 5 SRMR Relevance of national laws transposing the BRRD
Resolution actions Art. 31 BRRD: Resolution objectives
Art. 14 SRMR: Resolution objectives
National laws transposing the BRRD are fully substituted.
Art. 34 BRRD: General principles governing resolution
Art. 15 SRMR: General principles governing resolution
National laws transposing the BRRD are fully substituted.
Art. 33 BRRD: Conditions Art. 16 SRMR: Resolution for resolution with regard of financial institutions to financial institutions and parent undertakings and holding companies
National laws transposing the BRRD are fully substituted.
Art. 47 BRRD: Treatment of shareholders in bail-in or write- down of capital instruments Art. 48 BRRD: Sequence of write-down and conversion Art. 108 BRRD: Ranking of deposits in insolvency hierarchy
Art. 17 SRMR: Order of priority of claims
Resolution actions both by the SRB and by NRAs to be in accordance with national laws transposing relevant BRRD provisions (Art. 17(1) SRMR).
Art. 32 BRRD: Conditions for resolution Art. 32(1) BRRD: list of conditions for resolution Art. 32(4) BRRD: definition of ‘failing or likely to fail’ Art. 32(5) BRRD: definition of ‘resolution in the public interest’
Art. 18 SRMR: Resolution procedure Art. 18(1) SRMR: list of conditions for resolution Art. 18(4) SRMR: definition of ‘failing or likely to fail’ Art. 18(5) SRMR: definition of ‘resolution in the public interest’
Within the scope of the SRMR, national resolution laws transposing the BRRD are fully substituted; if NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 18 SRMR applies also for those actions (cf. Art. 7(3) SRMR).10
Art. 19 SRMR: State aid and Fund aid
Procedural requirements applicable exclusively within scope of SRM; no direct equivalent within BRRD, but cf. references to State aid procedure in Arts. 32(4)(d), 34(3) and 37(10)(b) BRRD
8 Note that, in order to highlight the parallels and differences, only the core elements of relevant provisions for present purposes are recorded, and that the table should not be misread as an exhaustive account, and interpretation, of the scope and content of the provisions cited. 10 See, further infra, → Art. 7 paras. 33–35.
Jens-Hinrich Binder
489
Art. 5 SRMR
Relation to Directive 2014/59/EU and applicable national law
Original provision(s) in BRRD8
Corresponding provision(s) in SRMR
Relevance of national laws transposing the BRRD
Art. 36 BRRD: Valuation for the purposes of resolution Art. 36(1), (3)-(8), (13)-(16) BRRD: requirements for valuations prior to taking resolution action Art. 36(2), (9)-(12) BRRD: provisional valuations in urgent cases where a definitive valuation is not feasible Art. 74 BRRD: Valuation of difference in treatment
Art. 20 SRMR: Valuation for the purposes of resolution Art. 20(1)-(15) SRMR: valuation (including provisional valuation) Art. 20(16)-(18) SRMR: ex post valuation of difference in treatment
Within the scope of the SRMR, national resolution laws transposing the BRRD are fully substituted; if NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 20 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
Art. 59 SRMR: Requirement to write down or convert capital instruments Art. 60 SRMR: Provisions governing the write-down or conversion of capital instruments Art. 61 BRRD: Authorities responsible for determination Art. 62 BRRD: Consolidated application: procedure for determination
Art. 21 SRMR: Writedown and conversion of capital instruments Art. 21(1)-(8) SRMR: conditions for, and requirements pertaining to, the write-down and conversion powers Art. 21(8) SRMR: writedown/ conversion of capital instruments if conditions for resolution are not met Art. 21(9)-(11) SRMR: procedure for write-down and conversion of capital instruments within the SRM
Within the scope of the SRMR, substantive conditions for, and requirements pertaining to, the writedown and conversion powers are fully substituted; national laws transposing the BRRD do not apply in this respect. However, upon instructions by the SRB, NRAs are to implement the write-down/conversion powers under these laws (Art. 21(8) SRMR and Art. 21(11) in conjunction with Art. 29 SRMR, respectively). If NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 21 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
8 Note that, in order to highlight the parallels and differences, only the core elements of relevant provisions for present purposes are recorded, and that the table should not be misread as an exhaustive account, and interpretation, of the scope and content of the provisions cited.
490
Jens-Hinrich Binder
Relation to Directive 2014/59/EU and applicable national law
Original provision(s) in BRRD8 Art. 37 BRRD: General principles of resolution tools
Art. 38 BRRD: The sale of business tool Art. 39 BRRD: Sale of business tool: procedural requirements
Corresponding provision(s) in SRMR
Art. 5 SRMR Relevance of national laws transposing the BRRD
Art. 22 SRMR: General principles of resolution tools
Within the scope of the SRMR, national resolution laws transposing the BRRD are fully substituted; if NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 22 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
Art. 23 SRMR: Resolution scheme
Procedural provision without equivalent in the BRRD that specifies (in conjunction with Art. 18 SRMR) how the resolution scheme is to define the design of resolution actions; in this context, the appointment of a special manager under the national laws transposing Art. 35 BRRD may be determined.
Art. 24 SRMR: Sale of business tool
The resolution scheme adopted in accordance with Arts. 18 and 23 SRMR is to define how the tool is implemented under the national laws transposing Arts. 38 and 39 BRRD (cf. Art. 24(2) SRMR). If NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 24 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
8 Note that, in order to highlight the parallels and differences, only the core elements of relevant provisions for present purposes are recorded, and that the table should not be misread as an exhaustive account, and interpretation, of the scope and content of the provisions cited.
Jens-Hinrich Binder
491
Art. 5 SRMR
Relation to Directive 2014/59/EU and applicable national law
Original provision(s) in BRRD8
Corresponding provision(s) in SRMR
Relevance of national laws transposing the BRRD
Art. 40 BRRD: Bridge institution tool Art. 41 BRRD: Operation of a bridge institution tool
Art. 25 SRMR: Bridge institution tool
The resolution scheme adopted in accordance with Arts. 18 and 23 SRMR is to define how the tool is implemented under the national laws transposing Arts. 40 and 41 BRRD (cf. Art. 25(2) SRMR). If NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 25 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
Art. 42 SRMR: Asset sepa- Art. 26 SRMR: Asset sepa- The resolution scheme ration tool ration tool adopted in accordance with Arts. 18 and 23 SRMR is to define how the tool is implemented under the national laws transposing Art. 42 BRRD (cf. Art. 26(2) SRMR). If NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 25 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
8 Note that, in order to highlight the parallels and differences, only the core elements of relevant provisions for present purposes are recorded, and that the table should not be misread as an exhaustive account, and interpretation, of the scope and content of the provisions cited.
492
Jens-Hinrich Binder
Relation to Directive 2014/59/EU and applicable national law
Art. 5 SRMR
Original provision(s) in BRRD8
Corresponding provision(s) in SRMR
Relevance of national laws transposing the BRRD
Art. 43 BRRD: The bail-in tool Art. 43(2) BRRD: purposes of bail-in Art. 44 BRRD: Scope of bail-in tool Art. 44(2) BRRD: excluded liabilities Art. 44(3), (9) and (10) BRRD: further exclusions in the discretion of the resolution authorities Art. 44(4)-(8) BRRD: contribution from financing arrangements or other sources to compensate for shortfalls due to exclusion under Art. 44(3) BRRD Art. 46 BRRD: Assessment of amount of bail-in Art. 47 BRRD: Treatment of shareholders in bail-in or write-down of capital instruments Art. 48 BRRD: Sequence of write-down and conversion Art. 49 BRRD: Derivatives
Art. 27 SRMR: Bail-in tool Art. 27(1) SRMR: purposes of bail-in and scope of resolution scheme in this respect Art. 27(3) SRMR: excluded liabilities Art. 27(4), (12) and (14) SRMR: further exclusions in the discretion of the SRB Art. 27(5)-(9) SRMR: contribution by SRF or other sources to compensate for shortfalls due to exclusions under Art. 27(4) SRMR Art. 27(13) SRMR: assessment of amount of bail-in Art. 27(15) SRMR: reference to Art. 17 SRMR with regard to priority of claims
NRAs to implement decisions under the national laws transposing the BRRD pursuant to Art. 29(1) BRRD. If NRAs take resolution action with regard to entities not within the direct responsibility of the SRB, Art. 27 SRMR applies also for those actions (cf. Art. 7(3) SRMR).
Missing in this picture is the extensive range of ‘resolution powers’ and associated 8 requirements facilitating the implementation of decisions accorded to NRAs under the national laws transposing the requirements laid down in Arts. 63–72 BRRD, which are not replicated for direct application by the SRB (or, for that matter, NRAs) in the SRMR. The relevant provisions are not commented on separately in the present volume, but will be discussed in connection with the resolution measures they are designed to facilitate. The relevant powers provide national authorities with a comprehensive set of powers of control over the failing institution and the power to amend its contractual relationships with counterparties and market infrastructure in order to implement the resolution tools. The powers are similar to those frequently granted to insolvency administrators under general insolvency law, but are tailored specifically to the needs arising in the context of the implementation of resolution actions under the Directive. They include:
8 Note that, in order to highlight the parallels and differences, only the core elements of relevant provisions for present purposes are recorded, and that the table should not be misread as an exhaustive account, and interpretation, of the scope and content of the provisions cited.
Jens-Hinrich Binder
493
Art. 5 SRMR
Relation to Directive 2014/59/EU and applicable national law
–
‘general powers’ (defined in Art. 63 BRRD, including, in particular, the powers necessary to implement resolution actions vis-à-vis shareholders, other owners and management of the insolvent institution and the powers to amend debt relationships in order to carry out a write-down and bail-in), – ‘ancillary powers’ (Art. 64 BRRD, including additional powers necessary to carry out resolution actions), – the ‘power to require the provision of services and facilities’ from the institution under resolution or group entities associated with it (Art. 65 BRRD), – the ‘power to enforce crisis management measures or crisis prevention measures by other Member States’ (Art. 66 BRRD), – the ‘power in respect of assets, rights, liabilities, shares and other instruments if ownership located in third countries’ (Art. 67 BRRD), – requirements providing for the ‘exclusion of certain contractual terms in early intervention and resolution’ (Art. 68 BRRD), – the ‘power to suspend certain obligations’ (Art. 69 BRRD), – the ‘power to restrict the enforcement of security interests’ (Art. 70 BRRD), – the ‘power to temporarily suspend termination rights’ (Art. 71 BRRD), and – certain requirements relating to the ‘exercise of resolution powers’ under national law (Art. 72 BRRD). 9 In addition to the powers and requirements discussed in para. 8, Part. II, Chapter VII of the BRRD (Arts. 73–80 BRRD) also provides for certain ‘safeguards’ for the protection of specific contractual relationships, whose exposure to the effects of resolution actions would otherwise cause a disproportionate burden on the relevant parties, or jeopardize systemic stability because of the nature of the relevant relationships. The ‘safeguards’, expressly referred to as mandatory also for resolution actions under the auspices of the SRM in Art. 29(1) SRMR, effectively serve two objectives: (a) to complement the resolution tools with ancillary instruments to protect systemic stability, and (b) to mitigate the impact of resolution actions – which, in themselves, are geared towards protecting systemic stability rather than the interests of individual stakeholders – on these stakeholders. The ‘safeguards’, which will be commented on in conjunction with the specific resolution tools, include: – minimum standards of protection for the ‘treatment of shareholders and creditors in the case of partial transfers and application of the bail-in tool’ (Art. 73 BRRD), – provisions for the ex post ‘valuation of difference in treatment’ and corresponding compensation rights of shareholders and creditors (Arts. 74 and 75 BRRD – as noted before, the requirement to carry out a valuation of differences in treatment has been replicated in Art. 20(16)-(18) SRMR), – provisions to offer a ‘safeguard for counterparties in partial transfers’ (Art. 76 BRRD, including, in particular, for the protection of contractual security and collateral arrangements, set-off and netting rights), – additional specific requirements for the ‘protection for financial collateral, set-off and netting agreements’ (Art. 77 BRRD), the ‘protection for security arrangements’ (Art. 78 BRRD) and the ‘protection for structured finance arrangements and covered bonds’ (Art. 79 BRRD), and – provisions for the ‘protection of trading, clearing and settlement systems’ in the event of a partial transfer (Art. 80 BRRD).
494
Jens-Hinrich Binder
Relation to Directive 2014/59/EU and applicable national law
Art. 5 SRMR
C. The SRB and NRAs within the BRRD framework – Technical content of Art. 5 SRMR I. SRB to assume the functions of NRAs under the BRRD (Art. 5(1) SRMR) Art. 5(1) SRMR stipulates the general principle that the SRB, in performing its tasks 10 and exercising powers under the Regulation, assumes the role allocated to National Resolution Authorities under the BRRD. Given that the tasks and powers of the SRB, as such, are defined elsewhere in the Regulation and that the relevant provisions also address the implementation of decisions in conjunction with the national laws transposing the BRRD (see supra, → paras. 6–10), the practical relevance of Art. 5(1) SRMR, as enacted, is limited. One notable exception is the adoption of direct resolution measures taken by the SRB vis-à-vis less significant entities or groups in accordance with Art. 7(4) SRMR. By substituting the SRB for NRAs, however, Art. 5(1) SRMR also reinforces the principle of full responsibility of the SRB in terms of the application of national resolution frameworks within the limits defined, in particular, by Art. 7 SRMR (see, in particular, Art. 7(4) SRMR and cf. Art. 7 SRMR para. 38). By virtue of Art. 5(1) SRMR, the SRB’s powers take priority over the allocation of powers under national legislation. This is also of relevance with regard to cross-border scenarios with non-participating Member States, which have to recognise (and, where necessary, give effect to) resolution actions taken by the SRB just as they would have to with regard to the measures taken by NRAs under the national laws transposing the 2001 Winding-up Directive.11 By virtue of Art. 5(1) SRMR, actions of the SRB have to be recognised and, where necessary, assisted by NRAs across the EU in exactly the same way as resolution actions taken by NRAs under the BRRD framework.
II. The SRM within the European System of Financial Supervision (Art. 5(2) SRMR) Pursuant to Art. 5(2)(1) SRMR, the Board, the Council and the Commission and, 11 where relevant, NRAs ‘shall take decisions subject to and in compliance with the relevant Union law and in particular any legislative and non-legislative acts, including those referred to in Arts. 290 and 291 TFEU.’ Subpara. (2) of Art. 5(2) SRMR then expressly declares the Board, the Council and the Commission to be subject to binding regulatory and implementing technical standards developed by EBA and adopted by the Commission in accordance with Arts. 10–15 of Regulation (EU) No. 1093/2010 and to any guidelines issued by EBA in accordance with Art. 16 of that Regulation. To be sure, the first half of subpara. (1) is merely declaratory and states the obvious; the fact that the SRB (as a Union agency pursuant to Art. 42(1) SRMR) as well as the Council and the Commission as organs of the EU are subject to ‘relevant EU law’ follows from general principles of EU law and hardly deserves further mention. The same applies to the 11 Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions, OJ L 125 of 5.5.2001, at p. 15 (as amended by Art. 117 BRRD). On the applicable framework for the cross-border recognition and enforcement of national bank insolvency regimes and their legal effects, see, generally, Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), paras. 16.17–16.33; Wessels, ‘Commentary to Directive 2001/24/EC’, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017). Ch. 3; Binder, ECFR 4 (2016), 575, at pp. 585–590.
Jens-Hinrich Binder
495
Art. 5 SRMR
Relation to Directive 2014/59/EU and applicable national law
NRAs, which are bound by the national laws transposing relevant European law (in particular, the BRRD). The real significance of both subparas. of Art. 5(3) SRMR thus lies not in the general statement expressed in the first subpara., but in the definition of the relationship between the SRM and the European System of Financial Supervision as established, inter alia, by Regulation (EU) No. 1093/2010 (EBAR). 12 In this respect, Art. 5(3)(1) SRMR generally ensures the full applicability of legal acts adopted in accordance with Art. 290 TFEU (delegated legislation) and Art. 291 TFEU (implementing legislation), respectively, which play an important role for the specification, and further harmonisation, of requirements of European secondary legislation in the field of banking regulation generally and the area of bank resolution in particular. Art. 5(3)(2) SRMR specifies this further by way of reference to those provisions of Regulation (EU) No. 1093/2010 that define the functional role and scope of such legal instruments within the context of the so-called ‘Lamfalussy process,’ i.e. the tiered system of tertiary legislation and quasi-legislation designed so as to ensure effective and flexible harmonisation of European financial legislation within the framework defined by the relevant secondary legislation (in the case of bank resolution, the BRRD). By virtue of Art. 5(3) sent. 1 and 2 SRMR, resolution under the auspices of the SRMR is subject to exactly the same set of requirements and guidelines that is relevant for resolution actions by NRAs under the national laws transposing the BRRD – the ‘Single Rulebook’ developed by EBA and, to some extent, the Commission.12 This should ensure operational consistency between the approaches taken by resolution authorities across the EU as a whole and also defines the institutional hierarchy between EBA, which maintains its role as a key driver for the harmonisation of national laws and standards under the BRRD as the relevant act of secondary legislation, and the SRB. 13 Under the BRRD (as in other areas of European financial regulation), some of the different forms of tertiary regulation referred to in Arts. 10–15 Regulation (EU) No. 1093/2010 play an important role in ensuring the consistency of national implementation standards. Delegated Acts, as defined in Art. 290(1)(1) TFEU, are provided for in a number of articles of the BRRD,13 as are Regulatory Technical Standards prepared by EBA and adopted by the Commission in accordance with Art. 10 Regulation (EU) No. 1093/2010.14 By contrast, Implementing Acts developed and adopted exclusively by the Commission pursuant to Art. 291(2) TFEU do not play a role in the existing legal framework. This is different with regard to Implementing Technical Standards developed by EBA and adopted by the Commission in accordance with Art. 15 Regulation (EU) No. 1093/2010, which are envisaged in a number of provisions of the BRRD.15 14 Pursuant to Art. 5(3)(2) sent. 1 SRMR, guidelines and recommendations adopted by EBA in accordance with Art. 16 Regulation (EU) No. 1093/2010 are also of relevance for resolution under the auspices of the SRM. Significantly, pursuant to sent. 2 of that subpara., the SRB, the Council and the Commission are required to ‘make every effort to comply with any guidelines and recommendations of EBA which relate to tasks of a kind to be performed by these bodies’, although sent. 3 then expressly anticipates decisions not to comply subject to the comply-or-explain mechanism set out in Art. 16(3) of Regulation (EU) No. 1093/2010. Under the BRRD, EBA guidelines are envisaged with regard
12 See, generally, Theissen, EU Banking Regulation (2013), at pp. 1200–1223; Babis, EBLR 26 (2015), 779; Moloney, ICLQ 62 (2013), 955. 13 Arts. 2(2), 44(11), 76(4), 103(7) and (8), 104(4) in conjunction with Art. 115 BRRD. 14 Arts. 4(6), 5(10), 6(8), 10(9), 12(6), 15(4), 23(2), 27(5), 36(14) and (15), 45c(4), 45f(6), 549(5), 52(12) and (14), 55(5) and (6), 71(8), 71a(5), 74(4), 82(3), and 88(8) BRRD. 15 See Arts. 4(11), 11(3), 26(2), 45i(5) and (6), 45j(2) and 55(8) BRRD.
496
Jens-Hinrich Binder
Art. 6 SRMR
General Principles
to a broad range of aspects,16 whereas recommendations are only referred to in relation to specific problems of resolution funding.17 Pursuant to Art. 5(2)(2) sent. 4 SRMR, the SRB, the Commission and the Council are 15 also required to cooperate with EBA in the way envisaged in Arts. 25 and 30 of Regulation (EU) No. 1093/2010. Art. 25(1) of that Regulation generally requires EBA to ‘contribute to and participate actively in the development and coordination of effective and consistent recovery and resolution plans, procedures in emergency situations and preventive measures to minimise the systemic impact of any failure’, while Art. 25(2) defines EBA’s responsibility for the development of best practice standards in the area. By contrast, Art. 30 of Regulation (EU) No. 1093/2010 is broader in scope and lays down the framework for peer reviews of competent authorities under the auspices of EBA. Finally, the SRB, pursuant to Art. 5(2)(2) sent. 5 SRMR is also subject to decisions by 16 EBA taken in accordance with Art. 19 of Regulation (EU) No. 1093/2010, where the BRRD provides for such decisions. Art. 19 of that Regulation provides for dispute resolution by EBA in the event of conflicts between authorities in different Member States relating to the interpretation and implementation of legal acts of EU banking regulation generally. This mechanism is referred to in a number of provisions of the BRRD. 18
Art. 6 SRMR General Principles 1. No action, proposal or policy of the Board, the Council, the Commission or a national resolution authority shall discriminate against entities, deposit holders, investors or other creditors established in the Union on the grounds of their nationality or place of business. 2. Every action, proposal or policy of the Board, the Council, the Commission, or of a national resolution authority in the framework of the SRM shall be undertaken with full regard and duty of care for the unity and integrity of the internal market. 3. When making decisions or taking action which may have an impact in more than one Member State, and in particular when taking decisions concerning groups established in two or more Member States, due consideration shall be given to the resolution objectives referred to in Article 14 and all of the following factors: (a) the interests of the Member States where a group operates and in particular the impact of any decision or action or inaction on the financial stability, fiscal resources, the economy, the financing arrangements, the deposit guarantee scheme or the investor compensation scheme of any of those Member States and on the Fund; (b) the objective of balancing the interests of the various Member States involved and of avoiding unfairly prejudicing or unfairly protecting the interests of a Member State; (c) the need to minimise a negative impact for any part of a group of which an entity referred to in Article 2, which is subject to a resolution, is a member.
16 Arts. 4(5), 5(7), 9(2), 17(8), 23(3), 27(4), 32(4)(4) and (6), 39(4), 42(14), 47(6), 48(6), 50(4), 52(13), 65(5), 84(7) BRRD. 17 Art. 102(4) BRRD. 18 See, as far as relevant for present purposes, Arts. 13(5), (6) and (9) (group resolution plans), 18(6), (7) and (9) (powers to address impediments to resolvability: group treatment), 20(7) (intra-group financial support), 30(6)-(8) (early intervention measures), and 45h(1) and (4) (determination of MREL) BRRD.
Jens-Hinrich Binder
497
Art. 6 SRMR
General Principles
4. When making decisions or taking actions, in particular regarding entities or groups established both in a participating Member State and in a non-participating Member State, possible negative effects on non-participating Member States, including on entities established in those Member States, shall be taken into consideration. 5. The Board, the Council and the Commission shall balance the factors referred to in paragraph 3 with the resolution objectives referred to in Article 14 as appropriate to the nature and circumstances of each case and shall comply with the decisions made by the Commission under Article 107 TFEU and Article 19 of this Regulation. 6. Decisions or actions of the Board, the Council or the Commission shall neither require Member States to provide extraordinary public financial support nor impinge on the budgetary sovereignty and fiscal responsibilities of the Member States. 7. Where the Board takes a decision that is addressed to a national resolution authority, the national resolution authority shall have the right to specify further the measures to be taken. Such specifications shall comply with the decision of the Board in question. Bibliography Basel Committee on Banking Supervision, ‘Report and Recommendations of the Crossborder Bank Resolution Group’ (2010); Jens-Hinrich Binder, ‘Ring-fencing: An Integrated Approach with Many Unknowns’, EBOR 16 (2015), 97; id., ‘Cross-border coordination of bank resolution in the EU: All problems resolved?’, ECFR 4 (2016), 575; id., ‘Resolution planning and structural bank reform within the banking union’ in: Juan E. Castaňeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union – Prospects and Challenges (Routledge, Oxford 2016), 129; id., ‘Resolving a Bank – Judicial Review With Regard to the Exercise of Resolution Powers’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, Cheltenham 2021), 367; Eilís Ferran, ‘European Banking Union and the EU Single Financial Market: More Differentiated Integration, or Disintegration?’ in: Bruno De Witte, Andrea Ott and Ellen Vos (eds), Between Flexibility and Disintegration: The Trajectory of Differentiation in EU Law (Edward Elgar, Cheltenham, 2017); Richard Herring, ‘The Challenges of Resolving Cross-Border Financial Institutions’, Yale JREG 31 (2014), 853; Gabriel Moss and Matthias Haentjens, ‘Principles for Cross-border Financial Institution Insolvencies’ in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), Ch. 2; Bob Wessels, ‘Commentary on Directive 2001/24/EC on the Reorganisation and Winding up of Credit Institutions’ in: Gabriel Moss, Bob Wessels and Mathias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), Ch. 3; Rosalind Z. Wiggins, Natalie Tente and Andrew Metrick, ‘European Banking Union D: Cross-Border Resolution — Dexia Group’, 2014 . A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Background: Cross-border implications of bank failures and bank resolution as a core problem for the Banking Union . . . . . . . . . . . . . . . . . . . . . . . . .
4
C. Protection of individuals and individual legal entities within EU Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. No discrimination rule (Art. 6(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Minimisation of impact of resolution on group entities (Art. 6(3)(c) SRMR)
8 8 13
D. Potential implications for Member States and the Internal Market (Art. 6(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Context and background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Substantive and procedural content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Protection of budgetary sovereignty and fiscal responsibility of Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Legal relevance and enforceability of Art. 6 SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . .
498
Jens-Hinrich Binder
15 15 17 19 20
Art. 6 SRMR
General Principles
A. Introduction Art. 6 SRMR, in a rather convoluted and not entirely coherent structure, lays down 1 general principles for the functioning of the SRM, in particular with regard to the implications of decisions and policies adopted by the SRB and other authorities under the auspices of the SRM for participating Member States, as well as stakeholders and markets in those Member States. The provision also addresses potential externalities of acts, decisions and policies adopted by the relevant actors for non-participating EU Member States. Although this is only partly reflected in the sequence of the respective paragraphs, the provision thus seeks to mitigate potential conflicts with three distinct (but interrelated) groups of stakeholders, which provides a convenient analytical framework for the analysis of the provision as a whole: (a) individuals and individual legal entities within EU Member States that are affected by resolution, (b) participating Member States, and (c) non-participating Member States. The provision addresses legitimate concerns about the impact of resolution actions, particularly in cross-border scenarios (see infra, → paras. 4–7), its legal relevance – and enforceability – is not entirely clear, however (see infra, → para. 20). With regard to the first of the three categories of beneficiaries identified above, 2 Art. 6(1) SRMR prohibits discrimination against entities, deposit holders, investors or other creditors established in the Union on the grounds of their nationality or place of business, while para. (3)(c) specifically stresses the need to minimise implications of resolution actions with regard to resolution entities that form part of a group (see infra, → paras. 8–13). As for the second category, Art. 6(3)(a) and (b) SRMR address the need to balance the interests of all participating Member States with respect to actions and decisions taken under the auspices of the SRM, while Art. 6(6) SRMR expressly protects the budgetary sovereignty of participating Member States with regard to the funding of resolution actions. Third, Art. 6(4) SRMR restricts potential implications of resolution actions and other decisions taken under the auspices of the SRM for non-participating Member States (see infra, → paras. 15–19). Art. 6(2) SRMR, requiring relevant decisions and actions to protect the ‘unity and in- 3 tegrity of the internal market’, and Art. 6(5) SRMR, requiring compliance with the restrictions for the funding of resolution actions arising from the State Aid regime on the one hand and under Art. 19 SRMR (on the use of the SRF) on the other hand, specify these requirements yet further. While neither provision focuses on individual stakeholders and both take a broader perspective than the paragraphs summarised above, the objective clearly is fully consistent with the other subparagraphs. Finally, on a more operational level, Art. 6(7) SRMR empowers NRAs to specify further the measures taken by the SRB for the purposes of implementation at the national level.
B. Background: Cross-border implications of bank failures and bank resolution as a core problem for the Banking Union Particularly with the requirements set out in Art. 6(1)-(5) SRMR, the provision clear- 4 ly reflects general concerns about, and lessons learnt from, cross-border implications of bank failures, and addresses problems bound to occur in all insolvencies of large, internationally active banking institutions and firms. Within Europe, a number of cases during the global financial crisis – including, in particular, the failures of Dexia and Fortis Group, both before the creation of the Banking Union – have highlighted not just the
Jens-Hinrich Binder
499
Art. 6 SRMR
General Principles
difficulties for effective cross-border resolutions, but also the potential externalities for stakeholders in different jurisdictions.1 5 To be sure, the creation of the Banking Union in general and the SRM in particular is, in itself, an attempt to mitigate such problems through the centralisation of powers and the introduction of decision-making procedures designed to cancel out national biases (supra, → Art. 1 para. 5).2 Realistically, though, the centralisation of powers as such, while balancing out potentially competing national interests to some extent, can hardly be expected to fully resolve residual conflicts of interest, or resulting problems of coordination. In resolution scenarios, conflicting economic and political interests are not unlikely to obstruct effective cooperation even where more technical impediments – which typically will have to be resolved within a very short timeframe – can be sorted out.3 Given the high degree of administrative discretion provided with regard to preventive measures (i.e., the drafting of resolution plans and the assessment of resolvability, cf. infra, → Art. 10 paras. 6-29) and the initiation and implementation of resolution actions (infra, → Art. 14 para. 30 and → Art. 18 para. 99), both the substantive content of decisions and actions taken by the relevant actors and their economic implications for addressees and stakeholders are not exclusively determined by the Regulation, but will always result from the relevant actors’ assessment of a diverse range of factors of relevance. Therefore, any resolution action taken with regard to institutions and groups whose activities reach beyond national borders, even absent discretionary exemptions for certain stakeholders (e.g., by way of exclusions from bail-ins under Art. 27(5) SRMR), is bound to affect stakeholders within the relevant jurisdictions not indiscriminately, but in differing ways and to a different extent (depending on the nature of the relevant contractual relationships, but also on the ability of the respective counterparties and market environments to absorb credit and liquidity risks). Hence, participating Member States may try to exercise pressure within the decision-making process (as defined by Art. 18(7) SRMR) and/or try to use their leverage over NRAs to obstruct the swift execution of a Resolution Scheme under Arts. 23 and 29 SRMR, in particular in cases where individual stakeholders or groups of stakeholders, whose interests do not merit special protection from the neutral, supra-national perspective of the SRB, trigger special economic and/or political concerns among national legislators or policy makers. 6 The above considerations are all the more pressing with regard to the relationship between Eurozone jurisdictions and the remainder of the internal market, i.e., in scenarios where institutions subject to resolution under the auspices of the SRM have operations, or are part of a group including entities based also in, non-participating Member States. In such scenarios, where the SRB is responsible for drawing up resolution plans, the assessment of resolvability, the determination of MREL, and the resolution of the relevant institution or group pursuant to Arts. 7(2), 8, 10, 12, 18 and 23 SRMR, its powers 1 E.g., Basel Committee on Banking Supervision, Report and Recommendations of the Cross-border Bank Resolution Group, paras. 28–33 (Fortis), 34–37 (on Dexia), 38–48 (on the Icelandic Kaupthing bank) and 49–53 (Lehman); see also Wiggins, Tente and Metrick, European Banking Union D: Cross-Border Resolution – Dexia Group (2014) , and id., European Banking Union C: Cross-Border Resolution – Fortis Group (2015) ; Herring, The Challenges of Resolving Cross-Border Financial Institutions, Yale JREG 31 (2014), 853, at pp. 867–72 (Lehman), 872–873 (Fortis), 874–875 (Iceland). 2 See, discussing this context, Binder, ECFR 4 (2016), 575, at pp. 590–592. And cf. Recital 2, sent. 4 and 5 SRMR: “In the absence of the SRM, bank crises in Member States participating in the SSM would have a stronger negative systemic impact also in non-participating Member States. The establishment of the SRM will ensure a neutral approach in dealing with failing banks and therefore increase stability of the banks of the participating Member States and prevent the spill-over of crises into non-participating Member States and will thus facilitate the functioning of the internal market as a whole.” 3 See, again, Binder, ECFR 4 (2016), 575, at pp. 582–583.
500
Jens-Hinrich Binder
Art. 6 SRMR
General Principles
are subject to cooperation obligations set out in these provisions and, more generally, in Arts. 30–32 SRMR. Under this framework, decisions pertaining to the resolution of groups with entities (and operations) in more than one Member States are prepared within resolution colleges convened by the group-level resolution authority (cf. Art. 88 BRRD). Within the SRM, this function is allocated to the SRB (Art. 5(1) SRMR). Pursuant to Art. 32(1) SRMR, national NRAs will be represented by the SRB in this process. Against this backdrop and as both the initiative to take decisions and the sole responsibility for the design of resolution actions rest with the SRB, the potential for conflicts between actions and decisions taken by the SRB and the interests of non-participating Member States, which are required to give effect to these actions and decisions under the national laws transposing the BRRD and the Winding-up Directive of 2001,4 is high. In this context, it is particularly important that, unlike under general principles of 7 international insolvency law (as codified in the EU Insolvency Regulation5), insolvencies of credit institutions within the EU are to be resolved under a strict ‘single entity’ principle, with no room for secondary proceedings in the interest, and for the protection of, constituencies in jurisdictions other than the relevant institution’s home jurisdiction. 6 As a result, the capacity of national authorities (and/or courts) to protect domestic stakeholders against the implications of resolution actions taken in other Member States is restricted.
C. Protection of individuals and individual legal entities within EU Member States I. No discrimination rule (Art. 6(1) SRMR) Art. 6(1) SRMR prohibits discriminations against ‘entities, deposit holders, investors 8 or other creditors established in the Union on the grounds of their nationality or place of business’. It appears obvious that Art. 6(1) SRMR seeks to protect all potential stakeholders – legal persons and individuals – from discrimination as a result of actions or decisions taken under the auspices of the SRM. Given the high degree of discretion granted not just to the SRB and NRAs but also to the Commission and the Council (see supra, → para. 5), which may almost inevitably result in differences in treatment across the board of future cases, the scope of application is thus very broad. For the purposes of Art. 6 SRMR, in order to ensure consistency with the remainder of the Regulation, the term ‘entities’ – while not expressly defined in the Regulation – arguably has to be construed as referring to the entities defined in Art. 2 SRMR. ‘Deposit holders’, although not defined either, could be construed as including all holders of deposits as recognised by
4 Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions, OJ L 125, 5.5.2001, p. 15, in particular Arts. 3(2)(2) (direct effect of ‘reorganisation measures’), 9(1)(2) and 10(1) (recognition of ‘winding up proceedings’ and applicable law); see Binder, ECFR 4 (2016), 575, at pp. 592–597 and, for a detailed commentary to the Directive, Wessels, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2 nd edn, 2017), Ch. 3. 5 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings, OJ L 141, 5.6.2015, p. 19. 6 Contrast Directive 2001/24/EC, Arts. 3 (‘reorganisation measures’), 9 and 10 (‘winding up’) with Regulation (EU) 2015/848, Ch. III (‘secondary insolvency proceedings’). And see Haentjens and Wessels, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), paras. 2.03–2.06.
Jens-Hinrich Binder
501
Art. 6 SRMR
9
10
11
12
General Principles
the DGSD.7 The category of ‘investors’ for the purposes of Art. 6(1) SRMR, by contrast, probably is intended to reach beyond the definition of that term in the ICSD,8 and should be read as including all persons who have entrusted funds or instruments to an entity under resolution or hold debt and/or equity instruments issued by such entity. At the same time, it has to be noted that Art. 6(1) SRMR merely reinforces the general prohibition of discrimination as recognised by Art. 21 CFREU, binding in conjunction with Art. 6(1) TEU. Arguably, Art. 6(1) SRMR merely replicates, and reinforces, this general rule for the purposes of the SRM, but does not add substance to the safeguards arising thereunder. Stricto sensu, Art. 6(1) SRMR is thus merely declaratory in nature, just as is Art. 1(4) SSMR (supra, → Art. 1 para. 28). It complements more specific requirements for the ‘equitable’ treatment of regulates and stakeholders under Arts. 8(11)(2) and 15(1)(f) SRMR, as well as the requirement to minimise the impact of resolution actions on group entities and the group as a whole in Art. 15(2) SRMR (infra, → Art. 15 paras. 20-26 and 36, respectively). In practical terms, Art. 6(1) SRMR – just as Art. 21 CFREU – does not prohibit differences in treatment outright. In line with established principles developed in European case law, ‘discrimination’ should not be interpreted as synonymous with differences in treatment. In fact, as held by the CJEU with respect to the general prohibition of discriminatory acts (in contexts other than the area of banking regulation), differences in treatment can be justified if they are based on objective considerations independent of the nationality of the persons concerned and if they are proportionate to the legitimate aim of the relevant provisions.9 As noted before, the Regulation (just as the BRRD) leaves substantial scope for differences in treatment on the grounds of systemic stability considerations. Relevant examples include (but are not restricted to): (a) measures taken to remedy deficiencies in the resolvability of institutions and groups (cf. Art. 19(11) SRMR), (b) the calculation of MREL requirements, in particular with regard to group entities (cf. Art. 12e and 12g SRMR), and, notably, (c) the exclusion or partial exclusion from a bail-in at the discretion of the SRB under Art. 27(5) SRMR. In each of these areas, relevant decisions – to the extent that the principle can be relied on in legal actions (see infra, → para. 20) – could be challenged on the grounds that differences in treatment are not, or not exclusively, motivated by legitimate objectives. Although Art. 6(5) SRMR, which refers to the resolution objectives defined in Art. 14 SRMR, does not expressly apply with regard to the prohibition of discriminatory acts 7 See Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes, OJ L 173, 12.6.2014, p. 149, Art. 2(1)(3): “‘deposit’ means a credit balance which results from funds left in an account or from temporary situations deriving from normal banking transactions and which a credit institution is required to repay under the legal and contractual conditions applicable, including a fixed-term deposit and a savings deposit, but excluding a credit balance where: (a) its existence can only be proven by a financial instrument as defined in Article 4(17) of Directive 2004/39/EC of the European Parliament and of the Council, unless it is a savings product which is evidenced by a certificate of deposit made out to a named person and which exists in a Member State on 2 July 2014; (b) its principal is not repayable at par; (c) its principal is only repayable at par under a particular guarantee or agreement provided by the credit institution or a third party.” 8 See Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investorcompensation schemes, OJ L 84, 26.3.1997, p. 22, Art. 1(4), whereby “‘investor‘ shall mean any person who has entrusted money or instruments to an investment firm in connection with investment business”. 9 Case C-209/03, Bidar, ECLI:EU:C:2005:169, para. 54; Case C-628/11, International Jet Management GmbH, ECLI:EU:C:2014:171, para. 68.
502
Jens-Hinrich Binder
Art. 6 SRMR
General Principles
and decisions in Art. 6(1) SRMR, the standard for legitimate differences in treatment, in the absence of more specific provisions (as provided, in particular, by Art. 27(5) SRMR), nonetheless can only be derived from that enumerative list of legitimate objectives. Consequently, if and to the extent that the Regulation allows for discretionary differentiation between the treatments of individual actors, such differences must be necessary and proportionate measured against the resolution objectives defined in Art. 14 SRMR, which has to be reflected in the motivated decisions of the SRB and other relevant actors.
II. Minimisation of impact of resolution on group entities (Art. 6(3)(c) SRMR) In addition to the prohibition of discriminatory treatment, Art. 6(3)(c) SRMR re- 13 quires the relevant actors to consider ‘the need to minimise a negative impact for any part of a group of which an entity referred to in Art. 2 SRMR, which is subject to a resolution, is a member’. Although it does not expressly refer to the SRB, the Council, the Commission or NRAs, the provision obviously addresses the same actors as Art. 6(2) SRMR. For resolution actions, the principle is duplicated (unnecessarily) in Art. 15(2) SRMR, which in turn is a verbatim adaption from the corresponding provision of Art. 34(2) BRRD. Moreover, Art. 8(11)(2) SRMR requires group resolution plans to be developed ‘on the basis of equitable and balanced’ criteria, although this provision also addresses concerns with regard to the impact of resolution planning on the interests of participating Member States. Finally, Art. 10(10)(3) SRMR requires the SRB, when enforcing measures to remedy impediments to resolvability, to ‘take into account the need to avoid any impact on the institution or the group concerned which would go beyond what is necessary to remove the impediment to resolvability or would go beyond what is necessary to remove the impediment to resolvability or would be disproportionate’. Against this backdrop, Art. 6(3)(c) SRMR should be interpreted as part of a broader system of proportionality requirements for the preparation and implementation of resolution actions within groups. Just as the other provisions cited above, its role is both substantive and procedural, requiring the relevant actors to take into account potential externalities of resolution actions, and to motivate their decisions accordingly. As with the other provisions cited above, Art. 6(3)(c) SRMR reflects the insight that 14 the insolvency of institutions that form part of a group (i.e., the usual scenario with banks subject to direct supervision by the ECB and, hence, subject to SRB decisions under Arts. 7(2) and 2 SRMR) requires comprehensive, coordinated approaches that take into account intra-group interdependencies in organisational, commercial, and financial terms. In this context, the choice between ‘Multiple Point of Entry’ (‘MPOE’) and ‘Single Point of Entry’ (‘SPOE’) strategies is particularly important. In MPOE scenarios, resolution actions will address individual group companies identified to be failing or likely to fail (cf. Art. 18(1)(a) SRMR), whereas SPOE strategies concentrate resolution action to only one entity (usually the parent undertaking) (see, for further discussion, infra, → Art. 12k para. 32 and Art. 16 para. 7). Among these two fundamentally different concepts, MPOE scenarios are the most obvious source of potential negative externalities of resolution actions on other parts of the group, which may arise because, and to the extent that, the relevant action interferes with existing organisational and/or financial interdependencies between the different parts of the group. Ideally, relevant problems should be identified in the process of resolution planning and the assessment of resolvability under Arts. 8–10 SRMR. However, frictions could still occur in the
Jens-Hinrich Binder
503
Art. 6 SRMR
General Principles
course of implementation of resolution actions, especially where the relevant scenario deviates from anticipated ones in terms of the financial condition of the institute under resolution and/or the relevant market environment at the time.
D. Potential implications for Member States and the Internal Market (Art. 6(2) SRMR) I. Context and background In addition to externalities of resolution actions for individuals, Art. 6 SRMR also addresses potential adverse implications of decisions taken under the auspices of the SRB for Member States and the Internal Market. The provision establishes a general principle that is taken up, and complemented, by a number of other provisions in the Regulation, including (a) the requirement to take into account the ‘impact on financial stability in all Member States concerned’ when devising group resolution plans (Art. 8(11)(2) SRMR, infra, → Art. 8 para. 56), (b) a more specific prohibition of a ‘disproportionate impact’ of resolution planning on the relevant Member States (Art. 8(11)(3) SRMR, infra, → Art. 8 para. 56), (c) the requirement to consider the impact on Member States when assessing alternative remedies for impediments to the resolvability of institutions (Art. 10(10)(2) SRMR, infra, → Art. 10 paras. 41-45), as well as (d) the general requirement to minimise the impact of resolution actions on ‘financial stability in the Union and its Member States, in particular in the countries where the group operates’ (Art. 15(2) SRMR, adapted verbatim from Art. 34(2) BRRD, infra, → Art. 15 para. 36). 16 Jointly with the emphasis on the need to protect ‘the unity and integrity of the internal market’ (Art. 6(2) SRMR), the provisions cited above implicitly react to broader concerns as to the relationship between the Eurozone and non-participating Member States. Although the latter are represented in the Council and thus will be able to exercise some (albeit limited) influence on the preparation of resolution actions under Art. 18(7) SRMR (infra, → Art. 18 paras. 108-113),10 the relationship between the Eurozone and non-participating Member States has been the object of substantial concerns, in particular outside the Eurozone.11 In the area of bank resolution, such concerns are particularly understandable given an almost natural home bias of responsible authorities in cross-border scenarios, which could result in strategies to use both the preventive powers with regard to recovery and resolution planning as well as the actual resolution powers in order to shield the Eurozone against the implications of failures originating in non-participating Member States. Ring-fencing Eurozone entities or groups in a way that conflicts with the internal market and the passporting regime would be an obvious, albeit extreme example.12 To be sure, ring-fencing (in the form of ex ante arrangements for the financial and organisational segregation of domestic subsidiaries and, indeed, branches of foreign banks and banking groups as well as ad hoc measures adopted in the event of an actual insolvency) has proved to be quite effective in protecting domestic stakeholders against the consequences of insolvencies originating outside the relevant 15
10 Cf. also Recital 24 SRMR (justifying Council participation in the decision-making process on the grounds that resolution actions will have an impact on Member States’ interests). 11 E.g., Ferran, in: De Witte, Ott and Vos (eds), Between Flexibility and Disintegration (2017), 252, at 270-278. 12 See, for a theoretical analysis prior to the full implementation of the SRM, Binder, in: Castaňeda, Mayes and Wood (eds), European Banking Union (2016), 129, at pp. 142–149.
504
Jens-Hinrich Binder
Art. 6 SRMR
General Principles
authority’s home turf.13 However, the adoption of such strategies, with a view to protecting the Eurozone as a whole not just against the consequences of insolvencies originating (and administered) in non-EU Third Countries but also against risks originating in nonparticipating EU Member States would obviously conflict with the founding principles of the internal market, as well as with the general prohibition of discrimination between Member States as stipulated by Art. 4(2) TEU. Against this backdrop, Art. 6(2) SRMR, just as the other provisions cited above, should be interpreted as a sector-specific emanation on a broader principle established already in primary EU law.14
II. Substantive and procedural content In rather general terms, Art. 6(2) SRMR first requires the relevant actors, with regard 17 to ‘[e]very action, proposal or policy’, to duly consider ‘the duty of care for the unity and integrity of the internal market’. More specifically, Art. 6(3) SRMR, in conjunction with Art. 6(2) SRMR, then requires the SRB, the Council, the Commission and NRAs to balance the resolution objectives as defined in Art. 14 SRMR against ‘(a) the interests of Member States where a group operates and in particular the impact of any decision or action or inaction on the financial stability, fiscal resources, the economy, the financing arrangements, the deposit guarantee scheme or the investor compensation scheme of any of those Member States and on the Fund; [and] (b) the objective of balancing the interests of the various Member States involved and of avoiding unfairly prejudicing or unfairly protecting the interests of a Member State’. Arguably, the two provisions jointly have to be interpreted as seeking to ensure the proportionality of resolution actions in relation to both participating and non-participating Member States, although the interests of non-participating Member States are then (to some extent, redundantly) emphasised again in Art. 6(4) SRMR. Taken together, the relevant actors, by virtue of Art. 6(2), (3)(a), (b) and (4) SRMR 18 and the other provisions cited supra, → para. 15, are required (a) to identify potential implications with regard to the factors mentioned in Art. 6(3)(a) SRMR when devising resolution actions or taking other relevant decisions, (b) to balance these implications against the resolution objectives, and (c) to avoid unfair and illegitimate differences in treatment between Member States. Just as with the requirements related to the treatment of individuals and legal entities discussed above (see supra, → paras. 8–14), the standard is thus both substantive and procedural, requiring the relevant actors to motivate their decisions accordingly and thus facilitating the review by the court in the context of legal actions against specific decisions or actions taken by the SRB or other relevant actors.
III. Protection of budgetary sovereignty and fiscal responsibility of Member States More specifically than the previous paragraphs of the provision, Art. 6(6) SRMR pro- 19 hibits actions or decisions that would result in claims on Member States for financial support. The provision expressly protects the budgetary sovereignty of Member States and has to be interpreted in conjunction with the funding regime established by Title V of the Regulation. 13 14
See, generally, Binder, EBOR 16 (2015), 97. Cf. also Recitals 12 and 55 SRMR.
Jens-Hinrich Binder
505
Art. 7 SRMR
Division of tasks within the SRM
E. Legal relevance and enforceability of Art. 6 SRMR 20
In principle, just as the other substantive and procedural requirements stipulated by the Regulation, the restrictions defined by Art. 6(1)-(6) SRMR may be relied upon in proceedings brought against decisions under Art. 86 SRMR in conjunction with Art. 263 TFEU (infra, → Art. 86 paras. 5-6). In this context, the high level of discretion granted to the SRB and other relevant actors (see supra, → para. 5) will generally lead to a limited review of the substance of individual decisions and actions, as long as the documented motivations indicate that the relevant aspects have been taken into account. 15 Moreover, violations of Art. 6(1)-(6) SRMR can, in principle, also be relied upon in an appeal against a decision of the SRB under Art. 85 SRMR. Finally, it is not unlikely that the restrictions under Art. 6 SRMR could also play a role in objections raised by the Council in the process laid down in Art. 18(6) SRMR.
Art. 7 SRMR Division of tasks within the SRM1 1. The Board shall be responsible for the effective and consistent functioning of the SRM. 2. Subject to the provisions referred to in Article 31(1), the Board shall be responsible for drawing up the resolution plans and adopting all decisions relating to resolution for: (a) the entities referred to in Article 2 that are not part of a group and for groups: (i) which are considered to be significant in accordance with Article 6(4) of Regulation (EU) No 1024/2013; or (ii) in relation to which the ECB has decided in accordance with Article 6(5)(b) of Regulation (EU) No 1024/2013 to exercise directly all of the relevant powers; and (b) other cross-border groups. 3. In relation to entities and groups other than those referred to in paragraph 2, without prejudice to the responsibilities of the Board for the tasks conferred on it by this Regulation, the national resolution authorities shall perform, and be responsible for, the following tasks: (a) adopting resolution plans and carrying out an assessment of resolvability in accordance with Articles 8 and 10 and with the procedure laid down in Article 9; (b) adopting measures during early intervention in accordance with Article 13(3); (c) applying simplified obligations or waiving the obligation to draft a resolution plan, in accordance with Article 11; (d) setting the level of minimum requirement for own funds and eligible liabilities, in accordance with Articles 12 to 12k; (e) adopting resolution decisions and applying resolution tools referred to in this Regulation, in accordance with the relevant procedures and safeguards, provided that the resolution action does not require any use of the Fund and is 15 On the judicial review of resolution actions, see, generally, Binder, in. Zilioli and Wojcik (eds), Judicial Review in the European Banking Union (2021), 367, at 379-384, paras. 22.18-22.30. 1 The views expressed by the author are strictly personal and do not engage the Single Resolution Board or the European Commission or its services in any way.
506
Karl-Philipp Wojcik
Art. 7 SRMR
Division of tasks within the SRM
financed exclusively by the tools referred to in Articles 21 and 24 to 27 and/or by the deposit guarantee scheme, in accordance with Article 79, and with the procedure laid down in Article 31; (f) writing down or converting relevant capital instruments pursuant to Article 21, in accordance with the procedure laid down in Article 31. If the resolution action requires the use of the Fund, the Board shall adopt the resolution scheme. When adopting a resolution decision, the national resolution authorities shall take into account and follow the resolution plan as referred to in Article 9, unless they assess, taking into account the circumstances of the case, that the resolution objectives will be achieved more effectively by taking actions which are not provided for in the resolution plan. When performing the tasks referred to in this paragraph, the national resolution authorities shall apply the relevant provisions of this Regulation. Any references to the Board in Article 5(2), Article 6(5), Article 8(6), (8), (12) and (13), Article 10(1) to (10), Articles 11 to 14, Article 15(1), (2) and (3), Article 16, the first subparagraph of Article 18(1), Article 18(2) and (6), Article 20, Article 21(1) to (7), the second subparagraph of Article 21(8), Article 21(9) and (10), Article 22(1), (3) and (6), Articles 23 and 24, Article 25(3), Article 27(1) to (15), the second sentence of the second subparagraph, the third subparagraph, and the first, third and fourth sentences of the fourth subparagraph of Article 27(16), and Article 32 shall be read as references to the national resolution authorities with regard to groups and entities referred to in the first subparagraph of this paragraph. For that purpose the national resolution authorities shall exercise the powers conferred on them under national law transposing Directive 2014/59/EU in accordance with the conditions laid down in national law. The national resolution authorities shall inform the Board of the measures referred to in this paragraph that are to be taken and shall closely coordinate with the Board when taking those measures. The national resolution authorities shall submit to the Board the resolution plans referred to in Article 9, as well as any updates, accompanied by a reasoned assessment of the resolvability of the entity or group concerned in accordance with Article 10. 4. Where necessary to ensure the consistent application of high resolution standards under this Regulation, the Board may: (a) further to the notification by a national resolution authority of a measure under paragraph 3 of this Article pursuant to Article 31(1), within the appropriate timeframe having regard to the urgency of the circumstances, issue a warning to the relevant national resolution authority where the Board considers that the draft decision with regard to any entity or group referred to in paragraph 3 of this Article does not comply with this Regulation or with its general instructions referred to in Article 31(1)(a); (b) at any time decide, in particular if its warning referred to in point (a) is not being appropriately addressed, on its own initiative, after consulting the national resolution authority concerned, or upon request from the national resolution authority concerned, to exercise directly all of the relevant powers under this Regulation also with regard to any entity or group referred to in paragraph 3 of this Article.
Karl-Philipp Wojcik
507
Art. 7 SRMR
Division of tasks within the SRM
5. Notwithstanding paragraph 3 of this Article, participating Member States may decide that the Board exercise all of the relevant powers and responsibilities conferred on it by this Regulation in relation to entities and to groups, other than those referred to in paragraph 2, established in their territory. If so, paragraphs 3 and 4 of this Article, Article 9, Article 12(2), and Article 31(1) shall not apply. Member States that intend to make use of this option shall notify the Board and the Commission accordingly. The notification shall take effect from the day of its publication in the Official Journal of the European Union. Bibliography Niamh Moloney, ‘European Banking Union: Assessing its Risks and Resilience’, CMLR 51 (2014), 1609. A. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Art. 7(1) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
C. Art. 7(2) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Scope ratione materiae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Drawing up of resolution plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Adopting all decisions relating to resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Subject to the provisions referred to in Art. 31(1) SRMR . . . . . . . . . . . . . . . . . II. Scope ratione personae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Art. 7(2)(a) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Art. 7(2)(b) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Practical comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 15 16 17 19 20 21 23 25
D. Art. 7(3) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Scope ratione materiae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope ratione personae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Rules on the application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Collaboration between NRAs and SRB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 28 32 33 36
E. Art. 7(4) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Warnings according to Art. 7(4)(a) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Taking over of direct resolution tasks from the NRA pursuant to Art. 7(4)(b) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38 40 43
F. Art. 7(5) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
G. Beginning and end of direct resolution responsibility and change of Status . .
53
A. Introductory remarks Art. 7 SRMR is one of the fundamental organizational provisions of the SRMR which govern the institutional design and functioning of the Single Resolution Mechanism (SRM). It is of pivotal importance for the architecture of the SRM as the Second Pillar of the Banking Union. 2 Art. 7 SRMR belongs to Part I of the SRMR under the heading “General Provisions”. Art. 7 SRMR in its current shape and in particular its rules on the division of tasks between the Single Resolution Board and the National Resolution Authorities (NRAs) were only added to the SRMR by Council and European Parliament during the legislative negotiations. It did not appear in the Commission’s proposal2 to this effect. 1
2 Proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No. 1093/2010 of the European Parliament and of the Council, COM(2013) 520 final.
508
Karl-Philipp Wojcik
Art. 7 SRMR
Division of tasks within the SRM
However, Art. 7 SRMR is not without precedent. In fact, it follows closely and logically the design of the Banking Union and the institutional approach chosen by the Union legislator for the creation of the Single Supervisory Mechanism (SSM) by the SSMR. 3 The basic rationale for Art. 7 SRMR is the intention to align, if not to mirror as closely as possible, the division of tasks within the SRM between the SRB and the NRAs with the one adopted for the division of direct and indirect supervisory responsibilities between the ECB and the National Competent Authorities (NCAs) in the SSM. Against this background and within the general scope of application of the SRMR, as set out in its Art. 1 SRMR, Art. 7 SRMR establishes delimitations between the exercise of tasks by the SRB and the NRAs in function of the type of power and the type of entity. More specifically, the structure of Art. 7 SRMR can be explained in the following way: Art. 7(1) SRMR establishes the general responsibility of the SRB for the effective and consistent functioning of the SRM. Art. 7(2) SRMR sets out the entities and powers for which the SRB is directly responsible, while Art. 7(3) SRMR sets out the entities for which the NRAs are directly responsible, and the tasks which the NRAs are to perform. In addition, Art. 7(3) SRMR contains important rules on the provisions to be applied by the NRAs in this regard. Rules on the interaction between the NRAs and the SRB are set out in Arts. 7(3)(5) and (6) SRMR as well as in Art. 7(4)(a) SRMR. Arts. 7(4)(b) and (5) SRMR in turn provide for specific exceptions with regard to the general allocation of tasks between the SRB and the NRAs. Overall, the alignment of the division of tasks between the SRB and the NRAs comes very close to the one between the ECB and NCAs in the SSM.4 However, there exist certain differences which are due to the specific nature and needs of the SRM. They will be highlighted and explained in the following.
3
4
5 6 7
8 9
B. Art. 7(1) SRMR Art. 7(1) SRMR entrusts the SRB with the responsibility for the effective and 10 consistent functioning of the SRM. It is almost identical with Art. 6(1)(2) SSMR which entrusts the ECB with the same responsibility for the Single Supervisory Mechanism (SSM). This demonstrates that the organizational approach for the SRM is identical with the one for the SSM. Art. 7(1) SRMR underlines the Union legislator’s concept of the SRM as a mechanism 11 intertwining European and national levels, but with a strong, if not predominant, European center where the national authorities are acting within the scope of decentralised implementation of an exclusive competence of the Union, not the exercise of a national competence.5 It makes sense to emphasize the SRB’s responsibility for the effective and consistent 12 functioning of the SRM because the SRB is the European body with the highest concentration of technical expertise in the field of bank resolution. Moreover, it is endowed by the SRMR with the necessary powers to make the SRM function effectively and consistently. For instance, where the efficient and consistent functioning of the SRM is put at 3 Council Regulation (EU) No. 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. 4 Moloney, CMLR 51 (2014), 1609, at p. 1639. 5 See to this effect for the SSM, Case T-122/15, Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:T:2017:337, para. 72, which was upheld by the Court of Justice in the appeal case C-450/17 P, ECLI:EU:C:2019:372, para. 38.
Karl-Philipp Wojcik
509
Art. 7 SRMR
Division of tasks within the SRM
risk by an NRA not fulfilling sufficiently its tasks, the SRB may decide to exercise directly all the relevant resolution powers also with regard to the less significant entities according to Art. 7(4)(b) SRMR. In addition, pursuant to Art. 28 SRMR the SRB is obliged to closely monitor the execution by the NRA of a resolution scheme adopted by the SRB and may give instructions to the NRA. 13 It is the author’s view though that Art. 7(1) SRMR cannot be interpreted as making the SRB legally liable for any outcome of the SRM or any action of one of the composing bodies of the SRM. First of all, the SRM as such has no legal personality for which the SRB could vouch. Secondly, the other bodies which form the SRM, i.e. Council, the Commission and the NRAs,6 are distinct legal persons and have their distinct legal rights and obligations. The wording of Art. 7(1) SRMR does not contain any element which would alter this. Thirdly, the objective of Art. 7(1) SRMR is to emphasize the enabling key role of the SRB in making the SRM work, so that all the components of the SRM can perform their duties appropriately.
C. Art. 7(2) SRMR 14
Art. 7(2) SRMR sets out the scope of the SRB’s direct responsibilities ratione personae and ratione materiae.
I. Scope ratione materiae 15
In terms of material scope Art. 7(2) SRMR provides that vis-à-vis those entities mentioned in Art. 7(2) SRM the SRB “shall be responsible for drawing up the resolution plans and adopting all decisions relating to resolution”. This includes two situations:
1. Drawing up of resolution plans 16
It follows from the wording “the SRB shall be responsible for drawing up the resolution plans” that it falls within the SRB’s competence to draw up resolutions plans according to Art. 8 SRMR. Since drawing up of resolution plans by law includes an assessment of resolvability (Art. 10 SRMR), a possible application of simplified obligations (Art. 11 SRMR) and the determination of the minimum requirement for own funds and eligible liabilities (MREL – Art. 12 et seq. SRMR), the SRB is empowered to exercise all the powers and rights conferred in Arts. 10 et seq. SRMR vis-à-vis those entities mentioned in Art. 7(2) SRMR without these provisions being mentioned explicitly in Art. 7(2) SRMR.
2. Adopting all decisions relating to resolution 17
While the term “adopting all decisions relating to resolution” could be understood in a very narrow way by giving the SRB only the power to adopt decisions which directly relate to resolution, namely to adopt a resolution scheme within the meaning of Art. 18 SRMR, such a narrow understanding is not in line with the wording and the objective of this term. In fact, the objective of this term is to provide a “catch all” competence to the SRB vis-à-vis those entities mentioned in Art. 7(2) SRMR. Therefore, the term “decisions” does not only comprise binding acts intended to produce legal effects vis-àvis third parties, but all acts, internal or external, the object of which is directly or indirectly linked to the overarching goal of “resolution” of one of the entities captured by 6
510
See Art. 1(2) SRMR.
Karl-Philipp Wojcik
Art. 7 SRMR
Division of tasks within the SRM
Art. 7(2) SRMR. It would for instance also comprise information requests by the SRB addressed not to the entity concerned, but to NRAs, NCAs or other bodies concerning the relevant entity. The same is true for imposing fines and penalties, as well as for the decision on contributions to the Single Resolution Fund (SRF) or for contributions for administrative expenditures, including all preparatory stages. Such an understanding is warranted because otherwise there would be a gap in terms of competences rendering the SRMR ineffective: the NRAs’ competences vis-à-vis entities not mentioned in Art. 7(2) SRMR are listed in a precise and enumerative way and do not comprise a full list of possible powers. If the SRB were thus to be regarded as not having the requisite comprehensive competences, there would in fact not be any public body having such competences – an absurd result. On that basis, the powers conferred on the SRB vis-à-vis those entities mentioned in 18 Art. 7(2) SRMR are of a very wide scope.
3. Subject to the provisions referred to in Art. 31(1) SRMR The powers of the SRB vis-à-vis those entities mentioned in Art. 7(2) SRMR are sub- 19 ject to the provisions referred to in Art. 31(1) SRMR. Art. 31(1) SRMR sets out the SRB’s obligation to cooperate closely with the NRAs, in line with a public cooperation framework,7 while not limiting though the material tasks as set out in Art. 7(2) SRMR. However, it clarifies that any exercise of the SRB’s powers, even in regard to those entities mentioned in Art. 7(2) SRMR needs to be carried out in close cooperation with the relevant NRAs. It therefore recalls and reinforces the construction of the SRM as an integrated, but decentralized structure in which all its components play mutually reinforcing roles, while not putting in question the assistance function of NRAs vis-à-vis the SRB. 8
II. Scope ratione personae At first sight, Arts. 7(2)(a) and (b) SRMR, which lay down the entities vis-à-vis which 20 the SRB is exercising its resolution related powers directly, seems to be drafted in a rather complicated way, by making references to other provisions of the SRMR as well as of the SSMR. However, it is here that the fundamental idea of aligning the division of tasks between the Union and the national level, i.e. between the SRB and the NRAs, within the SRM with the one adopted for the division of direct and indirect supervisory responsibilities between the ECB and the NCAs in the first pillar of the Banking Union becomes most visible. Nevertheless, the alignment is deliberately not a perfect one since the SRB enjoys direct resolution powers over a wider range of entities than the ECB.
1. Art. 7(2)(a) SRMR Basically, the SRB has direct resolution powers over those entities which have been 21 considered as significant by the ECB according to the criteria set out in Arts. 6(4) and 7 This public cooperation framework is laid down in the Decision of the Single Resolution Board of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15) (hereinafter the “SRB Framework Decision”), available at , https://srb.europa.eu/sit es/default/files/decision_of_the_srb_on_cofra.pdf . This SRB Decision is of high importance since, among others, it further details the way in which the SRB and the NRAs will apply Art. 7 SRMR. Where relevant or useful, reference will be made in the following to this Decision, without however having the intention to fully discuss all the implementing rules contained therein. 8 See on this last point Recital 28 SRMR.
Karl-Philipp Wojcik
511
Art. 7 SRMR
Division of tasks within the SRM
(5)(b) SSMR in connection with the relevant provisions of Regulation No. 468/2013 (“the SSM‑FR”) and over which the ECB exercises thus its prudential tasks in a direct manner. 22 Art. 7(2)(a) SRMR distinguishes between entities referred to in Art. 2 SRMR which are part of a group and those which are not. The term “group” is defined in Art. 3(1) point 23 SRMR as “a parent undertaking and its subsidiaries that are entities as referred to in Art. 2”.9 As a consequence and on the assumption that the entity has been qualified as significant within the meaning of Arts. 6(4) and (5)(b) SRMR, the SRB exercises its powers directly over – credit institutions established in a participating Member State, whether they form part of a group or not, – parent undertakings, including financial holding companies10 and mixed financial holding companies,11 established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR (such entities will always form part of a group), and – investment firms and financial institutions12 established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR (such entities will thus always form part of a group).
2. Art. 7(2)(b) SRMR Art. 7(2)(b) SRMR grants direct resolution powers to the SRB over “other cross-border groups”. This encompasses groups whose parent undertakings and and subsidiaries are entities as referred to in Art. 2 SRMR and established in more than one participating Member State.13 24 Moreover, this encompasses such groups which have not been considered as significant by the ECB according to Arts. 6(4) and (5)(b) SRMR.14 It is here however that the direct resolution powers of the SRB are not fully aligned ratione personae with the direct powers of supervision of the ECB. 23
3. Practical comments From a practical point of view, it is important to note that the SRB publishes on its website, for informative purposes, a list containing the name of the entities and groups which fall under the direct responsibility of the SRB.15 This list will be updated regularly. 26 As a matter of fact, since all those entities which fall under the direct supervision of the ECB will also be falling under the SRB’s direct responsibilities, the list of significant 25
9 The term “parent undertaking” is defined in Art. 3(1)(20) SRMR by reference to Art. 4(1)(15)(a) CRR and the term “subsidiary” is defined in Art. 3(1)(21) SRMR by reference to Art. 4(1)(16) CRR. 10 The term “financial holding company” is defined in Art. 3(1)(16) SRMR by reference to Art. 4(1)(20) CRR. 11 The term “mixed financial holding company” is defined in Art. 3(1)(17) SRMR by reference to Art. 4(1)(21) CRR. 12 The term “financial institution” is defined in Art. 3(1)(15) SRMR by reference to Art. 4(1)(26) CRR. 13 See definition in Art. 3(1)(24) SRMR. 14 For a current list of other cross-border groups” see: . 15 See Art. 17 of the SRB Framework Decision. The current list is available at: .
512
Karl-Philipp Wojcik
Art. 7 SRMR
Division of tasks within the SRM
entities which the ECB publishes on its website16 is another practically useful source indicating those entities which fall under the SRB’s remit.
D. Art. 7(3) SRMR Art. 7(3) SRMR sets out the entities and tasks which NRAs implement in a decentral- 27 ized manner and under the control of the SRB. Moreover, Art. 7(3) SRMR provides for a clarification of the rules which NRAs have to apply in this respect as well as some requirements as regards the collaboration between the NRAs and the SRB.
I. Scope ratione materiae Art. 7(3)(1) SRMR enumerates those tasks which the NRAs are entitled to carry out vis-à-vis those entities which are not mentioned in Art. 7(2) SRMR. A contrario, those tasks which are not listed in Art. 7(3)(1) SRMR rest with the SRB. Part of the tasks entrusted to the NRAs are the adoption of resolution plans and the assessment of resolvability (Arts. 8–10 SRMR), the adoption of measures during early intervention (Art. 13(3) SRMR), the application of simplified obligations or the waiving of the obligation to draft resolution plans (Art. 11 SRMR), the setting of MREL (Art. 12 et seq. SRMR), the adoption of resolution decisions and application of resolution tools (including the bail-in tool) and the write down or conversion of relevant capital instruments (Art. 21 SRMR). Arts. 7(3)(1)(e) and (2) SRMR introduce a very important limitation to the NRAs’ tasks to adopt resolution decisions and apply resolution action. In fact, where the resolution action provided for in the resolution scheme requires the use of the SRF or is not financed exclusively by write down and conversion powers, the resolution tools, namely the bail-in tool, or the deposit guarantee scheme, the SRB shall adopt the resolution scheme for the entity concerned. The rationale for this exception which provides for a partial fall back in the attribution of tasks to the benefit of the SRB is clear: the SRB is the owner of the SRF (see Art. 67(3) SRMR) and manages it. The power to commit and use the SRF is thus for the SRB and not for the NRA. Moreover, this rule avoids moral hazard problems by setting the right incentives so that the one who bears the costs of using the SRF is also the one who decides on its use. In practice, the application of this rule should usually not prove to be problematic. Overall, however, this exception in case of funding by the SRF provides for another mismatch in the alignment of the division of tasks between the SSM and the SRM. Finally, the exercise of the tasks under Art. 7(3)(1) SRMR is limited by the general responsibility of the SRB for the tasks conferred on it by the SRMR, even where such tasks would also concern entities not mentioned in Art. 7(2) SRMR. Such tasks could be for instance non-binding cooperation agreements concluded by the SRB according to Art. 32(4) SRMR which would necessarily also cover entities not mentioned in Art. 7(2) SRMR.
16 See for the current list of significant supervised entities: .
Karl-Philipp Wojcik
513
28
29
30
31
Art. 7 SRMR
Division of tasks within the SRM
II. Scope ratione personae 32
NRAs are in charge of implementing the list of tasks enumerated in Art. 7(3)(1) SRMR only vis-à-vis entities not mentioned in Art. 7(2) SRMR. This means that NRAs rest in charge of less significant credit institutions and less significant groups which are not cross-border groups.
III. Rules on the application As a general rule, NRAs apply the national rules transposing Directive 2014/59/EU (“the BRRD”) when acting in the field of bank resolution. They fully continue to do so when acting vis-à-vis those entities which fall within the scope of the BRRD, but which do not fall within the scope of the SRMR. This is the case for instance for solo investment firms established in a participating Member State and which are not covered by the consolidated supervision of a parent undertaking by the ECB. 34 Art. 7(3)(4) SRMR provides for an important adaptation of the substantive provisions which the NRAs have to apply in the area of bank resolution when acting directly within the scope of the SRM. It prescribes that the NRAs, when performing the tasks referred to in Art. 7(3) SRMR vis-à-vis those entities not falling within the SRB’s remit of direct exercise of resolution powers, have to apply certain provision of the SRMR instead of applying the national rules transposing the BRRD. Art. 7(3)(4) SRMR lists the specific provision of the SRMR and provides that the term “Board” employed in these provisions is to be read as the relevant “NRA”. By making the NRAs apply the same rules as the SRB, the SRMR further increases the level of harmonization and effectively reduces very considerably the risk of divergences which could potentially result from the fact that different authorities act vis-à-vis those entities falling within the scope of the SRM. 35 This finding is not contradicted by the last sentence of Art. 7(3)(4) SRMR which provides that the NRAs shall, for the purpose of applying the SRMR, exercise the powers conferred on them under national law transposing the BRRD. In fact, this provision clarifies that the direct application of certain provisions of the SRMR does not fully replace the need for the NRAs to also apply the relevant national law. The bail-in tool provides for an appropriate example in this regard: while Art. 27 SRMR prescribes the conditions and ways in which the bail-in tool is to be applied, the specific implementation of the bail-in tool via write down and/or conversion of shares and liabilities will be done by the NRA, even if the application of the bail-in tool was decided by the SRB. To this end, the BRRD in its Art. 63 ff has obliged Member States to give the relevant resolution powers to NRAs. 33
IV. Collaboration between NRAs and SRB 36
Cooperation within the SRM is a topic of crosscutting importance to which Arts. 7(3) (5) and (6) SRMR only add some specific rules regarding “upstream” information requirements by the NRA towards the SRB. Namely, NRAs are obliged to inform the SRB of measures referred to in Art. 7(3) SRMR that are to be taken and shall coordinate closely when taking those measures. In addition, they are obliged to submit resolution plans and updates as well as resolvability assessments to the SRB. Such information or
514
Karl-Philipp Wojcik
Art. 7 SRMR
Division of tasks within the SRM
documents, in line with the principle of loyal cooperation, need to be given to the SRB sufficiently in advance so that the SRB can meaningfully influence the process.17 Apart from these specific “upstream” cooperation requirements, the SRMR includes 37 further provisions on collaboration and information exchange, in particular in Arts. 28, 30 and 31 SRMR. This commentary on Art. 7 SRMR is however not the place to discuss these provisions and it is referred to the respective commentaries of these provisions.
E. Art. 7(4) SRMR Art. 7(4) SRMR is the expression of the SRB’s overall responsibility for the effective 38 and consistent functioning of the SRM, as laid down in Art. 7(1) SRMR. By granting the SRB the power to take over the direct exercise of all resolution powers from NRAs, it provides for the necessary corollary to the SRB’s central role in leading and safeguarding the SRM. Art. 7(4) SRMR is inspired by Art. 6(5)(b) SSMR which grants a similar right to the ECB. Art. 7(4) SRMR provides for a system of escalation: where necessary to ensure the 39 consistent application of high resolution standards, the SRB is entitled to issue a warning under Art. 7(4)(a) SRMR or to decide to exercise directly all the resolution powers vis-àvis entities which are normally under the direct resolution power of NRAs.
I. Warnings according to Art. 7(4)(a) SRMR The SRB receives information and draft decisions from the NRAs about measures 40 they intend to take in respect of those entities over which the NRAs exercise the powers mentioned in Art. 7(3) SRMR directly. Such information is sent on the initiative of the NRAs18 or upon request by the SRB.19 This allows the SRB to monitor the compliance of the exercise of resolution powers by the NRAs. Where the SRB considers that a draft decision of the NRA does not comply with the 41 SRMR or with a general instruction by the SRB referred to in Art. 31(1)(a) SRMR, the SRB may issue a warning to the NRA.20 The immediate objective of the warning is to express the SRB’s concern with a draft 42 decision towards the NRA and to give the NRA the opportunity to address this concern by modifying the draft or by not taking the intended measure at all. However, the warning does not legally oblige an NRA to take corrective action. This can be inferred from the wording of Art. 31(1)(d) SRMR which refers to the SRB’s power to only express its views on draft decisions. In particular, a warning does not fall within the remit of Art. 29 SRMR. Otherwise, the SRB would be able to exercise directly resolution powers over those entities which do not fall within the remit of Art. 7(2) SRMR with regard to specific resolution issues. This goes however against the legislation’s intention to grant direct responsibilities “only in a package”. This can be inferred from the fact that the SRB is entitled to issue only “general instructions”21 and from the fact that the SRB can take over the NRA’s tasks in their entirety. Nevertheless, a warning is a strong political sign and the NRA’s follow-up on the warning constitutes an important element when taking a
Art. 34(2)-(5) of the SRB Framework Decision contains specific rules as regards the deadlines. Art. 7(3)(5) SRMR. 19 Art. 31(1)(c) SRMR. 20 See also Art. 7 of the SRB Framework Decision containing specific rules as regards the deadlines. 21 See Art. 31(1)(a) SRMR. 17
18
Karl-Philipp Wojcik
515
Art. 7 SRMR
Division of tasks within the SRM
decision whether to take over direct resolution tasks from the NRA according to Art. 7(4)(b) SRMR.
II. Taking over of direct resolution tasks from the NRA pursuant to Art. 7(4)(b) SRMR 43
44
45
46
47
48
The SRB is entitled to take a decision, either on its own initiative or upon request from the NRA concerned, to exercise directly all of the relevant resolution powers under the SRMR also with regard to entities not referred to in Art. 7(2) SRMR. Where the SRB launches the initiative, procedurally it is bound to consult the NRA concerned. The SRB does not need to have issued a prior warning in order to be able to take an own initiative decision pursuant to Art. 7(4)(b) SRMR. However, it seems reasonable to predict that the SRB will have tried less intrusive measures, such as issuing a warning, before resorting to the ultimate power of taking over the direct exercise of responsibilities. In any case, the only substantive requirement for the exercise of this power is the necessity to ensure the consistent application of high resolution standards. This is a rather broad term implying some discretion in the factual and legal assessment of the case. However, given that the SRB’s decision is to be regarded as a challengeable act within the meaning of Art. 263 TFEU, it is obvious that there must be sufficient objective grounds to argue that the taking over of direct responsibility is a reasonable measure in the circumstances at hand. Where the procedure is started on request of the NRA concerned, it cannot be automatically assumed that the SRB will adopt a take-over-decision. In fact, the SRB needs to verify that indeed there is a necessity to ensure the consistent application of high resolution standards. If this is not the case, the SRB must not adopt a positive take-over-decision.22 Procedurally, the SRB will notify the entity or group concerned of its decision to assume directly the responsibility according to Art. 7(4)(b) SRMR. This follows from Art. 18(3) of the SRB Framework Decision. As a consequence, the entity might challenge this decision under the requirements of Art. 263 TFEU. Art. 7(4)(b) SRMR does not create a “one way street” in that sense that whenever the SRB has taken over direct responsibility for a specific entity or group from the NRA concerned, it will exercise direct powers forever. Since Art. 7(4)(b) SRMR creates an exception to the general rule for the division of tasks in case that there is a necessity to ensure the consistent application of high resolution standards, the SRB is under an obligation to regularly review whether there continues to exist a necessity to ensure the consistent application of high resolution standards and, where this has ceased to be the case, to end the exercise of the direct powers.23 The relevant entity or group will thus “return” within the hands of the NRA concerned.
F. Art. 7(5) SRMR 49
Art. 7(5) SRMR provides for a Member State option to reverse the division of tasks between the SRB and NRAs. In fact, participating Member States may decide that the 22 Arts. 21(2) and (3) of the SRB Framework Decision sets out which information the request by the NRA has to include. 23 This is correctly reflected in Art. 22(1) of the SRB Framework Decision.
516
Karl-Philipp Wojcik
Art. 7 SRMR
Division of tasks within the SRM
SRB exercises all of the relevant powers and responsibilities conferred on it by the SRMR in relation to entities and to groups, other than the ones mentioned in Art. 7(2) SRMR, established in the territory of the participating Member State. To this end, the participating Member State needs to notify its decision to the SRB and the Commission. The notification and thus the transfer of direct resolution powers to the SRB will take effect from the day of publication of the notification in the Official Journal of the EU. In contrast to Art. 7(4)(b) SRMR where the SRB may decide to directly exercise reso- 50 lution powers if this is necessary to ensure the consistent application of high resolution standards, the transfer of direct resolution powers upon decision by the participating Member State is not linked to the fulfilment of a substantive requirement. It is for this reason that Art. 7(5) SRMR allows the transfer of direct resolution powers 51 only if they are transferred for all entities and groups, other than the ones mentioned in Art. 7(2) SRMR, established in the territory of the participating Member State at once. Otherwise, the substantive requirement included in Art. 7(4)(b) SRMR according to which the NRA can request the SRB to take over direct resolution powers only when there is a necessity to ensure the consistent application of high resolution standards could be easily circumvented. Art. 7(5) SRMR clarifies that, in case the SRB has received direct responsibilities ac- 52 cording to that paragraph, Arts. 7(3) and (4), 9, 12(2) and 31(1) SRMR do not apply.
G. Beginning and end of direct resolution responsibility and change of Status Although it is evident that the entities falling under the scope of direct SRB responsibilities are, by nature, not static and can change over time, the SRMR does not contain any rules on the practically very important matters of when direct SRB responsibility starts, ends and how the change of status of an entity is dealt with both between the SRB and the relevant NRA as well as vis-à-vis the entity or group concerned. Arts. 17–23 of the SRB Framework Decision make an attempt to fill this lacuna. Vis-à-vis the entity or group concerned, whenever the SRB or the NRA assumes direct responsibility, it will inform the entity or group concerned.24 Where, by contrast, the SRB decides that the conditions for its direct responsibility over an entity or group do not exist anymore, the SRB will notify its decision to the entity or group concerned. 25 Since the change of status of an entity or group triggers a change in the exercise of responsibilities between the SRB and NRAs, the SRB Framework Decision sets out specific cooperation and information requirements between the SRB and the NRAs. 26 They specify the general obligation of loyal cooperation between the SRB and the NRAs and are not to be regarded as exhaustive. Given that decision making procedures may take some time, Art. 23 of the SRB Framework Decision addresses the issue of pending procedures. As a general rule, the authority whose direct responsibility will end shall undertake reasonable efforts to complete any pending resolution process which requires a decision prior to the date on which the change in the direct responsibility is to occur. . If this is not possible, the transferring authority shall complete any preparatory steps, unless the authority assuming direct responsibility objects. The transferring authority shall consult on any preparatory steps the authority assuming direct responsibility. See Arts. 17(4) and 18(1), 18(3) of the SRB Framework Decision. See Art. 19 of the SRB Framework Decision. 26 See for instance Arts. 20, 22 and 23 of the SRB Framework Decision. 24 25
Karl-Philipp Wojcik
517
53
54
55
56
Art. 8 SRMR
Resolution plans drawn up by the Board
Art. 8 SRMR Resolution plans drawn up by the Board 1. The Board shall draw up and adopt resolution plans for the entities and groups referred to in Article 7(2), and for the entities and groups referred to in Article 7(4)(b) and (5) where the conditions for the application of those paragraphs are met. 2. The Board shall draw up the resolution plans, after consulting the ECB or the relevant national competent authorities and the national resolution authorities, including the group-level resolution authority, of the participating Member States in which the entities are established, and the resolution authorities of non-participating Member States in which significant branches are located insofar as relevant to the significant branch. To that end, the Board may require the national resolution authorities to prepare and submit to the Board draft resolution plans and the group-level resolution authority to prepare and submit to the Board a draft group resolution plan. 3. In order to ensure effective and consistent application of this Article, the Board shall issue guidelines and address instructions to the national resolution authorities for the preparation of draft resolution plans and draft group resolution plans relating to specific entities or groups. 4. For the purposes of paragraph 1 of this Article, the national resolution authorities shall submit to the Board all information necessary to draw up and implement the resolution plans, as obtained by them in accordance with Article 11 and Article 13(1) of Directive 2014/59/EU, without prejudice to Chapter 5 of this Title. 5. The resolution plan shall set out options for applying the resolution tools and exercising resolution powers referred to in this Regulation to the entities and groups referred to in paragraph 1. 6. The resolution plan shall provide for the resolution actions which the Board may take where an entity or a group referred to in paragraph 1 meets the conditions for resolution. The information referred to in paragraph 9 shall be disclosed to the entity concerned. When drawing up and updating the resolution plan, the Board shall identify any material impediments to resolvability and, where necessary and proportionate, outline relevant actions for how those impediments could be addressed, in accordance with Article 10. The resolution plan shall take into consideration relevant scenarios including that the event of failure may be idiosyncratic or may occur at a time of broader financial instability or system wide events. The resolution plan shall not assume any of the following: (a) any extraordinary public financial support besides the use of the Fund established in accordance with Article 67; (b) any central bank emergency liquidity assistance; or (c) any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms. 7. The resolution plan shall include an analysis of how and when an institution may apply, in the conditions addressed by the plan, for the use of central bank facilities and shall identify those assets which would be expected to qualify as collateral. 8. The Board may require institutions to assist it in the drawing up and updating of the plans. 518
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
9. The resolution plan for each entity shall include, quantified where appropriate and possible: (a) a summary of the key elements of the plan; (b) a summary of the material changes to the institution that have occurred after the latest resolution information was filed; (c) a demonstration of how critical functions and core business lines could be legally and economically separated, to the extent necessary, from other functions so as to ensure continuity upon the failure of the institution; (d) an estimation of the timeframe for executing each material aspect of the plan; (e) a detailed description of the assessment of resolvability carried out in accordance with Article 10; (f) a description of any measures required pursuant to Article 10(7) to address or remove impediments to resolvability identified as a result of the assessment carried out in accordance with Article 10; (g) a description of the processes for determining the value and marketability of the critical functions, core business lines and assets of the institution; (h) a detailed description of the arrangements for ensuring that the information required pursuant to Article 11 of Directive 2014/59/EU is up to date and at the disposal of the resolution authorities at all times; (i) an explanation as to how the resolution options could be financed without the assumption of any of the following: (i) any extraordinary public financial support besides the use of the Fund established in accordance with Article 67; (ii) any central bank emergency liquidity assistance; or (iii) any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms; (j) a detailed description of the different resolution strategies that could be applied according to the different possible scenarios and the applicable timescales; (k) a description of critical interdependencies; (l) a description of options for preserving access to payments and clearing services and other infrastructures and an assessment of the portability of client positions; (m) an analysis of the impact of the plan on the employees of the institution, including an assessment of any associated costs, and a description of envisaged procedures to consult staff during the resolution process, taking into account national systems for dialogue with social partners, where applicable; (n) a plan for communicating with the media and the public; (o) the minimum requirement for own funds and eligible liabilities required pursuant to Article 12 and a deadline to reach that level, where applicable; (p) where applicable, the minimum requirement for own funds and contractual bail-in instruments pursuant to Article 12, and a deadline to reach that level, where applicable; (q) a description of essential operations and systems for maintaining the continuous functioning of the institution's operational processes; (r) where applicable, any opinion expressed by the institution in relation to the resolution plan. 10. Group resolution plans shall include a plan for the resolution of the group, headed by the Union parent undertaking established in a participating Member State, as a whole, either through resolution at the level of the Union parent undertaking or Matthias Haentjens
519
Art. 8 SRMR
Resolution plans drawn up by the Board
through break up and resolution of the subsidiaries. The group resolution plan shall identify measures for the resolution of: (a) (b) (c) (d)
the Union parent undertaking; the subsidiaries that are part of the group and that are established in the Union; the entities referred to in Article 2(b); and subject to Article 33, the subsidiaries that are part of the group and that are established outside the Union.
11. The group resolution plan shall: (a) set out the resolution actions to be taken in relation to group entities, both through resolution actions in respect of the entities referred to in Article 2(b) and subsidiary institutions and through coordinated resolution actions in respect of subsidiary institutions, in the scenarios provided for in paragraph 6; (b) examine the extent to which the resolution tools and powers could be applied and exercised in a coordinated way to group entities established in the Union, including measures to facilitate the purchase by a third party of the group as a whole, or separate business lines or activities that are delivered by a number of group entities, or particular group entities, and identify any potential impediments to a coordinated resolution; (c) include a detailed description of the assessment of resolvability carried out in accordance with Article 10; (d) where a group includes entities incorporated in third countries, identify appropriate arrangements for cooperation and coordination with the relevant authorities of those third countries and the implications for resolution within the Union; (e) identify measures, including the legal and economic separation of particular functions or business lines, that are necessary to facilitate group resolution where the conditions for resolution are met; (f) identify how the group resolution actions could be financed and, where the Fund and the financing arrangements from non-participating Member States established in accordance with Article 100 of Directive 2014/59/EU would be required, set out principles for sharing responsibility for that financing between sources of funding in different participating and non-participating Member States. The plan shall not assume any of the following: (i) any extraordinary public financial support besides the use of the Fund established in accordance with Article 67 of this Regulation and the financing arrangements from non-participating Member States established in accordance with Article 100 of Directive 2014/59/EU; (ii) any central bank emergency liquidity assistance; or (iii) any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms. Those principles shall be set out on the basis of equitable and balanced criteria and shall take into account in particular Article 107(5) of Directive 2014/59/EU and the impact on financial stability in all Member States concerned. The group resolution plan shall not have a disproportionate impact on any Member State. 12. The Board shall determine the date by which the first resolution plans shall be drawn up. Resolution plans and group resolution plans shall be reviewed, and where appropriate updated, at least annually and after any material changes to the legal 520
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
or organisational structure or to the business or the financial position of the entity or, in the case of group resolution plans, of the group including any group entity that could have a material effect on the effectiveness of the plan or that otherwise necessitates a revision of the resolution plan. For the purpose of the revision or update of the resolution plans referred to in the first subparagraph, the institutions, the ECB or the national competent authorities shall promptly communicate to the Board any change that necessitates such revision or update. When setting the deadlines referred to in points (o) and (p) of paragraph 9 of this Article, in the circumstances referred to in the third subparagraph of this paragraph, the Board shall take into account the deadline for complying with the requirement referred to in Article 104b of Directive 2013/36/EU. 13. The Board shall transmit the resolution plans and any changes thereto to the ECB or to the relevant national competent authorities. Bibliography Emilios Avgouleas, Charles Goodhart and Dirk Schoenmaker, ‘Bank Resolution Plans as a catalyst for global financial reform’, Journal of Financial Stability 9 (2013), 210; Jens-Hinrich Binder, ‘Resolution planning and structural bank reform within the banking union’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union (Routledge, Abington 2015), Ch. 7; JensHinrich Binder and Dalvinder Singh, Bank Resolution: the European Regime (Oxford University Press, Oxford 2016); Günter Franke, Jan Pieter Krahnen and Thomas von Lüpke, ‘Effective Resolution of Banks, problems and solutions’, ZVglRWiss(2014), 556; FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (15 October 2014), ; Simon Gleeson and Randall D. Guynn, Bank Resolution and Crisis Management: Law and Practice (Oxford University Press, Oxford 2016); Matthias Haentjens and Bob Wessels, Bank Recovery and Resolution (Eleven International Publishing, The Hague 2014); Thomas F. Huertas, ‘European Bank Resolution: Making it Work!’, Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution’ (January 2016), ; Gerard Kastelein, De Bankenunie en het vertrouwen in een goede afwikkeling (Wolters Kluwer, Alphen aan den Rijn2014); Giannoula Karamichailidou and David G. Mayes, ‘Plausible recovery and resolution plans for cross-border financial institutions’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union (Routledge, Abington 2015), Ch. 3; Stephan Madaus, ‘Bank failure and pre-emptive planning’ in: Matthias Haentjens and Bob Wessels (eds), Bank Recovery and Resolution (Eleven International Publishing, The Hague 2014), 49; Charles W. Mooney Jr. and Guy Morton, ‘Harmonizing Insolvency Law for Intermediated Securities: the Way Forward’ in: Thomas Keijser (ed), Transnational Securities Law (Oxford University Press, Oxford 2014), Ch. 8; Gabriel S. Moss, Bob Wessels and Matthias Haentjens, EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017); Sven Schelo, Bank Recovery and Resolution (Wolters Kluwer, Alphen aan den Rijn2015); Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (Oxford University Press, Oxford 2016); Michael Schillig, ‘Bank Resolution Regimes in Europe – Part I: Recovery and Resolution Planning, Early Intervention’, EBLR 6 (2013), 751; Giulia Vallar, ‘Resolution of cross-border groups’, in: Matthias Haentjens and Bob Wessels (eds), Bank Recovery and Resolution (Eleven International Publishing, The Hague 2014), 131; World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), ; World Bank Group, ‘Bank Resolution and “Bail-In” in the EU: Selected Case Studies Pre and Post BRRD’ (2016), . A. Resolution and recovery planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Drawing-up, adoption and scope (Art. 8(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . I. Drawing-up and adoption of resolution plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Entities and groups subject to resolution planning . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 7 12
C. Process of drawing-up resolution plans (Art. 8(2)-(4) and (8) SRMR) . . . . . . . I. Cooperation with NRAs (Art. 8(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Guidelines and instructions (Art. 8(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Information provided by NRAs (Art. 8(4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 19 27 28
Matthias Haentjens
521
Art. 8 SRMR
Resolution plans drawn up by the Board
IV. Cooperation with the institution (Art. 8(8) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . .
29
D. Elements of the resolution plan (Art. 8(5)-(7) and (9) SRMR) . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Resolution tools and powers (Art. 8(5) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Resolution action (Art. 8(6) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Perspectives to be taken into account (Art. 8(6)-(7) SRMR) . . . . . . . . . . . . . . . . . . V. Summary of mandatory elements (Art. 8(9) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . .
33 33 34 37 38 44
E. Group resolution plans (Art. 8(10)-(11) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Resolution of group entities (Art. 8(10) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Elements of group resolution plans (Art. 8(11) SRMR) . . . . . . . . . . . . . . . . . . . . . . .
48 48 49 56
F. Review and updating resolution plans (Art. 8(12) SRMR) . . . . . . . . . . . . . . . . . . .
58
G. Review and updating resolution plans (Art. 8(12) SRMR) . . . . . . . . . . . . . . . . . . .
59
A. Resolution and recovery planning These Arts. 8-12 SRMR are the first substantive provisions of the SRMR, i.e. these are the first provisions that set out substantive tasks for the SRB and the institutions that fall under its remit (on this point see also infra, → para. 9 et seq.). Arts. 8-12 SRMR together form Chapter 1 (entitled Resolution planning), of Title I (entitled Functions within the SRM and procedural rules), of Part II (entitled Specific Provisions). Thus, they all concern resolution planning. 2 Resolution planning is – together with recovery planning – one of the most important elements (and some have argued: the most important element1) of the new resolution regime introduced by the joint set of the Bank Recovery and Resolution Directive2 and the SRMR. In the words of the legislator: “Resolution planning is an essential component of effective resolution.” (Recital 46 SRMR). 3 The SRB itself sees resolution planning as its primary role: “The role of the SRM is proactive: rather than waiting for resolution cases to occur, the SRB, in cooperation with NRAs, focuses on resolution planning and preparation (…) to avoid the potential negative impact of bank failure on the economy and financial stability.”4 Recovery planning must be distinguished from resolution planning, as they have different functions and are drafted by different parties.5 3 Institutions will be required to draw up recovery plans setting out arrangements and measures to enable it to take early action to restore its long-term viability in the event of a material deterioration of its financial situation. Groups will be required to develop 1
1 Others have argued, however, that resolution plans would not have been able to prevent the government interventions in Dutch banks ING, SNS Reaal and ABN AMRO. See Kastelein, De Bankenunie en het vertrouwen in een goede afwikkeling (2014), at p. 111. 2 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. OJ L 173, 12.6.2014, p. 190. 3 See also Huertas, Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution (2016), at pp. 33-35; Madaus, in: Wessels and Heantjens (eds), Bank Recovery and Resolution (2014), at pp. 49-60. 4 SRB, ‘Introduction to Resolution Planning’ (September2016), at p. 8, . See also Franke, Krahnen and von Lüpke, ZVglRWiss 2014, 1, at pp. 1-2. 5 See also Schillig, EBLR 6 (2013), 751, at pp. 764-770; Binder and Singh, Bank Resolution: the European Regime (2016), at pp. 17-18.
522
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
plans at both group level and for the individual institutions within the group. Supervisors will assess and approve recovery plans. Thus, pursuant to Arts. 5-9 BRRD, institutions must draw up ‘recovery plans’ which are to be approved by the relevant supervisory authorities, so as to have a plan in place that might be useful to help turn around a material deterioration of the financial situation that institution may face. The ‘relevant supervisors’ are the ECB under the SSM for systemically important institutions, and the national supervisory authorities (in the BRRD and SRMR terminology: national competent authorities, see Art. 3(1)(1) SRMR, which refers to Art. 2(2) SSMR) for less systemically important institutions, as well as institutions outside of the Banking Union. In contrast, resolution plans are intended to allow an institution to be resolved mini- 4 mizing taxpayer exposure to loss from solvency support while protecting vital economic functions. A resolution plan, prepared by the resolution authorities in cooperation with supervisors in normal times, will set out options for resolving the institution in a range of situations, including systemic crisis. Such plans should include details on the application of resolution tools and ways to ensure the continuity of critical functions. Group resolution plans will include a plan for the group as well as plans for each institution within the group.6 In the SRM, the relevant resolution authority responsible for the resolution plans is the SRB and it is the national resolution authorities for less systemically important institutions as well as for institutions outside the Banking Union.7 Therefore, the SRMR contains provisions on the resolution plans for which the SRB is responsible, while provisions on recovery plans must be found in the BRRD.8 Although recovery planning as such is thus not a part of the SRMR, the SRB does 5 describe the recovery plan as a ‘starting point’ for resolution planning.9 More generally, it is notable that both recovery plans and resolution plans involve ‘double hypothetical events’: they are hypothetical both as regards the potential crisis situation as well as regards the potential reactions to the same.10 This Art. 8 SRMR contains the elements that a resolution plan must contain, and 6 which elements it must disregard. There are specific rules for groups, which in practice will be highly relevant, as most institutions that fall under the remit of these Arts. 8-12 SRMR, will be organised as groups. The SRMR expresses this even more poignantly, saying “it should be the general rule that the group resolution plans are prepared for the group as a whole” (Recital 44 SRMR).
B. Drawing-up, adoption and scope (Art. 8(1) SRMR) I. Drawing-up and adoption of resolution plans A ‘resolution plan’ as used in this para. 1 is “defined” in Art. 3(1)(6) SRMR with the 7 following circular definition: “‘resolution plan’ means a plan drawn up in accordance with Art. 8 or 9”. This is of not much help.
6 See Schelo, Bank Recovery and Resolution (2015), at pp. 59–61 on the differences between recovery and resolution plans. 7 See also Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), at pp. 162 et seq. 8 On the process of recovery and resolution planning under the BRRD, see World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), at pp. 50-91. 9 SRB, ‘Introduction to Resolution Planning’ (2016), para. 2.1. 10 See Schelo, Bank Recovery and Resolution (2015), at p. 61.
Matthias Haentjens
523
Art. 8 SRMR
Resolution plans drawn up by the Board
Otherwise, this para. 1 contains two important elements. First, it contains the essential stipulation that the SRB must: (a) ‘draw up’; and (b) adopt a resolution plan. Second, it states that the SRB must do so for three categories of ‘entities and groups’. 9 What exactly ‘drawing-up’ a resolution plan means, is further specified in this Art. 8 SRMR. Paras. 2-4 and 8 elaborate on the process of drawing-up or drafting the plans, where paras. 5-7 and 9-10 concern the contents thereof. The ‘adoption’ of the plan is not further specified in this Art. 8 SRMR, but it may be assumed that adoption will happen prior to the SRB sending the resolution plans to the ECB or the relevant national competent authorities, as required by para. 13. Moreover, ‘adoption’ will probably qualify as ‘approval’ as meant in Art. 54(2) SRMR, where it is stated that the SRB shall ‘prepare, assess and approve resolution plans’ in its executive session (Art. 54(1) SRMR). The executive session is made up by the SRB Chair and four other full-time members (Arts. 43(1)(b) and 53(1) SRMR). The SRB itself confirms this and states that adoption happens in an ‘extended’ executive session, which – apart from the SRB Chair and the four other full-time members – also includes the board members that represent the relevant NRA(s).11 In this case, it will include the NRAs’ representatives responsible for the institution in question. 10 For the SRMR no delegated legal instruments have been adopted yet, but the SRB has attempted to create more clarity with regards to resolution planning through its publication ‘Introduction to Resolution Planning’12. Pursuant to this document, resolution planning by the SRB happens in IRTs. According to the SRB, “IRTs are composed of staff of the SRB and the relevant NRAs, and are headed by coordinators appointed from the SRB’s senior staff.” 13As part of the preparation of the resolution plan, an IRT consults with the ECB and NCA (see also the commentary at Art. 8(2) SRMR). A resolution plan will be adopted once approval has been gained from the Executive Session (→ Art. 54(2) SRMR). Only then will the resolution plan be communicated to the relevant institution. 11 Moreover, it should be noted that the EBA published final draft technical standards on resolution planning and resolvability assessment on 19 December 2014.14 As a matter of principle, these RTS apply to the NRAs, but from these RTS may also be gleaned how the SRB will operate. More specifically, the RTS just referred to identify eight categories of information that should be included in a resolution plan and set out both general and specific requirements to be included in each category to ensure the preferred resolution strategy is achieved. According to the EBA, the RTS aims to recognize the need for proportionality, which is addressed through a staged assessment process, inherently less complex resolution plans for less complex institutions and the possibility for Member States to apply simplified obligations to certain institutions. The EBA has issued Guidelines on the criteria for applying such simplified obligations. See on this issue the commentary at Art. 11 SRMR. 8
SRB, ‘Introduction to Resolution Planning’ (2016), at p. 14. See supra, fn 4. 13 SRB, ‘Introduction to Resolution Planning’ (2016), at p. 11. 14 Now published as Delegated Regulation (EU) 2016/1075 of 23 March 2016 supplementing Directive 2014/59/EU of the European Parttime and of the Council with regard to regulatory technical standards specifying the content of recovery plans, resolution plans and group resolution plans, the minimum criteria that the competent authority is to assess as regards recovery plans and group recovery plans, the conditions for group financial support, the requirements for independent valuers, the contractual recognition of write-down and conversion powers, the procedures and contents of notification requirements and of notice of suspension and the operational functioning of the resolution colleges. OJ L 184, 8.7.2016, p. 1. 11
12
524
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
II. Entities and groups subject to resolution planning Pursuant to Art. 8(1) SRMR, the categories of entities and groups for which the SRB must draft resolution plans are entities and groups: (a) under ECB supervision as well as all other cross-border groups under Art. 7(2) SRMR; (b) regarding which the SRB has taken control under Art. 7(4)(b) SRMR; and (c) regarding which Member States have requested the SRB to take control under Art. 7(5) SRMR. Re. (a): The SRB must draft resolution plans for ‘entities and groups’ under Art. 7(2) SRMR, which means: entities and groups under ECB supervision as well as all other cross-border groups.15 More specifically, ‘entities’ means: (a) credit institutions established in a Member State, (b) parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR and (c) investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR. On these terms, see the commentary on → Art. 2. Art. 3(1)(23) SRMR defines ‘group’ as “a parent undertaking and its subsidiaries that are entities as referred to in Art. 2.” On the term ‘subsidiaries’, see infra, → para. 10. The term ‘entities’ has just been explained supra, para 13. ‘Under ECB supervision’ means: (a) the entities and groups considered ‘significant’ as defined in Art. 6(4) SSMR and (b) the entities and groups in relation to which the ECB has decided to exercise directly all of the relevant powers in accordance with Art. 6(5)(b) SSMR. Notably, Art. 11(7) SRMR declares that all references to a ‘group’ in this Chapter on Resolution Planning, i.e. Arts. 8-12 SRMR, also refer to a central body with affiliated institutions, while all references to ‘parent undertakings’ or ‘institutions that are subject to consolidated supervision pursuant to Art. 111 of Directive 2013/36/EU’ also include the central body. ‘Central body and institutions affiliated to it’ is further defined in Art. 10 CRR. Re.(b): Pursuant to Art. 7(4)(b) SRMR, the SRB may, at any time, decide “on its own initiative, after consulting the national resolution authority concerned, or upon request from the national resolution authority concerned, to exercise directly all of the relevant powers under this Regulation”. See also the commentary on Art. 7 SRMR. Re.(c): Pursuant to Art. 7(5) SRMR, participating Member States may request the SRB to exercise “all of the relevant powers and responsibilities conferred on it by this Regulation”. In such instance, Member States must notify the Board and the Commission accordingly. See also the commentary on Art. 7 SRMR. N.B.: participating Member States are the euro area Member States and those non-euro area Member States who choose to participate in the SSM (see Recital 7 SRMR).
15 See, for the resolution of cross-border groups, Karamichailidou and Mayes, in: Castañeda, Mayes and Wood (eds), European Banking Union (2015), at pp. 42-46.
Matthias Haentjens
525
12
13
14
15
16
17
18
Art. 8 SRMR
Resolution plans drawn up by the Board
C. Process of drawing-up resolution plans (Art. 8(2)-(4) and (8) SRMR) I. Cooperation with NRAs (Art. 8(2) SRMR) 19
20
21
22
23
24
This para. 2 makes explicit that the SRB must work together with the relevant national resolution authorities (NRAs). This work is organised in the so-called ‘IRTs’. More specifically, pursuant to this para. 2, the SRB must consult: (a) the ECB or the relevant national competent authorities, (b) NRAs of the participating Member States in which the entities are established, (c) resolution authorities of non-participating Member States in which significant branches are located insofar as relevant to the significant branch. Re. (a): ‘National competent authorities’ are ‘defined’ in Art. 3(1)(1) SRMR, but this definition refers to Art. 2(2) SSMR, which states that ‘national competent authority’ “means a national competent authority designated by a participating Member State in accordance with 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 (13) and Directive 2013/36/EU”. In Art. 4(1)(40) of Regulation (EU) No 575/2013 a competent authority is defined as the public authority or body officially recognized by national law, which is empowered by national law to supervise institutions as part of the supervisory system in operation in the Member State concerned. In other words, it means the national authority responsible for the prudential supervision of credit institutions and investment firms. Pursuant to Art. 3(1)(2) SRMR, a ‘competent authority’ is a competent authority as defined in Art. 4(2)(i) EBAR. Under Art. 4(2)(i) EBAR (which has been amended by Art. 95 SRMR), a competent authority can refer to, in short, a prudential supervisory authority including the ECB, a money laundering supervisory authority, an authority responsible for the relevant deposit guarantee scheme, or a resolution authority including the SRB. Re. (b): ‘national resolution authorities’ are ‘defined’ in Art. 3(1)(1) SRMR, where it is stated that it “means an authority designated by a participating Member State in accordance with Art. 3 of Directive 2014/59/EU”. Art. 3 BRRD sets out the procedure for the designation of a resolution authority, and which authorities are eligible. ‘Participating Member States’ is defined in Recital 7 SRMR as “the euro area Member States and those non-euro area Member States who choose to participate in the SSM”. Re. (c): The SRMR does not define ‘significant branch’, but the BRRD does and pursuant to Art. 3(2) SRMR, “in the absence of a relevant definition in paragraph 1 of this Article, the definitions referred to in Article 2 of Directive 2014/59/EU apply. In the absence of a relevant definition in paragraph 1 of this Article or in Article 2 of Directive 2014/59/EU, the definitions referred to in Article 3 of Directive 2013/36/EU apply”. Definition 34 of Art. 2(1) BRRD refers to Art. 51(1) CRD IV, which says, in short, that it is for the consolidating supervisor or the home supervisor to determine whether a branch is to be considered significant. This supervisor will specifically have to take into consideration: (a) whether the market share of the branch in terms of deposits exceeds 2 % in the host Member State, (b) the likely impact of a suspension or closure of the operations of the institution on systemic liquidity and the payment, clearing and settlement systems in the host Member State and (c) the size and the importance of the branch in terms of number of clients within the context of the banking or financial system of the host Member State.
526
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
Pursuant to para. 2 sent. 2, the SRB may require the national resolution authorities 25 to prepare and submit draft resolution plans. The SRB may also require the group-level resolution authority to prepare and submit a draft group resolution plan. In certain situations, a Resolution College is required to be consulted. The precise re- 26 quirements for this are further set out in Commission Delegated Regulation 2016/1075, Arts. 50-60. In short, a Resolution College has to be involved in resolution planning, when the relevant institution has one or more subsidiaries or significant branches in non-participating Member States. The Resolution College consists, amongst others, out of representatives of the national authorities of these non-participating Member States.
II. Guidelines and instructions (Art. 8(3) SRMR) Pursuant to para. 3, the SRB must “issue guidelines and address instructions to 27 the national resolution authorities for the preparation of draft resolution plans and draft group resolution plans relating to specific entities or groups.” The guidelines and instructions meant in this provision are institution-specific and not made public. On the term ‘national resolution authorities’, see supra, → para. 22.
III. Information provided by NRAs (Art. 8(4) SRMR) Like the previous one, this para. also concerns the relationship between SRB and 28 NRAs. Where para. 3 requires the SRB to issue “guidelines and address instructions to the national resolution authorities”, this para. says national resolution authorities must submit to the SRB “all information necessary to draw up and implement the resolution plans, as obtained by them in accordance with Arts. 11 and 13(1) BRRD, without prejudice to Chapter 5 of this Title”. Arts. 11 and 13(1) BRRD set out, in short, that resolution authorities must be in a position to require information from the relevant credit institutions and groups, respectively. Chapter 5 of Title I SRMR are Arts. 34-37 and concern the independent investigatory powers the SRB has. The provision thus purports to say that national resolution authorities must submit to the SRB all relevant information for the drawing up of resolution plans,16 but that, nonetheless, the SRB has the power to approach the institutions in question. If the relevant resolution authority does not comply with the obligation set out in this provision, probably the sanctions of Art. 7(4) SRMR can be applied, viz. the SRB can approach the relevant institution itself (Art. 7(4)(b) SRMR).
IV. Cooperation with the institution (Art. 8(8) SRMR) Para. 8 states that the SRB “may require institutions to assist it in the drawing up and 29 updating of the plans.” This is next to the working relationship the SRB has with the NRAs as discussed supra, → para. 27-28 and next to the investigatory powers the SRB has according to Arts. 34-37 SRMR. For the definition of ‘institution’, see Art. 3(1)(13) SRMR. According to the SRB’s Introduction to Resolution Planning, it uses, as a starting 30 point, the institutions’ recovery plans. Further information the SRB may derive “from the data templates banks are required to fill out. Firstly, banks are required to submit 16 On information sharing, see further FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2014), at pp. 23-30.
Matthias Haentjens
527
Art. 8 SRMR
Resolution plans drawn up by the Board
information within the templates annexed to the EC Implementing Regulation with regard to procedures, standard forms and templates for the provision of information for the purpose of resolution plans. The information within these templates provides basic information regarding mainly the strategic business analysis (e.g. bank structure, interconnections). Secondly, banks must populate the Liability Data Template (LDT) developed by the SRB, in cooperation with NRAs, the ECB and the EBA, to provide information regarding the bank’s liability structure and for the determination of MREL. In the future, the SRB may update the LDT or design additional standardized templates, with the ultimate aim of aligning the resolution data collection process with the supervisory data collection process of the SSM. 31 The IRT may require the bank – in writing or during meetings or workshops – to provide additional information or support in order to draft the resolution plan, for example: information about the bank’s structure, critical functions or interconnections, an analysis of the operational consequences of a resolution strategy, or a description of the processes and arrangements necessary to effectively provide information in resolution.”17 32 From all this, it will follow that a resolution plan will contain sensitive information. Following Recital 44 SRMR, these plans are therefore, “subject to the requirements of professional secrecy” as set out in Art. 88 SRMR.
D. Elements of the resolution plan (Art. 8(5)-(7) and (9) SRMR) I. Introduction 33
The elements a resolution plan must contain18 are listed in → paras. 5-7 and 9. The list is detailed and to a large extent self-explanatory. Moreover, Art. 22 Commission Delegated Regulation 2016/1075, which codifies final draft technical standards on resolution planning and resolvability assessment published by EBA on 19 December 2014, further specifies the elements that a resolution plan must contain under the BRRD. As a matter of principle and as mentioned above, these RTS apply to the NRAs, but from these RTS may also be gleaned how the SRB will operate. More specifically, the RTS just referred to identify eight categories of information that should be included in a resolution plan and set out both general and specific requirements to be included in each category to ensure the preferred resolution strategy is achieved. In addition, the SRB’s ‘Introduction to Resolution Planning’ document explains what a resolution plan should look like.
II. Resolution tools and powers (Art. 8(5) SRMR) 34
First, this para. 5 says the resolution plan must contain options for (a) applying resolution tools and (b) exercising resolution powers. All, as a matter of course, as referred to in the SRMR and insofar as entities and groups fall under the remit of Art. 8(1) SRMR (see supra, → para. 12 et seq.).
SRB, ‘Introduction to Resolution Planning’ (2016), at pp. 21-22. On the essential elements for effective resolution planning see FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2014), at pp. 43-50. See further Mooney and Morton, in: Keijser (ed), Transnational Securities Law (2014), at pp. 227-239. 17
18
528
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
Re. (a): ‘resolution tools’ are ‘defined’ in Art. 3(1)(9) SRMR, which refers to 35 Art. 22(2) SRMR, where the following tools are listed: the sale of business tool, the bridge institution tool, the asset separation too land the bail-in tool. See on these tools the commentary on Art. 22 SRMR. Re. (b): ‘resolution powers’ are not defined in the SRMR, but Chapter VI BRRD 36 (Arts. 63-72 BRRD) is entirely devoted to them. More specifically, Art. 63(1) BRRD lists 15 ‘powers’ which the resolution authorities must have in order to apply the resolution tools to institutions and to entities that meet the applicable conditions for resolution. These resolution powers may be exercised “individually or in any combination” (Art. 63(1) BRRD).
III. Resolution action (Art. 8(6) SRMR) Second, pursuant to this para. 6, a resolution plan must contain the ‘resolution ac- 37 tions’ the SRB may take when an entity or group meets the conditions for resolution. This is besides the options for applying resolution tools and exercising resolution powers pursuant to para. 5, but pursuant to Art. 3(1)(10) SRMR, ‘resolution action’ means “the decision to place an entity referred to in Art. 2 under resolution pursuant to Art. 18, the application of a resolution tool or the exercise of one or more resolution powers”. Consequently, this para. 6 only adds to para. 5 that the resolution plan must also address the decision to place an entity under resolution pursuant to Art. 18 SRMR. Under Art. 18 SRMR, an entity may be placed under resolution, if, in short: (a) the entity is failing or is likely to fail; (b) there is no reasonable prospect that any alternative private sector measures would prevent its failure within a reasonable timeframe; and (c) a resolution action is necessary in the public interest, which means that winding up of the entity under normal insolvency proceedings would not meet the resolution objectives to the same extent. See further at the commentary on Art. 18 SRMR.
IV. Perspectives to be taken into account (Art. 8(6)-(7) SRMR) Other than prescribing an additional element that a resolution plan must contain, this 38 para. 6 also prescribes: (a) which information must be shared with the entity in question; (b) which perspectives the SRB must take into account when drawing up the plan – and which perspectives it must disregard. Art. 8(6) sent. 2 SRMR simply requires the SRB to disclose to the entity concerned “the information referred to in paragraph 9”. On para. 9, see infra, → para. 44 et seq. Pursuant to Art. 8(6) sent. 3 and 4 SRMR the SRB must, when drawing up a resolu- 39 tion plan, take (at least) two perspectives into account. First, it must “identify any material impediments to resolvability and, where necessary and proportionate, outline relevant actions for how those impediments could be addressed, in accordance with Article 10.” Strictly speaking, this is redundant, because Art. 10 SRMR also – and in a more detailed way – requires the SRB to assess an entity’s or a group’s resolvability, identify any material impediments thereto, and outline relevant actions that are necessary and proportionate for the removal of such impediments. Moreover, this is to be included in any resolution plan pursuant to Art. 8(9)(e) and (f) SRMR. Of particular relevance is the demonstration of how critical functions and core business lines can be legally and eco-
Matthias Haentjens
529
Art. 8 SRMR
40
41
42
43
Resolution plans drawn up by the Board
nomically separated in order to ensure their continuity under a range of stress scenarios.19 See further on this issue the commentary on Art. 10 SRMR. Second, pursuant to 8(6) sent. 3 SRMR the SRB must take into consideration in its resolution plans relevant scenarios including: (a) that the event of failure may be idiosyncratic; or (b) may occur at a time of broader financial instability or system wide events. Thus, various scenarios should be considered, but at least two very distinct ones, viz. a single failure and a systemic meltdown. Third, pursuant to 8(6) sent. 4 SRMR the SRB must disregard: (a) any extraordinary public financial support besides the use of the Fund established in accordance with Art. 67 SRMR; (b) any central bank emergency liquidity assistance; or (c) any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms. In short, this reflects the purpose of resolution planning to move away from the ‘bail-out’ as a (standard) solution. In contrast, para. 7 prescribes that the resolution plan must “include an analysis of how and when an institution may apply, in the conditions addressed by the plan, for the use of central bank facilities and shall identify those assets which would be expected to qualify as collateral.” More specifically, Art. 3(1)(29) SRMR defines ‘extraordinary public financial support’ as “State aid within the meaning of Article 107(1) TFEU or any other public financial support at supra-national level, which, if provided at national level, would constitute State aid, that is provided in order to preserve or restore the viability, liquidity or solvency of an entity referred to in Article 2 of this Regulation or of a group of which such an entity forms part”. On the use of the Single Resolution Fund according to Art. 67 SRMR, see the commentary on Art. 67 SRMR. Art. 3 SRMR does not define ‘central bank emergency liquidity assistance’, but Art. 2(1)(29) BRRD does. Pursuant to this provision, central bank emergency liquidity assistance means “the provision by a central bank of central bank money, or any other assistance that may lead to an increase in central bank money, to a solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems, without such an operation being part of monetary policy.”
V. Summary of mandatory elements (Art. 8(9) SRMR) This para. 9 sets in out in some detail the elements a resolution plan must contain, which elements are to be shared with the entity concerned pursuant to 8(6) sent. 2 SRMR. The elements listed in this para. 9 are self-explanatory. But the list contains no less than 18 elements. Fortunately, the SRB has categorized these elements into 6 chapters that a resolution plan must contain, viz.: strategic business analysis, preferred resolution strategy, financial and operational continuity in resolution, information and communication plan, conclusion of the resolvability assessment and opinion of the bank in relation to the resolution plan.20 45 Several important elements deserve to be elaborated on. The commentaries on Arts. 10 and 12 SRMR will further elaborate on the assessment of resolvability and the MREL. 46 Art. 8(9)(c) SRMR determines that the resolution plan must demonstrate how critical functions and core business lines could be legally and economically separated from other functions. The continuity of critical functions is one of the resolution objectives as defined in Art. 14(2)(a) SRMR. A function is critical if the discontinuance of the func44
19 20
530
Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), at p. 170. See SRB, ‘Introduction to Resolution Planning’ (2016), at pp. 19 et seq.
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
tion is likely to lead to the disruption of services that are essential to the real economy or to disrupt financial stability in one or more Member States as explained in Art. 2(1)(35) BRRD.21 The SRB has published a document to further set out its policy regarding critical functions.22 Pursuant to this document it is first up to the institutions themselves to identify their critical functions in their recovery plans (“bottom-up approach”). This self-assessment is to be reviewed by the resolution authorities (“top-down approach”). The identification of critical functions is essential also for other parts of the resolution plan since those parts focus on preserving the critical functions. First of all, the analysis of the critical functions is necessary to determine whether these critical functions can be separated from the rest of the institution. Furthermore, the identification of critical functions is necessary to determine whether resolution action is to be taken. Resolution action is only to be taken if it is considered to be in the public interest, for which critical functions can be an indicator. If resolution action is to be applied, the critical function analysis helps determine which resolution tool or tools are most appropriate with regard to ensuring the continuation of the critical functions. Art. 8(9)(j) SRMR determines that the resolution plan must contain the possible res- 47 olution strategies. After it is determined that winding up the institution under normal insolvency proceedings would not meet the resolution objectives as the resolution would (of Art. 18(5) SRMR), a resolution strategy must be determined. Two factors must then be considered: the loss-absorbing capacity (see commentary on Art. 12 SRMR) and the separability (of the critical functions). The preferred resolution strategy will set out which resolution tools are to be applied. See for the resolution tools the commentaries at Arts. 24 to 27 SRMR.
E. Group resolution plans (Art. 8(10)-(11) SRMR) I. Introduction There are specific rules for groups, which in practice will be highly relevant, as most 48 institutions that fall under the remit of these Arts. 8-12 SRMR will be organised as groups. The SRMR expresses this even more poignantly, saying “it should be the general rule that the group resolution plans are prepared for the group as a whole” (Recital 44 SRMR).
II. Resolution of group entities (Art. 8(10) SRMR) Under Art. 8(10) SRMR, group resolution plans must “include a plan for the resolu- 49 tion of the group headed by the Union parent undertaking established in a participating Member State, as a whole, either through resolution at the level of the Union parent undertaking or through a break up and resolution of the subsidiaries.” Pursuant to Art. 2(1)(85) BRRD, a ‘Union parent undertaking’ means: (a) a Union parent institution, (b) a Union parent financial holding company, or (c) a Union parent mixed financial holding company. Terms (a) and (b) are defined in Art. 3(1)(19) and (18) SRMR, respectively, so that reference is made to the commentary there. Term (c) is ‘defined’ in Art. 2(1)(14) BRRD “an EU parent mixed financial holding company as defined in point SRB, ‘Introduction to Resolution Planning’ (2016), at p. 25. SRB, ‘Critical Functions: SRB Approach in 2017 and Next Steps’, . 21
22
Matthias Haentjens
531
Art. 8 SRMR
50
51
52 53
Resolution plans drawn up by the Board
(33) of Art. 4(1) of Regulation (EU) No 575/2013”. Consequently, a Union parent mixed financial holding company means a parent mixed financial holding company in a Member State which is not a subsidiary of an institution authorised in any Member State or of another financial holding company or mixed financial holding company set up in any Member State.23 It is one of the four categories of holding companies that are in the scope of the BRRD pursuant to Art. 1(1)(d) BRRD. This para. 10 makes explicit that a resolution plan should not ex ante prescribe the way resolution of a group should be organised: it leaves it open that resolution could either be done “through resolution at the level of the Union parent undertaking or through break up and resolution of the subsidiaries”. Resolution at the level of the parent undertaking is an expression of the so-called ‘SPE’ principle. SPE means a resolution strategy involving the application of resolution powers by a single resolution authority (in the present case: the SRB) at the level of a single parent undertaking or of a single institution subject to consolidated supervision. This would allow the subsidiaries to continue operating. SPE is usually contrasted with a MPE approach, i.e. an entity-by-entity approach, which in para. 10 is referred to as “[resolution] through break up and resolution of the subsidiaries”.24 Para. 10 specifically requires that the resolution plan addresses the resolution of: (a) the Union parent undertaking, (b) the subsidiaries that are part of the group and that are established in the Union, (c) the entities referred to in Art. 2(b) SRMR; and (d) subject to Art. 33 SRMR, the subsidiaries that are part of the group and that are established outside the Union. Re. (a): on the term ‘Union parent undertaking’, see supra, → para. 49. Re. (b): ‘subsidiary’ is defined in Art. 3(1)(21) SRMR as a subsidiary as defined in Art. 4(1)(16) CRR, which, rather unhelpfully says: “subsidiary means: (a) a subsidiary undertaking within the meaning of Articles 1 and 2 of Directive 83/349/EEC; (b) a subsidiary undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking over which a parent undertaking effectively exercises a dominant influence. Subsidiaries of subsidiaries shall also be considered to be subsidiaries of the undertaking that is their original parent undertaking”. Arts. 1 and 2 of Directive 83/349/EEC read as follows: “Article 1 1. A Member State shall require any undertaking governed by its national law to draw up consolidated accounts and a consolidated annual report if that undertaking (a parent undertaking): (a) has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking); or (b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or member of that undertaking; or (c) has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions. A Member State need not prescribe that a parent undertaking must be a shareholder in or member of its subsidiary undertaking. Those Member States the laws of which do not provide for such contracts or clauses shall not be required to apply this provision; or 23 For the various scenarios involving cross-border group resolution see Binder, in: Castañeda, Mayes and Wood (eds), European Banking Union, (2015), at pp. 24-32. See further Vallar, in: Haentjens and Wessels (eds), Bank Recovery and Resolution (2015), 131. 24 For MPE and SPE under BRRD, see Moss, Wessels and Haentjens, Banking and Insurance Insolvency (2nd edn, 2017), at pp. 33-34 and the references there given.
532
Matthias Haentjens
Resolution plans drawn up by the Board
Art. 8 SRMR
(d) is a shareholder in or member of an undertaking, and: (aa) a majority of the members of the administrative, management or supervisory bodies of that undertaking (a subsidiary undertaking) who have held office during the financial year, during the preceding financial year and up to the time when the consolidated accounts are drawn up, have been appointed solely as a result of the exercise of its voting rights; or (bb) controls alone, pursuant to an agreement with other shareholders in or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking. The Member States may introduce more detailed provisions concerning the form and contents of such agreements. The Member States shall prescribe at least the arrangements referred to in (bb) above. They may make the application of (aa) above dependent upon the holding's representing 20 % or more of the shareholders' or members' voting rights. However, (aa) above shall not apply where another undertaking has the rights referred to in subparagraphs (a), (b) or (c) above with regard to that subsidiary undertaking. 2. Apart from the cases mentioned in paragraph 1 above and pending subsequent coordination, the Member States may require any undertaking governed by their national law to draw up consolidated accounts and a consolidated annual report if that undertaking (a parent undertaking) holds a participating interest as defined in Article 17 of Directive 78/660/EEC in another undertaking (a subsidiary undertaking), and: (a) it actually exercises a dominant influence over it; or (b) it and the subsidiary undertaking are managed on a unified basis by the parent undertaking. Article 2 1. For the purposes of Article 1 (1) (a), (b) and (d), the voting rights and the rights of appointment and removal of any other subsidiary undertaking as well as those of any person acting in his own name but on behalf of the parent undertaking or of another subsidiary undertaking must be added to those of the parent undertaking. 2. For the purposes of Article 1 (1) (a), (b) and (d), the rights mentioned in paragraph 1 above must be reduced by the rights: (a) attaching to shares held on behalf of a person who is neither the parent undertaking nor a subsidiary thereof; or (b) attaching to shares held by way of security, provided that the rights in question are exercised in accordance with the instructions received, or held in connection with the granting of loans as part of normal business activities, provided that the voting rights are exercised in the interests of the person providing the security. 3. For the purposes of Article 1 (1) (a) and (c), the total of the shareholders' or members' voting rights in the subsidiary undertaking must be reduced by the voting rights attaching to the shares held by that undertaking itself by a subsidiary undertaking of that undertaking or by a person acting in his own name but on behalf of those undertakings.”
Re. (c): reference here is made to Art. 2(b) SRMR, which provision relates to, in short, 54 parent undertakings subject to supervision by the ECB (and thus falling under the CRR). Please be referred to the specific commentary on Art. 2(b) SRMR. Re. (d): Art. 33 SRMR concerns with the recognition and enforcement of third- 55 country resolution proceedings. In other words, Art. 33 SRMR concerns ‘inbound’ resolution measures and proceedings. By contrast, this para. 10 requires an SRB resolution plan to include subsidiaries that are established outside the Union. In other words: ‘outbound’ or extraterritorial effects of EU resolution. The reference to Art. 33 SRMR is probably intended to signify that when drafting resolution plans concerning third-country subsidiaries, the SRB should take into account also possible resolution measures that may be taken in the relevant third country or countries, which may affect the EU.
Matthias Haentjens
533
Art. 9 SRMR
Resolution plans drawn up by national resolution authorities
III. Elements of group resolution plans (Art. 8(11) SRMR) Similar to para. 9, this para. 11 sets out in some detail the elements a group resolution plan must contain, which elements to a large extent are self-explanatory. As a matter of principle, this para. concludes with the statement that the group resolution plan “shall not have a disproportionate impact on any Member State”. This provision is identical to Art. 12(5) BRRD. Presumably, this provision makes explicit that the resolution plan should be proportionate, as is required anyway for any action taken by Union institutions under Art. 5(4) TEU. 57 Under EU law, decisions may be challenged with an EU Court on the grounds of disproportionality. For such a challenge to succeed, the Court must be convinced that the challenged authority’s decision does not meet a ‘suitability and necessity’ test and that it has not been proportionate stricto sensuto the desired goal.25 Also, it will assess whether the relevant resolution authority has taken into account all relevant elements. Finally, the Court will determine how much discretion the relevant resolution authority had to take the decision in question and whether its decision has been adequately reasoned. See on proportionality more extensively at the commentary on Art. 10 SRMR. 56
F. Review and updating resolution plans (Art. 8(12) SRMR) 58
Para. 12 again concerns the process of drawing up resolution plans. It is quite operational in that it requires the SRB to “determine the date by which the first resolution plans shall be drawn up.” More notably, it requires the SRB to review and where appropriate update resolution plans and group resolution plans. Pursuant to this para., this review or update must be done “at least annually and after any material changes to the legal or organisational structure or to the business or the financial position of the entity or, in the case of group resolution plans, of the group including any group entity that could have a material effect on the effectiveness of the plan or that otherwise necessitates a revision of the resolution plan.” To this purpose, para. 12, last sentence, requires “the institutions, the ECB or the national competent authorities” to “promptly” communicate to the SRB “any change that necessitates such revision or update”.
G. Review and updating resolution plans (Art. 8(12) SRMR) 59
Para. 13 says what must be done once the SRB has drawn up a resolution plan, as well as when the SRB has amended a resolution plan. As para. 12, it is quite operational in that it requires the SRB to “transmit the resolution plans and any changes thereto to the ECB or to the relevant national competent authorities.” On the NCAs, see supra, → para. 20.
Art. 9 SRMR Resolution plans drawn up by national resolution authorities 1. The national resolution authorities shall draw up and adopt resolution plans for the entities and for the groups, other than those referred to in Article 7(2), (4)(b) and (5), in accordance with Article 8(5) to (13). 25
534
Cf. Case C-62/14, Gauweiler and others v Deutscher Bundestag, ECLI:EU:C:2015:400.
Matthias Haentjens
Resolution plans drawn up by national resolution authorities
Art. 9 SRMR
2. The national resolution authorities shall prepare resolution plans, after consulting the relevant national competent authorities and the national resolution authorities of the participating and non-participating Member States, in which significant branches are located, insofar as relevant to the significant branch. Bibliography Emilios Avgouleas, Charles Goodhart and Dirk Schoenmaker, ‘Bank Resolution Plans as a catalyst for global financial reform’, Journal of Financial Stability 9 (2013), 210; Jens-Hinrich Binder, ‘Resolution planning and structural bank reform within the banking union’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union (Routledge, Abington 2015), Ch. 7; Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (15 October 2014), ; Thomas F. Huertas, ‘European Bank Resolution: Making it Work!’, Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution (January 2016), ; Giannoula Karamichailidou and David G. Mayes, ‘Plausible recovery and resolution plans for cross-border financial institutions’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union, (Routledge, Abington 2015), Ch. 3; World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), ; World Bank Group, ‘Bank Resolution and “Bail-In” in the EU: Selected Case Studies Pre and Post BRRD’ (2016), . A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Competence of NRAs (Art. 9(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
C. Consultation of relevant authorities (Art. 9(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . .
10
A. Introduction Art. 9 SRMR is a part of Chapter I Resolution Planning. It details the situation in 1 which not the SRB, but the relevant NRA is charged with drawing up a resolution plan. As Arts. 10-14 BRRD also require national resolution authorities to draw up resolution plans, this provision was included so as to make explicit the division of responsibilities between the SRB on the EU level and the NRAs on the Member State level. 1 Pursuant to this Art. 9 SRMR, the relevant NRA must prepare resolution plans 2 where the SRB is not competent, in consultation with the relevant supervisory authority, as well as with the resolution authorities of participating and non-participating Member States in all jurisdictions where significant branches are located.
B. Competence of NRAs (Art. 9(2) SRMR) Pursuant to Art. 9(1) SRMR, the relevant NRA has to prepare resolution plans 3 where, in short, the SRB is not competent. More specifically, the relevant NRA is responsible for the institutions other than those referred to in: (a) Art. 7(2) SRMR; (b) Art. 7(4)(b) SRMR; (c) and Art. 7(5) SRMR. For these institutions, the SRB is the competent authority under Art. 8(1) SRMR. Re. (a): ‘entities and groups’ under Art. 7(2) SRMR means: entities and groups under 4 ECB supervision as well as all other cross-border groups. More specifically: ‘entities’ means: (a) credit institutions established in a Member State; (b) parent undertakings, 1 For resolution planning under the BRRD see World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), at pp. 50-91.
Matthias Haentjens
535
Art. 9 SRMR
5
6
7
8
9
Resolution plans drawn up by national resolution authorities
including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR; and (c) investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR. On these terms, see the commentary on Art. 2 SRMR; ‘under ECB supervision’ means: (a) the entities and groups considered ‘significant’ as defined in Art. 6(4) SSMR; and (b) the entities and groups in relation to which the ECB has decided to exercise directly all of the relevant powers in accordance with Art. 6(5)(b) SSMR. Re. (b): Pursuant to Art. 7(4)(b) SRMR, the SRB may, at any time, decide “on its own initiative, after consulting the national resolution authority concerned, or upon request from the national resolution authority concerned, to exercise directly all of the relevant powers under this Regulation”. See also the commentary at Art. 7 SRMR. Re. (c): Pursuant to Art. 7(5) SRMR, participating Member States may request the SRB to exercise “all of the relevant powers and responsibilities conferred on it by this Regulation”. In such instance, Member States must notify the Board and the Commission accordingly. See also the commentary on Art. 7 SRMR. NB: participating Member States are the euro area Member States and those non-euro area Member States who choose to participate in the SSM (see Recital 7 SRMR). See also the commentary on Art. 8(1) SRMR. ‘National resolution authority’ is defined in Art. 3(1)(3) SRMR as the authority designated by a participating Member State in accordance with Art. 3 BRRD. According to this Art. 3 BRRD, Member States must designate one or exceptionally more resolution authorities that are empowered to apply the resolution tools and exercise the resolution powers. It is these national resolution authorities that are the designated authorities to prepare resolution plans under Art. 10 BRRD. As the BRRD requires NRAs to draft resolution plans for all institutions in the scope of the BRRD, this Art. 9(1) SRMR makes explicit that this provision does not extend to the categories of institutions dissected above for which the SRB is responsible. This does not mean that the NRAs have no role to play in the drawing up of these resolution plans. In accordance with Art. 8(3) SRMR, for instance, the SRB can issue guidelines and address instruction to the NRAs “to ensure effective and consistent resolution planning” whenever the SRB is responsible for resolution plans. Furthermore, the SRB may issue a warning to an NRA where the SRB considers that a decision of that NRA does not comply with the SRMR or with the SRB’s guidelines and instructions.2 Art. 9(1) SRMR also states that the resolution plans drawn up by the NRAs must be drafted in accordance with Art. 8(5) to (13) SRMR. See also the commentary on Art. 8 SRMR. This addition seems redundant because Art. 10 BRRD already sets out how NRAs should draft their resolution plans, albeit that Art. 8 SRMR is somewhat more elaborate. Accordingly, the SRB’s Introduction to Resolution Planning paper which strictly speaking only applies to resolution plans to be drawn up by the SRB, may also be a useful source for NRAs regarding their resolution planning.
C. Consultation of relevant authorities (Art. 9(2) SRMR) 10
Read in conjunction with Art. 10 BRRD, this Art. 9(2) SRMR must be interpreted so as to mean that a relevant NRA must consult: (a) the relevant national competent au2
536
SRB, ‘Introduction to Resolution Planning’, at p. 10.
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
thority, i.e. the national competent authority of the same Member State as the NRA responsible for drawing up the resolution plan; (b) all NRAs of the participating Member States in which significant branches are located; and (c) all NRAs of non-participating Member States in which significant branches are located.3 Re. (a): ‘National competent authorities’ is ‘defined’ in Art. 3(1)(1) SRMR, but this definition refers to Art. 2(2) SSMR, which states that ‘national competent authority’ “means a national competent authority designated by a participating Member State in accordance with 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 (13) and Directive 2013/36/EU”. In Art. 4(1)(40) CRR a competent authority is defined as the public authority or body officially recognized by national law, which is empowered by national law to supervise institutions as part of the supervisory system in operation in the Member State concerned. In other words, it means the national authority responsible for the prudential supervision of credit institutions and investment firms. Re. (b): The SRMR does not define ‘significant branch’, but the BRRD does. Definition 34 of Art. 2(1) BRRD refers to Art. 51(1) CRD IV, which says, in short, that it is for the consolidating supervisor or the home supervisor to determine whether a branch is to be considered significant. This supervisor will specifically have to take into consideration: (a) whether the market share of the branch in terms of deposits exceeds 2 % in the host Member State; (b) the likely impact of a suspension or closure of the operations of the institution on systemic liquidity and the payment, clearing and settlement systems in the host Member State; and (c) the size and the importance of the branch in terms of number of clients within the context of the banking or financial system of the host Member State. ‘Participating Member States’ is defined in Recital 7 SRMR as “the euro area Member States and those non-euro area Member States who choose to participate in the SSM”. Re. (c): “All NRAs of non-participating Member States in which significant branches are located” must be understood in the light of the definitions of ‘significant branch’ and ‘participating Member States’ as explained above.
Art. 10 SRMR Assessment of resolvability 1. When drafting and updating resolution plans in accordance with Article 8, the Board, after consulting the competent authorities, including the ECB, and the resolution authorities of non-participating Member States in which significant branches are located insofar as relevant to the significant branch, shall conduct an assessment of the extent to which institutions and groups are resolvable without the assumption of any of the following: (a) any extraordinary public financial support besides the use of the Fund established in accordance with Article 67; (b) any central bank emergency liquidity assistance; or (c) any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms. 3 For the various scenarios involving cross-border group resolution, see Binder, in: Castañeda, Mayes and Wood (Eds), European Banking Union (2015), at pp. 24-32; see also Avgouleas, Goodhart and Schoenmaker, Journal of Financial Stability 9 (2013), at pp. 5-8. See on the essential elements for crossborder resolution FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2014), at pp. 31-37.
Matthias Haentjens
537
11
12
13 14
Art. 10 SRMR
Assessment of resolvability
2. The ECB or the relevant national competent authority shall provide the Board with a recovery plan or group recovery plan. The Board shall examine the recovery plan with a view to identifying any actions in the recovery plan which may adversely impact the resolvability of the institution or group and make recommendations to the ECB or the national competent authority on those matters. 3. When drafting a resolution plan, the Board shall assess the extent to which such an entity is resolvable in accordance with this Regulation. An entity shall be deemed to be resolvable if it is feasible and credible for the Board to either liquidate it under normal insolvency proceedings or to resolve it by applying to it resolution tools and exercising resolution powers while avoiding, to the maximum extent possible, any significant adverse consequences for financial systems, including circumstances of broader financial instability or system wide events, of the Member State in which the entity is situated, or other Member States, or the Union and with a view to ensuring the continuity of critical functions carried out by the entity. The Board shall notify EBA in a timely manner where an institution is deemed not to be resolvable. 4. A group shall be deemed to be resolvable if it is feasible and credible for the Board to either liquidate group entities under normal insolvency proceedings or to resolve them by applying resolution tools and exercising resolution powers in relation to group entities while avoiding, to the maximum extent possible, any significant adverse consequences for financial systems, including circumstances of broader financial instability or system wide events, of the Member States in which group entities are established, or other Member States or the Union and with a view to ensuring the continuity of critical functions carried out by those group entities, where they can be easily separated in a timely manner or by other means. The Board shall notify EBA in a timely manner where a group is deemed not to be resolvable. Where a group is composed of more than one resolution group, the Board shall assess the resolvability of each resolution group in accordance with this Article. The assessment referred to in the first subparagraph shall be performed in addition to the assessment of the resolvability of the entire group. 5. For the purposes of paragraphs 3, 4 and 10, significant adverse consequences for the financial system or threat to financial stability refers to a situation where the financial system is actually or potentially exposed to a disruption that may give rise to financial distress liable to jeopardise the orderly functioning, efficiency and integrity of the internal market or the economy or the financial system of one or more Member States. In determining the significant adverse consequences the Board shall take into account the relevant warnings and recommendations of the ESRB and the relevant criteria developed by EBA in considering the identification and measurement of systemic risk. 6. For the purpose of the assessment referred to in this Article, the Board shall examine the matters specified in Section C of the Annex to Directive 2014/59/EU. 7. If, pursuant to an assessment of resolvability for an entity or a group carried out in accordance with paragraph 3 or 4, the Board, after consulting the competent authorities, including the ECB, determines that there are substantive impediments to the resolvability of that entity or group, the Board shall prepare a report, in cooperation with the competent authorities, addressed to the institution or the parent undertaking analysing the substantive impediments to the effective application of resolution tools and the exercise of resolution powers. That report shall consider the impact on the institution's business model and recommend any proportionate and 538
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
targeted measures that, in the Board's view, are necessary or appropriate to remove those impediments in accordance with paragraph 10. 8. The report shall also be notified to the competent authorities and to the resolution authorities of non-participating Member States in which significant branches of institutions which are not part of a group are located. It shall be supported by reasons for the assessment or determination in question and shall indicate how that assessment or determination complies with the requirement for proportionate application laid down in Article 6. 9. Within four months from the date of receipt of the report, the entity or the parent undertaking shall propose to the Board possible measures to address or remove the substantive impediments identified in the report. The Board shall communicate any measure proposed by the entity or parent undertaking to the competent authorities, to EBA and, where significant branches of institutions that are not part of a group are located in non-participating Member States, to the resolution authorities of those Member States. Within two weeks of the date of receipt of a report made in accordance with paragraph 7 of this Article, the entity shall propose to the Board possible measures and a timeline for their implementation to ensure that the entity or the parent undertaking complies with Article 12f or 12g, and the combined buffer requirement, where a substantive impediment to resolvability is due to either of the following situations: 1. the entity meets the combined buffer requirement when considered in addition to each of the requirements referred to in points (a), (b) and (c) of Article 141a(1) of Directive 2013/36/EU, but does not meet the combined buffer requirement when considered in addition to the requirements referred to in Articles 12d and 12e of this Regulation when calculated in accordance with point (a)of Article 12a(2) of this Regulation; or 2. the entity does not meet the requirements referred to in Articles 92a and 494 of Regulation (EU) No 575/2013 or the requirements referred to in Articles 12d and 12e of this Regulation.¶ When proposing the timeline for the implementation of measures referred to in the second subparagraph, the entity shall take into account the reasons for the substantive impediment. The Board, after consulting the competent authorities, including the ECB, shall assess whether those measures effectively address or remove the substantive impediment in question. 10. The Board, after consulting the competent authorities, shall assess whether the measures referred to in paragraph 9 effectively address or remove the substantive impediments in question. If the measures proposed by the entity or parent undertaking concerned do not effectively reduce or remove the impediments to resolvability, the Board shall take a decision, after consulting the competent authorities and, where appropriate, the designated macro-prudential authority, indicating that the measures proposed do not effectively reduce or remove the impediments to resolvability, and instructing the national resolution authorities to require the institution, the parent undertaking, or any subsidiary of the group concerned, to take any of the measures listed in paragraph 11. In identifying alternative measures, the Board shall demonstrate how the measures proposed by the institution would not be able to remove the impediments to resolvability and how the alternative measures proposed are proportionate in removing them. The Board shall take into account the threat to financial stability of those Matthias Haentjens
539
Art. 10 SRMR
Assessment of resolvability
impediments to resolvability and the effect of the measures on the business of the institution, its stability and its ability to contribute to the economy, on the internal market for financial services and on the financial stability in other Member States and the Union as a whole. The Board shall also take into account the need to avoid any impact on the institution or the group concerned which would go beyond what is necessary to remove the impediment to resolvability or would be disproportionate. 11. For the purpose of paragraph 10, the Board, where applicable, shall instruct the national resolution authorities to take any of the following measures: (a) to require the entity to revise any intragroup financing agreements or review the absence thereof, or draw up service agreements (whether intra-group or with third parties) to cover the provision of critical functions; (b) to require the entity to limit its maximum individual and aggregate exposures; (c) to impose specific or regular additional information requirements relevant for resolution purposes; (d) to require the entity to divest specific assets; (e) to require the entity to limit or cease specific existing or proposed activities; (f) to restrict or prevent the development of new or existing business lines or sale of new or existing products; (g) to require changes to legal or operational structures of the entity or any group entity, either directly or indirectly under their control, so as to reduce complexity in order to ensure that critical functions may be legally and operationally separated from other functions through the application of the resolution tools; (h) to require an entity to set up a parent financial holding company in a Member State or a Union parent financial holding company; (i) to require an entity to issue eligible liabilities to meet the requirements of Article 12; (j) to require an entity to take other steps to meet the requirements referred to in Article 12, including in particular to attempt to renegotiate any eligible liability, Additional Tier 1 instrument or Tier 2 instrument it has issued, with a view to ensuring that any decision of the Board to write down or convert that liability or instrument would be effected under the law of the jurisdiction governing that liability or instrument; (k) to require an entity to submit a plan to restore compliance with the requirements of Articles 12f and 12gof this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013 and, where applicable, with the combined buffer requirement and with the requirements of Article 12f or 12g of this Regulation expressed as a percentage of the total exposure measure referred to in Articles 429 and 429aof Regulation (EU) No 575/2013; (l) for the purpose of ensuring ongoing compliance with Article 12f or 12g, to require an entity to change the maturity profile of: (i) own funds instruments, after having obtained the agreement of the competent authorities, including the ECB, and (ii) eligible liabilities referred to in Article 12c and point (a) of Article 12g(2). Where applicable, the national resolution authorities shall directly take the measures referred to in points (a) to (j) of the first subparagraph. 12. The national resolution authorities shall implement the instructions of the Board in accordance with Article 29. 540
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
13. A decision made pursuant to paragraphs 10 and 11 shall meet the following requirements: (a) it shall be supported by reasons for the assessment or determination in question; (b) it shall indicate how that assessment or determination complies with the requirement for proportionate application laid down in paragraph 10. Bibliography Jens-Hinrich Binder, ‘Resolution planning and structural bank reform within the banking union’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union (Routledge, Abington 2015), Ch. 7; Jens-Hinrich Binder and Dalvinder Singh, Bank Resolution: the European Regime (Oxford University Press, Oxford 2016); Alexander Bornemann, ‘Resolution regimes for financial institutions and the rule of law’ in: Matthias Haentjens and Bob Wessels (eds), Bank Recovery and Resolution (Eleven International Publishing, The Hague 2014), 87; FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (15 October 2014), ; Andromachi Georgosouli, ‘The emerging special recovery and resolution framework of G-SIIs and its effectiveness’ in: Andromachi Georgosouli and Miriam Goldby (eds), Systemic Risk and the Future of Insurance Regulation (Informa Law from Routledge, Abingdon 2015), 125; Simon Gleeson and Randall D. Guynn, Bank Resolution and Crisis Management: Law and Practice, (Oxford University Press, Oxford 2016); Giannoula Karamichailidou and David G. Mayes, ‘Plausible recovery and resolution plans for cross-border financial institutions’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union (Routledge, Abington 2015), Ch. 3; Nikoletta Kleftouri, ‘The European Union Bank Resolution Framework: can the objective of financial stability ensure consistency in resolution authorities’ decisions?’, ERA Forum 18/2 (2017), 263; Matthias Hanetjens, ‘Titles II and II: Preparation and Early Intervention’, in Gabriel S. Moss, Bob Wessels and Matthias Haentjens, EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 195; Sven Schelo, Bank Recovery and Resolution (Wolters Kluwer, Alphen aan den Rijn 2015); Dirk Schoenmaker, ‘The impact of the legal and operational structures of euro-area banks on their resolvability’, Bruegel Policy Contribution No. 23 (2016), ; Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (Oxford University Press, Oxford 2016); World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), ; World Bank Group, ‘Bank Resolution and “Bail-In” in the EU: Selected Case Studies Pre and Post BRRD’ (2016), . A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Assessment of resolvability (Art. 10(1)-(6) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Resolvability (Art. 10(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Recovery plans (Art. 10(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Resolvability assessment (Art. 10(6) and (3)-(4) SRMR) . . . . . . . . . . . . . . . . . . . . . 1. Matters to be taken into account (Art. 10(6) SRMR) . . . . . . . . . . . . . . . . . . . . . . 2. Assessment of an entity (Art. 10(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Assessment of a group (Art. 10(4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Significant adverse consequences (Art. 10(5) SRMR) . . . . . . . . . . . . . . . . . . . . . . . .
6 6 12 13 13 14 25 27
C. Substantive impediments to resolvability (Art. 10(7)-(13) SRMR) . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Report on substantive impediments (Art. 10(7)-(8) SRMR) . . . . . . . . . . . . . . . . . . III. Measures proposed by institution or parent undertaking (Art. 10(9) SRMR) IV. Measures imposed on institution or group (Art. 10(10) and (13) SRMR) . . . . V. Instructions to NRAs (Art. 10(11)-(12) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29 29 32 37 38 43
A. Introduction Art. 10 SRMR details with a particularly important aspect of any resolution plan: the 1 assessment of resolvability. As required by Art. 8(9)(e) and (11)(c) SRMR, every resolution plan drawn up by the SRB for an entity or group, respectively, must contain a ‘de-
Matthias Haentjens
541
Art. 10 SRMR
2
3
4
5
Assessment of resolvability
tailed description of the assessment of resolvability carried out in accordance with Art. 10’. A similar requirement is formulated for NRAs in Arts. 10(2), 10(7)(e), and 12(4) BRRD, respectively.1 In short, this means that in each resolution plan, the relevant resolution authority must assess whether an entity or group is ‘resolvable’. What ‘resolvable’ means, is set out more in detail in this Art. 10 SRMR (and Art. 15 BRRD). In short, the resolvability assessment is used to determine whether it is practically and economically feasible to either wind up the entity or group under normal insolvency proceedings or to resolve it by applying resolution tools and exercising resolution powers (Art. 10(1)-(6) SRMR).2 In general, the resolvability assessment takes place in parallel to the resolution planning. Moreover, the assessment of an entity’s or group’s resolvability is the concluding analyses of the resolution plan and takes place in accordance with the SRBs’ ‘Introduction to Resolution Planning’. All the analyses and assessments of the previous sections of the resolution plan feed into this overall assessment of resolvability.3 The assessment is conducted by the IRT in consultation with the ECB (or NCA) and relevant resolution authorities of non-participating Member States. Where the assessment identifies substantive impediments to resolvability, the entity or group in question is given the opportunity to propose measures to remedy the situation. If the SRB is not satisfied with these measures, it can implement ‘alternative measures’ of its own, which may be radical (Art. 10(7)-(13) SRMR). The EBA has published Regulatory Technical Standards on (inter alia) the content of the resolution plans and the assessment of resolvability, which are enacted as the Delegated Regulation (EU) 2016/1075. Whilst these RTS are primarily addressed to NRAs, they can be analogously applied to the SRB. Arts. 15–18 BRRD deal with the same subject matter as this Art. 10 SRMR. 4 More specifically, the substantive assessment of resolvability of Art. 10(3) SRMR is virtually the same as the assessment required by Art. 15(1) BRRD. The powers to address or remove impediments are also quite similar. The main difference with the BRRD is that unlike the SRMR (where such a provision is absent), Art. 18 BRRD contains a specific procedure for taking measures if substantial impediments to resolvability are determined in a group. Art. 18 BRRD has rather complex procedural rules on how this decision must be made and the various steps must be taken and which role the EBA should play in that process. The SRMR has simplified this procedure for groups. Since the Board is the single competent authority (rather than a group of NRAs) a joint decision is no longer necessary, which simplifies the procedural requirements significantly. Nonetheless, the SRB must consult with the ECB, other competent authorities and NRAs in virtually all phases of the resolvability assessment and its related decision making.
1 Binder, in: Castañeda, Mayes, Wood (eds), European Banking Union (2015), at pp. 17-19. See also World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), at pp. 79-82. 2 See also FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2014), at pp. 37-42. On the effectiveness of resolvability assessments see, Georgosouli, in: Georgosouli and Goldby (eds), Systemic Risk and the Future of Insurance Regulation (2015), 125, at pp. 137-139. 3 SRB, ‘Introduction to Resolution Planning’ (2016), at p. 37. 4 See further Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2017), 195, at pp. 206-210; Binder and Singh, Bank Resolution, the European Regime (2016), at pp. 18-20.
542
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
B. Assessment of resolvability (Art. 10(1)-(6) SRMR) I. Resolvability (Art. 10(1) SRMR) Under Art. 8(9)(e) and (11)(c) SRMR, the SRB must take into account the relevant entity’s or group’s ‘resolvability’ when drawing up the resolution plan. This is repeated in this Art. 10(1) SRMR. Art. 10(1) SRMR requires the SRB to assess constantly the extent to which an ‘institution’ or a group is ‘resolvable’. Resolvability is then further defined in para. 3-5. In short, it means that it must be reasonably feasible and credible either to liquidate or restructure the entity or group in question under normal insolvency proceedings or to resolve the same by applying resolution tools and powers. Other than Art. 8 SRMR and the other paras. of this Art. 10 SRMR, paras. (1)-(2) refer to ‘institutions’ and groups, rather than to entities and groups. Art. 3(1)(3) SRMR defines ‘institution’ as “a credit institution, or an investment firm covered by consolidated supervision in accordance with Art. 2(c)”. An ‘institution’ is a sub-category of ‘entity’. See the commentary on Art. 8 SRMR. As paras. (3)-(4) specify para. 1, and both Art. 8 SRMR and the other paras. of this Art. 10 refer to ‘entities’ rather than to ‘institutions’, this Art. 10(1) SRMR does not seem to have been intended to be restricted to ‘institutions’. It could therefore be argued that this Art. 10(1) and (2) SRMR must be understood to refer to ‘entities’ where it refers to ‘institutions’. Alternatively, it could have been a conscious choice to use the term ‘institution’ as to exclude the parent undertaking, defined in Art. 2(b) SRMR, from an individual resolvability assessment and instead to assess the resolvability of the parent undertaking as part of a group assessment. However, this terminology is not used consistently in the following paragraphs, most notably not so in para. 3, where the term ‘entity’ is used rather than institution. Pursuant to this Art. 10(1) SRMR, the SRB must consult: (a) the competent authorities, including the ECB; and (b) resolution authorities of non-participating Member States in which significant branches are located insofar as relevant to the significant branch. Re. (a): pursuant to Art. 3(1)(2) SRMR, a ‘competent authority’ is a “competent authority as defined in Art. 4(2)(i) of Regulation (EU) No 1093/2010”, which is the Regulation establishing the EBA (EBAR). Under Art. 4(2)(i) EBAR (which has been amended by Art. 95 SRMR), a competent authority can refer to, in short, a prudential supervisory authority including the ECB, a money laundering supervisory authority, an authority responsible for the relevant deposit guarantee scheme or a resolution authority including the SRB. Strictly speaking, the addition in this Art. 10(1) SRMR of ‘including the ECB’ is thus redundant, as a ‘competent authority’ already includes the ECB. Re. (b): A ‘resolution authority’ is defined in Art. 2(1)(18) BRRD as “an authority designated by a Member State in accordance with Art. 3”. Consequently, this means a national resolution authority (rather than the SRB). The SRMR does not define ‘significant branch’, but the BRRD does, and pursuant to Art. 3(2) SRMR, “In the absence of a relevant definition in paragraph 1 of this Art., the definitions referred to in Art. 2 of Directive 2014/59/EU [BRRD, MH] apply. In the absence of a relevant definition in para. 1 of this Art. or in Art. 2 of Directive 2014/59/EU, the definitions referred to in Art. 3 of Directive 2013/36/EU [CRD IV, MH] apply”. Definition 34 of Art. 2(1) BRRD refers to Art. 51(1) CRD IV, which says, in short, that it is for the consolidating supervisor or the home supervisor to determine whether a branch is to be considered significant. This supervisor will specifically have to take into consideration: (a) whether the market share of
Matthias Haentjens
543
6
7
8
9
10
Art. 10 SRMR
Assessment of resolvability
the branch in terms of deposits exceeds 2 % in the host Member State; (b) the likely impact of a suspension or closure of the operations of the institution on systemic liquidity and the payment, clearing and settlement systems in the host Member State; and (c) the size and the importance of the branch in terms of number of clients within the context of the banking or financial system of the host Member State. 11 This consultation must be done anyway, pursuant to Art. 8(2) SRMR, so this provision seems redundant. Moreover, pursuant to this para. 1, the SRB must assess the resolvability of ‘institutions’ (see on this term supra, → para. 7) and groups without the assumption of, in short, a taxpayer bail-out. More specifically, the entity or group has to be resolvable without assuming: (a) Any extraordinary public financial support (besides the use of the Fund established in accordance with Art. 67 SRMR); (b) Any central bank emergency liquidity assistance; or (c) Any central bank liquidity assistance provided under non-standard collateralization, tenor and interest rates. Also this seems redundant, as the resolution plan as a whole must be drawn up without assuming these three situations under Art. 8(6) SRMR, which is repeated for entities in Art. 8(9)(i) SRMR and for groups in Art. 8(11)(f) SRMR. Be that as it may, Art. 3(1) (29) SRMR defines ‘extraordinary public financial support’ as “State aid within the meaning of Art. 107(1) TFEU or any other public financial support at supra-national level, which, if provided at national level, would constitute State aid, that is provided in order to preserve or restore the viability, liquidity or solvency of an entity referred to in Art. 2 of this Regulation or of a group of which such an entity forms part”. On the use of the Single Resolution Fund according to Art. 67 SRMR, see the commentary on Art. 67 SRMR. Art. 3 SRMR does not define ‘central bank emergency liquidity assistance’, but Art. 2(1)(29) BRRD does. Pursuant to this provision, central bank emergency liquidity assistance means “the provision by a central bank of central bank money, or any other assistance that may lead to an increase in central bank money, to a solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems, without such an operation being part of monetary policy.”
II. Recovery plans (Art. 10(2) SRMR) 12
Pursuant to para. 2, the ECB or the relevant national competent authority must provide the SRB with the recovery plan or group recovery plan. Art. 2(1)(32) BRRD defines a ‘recovery plan’ somewhat circularly as “a recovery plan drawn up and maintained by an institution in accordance with Art. 5”. Under Arts. 5-9 BRRD, each institution must draft and submit a recovery plan to the competent authority. In the context of the resolvability assessment, providing the recovery plan is deemed necessary, because the SRB must use the recovery plan for its assessment of resolvability. More specifically, the SRB must examine the recovery plan to see whether it contains planned actions that could adversely impact the resolvability of the institution or group. This examination is done in the so-called IRTs (see supra, → Art. 8).5 On the term ‘resolvability’, see infra, → para. 17 et seq. If that is the case, the SRB must make recommendations to the ECB or the national competent authority, presumably so that these impediments to resolvability are addressed. It can be safely assumed that the ECB must be addressed for institutions falling under the remit of the SSM, and the national competent authorities in all other instances. It should be noted that the use of ‘institution’, rather than entity, makes sense, because under Arts. 5-9 BRRD, it is institutions that must draft and submit a recovery plan to the competent authority. 5
544
SRB, ‘Introduction to Resolution Planning’ (2016), at p. 37.
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
III. Resolvability assessment (Art. 10(6) and (3)-(4) SRMR) 1. Matters to be taken into account (Art. 10(6) SRMR) Pursuant to para. 6, the SRB must examine, when assessing the resolvability of an 13 entity or group, the matters specified in Section C of the Annex to the BRRD. Section C BRRD sets out the matters that the resolution authority in question must examine. It is a detailed list of 28 different subjects which largely reflects the relevant characteristics of the institution concerned and are largely self-explanatory.
2. Assessment of an entity (Art. 10(3) SRMR) Pursuant to para. 3, the SRB must assess the resolvability of “such an entity”, where para. 4 requires the same for a group. It is unclear to what the phrase “such an entity” refers. Probably, it refers to the entity that is the topic of the relevant resolution plan. The entities this may concern are: (a) credit institutions established in a Member State; (b) parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR; and (c) investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR. On these terms, see the commentary on Art. 2 SRMR. Para. 3 goes on to specify the term ‘resolvability’ by saying that an entity “shall be deemed to be resolvable if it is feasible and credible” for the SRB to either: (a) liquidate the entity under normal insolvency proceedings; or (b) to resolve it by applying to it resolution tools and exercising resolution powers. Re. (a): pursuant to Art. 2(1)(47) BRRD, ‘normal insolvency proceedings’ means “collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator or an administrator normally applicable to institutions under national law and either specific to those institutions or generally applicable to any natural or legal person.” Re. (b): ‘Resolution tools’ are ‘defined’ in Art. 3(1)(9) SRMR, which refers to Art. 22(2) SRMR, where the following tools are listed: the sale of business tool, the bridge institution tool, the asset separation tool; and the bail-in tool. See on these tools the commentary on Art. 22 SRMR. ‘Resolution powers’ are not defined in the SRMR, but Chapter VI BRRD (Arts. 63-72 BRRD) is entirely devoted to them. More specifically, Art. 63(1) BRRD lists 15 ‘powers’ which the resolution authorities must have in order to apply the resolution tools to institutions and to entities that meet the applicable conditions for resolution. These resolution powers may be exercised “individually or in any combination” (Art. 63(1) caput BRRD). Under this Art. 10(3) SRMR’s ‘definition’ of resolvability, an entity is ‘resolvable’ if both normal insolvency proceedings and resolution can be realistically done without (to the maximum extent possible): “any significant adverse consequences for financial systems, including circumstances of broader financial instability or system wide events of the Member State in which the entity is situated, or other Member States, or the Union and with a view to ensuring the continuity of critical functions carried out by the entity.” Consequently, the assessment of resolvability requires an examination of the macro-economic consequences of a failing entity at Member State and EU level, as well
Matthias Haentjens
545
14
15
16
17
18
Art. 10 SRMR
19
20
21
22
Assessment of resolvability
as an assessment of the consequences for the continuity of critical functions that the entity in question performs.6 The macro-economic consequences of a failing institution that should be avoided are further set out in para. 5. One of the micro-economic elements of a failing bank that must be examined in the context of the resolvability assessment is the continuity of critical functions. 7 Other elements are listed in Section C of the Annex to the BRRD, which list includes elements that could also be qualified as ‘critical functions’. In any event, the continuity of critical functions is one of the resolution objectives as defined in Art. 14(2)(a) SRMR. A function is critical if the discontinuance of the function is likely to lead to the disruption of services that are essential to the real economy or to disrupt financial stability in one or more Member States as explained in Art. 2(1)(35) BRRD. 8 The SRB has published a document to further set out its policy regarding critical functions.9 Pursuant to this document it is first up to the institutions themselves to identify their critical functions in their recovery plans (“bottom-up approach”). This self-assessment is to be reviewed by the resolution authorities (“top-down approach”). The identification of critical functions is essential also for other parts of the resolution plan since those parts focus on preserving the critical functions. First of all, the critical functions analysis is necessary to determine whether these critical functions can be separated from the rest of the institution. Furthermore, the identification of critical functions is necessary to determine whether resolution action is to be taken. Resolution action is only to be taken if it is considered to be in the public interest, for which critical functions can be an indicator. If resolution action is to be applied, the critical functions analysis helps determine which resolution tool or tools are most appropriate with regards to ensuring the continuation of the critical functions. The consecutive stages of the assessment of resolvability are set out in the Arts. 23 to 32 of the RTS, i.e. Delegated Regulation (EU) 2016/1075. The first step of the assessment is to determine whether the entity in question can ‘credibly’ be wound up under normal insolvency proceedings (on this term, see supra, → para. 19). In order to do this, the IRT assesses whether winding up under normal insolvency proceedings would likely have a material adverse impact on financial market functioning, financial market infrastructures, other financial institutions or the real economy. The IRT will also assess whether it would be ‘feasible’, i.e.: whether the entity’s systems are able to provide the information required by relevant deposit guarantee schemes (DGSs) and whether the bank has the capability required to support the DGS’s operations, in particular by distinguishing between covered and non-covered balances on the deposit accounts. If the IRT concludes that it is not feasible or credible to wind up the bank under normal insolvency proceedings or that resolution action may otherwise be necessary in the public interest, the IRT looks at the alternative offered in para. 3, viz. whether the entity can be resolved by applying resolution tools and exercising resolution powers. 10 The IRT will then select the preferred resolution strategy. In accordance with Art. 25 of the RTS the IRT must assess whether it would be more appropriate to apply an SPE or MPE strategy (see on these terms the commentary on Art. 8 SRMR). Relevant 6 See also Karamichailidou and Mayes, in: Castañeda, Mayes and Wood (eds), European Banking Union (2015), at pp. 46-50; Kleftouri, ERA Forum 18/2 (2017), 263, at pp. 269-273. 7 See also Schoenmaker, Bruegel Policy Contribution No. 23 (2016), at pp. 8-11. 8 SRB, ‘Introduction to Resolution Planning’ (2016), at p. 25. 9 SRB, Critical Functions: SRB Approach in 2017 and Next Steps, . 10 SRB, ‘Introduction to Resolution Planning’ (2016), at p. 38.
546
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
for this assessment are, among others, the preferred resolution tools, is the loss-absorbing capacity (see the commentary on Art. 12 SRMR) and the separability of the institution’s or group’s functions. Furthermore, the strategy must be determined in a scenario based on an idiosyncratic shock and tested against scenarios of broader financial instability or system wide events in order to assess the robustness of the preferred resolution strategy.11 Again, the IRT must assess whether the preferred resolution strategy is both feasible 23 and credible, taking into account any significant adverse consequences for financial systems and real economies of any Member State or the EU, with a view to ensuring the continuity of critical functions carried out by the bank. This assessment will take place in accordance with Arts. 26 to 32 of the RTS. The second sentence of para. 3 determines that the SRB shall notify the EBA in a 24 timely manner whenever ‘an institution’ is deemed not to be resolvable. Again, because the previous part of this Art. 10(3) SRMR refers to ‘entities’ rather than ‘institutions’ and because the category of entities includes institutions, this reference to ‘institutions’ must probably read as a reference to ‘entities’.
3. Assessment of a group (Art. 10(4) SRMR) Where para. 3 concerned the SRB’s resolvability assessment of ‘entities’, this para. 4, 25 concerns, in almost identical terms, the SRB’s resolvability assessment of ‘groups’. Thus, also under this para. 4, a group shall be deemed to be resolvable if it is feasible and credible for the SRB to either wind up group entities under normal insolvency proceedings or by applying resolution tools and powers to group entities. In either scenario, any significant adverse effect on the financial system must be avoided to the maximum extent possible, including in circumstances of broader financial instability or system wide events, of the Member States in which group entities are established, or the other Member States or the Union. This is with a view to ensure the continuity of critical functions carried out by the group entities, where they can be easily separated in a timely manner or by other means. In particular, for groups, it is important for the IRT to select an SPE or MPE strategy.12 See, more extensively, the commentary on para. 3 supra, → para. 14 et seq. As with entities, the SRB must notify the EBA in a timely manner whenever a group 26 is deemed not to be resolvable.
IV. Significant adverse consequences (Art. 10(5) SRMR) Para. 5 further elaborates on what ‘significant adverse consequences for the finan- 27 cial system’ as referred to in paras. 3-4 and 10 means. Pursuant to this Art. 10(5) SRMR, significant adverse consequences for the financial system means a situation “where the financial system is actually or potentially exposed to a disruption that may give rise to a financial distress liable to jeopardise the orderly functioning, efficiency and integrity of the internal market or the economy or the financial system of one or more Member States”. In other words, when assessing the resolvability of an entity or group, the SRB must determine whether a failing bank would pose any risks for the financial system of one or more Member States as a whole.
11 12
SRB, ‘Introduction to Resolution Planning’ (2016), at p. 30. Art. 25 Commission Delegated Regulation (EU) 2016/1075 of 23 March 2016.
Matthias Haentjens
547
Art. 10 SRMR 28
Assessment of resolvability
Pursuant to the second sentence of para. 5, the SRB must take into account ‘the relevant warnings and recommendations’ of the European Systemic Risk Board (ESRB) for its determination of whether a failing bank would pose any risks for the financial system of one or more Member States. The ESRB is responsible for the oversight of the EU financial system and the prevention and mitigation of systemic risk.13 The ESRB issues warnings when significant systemic risks are identified and flags them when necessary. If it identifies systemic risks, the ESRB will also issue recommendations to remedy them when it deems action to be necessary. Other than the relevant warnings and recommendations of the ESRB, the SRB must also take into account ‘the relevant criteria developed by EBA in considering the identification and measurement of systemic risk’. To our knowledge, the EBA has not published an official document in which it comprehensively sets out the criteria it uses when considering the identification and measurement of systemic risk. However, the EBA does assess systemic risks in the EU financial system and to that purpose, uses the results of its periodic EU wide stress tests. Yet the methodology used in these stress tests are altered every time one is held. 14
C. Substantive impediments to resolvability (Art. 10(7)-(13) SRMR) I. Introduction Under these paras. 7-13, the SRB may take action against an entity or group if it determines that this entity or group is not ‘resolvable’, or, more precisely, if it determines that there are ‘substantive impediments’15 to the resolvability of that entity or group. In brief, the procedure to address or remove substantive impediments is as follows. 30 First of all, it must be determined whether ‘substantive impediments’ exist. If the IRT in question determines that there are impediments to the effective winding up or resolution of the entity or group in question, the entity or group will be requested, informally, to propose and implement measures to address or remove those impediments. If the IRT determines that the impediments have not been sufficiently addressed, the impediments can be designated as significant.16 If the SRB thus determines that there are substantive impediments to the resolvability of the entity or group, the SRB prepares a report analyzing these impediments and recommends proportionate and targeted measures to remove those impediments (paras. 7-8). The entity or parent undertaking, respectively, can then respond to this report with its own proposed measures, which the SRB shall assess (para. 9). If the SRB believes the proposed measures do not effectively address, the impediments, it may instruct the relevant NRA to take ‘alternative measures’ in a decision (para. 10). This decision must be proportionate, i.e. reasoned, necessary and appropriate (para. 13). The ‘alternative measures’ the SRB may instruct an NRA to take are listed in para. 11 (see the commentary on para. 11 infra, → para. 43 et seq.). 31 The EBA has issued Guidelines on the specification of the measures to reduce or remove impediments to resolvability (EBA/GL/2014/11, Guidelines). These Guidelines have been issued in relation to Art. 17 BRRD rather than in relation to Art. 10 SRMR so that they concern resolvability decisions taken by NRAs rather than by the SRB. 29
13 On systemic risk assessment, see Bornemann, in: Haentjens and Wessels (eds), Bank Recovery and Resolution: A Conference Book (2015), 87, at pp. 97-102. 14 EBA, ‘The European Banking Authority at a Glance’ (2016), at p. 6. 15 See Schelo, Bank Recovery and Resolution (2015), at pp. 165-166. 16 SRB, ‘Introduction to Resolution Planning’ (2016), at p. 38.
548
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
Nonetheless, they may be applied analogously and the SRB does refer to the Guidelines in its Introduction to Resolution Planning, so as to provide guidance regarding the specification of the measures it may take. The Guidelines also elaborate on the circumstances in which each measure may be applied.17
II. Report on substantive impediments (Art. 10(7)-(8) SRMR) Pursuant to this para. 7, the SRB must consult with ‘the competent authorities, including the ECB to determine whether there are ‘substantive impediments to the resolvability’ of the entity or group in question. On the term ‘competent authorities, including the ECB’ see supra, → para. 9. If the outcome of the determination is that there are substantive impediments to the resolvability of the entity or group in question, Art. 10(7) SRMR requires that the SRB prepare a report in cooperation with the competent authorities, in which the SRB analyses the impediments to the effective ‘application of resolution tools and the exercise of resolution powers’. On the terms ‘resolution tools’ and ‘resolution powers’, see supra, → para. 17. In case the resolution plan concerns an entity, the resolvability report will be addressed to the entity (although Art. 10(7) SRMR refers to ‘institution’; on the distinction between these terms, see supra, → para. 7). In case the resolution plan concerns a group, it will be addressed to the parent undertaking of the group. ‘Parent undertakings’ are defined in Arts. 2(b) and 3(20) SRMR. Reference is made to the commentary there. Substantively, the resolvability report must consider the impact of possible resolution tools that may be applied and resolution powers that may be exercised on the business model of the institution in question. Also, and – from the perspective of the institution – perhaps more importantly, the report must recommend any ‘proportionate and targeted measures that, in the Board's view, are necessary or appropriate to remove’ the impediments to resolvability. In accordance with Art. 8(9)(f) SRMR, these measures already had to be included in the resolution plan. Pursuant to para. 7, this recommendation for measures to address substantive impediments to resolvability must be made ‘in accordance with paragraph 10’. The reference to para. 10 can be understood to mean that the measures proposed must be proportionate. To comply with the proportionality requirement is required anyway for any action taken by Union institutions under Art. 5(4) TEU. More specifically, para. 10 explains that the SRB must, on one hand, take into account the threat to financial stability of the identified impediments to resolvability. On the other hand, the SRB must consider the effect of the proposed measures on the business of the institution, its stability and its ability to contribute to the economy, on the internal market for financial services and on the financial stability in other Member States and the Union as a whole. Also, the SRB must “avoid any impact on the institution or the group concerned which would go beyond what is necessary to remove the impediment to resolvability or would be disproportionate.” This reflects the ‘suitability and necessity’ test that has been developed by the CJEU as a test to determine whether the proportionality requirement has been met. 18 The proportionality requirement is again made explicit in para. 13, which requires the SRB decision to be reasoned and proportionate. See also the commentary on para. 10 infra, → para. 38 et seq. Pursuant to para. 8, the report referred to in para. 7 must not only be addressed to the entity or group in question, but also to ‘the competent authorities and to the resolu17 18
SRB, ‘Introduction to Resolution Planning’ (2016), at p. 38. Cf. Case C-62/14, Gauweiler and others v Deutscher Bundestag, ECLI:EU:C:2015:400.
Matthias Haentjens
549
32
33
34
35
36
Art. 10 SRMR
Assessment of resolvability
tion authorities of non-participating Member States in which significant branches of institutions which are not a part of the group are located’. For the definitions of ‘competent authorities’ and ‘resolution authorities’ and ‘significant branches’, see supra, → para. 9 et seq. Notably, this para. 8 requires that the report be ‘supported by reasons’ and indicate how the assessment or determination in question ‘complies with the requirement for proportionate application laid down in Art. 6’. This requirement to adequately motivate the SRB’s resolvability assessment and its determination that there be substantive impediments to such resolvability can also be seen as concrete implementation of the proportionality requirement. See also the commentary on Art. 6 SRMR.
III. Measures proposed by institution or parent undertaking (Art. 10(9) SRMR) 37
Pursuant to para. 9, the relevant entity (in the case of a single institution) or parent undertaking (in the case of a group) must, within four months from the date of receipt of the report, propose to the SRB possible measures to address or remove the substantive impediments. In its turn, the SRB must then communicate these proposed measures to the ‘competent authorities’, to the EBA, and to the ‘resolution authorities of the Member States where significant branches of institutions that are not part of a group are located in non-participating Member States’. On the terms ‘competent authorities’, ‘resolution authorities’ and ‘significant branches’, see supra, → para. 9 et seq.
IV. Measures imposed on institution or group (Art. 10(10) and (13) SRMR) From a judicial protection perspective, this para. 10 is the most important provision of Art. 10 SRMR. Specifically, para. 10 requires the SRB, after it has received a reaction of the relevant entity (in the case of a single institution) or parent undertaking (in the case of a group) to the SRB’s resolvability report, to assess whether the measures the entity or parent undertaking in question has proposed effectively address or remove the substantive impediments identified by the SRB. The SRB must make this assessment after consulting ‘the competent authorities’ and ‘where appropriate, the designated macroprudential authority’. On the term ‘competent authorities’, see supra, → para. 9. Art. 2(1)(106) BRRD ‘defines’ the term ‘designated macro-prudential authority’ as “the authority entrusted with the conduct of macroprudential policy referred to in Recommendation B1 of the Recommendation of the European Systemic Risk Board of 22 December 2011 on the macroprudential mandate of national authorities (ESRB/2011/3).” The relevant ESRB recommendation recommends the Member States to “designate in the national legislation an authority entrusted with the conduct of macroprudential policy, generally either as a single institution or as a board composed of the authorities whose actions have a material impact on financial stability. The national legislation should specify the decision-making process of the governing body of the macro-prudential authority.” 39 If the SRB comes to the conclusion that the measures the entity or parent undertaking in question has proposed do not effectively address or remove the substantive impediments identified by the SRB, the SRB must take a “decision”. This decision must: (a) indicate that the measures proposed do not effectively reduce or remove the impediments to resolvability; and (b) instruct the national resolution authorities to require the institution, the parent undertaking, or any subsidiary of the group concerned, to take any of 38
550
Matthias Haentjens
Art. 10 SRMR
Assessment of resolvability
the measures listed in para. 11. The qualification as ‘decision’ is important, as this makes it challengeable before the SRB Appeal Panel under Art. 85(3) SRMR, and possibly also before the CJEU under Art. 86 SRMR. Pursuant to the third sentence of para. 10, in its decision, the SRB must demonstrate: 40 (a) how the measures proposed by the institution would not be able to remove the impediments to resolvability; and (b) how the alternative measures proposed are proportionate in removing them. As stated supra, → para. 35, this para. 10 thus makes explicit that the measures proposed by the SRB must be proportionate. This proportionality requirement is again made explicit in para. 13, which requires the SRB decision to be reasoned and proportionate. More specifically, under this para. 10, the SRB must, on one hand, take into account 41 the threat to the financial stability of the identified impediments to resolvability. On the other hand, the SRB must consider the effect of the proposed measures on the business of the institution, its stability and its ability to contribute to the economy, on the internal market for financial services and on the financial stability in other Member States and the Union as a whole. Also, the SRB must “avoid any impact on the institution or the group concerned which would go beyond what is necessary to remove the impediment to resolvability or would be disproportionate.” The above reflects the ‘suitability and necessity’ test that has been developed by the 42 CJEU as a test to determine whether the proportionality requirement has been met. 19 The EBA Guidelines on the specification of the measures to reduce or remove impediments to resolvability (EBA/GL/2014/11) have explained, more generally, that the resolution authority in question may apply a measure if it is ‘suitable, necessary and proportionate’ to reduce or remove the impediments to the implementation of a certain resolution strategy. According to the EBA, a measure is ‘suitable’ if it is able to materially reduce or remove the impediment in a timely manner; a measure is ‘necessary’ if it is required to remove or materially reduce the impediment and if there are no less intrusive measures which are able to achieve the same objective to the same extent; and a measure is ‘proportionate’ to the threat of an impediment if the overall benefits outweigh the overall costs and negative effects of removing the impediments. Again, less intrusive measures must be considered. The intrusiveness of a measure is assessed by the cost and negative effects. In accordance with Art. 10(1) SRMR, extraordinary public support must not be considered as a less intrusive measure.
V. Instructions to NRAs (Art. 10(11)-(12) SRMR) Para. 11 lists the measures that the SRB can instruct the NRAs to take: (a) Revising 43 the intragroup financing agreements; (b) Limitation of the maximum individual and aggregate exposures; (c) Imposing specific or regular additional information requirements; (d) Divesting specific assets; (e) Limitation or ceasing specific activities; (f) Restricting or preventing new business lines; (g) Requiring changes to legal or operational structures of the institution; (h) Setting up a parent financial holding company; (i) Issuing eligible liabilities to meet the requirement of Art. 12 SRMR; (j) Requiring any other steps to meet the requirements referred to in Art. 12 SRMR. The EBA Guidelines on the specification of the measures to reduce or remove the 44 impediments to resolvability (EBA/GL/2014/11) group the measures that can be taken to address resolvability under three headings, based on the nature of the impediment that the measure in question may be used to remove: (a) structural measures concerning 19
Cf. Case C-62/14, Gauweiler and others v Deutscher Bundestag, ECLI:EU:C:2015:400.
Matthias Haentjens
551
Art. 10a SRMR
45
46
47 48
Power to Prohibit Certain Distributions
the organizational, legal and business structure of an institution (Art. 10(11)(a), (g) and (h) SRMR); (b) financial measures relating to its assets and liabilities and products (Art. 10(11)(b), (d)-(f), (i)-(j) SRMR); and (c) additional information requirements (Art. 10(11)(c) SRMR). It is worth noting that when it comes to taking measures, the SRB has a certain level of discretion. Whilst the SRB does have an obligation to impose alternative measures should the measures proposed by the entity or group itself not suffice, the SRB has discretion in choosing which measures to apply. The Guidelines explain under what kind of circumstances a resolution authority should apply which kind of measures. Also, it is notable that pursuant to Art. 10(11)(j) SRMR, the list of possible measures is not exhaustive. If other measures are necessary to remove impediments relating to the minimum requirement for own funds and eligible liabilities as defined in Art. 12 SRMR, they can be applied even if they are not listed in para. 11. As a sort of afterthought, the last sentence of para. 11 codifies that NRAs must directly take the measures listed above ‘where applicable’. This seems not to refer to the situations where the SRB is not the responsible resolution authority (as such own responsibility for NRAs already follows from the relevant BRRD provisions (more specifically: Art. 17(5) BRRD)), but to make explicit that the NRAs should immediately carry out the SRB instructions. Pursuant to para. 12, the NRAs shall implement the instructions of the SRB in accordance with Art. 29 SRMR. See the commentary on Art. 29 SRMR. Pursuant to para. 13, the SRB must, in its decision: (a) give the reasons for its assessment of the entity or group’s resolvability or for its determination that there are substantive impediments that will not effectively be addressed or removed; and (b) indicate how this assessment and decision complies with the requirement for proportionate application as laid down in para. 10. See on this proportionality requirement the commentary on para. 10 supra, → para. 38 et seq.
Art. 10a SRMR Power to Prohibit Certain Distributions1 1. Where an entity is in a situation where it meets the combined buffer requirement when considered in addition to each of the requirements referred to in points (a), (b) and (c) of Article 141a(1) of Directive 2013/36/EU, but it fails to meet the combined buffer requirement when considered in addition to the requirements referred to in Articles 12d and 12e of this Regulation, when calculated in accordance with point (a) of Article 12a(2) of this Regulation, the Board shall have the power, in accordance with paragraphs 2 and 3 of this Article, to prohibit an entity from distributing more than the Maximum Distributable Amount related to the minimum requirement for own funds and eligible liabilities (“M-MDA”), calculated in accordance with paragraph 4 of this Article, through any of the following actions: (a) make a distribution in connection with Common Equity Tier 1 capital; (b) create an obligation to pay variable remuneration or discretionary pension benefits, or to pay variable remuneration if the obligation to pay was created at a time when the entity failed to meet the combined buffer requirement; or (c) make payments on Additional Tier 1 instruments.
1
552
As amended by Art. 1(5) SRMR II.
Matthias Haentjens
Power to Prohibit Certain Distributions
Art. 10a SRMR
Where an entity is in the situation referred to in the first subparagraph, it shall immediately notify the national resolution authority and the Board thereof. 2. In the situation referred to in paragraph 1, the Board, after consulting the competent authorities, including the ECB, where applicable, shall without unnecessary delay assess whether to exercise the power referred to in paragraph 1, taking into account all of the following elements: (a) the reason, duration and magnitude of the failure and its impact on resolvability; (b) the development of the entity's financial situation and the likelihood of it fulfilling, in the foreseeable future, the condition referred to in point (a) of Article 18(1); (c) the prospect that the entity will be able to ensure compliance with the requirements referred to in paragraph 1 within a reasonable timeframe; (d) where the entity is unable to replace liabilities that no longer meet the eligibility or maturity criteria laid down in Articles 72b and 72c of Regulation (EU) No 575/2013, Article 12c or Article 12g(2) of this Regulation, if that inability is idiosyncratic or is due to market-wide disturbance; (e) whether the exercise of the power referred to in paragraph 1 is the most adequate and proportionate means of addressing the situation of the entity, taking into account its potential impact on both the financing conditions and resolvability of the entity concerned. The Board shall repeat its assessment of whether to exercise the power referred to in paragraph 1 at least every month for as long as the entity continues to be in the situation referred to in paragraph 1. 3. If the Board finds that the entity is still in the situation referred to in paragraph 1 nine months after such situation has been notified by the entity, the Board, after consulting the competent authorities, including the ECB, where applicable, shall exercise the power referred to in paragraph 1, except where the Board finds, following an assessment, that at least two of the following conditions are fulfilled: (a) the failure is due to a serious disturbance to the functioning of financial markets which leads to broad-based financial market stress across several segments of financial markets; (b) the disturbance referred to in point (a) not only results in the increased price volatility of the own funds instruments and eligible liabilities instruments of the entity or increased costs for the entity, but also leads to a full or partial closure of markets which prevents the entity from issuing own funds instruments and eligible liabilities instruments on those markets; (c) the market closure referred to in point (b) is observed not only for the concerned entity, but also for several other entities; (d) the disturbance referred to in point (a) prevents the concerned entity from issuing own funds instruments and eligible liabilities instruments sufficient to remedy the failure; or (e) an exercise of the power referred to in paragraph 1 leads to negative spill-over effects for part of the banking sector, thereby potentially undermining financial stability. Where the exception referred to in the first subparagraph applies, the Board shall notify the competent authorities, including the ECB, where applicable, of its decision and shall explain its assessment in writing.
Matthias Haentjens
553
Art. 10a SRMR
Power to Prohibit Certain Distributions
Every month, the Board shall repeat its assessment of whether the exception referred to in the first subparagraph applies. 4. The M-MDA shall be calculated by multiplying the sum calculated in accordance with paragraph 5 by the factor determined in accordance with paragraph 6. The M-MDA shall be reduced by any amount resulting from any of the actions referred to in points (a), (b) or (c) of paragraph 1. 5. The sum to be multiplied in accordance with paragraph 4 shall consist of: (a) any interim profits not included in Common Equity Tier 1 capital pursuant to Article 26(2) of Regulation (EU) No 575/2013, net of any distribution of profits or any payment resulting from the actions referred to in points (a), (b) or (c) of paragraph 1 of this Article; plus (b) any year-end profits not included in Common Equity Tier 1 capital pursuant to Article 26(2) of Regulation (EU) No 575/2013, net of any distribution of profits or any payment resulting from the actions referred to in points (a), (b) or (c) of paragraph 1 of this Article; minus (c) amounts which would be payable by tax if the items specified in points (a) and (b) of this paragraph were to be retained. 6. The factor referred to in paragraph 4 shall be determined as follows: (a) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet any of the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the first (that is, the lowest) quartile of the combined buffer requirement, the factor shall be 0; (b) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet any of the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the second quartile of the combined buffer requirement, the factor shall be 0,2; (c) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the third quartile of the combined buffer requirement, the factor shall be 0,4; (d) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the fourth (that is, the highest) quartile of the combined buffer requirement, the factor shall be 0,6; The lower and upper bounds of each quartile of the combined buffer requirement shall be calculated as follows:
554
Matthias Haentjens
Art. 10a SRMR
Power to Prohibit Certain Distributions
Lower bound of quartile = Upper bound of quartile =
Combined buffer requirement 4 Combined buffer requirement 4
x (Qn -1) x Qn
where “Qn” = the ordinal number of the quartile concerned. Bibliography Financial Stability Board, ‘Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution’ (2015). A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Conditions for Enforcement, Enforcement Actions and Notification Requirement (Art. 10a(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Conditions for enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Enforcement actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Notification requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 5 12 15
C. Relevant circumstances for enforcement (Art. 10a(2)-(3) SRMR) . . . . . . . . . . . . I. Discretionary power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Obligation to exercise power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 16 20
D. Calculation of the M-MDA (Art. 10a(4)-(6) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . .
25
A. Introduction As part of the 2019 banking reform package, and in part to implement the interna- 1 tionally agreed Total Loss-Absorbing Capacity (TLAC) rules for Global Systemically Important Institutions (G-SIIs),2 the existing provisions on the minimum requirement for own funds and eligible liabilities (MREL) were amended and an impressive number of new ones were introduced in the SRMR. Specifically, Arts. 12-12k SRMR now provides detailed rules for the SRB, NRAs and entities on how the MREL must be determined, how it must be calculated and how it must be applied (Arts. 12-12k SRMR). As explained below, the MREL determination forms part of the wider resolution planning process (Art. 8 SRMR and Art. 9 SRMR): It ensures that on a continuous basis, entities have sufficient own funds and liabilities that can be made subject to the bail-in tool (→ Art. 17 SRMR), and the write-down and conversion of capital instruments powers (WDCCI, → Art. 21 SRMR). Thus, the MREL aims to make resolution plans effective and credible by imposing extra quasi-capital requirements. Art. 12j SRMR now authorises the SRB to impose various sanctions when any of the 2 MREL rules as set out in Art. 12f SRMR or Art. 12g SRMR is breached. One of these sanctions is to prohibit distributions, including paying out dividends on Common Equity Tier 1 and interest on Additional Tier 1 instruments. Moreover, the payment of variable remuneration and pension benefits may be prohibited, the prospect of which may function as an incentive for entities to comply with the MREL rules (cf. Recital (21) SRMR II). This power to prohibit certain distributions, which obviously constitutes an intrusive sanction from a corporate law point of view, is elaborated in Art. 10a SRMR, which also formed part of the newly enacted provisions in the context of the 2019 banking reform package. Thus, pursuant to Art. 12j(1)(b) SRMR, the SRB may enforce Art. 10a SRMR to sanction the violation of the MREL rules. In addition, the SRB can also apply Art. 10a SRMR as a standalone power, i.e. if an entity breaches a certain
2 Financial Stability Board, ‘Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution’ (9 November 2015), .
Matthias Haentjens
555
Art. 10a SRMR
Power to Prohibit Certain Distributions
threshold related to the combined buffer requirement, but is not (yet) in violation of the MREL as such. 3 Art. 10a SRMR mirrors Art. 16a BRRD. In short, it introduces the concept of a Maximum Distributable Amount related to the MREL (M-MDA). This is the amount of payments on Common Equity Tier 1, Additional Tier 1 instruments, etc. that entities may always make. M-MDA thus forms an additional test that supplements the capital conservation measures (including MDA) that were introduced in Art. 141 CRD IV in 2013. Thus, the ECB or a national competent authority must first determine whether an entity has complied with the MDA as defined in Art. 141 CRD IV. Subsequently, the SRB or a national resolution authority will have to assess compliance with the M-MDA as defined in this Art. 10a SRMR. 4 If a certain threshold of MREL is breached, the SRB may (but is not obliged to) prohibit the distribution of any amount more than the M-MDA. More specifically, Art. 10a(1) SRMR sets out which enforcement actions the SRB may take. Art. 10a(2) SRMR specifies the circumstances the SRB must take into account when deciding whether or not to impose any of the measures of Art. 10a(1) SRMR. Pursuant to Art. 10a(3) SRMR, the SRB must impose any measure if an entity violates the MREL for nine months, unless, there is, in short, a systemic crisis or other compelling reasons that would make this unwarranted. The precise calculation of the M-MDA, i.e. the amount of payments on Common Equity Tier 1, Additional Tier 1 instruments, etc. that entities may always make, is detailed in Art. 10a(4), (5) and (6) SRMR.
B. Conditions for Enforcement, Enforcement Actions and Notification Requirement (Art. 10a(1) SRMR) I. Conditions for enforcement Art. 10a(1) SRMR sets out the conditions for the application of three enforcement actions. First, it must concern an entity. The term “entity” as such is not defined here, but regard is to be had to Art. 2 SRMR on the scope of the SRMR (Art. 8 SRMR and Art. 2 SRMR). In practical terms, entities can only be the subject of Art. 10a SRMR if they also satisfy the second condition for application, which relates to the combined buffer requirement and the MREL. This limits the scope since entities that are in transitional periods before a binding MREL determination has been issued or in grace periods after resolution thus seem to be excluded from the scope of Art. 10a SRMR (Art. 12k SRMR). Also, and more generally, it excludes all entities that are not subject to the combined buffer requirement as defined in CRD IV. 6 The second condition for application consists of two separate sub-conditions, viz.: (i) the entity must “meet[s] the combined buffer requirement when considered in addition to each of the requirements referred to in points (a), (b) and (c) of Art. 141a(1) of Directive 2013/36/EU”; but (ii) “fails to meet the combined buffer requirement when considered in addition to the requirements referred to in Arts. 12d and 12e of this regulation, when calculated in accordance with point (a) of Art. 12a(2) of this regulation”. 7 “Combined buffer requirement” is defined via Art. 3(1)(55) SRMR by Art. 128(6) CRD IV as “the total Common Equity Tier 1 capital required to meet the requirement for the capital conservation buffer extended by the following as applicable: 5
(a) an institution-specific countercyclical capital buffer; (b) a G-SII buffer;
556
Matthias Haentjens
Power to Prohibit Certain Distributions
Art. 10a SRMR
(c) an O-SII buffer; and (d) a systemic risk buffer”. The “capital conservation buffer” is set out in Art. 129 CRD IV to be an additional CET1 requirement on top of the requirements of Art. 92 CRR, consisting of 2.5 % of the total risk exposure amount (TREA). Art. 141a(1)(a)-(c) CRD IV (as introduced by CRD V) refers to the own funds’ requirements defined in Art. 92(1) CRR. The legislature apparently found it necessary to stress the sequence of meeting these requirements, so that CET1 must first be counted to meet the regular capital requirements and then the combined buffers (i.e. capital conservation buffer, countercyclical capital buffer and G-SII/O-SII/systemic risk buffer). “Combined buffer requirement” in the second sub-condition has the same meaning as in the first sub-condition. The added “when considered in addition to the requirements referred to in Art. 12d and 12e of this regulation when calculated in accordance with point (a) of Art. 12a(2) of this regulation” intends to refer to the different determinations of the MREL for various categories of entities. Art. 12a(2) SRMR sets out the calculation ratios that must be used when determining the MREL, using as denominators the highest of the total risk exposure amount (TREA) or the leverage ratio exposure measure (LREM). Point (a) of this article concerns the TREA exclusively. Thus, Art. 10a SRMR takes only the MREL-TREA into account. Also here, CET1 must be counted to meet the MREL-TREA first, before it can be used to meet the combined buffer requirement. For an extensive overview on the MREL determination, see our commentary on Arts. 12-12k SRMR. Prof. Dr. E.P.M. Joosen explains: “In essence, the M-MDA measures can be taken in the event an institution is expected to hold MREL to meet the ‘market confidence’ buffer exceeding the ordinary recapitalisation amount. The market confidence surplus is essentially defined in Art. 12(d)(b) sixth and seventh subparagraph SRMR as the amount of the ‘combined buffer requirement’ as defined in Art. 128(6) CRD IV, minus the amount of the countercyclical buffer. This means that the combined buffer requirement within the meaning of Art. 12(d)(b) sixth and seventh subparagraph SRMR shall be the capital conservation buffer of 2.5 % plus (potentially) the higher of the O-SII/GSIB or SRB buffer requirements. These buffer requirements are calculated by reference to the TREA, although in their nature they are not a risk-weighted buffer per se within the meaning of Art. 92(3) CRR risk weightings. Determination of the combined buffer takes place after the calculation of the TREA amount. If a resolution will result in the downsizing of the bank’s business, a lower recapitalisation amount shall be necessary, and the market confidence surplus shall, accordingly also be lower. The M-MDA measure is therefore geared to ensure that, in the event, the MREL determination for a bank requires the bank to also capitalise for the market confidence factor, then potential distributions of dividend, payments to holders of AT1 instruments or remuneration shall not be possible. This also explains the exceptions to the power of the SRB to apply the Art. 10a SRMR sanctions, where non-idiosyncratic events (such as a general market disturbance) provide for an exception to apply for the M-MDA mechanism. The reasoning is, ‘market confidence’ in such a case is influenced by the nature of a sector-wide development and not an institution-specific development. In such cases, it would not be justified to impose on the individual institution the restrictive measures of Art. 10a SRMR.”
Matthias Haentjens
557
8
9
10
11
Art. 10a SRMR
Power to Prohibit Certain Distributions
II. Enforcement actions 12
Fulfilment of the conditions of application just discussed allows the SRB to prohibit an entity from distributing more than the M-MDA through employing any of the following three enforcement actions: 1) make a distribution in connection with Common Equity Tier 1 capital; 2) create an obligation to pay variable remuneration or discretionary pension benefits or to pay variable remuneration if the obligation to pay was created at a time when the entity failed to meet the combined buffer requirement; and 3) make payments on Additional Tier 1 instruments.
Thus, the SRB has a certain level of discretion whether or not to employ any of these three enforcement actions. Nonetheless, from Art. 10a(2) SRMR it follows that the SRB must seriously consider exercising its discretionary power at least every month. If the entity in question continues to meet the conditions for enforcement for nine months, the enforcement power becomes mandatory for the SRB pursuant to Art. 10a(3) SRMR. In any event, the SRB must always comply with the requirements set forth in Art. 10a(2)-(3) SRMR when exercising its power under Art. 10a(1) SRMR, which will be discussed below. 14 Specifically, the enforcement actions the SRB may take all concern prohibiting any distributions above the M-MDA threshold. First, this may concern the distribution of dividend payments on CET1. Second, entities may be prohibited to create new obligations to pay variable remuneration or discretionary pension benefits, or to pay variable remuneration if the obligation to pay was created at a time when the entity failed to meet the combined buffer requirement as defined in Art. 12d SRMR and Art. 12e SRMR. This is rather self-explanatory. Third, entities may be prohibited to make payments on AT1 instruments, such as interest payments on convertible bonds. These measures ensure that entities keep capital within the entity so as to prevent any further increases in MREL shortfall. They can also be categorized as sanctions, as they will be felt to restrict the entities’ commercial freedom to perform some key functions as a business, especially where it regards the variable remuneration restriction. 13
III. Notification requirement 15
Art. 10a(1) sent. 2 SRMR obliges entities to notify the NRA and the SRB immediately if the specific situation as discussed above arises. This requires entities to monitor their combined requirements (that is: combined buffer requirement, prudential capital requirement and MREL) continuously. It is not immediately clear what the sanction would be when an entity would fail to notify as required.
C. Relevant circumstances for enforcement (Art. 10a(2)-(3) SRMR) I. Discretionary power 16
As discussed above, Art. 10a(2) and (3) SRMR contains various circumstances the SRB must consider, when it is confronted with a notification from an entity as meant in Art. 10a(1) sent. 2 SRMR. Art. 10a(2) SRMR requires the SRB to consult the competent authorities, including the ECB, where applicable. Pursuant to Art. 3(1)(2) SRMR, a 558
Matthias Haentjens
Power to Prohibit Certain Distributions
Art. 10a SRMR
“competent authority” is a “competent authority as defined in Article 4(2)(i) of Regulation (EU) No 1093/2010”, which is the Regulation establishing the EBA (EBAR 3). Under Art. 4(2)(i) EBAR (as amended by Art. 95 SRMR), a competent authority can refer to, in short, a prudential supervisory authority including the ECB, a money laundering supervisory authority, an authority responsible for the relevant deposit guarantee scheme, or a resolution authority including the SRB. Furthermore, paragraph 2 requires the SRB to assess without unnecessary delay 17 “whether to exercise the power referred to in paragraph 1, taking into account all of the following elements: (a) the reason, duration and magnitude of the failure and its impact on resolvability; (b) the development of the entity's financial situation and the likelihood of it fulfilling, in the foreseeable future, the condition referred to in point (a) of Article 18(1); (c) the prospect that the entity will be able to ensure compliance with the requirements referred to in paragraph 1 within a reasonable timeframe; (d) where the entity is unable to replace liabilities that no longer meet the eligibility or maturity criteria laid down in Articles 72b and 72c of Regulation (EU) No 575/2013, Article 12c or Article 12g(2) of this Regulation, if that inability is idiosyncratic or is due to market-wide disturbance; (e) whether the exercise of the power referred to in paragraph 1 is the most adequate and proportionate means of addressing the situation of the entity, taking into account its potential impact on both the financing conditions and resolvability of the entity concerned.” Points (a), (c) and (e) are self-explanatory and imply a rather wide margin of (techni- 18 cal) discretion for the SRB. Point (b) refers to the situation that the entity in question may be “failing or likely to fail” (as defined in Art. 18(1)(a) SRMR and Art. 18(4)(a) SRMR). Please be referred to the commentary there. Point (d) requires the SRB to take into account whether the entity in question is unable to replace the required liabilities that no longer meet the mandatory eligibility or maturity criteria with appropriate ones is due to an idiosyncratic inability or to a market-wide disturbance. Presumably, the SRB will less likely employ any of its enforcement actions in an idiosyncratic failure rather than in a market-wide disturbance. Pursuant to Art. 10a(2) sent. 2 SRMR, the SRB must repeat its assessment at least ev- 19 ery month for as long as the entity continues to be in the situation of Art. 10a(1) SRMR. This is a mandatory obligation of the SRB, but it is unclear as how it could be enforced.
II. Obligation to exercise power Art. 10a(3) SRMR obliges, as a matter of principle, the SRB to exercise its power un- 20 der Art. 10a(1) SRMR when the entity in question still fails to comply with the requirement defined in Art. 10a(1) SRMR nine months after notification of that failure by the entity. These nine months must be consecutive. If an entity manages to resolve its failure, but later finds itself again in Art. 10a(1) SRMR situation, the entity must again notify the NRA and SRB, and the nine months cycle starts again. The SRB thus seems to have no discretion to elect not to apply any enforcement 21 actions after nine months. However, it does not need to apply enforcement actions in 3 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, OJ L 331, 15.12.2010, p. 12.
Matthias Haentjens
559
Art. 10a SRMR
Power to Prohibit Certain Distributions
a limited set of circumstances. The assessment of whether any of these circumstances involve a certain margin of appreciation, this assessment must take place in consultation with the competent authorities, including the ECB, where applicable. 22 Specifically, the SRB need not apply enforcement actions when at least two of the following conditions are fulfilled: (a) “the failure is due to a serious disturbance to the functioning of financial markets which leads to broad-based financial market stress across several segments of financial markets; (b) the disturbance referred to in point (a) not only results in the increased price volatility of the own funds’ instruments and eligible liabilities instruments of the entity or increased costs for the entity, but also leads to a full or partial closure of markets which prevents the entity from issuing own funds instruments and eligible liabilities instruments on those markets; (c) the market closure referred to in point (b) is observed not only for the concerned entity, but also for several other entities; (d) the disturbance referred to in point (a) prevents the concerned entity from issuing own funds instruments and eligible liabilities instruments sufficient to remedy the failure; or (e) an exercise of the power referred to in paragraph 1 leads to negative spill-over effects for part of the banking sector, thereby potentially undermining financial stability”. Points (a)-(d) concern below suboptimal market conditions if not a systemic crisis. It could be argued that in such conditions an entity would deserve less blame and is practically not in a position to resolve its failure to meet the capital standards Art. 10a(1) SRMR requires. Point (e) requires a hypothetical assessment of the exercise of power under para. 1. 24 Art. 10a(3) sent. 2 SRMR obliges the SRB to notify the competent authorities, including the ECB, where applicable, when it decides to apply the exception of this Art. 10a(3) SRMR and not to prohibit certain distributions. The decision of the assessment must be reasoned and in writing. Art. 10a(3) sent. 3 SRMR requires the SRB to repeat such an exception assessment every month. 23
D. Calculation of the M-MDA (Art. 10a(4)-(6) SRMR) 25
Art. 10a(4)-(6) SRMR further detail the calculation of the M-MDA, i.e. the amount of payments on Common Equity Tier 1, Additional Tier 1 instruments, etc. that entities may always make. Art. 10a(4) SRMR defines M-MDA in a general sense as the sum determined by paragraph 5 multiplied by the factor determined by paragraph 6. As explained above, this calculation serves to set the amount of distribution that may be prohibited under Art. 10a(1)-(3) SRMR. As a matter of course, the M-MDA must be reduced by any amount resulting from a distribution made as defined in Art. 10a(1)(a)-(c) SRMR. The purpose of this is that any unwarranted distribution circumventing an exercise of power under paragraph 1 will not have any advantage, as it will be compensated by a reduction in M-MDA. MMDA = para 6 ∙ para 5 − para 1 reductions
560
Matthias Haentjens
Power to Prohibit Certain Distributions
Art. 10a SRMR
The application of paragraph 5 results in a sum consisting of:
26
“(a) any interim profits not included in Common Equity Tier 1 capital pursuant to Article 26(2) of Regulation (EU) No 575/2013, net of any distribution of profits or any payment resulting from the actions referred to in points (a), (b) or (c) of paragraph 1 of this Article; plus (b) any year-end profits not included in Common Equity Tier 1 capital pursuant to Article 26(2) of Regulation (EU) No 575/2013, net of any distribution of profits or any payment resulting from the actions referred to in points (a), (b) or (c) of paragraph 1 of this Article; minus (c) amounts which would be payable by tax if the items specified in points (a) and (b) of this paragraph were to be retained”. Re. (a) and (b): Pursuant to Art. 26(2) CRR, “for the purposes of (retained earnings) 27 institutions may include interim or year-end profits in Common Equity Tier 1 capital before the institution has taken a formal decision confirming the final profit or loss of the institution for the year only with the prior permission of the competent authority”. Thus, where interim or year-end profits have not been included in CET1 (i.e. retained earnings), they must be added to the sum, provided that any distribution defined in Art. 10a(1)(a)-(c) SRMR has been deducted. Re. (c): The (hypothetical) amount payable by tax, if these earnings were to be retained, must be deducted from the sum. MMDA = para 6 ∙ para 5a + para 5b − para 5c
The application of paragraph 6 results in a factor determined as follows (emphasis 28 added): “(a) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet any of the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the first (that is, the lowest) quartile of the combined buffer requirement, the factor shall be 0; (b) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet any of the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the second quartile of the combined buffer requirement, the factor shall be 0,2; (c) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the third quartile of the combined buffer requirement, the factor shall be 0,4; (d) where the Common Equity Tier 1 capital maintained by the entity which is not used to meet the requirements set out in Article 92a of Regulation (EU) No 575/2013 and in Articles 12d and 12e of this Regulation, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, is within the fourth (that is, the highest) quartile of the combined buffer requirement, the factor shall be 0,6;
Matthias Haentjens
561
Art. 11 SRMR
Simplified obligations for certain institutions
The lower and upper bounds of each quartile of the combined buffer requirement shall be calculated as follows: Lower bound of quartile = Upper bound of quartile
Combined buffer requirement x (Qn -1) 4 Combined buffer requirement = x Qn 4
where “Qn ” = the ordinal number of the quartile concerned”.
Art. 92a CRR (as amended by CRR II) is the statutory legal basis for the MREL where G-SIIs are concerned. Art. 12d SRMR and Art. 12e SRMR form, as noted above, the legal basis for MREL determinations for a variety of entities by the SRB. More specifically, for Art. 10a SRMR only the MREL-TREA is of relevance (on this term, see infra, → Arts. 12-12j). Thus, Art. 10a(6) SRMR excludes all CET1 that is used to meet the MREL-TREA for the purposes of determining the paragraph 6 factor. This reflects the importance of CET1 capital as opposed to other forms of capital in cases of a shortfall. 30 In sum, the paragraph 6 factor is determined by the amount of CET1 in excess of the MREL-TREA. For this, the combined buffer requirement is divided into four stacked quartiles. If the amount in excess only fills up to 25 % of the combined buffer requirement, then the factor is zero and no distribution is allowed. If it fulfills up to 50 %, 75 % or 100 % of the combined buffer requirement, then the factor is 0,2; 0,4 or 0,6 respectively. 31 All this taken together results in the following M-MDA calculation: 29
MMDA = Factorn ∙ para 5a + para 5b − para 5c MMDA = 0 or 0,2 or 0,4 or 0, 6 ∙ para 5a + para 5b − para 5c
Art. 11 SRMR Simplified obligations for certain institutions 1. The Board, on its own initiative after consulting a national resolution authority or upon proposal by a national resolution authority, may apply simplified obligations in relation to the drafting of resolution plans referred to in Article 8 or may waive the obligation of drafting those plans in accordance with paragraphs 3 to 9 of this Article. 2. National resolution authorities may propose to the Board to apply simplified obligations to institutions or groups pursuant to paragraphs 3 and 4 or to waive the obligation of drafting resolution plans pursuant to paragraph 7. That proposal shall be reasoned and shall be supported by all of the relevant documentation. 3. On receiving a proposal to apply simplified obligations pursuant to paragraph 2 of this Article, or when acting on its own initiative, the Board shall conduct an assessment of the institution or group concerned and shall apply simplified obligations, if the failure of the institution or group is not likely to have significant adverse consequences for the financial system or be a threat to financial stability within the meaning of Article 10(5). For those purposes, the Board shall take into account: (a) the nature of the institution's or group's business, its shareholding structure, its legal form, its risk profile, size and legal status, its interconnectedness to other institutions or to the financial system in general, the scope and complexity of its activities;
562
Matthias Haentjens
Simplified obligations for certain institutions
Art. 11 SRMR
(b) its membership of an IPS or other cooperative mutual solidarity systems as referred to in Article 113(7) of Regulation (EU) No 575/2013; (c) any exercise of investment services or activities as defined in Article 4(1)(2) of Directive 2014/65/EU of the European Parliament and of the Council (15); and (d) whether its failure and subsequent winding up under normal insolvency proceedings would be likely to have a significant negative effect on financial markets, on other institutions, on funding conditions, or on the wider economy. The Board shall make the assessment referred to in the first subparagraph after consulting, where appropriate, the national macroprudential authority and, where appropriate, the ESRB. 4. When applying simplified obligations, the Board shall determine: (a) the contents and details of resolution plans provided for in Article 8; (b) the date by which the first resolution plans are to be drawn up and the frequency for updating resolution plans which may be lower than that provided for in Article 8(12); (c) the contents and details of the information required from institutions as provided for in Article 8(9) of this Regulation and in Section B of the Annex to Directive 2014/59/EU; (d) the level of detail for the assessment of resolvability provided for in Article 10 of this Regulation, and in Section C of the Annex to Directive 2014/59/EU. 5. The application of simplified obligations shall not in itself affect the Board's power to take any resolution action. 6. Where simplified obligations are applied, the Board shall impose full, unsimplified obligations at any time if any of the circumstances that justified them no longer exist. 7. Without prejudice to Articles 9 and 31, on receiving a proposal to waive the obligation of drafting resolution plans pursuant to paragraph 2 of this Article, or when acting on its own initiative, the Board shall, pursuant to paragraph 3 of this Article, waive the application of the obligation of drafting resolution plans to institutions affiliated to a central body and wholly or partially exempt from prudential requirements in national law in accordance with Article 10 of Regulation (EU) No 575/2013. Where a waiver is granted in accordance with the first subparagraph, the obligation of drafting the resolution plan shall apply on a consolidated basis to the central body and institutions affiliated to it within the meaning of Article 10 of Regulation (EU) No 575/2013. For that purpose, any reference in this Chapter to a group shall include a central body and institutions affiliated to it within the meaning of Article 10 of Regulation (EU) No 575/2013 and their subsidiaries, and any reference to parent undertakings or institutions that are subject to consolidated supervision pursuant to Article 111 of Directive 2013/36/EU shall include the central body. 8. Institutions that are subject to direct supervision by the ECB pursuant to Article 6(4) of Regulation (EU) No 1024/2013 or that constitute a significant share in the financial system of a participating Member State shall be the subject of individual resolution plans. For the purposes of this paragraph, the operations of an institution shall be considered to constitute a significant share of that participating Member State's financial system where:
Matthias Haentjens
563
Art. 11 SRMR
Simplified obligations for certain institutions
(a) the total value of its assets exceeds EUR 30 000 000 000; or (b) the ratio of its total assets over the GDP of the Member State of establishment exceeds 20%, unless the total value of its assets is below EUR 5 000 000 000. 9. Where the national resolution authority which has proposed the application of simplified obligations or the grant of a waiver in accordance with paragraph 2 considers that the decision to apply simplified obligations or to grant the waiver must be withdrawn, it shall submit a proposal to the Board to that end. In that case, the Board shall take a decision on the proposed withdrawal taking full account of the justification for withdrawal put forward by the national resolution authority in the light of the factors or circumstances referred to in paragraph 3 or in paragraphs 7 and 8. 10. The Board shall inform EBA of its application of this Article. Bibliography Jens-Hinrich Binder, ‘Resolution planning and structural bank reform within the banking union’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union (Routledge, Abington 2015), Ch. 7; Nikoletta Kleftouri, ‘The European Union Bank Resolution Framework: can the objective of financial stability ensure consistency in resolution authorities ’decisions?’, ERA Forum 18/2 (2017) 263; Simon Gleeson and Randall D. Guynn, Bank Resolution and Crisis Management: Law and Practice (Oxford University Press, Oxford 2016); Sven Schelo, Bank Recovery and Resolution (Wolters Kluwer, Alphen aan den Rijn2015); Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (Oxford University Press, Oxford 2016); Dominik Skauradszun, ‘Legal Protection against Decisions of the Single Resolution Board pursuant to Article 85 Single Resolution Mechanism Regulation’, ECFR 15/1 (2018), 123; World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016), ; World Bank Group, ‘Bank Resolution and “Bail-In” in the EU: Selected Case Studies Pre and Post BRRD’ (2016), . A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Simplified obligations (Art. 11(1)-(2) and (9)-(10) SRMR) . . . . . . . . . . . . . . . . . . . I. SRB decision (Art. 11(1) and (9)-(10) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Proposal by NRAs (Art. 11(2) and (9) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 3 9
C. Assessment of eligibility for simplified obligations (Art. 11(3) SRMR) . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Significant adverse consequences (Art. 11(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . III. Two-stage assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 12 13 16
D. Application of simplified obligations (Art. 11(4)-(5) SRMR) . . . . . . . . . . . . . . . . .
25
E. Waiving the obligation of drafting resolution plan (Art. 11(6)-(8) SRMR) . . . I. Circumstances in which the obligation may be waived (Art. 11(6)-(7) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Institutions for which a waiver cannot be granted (Art. 11(8) SRMR) . . . . . . .
31
F. Ending the application of simplified obligations (Art. 11(6) SRMR) . . . . . . . . .
40
31 37
A. Introduction 1
As a matter of principle, the SRB drafts comprehensive resolution plans for the entities and groups in its remit. However, in certain circumstances, the SRB is allowed to draw up simplified resolution plans (Art. 11(3)-(6) SRMR) or even waive the obligation of drafting resolution plans altogether (Art. 11(7)-(8) SRMR). In short and grossly simplifying, the SRB must draw up comprehensive and detailed plans for the bigger institutions and may draw up less detailed ones for smaller institutions. Resolution plans may only be waived for institutions that are, in short, part of a group and (partially) exempt 564
Matthias Haentjens
Simplified obligations for certain institutions
Art. 11 SRMR
from prudential supervision. In the words of the EBA: “the requirements regarding recovery planning, resolution planning and resolvability assessments should be applied proportionately, reflecting, inter alia, the systemic importance of the institution concerned”.1 The EBA has published Guidelines and Draft Regulatory Technical Standards 2 (RTS) relating to the eligibility of institutions for simplified obligations as allowed under Art. 4 BRRD.2 The SRB’s paper Introduction to Resolution Planning clarifies that the SRB will apply these EBA Guidelines (which strictly speaking apply only to resolution plans drawn up by NRAs), to Art. 11 SRMR (which applies to resolution plans drawn up by the SRB). The EBA Guidelines on simplified obligations have been published in 2015 and the draft RTS, which had been published in 2017, had been developed taking into account, inter alia, the experience acquired in the application of the Guidelines.3 The draft RTS have been adopted by the Commission as Commission Delegated Regulation (EU) 2019/348 of 25 October 2018, C/2018/6901, OJ L 63. This Delegated Regulation has thus replaced the Guidelines.4
B. Simplified obligations (Art. 11(1)-(2) and (9)-(10) SRMR) I. SRB decision (Art. 11(1) and (9)-(10) SRMR) In accordance with para 1, the SRB may apply simplified obligations in relation to the drafting of the resolution plans referred to in Art. 8 SRMR, or may waive its obligation to draft those plans altogether. Para. 3 sets out the assessment that the SRB must determine whether simplified obligations may indeed be applied, and para 4 explains what those ‘simplified obligations’ may entail. In short, it means the SRB may draw up simplified resolution plans, but also may not need to adopt them annually. Para. 7 sets out the conditions under which the obligation may be completely waived. In short, it must concern group institutions with consolidated supervision. The SRB may decide to apply simplified obligations either on its own accord, in which case the relevant NRA has to be consulted, or upon proposal by an NRA. National resolution authorities are ‘defined’ in Art. 3(1)(3) SRMR, where it is stated that it “means an authority designated by a participating Member State in accordance with Art. 3 of Directive 2014/59/EU”. Art. 3 BRRD sets out the procedure for the designation of a resolution authority, and which authorities are eligible. ‘Participating Member States’ is defined in Recital 7 SRMR as “the euro area Member States and those noneuro area Member States who choose to participate in the SSM”. A ‘resolution plan’ is “defined” in Art. 3(1)(6) SRMR with the following circular definition: “‘resolution plan means a plan drawn up in accordance with Art. 8 or 9”. See the commentary on Art. 8 SRMR. Although this is not explicitly stated in para. 1, para. 9 indicates that the application of simplified obligations or the granting of a waiver by the SRB takes place as a (forEBA/RTS/2017/11, at p. 5. Guidelines on the application of simplified obligation under Art. 4(5) of Directive 2014/59/EU (EBA/GL/2015/16); Draft regulatory technical standards on simplified obligations under Art. 4(6) of Directive 2014/59/EU (EBA/RTS/2017/11). See on simplified obligations under the BRRD, World Bank Group, Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2016), at pp. 77-78. 3 EBA/RTS/2017/11, at p. 3. 4 EBA/RTS/2017/11, at p. 15, Recital 19. 1
2
Matthias Haentjens
565
3
4 5
6
7
Art. 11 SRMR
Simplified obligations for certain institutions
mal) decision. Art. 85(3) SRMR states “a decision of the Board referred to in (…) Art. 11” is open for appeal, without reference to a specific para. (unlike the specific references to Arts. 10(10) and 12(1) SRMR). This indicates that not only the SRB’s decision to refuse the withdrawal proposal can be challenged with the Appeal Panel, but also the decision to apply simplified obligations or to grant a waiver.5 See on this matter, the commentary on Art. 85 SRMR. 8 Para. 10 requires the SRB to notify the EBA when it applies simplified obligations, or a waiver as defined in this Art. 11 SRMR.
II. Proposal by NRAs (Art. 11(2) and (9) SRMR) Pursuant to this para. 2, if an NRA proposes to apply simplified obligations to an ‘institution or group’ or to waive the obligation (see supra, → para. 1, and infra, → para. 33 et seq.), this proposal must be reasoned and supported by ‘all of the relevant documentation’. In other words, the NRA will have to substantiate why simplified obligations should be applied or the obligation should be waived in accordance with paras. 3, 4 and 7. Under para. 9, the relevant NRA may not only propose to apply simplified obligations or to waive them altogether, it may also propose to withdraw such application or waiver. See further infra, → para. 33 et seq. 10 An ‘institution’ is defined under Art. 3(1)(13) SRMR as “a credit institution, or an investment firm covered by consolidated supervision in accordance with Art. 2(c)”. An ‘institution’ is a sub-category of ‘entity’. ‘Entities’ means: (a) credit institutions established in a Member State; (b) parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR; and (c) investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR. On these terms, see the commentary on Art. 2 SRMR. Thus, the term ‘institution’ excludes parent undertakings as defined in Art. 2(b) SRMR. Confusingly, Art. 8 SRMR and most paras. of Art. 10 refer to ‘entities and groups’, rather than to ‘institutions and groups’. It is unclear, whether a difference in meaning is intended. See also the commentary on Art. 10 SRMR. 11 Pursuant to para. 9, the NRA which has proposed the application of simplified obligations or a waiver must submit a proposal to the SRB, if and when it has become of the opinion that the decision to do this must be withdrawn. When such a withdrawal proposal has been submitted, the Board must take a decision, taking full account of the justification for withdrawal put forward by the NRA in the light of the factors or circumstances referred to in para. 3 (where it regards simplified obligations) or in paras. 7 and 8 (where it regards a waiver). The SRB’s decision can be challenged with the SRB’s Appeal Panel under Art. 85(3) SRMR. 9
5
566
See also, Skauradszun, ECFR 15/1(2018), 123.
Matthias Haentjens
Simplified obligations for certain institutions
Art. 11 SRMR
C. Assessment of eligibility for simplified obligations (Art. 11(3) SRMR) I. Introduction Pursuant to para.3, the decision to apply simplified obligations hinges on the SRB’s 12 assessment of whether the failure of the ‘institution or group’ in question is likely to have ‘significant adverse consequences for the financial system or be a threat to financial stability within the meaning of Art. 10(5).’ On the terms ‘institution or group’, see supra, → para. 10. If the failure of an institution or group is likely to have significant adverse consequences, full obligations should apply.
II. Significant adverse consequences (Art. 11(3) SRMR) Pursuant to Art. 10(5) SRMR, ‘significant adverse consequences for the financial 13 system’ (which may include ‘a threat to financial stability’, see, e.g., Art. 10(4) SRMR) means a situation “where the financial system is actually or potentially exposed to a disruption that may give rise to a financial distress liable to jeopardise the orderly functioning, efficiency and integrity of the internal market or the economy or the financial system of one or more Member States”. In other words, the SRB must determine whether the failure of the ‘institution or group’ in question would pose any risks for the financial system of one or more Member States as a whole. See also the commentary on Art. 10(5) SRMR. More specifically, when making the assessment of whether an institution or group is 14 likely to have significant adverse consequences for the financial system, the SRB must take into account in accordance with Art. 11(3) SRMR: (a) nature of the business of the institution or group in question; (b) its shareholding structure; (c) its legal form; (d) its risk profile; (e) its size; (f) its legal status; (g) its interconnectedness to other institutions or to the financial system in general; (h) its scope and the complexity of activities; (i) its membership of an IPS or other cooperative mutual solidarity system as referred to in Art. 113(7) of Regulation (EU) No 575/2013; (j) any exercise of investment services or activities as defined in Art. 4(1)(2) of Directive 2014/65/EU; (k) whether its failure and subsequent winding up under normal insolvency proceedings would be likely to have a significant negative effect on financial markets, on other institutions, on funding conditions, or on the wider economy. To a certain extent these criteria are self-explanatory, but the following criteria may need to be elaborated upon. Re. (a): as regards the legal status of the institution or group, it is of particular rele- 15 vance whether the institution or group is designated as a Global Systemically Important Institution (G-SII) or other systemically important institution (O-SII) by virtue of Art. 131 CRD IV. In the SREP, G-SIIs and O-SIIs are categorized as so called ‘Category-1’ institutions. Other institutions may also be classified as Category-1 on the basis of the SREP guidelines. Under the EBA Guidelines on simplified obligations, Category-1 institutions should always be subject to full obligations. In contrast, this does not mean that institutions that do not fall into this category automatically qualify for simplified obligations. For each and every of these institutions, individual assessments have to be carried out as to whether their failure would have ‘significant adverse consequences’ (as defined supra, → para. 13-14).
Matthias Haentjens
567
Art. 11 SRMR
Simplified obligations for certain institutions
Re. (i): Whether an institution is a member of an IPS or other cooperative mutual solidarity systems as referred to in Art. 113(7) CRR, may be relevant to determine the possibility of failure of this institution. If an institution has entered into an institutional protection scheme, it has entered a contractual or statutory liability arrangement which protects the institutions involved and in particular may ensure their liquidity and solvency to avoid bankruptcy where necessary. Re. (j): Art. 4(1)(2) MiFID II defines ‘investment services or activities’ by reference to Section A of Annex I MiFID II and to the instruments listed in Section C of Annex I of the same Directive. Sections A and C of Annex I MiFID II contain a list of the investment services and activities, and the financial instruments, respectively, that fall under the scope of MiFID II.
III. Two-stage assessment The RTS on simplified obligations say that the resolution authority in question conducts a two-stage eligibility assessment to determine whether simplified obligations ought to be applied.6 In stage 1, the institution concerned is assessed against quantitative criteria: the size, interconnectedness, scope and complexity of the activities and nature of its business. The RTS provide a number of indicators that can be used in assessing and weighing these quantitative criteria. If it follows from the quantitative score that the institution is ineligible for simplified criteria, there is no need to move on to stage 2.7 17 Small credit institutions (i.e. institutions with less than 0.02% of the total assets of all credit institutions authorized by the same supervisory authority), may not be subject to stage 1 assessment, as these institutions are on that basis alone assumed not to have a significant negative effect in case of failure.8 On the other hand, the failure of G-SIIs, O-SIIs or other institutions classified as Category-1 institutions is assumed to have a likely significant negative effect.9 18 In any event, if the institution in question passes stage 1, the institution will be assessed against qualitative criteria in stage 2: shareholding structure, legal form, legal status, membership of an IPS or other cooperative solidarity systems, risk profile and exercise of the investment services or activities. Where relevant, other quantitative indicators can also be taken into account, but the ones in Art. 11(3) SRMR are mandatory to be taken into account.10 19 The quantitative and qualitative assessments for investment firms are slightly different than those for credit institutions. These quantitative assessments take place based on a more complex valuation of different indicators, such as total assets, liabilities, fees and commission income and assets under management. Unlike for credit institutions, there is no fixed threshold for investment firms and it is up to the competent and resolution authorities to determine that threshold. When the total quantitative score of the investment firm in question is equal or higher than that threshold, it shall be regarded as an institution the failure of which would be likely to have a significant negative effect.11 With regard to the qualitative assessment, some different criteria are 16
See also Kleftouri, ERA Forum (2017), 269. Art. 1(1)-(3) Delegated Regulation (EU) 2019/348. 8 Art. 1(6) Delegated Regulation (EU) 2019/348. 9 Art. 1(7) Delegated Regulation (EU) 2019/348. 10 See also, Art. 2(1) Delegated Regulation (EU) 2019/348. 11 Art. 3 and Annex II and III Delegated Regulation (EU) 2019/348. 6
7
568
Matthias Haentjens
Simplified obligations for certain institutions
Art. 11 SRMR
applied, such as whether the clients are retail or professional. Furthermore, there is no possibility to perform the assessment of a category of investment firms that have similar characteristics.12 The assessment is made on an individual basis for each institution that falls within the scope of resolution planning. However, the RTS on simplified obligations regulate that, when it comes to groups, one assessment takes place at parent level per Member State. Group plans can only be simplified if all entities of the group are eligible for simplified treatment.13 The Guidelines on simplified obligations (which have now been repealed) used a slightly different assessment than the one used in the RTS on simplified obligations. For instance, the Guidelines did not use a weighting of criteria, which aligns with the text of the BRRD and SRMR. However, this would not prevent the SRB from weighing should they consider that appropriate for the purpose of the assessment exercise. Furthermore, the SRB is allowed to assess on an individual basis or category basis when institutions have similar characteristics.14 In any event, the criteria in para. 3 should be assessed by the mandatory indicators, as listed in the Guidelines (which have now been repealed). Additionally, Annex 2 of the Guidelines contained a list of optional indicators that may be used in the assessment. The rationale behind the combination of optional and mandatory indicators is that this approach would ensure that the assessment process will be conducted in a proportionate manner in line with the characteristics of the institution or category of institution under consideration.15 If it is clear, having regard to the mandatory indicators for one of the criteria, that an institution’s failure would have a significant adverse outcome, it is not necessary to conduct a detailed assessment based on the other criteria. However, before a positive assessment of eligibility is made, the SRB should have regard to all of the criteria.16 Under both the Guidelines and the current RTS on simplified obligations, full obligations must always be applied for G-SIIs, O-SIIs and other institutions categorized as Category-1 institutions.17 Pursuant to the last sentence of para. 3, the SRB must consult with the national macroprudential authority and, where appropriate, the ESRB. The ‘national macroprudential authority’ is not defined in the SRMR, so that, in accordance with Art. 3(2) SRMR, the definition of the BRRD applies. Art. 2(1)(106) BRRD defines the national macroprudential authority as the authority entrusted with the conduct of macroprudential policy referred to in Recommendation B1 of ESRB/2011/3. This Recommendation states that the Member States designate in the national legislation an authority entrusted with the conduct of macroprudential policy.
20
21
22
23
24
D. Application of simplified obligations (Art. 11(4)-(5) SRMR) Para. 4 explains what the ‘simplified obligations’ of the previous provisions actually 25 mean. In essence, these simplified obligations could concern: (a) less elaborate contents and details of resolution plans; (b) later date by which the first resolution plans are to be Arts. 2(1) and (3), 5(1)-(2) Delegated Regulation (EU) 2019/348. EBA/RTS/2017/11, at p. 8 and Art. 5 Delegated Regulation (EU) 2019/348. 14 EBA/GL/2015/16, Guidelines, nr. 7 (p. 15). 15 EBA/GL/2015/16, Guidelines, p. 3. 16 EBA/GL/2015/16, Guidelines, nr. 17 (p. 19). 17 EBA/GL/2015/16, Guidelines, nr. 17 (p. 8). 12
13
Matthias Haentjens
569
Art. 11 SRMR
26
27
28
29
30
Simplified obligations for certain institutions
drawn up and lower frequency for updating resolution plan than the frequency required by Art. 8(12) SRMR; (c) less elaborate contents and details of the information required from institutions as provided for in Art. 8(9) SRMR and Section B of the Annex to the BRRD; (d) lower level of detail for the assessment of resolvability as defined in Art. 10 SRMR and Section C of the Annex to the BRRD. In short, ‘simplified obligations’ mean that a resolution plan still needs to be drafted albeit in less detail or less frequently updated. If the SRB has determined one or more institutions to be eligible for simplified obligations, it may apply different sets of simplified obligations to different (categories of) institutions.18 Re. (a): the SRB has a certain margin of discretion when determining the contents and details of a resolution plan when applying simplified obligations to that plan. However, the SRB has determined a minimal standard any resolution plan must contain, consisting of: general information about the bank; relevant communication provisions; identification of legal and practical impediments to the application of normal insolvency proceedings; conclusion of the resolvability assessment and measures to address or remove impediments to the application of normal insolvency proceedings; and the position of the bank itself.19 Re. (b): Art. 8(12) SRMR determines that resolution plans have to be updated at least once a year. See the commentary on Art. 8(12) SRMR. For resolution plans under simplified obligations, this requirement does not apply and the SRB is allowed to update these resolution plans less frequently. Re. (c): Art. 8(9) SRMR contains a list of 21 requirements for a resolution plan. See the commentary on Art. 8(9) SRMR. A resolution plan under simplified obligations can be less detailed with regard to these subjects, although it will have to meet the minimum requirements as set out in the SRB’s paper Introduction to Resolution Planning. Section B of the Annex to the BRRD contains a list of information that the resolution authorities may request institutions to provide. The SRB has the discretion to request less detailed information when applying the simplified obligations. Re. (d): Art. 10 SRMR contains the assessment of resolvability which, in accordance with Art. 8(9)(e) SRMR, must be a part of the resolution plan. See also the commentary on Art. 10 SRMR. Section C of the Annex to the BRRD is a list of 28 matters that the resolution authority in question ought to consider when assessing an institution’s resolvability. Again, this assessment may take place with less detail than that of a ‘normal’ resolution plan. Nevertheless, the SRB’s Introduction to Resolution Planning clearly states that the resolution plan must contain a conclusion on the resolvability assessment and when necessary, measures to address or remove impediments to resolvability. Strictly speaking, para. 5 is redundant where it states that ‘the application of simplified obligations shall not in itself affect the Board’s power to take any resolution action’, because no provision of this Art. 11 concerns the SRB’s power to take ‘resolution action’. Pursuant to Art. 3(1)(10) SRMR, ‘resolution action’ may mean: (a) the decision to place an entity under resolution as defined in Art. 18 SRMR; (b) the application of a resolution tool; or (c) the exercise of one or more resolution powers. On the terms ‘resolution tool’ and ‘resolution powers’, see the commentary on Art. 8(5) SRMR. This Art. 11(5) SRMR seems to have been drafted for the avoidance of doubt (should there be any), so as to clarify that any entity or group can still be placed under resolution and that all the resolution tools and powers available for ‘normal’ resolutions, are also available for the institution or group for which simplified obligations have been applied. 18 19
570
EBA/GL/2015/16, Guidelines, p. 8. SRB, ‘Introduction to Resolution Planning’ (2016), at p. 21.
Matthias Haentjens
Simplified obligations for certain institutions
Art. 11 SRMR
E. Waiving the obligation of drafting resolution plan (Art. 11(6)-(8) SRMR) I. Circumstances in which the obligation may be waived (Art. 11(6)-(7) SRMR) Pursuant to paras. 7 and 8, the SRB may waive, i.e. exempt itself from, the obligation of drafting resolution plans under certain circumstances. As already stated in paras. 1 and 2, this para. 7 reiterates that the SRB can make this decision on its own accord or pursuant to a proposal by the relevant NRA. Such a proposal must be made ‘in accordance with para. 2’, which means that the proposal must be reasoned and supported by ‘all of the relevant documentation’. Moreover, under para. 7, an SRB’s waiver of its obligation to draft a resolution plan is ‘without prejudice to Art. 9 and 31’. Both Arts. 9 and 31 SRMR concern the division of powers and cooperation between the SRB and NRAs. This reference to these Arts. 9 and 31 SRMR therefore probably intends to express that a waiver of the SRB’s obligation to draft resolution plans does not mean to exempt the NRAs from their own responsibilities regarding the drawing up of resolution plans for institutions under their remit. See also the commentary on Arts. 9 and 31 SRMR. Also, the SRB’s decision to waive its obligation to draft a resolution plan must be made ‘pursuant to para. 3’, meaning that such a decision may not be made should the failure of the institution or group in question be likely to have significant adverse consequences. On the term ‘significant adverse consequences’, see the commentary on Arts. 10(5) and 11(3) SRMR. More specifically, a waiver may only be applied to ‘institutions affiliated to a central body’, which institutions are ‘wholly or partially exempt from prudential requirements in national law in accordance with Art. 10 of Regulation (EU) No 575/2013’. The waiver therefore is only relevant for group institutions. On the term ‘institution’, see supra, → para. 10. Art. 10 CRR further explains the exemption. The institution for which no resolution plan may need to be drafted has to be permanently affiliated to a central body which supervises that institution. Also, the central body and institution must be established in the same Member State. Moreover, pursuant to Art. 10 CRR, the following conditions need to be met: (a) the commitments of the central body and affiliated institutions are joint and several liabilities or the commitments of its affiliated institutions are entirely guaranteed by the central body; (b) the solvency and liquidity of the central body and of all the affiliated institutions are monitored as a whole on the basis of consolidated accounts of these institutions; and (c) the management of the central body is empowered to issue instructions to the management of the affiliated institutions. The second subpara. of para. 7 clarifies that if the obligation of drafting a resolution plan is waived in relation to an institution that obligation nonetheless applies on a consolidated basis to the central body and institutions affiliated to it, as well as their subsidiaries (as defined in Art. 10 CRR), including, of course, the institution in relation to which the resolution plan obligation is waived. Art. 3(1)(25) SRMR defines ‘consolidated basis’ by reference to Art. 4(1)(47) CRR, which says, somewhat unhelpfully, that a ‘consolidated situation’ means “the situation that results from applying the requirements of this Regulation in accordance with Part One, Title II, Chapter 2 to an institution as if that institution formed, together with one or more other entities, a single institution”. From this, it may be inferred that the obligation to draw up a resolution plan applies in
Matthias Haentjens
571
31
32
33
34
35
36
Art. 11 SRMR
Simplified obligations for certain institutions
any event to the group with which the exempted institution is affiliated, as if that institution formed, together with the group, a single institution. Therefore, para. 7 says that all references to a ‘group’ in this Chapter on Resolution Planning, i.e. Arts. 8-12 SRMR, also refer to a central body with affiliated institutions, while all references to ‘parent undertakings’ or ‘institutions that are subject to consolidated supervision pursuant to Art. 111 of Directive 2013/36/EU’ also include the central body.
II. Institutions for which a waiver cannot be granted (Art. 11(8) SRMR) Para. 8 sets out the exception to the exception of para. 7, and thus reestablishes the main rule of Art. 8 SRMR. More elaborately put: where para. 7 exempted the SRB from the obligation to draw up a resolution plan in relation to institutions that formed part of a group subject to consolidated supervision, this para. 8 requires that an individual resolution plan must nonetheless be drafted for institutions that: (a) ‘are subject to direct supervision by the ECB pursuant to Art. 6(4) of Regulation (EU) No 1024/2013’; or (b) ‘constitute a significant share in the financial system of a participating Member State’. 38 Re. (a): Art. 6(4) SSMR sets out the division of responsibilities between the ECB and the national competent authorities. The national competent authorities are responsible for ‘less significant institutions’, whilst institutions of ‘significant relevance’ are subject to direct supervision by the ECB. An institution is considered ‘significant’ when: (a) the total value of its assets exceeds EUR 30 billion; (b) the ratio of its total assets over the GDP of the participating Member State of establishment exceeds 20%, unless the total value of its assets is below EUR 5 billion; (c) following a notification by its national competent authority that it considers such an institution of significant relevance with regard to the domestic economy, the ECB takes a decision confirming such significance following a comprehensive assessment by the ECB, including a balance-sheet assessment, of that credit institution. Nevertheless, the first sentence of this para. provides an exception: even when an institution fulfills one of these criteria, it will not be considered significant when justified by “particular circumstances”. Art. 70 SSM‑FR 20 further elaborates on what these “particular circumstances” are that can lead to a significant entity being classified as less significant. The ECB may also determine an institution to be of significant relevance where it has established banking subsidiaries in more than one participating Member States and its cross-border assets or liabilities represent a significant part of its total assets or liabilities. The institutions for which public financial assistance has been requested or received directly from the EFSF or the ESM are also to be considered significant. And finally, the three most significant credit institutions in each of the participating Member States, are under direct ECB supervision. 39 Re. (b): the second subpara. of para. 8 further explains what must be considered to constitute a ‘significant share’ of a participating Member State’s financial system. Pursuant to this para., individual resolution plans must always be drafted for institutions of which: (a) the total value of its assets exceeds EUR 30 billion; or (b) the ratio of its total assets over the GDP of the Member State of establishment exceeds 20%, unless the total value of its assets is below EUR 5 billion. At first glance this para. appears to be redundant because the two criteria in this para. are the same ones used in Art. 6(4) SSMR to 37
20 Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM‑FR).
572
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
qualify an institution as significant. However, Art. 6(4) SSMR also provides an extra circumstance, viz. the “particular circumstances”.21 This para. seems to have been drafted for the institutions that fall under the exception in Art. 6(4) SSMR but for which an individual resolution plan still has to be drafted.
F. Ending the application of simplified obligations (Art. 11(6) SRMR) Pursuant to para. 6, the SRB has to impose full obligations at any time if any of the 40 circumstances that justified simplified obligations no longer exists. Therefore, the SRB must ensure that it is kept informed of changes to the entity or group in question, in order to ensure that the application of full or simplified obligations remains appropriate. For instance, if the failure of the entity or group has become likely to have significant adverse consequences, full obligations are to be applied. Consequently, the assessment of whether it is appropriate to (continue to) apply simplified obligations should be done regularly and at a minimum of once every two years.22
Art. 12 SRMR Minimum requirement for own funds and eligible liabilities1* 1. The Board, after consulting the competent authorities, including the ECB, shall determine the requirements for own funds and eligible liabilities as referred to in Articles 12a to 12i, subject to write-down and conversion powers, which are to be met at all times by the entities and groups referred to in Article 7(2) and by the entities and groups referred to in point (b) of Article 7(4) and in Article 7(5) when the conditions for the application of these paragraphs are met. 2. Entities that are referred to in paragraph 1, including entities that are part of groups, shall report the information in accordance with Article 45i(1), (2) and (4) of Directive 2014/59/EU to the national resolution authority of the participating Member State in which they are established. The national resolution authority shall transmit the information referred to in the first subparagraph to the Board without undue delay. 3. When drafting resolution plans in accordance with Article 9, after consulting the competent authorities, national resolution authorities shall determine the requirements for own funds and eligible liabilities, as referred to in Articles 12a to 12i, subject to write-down and conversion powers, which are to be met at all times by the entities referred to in Article 7(3). In that regard the procedure established in Article 31 shall apply. 4. The Board shall make any determination referred to in paragraph 1 of this Article in parallel with the development and maintenance of the resolution plans pursuant to Article 8. 5. The Board shall address its determination to the national resolution authorities. The national resolution authorities shall implement the instructions of the Board 21 As follows from the ECB’s ‘List of significant supervised entities and the list of less significant institutions’ (4 September 2014), there are five institutions have been qualified as less significant under this exception. 22 EBA/RTS/2017/11, at p. 6 and Art. 1 Delegated Regulation (EU) 2019/348. 1 As amended by Art. 1(6) SRMR II. * I am grateful to Prof. Dr. E.P.M. Joosen, for his insightful comments to an earlier version of this commentary.
Matthias Haentjens
573
Arts. 12–12k SRMR
Minimum Requirements
in accordance with Article 29. The Board shall require that the national resolution authorities verify and ensure that entities and groups maintain the requirements for own funds and eligible liabilities laid down in paragraph 1 of this Article. 6. The Board shall inform the ECB and EBA of the requirements for own funds and eligible liabilities that it has determined for each entity and group under paragraph 1. 7. In order to ensure the effective and consistent application of this Article, the Board shall issue guidelines, and address instructions, to national resolution authorities relating to specific entities or groups.
Art. 12a SRMR Application and calculation of the minimum requirement for own funds and eligible liabilities 1. The Board and national resolution authorities shall ensure that entities referred to in Article 12(1) and (3) meet, at all times, the requirements for own funds and eligible liabilities where required by and in accordance with this Article and Articles 12b to 12i. 2. The requirement referred to in paragraph 1 of this Article shall be calculated in accordance with Article 12d(3), (4), or (6), as applicable, as the amount of own funds and eligible liabilities and expressed as percentages of: (a) the total risk exposure amount of the relevant entity referred to in paragraph 1 of this Article, calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013; and (b) the total exposure measure of the relevant entity referred to in paragraph 1 of this Article, calculated in accordance with Articles 429 and 429a of Regulation (EU) No 575/2013.
Art. 12b SRMR Exemption from the minimum requirement for own funds and eligible liabilities 1. Notwithstanding Article 12a, the Board shall exempt from the requirement laid down in Article 12a(1) mortgage credit institutions financed by covered bonds which are not allowed to receive deposits under national law, provided that all of the following conditions are met: (a) those institutions will be wound up in national insolvency proceeding or in other types of proceedings laid down for those institutions and implemented in accordance with Article 38, 40 or 42 of Directive 2014/59/EU; and (b) the proceedings referred to in point (a) ensure that creditors of those institutions, including holders of covered bonds, where relevant, bear losses in a way that meets the resolution objectives. 2. Institutions exempted from the requirement laid down in Article 12(1) shall not be part of the consolidation referred to in Article 12f(1).
574
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
Art. 12c SRMR Eligible liabilities for resolution entities 1. Liabilities shall be included in the amount of own funds and eligible liabilities of resolution entities only where they satisfy the conditions referred to in the following Articles of Regulation (EU) No 575/2013: (a) Article 72a; (b) Article 72b, with the exception of point (d) of paragraph 2; and (c) Article 72c. By way of derogation from the first subparagraph of this paragraph, where this Regulation refers to the requirements in Article 92a or Article 92b of Regulation (EU) No 575/2013, for the purpose of those Articles, eligible liabilities shall consist of eligible liabilities as defined in Article 72k of that Regulation and determined in accordance with Chapter 5a of Title I of Part Two of that Regulation. 2. Liabilities that arise from debt instruments with embedded derivatives, such as structured notes, that meet the conditions of the first subparagraph of paragraph 1, except for point (l) of Article 72a(2) of Regulation (EU) No 575/2013, shall be included in the amount of own funds and eligible liabilities only where one of the following conditions is met: (a) the principal amount of the liability arising from the debt instrument is known at the time of issue, is fixed or increasing, and is not affected by an embedded derivative feature, and the total amount of the liability arising from the debt instrument, including the embedded derivative, can be valued on a daily basis by reference to an active and liquid two-way market for an equivalent instrument without credit risk, in accordance with Articles 104 and 105 of Regulation (EU) No 575/2013; or (b) the debt instrument includes a contractual term that specifies that the value of the claim in cases of the insolvency of the issuer and of the resolution of the issuer is fixed or increasing, and does not exceed the initially paid-up amount of the liability. Debt instruments referred to in the first subparagraph, including their embedded derivatives, shall not be subject to any netting agreement and the valuation of such instruments shall not be subject to Article 49(3) of Directive 2014/59/EU. The liabilities referred to in the first subparagraph shall only be included in the amount of own funds and eligible liabilities with respect to the part of the liability that corresponds to the principal amount referred to in point (a) of that subparagraph or to the fixed or increasing amount referred to in point (b) of that subparagraph. 3. Where liabilities are issued by a subsidiary established in the Union to an existing shareholder that is not part of the same resolution group, and that subsidiary is part of the same resolution group as the resolution entity, those liabilities shall be included in the amount of own funds and eligible liabilities of that resolution entity, provided that all of the following conditions are met: (a) they are issued in accordance with point (a) of Article 12g(2); (b) the exercise of the write-down or conversion power in relation to those liabilities in accordance with Article 21 does not affect the control of the subsidiary by the resolution entity;
Matthias Haentjens
575
Arts. 12–12k SRMR
Minimum Requirements
(c) those liabilities do not exceed an amount determined by subtracting: (i) the sum of the liabilities issued to and bought by the resolution entity either directly or indirectly through other entities in the same resolution group and the amount of own funds issued in accordance with point (b) of Article 12g(2) from (ii) the amount required in accordance with Article 12g(1). 4. Without prejudice to the minimum requirement in Article 12d(4) or point (a) of Article 12e(1), the Board, on its own initiative after consulting the national resolution authority or upon proposal by a national resolution authority, shall ensure that a part of the requirement referred to in Article 12f equal to 8 % of the total liabilities, including own funds, shall be met by resolution entities that are G-SIIs or resolution entities that are subject to Article 12d(4) or (5) using own funds, subordinated eligible instruments, or liabilities as referred to in paragraph 3 of this Article. The Board may permit that a level lower than 8 % of the total liabilities, including own funds, but greater than the amount resulting from the application of the formula (1-(X1/ X2)) × 8 % of the total liabilities, including own funds, shall be met by resolution entities that are G-SIIs or resolution entities that are subject to Article 12d(4) or (5) using own funds, subordinated eligible instruments, or liabilities as referred in paragraph 3 of this Article, provided that all the conditions set out in Article 72b(3) of Regulation (EU) No 575/2013 are met, where, in light of the reduction that is possible under Article 72b (3) of that Regulation: – X1 = 3,5 % of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013; and – X2 = the sum of 18 % of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013 and the amount of the combined buffer requirement. For resolution entities that are subject to Article 12d(4), where the application of the first subparagraph of this paragraph leads to a requirement greater than 27 % of the total risk exposure amount, for the resolution entity concerned, the Board shall limit the part of the requirement referred to in Article 12f which is to be met using own funds, subordinated eligible instruments, or liabilities as referred to in paragraph 3 of this Article, to an amount equal to 27 % of the total risk exposure amount, if the Board has assessed that: (a) access to the Fund is not considered to be an option for resolving that resolution entity in the resolution plan; and (b) where point (a) does not apply, the requirement referred to in Article 12f allows that resolution entity to meet the requirement referred to in Article 27(7). In carrying out the assessment referred to in the second subparagraph, the Board shall also take into account the risk of disproportionate impact on the business model of the resolution entity concerned. For resolution entities that are subject to Article 12d(5), the second subparagraph of this paragraph does not apply. 5. For resolution entities that are neither G-SIIs nor resolution entities that are subject to Article 12d(4) or (5), the Board, either on its own initiative after consulting the national resolution authority or on a proposal by a national resolution authority, may decide that a part of the requirement referred to in Article 12f up to the greater of 8 % of the total liabilities, including own funds, of the entity and the formula referred to in paragraph 7 of this Article, shall be met using own funds, subordinated
576
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
eligible instruments, or liabilities as referred to in paragraph 3 of this Article, provided that the following conditions are met: (a) non-subordinated liabilities referred to in paragraphs 1 and 2 of this Article have the same priority ranking in the national insolvency hierarchy as certain liabilities that are excluded from the application of write-down and conversion powers in accordance with Article 27(3) or Article 27(5); (b) there is a risk that, as a result of a planned application of write-down and conversion powers to non-subordinated liabilities that are not excluded from the application of write-down and conversion powers in accordance with Article 27(3) or Article 27(5), creditors whose claims arise from those liabilities incur greater losses than they would incur in a winding up under normal insolvency proceedings; (c) the amount of own funds and other subordinated liabilities does not exceed the amount necessary to ensure that the creditors referred to in point (b) do not incur losses above the level of losses that they would otherwise have incurred in the winding-up under normal insolvency proceedings. Where the Board determines that, within a class of liabilities which includes eligible liabilities, the amount of the liabilities that are excluded or reasonably likely to be excluded from the application of write-down and conversion powers in accordance with Articles 27(3) or 27(5) totals more than 10 % of that class, the Board shall assess the risk referred to in point (b) of the first subparagraph of this paragraph. 6. For the purposes of paragraphs 4, 5, and 7, derivative liabilities shall be included in total liabilities on the basis that full recognition is given to counterparty netting rights. The own funds of a resolution entity that are used to comply with the combined buffer requirement shall be eligible to comply with the requirements referred to in paragraphs 4, 5 and 7. 7. By derogation from paragraph 3 of this Article, the Board may decide that the requirement referred to in Article 12f of this Regulation shall be met by resolution entities that are G-SIIs or resolution entities that are subject to Article 12d(4) or (5) of this Regulation using own funds, subordinated eligible instruments, or liabilities as referred to in paragraph 3 of this Article, to the extent that, due to the obligation of the resolution entity to comply with the combined buffer requirement and the requirements referred to in Article 92a of Regulation (EU) No 575/2013, Article 12d(4) and Article 12f of this Regulation, the sum of those own funds, instruments and liabilities does not exceed the greater of: (a) 8 % of total liabilities, including own funds, of the entity; or (b) the amount resulting from the application of the formula A × 2 + B × 2 + C, where A, B and C are the following amounts: A = the amount resulting from the requirement referred to in point (c) of Article 92(1) of Regulation (EU) No 575/2013; B = the amount resulting from the requirement referred to in Article 104a of Directive 2013/36/EU; C = the amount resulting from the combined buffer requirement. 8. The Board may exercise the power referred to in paragraph 7 of this Article with respect to resolution entities that are G-SIIs or that are subject to Article 12d(4) or (5), and that meet one of the conditions set out in the second subparagraph of this
Matthias Haentjens
577
Arts. 12–12k SRMR
Minimum Requirements
paragraph, up to a limit of 30 % of the total number of all resolution entities that are G-SIIs or that are subject to Article 12d(4) or (5) for which the Board determines the requirement referred to in Article 12f. The conditions shall be considered by the Board as follows: (a) substantive impediments to resolvability have been identified in the preceding resolvability assessment and either: (i) no remedial action has been taken following the application of the measures referred to in Article 10(11) in the timeline required by the Board, or (ii) the identified substantive impediments cannot be addressed using any of the measures referred to in Article 10(11), and the exercise of the power referred to in paragraph 7 of this Article would partially or fully compensate for the negative impact of the substantive impediments on resolvability; (b) the Board considers that the feasibility and credibility of the resolution entity's preferred resolution strategy is limited, taking into account the entity's size, its interconnectedness, the nature, scope, risk and complexity of its activities, its legal status and its shareholding structure; or (c) the requirement referred to in Article 104a of Directive 2013/36/EU reflects the fact that the resolution entity that is a G-SII or that is subject to Article 12d(4) or (5) of this Regulation is, in terms of riskiness, among the top 20 % of institutions for which the Board determines the requirement referred to in Article 12a(1) of this Regulation. For the purposes of the percentages referred to in the first and second subparagraphs, the Board shall round the number resulting from the calculation up to the closest whole number. 9. After consulting the competent authorities, including the ECB, the Board shall take the decisions referred to in paragraph 5 or 7. When taking those decisions, the Board shall also take into account: (a) the depth of the market for the resolution entity's own funds instruments and subordinated eligible instruments, the pricing of such instruments, where they exist, and the time needed to execute any transactions necessary for the purpose of complying with the decision; (b) the amount of eligible liabilities instruments that meet all of the conditions referred to in Article 72a of Regulation (EU) No 575/2013 that have a residual maturity below one year as of the date of the decision, with a view to making quantitative adjustments to the requirements referred to in paragraphs 5 and 7 of this Article; (c) the availability and the amount of instruments that meet all of the conditions referred to in Article 72a of Regulation (EU) No 575/2013 other than point (d) of Article 72b(2) of that Regulation; (d) whether the amount of liabilities that are excluded from the application of writedown and conversion powers in accordance with Article 27(3) or (5) and that, in normal insolvency proceedings, rank equally with or below the highest ranking eligible liabilities is significant in comparison to the own funds and eligible liabilities of the resolution entity. Where the amount of excluded liabilities does not exceed 5 % of the amount of the own funds and eligible liabilities of the resolution entity, the excluded amount shall be considered as not being significant. Above that threshold, the significance of the excluded liabilities shall be assessed by the Board;
578
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
(e) the resolution entity's business model, funding model, and risk profile, as well as its stability and ability to contribute to the economy; and (f) the impact of possible restructuring costs on the resolution entity's recapitalisation.
Art. 12d SRMR Determination of the minimum requirement for own funds and eligible liabilities 1. The requirement referred to in Article 12a(1) shall be determined by the Board, after consulting the competent authorities, including the ECB, on the basis of the following criteria: (a) the need to ensure that the resolution group can be resolved by the application of the resolution tools to the resolution entity, including, where appropriate, the bail-in tool, in a way that meets the resolution objectives; (b) the need to ensure, where appropriate, that the resolution entity and its subsidiaries that are institutions or entities referred to in Article 12(1) and (3) but are not resolution entities have sufficient own funds and eligible liabilities to ensure that, if the bail-in tool or write-down and conversion powers, respectively, were to be applied to them, losses could be absorbed and the total capital ratio and, as applicable, the leverage ratio, of the relevant entities can be restored to a level necessary to enable them to continue to comply with the conditions for authorisation and to carry on the activities for which they are authorised under Directive 2013/36/EU or Directive 2014/65/EU; (c) the need to ensure, if the resolution plan anticipates the possibility for certain classes of eligible liabilities to be excluded from bail-in pursuant to Article 27(5) of this Regulation or to be transferred in full to a recipient under a partial transfer, that the resolution entity has sufficient own funds and other eligible liabilities to absorb losses and to restore its total capital ratio and, as applicable, its leverage ratio, to the level necessary to enable it to continue to comply with the conditions for authorisation and to carry on the activities for which it is authorised under Directive 2013/36/EU or Directive 2014/65/EU; (d) the size, the business model, the funding model and the risk profile of the entity; (e) the extent to which the failure of the entity would have an adverse effect on financial stability, including through contagion to other institutions or entities, due to the interconnectedness of the entity with those other institutions or entities or with the rest of the financial system. 2. Where the resolution plan provides that resolution action is to be taken or that the power to write down and convert relevant capital instruments and eligible liabilities in accordance with Article 21 is to be exercised in accordance with the relevant scenario referred to in Article 8(6), the requirement referred to in Article 12a(1) shall equal an amount sufficient to ensure that: (a) the losses that are expected to be incurred by the entity are fully absorbed (“loss absorption”); (b) the resolution entity and its subsidiaries that are institutions or entities referred to in Article 12(1) or (3) but are not resolution entities are recapitalised to a level necessary to enable them to continue to comply with the conditions for authorisation, and to carry on the activities for which they are authorised under Matthias Haentjens
579
Arts. 12–12k SRMR
Minimum Requirements
Directive 2013/36/EU, Directive 2014/65/EU or an equivalent legislative act for an appropriate period not longer than one year (“recapitalisation”). Where the resolution plan provides that the entity is to be wound up under normal insolvency proceedings or other equivalent national procedures, the Board shall assess whether it is justified to limit the requirement referred to in Article 12a(1) for that entity, so that it does not exceed an amount sufficient to absorb losses in accordance with point (a) of the first subparagraph. The assessment by the Board shall evaluate, in particular, the limit referred to in the second subparagraph as regards any possible impact on financial stability and on the risk of contagion to the financial system. 3. For resolution entities, the amount referred to in the first subparagraph of paragraph 2 shall be the following: (a) for the purpose of calculating the requirement referred to in Article 12a(1), in accordance with point (a) of Article 12a(2), the sum of: (i) the amount of the losses to be absorbed in resolution that corresponds to the requirements referred to in point (c) of Article 92(1) of Regulation (EU) No 575/2013 and Article 104a of Directive 2013/36/EU of the resolution entity at the consolidated resolution group level; and (ii) a recapitalisation amount that allows the resolution group resulting from resolution to restore compliance with its total capital ratio requirement referred to in point (c) of Article 92(1) of Regulation (EU) No 575/2013 and its requirement referred to in Article 104a of Directive 2013/36/EU at the consolidated resolution group level after the implementation of the preferred resolution strategy; and (b) for the purpose of calculating the requirement referred to in Article 12a(1), in accordance with point (b) of Article 12a(2), the sum of: (i) the amount of the losses to be absorbed in resolution that corresponds to the resolution entity's leverage ratio requirement referred to in point (d) of Article 92(1) of Regulation (EU) No 575/2013 at the consolidated resolution group level; and (ii) a recapitalisation amount that allows the resolution group resulting from resolution to restore compliance with the leverage ratio requirement referred to in point (d) of Article 92(1) of Regulation (EU) No 575/2013 at the consolidated resolution group level after the implementation of the preferred resolution strategy. For the purposes of point (a) of Article 12a(2), the requirement referred to in Article 12a(1) shall be expressed in percentage terms as the amount calculated in accordance with point (a) of the first subparagraph of this paragraph, divided by the total risk exposure amount. For the purposes of point (b) of Article 12a(2), the requirement referred to in Article 12a(1) shall be expressed in percentage terms as the amount calculated in accordance with point (b) of the first subparagraph of this paragraph, divided by the total exposure measure. When setting the individual requirement provided in point (b) of the first subparagraph of this paragraph, the Board shall take into account the requirements referred to in Article 27(7).
580
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
When setting the recapitalisation amounts referred to in the previous subparagraphs, the Board shall: (a) use the most recently reported values for the relevant total risk exposure amount or total exposure measure, adjusted for any changes resulting from resolution actions set out in the resolution plan; and (b) after consulting the competent authorities, including the ECB, adjust the amount corresponding to the current requirement referred to in Article 104a of Directive 2013/36/EU downwards or upwards to determine the requirement that is to apply to the resolution entity after the implementation of the preferred resolution strategy. The Board shall be able to increase the requirement provided in point (a)(ii) of the first subparagraph by an appropriate amount necessary to ensure that, following resolution, the entity is able to sustain sufficient market confidence for an appropriate period, which shall not exceed one year. Where the sixth subparagraph of this paragraph applies, the amount referred to in that subparagraph shall be equal to the combined buffer requirement that is to apply after the application of the resolution tools, less the amount referred to in point (a) of point (6) of Article 128 of Directive 2013/36/EU. The amount referred to in the sixth subparagraph of this paragraph shall be adjusted downwards if, after consulting the competent authorities, including the ECB, the Board determines that it would be feasible and credible for a lower amount to be sufficient to sustain market confidence and to ensure both the continued provision of critical economic functions by the institution or entity referred to in Article 12(1) and its access to funding without recourse to extraordinary public financial support other than contributions from the Fund, in accordance with Article 27(7) and Article 76(3), after implementation of the resolution strategy. That amount shall be adjusted upwards if, after consulting the competent authorities, including the ECB, the Board determines that a higher amount is necessary to sustain sufficient market confidence and to ensure both the continued provision of critical economic functions by the institution or entity referred to in Article 12(1) and its access to funding without recourse to extraordinary public financial support other than contributions from the Fund, in accordance with Article 27(7) and Article 76(3), for an appropriate period which shall not exceed one year. 4. For resolution entities that are not subject to Article 92a of Regulation (EU) No 575/2013 and that are part of a resolution group the total assets of which exceed EUR 100 billion, the level of the requirement referred to in paragraph 3 of this Article shall be at least equal to: (a) 13,5 % when calculated in accordance with point (a) of Article 12a(2); and (b) 5 % when calculated in accordance with point (b) of Article 12a(2). By way of derogation from Article 12c, the resolution entities referred to in the first subparagraph of this paragraph shall meet a level of the requirement referred to in the first subparagraph of this paragraph that is equal to 13,5 % when calculated in accordance with point (a) of Article 12a(2) and to 5 % when calculated in accordance with point (b) of Article 12a(2) using own funds, subordinated eligible instruments, or liabilities as referred to in Article 12c(3) of this Regulation. 5. At the request of the national resolution authority of a resolution entity, the Board shall apply the requirements laid down in paragraph 4 of this Article to a resolution entity which is not subject to Article 92a of Regulation (EU) No 575/2013 and which Matthias Haentjens
581
Arts. 12–12k SRMR
Minimum Requirements
is part of a resolution group the total assets of which are lower than EUR 100 billion and which the national resolution authority has assessed as reasonably likely to pose a systemic risk in the event of its failure. When taking a decision to make a request as referred to in the first subparagraph of this paragraph, the national resolution authority shall take into account: (a) the prevalence of deposits, and the absence of debt instruments, in the funding model; (b) the extent to which access to the capital markets for eligible liabilities is limited; (c) the extent to which the resolution entity relies on Common Equity Tier 1 capital to meet the requirement referred to in Article 12f. The absence of a request by the national resolution authority pursuant to the first subparagraph of this paragraph is without prejudice to any decision of the Board under Article 12c(5). 6. For entities that are not themselves resolution entities, the amount referred to in the first subparagraph of paragraph 2 shall be the following: (a) for the purpose of calculating the requirement referred to in Article 12a(1), in accordance with point (a) of Article 12a(2), the sum of: (i) the amount of the losses to be absorbed that corresponds to the requirements referred to in point (c) of Article 92(1) of Regulation (EU) No 575/2013 and Article 104a of Directive 2013/36/EU of the entity; and (ii) a recapitalisation amount that allows the entity to restore compliance with its total capital ratio requirement referred in point (c) of Article 92(1) of Regulation (EU) No 575/2013 and its requirement referred to in Article 104a of Directive 2013/36/EU after the exercise of the power to write down or convert relevant capital instruments and eligible liabilities in accordance with Article 21 of this Regulation or after the resolution of the resolution group; and (b) for the purpose of calculating the requirement referred to in Article 12a(1), in accordance with point (b) of Article 12a(2), the sum of: (i) the amount of the losses to be absorbed that corresponds to the entity's leverage ratio requirement referred to in point (d) of Article 92(1) of Regulation (EU) No 575/2013; and (ii) a recapitalisation amount that allows the entity to restore compliance with its leverage ratio requirement referred to in point (d) of Article 92(1) of Regulation (EU) No 575/2013 after the exercise of the power to write down or convert relevant capital instruments and eligible liabilities in accordance with Article 21 of this Regulation or after the resolution of the resolution group. For the purposes of point (a) of Article 12a(2), the requirement referred to in Article 12a(1) shall be expressed in percentage terms as the amount calculated in accordance with point (a) of the first subparagraph of this paragraph, divided by the total risk exposure amount. For the purposes of point (b) of Article 12a(2), the requirement referred to in Article 12a(1) shall be expressed in percentage terms as the amount calculated in accordance with point (b) of the first subparagraph of this paragraph, divided by the total exposure measure.
582
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
When setting the individual requirement provided in point (b) of the first subparagraph of this paragraph, the Board shall take into account the requirements referred to in Article 27(7). When setting the recapitalisation amounts referred to in the previous subparagraphs, the Board shall: (a) use the most recently reported values for the relevant total risk exposure amount or total exposure measure, adjusted for any changes resulting from actions set out in the resolution plan; and (b) after consulting the competent authorities including the ECB, adjust the amount corresponding to the current requirement referred to in Article 104a of Directive 2013/36/EU downwards or upwards to determine the requirement that is to apply to the relevant entity after the exercise of the power to write down or convert relevant capital instruments and eligible liabilities in accordance with Article 21 of this Regulation or after the resolution of the resolution group. The Board shall be able to increase the requirement provided in point (a)(ii) of the first subparagraph of this paragraph by an appropriate amount necessary to ensure that, following the exercise of the power to write down or convert relevant capital instruments and eligible liabilities in accordance with Article 21, the entity is able to sustain sufficient market confidence for an appropriate period which shall not exceed one year. Where the sixth subparagraph of this paragraph applies, the amount referred to in that subparagraph shall be equal to the combined buffer requirement that is to apply after the exercise of the power referred to in Article 21 of this Regulation or after the resolution of the resolution group, less the amount referred to in point (a) of point (6) of Article 128 of Directive 2013/36/EU. The amount referred to in the sixth subparagraph of this paragraph shall be adjusted downwards if, after consulting the competent authorities, including the ECB, the Board determines that it would be feasible and credible for a lower amount to be sufficient to ensure market confidence and to ensure both the continued provision of critical economic functions by the institution or entity referred to in Article 12(1) and its access to funding without recourse to extraordinary public financial support other than contributions from the Fund, in accordance with Article 27(7) and Article 76(3), after the exercise of the power referred to in Article 21 or after the resolution of the resolution group. That amount shall be adjusted upwards if, after consulting the competent authorities including the ECB, the Board determines that a higher amount is necessary to sustain sufficient market confidence and to ensure both the continued provision of critical economic functions by the institution or entity referred to in Article 12(1) and its access to funding without recourse to extraordinary public financial support other than contributions from the Fund, in accordance with Article 27(7) and Article 76(3) for an appropriate period which shall not exceed one year. 7. Where the Board expects that certain classes of eligible liabilities are reasonably likely to be fully or partially excluded from bail-in pursuant to Article 27(5) or might be transferred in full to a recipient under a partial transfer, the requirement referred to in Article 12a(1) shall be met using own funds or other eligible liabilities that are sufficient to:
Matthias Haentjens
583
Arts. 12–12k SRMR
Minimum Requirements
(a) cover the amount of excluded liabilities identified in accordance with Article 27(5); (b) ensure that the conditions referred to in paragraph 2 are fulfilled. 8. Any decision by the Board to impose a minimum requirement of own funds and eligible liabilities under this Article shall contain the reasons for that decision, including a full assessment of the elements referred to in paragraphs 2 to 7 of this Article, and shall be reviewed by the Board without undue delay to reflect any changes in the level of the requirement referred to in Article 104a of Directive 2013/36/EU. 9. For the purposes of paragraphs 3 and 6 of this Article, capital requirements shall be interpreted in accordance with the competent authority's application of the transitional provisions laid down in Chapters 1, 2 and 4 of Title I of Part Ten of Regulation (EU) No 575/2013 and in the provisions of national legislation exercising the options granted to the competent authorities by that Regulation.
Art. 12e SRMR Determination of the minimum requirement for own funds and eligible liabilities for resolution entities of G-SIIs and Union material subsidiaries of non-EU G-SIIs 1. The requirement referred to in Article 12a(1) for a resolution entity that is a G-SII or part of a G-SII shall consist of the following: (a) the requirements referred to in Articles 92a and 494 of Regulation (EU) No 575/2013; and (b) any additional requirement for own funds and eligible liabilities that has been determined by the Board specifically in relation to that entity in accordance with paragraph 3 of this Article. 2. The requirement referred to in Article 12a(1) for a Union material subsidiary of a non-EU G-SII shall consist of the following: (a) the requirements referred to in Articles 92b and 494 of Regulation (EU) No 575/2013; and (b) any additional requirement for own funds and eligible liabilities that has been determined by the Board specifically in relation to that material subsidiary in accordance with paragraph 3 of this Article which is to be met using own funds and liabilities that meet the conditions of Article 12g and Article 92b(2) of Regulation (EU) No 575/2013. 3. The Board shall impose an additional requirement for own funds and eligible liabilities referred to in point (b) of paragraph 1 and point (b) of paragraph 2 only: (a) where the requirement referred to in point (a) of paragraph 1 or point (a) of paragraph 2 of this Article is not sufficient to fulfil the conditions set out in Article 12d; and (b) to an extent that ensures that the conditions set out in Article 12d are fulfilled. 4. Any decision by the Board to impose an additional requirement for own funds and eligible liabilities under point (b) of paragraph 1 of this Article or point (b) of paragraph 2 of this Article shall contain the reasons for that decision, including a
584
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
full assessment of the elements referred to in paragraph 3 of this Article, and shall be reviewed by the Board without undue delay to reflect any changes in the level of the requirement referred to in Article 104a of Directive 2013/36/EU that applies to the resolution group or the Union material subsidiary of a non-EU G-SII.
Art. 12f SRMR Application of the minimum requirement for own funds and eligible liabilities to resolution entities 1. Resolution entities shall comply with the requirements laid down in Articles 12c to 12e on a consolidated basis at the level of the resolution group. 2. The Board, after consulting the group-level resolution authority, if that authority is not the Board, and the consolidating supervisor shall determine the requirement referred to in Article 12a(1) for a resolution entity established in a participating Member State at the consolidated resolution group level on the basis of the requirements laid down in Articles 12c to 12e and on the basis of whether the third-country subsidiaries of the group are to be resolved separately under the resolution plan. 3. For resolution groups identified in accordance with point (b) of point (24b) of Article 3(1), the Board shall decide, depending on the features of the solidarity mechanism and of the preferred resolution strategy, which entities in the resolution group are to be required to comply with Article 12d(3) and (4) and Article 12e(1), in order to ensure that the resolution group as a whole complies with paragraphs 1 and 2 of this Article, and how such entities are to do so in conformity with the resolution plan.
Art. 12g SRMR Application of the minimum requirement for own funds and eligible liabilities to entities that are not themselves resolution entities 1. Institutions that are subsidiaries of a resolution entity or of a third-country entity, but are not themselves resolution entities, shall comply with the requirements laid down in Article 12d on an individual basis. The Board, after consulting the competent authorities, including the ECB, may decide to apply the requirement laid down in this Article to an entity referred to in point (b) of Article 2 that is a subsidiary of a resolution entity but is not itself a resolution entity. By way of derogation from the first subparagraph of this paragraph, Union parent undertakings that are not themselves resolution entities, but are subsidiaries of third-country entities, shall comply with the requirements laid down in Articles 12d and 12e on a consolidated basis. For resolution groups identified in accordance with point (b) of point (24b) of Article 3(1), those credit institutions which are permanently affiliated to a central body, but are not themselves resolution entities, a central body which is not itself a resolution entity, and any resolution entities that are not subject to a requirement under Article 12f(3), shall comply with Article 12d(6) on an individual basis. The requirement referred to in Article 12a(1) for an entity referred to in this paragraph shall be determined on the basis of the requirements laid down in Article 12d.
Matthias Haentjens
585
Arts. 12–12k SRMR
Minimum Requirements
2. The requirement referred to in Article 12a(1) for entities referred to in paragraph 1 of this Article shall be met using one or more of the following: (a) liabilities: (i) that are issued to and bought by the resolution entity, either directly or indirectly through other entities in the same resolution group that bought the liabilities from the entity that is subject to this Article, or are issued to and bought by an existing shareholder that is not part of the same resolution group as long as the exercise of write-down or conversion powers in accordance with Article 21 does not affect the control of the subsidiary by the resolution entity; (ii) that fulfil the eligibility criteria referred to in Article 72a of Regulation (EU) No 575/2013, except for points (b), (c), (k), (l) and (m) of Article 72b(2) and Article 72b(3) to (5) of that Regulation; (iii) that rank, in normal insolvency proceedings, below liabilities that do not meet the condition referred to in point (i) and that are not eligible for own funds requirements; (iv) that are subject to write-down or conversion powers in accordance with Article 21 in a manner that is consistent with the resolution strategy of the resolution group, in particular by not affecting the control of the subsidiary by the resolution entity; (v) the acquisition of ownership of which is not funded directly or indirectly by the entity that is subject to this Article; (vi) the provisions governing which do not indicate explicitly or implicitly that the liabilities would be called, redeemed, repaid or repurchased early, as applicable, by the entity that is subject to this Article, other than in the case of the insolvency or liquidation of that entity, and that entity does not otherwise provide such an indication; (vii) the provisions governing which do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the case of the insolvency or liquidation of the entity that is subject to this Article; (viii) the level of interest or dividend payments, as applicable, due thereon is not amended on the basis of the credit standing of the entity that is subject to this Article or its parent undertaking; (b) own funds, as follows: (i) Common Equity Tier 1 capital, and (ii) other own funds that: – are issued to and bought by entities that are included in the same resolution group, or – are issued to and bought by entities that are not included in the same resolution group as long as the exercise of write-down or conversion powers in accordance with Article 21 does not affect the control of the subsidiary by the resolution entity. 3. The Board may permit the requirement referred to in Article 12a(1) to be met in full or in part with a guarantee provided by the resolution entity which fulfils the following conditions: (a) both the subsidiary and the resolution entity are established in the same participating Member State and are part of the same resolution group;
586
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
(b) the resolution entity complies with the requirement referred to in Article 12f; (c) the guarantee is provided for at least an amount that is equivalent to the amount of the requirement for which it substitutes; (d) the guarantee is triggered when the subsidiary is unable to pay its debts or other liabilities as they fall due, or a determination has been made in accordance with Article 21(3) in respect of the subsidiary, whichever is the earliest; (e) the guarantee is collateralised through a financial collateral arrangement as defined in point (a) of Article 2(1) of Directive 2002/47/EC of the European Parliament and of the Council (*1) for at least 50 % of its amount; (f) the collateral backing the guarantee fulfils the requirements of Article 197 of Regulation (EU) No 575/2013, which, following appropriately conservative haircuts, is sufficient to cover the amount collateralised as referred to in point (e); (g) the collateral backing the guarantee is unencumbered and, in particular, is not used as collateral to back any other guarantee; (h) the collateral has an effective maturity that fulfils the same maturity condition as that referred to in Article 72c(1) of Regulation (EU) No 575/2013; and (i) there are no legal, regulatory or operational barriers to the transfer of the collateral from the resolution entity to the relevant subsidiary, including where resolution action is taken in respect of the resolution entity. For the purposes of point (i) of the first subparagraph, at the request of the Board, the resolution entity shall provide an independent written and reasoned legal opinion or shall otherwise satisfactorily demonstrate that there are no legal, regulatory or operational barriers to the transfer of collateral from the resolution entity to the relevant subsidiary.
Art. 12h SRMR Waiver of the minimum requirement for own funds and eligible liabilities applied to entities that are not themselves resolution entities 1. The Board may waive the application of Article 12g in respect of a subsidiary of a resolution entity established in a participating Member State where: (a) both the subsidiary and the resolution entity are established in the same participating Member State and are part of the same resolution group; (b) the resolution entity complies with the requirement referred to in Article 12f; (c) there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities by the resolution entity to the subsidiary in respect of which a determination has been made in accordance with Article 21(3), in particular where resolution action is taken in respect of the resolution entity. 2. The Board may waive the application of Article 12g in respect of a subsidiary of a resolution entity established in a participating Member State where: (a) both the subsidiary and its parent undertaking are established in the same participating Member State and are part of the same resolution group; (b) the parent undertaking complies on a consolidated basis with the requirement referred to in Article 12a(1) in that participating Member State;
Matthias Haentjens
587
Arts. 12–12k SRMR
Minimum Requirements
(c) there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities by the parent undertaking to the subsidiary in respect of which a determination has been made in accordance with Article 21(3), in particular where resolution action is taken in respect of the parent undertaking.
Art. 12i SRMR Waiver for a central body and credit institutions permanently affiliated to a central body The Board may partially or fully waive the application of Article 12g in respect of a central body or of a credit institution which is permanently affiliated to a central body, where all of the following conditions are met: (a) the credit institution and the central body are subject to supervision by the same competent authority, are established in the same participating Member State and are part of the same resolution group; (b) the commitments of the central body and its permanently affiliated credit institutions are joint and several liabilities, or the commitments of its permanently affiliated credit institutions are entirely guaranteed by the central body; (c) the minimum requirement for own funds and eligible liabilities, and the solvency and liquidity of the central body and of all of the permanently affiliated credit institutions, are monitored as a whole on the basis of the consolidated accounts of those institutions; (d) in the case of a waiver for a credit institution which is permanently affiliated to a central body, the management of the central body is empowered to issue instructions to the management of the permanently affiliated institutions; (e) the relevant resolution group complies with the requirement referred to in Article 12f(3); and, (f) there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the central body and the permanently affiliated credit institutions in the event of resolution.
Art. 12j SRMR Breaches of the minimum requirement for own funds and eligible liabilities 1. Any breach of the minimum requirement for own funds and eligible liabilities referred to in Article 12f or Article 12g shall be addressed on the basis of at least one of the following: (a) powers to address or remove impediments to resolvability in accordance with Article 10; (b) powers referred to in Article 10a; (c) measures referred to in Article 104 of Directive 2013/36/EU; (d) early intervention measures in accordance with Article 13; (e) administrative penalties and other administrative measures in accordance with Articles 110 and 111 of Directive 2014/59/EU.
588
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
Furthermore, the Board or the ECB may carry out an assessment of whether the institution is failing or is likely to fail, in accordance with Article 18. 2. The Board, resolution authorities and competent authorities of participating Member States shall consult each other when they exercise their respective powers referred to in paragraph 1.
Art. 12k SRMR Transitional and post-resolution arrangements 1. By way of derogation from Article 12a(1), the Board and national resolution authorities shall determine appropriate transitional periods for entities referred to in Article 12(1) and (3) to comply with the requirements in Articles 12f or 12g, or with the requirements that result from the application of Article 12c(4), (5) or (7), as appropriate. The deadline for entities to comply with the requirements in Articles 12f or 12g or the requirements that result from the application of Article 12c(4), (5) or (7) shall be 1 January 2024. The Board shall determine intermediate target levels for the requirements in Articles 12f or 12g or for requirements that result from the application of Article 12c(4), (5) or (7), as appropriate, that entities referred to in Article 12(1) and (3) shall comply with at 1 January 2022. The intermediate target levels, as a rule, shall ensure a linear build-up of own funds and eligible liabilities towards the requirement. The Board may set a transitional period that ends after 1 January 2024 where duly justified and appropriate on the basis of the criteria referred to in paragraph 7, taking into consideration: (a) the development of the entity's financial situation; (b) the prospect that the entity will be able to ensure compliance in a reasonable timeframe with the requirements in Articles 12f or 12g or with a requirement that results from the application of Article 12c(4), (5) or (7); and (c) whether the entity is able to replace liabilities that no longer meet the eligibility or maturity criteria laid down in Articles 72b and 72c of Regulation (EU) No 575/2013, and Article 12c or Article 12g(2) of this Regulation, and if not, whether that inability is of an idiosyncratic nature or is due to market-wide disturbance. 2. The deadline for resolution entities to comply with the minimum level of the requirements referred to in Article 12d(4) or (5) shall be 1 January 2022. 3. The minimum levels of the requirements referred to in Article 12d(4) and (5) shall not apply within the two-year period following the date: (a) on which the Board or the national resolution authority has applied the bail-in tool; or (b) on which the resolution entity has put in place an alternative private sector measure as referred to in point (b) of Article 18(1) by which capital instruments and other liabilities have been written down or converted into Common Equity Tier 1 instruments, or on which write down or conversion powers, in accordance with Article 21, have been exercised in respect of that resolution entity, in order to recapitalise the resolution entity without the application of resolution tools. 4. The requirements referred to in Article 12c(4) and (7) as well as Article 12d(4) and (5), as applicable, shall not apply within the three-year period following the date
Matthias Haentjens
589
Arts. 12–12k SRMR
Minimum Requirements
on which the resolution entity or the group of which the resolution entity is part has been identified as a G-SII, or the resolution entity starts to be in the situation referred to in Article 12d(4) or (5). 5. By way of derogation from Article 12a(1), the Board and the national resolution authorities shall determine an appropriate transitional period within which to comply with the requirements of Articles 12f or 12g, or a requirement resulting from the application of Article 12c(4), (5) or (7), as appropriate, for entities to which resolution tools or the write-down or conversion power referred to in Article 21 have been applied. 6. For the purposes of paragraphs 1 to 5, the Board and the national resolution authorities shall communicate to the entity a planned minimum requirement for own funds and eligible liabilities for each 12-month period during the transitional period, with a view to facilitating a gradual build-up of its loss-absorption and recapitalisation capacity. At the end of the transitional period, the minimum requirement for own funds and eligible liabilities shall be equal to the amount determined under Article 12c(4), (5) or (7), Article 12d(4) or (5), Article 12f or Article 12g, as applicable. 7. When determining the transitional periods, the Board shall take into account: (a) the prevalence of deposits and the absence of debt instruments in the funding model; (b) the access to the capital markets for eligible liabilities; (c) the extent to which the resolution entity relies on Common Equity Tier 1 capital to meet the requirement referred to in Article 12f. 8. Subject to paragraph 1, the Board shall not be prevented from subsequently revising either the transitional period or any planned minimum requirement for own funds and eligible liabilities communicated under paragraph 6. Bibliography Rym Ayadi and Giovanni Ferri, ‘“Total Assets” versus “Risk Weighted Assets”: does it matter for MREL requirements’, ECON (2016); Bank of England, ‘Internal MREL – the Bank of England’s approach to setting an MREL within groups, and further issues’ (October 2017); Bennet Berger, Pia Hüttl and Silvia Merler, ‘“Total Assets” versus “Risk Weighted Assets”: does it matter for MREL requirements’, ECON (2016); Jens-Hinrich Binder, ‘Resolution planning and structural bank reform within the banking union’ in: Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds), European Banking Union, (Routledge Taylor & Francis Group, London and New York 2015), 129; FSB, ‘G20 Leaders’ Declaration’ (September 2013); id., ‘Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution’ (9th November 2015), id., ‘Review of the Technical Implementation of the Total Loss-Absorbing Capacity (TLAC) Standard’ (2nd July 2019); Simon Gleeson and Randall D. Guynn, Bank Resolution and Crisis Management: law and practice (Oxford University Press, Oxford 2016); Charles Goodhart & Emilios Avgouleas, ‘A Critical Evaluation of Bail-ins as Bank Recapitalisation Mechanisms’, Centre for Economic Policy Research (2014); Willem Pieter de Groen, ‘“Total Assets” versus “Risk Weighted Assets”: does it matter for MREL requirements’, ECON (2016); Shuai Guo, ‘Cross-border Resolution of Financial Institutions: Perspectives from International Insolvency Law’, Norton Journal of Bankruptcy Law and Practice 27 (2018), 481; Matthias Haentjens and Bob Wessels, Research Handbook on Cross-Border Bank Resolution (Edward Elgar Publishing, Cheltenham 2019); id., Bank recovery and resolution: a conference book (Eleven International Publishing, The Hague 2014); Martin Hellwig, ‘“Total Assets” versus “Risk Weighted Assets”: does it matter for MREL requirements’, ECON (2016); Thomas F. Huertas, ‘European Bank Resolution: Making it Work!’, Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution (January 2016); Lynette Janssen, ‘Bail-in from an Insolvency Law Perspective’, Norton Journal of Bankruptcy Law and Practice 26 (2017); Lynette Janssen and Jouke Tegelaar, ‘How to Compensate Expropriated Investors? The Case of SNS Reaal’, JIBLR31 (2016), 162; Bart P.M. Joosen, ‘Regulatory capital requirements and bail in mechanisms’ in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar Publishing, Cheltenham 2015), 175; Martina Mišková and Lucia Országhová, ‘MREL: Gone Concern Loss Absorbing Capacity’, BIATEC – banking journal, National Bank of Slovakia 3/2015 (2015); Gabriel S. Moss QC, Bob Wessels and Matthias
590
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
Haentjens, EU Banking and Insurance Insolvency (2nd edn Oxford University Press, Oxford 2017); Matthias Haentjens and Pierre de Gioia Carabellese, European Banking and Financial Law (2nd edn, Routledge Taylor & Francis Group, London and New York 2020); José Carlos Pardo and Victoria Santillana, ‘The European MREL: main characteristics and TLAC similarities and differences’, European Regulation Watch (2014); Sven Schelo, Bank Recovery and Resolution (2nd edn, Kluwer Law International, The Hague 2015); Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (Oxford University Press, Oxford 2016); Dominik Skauradszun, ‘Legal Protection against decisions of the Single Resolution Board pursuant to Article 85 Single Resolution Mechanism Regulation’, ECFR15 (2018), 123; SRB, ‘MREL – SRB Policy under the Banking Package’ (17 February 2020); id., ‘Speech by Eline König as Board Chair to the European Parliament ECON Committee’ (3rd December 2019); id., ‘SRB launches public consultation on changes to its MREL policy under the 2019 Banking Package’ (17th February 2020); Lawrence Susskind, Good for You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation (Public Affairs, New York 2014); Tobias H. Tröger, ‘Too Complex to Work: a Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime’, SAFE Working Paper No. 179 (2017); id., ‘Why MREL Won’t Help Much’, SAFE Working Paper No. 180 (2017); Marco Ventoruzzo and Giulio Sandrelli, ‘O Tell Me the Truth about Bail-In: Theory and Practice’, The Journal of Business, Entrepreneurship & the Law 13 (2020), 187; World Bank Group, ‘Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD’ (2016); id., ‘Bank Resolution and “Bail-In” in the EU: Selected Case Studies Pre and Post BRRD’ (2016). A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. TLAC, MREL, and the Banking Reform Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. MREL, resolution planning and bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 5
B. Division of competence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Competence of the SRB (Arts. 12(1)-(2), 12(4)-(7), 12a(1) and 12f(2)-(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Competence of NRAs (Art. 12(3) and 12a(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . .
10 10 26
C. Scope of application of the MREL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. External and (waived) internal MREL (Art. 12f-12i SRMR) . . . . . . . . . . . . . . . . . . II. Exemption (Art. 12b SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 30 37
D. Calculation and determination of the MREL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Calculation of the MREL (Art. 12a(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Eligibility and subordination (Arts. 12c and 12g(2)-(3) SRMR) . . . . . . . . . . . . . . External MREL (Art. 12c SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internal MREL (Art. 12g(2)-(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. General calibration of the MREL(Art. 12d(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . IV. Determination of the MREL (Art. 12d(3)-(6), 12d(9) and 12e SRMR) . . . . . . .
40 42 49 49 58 59 65
E. Breaches of the MREL (Art. 12j SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
F. Transitional Period (Art. 12k SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
A. Introduction I. TLAC, MREL, and the Banking Reform Package At the 2013 G20 St. Petersburg Summit, the Financial Stability Board (FSB) was 1 asked to develop proposals on the adequacy of G-SIIs’ loss-absorbing capacity when they fail.1 The FSB’s effort aims to increase the markets’ confidence that systemically important banks (G-SIBs, here interchangeably used with the term G-SIIs) are truly no
1 FSB, G20 Leaders’ Declaration (2013), at p. 17 para. 68, available at: .
Matthias Haentjens
591
Arts. 12–12k SRMR
Minimum Requirements
longer “too big to fail” and resulted in the TLAC term sheet, published in November 2015.2 2 The 21 principles set out in the TLAC term sheet specify their objective to ensure that in and immediately following a G-SIB resolution critical functions can be continued without taxpayers’ funds or financial stability being put at risk.3 Thus, the TLAC principles must be understood in the context of preventing bailouts and reducing systemic risks. Substantially, this should ensure the effective use of the bail-in mechanism and the bail-in tool4 within this mechanism, if needed.5 3 In the EU legislative context, the TLAC standard for G-SIBs has been implemented within the existing framework of the MREL, which applies to all banks, regardless of their G-SIB status. This required several amendments to the existing MREL framework. In addition, many highly technical MREL related subjects previously dealt with by Commission Delegated Regulation (EU) 2016/1450 have now been transposed into level 1 EU legislation. This led to the amendment of the SRMR by Regulation (EU) 2019/877 (SRMR II), which has been applicable from 28 December 2020 onwards6, notwithstanding specific transitional arrangements provided pursuant to Art. 12k SRMR. The existing Art. 12 SRMR on the MREL is replaced and Arts. 12a-12k SRMR are inserted. In the following, a narrative analysis will be given of Arts. 12-12k SRMR. This approach is different from the other Articles, which are commented on a word-by-word basis, since these Articles are so technical and difficult to read that a narrative seemed more appropriate and informative. 4 Together with BRRD II7, CRR II8 and CRD V9 these changes in European banking law are collectively part of what is known as the banking reform package. As of 17 February 2020, the SRB launched a public consultation on its MREL policy under the banking reform package, which concluded on 6th March 2020.10 The questions posed to the banking industry include varied issues such as the impact on the level playing field, disclosure to investors and liabilities issued under third-country law. Alongside,
2 FSB, Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution (2015), at p. 3, available at: . 3 FSB, Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution (2015), at p. 9. See also Recital (1) SRMR II. 4 See infra, → Art. 27. 5 On the functioning of the MREL within the bail-in mechanism, see Janssen, Norton Journal of Bankruptcy Law and Practice 26 (2017), at pp. 464-466. 6 Pursuant to Art. 2(2) SRMR II. 7 Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC. 8 Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012. 9 Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures. 10 SRB, SRB launches public consultation on changes to its MREL policy under the 2019 Banking Package (2020), available at: .
592
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
a consultation paper was released.11 An updated final MREL Policy Statement was published in May 2020 and in May 2021.12
II. MREL, resolution planning and bail-in Arts. 12-12k SRMR in essence prescribe that the SRB must determine, per entity or 5 group, an MREL. As already alluded to above, MREL has to be understood in the context of the write-down and conversion powers (Art. 21 SRMR) and of the bail-in tool (Art. 27 SRMR). To put it very simply, the write-down and conversion of capital instruments (WDCI), which must precede bail-in or may be applied together with bail-in, intend to restore a failing entity’s or failing group’s capital structure by writing down – possibly to zero – shares and/or liabilities, and/or converting liabilities into shares of the entity in question. The bail-in tool is broad and applies to all liabilities that are not explicitly excluded 6 (→ Art. 27(3) SRMR). This could open a loophole to entities to structure their liabilities in such a manner that the bail-in tool could not be applied to them, because they have relied on forms of funding that consist entirely of excluded, i.e. non-bail-inable liabilities. Similarly, investors may prefer excluded liabilities, which are not susceptible to be written down or converted into shares, since those liabilities reduce their exposure on the entity. However, such a strategy would negatively affect the effectiveness of the bailin tool, so that the avoidance of reliance on public financial support (one of the resolution objectives, see Art. 14(2)(c) SRMR) would become illusory. Thus, in order to preclude entities and investors from structuring the relevant entity’s or group’s capital in such a way that would primarily consist of excluded liabilities, Arts. 12-12k SRMR and 45 BRRD13 prescribe that entities and groups must meet at all times a minimum requirement for own funds and eligible liabilities which may be written down or converted into shares (see also Recital (83) SRMR).14 Art. 8(9)(o) SRMR prescribes that MREL be part of the resolution plan and that a 7 resolution plan contains a deadline to meet the MREL. The SRMR thus sees determining the MREL as a part of the resolution planning process, which explains the position of Arts. 12-12k SRMR in the SRMR’s chapter on resolution planning. In contrast, the BRRD links MREL to bail-in, which explains the position of Art. 45 BRRD in the BRRD’s section on bail-in.15 However, the MREL not only contains minimum requirements for liabilities (the subject of bail-in), but also for capital instruments (i.e. own funds), so as to safeguard a possible application of the write-down and conversion of capital instruments powers. As noted above, this must precede bail-in or may be applied together with bail-in. Positioning the provisions on the MREL prior to both the provisions concerning the bail-in tool, and the provisions concerning the write-down and conversion of capital instruments, therefore seem to be the more logical place. 11 SRB, MREL – SRB Policy under the Banking Package (2020), available at: . 12 The research for this Chapter was concluded on 29 February 2020, so that developments since then could only occasionally be taken into account. 13 See further Moss, Wessels and Haentjens, Banking and Insurance Insolvency (2 nd edn, 2017), at pp. 244-245; Schelo, Bank Recovery and Resolution (2nd edn, 2015), at pp. 125-131. 14 For a critical evaluation of the effectiveness of MREL, see Goodhart and Avgouleas, Centre for Economic Policy Research (2014), at pp. 29-30; Tröger, SAFE Working Paper No. 180 (2017); Tröger, SAFE Working Paper No. 179 (2017). 15 See World Bank Group, Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2016), at pp. 83-91.
Matthias Haentjens
593
Arts. 12–12k SRMR
Minimum Requirements
The matters dealt with, in the MREL provisions, can generally be categorized as follows: division of competence (Arts. 12, 12a(1) and 12f(2)-(3) SRMR), scope of application (Arts. 12b and 12f-12i SRMR), calculation and determination (Arts. 12a(2), 12c, 12d, 12e and 12g(2)-(3) SRMR), and breaches of the MREL (Art. 12j SRMR). The transitional period is set out in Art. 12k SRMR. Judicial protection within the SRM is also relevant in light of MREL related decisions and will be briefly touched upon, as well as the MREL Case (SRB Appeal Panel Case 8/18). 9 On an editorial note, the scope of this commentary only allows for a discussion on the main legal characteristics of the MREL. Banking practice over the next years will crystallize the precise (economic) nature of these provisions. Points for further in-depth legal research include the relationship with the requirements codified in CRD IV and CRR, the subordination requirements, eligibilities issued under third-country law, and future MREL decisions and cases before the SRB Appeal Panel or the Court of Justice. 8
B. Division of competence I. Competence of the SRB (Arts. 12(1)-(2), 12(4)-(7), 12a(1) and 12f(2)-(3) SRMR) Similar to Art. 8(1) SRMR, the division of tasks between the SRB and NRAs regarding the determination of the MREL is relatively straightforward. On the one hand, pursuant to Art. 12(1) SRMR, the SRB must determine the MREL for entities and groups referred to in Art. 7(2), 7(4)(b) and 7(5) SRMR. These provisions must be understood in conjunction with Art. 6(4)-(6) SSMR. See also the supra, → Art. 8(1). The institutions under its remit mainly concern cross-border groups and significant financial institutions supervised by the ECB in the euro area.16 This includes credit institutions as well as certain investment firms that are part of a banking group. On the other hand, Art. 12(3) SRMR provides that it is the relevant NRA that must determine the MREL for less significant institutions when they draft their resolution plans. 11 Specifically, Art. 12(1) SRMR states that the SRB must determine MREL for “entities and groups”: 10
(i)
as defined under Art. 7(2) SRMR (entities and groups under ECB supervision as well as all other cross-border groups that have been designated by the SRB); and (ii) as defined in Art. 7(4) and 7(5) SRMR when applicable (non-ECB supervised institutions). More specifically, “entities” means: (a) credit institutions established in a Member State; (b) parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR; and (c) investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR. On these terms, see supra, → Art. 2. 13 Furthermore, “under ECB supervision” means: (a) the entities and groups considered “significant” as defined in Art. 6(4) SSMR.; and (b) the entities and groups in relation to 12
16
594
See Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), at pp. 100-101.
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
which the ECB has decided to exercise directly all of the relevant powers in accordance with Art. 6(5)(b) SSMR. Notably, Art. 11(7) SRMR declares that all references to a “group” in this Chapter on Resolution Planning, i.e. Arts. 8-12 SRMR, also refer to a central body with affiliated institutions, while all references to “parent undertakings” or “institutions that are subject to consolidated supervision pursuant to Art. 111 Directive 2013/36/EU” also include the central body. ”Central body and institutions affiliated to it” is further defined in Art. 10 CRR. Pursuant to Art. 7(4)(b) SRMR, the SRB may, at any time, decide “on its own initiative, after consulting the national resolution authority concerned, or upon the request from the national resolution authority concerned, to exercise directly all of the relevant powers under this Regulation”. See also supra, → Art. 7. Pursuant to Art. 7(5) SRMR, participating Member States may request the SRB to exercise “all of the relevant powers and responsibilities conferred on it by this Regulation”. In such an instance, Member States must notify the Board and the Commission accordingly. See also supra, → Art. 7. NB: participating Member States are the euro area Member States and those non-euro area Member States who choose to participate in the SSM (see Recital (7) SRMR). Pursuant to Art. 12(1) SRMR, the entities and groups subjected to resolution supervision have to meet their MREL “at all times”, but the SRB may set an individual appropriate transition period to reach the MREL target if necessary.17 As with the MREL targets themselves, the transition periods are set for entities and groups specifically and thus take into account their individual characteristics.18 Pursuant to paragraph (1), the SRB’s determination must be made “after consulting competent authorities, including the ECB.” Pursuant to Art. 3(1)(2) SRMR, a “competent authority” is a “competent authority as defined in Art. 4(2)(i) EBAR 19”, which is the Regulation establishing the EBA (EBAR.20). Under Art. 4(2)(i) EBAR (as amended by Art. 95 SRMR), a competent authority can refer to, in short, a prudential supervisory authority including the ECB, a money laundering supervisory authority, an authority responsible for the relevant deposit guarantee scheme, or a resolution authority including the SRB. The determination of the MREL, per entity and per group, within the SRB takes place by Internal Resolution Teams (IRTs), who make a first proposal for the MREL as part of the resolution planning process. After consultation with the relevant supervisory authority, the SRB will take the decision whereby the MREL is determined in an extended executive session. The executive session is made up of the SRB Chair and four other fulltime members (Art. 43(1)(b) and 53(1) SRMR). The entity in question will be informed about the decision, but it will not be publicly disclosed.21 The SRB has set informative MREL targets for the largest and most complex institutions in 2016. In 2017, these targets have become binding. Most of the other institutions have received informative targets in 2017.22 The SRB has expressed that it prefers an SRB, Introduction to Resolution Planning, at p. 39. MREL, SRB Policy for 2017 and Next Steps, at p. 17. 19 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, OJ L 331. 20 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, OJ L 331. 21 SRB, Introduction to Resolution Planning, at p. 39. 22 MREL, SRB Policy for 2017 and Next Steps, at p. 9. 17
18
Matthias Haentjens
595
14
15
16
17
18
19
Arts. 12–12k SRMR
20
21
22
23 24
Minimum Requirements
iterative process for setting the MREL, rather than taking immediate binding decisions. This process has been thoroughly changed with the enactment of SRMR II, which provides a detailed transition mechanism. Art. 12(2) SRMR requires entities and entities that are part of a group referred to in Art. 12(1) SRMR to report information to NRAs in accordance with Art. 45i(1), (2) and (4) of the BRRD. The NRAs must then transmit the information to the SRB. The information defined in Art. 45i(1)BRRD contains, in short, the amounts of own funds and bail-inable liabilities as well as their composition, maturity profile and ranking in normal insolvency proceedings. Art. 45i(2) BRRD prescribes when all this must be reported (in short, at least annually or semi-annually). Art. 45i(4) BRRD gives an exception for entities to be wound up under normal insolvency proceedings. The information transmitted through NRAs to the SRB enables the SRB to determine the MREL for each institution individually. Pursuant to Art. 12(4) SRMR, the SRB’s competence to determine the MREL should be exercised in parallel with the development and maintenance of the resolution plans referred to in Art. 8 SRMR. This provision firstly ensures from a practical point of view that the SRB is competent for all elements regarding resolution planning under Chapter 1 of Title 1 of Part II SRMR once an institution falls within its sphere of competence. Secondly, this provision recognizes the determination of the MREL as a critical part of resolution planning. In practice, this parallel requirement for the SRB is relevant in determining institution-specific requirements,23 thereby taking both the broader resolution plans and the specific MREL into account at the same time and in relation to each other. Pursuant to Art. 12(5) SRMR, the decision of the SRB on the determination of the MREL must be addressed to NRAs, which in their turn must implement the SRB’s determination in accordance with Art. 29 SRMR vis-à-vis the relevant institution. Pursuant to Art. 12(7) SRMR, the SRB must also issue guidelines and address instructions to NRAs relating to specific entities or groups. This Article mimics Art. 8(3) SRMR. Furthermore, Art. 12(5) SRMR empowers NRAs, when required by the SRB, to “verify and ensure” that entities and groups maintain the determined MREL. This provision strengthens the enforcement of the requirement in paragraph(1) that the MREL must be “met at all times”. However, the NRAs’ competence in this regard is not exclusive. Art. 12a(1) SRMR provides that the SRB has also been granted the competence to ensure compliance “at all times” with the determined MREL. This is in line with Art. 7(4)(b) SRMR on the SRB’s exercise of powers proprio motu. Finally, Art. 12(6) SRMR requires the SRB to inform the ECB and the EBA of its decision on the determination of the MREL for each entity and group. Art. 12f(2) and (3) SRMR in part reiterate the SRB’s competence to apply (external) MREL (on this term, see infra, → paras. 30 et seq.) to resolution entities, but also provides specific rules for G-SIIs, top-tier banks (i.e. banks with assets above EUR 100 billion) and resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk in the event of failure. Specifically, Art. 12f(2) SRMR provides that the SRB must together with the relevant consolidating supervisor determine MREL for resolution entities at the consolidated group level. Also, pursuant to Art. 12f(3) SRMR the SRB must determine which resolution entities much comply with the specific (and stricter) requirements for G-SIIs, top-tier banks and resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk. 23
596
See Recital(33) SRMR.
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
The SRB’s determination of the MREL in a specific instance can be challenged under 25 Art. 85(3) SRMR. The appeal together with the grounds must be filed at the SRB Appeal Panel within six weeks following the notification of the decision. For the appeal to be admissible, the decision must be addressed to the appellant party or the decision must be of direct and individual concern to the appellant party. However, pursuant to Art. 12(5) SRMR discussed above, the SRB’s MREL decisions must always be addressed to the NRAs and not to entities themselves. This may be problematic, but has not (yet) been tested in court. One might speculate that the Plaumann test would be applicable if an entity would seek judicial review.24 In the only MREL case heard before the Appeal Panel, the appellant was the relevant NRA.25 In this case, the SRB’s MREL determination was challenged on grounds of violation of Art. 12 SRMR (old). The Appeal Panel held that “in the calibration of MREL requirements the Board enjoys a margin of technical discretion because the MREL calibration implies, by its very nature, a technical assessment of all specific factual circumstances and a balancing of interests”, and that “it is not the Appeal Panel’s role to second-guess the Board’s technical assessment”. Furthermore, in paragraph 31, it referred to extensive case-law on the ECB’s decisions regarding prudential supervision and recognized the rationale of effet utile that grants authorities a margin of technical discretion. All grounds raised were either found to be inadmissible by reason of ratione materiae or were rejected on their merits. It can be concluded that judicial protection in the context of the MREL is limited, as the SRB is afforded a wide margin of technical appreciation and the Appeal Panel reviews MREL determinations restrictively.
II. Competence of NRAs (Art. 12(3) and 12a(1) SRMR) The main competence of NRAs regarding the determination of MREL is established 26 in Art. 12(3) SRMR. This provision refers to Art. 9 SRMR, which gives NRAs residual competence in relation to the SRB’s competence to draw up and adopt resolution plans for entities and groups not within the SRB’s sphere of competence. When drafting these plans, NRAs must also determine the MREL. Strictly speaking, a provision such as Art. 12(4) SRMR would therefore not have been necessary, as it is covered by the residual competence of NRAs, which is repeated in Art. 7(3)(d) SRMR. Specifically, “national resolution authorities” is “defined” in Art. 3(1)(3) SRMR, 27 where it is stated that it “means an authority designated by a participating Member State in accordance with Art. 3 of Directive 2014/59/EU”. Art. 3 BRRD sets out the procedure for the designation of a resolution authority, and which authorities are eligible. “Participating Member States” is defined in Recital (7) SRMR as “the euro area Member States and those non-euro area Member States who choose to participate in the SSM”. The procedure in Art. 31 SRMR is applicable to NRAs’ decisions on the determina- 28 tion of the MREL. This provision allows the SRB to be informed of the exercise of NRAs’ competence and receive draft decisions and to assess the compliance of these decisions with the SRMR. Further information rights and investigative powers of the SRB are set out in Articles 34-37 SRMR. See infra, → Art. 31. 24 Case 25/62, Plaumann & Co. v Commission of the European Economic Community, ECLI:EU:C: 1963:17. 25 SRB Appeal Panel, Appellant v the Single Resolution Board, available at: . Appeal against an Appeal Panel’s decision or an SRB’s non-appealable decision is possible before the Court of Justice on the grounds of Art. 86 SRMR and Art. 263 TFEU.
Matthias Haentjens
597
Arts. 12–12k SRMR 29
Minimum Requirements
It is unclear whether the third sentence of Art. 12(5) SRMR, which empowers the NRAs, when required by the SRB, to ensure that entities and groups maintain the determined MREL, is also applicable by analogy where MREL is determined by the NRAs themselves on the basis of Art. 12(3) SRMR. A strict reading seems to suggest it is not applicable. However, Art. 12a(1) SRMR requires NRAs to ensure that entities referred to in paragraph(3) meet at all times the determined MREL, which seems to indicate the power of NRAs to ensure that entities and groups maintain the determined MREL can also be exercised without instruction by the SRB. As previously mentioned, also this competence is shared with the SRB.
C. Scope of application of the MREL I. External and (waived) internal MREL (Art. 12f-12i SRMR) 30
An important novelty in the 2019 amendments to the SRMR has been the introduction of “internal” and “external” MREL. This distinction must be understood in connection with the broader topic of the different strategies to resolve a banking group. As briefly mentioned above, in the commentary on Art. 10(3) SRMR, a banking group can either be resolved under a so-called Multiple Point of Entry (MPE) or a Single Point of Entry (SPE) approach.26 Under the MPE approach, the banking group is resolved entityby-entity, i.e. through an individual resolution of each institution within the group that is covered by BRRD and SRMR and satisfies the conditions for resolution. Art. 10(10) SRMR refers to this resolution strategy as “[resolution] through break up and resolution of the subsidiaries”. Under an SPE approach, the banking group is resolved as a whole through the resolution of one entity, usually the holding company of the group (“parent undertaking”). In this strategy, losses suffered by subsidiaries are upstreamed and borne by the parent undertaking, so that these losses can be absorbed when write-down or conversion takes place at this parent undertaking level.
The terms external MREL and internal MREL are not mentioned as such in the SRMR, but have been coined by NRAs27 and the SRB in their MREL policies. External MREL means the requirement to issue sufficient eligible liabilities to third parties. When bail-in is applied, it is these third parties that suffer losses. Where SPE is the chosen resolution strategy, (only) the parent undertaking qualifies as “resolution entity” and therefore needs to issue external MREL. Where MPE is the chosen resolution strategy, all institutions in the group that have been designated as “resolution entities” need to issue external MREL. Pursuant to Art. 3(1)(24a) SRMR, a “resolution entity” means, somewhat circularly, “a legal person established in a participating Member State, which, in accordance with Art. 8 SRMR, is identified by the Board as an entity in respect of which the resolution plan provides for resolution action”. 32 Internal MREL means the requirement for all institutions in the group that have not been designated as a resolution entity to issue sufficient eligible liabilities to a resolution entity higher up in the “resolution group”. When bail-in is applied in an SPE 31
26 For MPE and SPE under BRRD, see Moss, Wessels and Haentjens, EU Banking and Insurance Insolvency (2nd edn, 2017), at pp. 33-34. 27 Bank of England, Internal MREL – the Bank of England’s approach to setting an MREL within groups, and further issues (2017), at pp. 8-9, available at: .
598
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
resolution strategy, it is only the resolution entity in the resolution group that absorbs the losses. Internal MREL fits SPE best as a resolution strategy, because then losses are concentrated at a resolution entity higher up in the resolution group. Consequently, the choice for resolution strategy28 impacts the MREL determinations. Under Art. 3(1)(24b) SRMR, a “resolution group” means “(a) a resolution entity, together with its subsidiaries that are not: (i) resolution entities themselves; (ii) subsidiaries of other resolution entities; or (iii) entities established in a third country that are not included in the resolution group under the resolution plan, and their subsidiaries; or credit institutions that are permanently affiliated to a central body, and the central body itself when at least one of those credit institutions or the central body is a resolution entity, and their respective subsidiaries”. See also supra our commentary at Art. 8(10) SRMR. A “resolution group” as defined in Art. 3(1)(24b) SRMR must be distinguished from a “group” as defined in Art. 3(1)(23) SRMR, which means “a parent undertaking and its subsidiaries that are entities as referred to in Art. 2.” Consequently, a “group” as defined in Art. 3(1)(23) SRMR can consist of: (i) only one resolution entity and several non-resolution entities, which together may form a “resolution group” (as defined in Art. 3(1)(24b) SRMR); (ii) multiple resolution entities and no non-resolution entities; or (iii) several resolution entities, which each may form a “resolution group” with non-resolution entities. Whilst Art. 12a(1) SRMR concerns the general competence of the SRB and NRAs to ensure compliance of MREL and Art. 12a(2) SRMR the general calculation of MREL for all “entities and groups” (see also our commentary above), the legal basis for external MREL at the parent company level on a consolidated basis is Art. 12f(1) SRMR. Pursuant to Art. 12g(1)(3) SRMR, Union parent undertakings must also comply with MREL on a consolidated basis even if they themselves are not resolution entities, but subsidiaries of third-country entities. This is necessary to establish a point of entry within the EU. On the term “Union parent undertaking”, see the commentary at Art. 8(10) SRMR. The specific legal basis for the internal MREL is Art. 12g(1) SRMR, which provides that subsidiaries of a resolution entity that are not resolution entities themselves must comply with Art. 12d SRMR on an individual basis. How the MREL on an individual basis is to be determined will be discussed infra, → paras. 40 et seq. Pursuant to Art. 12h SRMR, the SRB may waive at its discretion the requirement to comply with internal MREL if both the subsidiary and the resolution entity are established in the same Member State and are part of the same resolution group; if the resolution entity complies with the requirement of consolidated external MREL; and if there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liability by the resolution entity to the subsidiary when that subsidiary would be likely to fail, and resolution action is taken against the resolution entity (Art. 12h(1) SRMR). Similarly, the SRB may waive the requirement to comply with internal MREL if the subsidiary and its parent undertaking comply with the same conditions as just set out with regard to the subsidiary and the (group) resolution entity (Art. 12h(2) SRMR). Pursuant to Art. 12i SRMR, the SRB may also waive fully or partially the requirement to comply with internal MREL for a central body or credit institutions that are permanently affiliated to a central body if the cumulative conditions set out in this Article are met. “Central body and institutions affiliated to it” is further de-
28 On further differences between SPE and MPE, see Guo, Norton Journal of Bankruptcy Law and Practice 27(2018), 481, at pp. 499-500.
Matthias Haentjens
599
33
34
35
36
Arts. 12–12k SRMR
Minimum Requirements
fined in Art. 10 CRR and concerns groups that are organised as Raiffeisen banks, i.e. in cooperative structures, rather than as parent–subsidiary corporate structures.
II. Exemption (Art. 12b SRMR) Pursuant to Art. 21b(1) SRMR, “mortgage credit institutions financed by covered bonds which are not allowed to receive deposits according to national law”, are exempted from MREL. Other than the term “covered bond”, these terms are not defined in the SRMR or BRRD, and are self-explanatory. Pursuant to Art. 3(1)(52) SRMR, a “covered bond” means an instrument as referred to in Art. 52(4) Directive 2009/65/EC (UCITS). There, the following instruments are described: “bonds [that] are issued by a credit institution which has its registered office in a Member State and is subject by law to special public supervision designed to protect bond-holders. In particular, sums deriving from the issue of those bonds shall be invested in accordance with the law in assets which, during the whole period of validity of the bonds, are capable of covering claims attaching to the bonds and which, in the event of failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.” 38 The exemption applies under the conditions that: (i) mortgage credit institutions are wound up through national insolvency procedures, or other types of procedures, implemented in accordance with Arts. 38, 40 or 42 BRRD. This means that these institutions must be wound up by means of a sale of business, bridge institution, or asset separation vehicle; and (ii) such national insolvency procedures, or other types of procedures, ensure that creditors of those institutions including the holders of covered bonds where relevant, will bear losses in a way that meets the resolution objectives. “Resolution objectives” are defined (by Art. 3(1)(8) SRMR) in Art. 14 SRMR and references are made infra, → Art. 14. 39 Art. 12b(2) SRMR clarifies that exempted mortgage credit institutions should also not be part of the overall consolidated MREL at the level of the resolution group. Technically, these institutions must not be included in the consolidation referred to in Art. 12f(1) SRMR. 37
D. Calculation and determination of the MREL The following paragraphs explain the calculation and determination of MREL in narrative analysis, rather than a detailed provision-by-provision commentary. Such a provision-by-provision commentary did not seem appropriate considering the highly technical nature of the lengthy Article 12c-12i SRMR. When having to apply these provisions, it is advised also to take into consideration the SRB’s MREL Policy Statement (as amended from time to time). Where confronted with the implementation of the TLAC standard for G-SIBs, attention should be given to the FSB’s Review of the Implementation of the TLAC.29 41 It is of further note that in Article 12b-12i SRMR, numerous references have been made to the prudential framework for credit institutions (CRR and CRD IV). However, the MREL requirement must, by and large, be considered as a separate requirement, which should be generally added on top of the CRD IV prudential requirements. 40
29 FSB, Review of the Technical Implementation of the Total Loss-Absorbing Capacity (TLAC) Standard (2019), available at: .
600
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
I. Calculation of the MREL (Art. 12a(2) SRMR) Pursuant to Art. 12a(2) SRMR, the MREL is expressed as percentages of two separate 42 ratios, both of which have to be assessed cumulatively, i.e. in parallel. This means that the percentage resulting from either the MREL-Total Risk Exposure Amount (TREA) ratio or the MREL-Leverage Ratio Exposure Measure (LREM) ratio has to be met, whichever MREL expression imposes the higher requirement. This means the lower requirement will always be met. Under Art. 12a(2)(a) SRMR, the MREL-TREA is expressed as the percentage result- 43 ing from the amount of own funds and eligible liabilities divided by the total risk exposure amount (TREA). The TREA is further defined by Art. 92(3) CRR and is a riskbased measurement as it takes a Risk-Weighted Assets approach. MRELTREA % =
own funds + eligible liabilities TREA
Under Art. 12a(2)(b) SRMR, the MREL-LREM is expressed as the percentage result- 44 ing from the amount of own funds and eligible liabilities divided by the leverage ratio exposure measure (LREM). The LREM is further defined by Arts. 429 and 429a CRR, and is a non-risk weighted measurement. MRELLREM % =
own funds + eligible liabilities LREM
Furthermore, Art. 12a(2) SRMR explicitly distinguishes three categories of entities for 45 the purpose of the MREL determination, viz. entities as referred to in Art. 12d(3), (4) and (6) SRMR. First, resolution entities are covered by Art. 12d(3) SRMR. These entities must issue external MREL (see commentary above). Secondly, Art. 12d(4) SRMR applies to a specific category of resolution entities, viz. resolution entities that are part of a resolution group with assets exceeding EUR 100 billion (top-tier banks). Albeit not explicitly mentioned, entities referred to in Art. 12d(5) SRMR in conjunction with Art. 12d(4) SRMR can also be subject to MREL determination, viz. resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk in the event of failure. Thirdly, entities that are not themselves resolution entities are covered by Art. 12d(6) SRMR. These entities must issue internal MREL (see Art. 12g SRMR and our commentary above). “Own funds” is defined in Art. 3(1)(40) SRMR with reference to Art. 4(1)(118) CRR. 46 The latter provision defines “own funds” as the sum of Tier 1 and Tier 2 capital. This comes down, in essence, to the sum of Common Equity Tier 1, Additional Tier 1 and Tier 2 capital. CRR Part Two contains precise descriptions of the characteristics that instruments have to qualify as these categories of regulatory capital. More specifically, pursuant to Art. 3(1)(45) SRMR, “Common Equity Tier 1 instruments” means capital instruments that meet the conditions laid down in Art. 28(1)-(4), Art. 29(1)-(5) or Art. 31(1) CRR; pursuant to Art. 3(1)(46) SRMR, “Additional Tier 1 instruments” means capital instruments that meet the conditions laid down in Art. 52(1) CRR; and pursuant to Art. 3(1)(47) SRMR, “Tier 2 instruments” means capital instruments or subordinated loans that meet the conditions laid down in Art. 63 CRR. Own funds are always subject to the write-down and conversion of capital instruments powers, without the possibility of any exclusion. Importantly, the term own funds
Matthias Haentjens
601
Arts. 12–12k SRMR
Minimum Requirements
in the prudential and resolution framework is stricter, and thus generally lower, than the accounting notion of total equity. 47 “Eligible liabilities” are defined in Art. 3(1)(49) and (49a) SRMR. Art. 3(1)(49a) SRMR now says that “eligible liabilities means bail-inable liabilities that fulfil, as applicable, the conditions of Art. 12c or point (a) of Art. 12g(2) of this Regulation, and Tier 2 instruments that meet the conditions of point (b) of Art. 72a(1) of Regulation (EU) No 575/2013.” Thus, “eligible liabilities” can be either a sub-set of “bail-inable liabilities” or Tier 2 instruments at the end of the amortization schedule. Art. 3(1)(49) SRMR defines “bailinable liabilities” as “the liabilities and capital instruments that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments of an entity referred to in Art. 2 and that are not excluded from the scope of the bail-in tool pursuant to Art. 27(3)”. These provisions seem contradictory where it concerns Tier 2 instruments as these seem to be excluded by the definition of Art. 3(1)(49) SRMR, but included by Art. 3(1)(49a) SRMR. However, as the definition of Art. 3(1)(49a) SRMR seems to refer to a specific category of Tier 2 instruments, viz. if they meet the conditions of Art. 72a(1) (b) CRR. This specific category must probably be understood to be included and counted as “eligible liabilities” as they near maturity and do not count as regulatory capital (anymore). Moreover, as we shall see below, “own funds” may be counted as “eligible liabilities” for MREL purposes under certain circumstances. 48 Under the definition of Art. 3(1)(49a) SRMR, “eligible liabilities” are bail-inable liabilities that fulfil, as applicable, the conditions of Art. 12c or point (a) of Art. 12g(2) SRMR so that “eligible liabilities” need not only be “bail-inable liabilities”, but also comply with either Art. 12c or point (a) of Art. 12g(2) SRMR. Art. 12c SRMR concerns (the determination of liabilities for the purpose of) external MREL, whilst Art. 12g(2) SRMR concerns (the determination of liabilities for the purpose of) internal MREL. We will now proceed to elaborate on those determinations.
II. Eligibility and subordination (Arts. 12c and 12g(2)-(3) SRMR) External MREL (Art. 12c SRMR) Art. 12c(1)-(3) SRMR sets out general conditions related to the eligibility of liabilities for external MREL. Specific rules are spelled out for “G-SIIs” and “top-tier banks” in Art. 12c(4) and (6)-(9) SRMR, and a specific rule for other resolution entities in Art. 12c(5) SRMR. 50 G-SII means a Global systemically important institution and is “defined” in Art. 131(1) and (2) CRD IV (via Art. 3(24c) SRMR and through Art. 4(1)(133) CRR). Under Art. 131(1) and (2) CRD IV, a G-SII is to be designated as such by the relevant authorities. These are the largest banks in the world. A “top-tier bank” is a bank as defined in Art. 12d(4) SRMR, viz. a resolution entity that is part of a resolution group with assets exceeding EUR 100 billion. These will be smaller, less interconnected or otherwise less systemically important than the G-SIIs. The specific rules for G-SIIs and top-tier banks must be read in conjunction with Art. 12d(4)-(5) SRMR, which results in complex drafting. Art. 12d SRMR derogates from Art. 12c SRMR, but is also specified by the same Art. 12c SRMR. 51 Art. 12c(1) SRMR is the most fundamental provision in the context of prescribing which liabilities qualify as MREL. The Article, however, again largely consists of a reference to the CRR, viz. Arts. 72a, 72b and 72c CRR. These CRR provisions, introduced in the same 2019 banking reform package as SRMR II, provide in a detailed way which lia49
602
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
bilities may qualify as “eligible liabilities”. Importantly, these articles (among other requirements) represent an alignment with the provisions on bail-in of BRRD that set out which liabilities are not eligible for bail-in. Naturally, these “non-bail-inable” liabilities, i.e. instruments that are excluded from bail-in under BRRD (and SRMR), cannot qualify as eligible liabilities for MREL purposes. Art. 12c(2) SRMR contains a specific rule on debt instruments with embedded derivatives. In short, (only) if the value of the relevant derivatives is fixed or cannot have a negative effect on the total amount of the relevant liability, can they count as “eligible liability” for MREL purposes. Moreover, and more generally, pursuant to Art. 12c(6) SRMR, derivatives may only qualify as eligible liabilities for MREL purposes if counterparty netting rights are fully recognized, i.e. when netting can be fully enforced when the derivative in question is closed-out (and the resolution authority did not decide to exclude these derivatives). Art. 12c(3) SRMR also concerns a specific type of liabilities, viz. liabilities issued by a subsidiary that are held by a shareholder that is not the resolution entity itself. Unlike the subsidiary, which must be part of the resolution group together with the resolution entity, that (other) shareholder must not part of the resolution group. These liabilities can also count as external MREL, because the result is that losses will be borne by the external shareholder to the benefit of the resolution group. For G-SIIs, top-tier banks and resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk in the event of failure, Art. 12c(4) SRMR provides that eligible liabilities as a matter of principle must be either “own funds”, subordinated eligible instruments or liabilities as defined in Art. 12c(3) SRMR just discussed. Importantly, senior debt instruments issued by the resolution entity itself therefore cannot qualify as eligible liabilities of these G-SIIs and top-tier banks for external MREL purposes. This rule must be understood in connection with the so-called NCWO principle. The NCWO principle entails that no creditor of an institution should incur greater losses in resolution than they would have incurred under normal insolvency proceedings, see Art. 15(1)(g) SRMR. 30 In the context of MREL, this principle has as important ramification that instruments should not be (equally) bailed-in when under the applicable insolvency law they do not rank equally (but higher) with other instruments that are bailedin. This means only the lowest ranking liabilities should be bailed-in, so that for G-SIIs and top-tier banks, only subordinated liabilities qualify as eligible liabilities for MREL purposes. However, there is some discretion for the SRB when determining the exact amounts, but the floor and ceiling of the amounts required are spelled out by way of formulae in this Art. 12c(4) SRMR. Also, under Art. 12c(7) and (8) SRMR, the SRB is given some discretion where it regards resolution entities of G-SIIs, top-tier banks, and resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk in the event of failure, where those resolution entities must hold a “combined buffer requirement” as defined in the CRR and where the MREL for these entities will be applied on a consolidated basis under Art. 12f SRMR. As formulated by the EU legislator in the preamble to SRMR II (13): “For specific top-tier banks, the Board should, subject to conditions to be assessed by the Board, limit the level of the minimum subordination requirement to a certain threshold, 30 On the NCWO principle in relation to the bail-in tool under Dutch, German and English insolvency laws, see L. Janssen, in: Haentjens and Wessels (eds), Research Handbook on Cross-border Bank Resolution (2019), at pp. 109-136. On the consequences of the NCWO principle for investors, see Janssen and Tegelaar, JIBLR31 (2016), 162, at pp. 165-166.
Matthias Haentjens
603
52
53
54
55
Arts. 12–12k SRMR
Minimum Requirements
taking also into account the possible risk of disproportionately impacting the business model of those institutions. That limitation should be without prejudice to the possibility of setting a subordination requirement above this limit through the requirement for subordination under Pillar 2, subject also to the conditions applying to Pillar 2, on the basis of alternative criteria, namely impediments to resolvability, or the feasibility and credibility of the resolution strategy, or the riskiness of the institution.” 56 Pursuant to Art. 12c(5) SRMR, other banks than G-SIIs and top-tier banks may also be required to issue a certain amount of subordinated liabilities to conform with MREL (and avoid a breach of the NCWO principle).31 The SRB has more discretion to determine the exact amount here than in the case of G-SIIs and top-tier banks as just described. In short, the SRB may on its own initiative after consulting the NRA or on a proposal by the NRA, decide to require that part of the eligible liabilities for purposes of external MREL consists of subordinated liabilities. Certain conditions must then be met as described in Art. 12c(5) SRMR, which all boil down to the risk referred to above, viz. that if no sufficient subordinated instruments would be required to be issued, instruments would then be (equally) bailed-in which under the applicable insolvency law would not rank equally (but higher) with other instruments that are bailed-in. The SRB’s discretion can be exercised up to 8 % of total liabilities and own funds (TLOF) or the amount resulting from the formulae in Art. 12c(7)(b) SRMR, whichever one is higher. 32 57 When making a decision as referred to in Art. 12c(5) and (7) SRMR, i.e. a decision regarding the amount of subordinated liabilities that the entity in question must issue, the SRB must take into account the elements referred to in Art. 12(9) SRMR (which are quite self-explanatory).
Internal MREL (Art. 12g(2)-(3) SRMR) 58
For the internal MREL following Art. 12g(1) SRMR, conditions for own funds and eligible liabilities are set out in Art. 12g(2)-(3) SRMR, which are largely self-explanatory. Pursuant to Art. 12g(2)(a) SRMR, eligible liabilities for purposes of internal MREL must be issued to and bought by the resolution entity in the same resolution group or another shareholder, be fully subordinated, and be subject to bail-in even though the issuing entity is no resolution entity and thus not subject to resolution action itself.33 Pursuant to Art. 12g(3) SRMR, internal MREL can also be satisfied by a guarantee provided by the resolution entity in the same resolution group as the entity subject to the internal MREL requirement. From Art. 12g(3) SRMR, it must be inferred that under this guarantee, the resolution entity would pay to the subsidiary (the entity subject to internal MREL) the amount that would otherwise be bailed-in at the resolution entity. This guarantee must for at least 50 % be secured through a collateral arrangement as defined in the Collateral Directive.
III. General calibration of the MREL(Art. 12d(2) SRMR) 59
The previous paragraphs discussed for each type of institution which liabilities may count as MREL, i.e. which liabilities may qualify as “eligible liabilities” for purposes of 31 On how the SRB intends to use the NCWO principle in practice, see SRB, Speech by Eline König as Board Chair to the European Parliament ECON Committee (2019), available at: . For examples of the NCWO assessment, see MREL Policy Statement (2021), at pp. 44-45 (Annex I on NCWO). 32 See MREL Policy Statement (2021), at pp. 19 et seq. 33 See MREL Policy Statement (2021), at pp. 24 et seq.
604
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
external and internal MREL calculations. In parallel with this determination, the SRB must further determine the concrete MREL percentage for each institution and resolution group. The legal basis for this determination is found in Art. 12d SRMR. Again, this provision is rather detailed and requires a complex calculation exercise. Art. 12d SRMR contains two paragraphs that provide the general objectives and principles of the MREL determination. These paragraphs (1) and (2) are partly overlapping and sometimes state the obvious. Pursuant to Art. 12d(1)(a) SRMR, for instance, the MREL determination must comply with the general resolution objectives. Strictly speaking, this is redundant, but the idea here seems to stress that the MREL determination should result in the availability of a sufficient amount of liabilities to be bailed-in or be subjected to the write down or conversion of capital instruments (WDCI) in resolution, so that losses are borne by shareholders and creditors, rather than by taxpayers. Art. 12d(1)(b) SRMR then specifies that both resolution entities and other resolution should have sufficient liabilities so that when they are bailed-in or being subjected to WDCI, they can: (a) absorb the losses; and (b) be recapitalized, so that after the resolution they can again comply with all relevant authorization requirements imposed by CRD IV (for credit institutions) and MiFID (for investment firms) and function properly as such for (not longer than34) one year. This is repeated in Art. 12d(2) SRMR. Both the loss absorption and recapitalization function of MREL each come with their own specific rules for the MREL determination. Specifically, pursuant to Art. 12d(2)(a) SRMR,35 the loss-absorption function must be reflected by a “loss-absorption amount” (LAA), whilst the recapitalisation function be reflected in a “recapitalisation amount” (RCA). The second subparagraph of Art. 12d(2) SRMR allows the SRB to fully limit the RCA if the resolution plan provides for a winding-up under normal insolvency proceedings. In other words, if (the resolution plans foresees that) the institution in question can be wound-up under national insolvency law, there is no need for recapitalization as the bank will cease to function as such. For this determination, financial stability and any risk of contagion must be taken into account. In contrast to the BRRD (which does grant NRAs the same discretion), it is not entirely clear whether the Regulation grants NRAs this discretion. The implicit parallel requirement for NRAs under Art. 12(3) SRMR, as discussed above, in conjunction with the second subparagraph of Art. 12d(2) SRMR and the BRRD could provide a legal basis. If the RCA is not fully limited, it can be subject to a market confidence charge (MCC) pursuant to the sixth subparagraph of Art. 12d(3) SRMR. The MCC should enable the entity to sustain sufficient market confidence for up to one year following resolution (see below and Recital (13) SRMR II). When determining the MREL-TREA or the MREL-LREM (see supra, → paras. 43 et seq.), the relevant resolution authority will have to set the LAA and the RCA for each institution. The sum of these amounts then constitutes the MREL-TREA or MREL-LREM, which must be expressed as a percentage in relation to the TREA (total risk exposure amount) or LREM (leverage ratio exposure measure).36 MRELTREA or LREM % =
LAA + RCA + MCC − full limitation TREA or LREM
Art. 12d(3) last sentence SRMR. Cf. Art. 12d(1)(b) SRMR. 36 See MREL Policy Statement (2021), at pp. 10 et seq. 34
35
Matthias Haentjens
605
60
61
62
63
Arts. 12–12k SRMR 64
Minimum Requirements
The chapeau of Art. 12d(2) SRMR expressly refers to the SRB’s competence to draw up resolution plans and to provide for resolution actions under Art. 8(6) SRMR. However, it can be inferred from Art. 12d(1)(b) SRMR and the following paragraphs that the calibration technique using the LAA and the RCA must also be applied by NRAs, when entities are under their remit following Art. 12(3) SRMR.
IV. Determination of the MREL (Art. 12d(3)-(6), 12d(9) and 12e SRMR) The core provisions on the MREL are Art. 12d(3)-(6) and 12e SRMR. Art. 12d(3) SRMR further specifies the LAA and RCA; where Art. 12d(3)(a) SRMR concerns MREL-TREA, Art. 12d(3)(b) SRMR concerns MREA-LREM. From points (i) and (ii) of Art. 12d(3)(a) SRMR, it follows that the calibration of the MREL-TREA consists of the sum of the LAA and the RCA respectively. Specifically, the LAA for MREL-TREA must consist of the sum of the minimum Supervisory Pillar 1 and Pillar 2 requirements under Art. 92(1)(c) CRR and Art. 104a CRD IV, taking into account the amount of losses to be absorbed by the resolution entity at the group level on a consolidated basis. The RCA for MREL-TREA must consist of the same elements, taking into account the amount needed for the resolution group at the group level to restore compliance with the capital ratio requirements following resolution. Pursuant to points (i) and (ii) of Art. 12d(3)(b) SRMR, also the calibration of the MREL-LREM consists of the sum of the LAA and the RCA. The LAA and the RCA for MREL-LREM refer to the leverage ratio requirements as defined in Art. 92(1)(d) CRR (rather than to the risk exposure amount as defined in Art. 92(1)(c) CRR and 104a CRD IV). 66 When setting the RCA, the SRB must use the most recent values of TREA and MREL of the institution in question, adjusted for possible resolution (as contemplated in the resolution plan) following Art. 12d(3)(4) SRMR. Pursuant to the fifth and sixth subparagraph of Art. 12d(3) SRMR, the SRB may increase the RCA for the MREL-TREA by an appropriate amount necessary to ensure that, following resolution, the entity is able to sustain sufficient market confidence for a period not exceeding one year. This is the market confidence buffer (MCC) and may equal the combined buffer requirement minus the countercyclical capital buffer as defined in Art. 128(6)(a) CRD. 37 The RCA can also be adjusted downwards if a lower amount is deemed sufficient to sustain market confidence and upwards in light of the continued provision of critical economic functions without extraordinary public financial support other than support from the Single Resolution Fund (SRF). 67 Art. 12d(4) SRMR concerns specific rules for top-tier entities. In short, point (a) of this provision specifies that the MREL-TREA must not be set below 13.5 %. Point (b) specifies that the MREL-LREM must not be set below 5 %. 68 Art. 12d(5) SRMR concerns specific rules for certain designated entities, i.e. resolution entities that are part of a resolution group with total assets below EUR 100 billion and thus are outside the scope of Art. 12d(4) SRMR, but are designated by the relevant NRA as reasonably likely to pose a systemic risk in the event of its failure. The SRB may subsequently apply the rules for top-tier entities to these designated resolution entities. When deciding on the designation just referred to, the NRA in question must take into account the circumstances listed in this Art. 12d(5). 65
37 See also Haentjens and de Gioia Carabellese, European Banking and Financial Law (2 nd edn, 2020), at pp. 237-238.
606
Matthias Haentjens
Arts. 12–12k SRMR
Minimum Requirements
In a lengthy provision, Art. 12d(6) SRMR details specific rules for the determination 69 of internal MREL. This provision mainly is a repetition of the calibration rules for external MREL as set out in Art. 12d(3) SRMR. These rules apply mutatis mutandis, i.e. for instance without taking into account consolidated amounts at the group level. Pursuant to Art. 12d(8) SRMR, an MREL determination decision of the SRB under 70 Art. 12d SRMR must contain the reasons for that decision, including a full assessment of the elements referred to in this Article and must be reviewed by the SRB without undue delay to reflect any changes in the requirement referred to in Art. 104a CRD, which concerns the LAA component of the MREL-TREA. Art. 12e SRMR contains specific rules for the MREL determination for G-SIIs. 71 Specifically, Art. 12e(1)(a) SRMR refers to Arts. 92a and 494 CRR, which requires, in short, the MREL-TREA to be at least 18 % and the MREL-LREM to be at least 6.75%. Material subsidiaries of non-EU-G-SIIs are covered by Art. 12e(2) SRMR and must also meet the MREL pursuant to Arts. 92b and 494 CRR, which requires that these entities meet 90 % of the requirement for own funds and eligible liabilities as laid down in Art. 92a CRR. In addition, Art. 12e(1)(b) and (2)(b) SRMR authorize the SRB to apply additional MREL requirements to G-SIIs. For these “add-ons” to be applied, Art. 12e(3) SRMR requires the SRB to determine that the MREL as defined in Art. 12e(1) SRMR would not suffice to fulfil the conditions defined in Art. 12d SRMR and that the add-ons are only applied to the extent that these conditions are fulfilled. Art. 12e(4) SRMR mirrors Art. 12d(9) SRMR and further requires that these add-on decisions are reasoned, include a full assessment of the requirements of Art. 12e(3) SRMR and are reviewed by the SRB without undue delay to reflect any changes in the requirement referred to in Art. 104a CRD, which concerns the LAA component of the MREL-TREA.
E. Breaches of the MREL (Art. 12j SRMR) In the event that either the external or internal MREL is breached, Art. 12j SRMR 72 provides five possible ways this must be addressed. These ways include measures to remedy the deficit and outright sanctions and at least one of them must be enforced. They concern: a) all measures that can be taken to address or remove impediments to resolvability under Art. 10 SRMR (see infra, → Art. 10); b) a prohibition to distribute dividends, interests, or payout remunerations as defined in Art. 10a SRMR (see infra, → Art. 10a); c) all supervisory measures listed in Art. 104 CRD IV; d) all ”early intervention measures” as defined in Art. 13 SRMR; and e) administrative penalties and other administrative measures in accordance with Arts. 110 and 111 BRRD.
F. Transitional Period (Art. 12k SRMR) Although SRMR II has entered into force on 28 December 2020,38 Art. 12k SRMR allows 73 for the creation of a transitional period for some MREL provisions. Pursuant to Art. 12k(1) SRMR, the SRB and NRAs have the discretion to determine a transitional period for the requirements of Arts. 12f and 12g SRMR, which must end at the latest on 1 January 2024. 38
For G-SIBs, several provisions even apply as of 27 June 2019: Art. 3(3) CRR2.
Matthias Haentjens
607
Art. 13 SRMR
Early intervention
The SRB may set a transitional period after this date where duly justified and appropriate, taking into account the criteria described in Art. 12k(1) and (7) SRMR. In the meantime, the SRB will determine intermediate target levels and must ensure a linear build-up towards the full application of the MREL requirements, set at 1 January 2022. 74 For top-tier banks (i.e. banks with assets above EUR 100 billion) and resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk in the event of failure, the ultimate deadline is 1 January 2022. For these banks, Art. 12k(3) SRMR allows the SRB to set a grace period for two years after bail-in or the WDCI has been applied to that bank. More generally, Art. 12k(5) SRMR allows a grace period for the requirements of Arts. 12f and 12g SRMR after resolution tools or the WDCI have been applied to a specific resolution entity or other entity. 75 Art. 12k(4) SRMR grants entities a transitional period of three years after they have been identified as a G-SII, top-tier bank or resolution entities of resolution groups with assets below EUR 100 billion but which are considered by the national resolution authority as being likely to pose a systemic risk in the event. 76 Art. 12k(6)SRMR requires the SRB and NRAs to communicate a planned MREL for each year during the transitional period to facilitate a gradual build-up. Art. 12k(8) SRMR allows the SRB to revise its transitional period and the planned MREL.
Art. 13 SRMR Early intervention 1. The ECB or national competent authorities shall inform the Board of any measure that they require an institution or group to take or that they take themselves pursuant to Article 16 of Regulation (EU) No 1024/2013, to Article 27(1) or Article 28 or 29 of Directive 2014/59/EU, or to Article 104 of Directive 2013/36/EU. The Board shall notify the Commission of any information which it has received pursuant to the first subparagraph. 2. From the date of receipt of the information referred to in paragraph 1, and without prejudice to the powers of the ECB and national competent authorities in accordance with other Union law, the Board may prepare for the resolution of the institution or group concerned. For the purposes of the first subparagraph, the ECB or the relevant national competent authority shall closely monitor, in cooperation with the Board, the conditions of the institution or the parent undertaking and their compliance with any early intervention measure that was required of them. The ECB or the relevant national competent authority shall provide the Board with all of the information necessary in order to update the resolution plan and prepare for the possible resolution of the institution and for valuation of the assets and liabilities of the institution in accordance with Article 20(1) to (15). 3. The Board shall have the power to require the institution, or the parent undertaking, to contact potential purchasers in order to prepare for the resolution of the institution, subject to the criteria specified in Article 39(2) of Directive 2014/59/EU and the requirements of professional secrecy laid down in Article 88 of this Regulation. The Board shall also have the power to require the relevant national resolution authority to draft a preliminary resolution scheme for the institution or group concerned.
608
Christos V. Gortsos
Art. 13 SRMR
Early intervention
The Board shall inform the ECB, the relevant national competent authorities and the relevant national resolution authorities of any action it takes pursuant to this paragraph. 4. If the ECB or the national competent authorities intend to impose on an institution or a group any additional measure under Article 16 of Regulation (EU) No 1024/2013, under Article 27(1), 28 or 29 of Directive 2014/59/EU or under Article 104 of Directive 2013/36/EU, before the entity or group has fully complied with the first measure notified to the Board, they shall inform the Board before imposing such additional measure on the institution or group concerned. 5. The ECB or the national competent authority, the Board and the relevant national resolution authorities shall ensure that the additional measure referred to in paragraph 4 and any action of the Board aimed at preparing for resolution under paragraph 2 are consistent. Bibliography Basel Committee on Banking Supervision, ‘Frameworks for early supervisory intervention’, Bank for International Settlements, (March 2018); Denise Bauer-Weiler, ‘Frühzeitiges aufsichtsrechtliches Eingreifen’ in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS Verlag, Cologne, 2018), 735; Claudio Borio, Bent Vale and Goetz von Peter, ‘Resolving the financial crisis: are we heeding the lessons from the Nordics?’, BIS Working Papers No 311 (2010); Michele Cossa and Raffaele D’Ambrosio, ‘Recovery plans, early intervention measures and structural measures’ in: Raffaele D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (Quaderni di Ricerca Giuridica, Banca d’Italia, Numero 88, April 2020), 287; Dominik Freudenthaler, ‘Early Intervention Measures (EIM)’ in: Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Financial Sector Advisory Center (FinSAC), April 2017), 62; Christos V. Gortsos, ‘The evolution of European (EU) Banking Law under the influence of (public) International Banking Law: A comprehensive overview’ (Charles University, Prague 2019); Christos V. Gortsos, ‘Theoretische Grundlagen der Einlagensicherung und internationale Financial Standards’ in: Nicolas Raschauer and Thomas Stern (eds), Einlagensicherung: Mit Fokus auf Einlagensicherungssysteme im deutschen Sprachraum (Linde Verlag, Vienna 2021); Barbara Guastaferro, ‘Sincere Cooperation and Respect for National Identities’ in: Robert Schütze and Takis Tridimas (eds), Oxford Principles European Union Law – Volume I: The European Union Legal Order (Oxford University Press, Oxford 2018), 350; Jack Guttentag and Richard J. Herring, ‘Restructuring Depository Institutions’, International Banking Center, Wharton School, University of Pennsylvania,(1987), mimeo; Matthias Haentjens, ‘Selected Commentary on the Bank Recovery and Resolution Directive’ in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 177; Michael Krimminger and Rosa María Lastra, ‘Early Intervention’ in: Rosa María Lastra (ed), Cross-Border Bank Insolvency (Oxford University Press, Oxford 2011), 57; Fernando Restoy, ‘Early intervention regimes: the balance between rules vs discretion’, FSI-IADI Meeting on early supervisory intervention, resolution and deposit insurance, Basel (12.9.2017); Jürgen Schwarze, Ulrich Becker, Armin Hatje and Johann Schoo (eds), EU-Kommentar, (4th edn, Nomos, Baden-Baden 2019); Jean-Philippe Svoronos, ‘Early intervention regimes for weak banks’, FSI Insights on policy implementation, No 6 (April 2018); Marco Ventoruzzo and Giulio Sandrelli, ‘Oh Tell me the Truth about Bail-in: Theory and Practice’, ECGI, Law Working Paper No 442/2019 (March 2019). A. Theoretical and public policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The system of EU rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The framework applied in the internal market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Early intervention within the system of the BRRD . . . . . . . . . . . . . . . . . . . . . . . . 2. Arts. 27-30 BRRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The EBA Guidelines on triggers for use of early intervention measures . . 4. On Art. 104 CRD IV and its consistency with Art. 27 BRRD . . . . . . . . . . . . . II. The framework applied in the Banking Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. In particular: the exercise by the ECB of its power to apply early intervention measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 5 5 7 12 16 20 20
C. The interaction between the Board and the supervisory authorities under Art. 13 SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christos V. Gortsos
22 25
609
Art. 13 SRMR
Early intervention
I. Obligations imposed on the ECB and the relevant NCA and the role of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Application of early intervention or supervisory measures for the first time (Art. 13(1)-(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Adoption of additional early intervention of supervisory measures (Art. 13(4)-(5) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The powers of the Board (Art. 13(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25 25 31 33
A. Theoretical and public policy considerations The early intervention serves to prevent an identified weakness or deficiency of a bank from developing into a threat to financial stability. According to the literature, the nature and size of problems in the banking system should be recognized early and intervention should follow quickly.1 The purpose of such an early recognition and intervention is to allow banks’ asset quality less time to deteriorate and to avoid a hidden deterioration in their financial conditions, which could magnify the costs of an eventual resolution as highlighted, in particular, by the US savings and loan crisis during the 1980s and by Japan’s experience during the 1990s. Early intervention measures should be applied by supervisory authorities to banks that demonstrate deterioration in their financial position but, and as a last resort, before they become insolvent, which would require the taking of a resolution action. 2 A necessary condition for effective early intervention is, nevertheless, the existence of supportive institutions and appropriate instruments. In particular, it is facilitated by a special resolution regime for banks (and, potentially, also for all systemically important financial institutions), which empowers supervisory authorities to intervene promptly before bankruptcy occurs, triggering a costly and lengthy liquidation process. “In the absence of such a regime, early intervention will require swift policy decisions, typically backed by legislative action, which would avoid the temptation to resort to regulatory forbearance as a temporary expedient until the necessary policies and supporting legislation can be passed. Forbearance can produce a serious long-term collateral damage in terms of incentives and the credibility of the framework”.2 3 According to Section I of the “Core Principles for Effective Banking Supervision” of the Basel Committee on Banking Supervision (Basel Committee) of September 2012, 3 1
1 With regard to this potential source of supervisory failure, Guttentag and Herring, Wharton School (1987), at pp. 48-50, correctly distinguish between the “recognition lag” (i.e., the lag between the time the bank has become unviable and the authorities recognise this), the “reaction lag” (namely, the period from the time the authorities recognise the non-viability of the bank until they decide to terminate it) and the “implementation lag” (i.e., the period between the time the authorities initiate the procedure on closing down an unviable bank and the moment when the bank actually terminates its operations). 2 See on this Borio, Vale and von Peter, BIS Working Papers No 311 (2010), at pp. 3-4, with extensive further references. On the theoretical basis for early intervention see also Krimminger and Lastra, in: Lastra (ed), Cross-Border Bank Insolvency (2011), 57, at pp. 58-61 and Svoronos, FSI Insights on policy implementation, No 6 (2018), at pp. 2-16, who also undertakes a comparative analysis of early intervention (prompt corrective actions) in five national jurisdictions and in the EU (pp. 17-33). On recent international policy proposals relating to this aspect, see BCBS, Bank for International Settlements (2018), discussing the challenges of early supervisory intervention (pp. 8-11) the frameworks and processes for such intervention (pp. 11-20), as well as supervisory capacity, ability development and willingness to act (pp. 21-26). 3 This Report was first issued in 1997 and then revised in October 2006 and yet again in September 2012; it is available at: . On the Basel Committee and its work, see by means of indication Gortsos, The evolution of European (EU) Banking Law under the influence of (public) International Banking Law: A comprehensive overview (2019), at pp. 105-124, with extensive further references.
610
Christos V. Gortsos
Art. 13 SRMR
Early intervention
in order to strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks, a greater focus should be given on effective riskbased supervision and the need for early intervention and timely supervisory actions. By setting out the powers that banking supervisors should have in order to address safety and soundness concerns, the Core Principles provide that those supervisors should use these powers once weaknesses or deficiencies are identified. Adopting a forward-looking approach to supervision through early intervention can prevent an identified weakness from developing into a threat to safety and soundness. This applies, in particular, to highly complex and bank-specific issues (such as liquidity risk) where effective supervisory actions must be tailored to a bank’s individual circumstances.4 Early intervention is, inter alia, also of interest to deposit guarantee. In accordance 4 with the “ Core Principles for Effective Deposit Insurance Systems” of the International Association of Deposit Insurers (IADI) of 1 November 2014,5 if the implementation of corrective measures is deficient, early intervention and an effective resolution regime can help lower the costs associated with bank failures, while the effectiveness of the resolution regime strengthens the financial system’s architecture and directly contributes to financial stability.6 According to the Chairman of the Financial Stability Institute (FSI) at the Bank for International Settlements (BIS), while for the supervisory authorities early intervention might be about the ability to change management behaviour, through moral suasion or more formal supervisory actions, while a bank’s financial condition remains sound, which is broadly consistent with the goals of “risk-based supervision”, for deposit insurers and resolution authorities, the focus might be narrower on taking intervention measures to try and avert a bank failure when a bank shows signs of distress; or in their absence, closing a bank when capital is still positive in the hope of minimising losses to the deposit insurer or the taxpayers.7
B. The system of EU rules I. The framework applied in the internal market 1. Early intervention within the system of the BRRD Neither the national resolution authorities (NRAs) nor the (Single Resolution) Board 5 has any powers to apply early intervention measures; this is, as already noted, a crisis prevention measure which falls under the competence of supervisory authorities. Under the EU financial law framework applying to the entire internal market, the substantive rules governing early intervention in relation to institutions (i.e., credit institutions and investment firms) and groups are laid down in the BRRD, which sets out a comprehensive set of substantive solvency crisis management rules. Within the “three-pillar system” of the BRRD, “early intervention” constitutes the second pillar (Arts. 27-30 BRRD), following the “preparatory measures”, including recovery planning, resolution planning and intra-group financial support agreements (Arts. 4-26 BRRD), which are included in the first pillar, and followed by the third pillar, which covers “resolution tools and powers” (the most extenCore Principles for Effective Banking Supervision, paras. 12-13. Available at: . 6 See IADI Core Principles, pp. 12-14 (under 2 and 3). On these IADI principles, see Gortsos, in: Raschauer and Stern (eds), Einlagensicherung: Mit Fokus auf Einlagensicherungssysteme im deutschen Sprachraum (2021). 7 See Restoy, FSI-IADI Meeting on early supervisory intervention, resolution and deposit insurance (2017), at pp. 1-2. 4
5
Christos V. Gortsos
611
Art. 13 SRMR
Early intervention
sively regulated aspect, Arts. 31-86 BRRD). Within this sequence of phases, preparation measures are taken first (either by NRAs or by national competent authorities (NCAs) in the case of recovery planning); then, the latter are granted powers to intervene early before an institution’s financial position has deteriorated to such an extent (the “failing of likely to fail” condition) that resolution action would be required.8 6 The above is classified as either “crisis prevention” or “crisis management” measures. 9 The application of an early intervention measure under Art. 27 BRRD and the appointment of a temporary administrator under Art. 29,10 are (evidently) included in the first category.
2. Arts. 27-30 BRRD 7
The early intervention measures are enumerated in a non-exhaustive way (“at least”) in Art. 27(1)(a)-(h) BRRD.11 NCAs are given the power to apply them, without prejudice to the measures referred to in Art. 104 CRD IV where applicable,12 if an institution meets any of the following two conditions: First, it infringes the prudential requirements of the CRR, the CRD IV, Title II MiFID II or Arts. 3-7, 14-17 and/or 24-26 MiFIR; or Second, it is likely, in the near future, to infringe these requirements due, inter alia, to a rapidly deteriorating financial (including liquidity) condition, increasing level of leverage, non-performing loans or concentration of exposures, as assessed on the basis of a set of triggers, including a minimum trigger based on a 1.5 % buffer above its own funds’ requirement.13 See the analysis infra, → Art. 18. Art. 2(1)(101) and (102) BRRD, respectively. 10 See infra, → para. 11. 11 In accordance with Ventoruzzo and Sandrelli, ECGI, Law Working Paper No 442/2019 (2019), at p. 20, they include a “panoply of tools”, namely: first, require the institution’s management body to implement one or more of the arrangements or measures set out in the recovery plan or, in accordance with Art. 5(2) BRRD, to update such a recovery plan when the circumstances that led to the early intervention are different from the assumptions set out in the initial recovery plan and implement one or more of the arrangements or measures set out in the updated plan within a specific timeframe and in order to ensure that the conditions referred to in the introductory phrase no longer apply; second, require its management body to examine the situation, identify measures to overcome any problems identified, as well as and draw up an action programme to overcome them and an implementation timetable; third, require its management body to convene, or if this body fails to comply with that requirement convene directly, a meeting of shareholders, and in both cases set the agenda and require certain decisions to be considered for adoption by the shareholders; fourth, require one or more members of its management body or senior management to be removed or replaced if those persons are found unfit to perform their duties pursuant to Arts. 13 CRD IV or 9 MiFID II; fifth, require its management body to draw up a plan for negotiation on restructuring of debt with some or all of its creditors according to the recovery plan; sixth, require changes to its business strategy, as well as to its legal or operational structures, and finally, acquire, including through on-site inspections and provide to the NRA, all information necessary in order to update the resolution plan and prepare for its possible resolution and for valuation of its assets and liabilities in accordance with Art. 36. 12 See infra, → paras. 16-19. 13 According to Ventoruzzo and Sandrelli, ECGI, Law Working Paper No 442/2019 (2019), at p. 19, this minimum trigger is essentially relevant only for smaller credit institutions, while the adoption of early intervention measures relies significantly on the results of the SREP or on material events. On Art. 27 BRRD, see also Freudenthaler, in: Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017), 62; Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd ed., 2017), 177, at pp. 215-216, Svoronos, FSI Insights on policy implementation, No 6 (2018), at pp. 31-33 and Cossa and D’Ambrosio, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020), 287, at pp. 293-294. In accordance with Art. 19(1) BRRD, the determination that these conditions are met also constitutes the basis for the establishment of intra-group financial support agreements, provided that the conditions set out in Arts. 19-26 BRRD are met as well. 8
9
612
Christos V. Gortsos
Art. 13 SRMR
Early intervention
For each measure applied, NCAs must set an appropriate deadline for completion, enabling them to evaluate their effectiveness.14 Upon determining that the above conditions (as laid down in Art. 27(1) BRRD) are met in relation to an institution, the relevant NCA must notify the NRA, without delay. On the basis of this phrasing, the NRA must be informed even before early intervention measures are applied, provided that the conditions for early intervention are met. 15 In such a case, the NRA has the power to require the institution to contact potential purchasers in order to prepare for its resolution, subject to the conditions laid down in Art. 39(2) BRRD (on the marketing requirements in case of application of the sale of a business tool) and the confidentiality provisions laid down in Art. 84 BRRD:16 “triggering ‘early intervention’ thus is the moment resolution may already be prepared”.17 Arts. 28-30 BRRD further develop on the provisions of Art. 27 BRRD. In particular: First, if measures have been taken in accordance with Art. 27 BRRD and are not sufficient to reverse a “significant” deterioration in the financial situation of an institution or there are “serious” infringements of law, regulations or its statutes, or “serious” administrative irregularities, NCAs may require the removal of its senior management or management body, either in its entirety or with regard to individuals (Art. 28 BRRD);18 Second, if NCAs deem such a replacement to be insufficient to remedy the situation, they also have the power to appoint a temporary administrator to the institution, in order to exert pressure in view of taking measures appropriate to restore its financial soundness (Art. 29 BRRD); Third, specific rules apply to the coordination of early intervention measures and the appointment of temporary administrators in relation to groups (Art. 30 BRRD). 19
8 9
10
11
3. The EBA Guidelines on triggers for use of early intervention measures On the basis of Art. 27(4) BRRD, the EBA adopted on 8 May 2015 its Guidelines “on 12 triggers for use of early intervention measures (…)” (EBA/GL/2015/03). 20 The purpose of these Guidelines is the promotion of the consistent application of the triggers for the decision on the application of early intervention measures and, for the sake of consistency in relation to their application, the clarification of the requirements that NCAs should follow when setting thresholds related to financial and risk indicators to be monitored Art. 27(3) BRRD. See also Freudenthaler in: Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017), 62, at p. 66, in finem. 16 Arts. 27(2) and 81(2) BRRD; this is equivalent (albeit with significant differences) to Art. 13(1) SRMR (see infra, → paras. 25-26). 17 Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2 nd edn, 2017), 177, at pp. 217-218 correctly identifies that the conditions that must be met for having resort to Art. 28 BRRD are more stringent (“significant” deterioration, “serious” infringements or irregularities) than those for taking measures under Art. 27(1) BRRD. 18 On Arts. 28-39 BRRD, see also Freudenthaler, in: Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017), 62, at p. 66 and, on Arts. 29-30 Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), 177, at pp. 217-218. 19 On Arts. 28-30 BRRD, see Freudenthaler, in: Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017), 62, at p. 66 and Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), 177, at pp. 216-218. 20 Available at: . Draft regulatory technical standards, which the EBA should develop, in accordance with Art. 27(5) BRRD, to specify a minimum set of triggers for the use of the measures, taking into account experience acquired in the application of these Guidelines, have not (yet) been adopted (see at: ). 14
15
Christos V. Gortsos
613
Art. 13 SRMR
Early intervention
under the supervisory review and evaluation process (SREP), and the procedures to follow in the event of breaches of these thresholds.21 13 The triggers identified in the Guidelines are three: First, the Overall SREP Score and pre-defined combinations of that Score and scores for individual SREP elements (as this Score and these elements are defined in the EBA Guidelines of 19 July 2018 (EBA/GL/2018/03), adopted on the basis of Art. 107(3) CRD IV, “on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP)”;22 Second, material changes or anomalies identified in monitoring key financial and non-financial indicators under the SREP, revealing that the conditions for early intervention are met; Third, significant events indicating that the conditions for early intervention are met.23 14 Their breach does not result in an automatic application of early intervention measures; it prompts NCAs to further investigate the situation if the cause of the breach is not yet known, and taking into account the urgency of the situation and the breach’s magnitude within the overall situation of the institution, to make a decision on whether or not to apply early intervention measures.24 15 When, upon the breach of a trigger, NCAs decide to apply early intervention measures, they should choose the one (or ones) which are most appropriate and proportionate to the particular circumstances, also taking into account recovery actions or measures specified in the institution’s recovery plan. In the specific case where an NCA assigns to an institution an Overall SREP Score of “4”, it should (also) consider gathering information for the valuation of its assets and liabilities in accordance with Art. 27(1)(h) BRRD.25
4. On Art. 104 CRD IV and its consistency with Art. 27 BRRD The above-mentioned early intervention measures under Art. 27 BRRD complement the supervisory powers provided for in Art. 104 CRD IV, in accordance with which NCAs can require an institution or a group to take specific measures or may take measures themselves.26 These two sets of rules are characterised by consistency. Nevertheless, the triggers for the application of early intervention and supervisory measures are partially different, even though Art. 27 BRRD was aligned with the wording in Art. 102(1) CRD IV (which was adopted first and forms the basis for the supervisory powers under Art. 104 CRD IV). 17 In particular, while the conditions for the activation by NCAs of early intervention measures is that an institution infringes the prudential requirements of the CRR, the CRD IV, Title II MiFID II or any of Arts. 3-7, 14-17 and 24-26 MiFIR or is likely in the 16
21 EBA Guidelines (2015), paras. 1-2. On the other hand, the Guidelines do not address the interaction between NCAs and NRAs in relation to breaches of the triggers, which is governed, as just noted, by Art. 27(2) BRRD (EBA Guidelines (2015), para. 3). 22 These Guidelines were presented in the analysis of Art. 16 SSMR.They revised the EBA Guidelines of 19 December 2014, which were applicable when the Guidelines discussed here were adopted. 23 EBA Guidelines (2015), para. 7, with further analysis in paras. 12-16, 17-22 and 23-28, respectively. Further triggers may be provided in the national legislation transposing the BRRD; see on this Freudenthaler, in: Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017), 62, at pp. 64-65, who distinguishes between qualitative and quantitative triggers. 24 EBA Guidelines (2015), para. 8. 25 EBA Guidelines (2015), paras. 10-11. On these Guidelines, see further Bauer-Weiler, in: Binder, Glos and Riepe (eds), Handbuch Bankenaufsichtsrecht (2018), 735, at pp. 765-766. 26 On this distinction, see also the analysis supra, → SSMR Art. 16.
614
Christos V. Gortsos
Art. 13 SRMR
Early intervention
near future to infringe these requirements due to specific factors, NCAs may, under Art. 102(1) CRD IV require an institution to take the necessary measures at an early stage to address relevant problems if it does not meet the prudential requirements of the CRD IV or the CRR, or they have evidence that it is likely to breach them within the following 12 months. It is noted in this respect that the Commission’s Report on the application of the 18 BRRD and the SRMR, adopted on the basis of Art. 129 BRRD and Art. 94 SRMR, remarks, inter alia (Section III, under A: Early intervention), that there is a need to further analyse the interaction between, and potential overlap of, early intervention powers conferred to NCAs on the basis of national laws implementing the BRRD and the supervisory powers which they can exercise based on the CRD IV (and the SSMR).27 The application of early intervention measures under Art. 27 BRRD does not pre- 19 clude the application of supervisory ones under Art. 104 CRD IV and, if viewed in combination, both these Articles vest NCAs with a wide range of powers. Nevertheless, in accordance with the principle of proportionality, once a measure is imposed, subsequent measures could complement, but not duplicate it. An overlapping problem arises to the extent that certain measures could be adopted either as supervisory measures or as early intervention ones.
II. The framework applied in the Banking Union 1. General overview Within the Banking Union, early intervention is governed by the SRMR. The “three- 20 pillar system” of the BRRD is embedded (albeit with some differentiation) in this legislative act as well: “early intervention” constitutes the second pillar (Art. 13 SRMR), following “resolution planning” (only) as the first one (Arts. 8-12 SRMR) and followed by the third pillar, which covers “resolution” (Arts. 14-29 SRMR). Art. 13 SRMR does not contain any substantive rules; it regulates the role of the Board and its interaction with the ECB, the NCAs and the NRAs when the ECB or NCAs apply early intervention measures.28 It is thus an extended equivalent of Art. 27(2) BRRD.29 In the (just) above-mentioned report on the application of the BRRD and the SRMR, adopted on the basis of Art. 129 BRRD and Art. 94 SRMR, the Commission also remarks that there is a need to reflect on replicating the provisions on early intervention powers contained in the BRRD also into the SRMR, to avoid recourse to diverging national transposition measures. The power of the ECB to carry out supervisory tasks in relation to (recovery plans 21 and) early intervention, if a credit institution or group, in relation to which it is the consolidating supervisor, does not meet or is likely to breach the applicable micro-prudential supervision requirements, is laid down in Art. 4(i) SSMR. In addition, and pursuant to Art. 16 SSMR on its supervisory powers, the ECB can also require an institution or a group to take measures; as already mentioned in its analysis, the wording of this Article is very close to that of Art. 104 CRD IV.30
27 On this point, see Cossa and D’Ambrosio, in: D’Ambrosio (ed), Law and Practice of the Banking Union and of its governing Institutions (Cases and Materials) (2020), 287, at pp. 297-299. 28 See infra, → paras. 25-33. Ratione personae these rules apply, by virtue of Art. 7(2) SRMR, to entities and groups for which are considered as significant in accordance with Art. 6 SSMR, as well as to other cross-border groups. 29 See supra, → paras. 7-11. 30 See the analysis supra, → SSMR Art. 16.
Christos V. Gortsos
615
Art. 13 SRMR
Early intervention
2. In particular: the exercise by the ECB of its power to apply early intervention measures As already mentioned, the overlapping between supervisory measures and early intervention measures is of particular importance, since certain measures could be adopted either as supervisory or as early intervention ones, while, in addition, the conditions triggering their use are similar. Accordingly, in the majority of the cases, whenever the conditions for adopting supervisory measures are fulfilled, those for early intervention are met as well. By application of the principle of proportionality, it is expected that the ECB or an NCA would, in principle, be tempted to take an action as a supervisory measure, as the less intrusive.31 23 The ECB has applied early intervention measures in two cases. In particular, on 6 September 2017 it decided the imposition of such measures to Dexia S.A. and Dexia Crédit Local S.A.: First, it required Dexia S.A. to submit by 30 September 2017 a plan ensuring that the conversion into instruments fulfilling the criteria of CET1 pursuant to the CRR all its preferred shares (then grandfathered as CET1 instruments), would be made effective as of 1 January 2018; and Second, it required Dexia Crédit Local S.A. to submit by the same date a plan ensuring that it would, as from 1 January 2018 as well, comply, in accordance with Art. 11(2) CRR, 32 with the overall capital requirement based on the consolidated situation of Dexia S.A.33 24 Then, on 2 January 2019, it decided to appoint temporary administrators and a threemember surveillance committee to take charge of the Italian credit institution Banca Carige (Cassa di Risparmio di Genova e Imperia) and replaced its Board of Directors after the resignation of the majority of this credit institution’s board members on the same day. This early intervention measure aimed at ensuring continuity and pursuing the objectives of a strategic plan. The appointment of the temporary administration resulted in the removal of Carige’s management and control bodies.34 22
31 See e.g., the response of Danièle Nouy, (former) Chairperson of the ECB Supervisory Board, to the letter of two Members of the European Parliament (Philippe Lamberts and Ernest Urtasun) of 24 January 2018 (available at: ). 32 This Article provides that institutions controlled by a parent financial holding company or a parent mixed financial holding company in a Member State must comply, to the extent and in the manner prescribed in Art. 18 CRR (on the methods for prudential consolidation), with the rules governing own funds (Arts. 25-91 CRR), capital requirements (Arts. 92-386 CRR) and large exposures (Arts. 387-403 CRR) on the basis of its consolidated situation. 33 See at: . 34 The relevant ECB Press Release is available at: .
616
Christos V. Gortsos
Art. 13 SRMR
Early intervention
C. The interaction between the Board and the supervisory authorities under Art. 13 SRMR I. Obligations imposed on the ECB and the relevant NCA and the role of the Board 1. Application of early intervention or supervisory measures for the first time (Art. 13(1)-(2) SRMR) In accordance with the considerations in Recital (52), sent. 2 and 3 SRMR, the Board should be empowered to intervene at an early stage where the financial situation or the solvency of an entity is deteriorating and that the information it receives from the ECB or the relevant NRA at that stage is instrumental in making a determination on the action it might take in order to prepare for the resolution of that entity. Recital (53), sent. 1 SRMR adds that, in order to ensure rapid resolution action when it becomes necessary, the Board should closely monitor, in cooperation with the ECB or the relevant NCA, the situation of the entities concerned and compliance with any early intervention measure taken in their respect.35 On the basis of these considerations, Art. 13 SRMR provides that, when the ECB or the relevant NCA require an institution or a group to take (or take themselves) any measure in accordance with the above-mentioned Art. 16 SRMR, Arts. 27(1)-29 BRRD or Art. 104 CRD IV, they must inform the Board, which in turn should notify the Commission of the information received.36 The previous adoption of a measure according to these Articles is not a condition for taking a resolution action.37 In accordance with the 2018 ECB “SSM Supervisory Manual – European banking supervision: functioning of the SSM and supervisory approach” (p. 97), the JST must closely cooperate with the Internal resolution Team (IRT) even from the point of time when a supervised entity’s financial condition deteriorates to such an extent that early intervention would have to be considered.38 From the date of receipt of this information, and without prejudice to the powers of the ECB and the NCAs under other EU legal acts, the Board has the discretionary power (may) to prepare for the resolution of the institution or group concerned.39 In this respect, the ECB or the relevant NCA are subject to two requirements: 40
35 The second sentence of that Recital remarks that, in determining whether a private sector action could prevent within a reasonable timeframe the failure of an entity, the appropriate authority should take into account the effectiveness of early intervention measures undertaken within a timeframe set by the competent authority. It is noted that, in accordance with Art. 18(1)(1)(b) SRMR (as in force after its amendment by point (8) SRMR II), the second condition for resolution consists in that, having regard to timing and other relevant circumstances, there is no reasonable prospect that any alternative private sector measures or supervisory action, including, inter alia, early intervention, would prevent the failure of the entity within a reasonable timeframe. 36 Art. 13(1)(1) and (2) SRMR. 37 Art. 18(3) SRMR. 38 SSM Supervisory Manual (2018), p. 97 (this manual, of March 2018, is available at: ). Of relevance in this respect is also Art. 7 (para. 7.1.2) of the MoU between the Board and the ECB of 22 December 2015 “in respect of cooperation and information exchange” (available at: ). 39 Art. 13(2)(1) SRMR. 40 Art. 13(2)(2) and (3) SRMR.
Christos V. Gortsos
617
25
26
27
28
Art. 13 SRMR
Early intervention
First, for the above-mentioned purpose, they must closely monitor, in cooperation with the Board, the conditions of the institution or the parent undertaking and their compliance with any early intervention measure required of them; and Second, they must provide the Board with all information necessary to update the resolution plan and prepare for the potential resolution of the institution, as well as for the valuation of its assets and liabilities in accordance with Art. 20(1)-(15) SRMR.41 29 The Board does not, thus, have the power to intervene against the imposition of early intervention measures; it is the recipient of the relevant information provided by the ECB or the relevant NCA on the adoption of such measures. The notification of this information is, nevertheless, of significant importance as a warning signal, since it may trigger the preparation for resolution, serving as a link between supervisory and resolution actions. The Board must also cooperate with the ECB or the relevant NCA for the sake of closely monitoring the conditions of the institution concerned and its compliance with the early intervention measures. 30 It is noted in this respect that, on the basis of the obligation to cooperate based on Art. 4(3) TEU laying down the “principle of sincere cooperation”42 and the regime of information exchange within the SRM, in the exercise of their respective responsibilities under the SRMR, the Board, the Council, the Commission, the ECB, the NRAs and the NCAs must at each stage (resolution planning, early intervention and resolution) closely cooperate and provide each other with all information necessary for the performance of their tasks.43
2. Adoption of additional early intervention of supervisory measures (Art. 13(4)-(5) SRMR) 31
The ECB or the relevant NCA may decide to impose on an institution or a group, which has not had fully complied with the first measure notified to the Board in accordance with Art. 13(1) SRMR,44 additional measures under the above-mentioned provisions of EU banking law. In such a case: First, before imposing any such additional measure, the ECB or the relevant NCA must inform accordingly to the Board;45 Second, the ECB or the NCA, the Board and the relevant NRAs must ensure consistency between any such additional measure imposed and any Board action aimed at preparing for resolution in accordance with Art. 13(2) SRMR.46 41 Reference is made to the ex-ante valuation(s), namely the so-called “valuation 1” and “valuation 2” (Art. 20(1)-(9) and (15) SRMR), as well as to the provisional and the ex-post definitive valuations (Art. 20(10)-(13) SRMR). It is noted, however, that in accordance with Recital (63), sent. 2 SRMR, the conduct of valuations ex-ante and, if possible, already in the early intervention phase should cover both these valuations and, if required, the valuation of the treatment that shareholders and creditors would have received if the entity had been wound up under normal insolvency proceedings. Accordingly, reference is also made to the ex-post valuation (Art. 20(16)-(18) SRMR), the so-called “valuation 3”. On all these valuations, see details in the analysis of Art. 20 SRMR. 42 Recital (88) SRMR. Art. 4(3) TFEU provides that Member States must, inter alia, facilitate the achievement of the EU’s tasks and refrain from any measure which could jeopardize the attainment of its objectives (for an analysis, see Guastaferro,in: Schütze and Tridimas (eds), Oxford Principles European Union Law – Volume I: The European Union Legal Order (2018), 350 and Hatje, in: Schwarze et al. (eds), EU-Kommentar, (4th edn, 2019), TEU Art. 4 pp. 69-91. 43 Art. 30(2) SRMR and Recital (89), sent. 3 SRMR. 44 See supra, → paras. 25-26. 45 Art. 13(4) SRMR. 46 Art. 13(5) SRMR.
618
Christos V. Gortsos
Art. 14 SRMR
Resolution Objectives
Accordingly, the Board does not (yet again) have the power to intervene against 32 the imposition of such additional measures. It is merely the recipient of the relevant information and must cooperate (together with the relevant NRAs) with the ECB or the NCAs for the sake of obtaining the above-mentioned consistency of approaches.
II. The powers of the Board (Art. 13(3) SRMR) Once the procedure set out in Art. 13(1) SRMR has been activated and the Board has 33 decided to start preparing for the resolution of the institution or group concerned, the Board has the following powers, informing the ECB and the relevant NCAs and NRAs of any action taken:47 First, it has the power to require the institution or the parent undertaking to contact potential purchasers in order to prepare for its resolution, subject to the criteria specified in Art. 39(2) BRRD (on the marketing requirements in case of application of the sale of a business tool) and the requirements of professional secrecy in accordance with Art. 88 SRMR;48 the latter provides in particular that information subject to such requirements may (also) not be disclosed to potential purchasers contacted in order to prepare for the resolution of an entity according to Art. 13(3) SRMR on early intervention.49 Second, it has the additional power to require the relevant NRA to draft a preliminary resolution scheme for the institution or the group concerned.50 In this respect, without prejudice to the responsibilities of the Board for the tasks conferred on it by the SRMR, NRAs must perform, and are responsible for, several tasks in relation to entities and groups which are not significant and cross-border,51 including, the adoption of measures during the early intervention (in accordance with Art. 13(3) SRMR).52 In addition, for the effective management of the resolution process of failing credit institutions and other entities, the Board must perform its tasks within the SRM in close cooperation with the NRAs not only for the implementation of its resolution decisions, but also prior to the adoption of any resolution decision, at the stage of resolution planning and/or during the phase of early intervention.53
Art. 14 SRMR Resolution Objectives 1. When acting under the resolution procedure referred to in Article 18, the Board, the Council, the Commission, and, where relevant, the national resolution authorities, in respect of their respective responsibilities, shall take into account the resolution objectives, and choose the resolution tools and resolution powers which, in their
Art. 13(3)(3) SRMR. Art. 13(3)(1) SRMR. 49 Art. 88(1)(3) SRMR. 50 Art. 13(3)(2) SRMR; on the resolution scheme, see the analysis of Art. 23 SRMR infra. 51 Recital (28) sent. 3 SRMR. According to consideration made in the fourth sentence of that recital, under certain circumstances, the NRAs should perform their tasks based on and in accordance with the SRMR, while exercising the powers conferred on them by and in accordance with the national law transposing the BRRD if not conflicting with the SRMR. 52 Art. 7(3)(1)(b) SRMR. 53 Art. 31(1)(1) sent. 1 SRMR and Recital (89), sent. 4-5 SRMR. 47
48
Jens-Hinrich Binder
619
Art. 14 SRMR
Resolution Objectives
view, best achieve the resolution objectives that are relevant in the circumstances of the case. 2. The resolution objectives referred to in paragraph 1 are the following: (a) to ensure the continuity of critical functions; (b) to avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline; (c) to protect public funds by minimising reliance on extraordinary public financial support; (d) to protect depositors covered by Directive 2014/49/EU and investors covered by Directive 97/9/EC; (e) to protect client funds and client assets. When pursuing the objectives referred to in the first subparagraph, the Board, the Council, the Commission and, where relevant, the national resolution authorities, shall seek to minimise the cost of resolution and avoid destruction of value unless necessary to achieve the resolution objectives. 3. Subject to different provisions of this Regulation, the resolution objectives are of equal significance, and shall be balanced, as appropriate, to the nature and circumstances of each case. Bibliography Basel Committee on Banking Supervision, ‘Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement‘ (July 2018); id., ‘Report and Recommendations of the Cross-border Bank Resolution Group‘ (March 2010); Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements, and Tools’, in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, Oxford 2016), Ch. 2; id., ‘Systemkrisenbewältigung durch Bankenabwicklung? Aktuelle Bemerkungen zu unrealistischen Erwartungen’, ZBB 2017, 57; id., ‘The Relevance of the Resolution Tools Within the Single Resolution Mechanism’, in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave MacMillan, Cham 2019); id., ‘Proportionality at the resolution stage: Calibration of resolution measures and the public interest test’, EBOR 21 (2020), 453; id., ‘Resolving a Bank – Judicial Review With Regard to the Exercise of Resolution Powers’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, Cheltenham 2021, 367; Olivier De Bandt, Philipp Hartmann and José-Luis Peydró Alcalde, ‘Systemic Risk in Banking after the Great Financial Crisis’ in: Allen N. Berger, Philip Molyneux, and John O.S. Wilson (eds), The Oxford Handbook of Banking (2 nd edn, Oxford University Press, Oxford 2015), 667; Miquel Dijkman, ‘A Framework for Assessing Systemic Risk’, World Bank Policy Research Working Paper 5282 (2010); EU Commission, Commission Staff Working Paper ‘The effects of temporary state aid rules adopted in the context of the financial and economic crisis’ (20 November 2012), SEC (2011) 1126 final; id., Commission Staff Working Paper: ‘Facts and figures on state aid in the EU Member States’ (1 December 2011), SEC (2011) 1487 final; Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions‘ (2011/2014); Gerard Hertig, ‘Governments as Investors of Last Resort: Comparative Credit Crisis Case-Studies‘, Theoretical Inquiries in Law 13 (2012), 385; Adam J. Levitin, ‘In Defense of Bail-outs‘, Geo. L.J. 99 (2011), 435; Gustaf Sjöberg, ‘Banking Special Resolution Regimes as a Governance Tool’, in: Wolf-Georg Ringe and Peter M. Huber (eds), Legal Challenges in the Global Financial Crisis (Hart, Oxford, Portland 2014), 187; Stéphanie Marie Stolz and Michael Wedow, ‘Extraordinary measures in extraordinary times: Public measures in support of the financial sector in the EU and the USA’, ECB Occasional Paper Series No. 117/July 2010; Tobias H. Tröger, ‘Too Complex to Work: A Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime’, JFR 4 (2018), 35.
620
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The resolution objectives in detail (Art. 14(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . I. Ensuring continuity of critical functions (Art. 14(2)(a) SRMR) . . . . . . . . . . . . . . 1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Technical details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Critical functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 5 5 6 6
Jens-Hinrich Binder
Art. 14 SRMR
Resolution Objectives
b) Critical services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Disruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Avoiding significant adverse effects on financial stability (Art. 14(2)(b) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Protecting public funds (Art. 14(2)(c) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Protecting insured depositors and investors; protecting client funds and assets (Art. 14(2)(d) and (e) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 15 16 20 23
C. Minimisation of costs and prohibition of destruction of value (Art. 14(2)(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
D. Ranking of resolution objectives and implications for the design of resolution actions (Art. 14(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
A. Introduction Art. 14 SRMR defines a set of specific, interrelated and to some extent overlapping, 1 rather technical objectives (see infra, → paras. 5–25) to be pursued by any resolution action taken under the auspices of the SRM. As formulated by Art. 14(1) SRMR, these objectives, which mirror international standards,1 are to be ‘take[n] into account’ by the relevant actors (the SRB, the Council, NRAs) ‘when acting under the resolution procedure referred to in Art. 18’, i.e., in cases for which the SRM is directly responsible pursuant to Arts. 7(2), (4)(b) and (5) SRMR. The scope ratione materiae is expressly defined in Art. 14(1) SRMR by reference to actions taken ‘under the resolution procedure referred to in Art. 18’. However, Art. 14 SRMR is included in the list of provisions that apply directly also to resolution actions taken by NRAs in relation to less significant institutions in Art. 7(3)(4) SRMR. For resolution actions outside this perimeter, identical objectives apply pursuant to the national laws transposing Art. 31 BRRD, from which Art. 14 SRMR has been adapted almost verbatim. In addition to the resolution objectives, Art. 14(2) SRMR also stipulates a require- 2 ment to minimise the cost of resolution and to avoid unnecessary destruction of value (see infra, → paras. 26–28). While Art. 14(3) SRMR expressly declares all objectives to be of equal significance, it should be noted that conflicts between them are almost unavoidable and that, therefore the authorities face a difficult task when striking the balance between them (see infra, → paras. 29 and 30). The wording of Art. 14(1) SRMR prima facie suggests that the objectives defined in 3 para. 2 of the provision should be interpreted as a mere guideline that should inform resolution actions initiated and implemented under the auspices of the SRM. The provision has to be interpreted in conjunction with the public interest test defined as a core prerequisite for the initiation of resolution actions in Art. 18(1)(c) and (5) SRMR, however pursuant to Art. 18(1)(c) SRMR (cf. Art. 32(1)(c) and (5) BRRD), a resolution scheme may only be adopted where, in addition to other requirements pertaining to the financial institution of the relevant entity and subject to a general proportionality test (see, for details, infra, → Art. 18 paras. 18-98), the proposed resolution action is ‘necessary in the public interest’. This, in turn, is defined in Art. 18(5) SRMR, whereby ‘a resolution action shall be treated as in the public interest if it is necessary for the achievement of, and is proportionate to one or more of the resolution objectives referred to in Art. 14 SRMR and winding-up of the entity under normal insolvency proceedings would not meet those resolution objectives to the same extent’ (emphasis added; see, for details, infra, → Art. 18 paras. 79-98). 1
ble.
Cf. FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014), Pream-
Jens-Hinrich Binder
621
Art. 14 SRMR 4
Resolution Objectives
Taken together, against this backdrop, the legal significance of the resolution objectives should not be underestimated. In conjunction with Art. 18(5) SRMR, they serve as a technical benchmark against which the proportionality of any resolution action has to be assessed by way of comparison to the outcome of a hypothetical insolvency liquidation of the relevant institution. The resolution objectives thus play an important role in restricting the resolution authorities’ discretion when planning and implementing resolution actions in each particular case.2 In this capacity, the objectives can be relied upon by the Council as a basis for objections against the adoption of a resolution scheme under Art. 18(6) and (8) SRMR (infra, → Art. 18 paras. 99-115). They could also play a role in proceedings brought against decisions taken by the SRB under Art. 86 SRMR in conjunction with Art. 263 TFEU.3 Moreover, violations of Art. 14 SRMR in conjunction with Art. 18(5) SRMR can, in principle, also be relied upon in an appeal against a decision of the SRB under Art. 85 SRMR.).
B. The resolution objectives in detail (Art. 14(2) SRMR) I. Ensuring continuity of critical functions (Art. 14(2)(a) SRMR) 1. Background 5
The need ‘to ensure continuity of critical functions’ refers to one of the most problematic aspects of large financial institutions’ insolvency, namely the disruptive, contagious effects triggered by an individual institution’s insolvency on the provision of core economic functions of modern banking activities generally. The protection of such functions (rather than the individual institute carrying out such activities) is clearly a core element of the policy considerations underlying both the SRM and the BRRD,4 as concerns about such functions were among the strongest motives for the provision of extraordinary, tax-funded open bank assistance during the crisis.5 From a functional perspective, the concept of ‘critical functions’ (see infra, → para. 6) is directly linked to the broader concept of systemic risk and systemic relevance of financial institutions, in that it refers to those elements of business activities and operations whose disruption would give rise to systemic contagion.6
Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.26. See, further, Binder, in: Zilioli and Wojcik (eds), Judicial Review in the European Banking Union (2021), 367, at 379-384, paras. 22.18-22.30. 4 Cf. also Recitals 1, 4, 5 and 45 BRRD (discussing the need to protect such functions as well as the unsuitability of traditional insolvency laws to effectively protect such functions in the event of an insolvency); Recital 4 Commission Delegated Regulation (EU) 2016/778 of 2 February 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to the circumstances and conditions under which the payment of extraordinary ex post contributions may be partially or entirely deferred, and on the criteria for the determination of the activities, services and operations with regard to critical functions, and for the determination of the business lines and associated services with regard to core business lines, OJ L 131, 20.5.2016, p. 41 (“one of the main resolution objectives”). 5 Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.28. 6 Cf., e.g., Basel Committee on Banking Supervision, Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement (July 2018), para. 24; see generally, Dijkman, ‘A Framework for Assessing Systemic Risk’ (2010); de Bandt, Hartmann and Peydró, in: Berger, Molyneux, and Wilson (eds), The Oxford Handbook of Banking (2nd edn, 2015), 667. 2
3
622
Jens-Hinrich Binder
Art. 14 SRMR
Resolution Objectives
2. Technical details a) Critical functions ‘Critical functions’, within the meaning of Art. 14(2)(a) SRMR, are defined in 6 Art. 2(1)(35) BRRD (applicable to the SRMR by virtue of Art. 3(2) SRMR), as ‘activities, services or operations the discontinuance of which is likely in one or more Member States, to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations’.
Art. 2(2) BRRD expressly provides for further specification of this term in Commis- 7 sion delegated acts, which has been invoked with Commission Delegated Regulation (EU) 2016/778,7 taking up recommendations presented by an EBA Opinion issued in 2015 in connection with this mandate.8 Pursuant to Art. 6(1) of the Delegated Regulation, ‘critical functions’ are to be interpreted as functions provided to ‘third parties not affiliated to the institution or group’ in resolution (Art. 6(1)(a) of the Delegated Regulation), the sudden disruption of which would ‘give rise to contagion or undermine the general confidence of market participants due to the systemic relevance of the function for the third parties and the systemic relevance of the institution or group in providing the function’ (Art. 6(1)(b) of the Delegated Regulation).
The concept of ‘critical functions’, in other words, is not to be interpreted as a generic 8 category including specific business lines or activities that would always qualify as ‘critical’ and thus merit special protection in all cases, across the board of all institutions or groups. Rather, the determination whether or not a function is ‘critical’ for present purposes requires the authorities to carry out a case-by-case assessment of the relevance of ‘activities, services, or operations’ carried out by the relevant institution, or group, in relation to third parties, and the market as a whole. Importantly, it is not the relevance of an activity for the institution’s own business model that will determine ‘criticality’ for present purposes, but rather the relevance of that activity for third parties, including market infrastructures. Thus, depending, inter alia, on the market share of the relevant institution, ‘critical functions’ can include deposit taking, lending and loan services, payment, clearing, custody and settlement services, wholesale funding markets activities, and capital markets and investment activities.9 Pursuant to Art. 6(2)(1) Commission Delegated Regulation (EU) 2016/778, the nec- 9 essary assessment has to take into account a complex range of interrelated aspects, which, again, illustrate the functional interplay of the concept of ‘critical functions’ with the systemic relevance: ‘When assessing the material negative impact on third parties, the systemic relevance of the function for third parties and the systemic relevance of the institution or group providing the function, the institution and the resolution authority shall take into account the size, market share, external and internal interconnectedness, complexity, and cross-border activities of the institution or group.’
Supra, fn 4. EBA, Technical advice on the delegated acts on critical functions and core business lines (EBA/Op/ 2015/05) (6 March 2015). 9 Recital 4 Commission Delegated Regulation (EU) 2016/778. 7 8
Jens-Hinrich Binder
623
Art. 14 SRMR 10
Resolution Objectives
Subpara. 2 of the same provision specifies further the elements to be considered in this regard: ‘The assessment criteria for the impact on third parties shall include at least the following elements: (a) the nature and reach of the activity, the global, national or regional reach, volume and number of transactions; the number of customers and counterparties; the number of customers for which the institution is the only or principal banking partner; (b) the relevance of the institution, on a local, regional, national or European level, as appropriate for the market concerned. The relevance of the institution may be assessed on the basis of the market share, the interconnectedness, the complexity and cross border activities; (c) the nature of the customers and stakeholders affected by the function, such as but not limited to retail customers, corporate customers, interbank customers, central clearing houses and public entities; (d) the potential disruption of the function on markets, infrastructures, customers and public services. In particular, the assessment may include the effect on the liquidity of markets concerned, the impact and extent of disruption to customer business, and short-term liquidity needs; the perceptibility to counterparties, customers and the public; the capacity and speed of customer reaction; the relevance to the functioning of other markets; the effect on the liquidity, operations, structure of another market; the effect on other counterparties related to the main customers and the interrelation of the function with other services.’
It appears evident that a comprehensive assessment along these lines cannot be carried out ad hoc in the event of a failure, but requires careful preparation. In this light, it is of essence that the assessment is an integral part of the recovery planning and resolution planning processes, as stipulated by the national laws transposing Arts. 6(6)(d) and 8(9)(c), (h) SRMR, respectively, as well as the assessment of resolvability pursuant to Art. 10(3), (4) and (11)(a) and (g) SRMR. The assessment of ‘criticality’ is thus a twostep process to be completed preventively, i.e., before each institution (or group) is failing or likely to fail,10 thus enabling the authorities (and, in particular, the SRM when devising a resolution scheme pursuant to Art. 18 SRMR) to calibrate resolution actions as swiftly and effectively as possible. 12 It should be noted, however, that ‘criticality’, in this sense, may develop and/or diminish from time to time, and will also be influenced by the relevant market environment. In a highly diversified, competitive market for financial services, functions of any particular institution will, as a rule, be more easily substitutable, and therefore less relevant to third parties, than in a narrow, concentrated environment with few competitors, especially in times of general economic distress where the supply of relevant services could be shrinking. This is particularly problematic because, as a consequence of the ‘public interest test’ stipulated by Art. 18(4) SRMR (see supra, → para. 3), the ‘criticality’ of functions will have to be considered when taking the decision not to initiate resolution actions but rather to subject the relevant institution to traditional insolvency liquidation. While the (inevitable) vagueness of the term could potentially give rise to political ma11
10
624
Cf. Recital 7 Commission Delegated Regulation (EU) 2016/778: ‘Critical functions should be identified in a two-step procedure: first, the institutions perform a self-assessment when establishing their recovery plans. Secondly, the resolution authorities critically review the recovery plans of the individual institutions to ensure consistency and coherence in the approaches used by banks. Since the resolution authorities benefit from the overarching view as to which functions are essential to maintain financial stability as a whole, they should take the final decision as regards the designation of critical functions for the purpose of resolution planning and execution.’
Jens-Hinrich Binder
Art. 14 SRMR
Resolution Objectives
noeuvre in the decision making process leading to resolution, 11 authorities ought to keep this problem in mind, and should reappraise the assessment of ‘criticality’ as prepared at the recovery and resolution planning stage before taking and calibrating actual resolution actions. b) Critical services Neither the BRRD nor the SRMR distinguish between ‘critical functions’ within the 13 meaning defined above and ‘critical services’,12 and the term ‘services’ is used as a subcategory of elements of the more general definition of Art. 2(1)(35) BRRD (see supra, → para. 6). However, Art. 6(4) Commission Delegated Regulation (EU) 2016/778 introduces a separate definition of ‘critical services’ as distinct from ‘critical functions’: ‘A service is considered critical where its disruption can present a serious impediment to or prevent the performance of, one or more critical functions. A service is not considered critical where it can be provided by another provider within a reasonable time frame to a comparable extent as regards its object, quality and cost.’
As specified by Recital 8 of the Regulation, the term ‘service’ is to be interpreted as 14 referring to internal activities without direct relevance to third parties; ‘services’, in this interpretation, are activities that support the carrying out of ‘functions’.13 While it may be reasonable to distinguish between business activities carried out vis-à-vis third parties and those carried out internally, it should be noted that the distinction between ‘functions’ and ‘services’ in this regard is not consistent with the wording of Art. 2(1)(35) BRRD (which, again, treats ‘services as a subcategory of ‘critical functions’). 14 This is all the more unconvincing because Art. 6 of the Delegated Regulation does not define the difference between ‘activities’ and ‘operations’, as mentioned in Art. 2(1)(35) BRRD. For practical purposes, authorities will have to ignore the somewhat inaccurate definition to some extent, and generally to assess what the immediate and indirect consequences of a termination of a certain activity would be in the event of a forced liquidation of the relevant institution (or group). c) Disruption Somewhat unnecessarily, Art. 6(5) Commission Delegated Regulation finally defines 15 the term ‘disruption’ for the purposes of Art. 2(1)(35) BRRD. Pursuant to that provision, 11 See, for further discussion of the potential implications, Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.31. As of today, the SRB’s approach to interpreting the ‘public interest’ test, as well as the support of the Council and the Commission in this regard, appear to have avoided the incentive to exploit the vagueness of the concept for political interference, however. 12 In fact, both terms appear to be treated as synonymous, cf., in particular, Art. 41(6)(b) BRRD. 13 Cf. the wording of Recital 8 Commission Delegated Regulation (EU) 2016/778: ‘Critical services should be the underlying operations, activities and services performed for one (dedicated services) or more business units or legal entities (shared services) within the group which are needed to provide one or more critical functions. Critical services can be performed by one or more entities (such as a separate legal entity or an internal unit) within the group (internal service) or be outsourced to an external provider (external service). A service should be considered critical where its disruption can present a serious impediment to, or completely prevent, the performance of critical functions as they are intrinsically linked to the critical functions that an institution performs for third parties. Their identification follows the identification of a critical function.’ 14 The use of the ‘services’ in Art. 6(4) of the Delegated Regulation is more in line with Art. 65 BRRD, pursuant to which resolution authorities are to be provided with ‘the power to require an institution under resolution, or any of its group entities, to provide any services or facilities that are necessary to enable a recipient to operate effectively the business transferred to it’ (emphasis added).
Jens-Hinrich Binder
625
Art. 14 SRMR
Resolution Objectives
‘The disruption of functions or services shall consist in functions and services that are no longer provided to a comparable extent, under comparable conditions and of comparable quality, unless the change in providing the function or service concerned takes place in an orderly manner.’
II. Avoiding significant adverse effects on financial stability (Art. 14(2)(b) SRMR) With the prevention of ‘significant adverse effects on financial stability’, Art. 14(2)(b) SRMR defines yet another objective closely related to the more general concept of systemic relevance (see supra, → paras. 5 and 9). Specifically, the provision identifies two entirely different means to preserve stability, namely ‘by preventing contagion, including to market infrastructures’ on the one hand, and ‘by maintaining market discipline’ on the other. 17 The first of these two elements, ‘preventing contagion’, clearly mirrors, and complements the objective of protecting ‘critical functions’ discussed above. Rather than focusing on the institute’s business activities and organisation, however, it takes the perspective of the relevant counterparties, markets, and market infrastructures. Notwithstanding this difference, however, it is difficult to conceive of any differences in terms of the potential implications of liquidation that have to be taken into account. If and to the extent that the assessment of ‘critical functions’ has identified activities and arrangements between the relevant institute and third parties, including market infrastructures, whose disruption would jeopardise financial stability, it is evident that the preservation of such ‘functions’ from the disruptive effects of traditional forms of insolvency liquidation ideally should prevent contagion within the meaning of Art. 14(2)(b) SRMR. To that extent, the substantive content of that provision does not appear to differ from that of Art. 14(2) (a) SRMR; in fact, both provisions have to be understood as synonymous and indeed duplicative. 18 By incorporating also the protection of ‘market discipline’, however, Art. 14(2)(b) SRMR takes a broader view. In contrast to both Art. 14(2)(a) and the first part of Art. 14(2)(b) SRMR, this element addresses not just the immediate economic implications of failure, but adopts a long term perspective and stresses the need to establish a viable incentive structure for bank shareholders and stakeholders, including creditors and managers. In this respect, the provision is clearly reflective of concerns about the adverse incentives created by the wave of emergency subsidies granted to problem banks during the crisis, which had a strong influence on the international best practice standards that informed also the BRRD and the SRMR15 and informed the trend towards mandatory private sector involvement in loss distribution, which is put in place by the statutory write-down and bail-in powers (Arts. 21 and 27 SRMR, respectively). 16 The objective to protect ‘market discipline’ is complemented, and specified further, by the ‘general principles governing resolution’ defined in Art. 15(1) SRMR, which operationalises the underlying policy to simulate the economic outcome of traditional insolvency procedures for bank shareholders, investors in bank debt, and bank managers to the extent that this is reconcilable with the overarching objective to prevent systemic implications of failure (infra, → Art. 15 paras. 3-7). 16
15 See, in particular, Basel Committee on Banking Supervision, Report and Recommendations of the Cross-border Bank Resolution Group (March 2010), paras. 2–16, 120–121; Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011), Preamble, at p. 3 (updated in October 2014). 16 See, for an excellent analysis of the underlying policy and a review of earlier literature, Tröger, JFR 4 (2018), 35, at pp. 38–42.
626
Jens-Hinrich Binder
Art. 14 SRMR
Resolution Objectives
Thus combining concerns for the immediate contagion triggered by the default of fi- 19 nancial institutions on the one hand and concerns about the long-term moral hazard associated with emergency subsidies, the provision implicitly seeks to reconcile the two aspects that might, in reality, not infrequently conflict with each other. As experience from the global financial crisis suggests, the provision of emergency funding can claim to be a rather effective shield against systemic contagion, although the long-term effects (not just) in terms of adverse incentives for bank owners, investors in bank debt, and bank management will clearly be detrimental.17 Against this backdrop, Art. 14(2)(b) SRMR is representative not just for the general quest for alternative means of insolvency management for systemically important financial institutions that has become a cornerstone of post-financial crisis regulation, but also illustrates the underlying policy conflicts in this regard.
III. Protecting public funds (Art. 14(2)(c) SRMR) The third objective, ‘to protect public funds by minimising reliance on extraordinary 20 public financial support’, ties in with the previous one in that it combines considerations of financial stability with the motive to avoid future bailouts in response to cases of individual failures. In addition to the desire to reign in moral hazard for bank owners, investors in bank debt, and bank managers, Art. 14(2)(c) SRMR reflects concerns about the negative implications of tax-funded emergency subsidies (‘bail-outs’) on public finances. This is particularly understandable in the European Union, where subsidies granted during the financial crisis have caused a heavy and long-lasting burden on the budgets of a number of Member States.18 Significantly, Art. 14(2)(c) SRMR requires authorities to ‘minimise’ reliance on pub- 21 lic funding, and does not rule out the use of public funds in crisis management altogether. This is fully consistent with the overall concept of the BRRD and the SRMR. Indeed, both the BRRD (in Arts. 32(4)(d), 37(10), 56–58) and the SRMR (in Arts. 18(4)(d) and 27(9) – see infra, → Art. 18 paras. 67-78 and → Art. 27 para. 172) expressly define conditions and restrictions for the provision of such funds, reflecting the – sound – insight that such interventions might be preferable to a strict prohibition of tax-funded bail-outs in extreme circumstances, e.g., a systemic financial crisis with many failures occurring simultaneously.19 Against this backdrop, Art. 14(2)(c) SRMR should not be mistaken as an absolute 22 substantive standard prohibiting the use of public funds in all circumstances, but rather defines a procedural requirement, whereby resolution actions should be designed and calibrated in a way that avoids negative implications for public budgets to the extent
17 See, for further discussion, e.g., Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), paras. 2.12–2.15. And see, for an analysis of the positive aspects of bail-outs, Levitin, Geo. L.J. 99 (2011), 435. 18 E.g., EU Commission, The effects of temporary state aid rules adopted in the context of the financial and economic crisis (2012); id., Facts and figures on state aid in the EU Member States (2011); Stolz and Wedow, Extraordinary measures in extraordinary times: Public measures in support of the financial sector in the EU and the USA (2010); see also Hertig, Theoretical Inq. L. 13 (2012), 385. 19 E.g., Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.35; Sjöberg, in: Ringe and Huber (eds), Legal Challenges in the Global Financial Crisis (2014), 187, at p. 204. See also, for a detailed analysis of the shortcomings of the BRRD/SRMR regime in systemic financial distress, Binder, ZBB (2017), 57; id., in: Chiti and Santoro (eds), The Palgrave Handbook of European Banking Union Law (2019), 299, at 315-316.
Jens-Hinrich Binder
627
Art. 14 SRMR
Resolution Objectives
possible.20 This view is consistent with the general prohibition to assume the provision of extraordinary public financial support as part of the recovery and resolution planning process (Arts. 5(3), 10(3)(a) and (7)(i)(i), 12(3)(f)(i), 15(1)(a), 16(1)(a) BRRD; Arts. 8(6) (a), (9)(i)(i) and (10)(f)(i), 10(1)(a) SRMR), and the valuation requirements (Art. 36(5) BRRD, Art. 20(6) SRMR). Taking into account also Art. 6(6) SRMR, whereby acts and decisions by the SRB, the Council or the Commission must not require Member States to provide such support (supra, → Art. 6 para. 19), the underlying policy can be summarised as follows: Extraordinary public financial support may be granted, in the discretion of Member States but subject to restrictive conditions, but it is not accepted as a standard response to events of failure, and therefore cannot be relied upon by either the relevant bank or any stakeholder.
IV. Protecting insured depositors and investors; protecting client funds and assets (Art. 14(2)(d) and (e) SRMR) The final two resolution objectives defined in Art. 14(2) SRMR, namely (d) protecting depositors and investors as well as client assets and (e) protecting client funds and client assets, prima facie may appear as entirely uncontroversial attributes of any bank insolvency procedure. Yet it should be noted that their lower rank in the list reflects substantial qualifications. Depositors and investors are not protected from any loss whatsoever, but only to the extent that they (or, more precisely, their claims against an institution that is failing or likely to fail) are protected under the Deposit Guarantee and Investor Compensation Directives, respectively.21 The more general objective of ‘protecting client funds and client assets’ in Art. 14(2)(e) SRMR clearly has to be interpreted in the light of the foregoing; evidently, the restrictions applicable by virtue of the Deposit Guarantee and Investor Compensation Directives mark the outermost limits of protection afforded to depositors and investors. 24 For depositors, it follows from the above considerations that they can expect to receive no more than the maximum level of coverage, i.e., up to a maximum amount of aggregate deposits of each depositor of EUR 100,000.00 (Art. 6(1) Deposit Guarantee Directive). Investors (within the meaning of Art. 1(4) Investor Compensation Directive)22 are entitled to an amount of up to EUR 20,000 by way of compensation for either monies owed to the investor in connection with a securities transaction, or financial instruments owned by the investor that cannot be restored to him because of an insolvency (Art. 4(1) in conjunction with Art. 2(2) Investor Compensation Directive). As both instruments mark the level of protection available in the insolvency liquidation of an institution, the restrictions stipulated in Art. 14(2)(d) SRMR are fully consistent with the principle that creditors, as a result of resolution under the SRMR and the BRRD, must not ‘incur greater losses than would have been incurred if [the relevant entity] had been wound up under normal insolvency proceedings’ (‘no creditor worse off principle’, Art. 15(1)(g) SRMR, see infra, → Art. 15 paras. 27-33). This is particularly relevant in the context of a bail-in, where the deposits covered by the Deposit Guarantee Directive are exempt from eligible liabilities (Art. 27(3)(a) in conjunction with Art. 3(1)(11) 23
20 See also Recitals 1 and 16 BRRD (acknowledging that extraordinary public financial support might be necessary in extraordinary circumstances, but should be restricted to the extent possible). 21 Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes (recast), OJ L 173 of 12 June 2014, p. 149; Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes, OJ L 84, 25.3.1997, p. 22. 22 I.e., “any person who has entrusted money or instruments to an investment firm in connection with investment business”.
628
Jens-Hinrich Binder
Art. 14 SRMR
Resolution Objectives
SRMR and Art. 2(1)(5) Deposit Guarantee Directive; see also Art. 15(1)(h) SRMR, which expressly requires that ensured deposits be protected in full). Irrespective of the limits thus defined, the objective to protect depositors and in- 25 vestors (and their claims against institutions that are failing or likely to fail, whether claims in money or related to assets kept by the institutions on their behalf), while entirely convincing as such, is problematic and difficult to implement in practice. Conflicts with other resolution objectives inevitably will occur in many circumstances, confronting resolution authorities with a complex task when devising and calibrating resolution actions. As such, the restricted level of protection afforded to depositors and investors is clearly consistent with the desire to preserve market discipline (Art. 14(2) (b) SRMR, see supra, → para. 18) by imposing losses not just on bank shareholders, but also on stakeholders, at least on sophisticated investors in bank debt. Unrestricted protection for depositors’ and investors’ claims would significantly reduce their incentives to monitor the relevant institution’s risk profile. At the same time, authorities must be aware of a complex trade-off between the position of depositors and investors on the one hand and the prevention of systemic contagion on the other hand. In order to remove incentives for bank-runs, which then – as in the case of the bail-in of deposits in Cypriot banks in 2013 – could trigger the imposition of capital controls and thus lead to massive disruptions in the relevant market and beyond,23 it will frequently be reasonable, or indeed necessary, to protect depositors and investors to a larger extent than would be the case under the minimum levels of protection referred to in Art. 14(2)(d) SRMR, and to restrict the scope of private sector involvement to sophisticated investors in (designated) bail-in-able debt instruments (who, unlike retail depositors, are the only group of stakeholders who can be expected to exercise market discipline anyhow).24
C. Minimisation of costs and prohibition of destruction of value (Art. 14(2)(2) SRMR) Art. 14(2) SRMR, in subpara. (2), also stipulates a requirement for the SRB, the 26 Council, the Commission and NRAs to ‘seek to minimise the cost of resolution and avoid destruction of value unless necessary to achieve the resolution objectives.’ Apart from the differences in terms of relevant actors, the provision is a verbatim adaptation from Art. 31(2)(2) BRRD. While somewhat inconsistently allocated in the context of the definition of resolution objectives in the first subpara. of Art. 14(2) SRMR, these provisions should be interpreted as (part of) a proportionality requirement in order not just to ensure cost efficiency of bank resolution, but also to prevent undue interference with shareholder (and, indeed, creditor) rights.25 The relevance of that requirement has to be assessed in the light of the specific 27 array of conflicting interests of shareholders, creditors, and public stakeholders that is characteristic for the resolution of systemically important financial institutions generally.26 In bank resolution, to some extent just as in traditional corporate insolvency, the shareholders’ interest in the preservation of their stake in the failing bank conflicts with the interests of creditors and other stakeholders, while the public interest in the 23 See also Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.37. And see infra, → Art. 27 paras. 114-135. 24 See, further, Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.60. And cf., Tröger, JFR 4 (2018), 35, at pp. 67–69. 25 Binder, EBOR 21 (2020), 453, at 461, 463-464. 26 Ibid., pp. 457-458.
Jens-Hinrich Binder
629
Art. 14 SRMR
Resolution Objectives
preservation of financial stability and the prevention of contagious effects adds to complexity and results in complex choices for the resolution authorities.27 28 In this context, Art. 14(2)(2) SRMR evidently seeks to minimise not just the impact of resolution for the public, but also to ensure proportionality in terms of the damage to be suffered by the shareholders of an institution that is failing or likely to fail. In this sense, it complements other proportionality requirements applicable in the context of bank resolution, including, in particular, the ‘public interest’ test in Art. 18(5) SRMR and restrictions for exemptions of liability from a bail-in under Art. 27(5) SRMR. 28 From the shareholders’ perspective, the practical relevance appears to be limited, however, because shareholders, as the ultimate beneficiaries and bearers of the entrepreneurial risk taken by the banks’ management, stand to lose their stake in both traditional insolvency liquidation and in resolution anyhow.29
D. Ranking of resolution objectives and implications for the design of resolution actions (Art. 14(3) SRMR) Art. 14(3) SRMR defines the systematic relationship between the different resolution objectives pursuant to by Art. 14(2) SRMR in rather flexible terms. Given the complex and, in part, conflicting nature of the objectives, the latter part of the provision, highlighting the need to balance the objectives, ‘as appropriate, to the nature and circumstances of each case’, can be interpreted more relevant than the first half of the sentence, whereby ‘[s]ubject to different provisions of this Regulation, the resolution objectives are of equal significance’. As noted before, it will be extremely difficult to reconcile the different objectives in practice, given, in particular, the complex trade-offs between maintaining systemic stability, market discipline, and the protection of depositors and investors (see supra, → paras. 25 and 27). Moreover, as resolution (by comparison with traditional insolvency procedures) will come with rather severe implications for the rights of shareholders and creditors alike, which may be justified on the grounds of public interest concerns for systemic stability but would be disproportionate in cases where such concerns are not warranted, it would appear obvious that the first three resolution objectives are likely to play a more important role as determinants for the design and implementation of resolution actions than the remaining ones. 30 Against this backdrop, in order to avoid an unduly restrictive, potentially paralysing interpretation of the provision by courts and authorities, the principle of equal ranking should not be taken too literally. In line with the second half of Art. 14(3) SRMR, it should be accepted that the relevant actors, in each particular case, will inevitably have to strike a reasonable, necessarily discretionary balance between the different objectives, with systemic stability concerns taking preference over the interests of shareholders, depositors, and investors to the extent these might conflict.30 This view is also consistent with other provisions in the BRRD and the SRMR that delineate the respective interests yet further, including, in particular, the ‘general principles governing resolution’ laid down in Art. 15 SRMR (Art. 34 BRRD) and the provisions on the ranking of claims in write-downs and bail-in (Arts. 17 and 21(10) SRMR, Arts. 48 and 49 BRRD), as well as on exemptions from bail-in (Art. 27(3) SRMR, Art. 44(3) BRRD). 29
Ibid., pp. 462-463. Ibid., pp. 460-461. 29 Ibid., p. 467. 30 Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.27. 27 28
630
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
Art. 15 SRMR General principles governing resolution 1. When acting under the resolution procedure referred to in Article 18, the Board, the Council, the Commission and, where relevant, the national resolution authorities, shall take all appropriate measures to ensure that the resolution action is taken in accordance with the following principles: (a) the shareholders of the institution under resolution bear first losses; (b) creditors of the institution under resolution bear losses after the shareholders in accordance with the order of priority of their claims pursuant to Article 17, save as expressly provided otherwise in this Regulation; (c) the management body and senior management of the institution under resolution are replaced, except in those cases where the retention of the management body and senior management, in whole or in part, as appropriate to the circumstances, is considered to be necessary for the achievement of the resolution objectives; (d) the management body and senior management of the institution under resolution shall provide all necessary assistance for the achievement of the resolution objectives; (e) natural and legal persons are made liable, subject to national law, under civil or criminal law, for their responsibility for the failure of the institution under resolution; (f) except where otherwise provided in this Regulation, creditors of the same class are treated in an equitable manner; (g) no creditor shall incur greater losses than would have been incurred if an entity referred to in Article 2 had been wound up under normal insolvency proceedings in accordance with the safeguards provided for in Article 29; (h) covered deposits are fully protected; and (i) resolution action is taken in accordance with the safeguards in this Regulation. 2. Where an institution is a group entity, without prejudice to Article 14, the Board, the Council and the Commission, when deciding on the application of resolution tools and the exercise of resolution powers, shall act in a way that minimises the impact on other group entities and on the group as a whole and minimises the adverse effect on financial stability in the Union and its Member States, in particular in the countries where the group operates. 3. Where the sale of business tool, the bridge institution tool or the asset separation tool is applied to an entity referred to in Article 2 of this Regulation, that entity shall be considered to be the subject of bankruptcy proceedings or analogous insolvency proceedings for the purposes of Article 5(1) of Council Directive 2001/23/EC. 4. When deciding on the application of resolution tools and the exercise of resolution powers, the Board shall instruct national resolution authorities to inform and consult employee representatives where appropriate. This is without prejudice to provisions on the representation of employees in management bodies as provided for by national law or practice. Bibliography John Armour et al., ‘What Is Corporate Law?’ in: Reinier Kraakman et al. (eds), The Anatomy of Corporate Law – A Comparative and Functional Approach (3rd edn, Oxford University Press, Oxford 2017), 1; Phoebus Athanassiou, ‘Valuation in resolution and the “no-creditor-worse-off principle”’, Butterworth’s Journal of International Banking and Financial Law 1 (2014), 16; Douglas Baird, ‘A World without bankruptcy’ in: Jagdeep S. Bhandari and Lawrence A. Weiss (eds), Corporate Bankruptcy –
Jens-Hinrich Binder
631
Art. 15 SRMR
General principles governing resolution
Economic and Legal Perspectives (Cambridge University Press, Cambridge 1996), 29; Basel Committee on Banking Supervision, ‘Report and Recommendations of the Cross-border Bank Resolution Group‘ (March 2010); Jens-Hinrich Binder, ‘“Too-big-to-fail” – can alternative resolution regimes really remedy systemic risk in large financial institutions’ insolvency?’ in: John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh (eds), Managing Risk in the Financial System (Edward Elgar Publishing, Cheltenham 2011), 233; id., ‘Resolution: Concepts, Requirements, and Tools’ in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, Oxford 2016), Ch. 2; id., ‘The position of creditors under the BRRD’ in: Bank of Greece (ed), Commemorative Volume for Leonidas Georgakopoulos (2016), 37; id., ‘Zivilrechtliche und strafrechtliche Aufarbeitung der Finanzmarktkrise’, ZGR (2016), 229; id., ‘The Relevance of the Resolution Tools’, in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave MacMillan, Cham 2019), 299; id., ‘Proportionality at the Resolution State: Calibration of Resolution Measures and the Public Interest Test’, EBOR 21 (2020), 453; id., ‘Resolving a Bank – Judicial Review With Regard to the Exercise of Resolution Powers’, in: Chiara Zilioli and Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, Cheltenham 2021), 367; Bethany Blowers and Garry Young, ‘The Economic Impact of Insolvency Law’ in: David G. Mayes and Aarno Liuksila (eds), Who Pays for Bank Insolvency? (Palgrave Macmillan, Basingstoke 2004), 164; Veronica Carriero, ‘Bank Rescues and Legal Challenges: The Case of Bail In’, EBLR (2017), 635; Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014); Anna Gardella, ‘Bail-in and the Financing of Resolution within the SRM Framework’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2 nd edn, Oxford University Press, Oxford 2020), 451; Christos Hadjiemmanuil, ‘Bank Stakeholders’ Mandatory Contribution to Resolution Financing: Principle and Ambiguities of Bail-in’ in: ECB (ed), ECB Legal Conference 2015 (2015), 225; Matthias Haentjens, ‘Title IV – Resolution’ in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 219; Victor P.G. de Serière and Daphne M. van der Houwen, ‘“No Creditor worse off ” in case of bank resolution: food for litigation?’, JIBLR (2016), 376; Gustaf Sjöberg, ‘Banking Special Resolution Regimes as a Governance Tool’ in: Wolf-Georg Ringe and Peter M. Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing, Oxford 2014), 187; UNCITRAL, ‘Legislative Guide on Insolvency Law – Parts I and II‘ (2005); id., ‘Legislative Guide on Insolvency Law – Part IV‘ (2013); Tobias H. Tröger, ‘Too Complex to Work: A Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime’, JFR 4 (2018), 35; Karl-Philipp Wojcik, ‘The Significance and Limits of the “No Creditor Worse Off ” Principle for an Effective Bail-In’ in: ECB (ed), ECB Legal Conference 2015 (2015), 253; id., ‘Bail-in in the Banking Union’, CMLR 53 (2016), 91. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. General substantive and procedural principles applicable to resolution actions (Art. 15(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Policy background and overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Fundamental principles governing the allocation of losses between shareholders and creditors (Art. 15(1)(a) and (b) SRMR) . . . . . . . . . . . . . . . . . . . . III. Treatment and responsibilities of management and other persons exercising influence on management in resolution (Art. 15(1)(c)-(e) SRMR) . . . . . . . . . . . 1. Definition of ‘management body’ and ‘senior management’ . . . . . . . . . . . . . . 2. Dismissal and replacement of management body and senior management (Art. 15(1)(c) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Responsibilities and duties of management in resolution (Art. 15(1)(d) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Personal liability for the failure (Art. 15(1)(e) SRMR) . . . . . . . . . . . . . . . . . . . . . IV. The position of creditors in resolution (Art. 15(1)(f)-(i) BRRD) . . . . . . . . . . . . . 1. ‘Equitable’ treatment of creditors (Art. 15(1)(f) SRMR) . . . . . . . . . . . . . . . . . . . a) Background and function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Technical details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Legal significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. ‘No creditor worse off ’ principle (Art. 15(1)(g) SRMR) . . . . . . . . . . . . . . . . . . . a) Significance and function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Practical implementation and limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Full protection of covered deposits (Art. 15(1)(h) SRMR) . . . . . . . . . . . . . . . . V. Resolution actions to respect ‘safeguards’ (Art. 15(1)(i) SRMR) . . . . . . . . . . . . . .
632
Jens-Hinrich Binder
1 3 3 8 11 11 13 16 17 20 20 20 21 23 25 27 27 30 34 35
Art. 15 SRMR
General principles governing resolution
C. Minimisation of impact on group entities, the relevant group as a whole, and of adverse effects on financial stabilities in the Union and its Member States (Art. 15(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
D. Employees’ rights und employees’ representation (Art. 15(3) and (4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
A. Introduction Art. 15(1) SRMR, essentially a verbatim adaptation of Art. 34(1) BRRD, comple- 1 ments the definition of ‘resolution objectives’ in Art. 14 SRMR with a list of ‘general principles governing resolution’, which translate the broader ‘resolution objectives’ into more specific substantive and procedural requirements to be observed by the SRB, the Council, the Commission and NRAs when devising and implementing resolution actions. Just like the resolution objectives, the ‘general principles’ closely mirror international standards.1 Although the substantive content is diverse and addresses a broad range of aspects (including general principles for loss distribution and creditor rights, the treatment of management and manager liability, and, in conjunction with Art. 29 SRMR and the BRRD, safeguards for certain types of contractual relationships), the principles, in conjunction with other provisions of the SRMR and the national laws transposing the BRRD, all serve to operationalise the resolution objective in line with the general policy to simulate the economic outcomes of traditional insolvency proceedings while avoiding the disruptive effects that would be associated with them (see infra, → paras. 3–7). In a different vein, Art. 15(2) SRMR, adapting Art. 34(2) BRRD and, to some extent, duplicating requirements arising under Art. 6(3) and (4) SRMR, then adds specific principles for the protection of group entities on the one hand and other Member States’ interests on the other hand (see infra, → para. 36). Finally, Art. 15(3) and (4) SRMR address the protection of employees in resolution (see infra, → paras. 37–39). Just as for Art. 14 SRMR, the scope ratione materiae is defined by way of reference to 2 resolution procedures under Art. 18 SRMR (Art. 14(1) SRMR). However, Art. 15(1), (2) and (3) SRMR are also included in the list of provisions directly applicable to the resolution of less significant institutions in the responsibility of NRAs in Art. 7(3)(4) SRMR, substituting the national laws transposing Art. 34 BRRD to that extent.
B. General substantive and procedural principles applicable to resolution actions (Art. 15(1) SRMR) I. Policy background and overview The principles stipulated in Art. 15(1) SRMR clearly reflect the fundamental policy 3 underpinning both the BRRD and the SRMR, namely to simulate the economic outcomes of traditional forms of insolvency procedures to the extent possible, so as to preserve a market-oriented incentive structure for bank shareholders, investors in bank debt and bank managers, while avoiding the systemic implications that would
1 Cf. FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014), Preamble and para. 3.2.
Jens-Hinrich Binder
633
Art. 15 SRMR
General principles governing resolution
commonly be associated with them.2 This reflects the insight that the provision of emergency subsidies to the financial industry during the global financial crisis, while successful at containing the implications of individual failures on other market participants and the real economy, would be untenable as a standard response to insolvencies of systemically important financial institutions not just because of the resulting burden on public budgets, but also because it reduced incentives to control excessive risk-taking by the management of banks (‘moral hazard’) in a way that would ultimately destabilise financial markets.3 4 In principle, there are compelling arguments supporting the application of the general insolvency law principles governing the distribution of losses according to a pre-defined hierarchy also to financial institutions that are failing or likely to fail. By allocating losses, first, to the shareholders as economic owners of the relevant company and subsequently to creditors, the traditional hierarchy of claims that has evolved as a characteristic of insolvency legislation worldwide over centuries not just seeks to ensure the fair treatment of stakeholders in cases where the liabilities of a firm exceed the aggregated value of its assets. Moreover, it also penalises actors who could have monitored and restricted the relevant firm’s risk profile prior to the failure, be it by using their control rights as shareholders, by exercising contractual rights as debt investors (e.g., in the form of covenants in corporate bonds or loan documentation), or by simple termination of the relevant contractual relationship.4 Insolvency law in its capacity as a system of sanctions for excessive risk-taking is thus an integral part of modern market economies. Finally, managers, even if they are not simultaneously exposed as shareholders and/or creditors of a failing firm, will also usually be penalised in traditional insolvency procedures, inasmuch as they stand to lose their positions as a result of the forced liquidation of their firm, and potentially because a breach of their duties might trigger civil or even criminal liability on the initiative of the court or a liquidator. 5 Irrespective of these functional advantages, however, traditional insolvency laws have become accepted widely, and with compelling reasons, to be unsuitable for the management and resolution of insolvencies of large, complex, and highly interconnected financial institutions. The reasons are manifold, including the institutional complexity of insolvency procedures and, in particular, the disruptive effects of the initiation process, which frequently involves the imposition of a moratorium for payments and a stay of enforcement proceedings against the relevant institution, for ongoing contractual relationships.5 6 Both aspects, the need to simulate the economic outcome of traditional insolvency laws for bank shareholders, creditors, and bank management on the one hand and the need to substitute those procedural elements of such laws that would give rise to sys2 See, e.g., Binder, in Binder and Singh (eds), Bank Resolution – The European Regime (2016), paras. 2.16 and 2.62. And cf. Recital 45 BRRD: ‘In order to avoid moral hazard, any failing institution should be able to exit the market, irrespective of its size and interconnectedness, without causing systemic disruption.’ 3 For a comprehensive analysis of the underlying policy, see ibid., paras. 2.05–2.19. 4 See, generally, e.g., Baird, in: Bhandari and Weiss (eds), Corporate Bankruptcy – Economic and Legal Perspectives (1996), 29, at p. 32. See also Blowers and Young, in: Mayes and Liuksila (eds), Who Pays for Bank Insolvency (2004), 164, at pp. 164–165. 5 See, for a detailed analysis and review of the relevant literature, Binder, in Binder and Singh (eds), Bank Resolution – The European Regime (2016), para. 2.11; id. in: LaBrosse, Olivares-Caminal and Singh (eds), Managing Risk in the Financial Sector (2011), 233, at pp. 234–240. For a good functional analysis, see also Sjöberg, in: Ringe and Huber (eds), Legal Challenges in the Global Financial Crisis (2014), 187, at pp. 188, 194–200.
634
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
temic disruption, have been recognised in the relevant international standards6 and have also become formative for the BRRD. Resolution is thus conceived as an ultima ratio for application in cases where traditional insolvency procedures would trigger undesirable economic implications for systemic stability, and as a functionally equivalent substitute for traditional insolvency laws to the extent these should be disapplied in order to avoid such implications.7 This is most evident in the design of the bail-in tool as an instrument to realign the incentives of shareholders and creditors with the long-term sustainability of its risk profile, thus reducing the risk of failures with potentially contagious implications for the stability of financial markets and, ultimately, the real economy.8 Regardless of which resolution tool will ultimately be applied in the circumstances, the core objective is always to protect certain business activities – those that are systemically relevant, or ‘critical’ as covered by Art. 14(2)(a) SRMR (supra, → Art. 14 paras. 6–12) – against the implications of insolvency management, rather than to protect the relevant institute as such. From a functional perspective, bank resolution thus has to complement governance mechanisms rooted in general company and contract law in essentially the same way as traditional corporate insolvency law.9
6 See Basel Committee, Report and Recommendations of the Cross-border Bank Resolution Group, paras. 2–16 and 120–121; FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014), Preamble. 7 See, again, Recital 45 BRRD: ‘In order to avoid moral hazard, any failing institution should be able to exit the market, irrespective of its size and interconnectedness, without causing systemic disruption. A failing institution should in principle be liquidated under normal insolvency proceedings. However, liquidation under normal insolvency proceedings might jeopardise financial stability (…)’. And cf. Recital 46 BRRD (Recital 49 SRMR): ‘The winding up of a failing institution through normal insolvency proceedings should always be considered before resolution tools are applied.’ 8 Cf., in particular, Recitals 1, 5 and 67 BRRD: Recital 1 BRRD: ‘The financial crisis has shown that there is a significant lack of adequate tools at Union level to deal effectively with unsound or failing credit institutions and investment firms (‘institutions’). Such tools are needed, in particular, to prevent insolvency or, when insolvency occurs, to minimise negative repercussions by preserving the systemically important functions of the institution concerned. During the crisis, those challenges were a major factor that forced Member States to save institutions using taxpayers’ money. The objective of a credible recovery and resolution framework is to obviate the need for such action to the greatest extent possible.’ Recital 5 BRRD: ‘A regime is therefore needed to provide authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the institution’s critical financial and economic functions, while minimising the impact of an institution’s failure on the economy and financial system. The regime should ensure that shareholders bear losses first and that creditors bear losses after shareholders, provided that no creditor incurs greater losses than it would have incurred if the institution had been wound up under normal insolvency proceedings in accordance with the no creditor worse off principle as specified in this Directive. New powers should enable authorities, for example, to maintain uninterrupted access to deposits and payment transactions, sell viable portions of the institution where appropriate, and apportion losses in a manner that is fair and predictable. Those objectives should help avoid destabilising financial markets and minimise the costs for taxpayers.’ Recital 67 BRRD: ‘(…) The bail-in tool will therefore give shareholders and creditors of institutions a stronger incentive to monitor the health of an institution during normal circumstances and meets the Financial Stability Board recommendation that statutory debt-write down and conversion powers be included in a framework for resolution, as an additional option in conjunction with other resolution tools.’ And see, for further discussion, Gardella, in: Busch and Ferrarini (eds), European Banking Union (2 nd edn, 2015), paras. 11.01–11.03; Hadjiemmanuil, in: ECB (ed), ECB Legal Conference 2015 (2015), 225, at pp. 232–234; Wojcik, CMLR 53 (2016), 91, at pp. 91–95. 9 See, again, also Sjöberg, in: Ringe and Huber (eds), Legal Challenges in the Global Financial Crisis (2014), 187, at p. 188 (‘Special Resolution Regimes as a Governance Tool’).
Jens-Hinrich Binder
635
Art. 15 SRMR 7
General principles governing resolution
The principles stipulated in Art. 15(1) SRMR (Art. 34(1) BRRD) are reflective of this background and translate the underlying policy into specific requirements to be followed by relevant actors when designing and calibrating resolution actions. These requirements are in part substantive, in part procedural in nature. Principles (a) and (b) define the substantive fundamentals governing the allocation of losses between shareholders and creditors in resolution (see infra, → paras. 8–10), which are then taken up and specified further in Art. 17 SRMR. For the management board and senior management, principles (c)-(e) then stipulate resolution-specific duties and replicate the consequences that would usually be triggered if the relevant entity were to enter traditional insolvency procedures (see infra, → paras. 11–19). Principles (f)-(h), also designed so as to realign the consequences of resolution with those of traditional insolvency procedures, then add specific requirements for the treatment of creditors in resolution (see infra, → paras. 20–34). Finally, principle (i), in conjunction with Art. 29 SRMR and the national laws transposing the BRRD, requires that ‘safeguards’ be respected in order to protect certain contractual relationships between institutions under resolution and counterparties, such as would also apply under general insolvency law (see infra, → para. 35).
II. Fundamental principles governing the allocation of losses between shareholders and creditors (Art. 15(1)(a) and (b) SRMR) 8
The allocation of losses of an insolvent company to shareholders and creditors according to a pre-defined hierarchy of claims obviously constitutes one of the core elements of traditional insolvency procedures and, at the same time, is the key determinant of the incentive structure for both groups associated with such procedures (cf. infra, → Art. 27 paras. 2–7). The principles governing the allocation of losses thus can be described as a function of the core socio-economic problems to be addressed by insolvency procedures, namely ‘to strike a balance not only between the different interests of these stakeholders, but also between these interests and the relevant social, political and other policy considerations that have an impact on the economic and legal goals of insolvency proceedings’.10
Implementing a pre-defined concept that reflects the contractually determined economic position of shareholders – as owners entitled to the residual profits of a company ultimately bearing the commercial risk taken thereby,11 – and the creditors, insolvency law thus provides for a predictable framework for the solution of a multipolar economic conflict, respects economic entitlements, ensures fair burden-sharing, and encourages investment and appropriate risk management by shareholders and creditors alike. 12 10 Art. 15(1)(a) and (b) SRMR adapt this rationale and, consequently, require that the allocation of losses to shareholders and creditors of an institute that is failing or likely to fail follows the same principles as the corresponding hierarchy of claims in traditional insolvency procedures. The two principles define but the general concept underpinning the allocation of losses in resolution, while the technical details are defined in Art. 17 SRMR in conjunction with the national laws transposing Arts. 47, 48 and 108 BRRD (see, for details, infra, → Art. 17 paras. 2–6). The specifications included in these provi9
10 As aptly summarised in UNCITRAL, Legislative Guide on Insolvency Law – Part I (2005), at p. 9 para. 2. 11 See, generally, e.g., Armour et al., in: Kraakman et al. (eds), Anatomy of Corporate Law (3 rd edn, 2017), 1, at p. 13. 12 Cf. UNCITRAL, Legislative Guide on Insolvency Law – Part I (2005), at p. 13 para. 12.
636
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
sions is particularly relevant given the relevance of non-equity capital instruments for the funding structures of credit institutions, which is reflected particularly in the complex definition of the applicable order of priority in Art. 48(1) BRRD (infra, → Art. 17 paras. 9–30).
III. Treatment and responsibilities of management and other persons exercising influence on management in resolution (Art. 15(1)(c)-(e) SRMR) 1. Definition of ‘management body’ and ‘senior management’ Art. 15(1)(c)-(e) SRMR lay down general principles for the treatment and the respon- 11 sibilities of bank managers in resolution. However, the terms ‘management body’ and ‘senior management’ are not defined in the SRMR. Art. 1(2)(24) and (25) BRRD (which apply by default pursuant to Art. 32(2) SRMR) define them by way of reference to the corresponding provisions in the CRD IV. Pursuant to Art. 3(1)(7) CRD IV, ‘management body’ means an institution's body or bodies, which are appointed in accordance with national law, which are empowered to set the institution's strategy, objectives and overall direction, and which oversee and monitor management’s decision-making, and include the persons who effectively direct the business of the institution’.
The term ‘senior management’, then, is defined by Art. 3(1)(9) CRD IV as referring to ‘those natural persons who exercise executive functions within an institution and who are responsible, and accountable to the management body, for the day-to-day management of the institution’.
These definitions are designed as a generic concept to capture the reality in different 12 board models, including, in particular, one-tier corporate boards with board executive and non-executive (supervisory) directors and two-tier boards (as mandatory for stock corporations under German law).13 It should be noted that, as a consequence of such differences, the scope of provisions addressing the ‘management body’ or the ‘senior management’ may differ from entity to entity, with overlaps between the two categories so defined.14 This is certainly not intended but should be borne in mind also for the purposes of Art. 15 SRMR (as well as of the national laws transposing the corresponding requirements of Art. 34(1) BRRD).
2. Dismissal and replacement of management body and senior management (Art. 15(1)(c) SRMR) Pursuant to Art. 15(1)(c) SRMR, the
13
‘management body and the senior management of the relevant institution are replaced, except where the retention of the management body and senior management, in whole or in part, as appropriate to the circumstances, is considered to be necessary for the achievement of the resolution objectives’.
In requiring the dismissal of management, the provision imposes a sanction that will usually occur also within, and as a result of, traditional insolvency proceedings, where a court-appointed liquidator (receiver, administrator, …) replaces existing management in order to protect the assets of an insolvent firm from transactions to the detriment of the
13 See, generally, Recital 55 CRD IV; for analysis, cf. Mülbert and Wilhelm, in: Busch and Ferrarini (eds), European Banking Union (2015), paras. 6.27–6.28 and 6.38–6.47. 14 Ibid., paras. 6.40–6.43.
Jens-Hinrich Binder
637
Art. 15 SRMR
General principles governing resolution
creditors as a whole, and to implement the liquidation.15 In the context of bank resolution, this objective is also addressed with the power to appoint a temporary administrator and a special manager and can thus be accomplished even before the initiation of resolution actions (cf. Arts. 28, 29 and 30 BRRD).16 At the same time, the risk of losing a management position can be expected to provide an incentive against excessive risktaking, and thus to play an important preventive role, which explains the fact that the dismissal of the management body and senior management ranks highly among the principles stipulated in Art. 15(1) SRMR. Although not expressly mentioned in the Preamble of the SRMR or the BRRD, the underlying policy can thus be described as to sanction those individuals whose commercial decisions and/or failure to correct excessive risk-taking by the executive directors caused or facilitated the financial problems of the relevant bank. 14 Implementation has to be carried out by NRAs in accordance with Art. 29 SRMR in exercising their powers under the national laws transposing Art. 63(1)(l) BRRD. Significantly, the applicable procedure is thus a matter of national law, which facilitates adaptation to the relevant company law framework but could also give rise to technical impediments to implementation (e.g., with regard to registration and/or transparency requirements relating to the composition of the board) not regulated by the BRRD.17 Moreover, given residual divergences in board models between participating Member States (see supra, → para. 12), difficulties could arise because the scope of the principle stipulated in Art. 15(1)(c) SRMR is not entirely clear. From a functional perspective, the dismissal and replacement of board members and/or office holders qualifying as ‘senior management’ ideally should be calibrated so as to capture those individuals who effectively determine, or control, the relevant institution’s risk-taking and whose actions, decisions, or emissions therefore can be qualified as having contributed to the failure. Given the rather strict wording of Art. 15(1)(c) SRMR (and irrespective of exemptions under the second half of the provision, see infra, → para. 15), however, there appears to be little room for a differentiated treatment in this respect. This may help to explain why the decision whether to replace (members of) the management board and of senior management, in the first resolution case under the auspices of the SRB (the resolution of Banco Popular Español S.A.), appears to have been left entirely to the Spanish NRA, with no specific prescriptions or guidance included in the SRB’s decision to adopt a resolution scheme under Art. 18 SRMR.18 15 Irrespective of the foregoing, it should be noted that exemptions from the principle are permissible, in whole or in part, if this ‘is considered to be necessary for the achievement of the resolution objectives’. While this introduces some flexibility to the wording of Art. 15(1)(c) SRMR, it should be noted that exemptions must be justifiable against the resolution objectives defined in Art. 14(2) SRMR. At least if interpreted restrictively, exemptions merely on the grounds that the relevant board member or senior manager was not personally responsible for the financial problems of the bank are not covered, which is regrettable, especially in cases where the management had been changed only recently. E.g., UNCITRAL, Legislative Guide on Insolvency Law – Part II (2005), at p. 161–162 para. 2. Cf. Recital 40 BRRD. 17 Art. 63(1)(l) BRRD requires that resolution authorities, as part of their general resolution powers, shall have ‘the power to remove or replace the management body and senior management of an institution under resolution’. But note that, in contrast to Art. 28 BRRD (on the ‘removal of senior management and management body’ prior to formal resolution) no reference is made to applicable national (company) law in this respect, which leaves room for potential conflicts between the resolution regime and the applicable company law as to the specific procedural requirements and consequences to be followed. 18 Cf. SRB, Decision of 7 June 2017 concerning the adaption of a resolution scheme in respect of Banco Popular Español, S.A. (SRB/EES/2017/08), Art. 7. 15
16
638
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
Rather, exemptions would be conceivable in cases where the retention of residual officeholders is necessary to prevent disruptions to systemically relevant business (‘critical functions’, cf. Art. 14(2)(a) SRMR and supra, → Art. 14 paras. 6–12). This could be the case where it is decided that the relevant entity should be recapitalised as a going concern, and where board members and/or senior managers should be retained because of their specialist expertise. From a functional perspective, such scenarios are comparable to ‘debtor in possession’ procedures under general insolvency law.19
3. Responsibilities and duties of management in resolution (Art. 15(1)(d) SRMR) Related to the foregoing, Art. 15(1)(d) SRMR requires both the management body 16 and senior management to ‘provide all necessary assistance for the achievement of the resolution objectives’. By imposing a duty to cooperate with resolution authorities, the provision obviously seeks to reduce the potential for obstructive behaviour on the part of the management and makes collaboration with resolution authorities mandatory. This is important not just where residual management has been retained during resolution under an exemption in accordance with Art. 15(1)(c) SRMR (see supra, → para. 15), but also in relation to new officeholders appointed during preventive measures or in resolution. The obligation can be relevant not just in cases where the institute under resolution is to be recapitalised as a going concern, but also in other scenarios, where cooperation from the part of the institute’s management is necessary for the implementation of other resolution tools (e.g., where internal information is needed in order to facilitate a full or partial transfer of relevant business activities to a bridge institution or a private-sector purchaser). As a result of Art. 15(1)(d) SRMR, the corporate duties of managers are shifted from serving the interests of the company and its shareholders to serving the public interest, as defined by the resolution objectives. Importantly, the duties should be interpreted as overriding applicable restrictions under general company law. A manager fulfilling his or her obligations under Art. 15(1)(d) SRMR, on the express request of the resolution authority or on his or her own initiative, cannot reasonably be held responsible for breach of a fiduciary duty owed to the institute under resolution or to its shareholders. While the principle is tailored to the needs of resolution procedures and reflects the overarching public interest in the preservation of financial stability, it should be noted that, just as the other principles formulated in Art. 15(1) SRMR, it is fully consistent with general insolvency law, which will frequently stipulate general duties of cooperation for the debtor company and its management, for application not just in ‘debtor in possession’ scenarios.20
4. Personal liability for the failure (Art. 15(1)(e) SRMR) Pursuant to Art. 15(1)(e) SRMR, ‘natural and legal persons’ are to be made
17
‘liable, subject to national law, under civil or criminal law, for their responsibility for the failure of the institution under resolution’.
The provision requires a consequence that will frequently arise also within traditional insolvency proceedings, where substantive rules governing the liability of company directors for acts committed in the vicinity of insolvency, as well as frameworks for the 19 See generally, UNCITRAL, Legislative Guide on Insolvency Law – Part II (2005), at pp. 165–166 paras. 16–18. 20 Cf., e.g., UNCITRAL, Legislative Guide on Insolvency Law – Part II (2005), at pp. 167–170 paras. 22–30.
Jens-Hinrich Binder
639
Art. 15 SRMR
General principles governing resolution
enforcement of such rules, feature as an important component of the applicable laws and thus play a role as part of the incentive structure created thereby.21 18 Importantly, unlike the principles formulated in Art. 15(1)(c) and (d) SRMR, the scope of Art. 15(1)(e) SRMR is not restricted to the management board and senior management, but includes all persons responsible for the failure of the relevant institute. While this could potentially facilitate liability also of large shareholders whose influence on management decisions may have contributed to the failure, the focus, for obvious reasons, will in most cases be on members of the management board and senior management. 19 Implementation of the principle will rest on the applicable national civil and criminal law, which have not been harmonised in this respect and, consequently, can be expected to differ significantly, e.g. with regard to the availability of criminal sanctions against legal persons. Against this backdrop, the enforcement of both civil and criminal liability will, in all likelihood, be exclusively reserved to NRAs, with only little (if any) guidance given by the SRB.22 Given the complexity of banking businesses and the resulting difficulty to establish a causal link between individual decisions or actions on the one hand and the ultimate failure of a firm on the other, that the practical relevance of Art. 15(1)(e) SRMR should not be overestimated.23 Irrespective of this caveat, it should be noted that the principle combines a substantive standard with a procedural enforcement aspect, in that it requires resolution authorities, when designing and implementing resolution actions, at least to contribute to the examination of the causes of a failure, and to initiate and support liability actions where merited on the facts of the case.
IV. The position of creditors in resolution (Art. 15(1)(f)-(i) BRRD) 1. ‘Equitable’ treatment of creditors (Art. 15(1)(f) SRMR) a) Background and function 20
Art. 15(1)(f) SRMR requires that creditors ‘of the same class’ be treated ‘in an equitable manner’. Evidently, the provision is designed so as to transpose a core principle of general insolvency procedures into the area of bank resolution, namely the principle of equal treatment of creditors (also known as ‘pari passu principle’). This principle reflects the general consideration that the economic outcome of insolvency should be fair, predictable, and, to the extent possible given the restrictions resulting from the debtor’s assets, respect economic entitlements created prior to insolvency 24 (see also supra, → para. 9). In adopting the same principle for the purposes of resolution actions, Art. 15(1) (f) SRMR is a particularly clear-cut illustration of the policy to simulate the economic outcome of traditional insolvency procedures – to the extent that these are compatible
21
44.
Cf., e.g., UNCITRAL, Legislative Guide on Insolvency Law – Part IV (2013), at pp. 18–30 paras. 17–
22 It is worth noting, in this context, that the resolution scheme with regard to Banco Popular does not even mention the abstract possibility of liability, see Cf. SRB, Decision of 7 June 2017 concerning the adaption of a resolution scheme in respect of Banco Popular Español, S.A. (SRB/EES/2017/08). 23 Cf., e.g. (discussing civil and criminal liability cases in the aftermath of the global financial crisis in Germany) Binder, ZGR (2016), 229. 24 Cf., e.g., UNCITRAL, Legislative Guide on Insolvency Law – Part I (2005), at pp. 11–12 para. 7: The objective of equitable treatment is based on the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognizes that all creditors do not need to be treated identically, but in a manner that reflects the different bargains they have struck with the debtor.
640
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
with the public interest in the preservation of financial stability – also in the case of large and complex financial institutions’ insolvency (see supra, → para. 3). b) Technical details While the term ‘class’ has not been defined in the SRMR (or the BRRD), it is evident 21 that the provision refers to the concept of classes as established in traditional insolvency law, thus differentiating between, e.g., secured and unsecured creditors, and respecting existing preferences. In traditional insolvency procedures, the relevant class usually decides on the ranking of claims for the distribution of assets, but may also come with different voting rights to the extent that creditors are granted rights of participation in the applicable decision-making process. 25 The classification of claims should mirror the corresponding, contractually agreed and/or statutory economic entitlement of each creditor, and is thus directly linked to the overall objective of ensuring the fair, predictable treatment of creditors in a manner that respects such entitlements (see supra, → para. 9). 26 Significantly, although Art. 108 BRRD (as amended by Dir. 2017/239927) has introduced a certain level of minimum harmonisation with regard to a few bank-specific obligations, the allocation of individual claims to specific classes remains largely a matter to be determined by the applicable national insolvency laws, which may differ in numerous respects. This interpretation is consistent with the use of the concept in Art. 36(8) BRRD, which expressly refers to the valuation of claims on the basis of ‘the subdivision of the creditors in classes in accordance with their priority levels under the applicable insolvency law’. As significant exemptions from the general principle apply in conjunction with other provisions of the Regulation (see infra, → paras. 23 and 24), the resulting lack of certainty is probably tolerable. Similarly, neither the BRRD nor the SRMR defines what constitutes ‘equitable treat- 22 ment’ for the purposes of Art. 15(1)(f) SRMR. The interpretation of that term therefore has to rely on general concepts of insolvency law, which are only vaguely defined and will, again, differ under the applicable national laws, however. Generally, ‘equitable treatment’ of creditors should be interpreted as requiring that similarly situated claims (based on the economic nature of the claims as defined by contract or statute) should be treated in the same manner in insolvency (and resolution), especially with regard to the distribution of assets and voting rights.28 Within the context of resolution, where voting of creditors does not take place, the requirement should include non-discriminatory, equal treatment with regard to the distribution of assets, but, arguably, also with regard to information rights. c) Qualifications Importantly, the principle of equitable treatment applies only ‘except where otherwise 23 provided in this Regulation’, which opens the gate to significant, and far-reaching, quali25 Cf., e.g., UNCITRAL, Legislative Guide on Insolvency Law – Part II (2005), at p. 220–221 para. 36 and at p. 222 paras. 41–43 (each in the context of reorganisation procedures, but equally applicable to liquidation). 26 Ibid., at p. 218 para. 27. 27 Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy, OJ L 345 of 27.12.2017, p. 96. 28 Cf., again, UNCITRAL, Legislative Guide on Insolvency Law – Part II (2005), at p. 218 para. 17: ‘The primary purpose of classifying claims is to satisfy the requirements to provide fair and equitable treatment to creditors, treating similarly situated claims in the same manner and ensuring that all creditors in a particular class are offered the same menu of terms.’
Jens-Hinrich Binder
641
Art. 15 SRMR
General principles governing resolution
fications. As recognised, inter alia, by Art. 14(2)(a) SRMR (supra, → Art. 14 para. 5), the fundamental decision not to protect individual banks (qua systemic relevance) but to shield systemically relevant business activities against the economic implications of a failure, almost by definition, implies the necessity to distinguish between activities that are systemically relevant (and therefore merit special protection), and those which are not. This explains why exemptions from the general principle are an integral part of the very concept of resolution as a functional substitute for traditional insolvencies, and are bound to occur on a regular basis. Recital 60 SRMR (just as Recital 47 BRRD, from which the former has been adapted) expressly recognises the need for differentiations in the treatment of creditors, and only requires that such differentiations be ‘justified in the public interest and should be neither directly nor indirectly discriminatory on the grounds of nationality’.
While these conditions are not replicated in the wording of Art. 15(1)(f) SRMR, the latter condition follows directly from Art. 6(1) SRMR and the former from the ‘public interest’ test in Art. 18(5) in conjunction with Art. 14(2) SRMR (supra, → Art. 14 paras. 3, 4 and 12). 24 Both the rationale for differentiations in treatment and their dimension are particularly evident in the case of partial transfers of certain contractual relationships in the case of a sale of business (Art. 24 SRMR) or transfers to a bridge institution (Art. 25 SRMR), where the transfer will preserve the relevant relationship – and thus the creditors’ positions – without interruption, whereas all liabilities not transferred to the private sector purchaser or the bridge institution stand to lose value to a significant extent. Similarly, exemptions from the application of the bail-in tool inevitably lead to differentiations between creditors that would normally rank equally in insolvency procedures, irrespective of whether they are expressly recognised in Art. 27(3) SRMR (cf. Art. 44(2) BRRD) or implemented, on a case-by-case basis at the discretion of the SRB, under Art. 27(5) SRMR (cf. Art. 44(3) BRRD). Other provisions which privilege specific relationships at the expense of the residual value available to the creditors as a whole include, in particular, the ‘safeguards’ for specific contractual relationships prescribed by Ch. VII (Arts. 73–80 BRRD), applicable to resolution actions under the auspices of the SRM by virtue of Art. 15(1)(i) in conjunction with Art. 29(1) SRMR (see infra, → para. 35). d) Legal significance 25
In comparison with the ‘no creditor worse off ’ principle in Art. 15(1)(g) SRMR, whose breach triggers claims for compensation (see infra, → para. 27), the legal significance of Art. 15(1)(f) SRMR is somewhat vague. In principle, it is certainly conceivable that aggrieved creditors could rely on the principle in proceedings brought under Art. 86 SRMR in conjunction with Art. 263 TFEU.29 Given that compensation is restricted to cases where the relevant creditor can demonstrate to have received less as a result of resolution than would have been the case had the relevant institution been liquidated under the national insolvency laws, however, the practical relevance of Art. 15(1)(f) SRMR seems rather limited, all the more so because relevant qualifications will usually follow directly from the provisions discussed above.
29 For a discussion of the problems of judicial review of resolution actions, see, generally, Binder, in: Zilioli and Wojcik (eds), Judicial Review in the European Banking Union (2021), 367, at 379–386, paras. 22.18–22.30.
642
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
Irrespective of the foregoing, it should be noted that, for the interpretation of 26 Art. 15(1)(f) SRMR, it may not always be possible to distinguish between (a) exemptions to the principle of equitable treatment of creditors within a given class of creditors, and (b) cases which should rather be interpreted as reflecting a reclassification of claims by virtue of substantive provisions of the SRMR and/or the BRRD. For example, the preferential treatment of covered deposits, as required by Arts. 14(2)(d) and Art. 15(1)(h) SRMR could be interpreted in both ways: as an exemption for the equal treatment of unsecured creditors, but also as reflecting the recognition of covered deposits as a specific class of claims under the resolution framework. As their status is expressly, and unambiguously, defined in the Regulation, however, it would appear that this distinction is but theoretical in nature and does not imply any practical consequences for the interpretation of Art. 15(1)(f) SRMR.
2. ‘No creditor worse off ’ principle (Art. 15(1)(g) SRMR) a) Significance and function Leaving aside the general principle of loss allocation defined in Art. 15(1)(b) SRMR 27 and the hierarchy of claims defined in Art. 17 SRMR and the national laws transposing Arts. 47 and 48 of the BRRD, the principle that creditors shall not incur greater losses than would have been incurred if the relevant entity ‘had been wound up under normal insolvency proceedings in accordance with the safeguards provided for in Article 29’ (known as ‘no creditor worse off ’ principle) arguably constitutes the most important determinant of the creditors’ position in bank resolution. The principle also mirrors international standards, as expressed in the Financial Stability Board’s Key Attributes.30 Art. 15(1)(g) SRMR provides creditors with a minimum level of protection, defined by reference to the hypothetical outcome of a liquidation of the relevant entity under the applicable national insolvency laws. Importantly, the substantive quantitative standard thereby defined is backed up by a statutory claim for payment of the difference against the SRF. This has been most clearly stated in Art. 75 BRRD, whereas Art. 20(16)-(18) SRMR as well as Art. 76(1)(e) SRMR merely take the existence of such a claim for granted and specify the procedural arrangements and competencies for such payments. As convincingly argued in the literature, the ‘no creditor worse off ’ principle – despite 28 its narrow wording – should be interpreted as covering not just the creditors’ position in a bail-in or otherwise, but also be extended to the treatment of investors in equity and other capital instruments issued by the relevant bank (in particular in the event of a write-down and/or conversion of capital instruments under Art. 21 SRMR).31 This is consistent with the general safeguard for shareholders and creditors in the case of partial
30 FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014), at p. 11 para. 5.2 31 See Wojcik, CMLR 53 (2016), 91, at p. 121 (highlighting the need to ensure a minimum level of protection of the right to property also for such instruments); Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), para. 7.74. See also Recital 77 BRRD, whereby ‘[e]xcept where otherwise specified in this Directive, resolution authorities should apply the bail-in tool in a way that respects the pari passu treatment of creditors and the statutory ranking of claims under the applicable insolvency law. (…)’.
Jens-Hinrich Binder
643
Art. 15 SRMR
General principles governing resolution
transfers and applications of the bail-in tool in Art. 73 BRRD32 and has also been recognised by EBA as a guiding principle for the treatment of the holders of such instruments in resolution.33 29 In combination, the ‘no creditor worse off ’ principle as defined by the above provisions reflects the notion that traditional insolvency procedures should be interpreted as a benchmark for the evaluation of alternative resolution arrangements, not only with regard to the incentive structure established in terms of the economic outcome for creditors and other stakeholders (see supra, → paras. 4–7), but also in terms of the maximum burden imposed on creditors as a result.34 From a functional perspective, the ‘no creditor worse off ’ principle thus complements the ‘public interest’ test defined in Art. 18(5) in conjunction with Art. 14(2) SRMR, which requires any resolution action (and any infringement of creditor rights associated with it) to be justified by public interest considerations (supra, → Art. 14 paras. 3, 4 and 12 and infra, → Art. 18 paras. 79–98). Jointly, both elements seek to enforce the principle of proportionality of resolution actions, which, particularly in the case of the ‘no creditor worse off ’ principle, also serves to address concerns with regard to the protection of the right to property under the EU Charter of Fundamental Rights and the European Convention on Human Rights, as well as under the national constitutions of Member States.35 Prima facie, the principle could also be interpreted as a substantive minimum compensation in return for the total exclusion of creditor participation in the design and implementation of resolution actions, which are carried out exclusively under the auspices of the SRB and NRAs, without formalised arrangements for the representation of creditors that are characteristic for traditional insolvency procedures.36 Given the practical limitations to the concept, however (see infra, → paras. 30–33), the value to creditors will frequently turn out to be much diminished. b) Practical implementation and limitations 30
While the principle as such is certainly sound and highly important from a conceptual perspective, it should be noted that its significance, in all likelihood, will be impaired by considerable difficulties which, at the same time, are likely to reduce the practical
Which reads: ‘Member States shall ensure that, where one or more resolution tools have been applied and, in particular for the purposes of Article 75: (a) except where point (b) applies, where resolution authorities transfer only parts of the rights, assets and liabilities of the institution under resolution, the shareholders and those creditors whose claims have not been transferred, receive in satisfaction of their claims at least as much as what they would have received if the institution under resolution had been wound up under normal insolvency proceedings at the time when the decision referred to in Article 82 was taken; (b) where resolution authorities apply the bail-in tool, the shareholders and creditors whose claims have been written down or converted to equity do not incur greater losses than they would have incurred if the institution under resolution had been wound up under normal insolvency proceedings immediately at the time when the decision referred to in Article 82 was taken.’ 33 Cf. EBA, Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments (5 April 2017, EBA/GL/2017/04), at p. 4. 34 See also Wojcik, in: ECB (ed), Legal Conference 2015 (2015), 253, at pp. 254–255. 35 Binder, EBOR 21 (2020), 453, at pp. 457–459; id., in: Bank of Greece (ed), Commemorative Volume for Leonidas Georgakopoulos (2016), 37, at p. 44; Gardella, in: Busch and Ferrarini (eds), European Banking Union (2015), paras. 11.24–11.31; Wojcik, CMLR 53 (2016), 91, at pp. 120–122; id., in: ECB (ed), ECB Legal Conference 2015 (2015), 253, at pp. 255–256. See also Recitals 62 and 63 SRMR. 36 See, generally, Binder, in: Bank of Greece (ed), Commemorative Volume for Leonidas Georgakopoulos (2016), 37, at p. 45. 32
644
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
value for creditors and increase the potential for protracted, costly and, ultimately, unpredictable and inefficient litigation particularly in, but not restricted to, bail-ins. 37 To begin with, creditors, by definition, are protected only if and to the extent that the 31 counterfactual insolvency value (in a liquidation scenario) is positive,38 not by way of comparison to a hypothetical scenario where the relevant entity would be restructured in full with or without the use of public funds (see also Art. 20(18) SRMR and infra, → Art. 18 paras. 81–88). To fully understand the implications, it is important to recognise that a forced liquidation of a banking book, in all likelihood, will usually trigger higher losses than a restructuring on a going-concern basis. If and to the extent that resolution leads to the preservation of contractual relationships, the relevant creditors will almost certainly fare better than under a hypothetical liquidation scenario, precluding their reliance on the ‘no creditor worse off ’ principle even if it could be established that alternative resolution measures would clearly have been far more beneficial on the facts of the case. And even creditors whose position vis-à-vis the relevant institute is not so preserved, may well benefit if the resolution actions have at least facilitated the preservation of some activities on a going‑concern basis. Even irrespective of the foregoing, implementation of the ‘no creditor worse off ’ 32 principle, by its very nature, always has to rest on the basis of complex assumptions regarding the determinants that would influence the hypothetical outcome of liquidation under general insolvency law. This has been addressed by the applicable valuation framework (Art. 20(16)-(18) SRMR), yet the resulting uncertainties are not unlikely to weaken the protection for creditors yet further.39 This is further aggravated in the case of institutes or groups in cross-border scenarios, where differences in the – yet to be harmonised – substantive and procedural provisions of national insolvency legislation can be expected to result in highly diverse implications in terms of the hypothetical insolvency value. 40 It is worth noting, in this respect, that the first resolution case carried out under the auspices of the SRB has highlighted both the considerable margin of appreciation for valuations and the resulting potential for complex post-resolution litigation.41 As a further consequence, the principle cannot be relied upon, and should not be 33 misinterpreted, as affording an ex ante protection against excessive losses resulting from resolution, as it is only on the basis of an ex post valuation, to be carried out upon completion of the relevant resolution action(s), that the creditors will receive their compensation (cf. Art. 20(16) SRMR). To be sure, the SRB, when drafting a resolution scheme under Art. 18 SRMR, should ideally take into account the restrictions following from the principle also ex ante and calibrate the actions in the light of implications for creditors accordingly. However, given time constraints and both the complexity of the relevant activities and the resulting implications for an ex ante valuation,42 it will hardly be possible, as a rule, to avoid undue infringements altogether.
37 Binder, in: Bank of Greece (ed), Commemorative Volume for Leonidas Georgakopoulos (2016), 37, at p. 48; Tröger, JFR 4 (2018), 35, at pp. 61–62; Wojcik, CMLR 53 (2016), 91, at p. 124. For a comprehensive analysis of litigation risks, see de Serière and van der Houwen, JIBLR (2016), 376. 38 E.g., Carriero, EBLR (2017), 635, at p. 644; see also Wojcik, CMLR 53 (2016), 91, at p. 120. 39 See, for further discussion, Binder, in: Bank of Greece (ed), Commemorative Volume for Leonidas Georgakopoulos (2016), 37, at pp. 47–48; see also Athanassiou, BJIBFL (2014), 16; Wojcik, CMLR 53 (2016), 91, at p. 124; id., in: ECB (ed), ECB Legal Conference 2015 (2015), 253, at p. 257. 40 See Wojcik, CMLR 53 (2016), 91, at pp. 124–126; id., in: ECB (ed), ECB Legal Conference 2015 (2015), 253, at pp. 257–258. 41 E.g., Binder, in: Chiti and Santoro (eds), The Palgrave Handbook of European Banking Union Law (2019), 299, at 311. 42 Cf. Gardella, in: Busch and Ferrarini (eds), European Banking Union (2015), para. 11.55.
Jens-Hinrich Binder
645
Art. 15 SRMR
General principles governing resolution
3. Full protection of covered deposits (Art. 15(1)(h) SRMR) 34
The principle that ‘covered deposits’ (as defined by Art. 3(1)(11) SRMR by way of reference to Art. 2(1)(5) of Directive 2014/49/EU) are to be ‘protected in full’ effectively reiterates the objective to ‘protect depositors covered by Directive 2014/49/EU’ as stipulated by Art. 14(2)(d) SRMR. Somewhat redundantly, Art. 15(1)(h) SRMR merely clarifies that depositors’ claims, to the extent that they are thus covered, shall remain wholly unaffected. It does not, however, add much substance to the more general rule in Art. 14(2)(d) SRMR and therefore does not merit further analysis (see, for further details, supra, → Art. 14 paras. 23–25).
V. Resolution actions to respect ‘safeguards’ (Art. 15(1)(i) SRMR) 35
Pursuant to Art. 15(1)(i) SRMR, resolution actions are to be ‘taken in accordance with the safeguards in this Regulation’. While the term ‘safeguard’, as such, has not been defined in the SRMR (or the BRRD), it would appear evident that it should be interpreted, in conformity with Art. 29(1)(1) SRMR, as referring to those ‘safeguards’ that have been defined in Ch. VII (Arts. 73–80 SRMR) (infra, → Art. 29 para. 12). Against this backdrop, Art. 15(1)(i) SRMR, which has been adapted from the corresponding provision in Art. 34(1)(i) BRRD, merely reiterates what would follow from these provisions anyhow. Its legal significance is therefore negligible.
C. Minimisation of impact on group entities, the relevant group as a whole, and of adverse effects on financial stabilities in the Union and its Member States (Art. 15(2) SRMR) 36
Art. 15(2) SRMR addresses the specific implications of resolution actions in group scenarios, where actions taken with regard to individual group entities will almost inevitably trigger implications for other parts of the group, or indeed the viability of the group as a whole, in view of existing organisational and/or financial interdependencies and business ties. The provision is an adaptation of the corresponding provision in Art. 34(2) BRRD. Within the context of the SRMR, however, it merely reiterates principles that have already been stated in Art. 6(3) and (4) SRMR. The duplication is probably attributable to inconsistent drafting, and does not add any substance to the earlier appearance of the same principles (see, for details, supra, → Art. 6 paras. 13–18).
D. Employees’ rights und employees’ representation (Art. 15(3) and (4) SRMR) Art. 15(3) and (4) SRMR stipulate principles for the treatment of employees in and during resolution procedures which also apply in traditional insolvency. This is, again, fully consistent with the general policy to realign the effects of resolution with those of traditional insolvency procedures to the extent this is compatible with the resolution objectives. 38 By virtue of Art. 15(3) SRMR, applications of the sale of business tool (Art. 24 SRMR), the bridge institution tool (Art. 25 SRMR) or the asset separation tool (Art. 26 SRMR) are deemed to qualify as bankruptcy proceedings or analogous insolvency pro37
646
Jens-Hinrich Binder
General principles governing resolution
Art. 15 SRMR
ceedings for the purposes of Art. 5(1) of Dir. 2001/23/EC,43 which governs the effects of a ‘transfer of an undertaking, business, or part of an undertaking or business to another employer as a result of a legal transfer or merger’ (cf. Art. 1(1)(a) Dir. 2001/23/EC). Whereas Arts. 3 and 4 Dir. 2001/23/EC stipulate that existing employment contracts, as a rule, remain unaffected by such transfer,44 Art. 5 of that Directive restricts the application of Arts. 3 and 4 Dir. 2001/23/EC in ‘bankruptcy or analogous insolvency proceedings’.45 As a consequence, employment contracts can be terminated, subject to the national laws transposing Dir. 2001/23/EC and the safeguards stipulated therein, also in relation to, and as a result of, the application of one of the resolution tools mentioned in Art. 15(3) SRMR. Finally, Art. 15(4) SRMR, in subpara. (1), first requires the SRB to instruct NRAs to 39 ‘inform and consult employee representatives where appropriate’. The provision is a verbatim adaptation from Art. 34(5) BRRD. Just as Art. 8(9)(m) SRMR, which requires res43 Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, OJ L 82 of 22.3.2001, p. 16. 44 By virtue of Art. 3(1)(1) Dir. 2001/23/EC, subject to qualifications provided by paras. (2) and (4), ‘The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee.’ In addition, Art. 3(3) Dir. 2001/23/EC stipulates that ‘[f]ollowing the transfer, the transferee shall continue to observe the terms and conditions agreed in any collective agreement on the same terms applicable to the transferor under that agreement, until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement. Member States may limit the period for observing such terms and conditions with the proviso that it shall not be less than one year.’ Art. 4(1)(1) Dir. 2001/23/EC then mandates that ‘[t]he transfer of the undertaking, business or part of the undertaking or business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce.’ 45 Art. 5 Dir. 2001/23/EC, as far as of interest for present purposes, reads as follows: ‘(1) Unless Member States provide otherwise, Articles 3 and 4 shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority). (2) Where Articles 3 and 4 apply to a transfer during insolvency proceedings which have been opened in relation to a transferor (whether or not those proceedings have been instituted with a view to the liquidation of the assets of the transferor) and provided that such proceedings are under the supervision of a competent public authority (which may be an insolvency practitioner determined by national law) a Member State may provide that: (a) notwithstanding Article 3(1), the transferor’s debts arising from any contracts of employment or employment relationships and payable before the transfer or before the opening of the insolvency proceedings shall not be transferred to the transferee, provided that such proceedings give rise, under the law of that Member State, to protection at least equivalent to that provided for in situations covered by Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer, and, or alternatively, that, (b) the transferee, transferor or person or persons exercising the transferor's functions, on the one hand, and the representatives of the employees on the other hand may agree alterations, in so far as current law or practice permits, to the employees' terms and conditions of employment designed to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business. (…)’
Jens-Hinrich Binder
647
Art. 16 SRMR
Resolution of financial institutions and parent undertakings
olution plans to ‘take into account national systems for dialogue with social partners, where applicable’, Art. 15(4) SRMR seeks to ensure conformity with national regimes for employee representation in connection with insolvency management.46 Pursuant to Art. 15(4)(2) SRMR, national laws on the representation of employees in management bodies remain unaffected.
Art. 16 SRMR Resolution of financial institutions and parent undertakings 1. The Board shall decide on a resolution action in relation to a financial institution established in a participating Member State, where the conditions laid down in Article 18(1) are met with regard to both the financial institution and with regard to the parent undertaking subject to consolidating supervision. 2. The Board shall take a resolution action in relation to a parent undertaking referred to in point (b) of Article 2 where the conditions laid down in Article 18(1) are met. 3. Notwithstanding the fact that a parent undertaking does not meet the conditions established in Article 18(1), the Board may decide on a resolution action with regard to that parent undertaking where it is a resolution entity and where one or more of its subsidiaries which are institutions but are not resolution entities themselves meet the conditions set out in Article 18(1), provided that their assets and liabilities are such that their failure threatens an institution or the group as a whole, and resolution action with regard to that parent undertaking is necessary either for the resolution of those subsidiaries which are institutions or for the resolution of the relevant resolution group as a whole. Bibliography John Crawford, ‘“Single Point of Entry”: The Promise and Limits of the Latest Cure for Bailouts’, Northwestern University Law Review 109 (2014), 103; Paul Davies, ‘Resolution of cross-border groups’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar, Cheltenham 2015), 261; Financial Stability Board, ‘Recovery and Resolution Planning for Systemically Important Financial Institutions: Guidance on Developing Effective Resolution Strategies’ (2013); Anna Gardella, ‘Bail-in and the Two Dimensions of Burden-sharing’, in: ECB (ed), ECB Legal Conference 2015 (2015), 205; Jeffrey N. Gordon and Wolf-Georg Ringe, ‘Bank Resolution in the European Banking Union: A Transatlantic Perspective on What It Would Take’, Columbia Law Review 115 (2015), 1297; ids., ‘Bank Resolution in Europe – The Unfinished Agenda of Structural Reform’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 500; Randall Guynn, ‘Framing the TBTF Problem’, in: Martin Neil Baily and John B. Taylor (eds), Across the Great Divide – New Perspectives on the Financial Crisis (Hoover Press, Stanford 2014), 281; Matthias Haentjens, ‘Title IV – Resolution’, in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 219; Richard Herring, ‘The Challenge of Resolving Cross-Border Financial Institutions’, Yale J. on Regulation 31 (2014), 853; Stephen J. Lubben and Arthur E. Wilmarth, Jr., ‘Too Big and Unable to Fail’, Florida Law Review 69 (2017), 1205; Federico Lupo-Pasini and Ross P. Buckley, ‘International Coordination in Cross-Border Bank Bailins: Problems and Prospects’, European Business Organization Law Review 15 (2015), 203; Gabriel Moss, Bob Wessels and Matthias Haentjens, ‘Principles for Cross-border Financial Institution Insolvencies’, in: ids. (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 29; Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (Oxford University Press, Oxford 2016); David A. Skeel, ‘Single Point of Entry and the Bankruptcy Alternative’, in: Martin Neil Baily and John B. Taylor (eds), Across the Great Divide – New Perspectives on the Financial Crisis (Hoover Press, Stanford 2014), 311; Victor de Serière, ‘Recovery and Resolution Plans of Banks in the Context of the BRRD and the SRM: Fundamental Issues’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd Oxford University Press, Oxford 2020), 336.
46
648
Cf. Recitals 48 and 90 SRMR as well as Recitals 35 and 48 BRRD.
Jens-Hinrich Binder
Resolution of financial institutions and parent undertakings
Art. 16 SRMR
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Background: the framework for the treatment of financial groups under the BRRD and the SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The legal framework for group resolution – overview . . . . . . . . . . . . . . . . . . . . . . . . III. Resolution strategies for group resolution and implementation under Art. 16 SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Substantive content of Art. 16 SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 3 3 6 7 9
A. Introduction Art. 16 SRMR is the technical legal basis for resolution actions in group scenarios un- 1 der the auspices of the SRM and, in conjunction with Art. 18 SRMR, defines the conditions for such actions against financial institutions and parent undertakings (see infra, → paras. 9–12). The provision has been adapted from Art. 33 BRRD, albeit with changes in terms of scope and substantive content. Its purpose is to facilitate comprehensive, group-wide resolution measures that address and resolve not just the financial difficulties of one or more regulated entity or entities that are failing or likely to fail, but also take into account the interdependencies between that entity or these entities and the remainder of the group, including the parent entity. Effectively, Art. 16 SRMR – just as Art. 33 BRRD – thus reflects the insight that, given the commercial and financial ties between affiliated legal entities, groups of companies, in insolvency scenarios, should receive a treatment that recognises these economic interlinkages in the interest of all stakeholders. Art. 16 SRMR is a part of a broader range of provisions in both the SRMR and the BRRD which, jointly, define the substantive and procedural framework for the treatment of financial groups in insolvency (see infra, → paras. 3–8). Art. 16 SRMR addresses resolution actions with regard to financial institutions and 2 parent undertakings. ‘Financial institutions’ are defined in Art. 3(1)(15) SRMR (just as in Art. 2(1)(4) BRRD) by way of reference to Art. 4(1)(26) CRR and include operating non-bank financial companies as well as certain categories of holding companies (see, for details, supra, → Art. 3 paras. 5-7). ‘Parent undertakings’ are defined in Art. 3(1) (20) SRMR by way of reference to Art. (4)(1)(15)(a) CRR, which in turn refers to Arts. 1 and 2 of Dir. 83/349/EEC1 (superseded by Art. 2(9) Dir. 2013/34/EU2) (see, for details, supra, → Art. 3 para. 8). The differences in scope ratione personae between Art. 16 SRMR and Art. 33 BRRD are attributable to the general differences between the scope of the SRMR and the BRRD, respectively (see further supra, → Art. 2 para. 3).
1 Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Art. 54(3)(g) of the Treaty on consolidated accounts, OJ L 193, 18.7.1983, p. 1. 2 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19.
Jens-Hinrich Binder
649
Art. 16 SRMR
Resolution of financial institutions and parent undertakings
B. Background: the framework for the treatment of financial groups under the BRRD and the SRMR I. General policy 3
Under both the BRRD and the SRMR, the insolvency of institutions and other entities that form part of a group of companies reflects the insight that such scenarios, given the commercial and financial interlinkages between group companies, often cannot and should not be addressed on an entity-by-entity basis, but in a comprehensive, coordinated manner. Effectively, this reasoning adapts the prudential framework for consolidated supervision of financial groups for the purposes of bank resolution and facilitates coordinated group-wide resolution actions, if and where necessary for the preservation of financial stability given the circumstances of each particular case. As acknowledged in Recital 11 BRRD, ‘[t]he crisis has demonstrated that the insolvency of an entity affiliated to a group can rapidly impact the solvency of the whole group and, thus, even have its own systemic implications. Authorities should therefore possess effective means of action with respect to those entities in order to prevent contagion and produce a consistent resolution scheme for the group as a whole, as the insolvency of an entity affiliated to a group could rapidly impact the solvency of the whole group.’
4
It is important to see that both the BRRD and the SRMR, as far as resolution actions are concerned, build on what could be described as an entity-based approach, and anticipate that resolution actions, although coordinated with each other, will be addressed to individual entities rather than the group as a whole.3 Art. 16 SRMR, among other provisions, is an illustrative case in this respect, in that it defines the conditions which must be fulfilled if resolution action is to be taken against the entities that fall within its scope of application. Likewise, Art. 8(10) SRMR (cf. Art. 12(1) BRRD) requires that group resolution plans ‘shall include a plan for the resolution of the group, headed by the Union parent undertaking established in a participating Member State, as a whole, either through resolution at the level of the Union parent undertaking or through break up and resolution of the subsidiaries’.
5
At the same time, as also reflected in the wording of Art. 8(10) SRMR, the fact that resolution under the BRRD or the SRMR will always be addressed to individual legal entities within a group and must not be mistaken for an entities-centred approach, in the sense that the perspective of the individual entity were to dominate and the group-perspective to be neglected. In fact, individual resolution actions are expected to be implemented as elements of a broader, consolidated resolution concept, whereby the individual actions are implemented in a consistent and coordinated manner across the group (and, where relevant, across the individual jurisdictions involved). This is particularly evident in the wording of Art. 8(11) SRMR, which defines the mandatory content of group resolution plans and, in this context, places particular emphasis on the need to coordinate the measures taken with regard to the individual parts of the group (cf. Art. 8(11)(b) and (d) SRMR, see supra, → Art. 8 paras. 12-18). In other words: For the resolution of groups within the framework defined by the BRRD and the SRMR, the element of coordination plays a crucial role in the adoption and implementation of resolution concepts that are tailored to the individual commercial and financial ties between companies. Indeed, Art. 8(11)(e) SRMR expressly anticipates the segregation of a group 3
650
See, explicitly to that effect, Recital 84(1) sent. 2 SRMR.
Jens-Hinrich Binder
Resolution of financial institutions and parent undertakings
Art. 16 SRMR
in insolvency, which clearly reflects the insight that, irrespective of the legal independence of its components, groups should be recognised as a single economic unit in resolution as a starting point.
II. The legal framework for group resolution – overview As noted before, Art. 16 SRMR is but one element of a more complex substantive and 6 procedural framework established in different parts of the BRRD and the SRMR, respectively. While Art. 16 SRMR is effectively confined to a definition of conditions for resolution in group scenarios (see infra, → paras. 9–12), details regarding the technical design of such actions are defined as part of the preventive provisions. In this context, Art. 8(10) and (11) SRMR, on group resolution plans, and Art. 10(4) SRMR, on the assessment of resolvability of groups, are preceded, and complemented, by the requirement for parent undertakings to draw up group recovery plans under the national laws transposing Art. 7 BRRD, which are then evaluated by the ECB pursuant to Art. 4(1)(i) SSMR (supra, → SSMR Art. 4 paras. 42 and 43) and, on the relationship between recovery and resolution planning, supra, → Art. 8 paras. 1 and 2). While these provisions are both substantive and procedural in nature, in that they stipulate both the relevant content of the planning exercises and the procedure to be followed in this regard, the procedural framework for inter-agency coordination and cooperation, in the case of crossborder groups, is defined in Arts. 30–33 SRMR and the national laws transposing Title V (Arts. 87–92 BRRD, on ‘group resolution’) and Title VI (Arts. 93–98 BRRD, on ‘relations with Third Countries’), respectively. Moreover, the treatment of groups is relevant for the calibration of MREL and TLAC requirements, which have to reflect the preferred resolution strategy (see further rsupra, → Art. 12k para. 32).
III. Resolution strategies for group resolution and implementation under Art. 16 SRMR Significantly, neither the BRRD nor the SRMR prescribe specific strategies for the 7 treatment of groups in insolvency. Specifically, neither legal instrument precludes the choice between Single Point of Entry (‘SPOE’) strategies, whereby resolution actions are addressed only to one particular group entity (in most cases, the parent undertaking), and Multiple Point of Entry (‘MPOE’) strategies, whereby several (or all) group companies are subject to coordinated resolution actions.4 However, it is generally acknowledged that the choice, in practical cases, will have to reflect each individual group’s organisational and financial structure, with holding structures (as common under US law) generally considered to be more conducive to SPOE strategies than integrated groups with operating business carried out at all levels, including the parent, of the
4 See, generally, e.g., FSB, Recovery and Resolution Planning for Systemically Important Financial Institutions, at pp. 12–20; see also Crawford, NWULR 109 (2014), 103; Davies, in: Haentjens and Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (2015), 261, at pp. 266–271; Gordon and Ringe, CLR 115 (2015), 1297, at pp. 1320–1330; Guynn, in: Baily and Taylor (eds), Across the Great Divide (2014), 281; Lubben and Wilmarth, FLR 69 (2017), 1205, at pp. 1215–1229; Lupo-Pasini and Buckley, EBOR 15 (2015), 203, at pp. 218–220; Moss, Wessels and Haentjens, in: ids. (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), para. 2.11; Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), paras. 4.21 and 4.31; Skeel, in: Baily and Tailor, Across the Great Divide – New Perspectives on the Financial Crisis (2014), 311; Herring, YJREG 31 (2014), 853, at pp. 875–880.
Jens-Hinrich Binder
651
Art. 16 SRMR
Resolution of financial institutions and parent undertakings
group.5 Also in light of the residual diversity of existing group structures and funding models both within the EU as a whole and within the Eurozone, the substantive and procedural provisions on group resolution are intentionally designed so as to allow for either strategy, depending on the circumstances.6 8 In practical terms, given the complexity of group resolution, the choice cannot, and will not, be made ad hoc once the conditions for resolution defined in Art. 16 SRMR have been established to be fulfilled in the circumstances. Rather, it will have been prepared in the process, and as a result, of resolution planning (supra, → Art. 8 para. 50). In fact, particularly in the context of cross-border groups, agreement between the different authorities involved in the choice between an SPOE or an MPOE strategy probably will be among the most important aspects of coordinated resolution planning in general, which also explains why Art. 16 SRMR, as the core provision addressing group-related problems for the actual resolution stage, does not address this matter at all.
C. Substantive content of Art. 16 SRMR 9
Against the backdrop just described, Art. 16(1) SRMR – in conjunction with Art. 18 SRMR – first defines the conditions for resolution actions for financial institutions, while Art. 16(2) and (3) SRMR do the same for parent undertakings. Pursuant to Art. 16(1) SRMR, financial institutions may be placed in resolution by the SRB in cases ‘where the conditions laid down in Art. 18(1) SRMR are met with regard to both the financial institution and with regard to the parent undertaking subject to consolidating supervision’.
It should be noted that, somewhat inconsistently with the wording of Art. 16(3) SRMR (see infra, → para. 11), reference is made only to Art. 18(1) SRMR, not also to Art. 18(4) and (5) SRMR. As the latter two paragraphs merely serve to specify further the requirements laid down in Art. 16(1) SRMR, however, they evidently have to be taken into account also for the purposes of Art. 16(1) SRMR. The same applies pursuant to Art. 33(1) BRRD. 10 Parent undertakings, pursuant to Art. 16(2) SRMR, as a rule can only be placed in resolution ‘where the conditions laid down in Article 18(1) are met with regard to both that parent undertaking and with regard to one or more subsidiaries which are institutions [cf. Art. 3(1)(13) SRMR: credit institutions or investment firms subject to consolidated supervision] or, where the subsidiary is not established in the Union, the third-country authority has determined that it meets the conditions for resolution under the law of that third country.’
11
In exceptional cases, however, Art. 16(3)(1) sent. 1 SRMR allows resolution actions to be taken in relation to the parent undertaking also where the parent undertaking as such does not meet the conditions defined in Art. 18(1) SRMR, but ‘when one or more of its subsidiaries which are institutions meet the conditions established in Article 18(1), (4) and (5) and their assets and liabilities are such that their failure threatens an institution or the group as a whole and resolution action with regard to that parent undertaking is necessary for the resolution of such subsidiaries which are institutions or for the resolution of the group as a whole.’
5 See references supra, fn. 4, in particular: Gordon and Ringe, CLR 115 (2015), 1297, at pp. 1320–1330; Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), paras. 4.21 and 4.31. See also Gardella, in: ECB (ed), ECB Legal Conference 2015 (2015), 205, at pp. 220–221. 6 See, specifically with regard to the MREL requirement, but applicable throughout, Recital 80 BRRD and Recital 84 SRMR.
652
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
Moreover, resolution action, pursuant to the second sentence of the same provision, resolution action against parent undertakings can also be taken by the SRB if this is necessary to facilitate the resolution under applicable national insolvency laws. In sum, by virtue of Art. 16 SRMR the fact that a financial institution or a parent un- 12 dertaking is failing or likely to fail within the meaning of Art. 18(1)(a) SRMR does not as such justify the initiation of resolution actions, irrespective of the size, complexity, or interconnectedness of that entity with other market participants. For financial institutions to be placed in resolution, the parent undertaking must meet the conditions of Art. 18(1) SRMR as well, which, as a rule, requires that subsidiaries regulated as credit institutions or investment firms subject to consolidated institutions are also failing or likely to fail. This is certainly reflective of the overall focus on credit institutions characteristic of both the BRRD and the SRMR, but appears rather complex and has been criticised on the grounds that it may unduly restrict the authorities’ flexibility for the pursuit of SPOE strategies.7 In view of Art. 16(3) SRMR (Art. 33(4) BRRD), however, which introduces a considerable degree of flexibility, the resulting difficulties should be manageable.8 Specifically, it should be expected that the conditions defined in the first sentence of Art. 16(3)(1) SRMR will be met in all cases where a failure of group entity triggers concerns for financial stability, which then would facilitate the adoption of resolution actions with a group-wide dimension also involving the relevant parent undertaking.
Art. 17 SRMR Order of priority of claims 1. When applying the bail-in tool to an entity referred to in Article 2 of this Regulation, and without prejudice to liabilities excluded from the bail-in tool under Article 27(3) of this Regulation, the Board, the Commission, or, where applicable, the national resolution authorities, shall decide on the exercise of the write-down and conversion powers, including on any possible application of Article 27(5) of this Regulation, and the national resolution authorities shall exercise those powers in accordance with Articles 47 and 48 of Directive 2014/59/EU and in accordance with the reverse order of priority of claims laid down in their national law, including the provisions transposing Article 108 of that Directive. 2. Participating Member States shall notify to the Commission and to the Board the ranking of claims against entities referred to in Article 2 in national insolvency proceedings on 1 July of every year or immediately, where there is a change of the ranking. Where the bail-in tool is applied, the relevant deposit guarantee scheme shall be liable in the terms provided for in Article 79. Bibliography Anna Gardella, ‘Bail-in and the Financing of Resolution within the SRM Framework’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 373; Christos Hadjiemmanuil, ‘Bank Stakeholders’ Mandatory Contribution to Resolution Financing: Principle and Ambiguities of Bail-in’ in: ECB (edn), ECB Legal Conference 2015 (2015), 225; Matthias Haentjens, ‘Title IV – Resolution’ in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU
7 Cf. Schillig, Resolution and Insolvency of Banks and Financial Institutions (2016), para. 9.15 (rightly recognising, however, that ‘the provisions seem to be sufficiently vague as not to pose an insurmountable obstacle’). 8 See, to the same effect, Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), para. 7.13.
Jens-Hinrich Binder
653
Art. 17 SRMR
Order of priority of claims
Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 219; Karl-Philipp Wojcik, ‘Bail-in in the Banking Union’, CMLR 53 (2016), 91. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Functional background: Art. 17 SRMR as the missing link between writedown and conversion of capital instruments and bail-in . . . . . . . . . . . . . . . . . . . . . I. Arts. 17, 21 and 27 SRMR in context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Functions of Art. 17 SRMR (in conjunction with Arts. 47 and 48 BRRD) . . . .
2 2 7
C. Substantive and procedural content of Art. 17 SRMR in conjunction with Arts. 47 and 48 BRRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Treatment of shareholders in bail-in (Art. 17(1) SRMR in conjunction with Art. 47 BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Cancellation of shares (Art. 17(1) SRMR in conjunction with Art. 47(1)(a) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Severe dilution of shares (Art. 17(1) SRMR in conjunction with Art. 47(1)(b) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The hierarchy of claims: sequence of write-down and conversion (Art. 17(1) SRMR in conjunction with Art. 48 BRRD) . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The order of priority according to Art. 17(1) SRMR in conjunction with Art. 48(1) and (2) BRRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Common Equity Tier 1 (Art. 48(1)(a) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Additional Tier 1 instruments (Art. 48(1)(b) BRRD) . . . . . . . . . . . . . . . . . . . . c) Tier 2 instruments (Art. 48(1)(c) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Other debt (Art. 48(1)(d) and (e) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Implementation and coordination with national laws . . . . . . . . . . . . . . . . . . . . . . . . 1. Calibration of the measures and implementation . . . . . . . . . . . . . . . . . . . . . . . . . 2. Coordination with national laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 9 9 12 17 20 20 23 23 25 27 28 29 29 32
A. Introduction 1
Art. 17 SRMR, mainly by way of reference to the relevant provisions of the BRRD, regulates the application of the write-down or conversion of capital instruments (Art. 21 SRMR) in relation to the application of the bail-in tool (Art. 27 SRMR). Effectively connecting these two elements for the implementation of bail-ins (see infra, → paras. 2–8), Art. 17 SRMR addresses the resolution-specific hierarchy of claims between capital instruments and bank debt (defined by Art. 48 BRRD), as well as the substantive and procedural technical conditions for the implementation of that hierarchy in relation to shareholders and holders of other capital instruments (Art. 47 BRRD, see infra, → paras. 9–28). Art. 17 SRMR, which addresses both the decision-making processes at the level of the SRB and implementation by NRAs (see infra, → paras. 29–32), thus complements, and operationalises, the general principles for the treatment of shareholders and creditors defined by Art. 15(1)(a) and (b) SRMR, whereby the shareholders are to bear first losses, and the creditors to bear losses after them. Just as Art. 15(1)(a) and (b) SRMR, Art. 17 SRMR – in conjunction with Arts. 47 and 48 BRRD – is particularly illustrative of the general policy to simulate the economic outcomes of traditional insolvency procedures for bank shareholders and bank creditors to the extent that this is compatible with the overall objective to preserve financial stability (→ Art. 15 paras. 3–6). In fact, Art. 17 SRMR – just as Art. 34(1)(b) BRRD – directly refers not just to the technical provisions of Arts. 47 and 48 BRRD, but also to ‘the reverse order of priority of claims laid down in (…) national law, including the provisions transposing Art. 108 [BRRD]’, effectively designating that order of priority as the benchmark for the treatment of equity, hybrid instruments, and debt in resolution. As clarified in 654
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
Art. 17(2), subpara. (2) SRMR, the liability of DGS in resolution, laid down in Art. 79 SRMR, remains unaffected. Somewhat confusingly, Art. 48 SRMR is not the only provision governing the order of priority of claims in the BRRD, the other one being Art. 60(1) BRRD (addressing the order of priority for the purposes of the write-down and/or conversion of capital instruments), which is referred to in Art. 21(8) SRMR.
B. Functional background: Art. 17 SRMR as the missing link between write-down and conversion of capital instruments and bail-in I. Arts. 17, 21 and 27 SRMR in context Art. 17 SRMR is part of a (unnecessarily) complex system of provisions, and has to be interpreted in conjunction with the conditions for the exercise of the write-down and conversion powers laid down in Art. 21 SRMR on the one hand and the requirements for the exercise and the implementation of the bail-in tool as defined by Art. 27 SRMR on the other hand. Within the context of the SRMR, the complexity is enhanced by the fact that neither Art. 17 SRMR nor Art. 21 SRMR fully replicate the corresponding provisions in the BRRD, but, to some extent, merely declare them to be applicable by way of reference. In the light of the foregoing, the interpretation of the relevant provisions of the BRRD is complicated because of a number of (sometimes redundant) cross-references in Arts. 47 and 48 BRRD to other provisions in the BRRD, some of which have been replicated or superseded by other cross-references in the SRMR, while others have not. For example, Art. 47(3) SRMR refers to the provisions on valuation in resolution in Art. 36 BRRD, which, within the SRM, is superseded by Art. 20 SRMR. The same applies with regard to references to Art. 44(2) and (3) BRRD in Arts. 47(1) and 48(1), (2) and (5) BRRD, instead of which Art. 27(3) and (5) SRMR apply. Likewise, Art. 46 BRRD, referred to in Art. 47(3)(c) BRRD, is superseded by Art. 27(13) SRMR. By contrast, Art. 21 SRMR includes, to a large extent, a modified adaptation of the technical content of the corresponding provisions in Arts. 59 and 60 BRRD. The high level of complexity is also attributable to the fact that, unlike the bail-in tool, the write-down and conversion powers in relation to capital instruments are no resolution tool (cf. Art. 22(2) SRMR = Art. 37(3) BRRD) but play a different role within the resolution framework. To be sure, the respective functions and technical implementation of both elements are very similar, as they serve either to reduce the nominal value of the covered instruments and/or convert them into an instrument of a lower rank in insolvency, thus shifting the losses from the relevant institution’s balance sheets onto holders of capital instrument or debtors, respectively.1 This similarity is also reflected in the technical definition of the term ‘bail-in tool’ in Art. 3(1)(33) SRMR (Art. 2(1)(57) BRRD), which – technically correct but somewhat confusingly in view of the term defined in Art. 3(1)(44) SRMR = Art. 2(1)(66) BRRD – defines the bail-in tool with reference to the exercise of ‘write-down and conversion powers in relation to liabilities’, using the same phrase for both elements. A fundamental difference between the write-down and/or conversion of capital instruments on the one hand and the bail-in on the other lies in the respective scope: The ‘write-down and conversion powers’, as defined in Arts. 3(1)(44) and 21 SRMR, apply in relation to relevant capital instruments, i.e., Additional Tier 1 and Tier 2 (AT1 and 1
Cf., for a good analysis, Wojcik, CMLR 53 (2016), 91, at pp. 111–112.
Jens-Hinrich Binder
655
2
3
4
5
Art. 17 SRMR
Order of priority of claims
AT2) capital instruments,2 and eligible liabilities.3 By contrast, the bail-in tool applies to bail-inable liabilities (excluding capital instruments) as defined in Art. 3(1)(49) SRMR (Art. 2(1)(71) BRRD) and specified in Art. 27(3)-(5) SRMR (Art. 44(2)-(3) BRRD, → Art. 27 paras. 44-46). 6 Depending on the circumstances of each particular case, it could be sufficient for the restoration of a failing institution’s balances merely to convert capital instruments into instruments of a higher order (and lower rank in insolvency). Reflecting this insight, the write-down and conversion powers pursuant to Art. 21 SRMR can be exercised not just in combination with the application of ‘resolution tools’ as defined in Arts. 3(1)(9), 22(2) SRMR, but also independently from it (cf. Art. 21(7) SRMR).4 Entirely consistent with the allocation of losses under traditional insolvency law, the creditors of a failing institution need not be affected if and to the extent that, in a given scenario, the losses are (only) of a dimension that they can be fully absorbed by reducing the nominal value of CET1 instruments, if necessary also writing-down AT1 and AT2 instruments, and substituting the shortfall in CET1 by the conversion of AT1 and AT2 instruments. 5 In other words: A bail-in, that implies a write-down of liabilities and/or conversion of liabilities into capital instruments, would not be necessary in such circumstances. This helps to explain why Art. 21(1) SRMR replicates the ‘conditions for resolution’ as defined by Art. 18(1) SRMR (infra, → Art. 21 paras. 11-12) and thus prepares the ground for the exercise of the write-down and conversion powers in relation to capital instruments independently from the initiation of resolution actions.
II. Functions of Art. 17 SRMR (in conjunction with Arts. 47 and 48 BRRD) Against this backdrop, the relevance of Art. 17 SRMR within the overall resolution framework can be described as the ‘missing link’ between the write-down and conversion powers on the one hand and the bail-in tool on the other in cases where the mere exercise of the write-down and conversion powers in relation to capital instruments is not sufficient to absorb the losses incurred by the failing institution. In such cases, Art. 17 SRMR, in conjunction with Arts. 47 and 48 BRRD, essentially serves two functions: First, in conjunction with Art. 47 BRRD, Art. 17 SRMR defines the treatment of shareholders in bail-ins (see infra, → paras. 9–19). Second, in conjunction with Art. 48 BRRD and by way of reference to the order of priority under general insolvency law, it defines the hierarchy between the holders of capital instruments and the creditors of a failing institute (see infra, → paras. 20–28). 8 From a systematic perspective, it is worth noting that this function (again, confusingly and highly unsatisfactorily) is only partially identical with the functions and scope of the corresponding provisions in Arts. 47 and 48 BRRD, which reflects differences in the arrangement of the bail-in and write-down and conversion powers in the BRRD and the SRMR, respectively. While Art. 17 SRMR, as noted before, applies only in relation to 7
2 Art. 21(1) in conjunction with Art. 3(1)(51) SRMR (Art. 59(1) in conjunction with Art. 2(1)(74) BRRD). For the definition of Additional Tier 1 instruments, see Art. 3(1)(46) SRMR (Art. 2(1)(69) BRRD), referring to Art. 52(1) CRR; for the definition of Tier 2 capital instruments, see Art. 3(1)(47) SRMR (Art. 2(1)(73) BRRD), referring to Art. 63 CRR. 3 Art. 21(1) in conjunction with Art. 21(7a) and Art. 3(49a) SRMR. 4 Cf. Wojcik, CMLR 53 (2016), 91, at p. 112. See also Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2017), para. 7.74. 5 Cf. Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2 nd edn, 2017), para. 7.11; see also Recital 81 BRRD.
656
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
bail-ins, Art. 47 BRRD – although part of the provisions governing the ‘implementation of the bail-in tool’ (Part IV, section 5, subsection 3, Arts. 46–52 BRRD) – is not so restricted in scope, but applies also to the write-down and conversion powers under Art. 59 BRRD. Within the context of the SRMR, by contrast, the treatment of shareholders in the event of a write-down or conversion of capital instruments follows not from Art. 17 SRMR, but from Art. 21(10) SRMR.
C. Substantive and procedural content of Art. 17 SRMR in conjunction with Arts. 47 and 48 BRRD I. Treatment of shareholders in bail-in (Art. 17(1) SRMR in conjunction with Art. 47 BRRD) 1. General principles Art. 47 BRRD lays down general rules governing the treatment of shareholders – and 9 holders of ‘other instruments of ownership’ (cf. Art. 2(1)(61) BRRD 6, applicable by virtue of Art. 3(2) SRMR) – in bail-in. To understand the relevance of these, it is important to recall that neither the bail-in tool (as specified in Art. 27 SRMR) nor the write-down and conversion powers pursuant to Art. 21 SRMR, as such, address the position of investors in Common Equity Tier 1 (CET1) instruments7 (including, in particular, the shareholders), as shares, technically, do not fall within the scope of either the write-down and conversion powers under Art. 21 SRMR or the bail-in tool (Art. 27 SRMR). The rules stipulated in Art. 47(1) BRRD complement these elements and realign the results of a bailin with those that would arise under general insolvency law, where the shareholders, as the ultimate economic owners of the relevant entity, have to bear first losses and, consequently, equity is wiped out first, before holders of capital instruments in the technical sense (as required by Art. 15(1)(a) SRMR.8 Importantly, Art. 47(1) SRMR, which has been specified further in EBA Guidelines promulgated in accordance with Art. 47(6) BRRD,9 distinguishes between different scenarios for application, depending on the circumstances of the case: Pursuant to Art. 47(1) SRMR, existing shares or other instruments of ownership will either be ‘cancelled’ (where the net asset value of the relevant institution is zero or negative; see infra, → paras. 12–16), or merely ‘severely diluted’
Defined as to include ‘shares, other instruments that confer ownership, instruments that are convertible into or give the right to acquire shares or other instruments of ownership, and instruments representing interests in shares or other instruments of ownership’. 7 As defined by Art. 3(1)(45) SRMR (Art. 2(1)(68) BRRD) in conjunction with Arts. 28(1)-(4), 29(1)-(5) and 31(1) CRR. 8 Cf. also Recital 77 BRRD. 9 EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04). 6
Jens-Hinrich Binder
657
Art. 17 SRMR
Order of priority of claims
(i.e., reduced in nominal value and in terms of the percentage of ownership, infra, → paras. 17–19).10 10 It should be noted that, pursuant to Art. 47(2) BRRD, the same principles are to be applied in cases where the relevant instruments of ownership have been issued in connection with either (a) a contractually agreed conversion of debt instruments into shares or other instruments of ownership prior to the assessment that the relevant entity meets the conditions for resolution, or (b) as a result of a conversion of relevant capital instruments into CET1 instruments by virtue of an exercise of the write-down and conversion powers. This indicates that the application of the write-down and conversion powers and the bail-in tool, respectively, will be implemented in a step-by-step approach, whereby instruments will first be converted into instruments of a higher order (and lower rank in insolvency), and then be written down in order to absorb losses. This at least appears to be the interpretation by the SRB, as evidenced in the resolution decision relating to Banco Popular Español S.A.11 11 Both (a) the fundamental decision whether to cancel or to severely dilute the relevant instruments and (b) the quantitative calibration of the measures crucially depend on the valuation of the relevant entity pursuant to Art. 20(5)(b)-(g) SRMR (Art. 36(4)(b)-(g) BRRD). Based on the valuation, the authorities have to assess the amount by which CET1 instruments must be reduced and relevant capital instruments have to be written down or converted in accordance with Art. 21(8) SRMR in conjunction with Art. 60(1) BRRD, as well as the aggregate amount of bail-in pursuant to Art. 27(13) SRMR = Art. 46 BRRD (Art. 47(3) BRRD, infra, → Art. 21 para. 14 and → Art. 27 para. 33, respectively). As a valuation carried out prior to the initiation of resolution actions will, almost invariably, be fraught with uncertainties, and often merely indicate a range of values rather than a definite value that could be relied upon (see also infra, → paras. 14), it is important to understand that Art. 17(1) SRMR in conjunction with Art. 47(1) SRMR does not just set a substantive standard, which prescribes a specific outcome for specific categories of real-world circumstances, but also defines a procedural approach to guide and structure the relevant decision-making process.12
Art. 48(1) BRRD reads: ‘Member States shall ensure that, when applying the bail-in tool in Article 43(2) or the write down or conversion of capital instruments in Article 59, resolution authorities take in respect of shareholders and holders of other instruments of ownership one or both of the following actions: (a) cancel existing shares or other instruments of ownership or transfer them to bailed-in creditors; (b) provided that, in accordance to the valuation carried out under Article 36, the institution under resolution has a positive net value, dilute existing shareholders and holders of other instruments of ownership as a result of the conversion into shares or other instruments of ownership of: (i) relevant capital instruments issued by the institution pursuant to the power referred to in Article 59(2); or (ii) eligible liabilities issued by the institution under resolution pursuant to the power referred to in point (f) of Article 63(1). With regard to point (b) of the first subparagraph, the conversion shall be conducted at a rate of conversion that severely dilutes existing holdings of shares or other instruments of ownership.’ 11 Cf. SRB, Decision of 7 June 2017 concerning the adaption of a resolution scheme in respect of Banco Popular Español, S.A. (SRB/EES/2017/08), Art. 6. 12 See also Hadjiemmanuil, in: ECB (ed), ECB Legal Conference 2015 (2015), 225, at p. 236 (arguing that the ‘very detailed legal frameworks are not necessarily intended to establish hard rules or prescribe with precision the final outcomes of resolution actions, but to structure discretion and standardize the procedural framework by establishing the decision-making order and relevant considerations for official actions, while leaving substantial room to the relevant official decision-makers for ex post variation of the substantive choices’). 10
658
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
2. Cancellation of shares (Art. 17(1) SRMR in conjunction with Art. 47(1)(a) BRRD) In line with general concepts of company law, a ‘cancellation’ of shares or other in- 12 struments of ownership, while not defined in the BRRD or the SRMR, results in the technical extinction of the relevant instrument and the termination of all ownership rights documented by that instrument,13 so that the residual owners of such instruments are effectively expropriated. This explains why, pursuant to Art. 47(1)(a) BRRD, a cancellation of the relevant instruments can be substituted by a transfer of the documents to bailed-in creditors, which renders the issuance (and registration) of new instruments unnecessary and thereby facilitates the replacement of residual owners by bailed-in creditors.14 In exercising their powers under Art. 47(1) BRRD, authorities have to observe the 13 principle that no stakeholder or creditor should receive less in resolution than would have been the case if the relevant institution had been liquidated under general insolvency law (the ‘no creditor worse off ’ principle, see Art. 15(1)(g) SRMR and, for the applicability of that principle to owners of capital instruments, → Art. 15 para. 27). The implications have been defined in EBA Guidelines pursuant to Art. 47(6) BRRD as follows: A full cancellation or transfer to bailed-in creditors can only take place if the net asset value, as determined by the valuation pursuant to Art. 20(5)(b)-(g) SRMR and the estimate produced pursuant to Art. 20(9) SRMR, is zero or negative.15 In this scenario, it will also be necessary to convert creditors’ claims.16 By contrast, if the net asset value is positive on both counts, the cancellation or transfer pursuant to Art. 47(1)(a) BRRD should only be partial, and the residual shareholders should retain their share in the residual net asset value according to the estimate under Art. 20(9) SRMR. 17 Moreover, the EBA Guidelines anticipate also scenarios where the net asset value of the relevant institution is negative according to the valuation pursuant to Art. 20(5)(b)-(g) SRMR, but zero according to the estimate pursuant to Art. 20(9) SRMR, in which case the authorities may choose from ‘a wider set of options consisting of: a) full cancellation or transfer; b) partial cancellation or transfer; or c) dilution.’ Realistically, it would appear that full cancellation of shares and ownerships will 14 probably be the rule rather than the exception in future cases. As the scope for a mere dilution under Art. 47(1)(b) SRMR is restricted (see infra, → para. 17), and given the (inevitably) wide margin of error that can be expected to be characteristic for valuations carried out prior to the initiation of resolution actions, cases where the net asset value of a failing institution will be estimated to be zero or positive either in the valuation pursuant to Art. 20(5) SRMR or under Art. 20(9) SRMR, in all likelihood, will be extremely rare, if at all practically conceivable. The underlying uncertainties could, in fact, result in a significantly higher burden for shareholders or other holders of instruments of owner13 Cf. also EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at p. 6: ‘“cancellation” of shares means that shares are cancelled and the shareholders’ economic claims and other rights of ownership are completely erased on those shares.’ 14 Cf. Gardella, in: Busch and Ferrarini (eds), European Banking Union (2015), para. 11.62; see also EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at p. 11, para. 1.25 (noting, correctly, that a transfer of shares rather than a cancellation may be necessary, in the case of entities listed on stock exchanges, to preserve the listing and thus to prevent discontinuity in trading). 15 EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at p. 8 para. 1.5. 16 Ibid., para. 1.7. 17 Ibid., para. 1.6.
Jens-Hinrich Binder
659
Art. 17 SRMR
Order of priority of claims
ship than would be justifiable by the real dimension of losses, as determined in the postresolution valuation carried out in accordance with Art. 20(11) and (12) SRMR. This is aptly illustrated by the circumstances of the resolution of Banco Popular Español S.A., where both the shares of residual shareholders and those allocated to investors in converted AT1 and AT2 instruments were cancelled in full,18 while estimations as to the net asset value, in the words of the auditing firm in charge of the valuation, were ‘in a range between EUR 1.3 bn and EUR -8.2 bn with our best estimate within that range being EUR -2.0 bn’.19 15 Irrespective of the foregoing, it should be noted that Art. 47 BRRD – just as the other relevant provisions in the Directive – does not distinguish between different types of shares and other instruments of ownership. Such distinctions may matter, first, in terms of the qualification of such instruments as CET1 or AT1 for regulatory purposes. Secondly, they may be associated, pursuant to the applicable company law, with differences in voting rights or financial entitlements (e.g., in the case of preferential shares). These differences may come with implications regarding the governance of the relevant entity following the exercise of the bail-in and/or write-down and conversion powers, and in terms of the respective investors’ entitlement to any residual profit the entity may make. In this context, the EBA Guidelines promulgated pursuant to Art. 47(7) BRRD are based on the view that the solution of such problems should be entirely within the authorities’ discretion, depending on the circumstances of each individual case, and that authorities should also be entitled to calibrate their decisions with a view to ‘simplify[ing] the structure of the reorganised firm’.20 16 In its generality, this interpretation is not free from doubt, and certainly contrasts with the principle, expressly recognised in Art. 48(2) BRRD, that instruments placed in the same rank in the order of priority of claims pursuant to Art. 48(1) BRRD are to be treated equally (see further infra, → para. 20).21 To be sure, shareholders and owners of other instruments of ownership in resolution, in principle, are not entitled to any protection beyond the ‘no creditor worse off ’ principle, which also reflects general proportionality considerations rooting in the right to property as guaranteed by the EU Charter of Fundamental Rights and the European Convention on Human Rights (supra, → Art. 15 para. 29). Precisely for that reason, however, the notion that authorities should enjoy unfettered discretion to change the capital structure of an institution in resolution as they think fit, including ‘simplification’ removing existing classes of shares, is not self-evident; especially in cases where, on the basis of a valuation carried out in accordance with Art. 20(5) BRRD, it is at least conceivable that the net asset value, based on positive assumptions, could turn out to be positive, such discretion may be difficult to reconcile with general proportionality considerations. While authorities, also in calibrating the cancellation of shares and other instruments of ownership, surely should be granted a
18 See, again, SRB, Decision of 7 June 2017 concerning the adaption of a resolution scheme in respect of Banco Popular Español, S.A. (SRB/EES/2017/08), Art. 6. 19 Deloitte, ‘Hippocrates Provisional Valuation Report [Sale of Business scenario]’, at p. 1. 20 EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at p. 11, para. 1.22. See also ibid., para. 1.23: ‘In some cases, there may be shares or other instruments of ownership which do not qualify as CET1 capital, for example preference shares which qualify as Additional Tier 1 instruments. Authorities may choose to transfer only the CET1 instruments and to cancel any shares or other instruments of ownership (respecting the relevant safeguards and legal protections).’ 21 See also EBA, ‘Final Guidelines concerning the interrelationship between the BRRD sequence of write-down and conversion and CRR/CRD’ (5 April 2017, EBA/GL/2017/02), at pp. 3 and 9, para. 10.
660
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
certain margin of discretion, 22 and should be entitled to ‘err on the safe side’ in the interest of a swift and effective resolution, the notion of untrammelled discretion in this respect arguably overstretches what can be justified on the general principle of proportionality.
3. Severe dilution of shares (Art. 17(1) SRMR in conjunction with Art. 47(1)(b) BRRD) In view of the foregoing, the severe dilution of shares pursuant to Art. 17(1) SRMR in 17 conjunction with Art. 47(1)(b) BRRD, which expressly requires a positive net asset value of the relevant institution, can be expected to be applied only in exceptional cases, if at all. While the term ‘severe dilution’ is not defined in the BRRD or the SRMR, it is interpreted in the EBA Guidelines as meaning ‘that both shareholders’ percentage of ownership of the institution and the value of the instruments of ownership must be reduced, unless this would breach the safeguard provided by Art. 73 of the BRRD.’23
Obviously, the line between a partial cancellation of shares and other instruments of ownership pursuant to Art. 47(1)(a) BRRD (see supra, → para. 13) and a ‘severe dilution’ within the meaning of Art. 47(1)(b) BRRD is a fine one, and the calibration will be difficult to make especially given the problems resulting from uncertainties in the valuation of the relevant entity on the one hand and the restrictions arising under the ‘no creditor worse off ’ principle in Art. 15(1)(g) SRMR (Art. 34(1)(g) BRRD, see supra, → Art. 15 paras. 27–29) on the other hand. Adapting that principle for the purposes of the bail-in, Art. 73(b) BRRD, requires that ‘where resolution authorities apply the bail-in tool, the shareholders and creditors whose claims have been written down or converted to equity do not incur greater losses than they would have incurred if the institution under resolution had been wound up under normal insolvency proceedings immediately at the time when the [resolution] decision […] was taken.’
Consequently, a dilution of shares and other instruments of ownership, as acknowledged in the EBA Guidelines pursuant to Art. 47(6) BRRD, can occur ‘only if resolution is expected to preserve less value for claimants on the bank than normal insolvency proceedings’.24
For the reasons discussed supra, → para. 14, this scenario is unlikely to occur, not 18 least because authorities will have to form their expectations on the basis of inevitably vague valuations carried out within a limited period of time prior to the initiation of resolution actions.25 If, based on this valuation, the net asset value of the relevant institution is (expected to be) zero or negative, shares or other instruments of ownership would
22 Cf., again, also Hadjiemmanuil, in: ECB (ed), ECB Legal Conference 2015 (2015), 225, at p. 236 (quoted supra, fn. 12). 23 EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at pp. 8–9, para. 1.11. 24 Ibid. 25 It has been argued that a severe dilution within the meaning of Art. 47(1)(b) BRRD could also be appropriate ‘when creditors have been bailed-in with a view to reconstituting the regulatory capital for purposes of meeting the conditions for authorization’, see Gardella, in: Busch and Ferrarini (eds), European Banking Union (2015), para. 11.63. It is submitted, though, that, in order to comply with the principle that shareholders should bear first losses, a cancellation of their positions would, again, be a more realistic consequence also in this scenario.
Jens-Hinrich Binder
661
Art. 17 SRMR
Order of priority of claims
probably be fully cancelled instead, in order to ensure compliance with the principle that shareholders bear first losses (Art. 15(1)(a) SRMR, Art. 34(1)(a) BRRD). 26 19 If, nonetheless, the circumstances are such as would justify a severe dilution, the authorities have to take into account Art. 50 BRRD, which specifies further the provisions of Arts. 59(3) and 63(1)(f) BRRD, as well as the applicable EBA Guidelines on conversion rates promulgated pursuant to Art. 50(4) BRRD (infra, → Art. 27 para. 63). 27
II. The hierarchy of claims: sequence of write-down and conversion (Art. 17(1) SRMR in conjunction with Art. 48 BRRD) 1. Overview 20
The sequence of claims defined by Art. 48(1) and (2) BRRD, as noted before, is effectively a direct transposition of the order of priority of claims that has become characteristic of traditional insolvency procedures world-wide (supra, → Art. 15 para. 4–7). Pursuant to Art. 48(6) BRRD, these provisions have been complemented by EBA Guidelines on the interrelationship of the sequence of write-down and conversion and the CRR and CRD.28 The general principle that the hierarchy of claims in resolution should follow the order of priority in traditional insolvency procedures is reflected both in the definition of the order of priority of claims as a whole, and reiterated in the wording of Art. 48(1)(d) and (e) BRRD, which expressly refer to the ‘hierarchy of claims in normal insolvency proceedings’ as the relevant benchmark. This is reinforced by Art. 48(5) BRRD, whereby ‘[w]hen deciding on whether liabilities are to be written down or converted into equity, resolution authorities shall not convert one class of liabilities, while a class of liabilities that is subordinated to that class remains substantially unconverted into equity or not written down, unless otherwise permitted under Article 44(2) and (3) [Art. 27(3) and (4) SRMR].’
With respect to the ranking of claims within the classes thus defined, Art. 48(2) BRRD clarifies that instruments in the same rank, subject to exceptions under Art. 44(3) BRRD (Art. 27(5) SRMR), are to be treated equally, and to be reduced pro rata to their value. Importantly, this principle has been interpreted by EBA to prevail irrespective of other characteristics of the relevant capital or debt instruments, such as differences in terms of voting rights, entitlement to profits, or maturity (see infra, → paras. 24 and 26). 21 It should be noted that, by virtue of the reference to the order of priority in ‘normal insolvency’, the ranking of claims in resolution ultimately depends on the provisions governing this hierarchy under the applicable national insolvency laws of the participating Member States. While Art. 108 BRRD has harmonised these rules to some extent, there has been no comprehensive, let alone full, harmonisation of such rules to date, which will complicate the implementation especially in the context of cross-border scenarios with more than one entity in resolution (see also infra, → para. 32). Moreover, funding practices and, hence, the legal characteristics of capital instruments eligible under the own funds requirements continue to differ from jurisdiction to jurisdiction, which also has to be taken into account. 26 EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at p. 9, para. 1.15. 27 EBA, ‘Final Guidelines on the rate of conversion of debt to equity in bail-in’ (5 April 2017, EBA/GL/ 2017/04); see also EBA, ‘Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments’ (5 April 2017, EBA/GL/2017/04), at p. 9, para. 1.12. 28 EBA, ‘Final Guidelines concerning the interrelationship between the BRRD sequence of write-down and conversion and CRR/CRD’ (5 April 2017, EBA/GL/2017/02).
662
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
Irrespective of the foregoing, the implementation of the sequence of write-down and 22 conversion defined in Art. 48 BRRD – just as the cancellation or dilution of shares and other instruments of ownership pursuant to Art. 47 BRRD – will have to be based on a valuation of the relevant institution carried out in accordance with Art. 20 SRMR (Art. 36 BRRD), and will have to reflect (a) the authorities’ assessment of the amount by which CET1 items must be reduced and relevant capital instruments must be written down or converted, and (b) the aggregate amount of bail-in pursuant to Art. 27(13) SRMR (Art. 46 BRRD), the sum of which is referred to as the benchmark for the calibration of write-downs and conversions in Art. 48(1)(1)(b)-(e) BRRD.
2. The order of priority according to Art. 17(1) SRMR in conjunction with Art. 48(1) and (2) BRRD a) Common Equity Tier 1 (Art. 48(1)(a) BRRD) In line with the general principle that shareholders bear first losses (Art. 15(1)(a) 23 SRMR = Art. 34(1)(a) BRRD), Art. 48(1)(a) BRRD first requires that ‘Common Equity Tier 1 items are reduced in accordance with point (a) of Article 60(1)’,
which in turn requires – in a less than clear-cut wording – that ‘Common Equity Tier 1 items are reduced first in proportion to the losses and to the extent of their capacity and the resolution authority takes one or both of the actions specified in Art. 47(1) in respect of holders of Common Equity Tier 1 instruments’.
The same principle is enunciated, in simpler terms, in Art. 21(10)(a) SRMR (infra, → Art. 21 para. 29). Taken together, Arts. 48(1)(a) and 60(1) BRRD thus define not just the subordina- 24 tion of CET1 in relation to all other capital instruments and debt positions, but also the equal rank of CET1 instruments among themselves, regardless of other characteristics (e.g., differences in terms of voting rights or in terms of the entitlement to the entity’s profits), in proportion to the losses. The latter is basically a repetition of the more general principle of equal treatment enunciated in Art. 48(2) BRRD, which in turn operationalises the principle of equal treatment stipulated in Art. 15(1)(f) SRMR (Art. 34(1) (f) BRRD). It has also been emphasised as the basis for the formulation of ‘guiding rules’ for the interpretation and application of Art. 48 BRRD in the EBA Guidelines on the interrelationship with the CRR/CRD.29
29
See ibid., at p. 9, paras. 10 and 11: ‘Guiding rule 1: When applying the bail-in tool or the write-down and conversion power at PONV the resolution authority should treat capital instruments which belong to the same category of the sequence established by Article 48 or Article 60 of the BRRD and which rank equally in insolvency in the same way, whatever their other characteristics or untriggered contractual terms governing write-down and conversion. In particular they should be written down to the same extent or subject to the same terms of conversion. If a contractual trigger event which would result in write-down or conversion of an instrument occurs before or at the same time as the application of either power, the assessment of the creditor hierarchy should reflect the effects of that write-down or conversion. Guiding rule 2: When determining the order and amount of write-down or conversion the resolution authority should apply the same treatment to all instruments eligible as own funds according to Part 2 or Part 10, Title 1, Chapter 2 of Regulation (EU) No 575/2013, independently of whether they are fully or partially excluded from counting towards an institution’s own funds. In particular they should be written down to the same extent or subject to the same terms of conversion.’
Jens-Hinrich Binder
663
Art. 17 SRMR
Order of priority of claims
b) Additional Tier 1 instruments (Art. 48(1)(b) BRRD) 25
Pursuant to Art. 48(1)(b) BRRD, ‘if, and only if, the total reduction pursuant to point (a) is less than the sum of the amounts referred to in points (b) and (c) of Article 47(3), authorities reduce the principal amount of Additional Tier 1 instruments to the extent required and to the extent of their capacity’.
Again, fully in line with the order of priority of claims under traditional insolvency law, the provision specifies the rank of AT1 instruments as subordinated to other capital instruments and liabilities, but higher than CET1 instruments. Just like with regard to CET1 (see supra, → para. 24), AT1 instruments, among themselves, are required to be treated equally, and have to be reduced pro rata to their value by virtue of Art. 48(2) BRRD. The same principle applies by virtue of Art. 21(10)(b) SRMR (infra, → Art. 21 para. 30). 26 According to the EBA Guidelines promulgated pursuant to Art. 48(6) BRRD, this principle is to be applied exclusively on the basis of the respective rank in insolvency, irrespective of other characteristics of such instruments and of whether the relevant instrument qualifies for inclusion in the regulatory own funds under Art. 52 CRR, or whether it has been grandfathered according to Part 10, Title 1, Ch. 2 CRR without meeting the conditions stipulated in Art. 52 CRR.30 This is consistent with the general policy to realign the order of priority of positions in resolution with that under general insolvency law, and thus entirely convincing. c) Tier 2 instruments (Art. 48(1)(c) BRRD) 27
Pursuant to Art. 48(1)(c) BRRD ‘if, and only if, the total reduction pursuant to points (a) and (b) is less than the sum of the amounts referred to in points (b) and (c) of Article 47(3), authorities reduce the principal amount of Tier 2 instruments to the extent required and to the extent of their capacity.’
In principle, this mirrors exactly the treatment of AT1 instruments as defined by Art. 48(1)(b) BRRD (see supra, → paras. 25 and 26), and reflects the rank of T2 instruments between AT1 and other subordinated debt instruments. The principle is also replicated in Art. 21(10(c) SRMR (see infra, → Art. 21 paras. 31). According to the EBA Guidelines promulgated pursuant to Art. 48(6) BRRD, Art. 48(1)(c) BRRD shall apply irrespective of differences in the maturity of the relevant instruments, although such differences will affect the eligibility for inclusion in the regulatory own funds.31 d) Other debt (Art. 48(1)(d) and (e) BRRD) 28
Art. 48(1)(d) and (e) BRRD finally define the rank of other subordinated and other eligible liabilities (as defined by Art. 3(1)(49) SRMR = Art. 2(1)(71) BRRD: liabilities that do not qualify as CET1, AT1 or AT2 instruments and are not excluded from the scope of the bail-in under Art. 27(3) SRMR = Art. 44(2) BRRD). The principles are the same as discussed above: The ranking follows the hierarchy of claims in traditional insolvency procedures, and positions in the same class are to be treated equally. Pursuant to Art. 48(1)(d) and (e) BRRD, ‘(d) if, and only if, the total reduction of shares or other instruments of ownership and relevant capital instruments pursuant to points (a), (b) and (c) is less than the sum of the amounts referred to in points (b) and (c) of Article 47(3), authorities reduce to the extent required the principal amount 30 31
664
Ibid., at pp. 9–10, paras. 12–17. Ibid., at p. 10, paras. 18–20.
Jens-Hinrich Binder
Art. 17 SRMR
Order of priority of claims
of subordinated debt that is not Additional Tier 1 or Tier 2 capital in accordance with the hierarchy of claims in normal insolvency proceedings, in conjunction with the write down pursuant to points (a), (b) and (c) to produce the sum of the amounts referred to in points (b) and (c) of Article 47(3); (e) if, and only if, the total reduction of shares or other instruments of ownership, relevant capital instruments and eligible liabilities pursuant to points (a) to (d) of this paragraph is less than the sum of the amounts referred to in points (b) and (d) of Article 47(3), authorities reduce to the extent required the principal amount of, or outstanding amount payable in respect of, the rest of eligible liabilities in accordance with the hierarchy of claims in normal insolvency proceedings, including the ranking of deposits provided for in Article 108, pursuant to Article 44, in conjunction with the write down pursuant to points (a), (b), (c) and (d) of this paragraph to produce the sum of the amounts referred to in points (b) and (c) of Article 47(3).’
Importantly, before a write-down or conversion in relation to the eligible liabilities referred to in Art. 48(1)(e) BRRD, authorities first have to write-down or convert CoCo bonds (Art. 48(3) BRRD).32 A corresponding provision is set out in Art. 21(10)(d) SRMR (infra, → Art. 21 paras. 32).
III. Implementation and coordination with national laws 1. Calibration of the measures and implementation With regard to implementation of the requirements stipulated in Arts. 47 and 48 29 BRRD, Art. 17 SRMR expressly applies to both the decision ‘on the exercise of the writedown and conversion powers, including on any possible application of Art. 27(5) BRRD’, by the SRB and the Commission and, where applicable, NRAs, as well as on the exercise of these powers by the NRAs. Two scenarios have to be distinguished in this respect: First, in cases falling within the responsibility of the SRB pursuant to Art. 7(2) 30 SRMR, the decision to calibrate the write-down and conversion powers and the bail-in, the SRB will make the relevant decisions as part of the resolution procedure defined in Art. 18 SRMR. The NRAs will then be responsible for the execution of the relevant measures pursuant to Art. 21(11) and Art. 29 SRMR (see, further, infra, → Art. 21 para. 33). Secondly, in cases where NRAs are responsible for the resolution pursuant to Art. 7(3)(e) and (f) SRMR, they are bound by Art. 17 SRMR in conjunction with Arts. 47 and 48 BRRD also with regard to the calibration of these powers. In both scenarios, the implementation of the relevant measures will have to rely on 31 the powers granted to NRAs under the national laws transposing the ‘resolution powers’ stipulated in Ch. VI BRRD, including, in particular: Art. 63(1)(c) BRRD (power to transfer shares or other instruments of ownership issued by an institution under resolution), Art. 63(1)(e) BRRD (power to reduce, including to reduce to zero, the principal amount of or outstanding amount due in respect of eligible liabilities, of an institution under resolution), Art. 63(1)(f) BRRD (power to convert eligible liabilities of an institution under resolution into ordinary shares or other instruments of ownership of that in32
Art. 48(3) BRRD reads: ‘Before applying the write down or conversion referred to in point (e) of paragraph 1, resolution authorities shall convert or reduce the principal amount on instruments referred to in points (b), (c) and (d) of paragraph 1 when those instruments contain the following terms and have not already been converted: (a) terms that provide for the principal amount of the instrument to be reduced on the occurrence of any event that refers to the financial situation, solvency or levels of own funds of the institution or entity referred to in point (b), (c) or (d) of Article 1(1); (b) terms that provide for the conversion of the instruments to shares or other instruments of ownership on the occurrence of any such event.’
Jens-Hinrich Binder
665
Art. 18 SRMR
Resolution procedure
stitution or entity […], a relevant parent institution or a bridge institution to which assets, rights or liabilities of the institution or the entity […] are transferred), Art. 63(1)(g) BRRD (power to cancel debt instruments issued by an institution under resolution except for secured liabilities subject to Art. 44(2) BRRD = Art. 27(4) BRRD), Art. 63(1)(h) BRRD (power to reduce, including to reduce to zero, the nominal amount of shares or other instruments of ownership of an institution under resolution and to cancel such shares or other instruments of ownership), Art. 63(1)(i) BRRD (power to require an institution under resolution or a relevant parent institution to issue new shares or other instruments of ownership or other capital instruments, including preference shares and contingent convertible instruments), and Art. 63(1)(j) BRRD (power to amend or alter the maturity of debt instruments and other eligible liabilities issued by an institution under resolution or amend the amount of interest payable under such instruments and other eligible liabilities, or the date on which the interest becomes payable, including by suspending payment for a temporary period, except for secured liabilities subject to Art. 44(2) BRRD = Art. 27(4) BRRD). In this context, the shareholders are not entitled to safeguards arising under EU company law (Art. 84(3) Dir. 2017/1132 33), including, in particular, the requirement that increases and reductions of capital be decided by the general meeting (Arts. 68 and 74 Dir. 2017/1132) and the need to convene a general meeting in case of serious losses of the subscribed capital (Art. 58 Dir. 2017/1132).
2. Coordination with national laws 32
As noted before, the order of priority under national insolvency laws plays a fundamental role as a benchmark for the treatment of claims in resolution (see supra, → paras. 9). As a result, residual differences between the applicable insolvency legislations in participating Member States will have to be taken into account when calibrating resolution actions in general and the write-down and conversion powers and the bail-in in particular, and will, at the same time, determine the economic outcome. In order to facilitate centralised decision-making regardless of such differences, Art. 17 SRMR requires participating Member States to notify to the Commission and to the Board the ranking of claims under national laws on an annual basis, and immediately upon changes to these laws. While this is certainly helpful in order to provide a reliable information basis for the planning process, it evidently does not remove the difficulties and complexities arising from residual national differences (especially in complex crossborder scenarios).
Art. 18 SRMR Resolution procedure* 1. The Board shall adopt a resolution scheme pursuant to paragraph 6 in relation to entities and groups referred to in Article 7(2), and to the entities and groups referred to in Article 7(4)(b) and (5) where the conditions for the application of those paragraphs are met, only when it assesses, in its executive session, on receiving
33 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, OJ L 169, 30.6.2017, p. 46. * The information and views set out in this publication are those of the author and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of this study. Neither does the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein.
666
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
a communication pursuant to the fourth subparagraph, or on its own initiative, that the following conditions are met: (a) the entity is failing or is likely to fail; (b) having regard to timing and other relevant circumstances, there is no reasonable prospect that any alternative private sector measures, including measures by an IPS, or supervisory action, including early intervention measures or the write-down or conversion of relevant capital instruments in accordance with Article 21, taken in respect of the entity, would prevent its failure within a reasonable timeframe; (c) a resolution action is necessary in the public interest pursuant to paragraph 5. An assessment of the condition referred to in point (a) of the first subparagraph shall be made by the ECB, after consulting the Board. The Board, in its executive session, may make such an assessment only after informing the ECB of its intention and only if the ECB, within three calendar days of receipt of that information, does not make such an assessment. The ECB shall, without delay, provide the Board with any relevant information that the Board requests in order to inform its assessment. Where the ECB assesses that the condition referred to in point (a) of the first subparagraph is met in relation to an entity or group referred to in the first subparagraph, it shall communicate that assessment without delay to the Commission and to the Board. 1a. An assessment of the condition referred to in point (b) of the first subparagraph shall be made by the Board, in its executive session, or, where applicable, by the national resolution authorities, in close cooperation with the ECB. The ECB may also inform the Board or the national resolution authorities concerned that it considers the condition laid down in that point to be met. 2. Without prejudice to cases where the ECB has decided to exercise directly supervisory tasks relating to credit institutions pursuant to Article 6(5)(b) of Regulation (EU) No 1024/2013, in the event of receipt of a communication pursuant to paragraph 1 or where the Board intends to make an assessment under paragraph 1 on its own initiative in relation to an entity or group referred to in Article 7(3), the Board shall communicate its assessment to the ECB without delay. 3. The previous adoption of a measure pursuant to Article 16 of Regulation (EU) No 1024/2013, to Article 27(1) or Article 28 or 29 of Directive 2014/59/EU, or to Article 104 of Directive 2013/36/EU is not a condition for taking a resolution action. 4. For the purposes of point (a) of paragraph 1, the entity shall be deemed to be failing or to be likely to fail in one or more of the following circumstances: (a) the entity infringes, or there are objective elements to support a determination that the institution will, in the near future, infringe the requirements for continuing authorisation in a way that would justify the withdrawal of the authorisation by the ECB, including but not limited to the fact that the institution has incurred or is likely to incur losses that will deplete all or a significant amount of its own funds; (b) the assets of the entity are, or there are objective elements to support a determination that the assets of the entity will, in the near future, be less than its liabilities; (c) the entity is, or there are objective elements to support a determination that the entity will, in the near future, be unable to pay its debts or other liabilities as they fall due;
Emiliano Tornese
667
Art. 18 SRMR
Resolution procedure
(d) extraordinary public financial support is required except where, in order to remedy a serious disturbance in the economy of a Member State and preserve financial stability, that extraordinary public financial support takes any of the following forms: (i) a State guarantee to back liquidity facilities provided by central banks in accordance with the central banks' conditions; (ii) a State guarantee of newly issued liabilities; or (iii) an injection of own funds or purchase of capital instruments at prices and on terms that do not confer an advantage upon the entity, where neither the circumstances referred to in points (a), (b) and (c) of this paragraph nor the circumstances referred to in Article 21(1) are present at the time the public support is granted. In each of the cases referred to in points (i), (ii) and (iii) of point (d) of the first subparagraph, the guarantee or equivalent measures referred to therein shall be confined to solvent entities and shall be conditional on final approval under the Union State aid framework. Those measures shall be of a precautionary and temporary nature and shall be proportionate to remedy the consequences of the serious disturbance and shall not be used to offset losses that the entity has incurred or is likely to incur in the near future. Support measures under point (d)(iii) of the first subparagraph shall be limited to injections necessary to address capital shortfall established in the national, Union or SSM-wide stress tests, asset quality reviews or equivalent exercises conducted by the ECB, EBA or national authorities, where applicable, confirmed by the competent authority. If the Commission submits a legislative proposal pursuant to Article 32(4) of Directive 2014/59/EU, it shall, if appropriate, submit a legislative proposal amending this Regulation in the same way. 5. For the purposes of point (c) of paragraph 1 of this Article, a resolution action shall be treated as in the public interest if it is necessary for the achievement of, and is proportionate to one or more of the resolution objectives referred to in Article 14 and winding up of the entity under normal insolvency proceedings would not meet those resolution objectives to the same extent. 6. If the conditions laid down in paragraph 1 are met, the Board shall adopt a resolution scheme. The resolution scheme shall: (a) place the entity under resolution; (b) determine the application of the resolution tools to the institution under resolution referred to in Article 22(2), in particular any exclusions from the application of the bail-in in accordance with Article 27(5) and (14); (c) determine the use of the Fund to support the resolution action in accordance with Article 76 and in accordance with a Commission decision taken in accordance with Article 19. 7. Immediately after the adoption of the resolution scheme, the Board shall transmit it to the Commission. Within 24 hours from the transmission of the resolution scheme by the Board, the Commission shall either endorse the resolution scheme, or object to it with regard to the discretionary aspects of the resolution scheme in the cases not covered in the third subparagraph of this paragraph.
668
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
Within 12 hours from the transmission of the resolution scheme by the Board, the Commission may propose to the Council: (a) to object to the resolution scheme on the ground that the resolution scheme adopted by the Board does not fulfil the criterion of public interest referred to in paragraph 1(c); (b) to approve or object to a material modification of the amount of the Fund provided for in the resolution scheme of the Board. For the purposes of the third subparagraph, the Council shall act by simple majority. The resolution scheme may enter into force only if no objection has been expressed by the Council or by the Commission within a period of 24 hours after its transmission by the Board. The Council or the Commission, as the case may be, shall provide reasons for the exercise of their power of objection. Where, within 24 hours from the transmission of the resolution scheme by the Board, the Council has approved the proposal of the Commission for modification of the resolution scheme on the ground referred to in point (b) of the third subparagraph or the Commission has objected in accordance with the second subparagraph, the Board shall, within eight hours modify the resolution scheme in accordance with the reasons expressed. Where the resolution scheme adopted by the Board provides for the exclusion of certain liabilities in the exceptional circumstances referred to in Article 27(5), and where such exclusion requires a contribution by the Fund or an alternative financing source, in order to protect the integrity of the internal market, the Commission may prohibit or require amendments to the proposed exclusion setting out adequate reasons based on an infringement of the requirements laid down in Article 27 and in the delegated act adopted by the Commission on the basis of Article 44(11) of Directive 2014/59/EU. 8. Where the Council objects to the placing of an institution under resolution on the ground that the public interest criterion referred to in paragraph 1(c) is not fulfilled, the relevant entity shall be wound up in an orderly manner in accordance with the applicable national law. 9. The Board shall ensure that the necessary resolution action is taken to carry out the resolution scheme by the relevant national resolution authorities. The resolution scheme shall be addressed to the relevant national resolution authorities and shall instruct those authorities, which shall take all necessary measures to implement it in accordance with Article 29, by exercising resolution powers. Where State aid or Fund aid is present, the Board shall act in conformity with a decision on that aid taken by the Commission. 10. The Commission shall have the power to obtain from the Board any information which it deems to be relevant for performing its tasks under this Regulation. The Board shall have the power to obtain from any person, in accordance with Chapter 5 of this Title, any information necessary for it to prepare and decide upon a resolution action, including updates and supplements of information provided in the resolution plans. Bibliography Jérôme Deslandes, Cristina Dias and Marcel Magnus, ‘Liquidation of Banks: Towards an ‘FDIC’ for the Banking Union?’, IPOL Economic Governance Support Unit (2019); Anna Gelpern and Nicolas Veron, ‘An Effective Regime for Non-viable Banks: US Experience and Considerations for EU Reform’, IPOL Economic Governance Support Unit (2019); Ana Kozina, Stefan Martinić and Vedrana Mihalić, ‘The EU’s Single Resolution Board: An EU Agency Built on Sand or on a Rock?’, CYELP
Emiliano Tornese
669
Art. 18 SRMR
Resolution procedure
(2017), 215; Rosa Lastra, ‘Banking Union and Single Market – Conflict or Companionship’, Fordham International Law Journal (2013), 1190; Fernando Restoy, ‘How to improve crisis management in the banking union: an European FDIC?’, Financial Stability Institute (2019); Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (revision2014); George S. Zavvos and Stella Kaltsouni, ‘The Single Resolution Mechanism in the European Banking Union: Legal Foundation, Governance Structure and Financing’ in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar, Cheltenham 2015), 117. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The legal basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
C. Conditions of resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Role of the Board and the ECB/SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The FOLF determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The Public Interest Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 18 26 48 79
D. Role of the Commission and the Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99
A. Introduction 1
2
3
4
5
In the context of the global financial crisis, the Member States called for the creation of the Banking Union1 in order to break the vicious circle between banks and their respective sovereigns.2 As a first step, the Single Supervisory Mechanism (SSM) was established by Council Regulation (EU) No 1024/2013 (SSMR) to ensure coherent and effective supervision of credit institutions and groups established in the euro area.3 Following the establishment of the SSM, in order to address the misalignment between the Union supervision and the national treatment of those banks in the resolution proceedings, the European Council called for the establishment of a Single Resolution Mechanism (SRM) for the euro area.4 Regulation (EU) No 806/2014 (SRMR) establishes the framework of the SRM. It sets out uniform rules – which constitute the material law to be applied by the SRM – and a uniform procedure for the resolution of banks which are established in the Member States participating in the Banking Union.5 Mindful of the difficulties of cross-border resolutions during the financial crisis,6 the co-legislators felt the need to establish a unified decision-making process for resolution in the Banking Union to re-establish the functioning of the internal market, to restore confidence, market stability and predictability as to the possible outcome of a bank failure in the euro area, and re-build trust among national authorities.7 In particular, during the financial crisis, the lack of a unified decision-making process and the different incentives and practices of Member States in the treatment of creditors of banks under resolution and in the bail-out of failing banks with tax payers' money were having an impact on the perceived credit risk, financial soundness and solvency European Council Conclusions of March 2012. Euro area summit statement of June 2012. 3 Recital 7 SRMR. 4 European Council Conclusions of December 2012. 5 Art. 1 SRMR. 6 The global financial crisis showed the limits of cross-border resolution due to the lack of trust among national resolution authorities and to the conflicting interests they represented (i.e. the case of Dexia and Fortis Group failures). This was summarized by the Governor of the Bank of England with the famous quote: “Banks are global in life and national in death.” 7 Recital 2 SRMR. 1 2
670
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
of their banks and thus creating an unlevel playing field in the internal market. 8 This was undermining public confidence in the banking sector and obstructing the exercise of the freedom of establishment and the free provision of services within the internal market because banks and customers would have faced different financing costs only because of their place of establishment.9 Moreover, absent a unified decision-making process, the national supervisors would have continued to have strong incentives to minimise the potential impact of bank crises on their national economies by adopting unilateral actions to ring-fence banking operations, for instance by limiting intragroup transfers and lending, or by imposing higher liquidity and capital requirements on subsidiaries in their jurisdictions of potentially failing parent undertakings. This would have restricted the cross-border activities of banks, created obstacles to the exercise of fundamental freedoms, distorted competition in the internal market, and eventually risked fragmenting the internal market.10 Art. 18 SRMR lays down the procedure of such unified resolution decision-making 6 process, in particular, describing the conditions which need to be assessed to place credit institutions and groups under resolution and the respective roles of the various actors involved, namely the ECB (SSM), the Single Resolution Board (Board), NRAs, the Commission and the Council. This procedure has often been criticised as too complex. However, the resolution of 7 a credit institution is in itself a complex procedure, which requires balancing different objectives and interests at stake.11 For this reason, also the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (K.A.) recognizes the possibility that resolution powers be granted to multiple resolution authorities within the same jurisdiction provided that their respective mandates, roles and responsibilities are clearly defined and coordinated.12 As a comparison, Title II of the Dodd-Frank Wall Street Reforms of 2010 provides 8 for an Orderly Liquidation Authority (OLA) as an alternative to bankruptcy to Systemically Important Financial Institutions (SIFIs) when a failure in bankruptcy would have serious adverse effects on financial stability in the United States (US). 13 The OLA is also a complex procedure that involves several authorities. It is often referred to as the “three keys” process, under which, orderly liquidation can be triggered only with the agreement of the Secretary of Treasury and the Federal Reserve, with the agreement of Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission or the new Federal Insurance Office, depending on the type of institution. The Secretary of the Treasury makes the determination in consultation with the President of the US. Moreover, the orderly liquidation order can also be challenged before the U.S. District Court for the District of Columbia and the judicial hearing is to be held within 24 hours, only after which the FDIC can be appointed as receiver. It is worth adding that the OLA concerns Bank Holding Companies (BHCs), which before had no access to a specialised resolution regime. Insured Depository Institutions (IDIs) have always been and continue to be covered by the general powers provided for under the Federal
Recital 3 SRMR. Recital 4 SRMR. 10 Recital 9 SRMR. 11 Art. 14(3) SRMR. 12 FSB K.A. 2.1. 13 Sec. 203(b)(2) Dodd-Frank Act. 8
9
Emiliano Tornese
671
Art. 18 SRMR
Resolution procedure
Deposit Insurance Act (FDIA). These processes covering different types of institutions show how complex the resolution procedure can be.14
B. The legal basis 9
10
11
12
13 14
The legal basis of the SRM was one of the most controversial issues of the negotiation. While for the SSM, the Treaty provides for an explicit legal basis, this was not the case for the SRM. The Commission proposed to use Art. 114 TFEU. The objective was to establish a centralized system of decision-making applying a set of uniform rules on bank resolution. Art. 114 TFEU is meant to be used to adopt “measures for the approximation of the provisions laid down by law, regulation or administrative action in the Member States (…)”. The CJEU case law has provided significant guidance as to when Art. 114 TFEU can be used as a legal basis.15 For example, the CJEU has consistently held that the provision can be used “only where it is actually and objectively apparent from the legal act that its purpose is to improve the conditions for the establishment and functioning of the internal market”,16 and where there are disparities or potential disparities between national rules "which are such as to obstruct the fundamental freedoms or to create distortions of competition".17 Moreover, in the "Smoke flavourings" case, the Court has accepted the use of Art. 114 TFEU for the establishment of a Union centralised process of deciding whose application - by the Commission - would bring about the approximation of the laws of Member States.18 Finally, in the "ENISA" case, the Court has upheld the use of Art. 114 TFEU for the creation of a Union body (an agency), insofar as the objectives and tasks of the body in question are closely linked to the subject matter of existing harmonising legislation, and are "likely to facilitate" the application of the harmonising legislation by supporting and providing a framework for its implementation.19 The centralised decision procedure provided for by the SRM aims to achieve those objectives as clearly stated by the co-legislators in Recitals 3, 4, 9, and 11 of the SRMR. In particular, the establishment of a centralised power of decision aims to create a level playing field in the treatment of creditors of banks under resolution promoting thereby the exercise of the freedom of establishment and the free provision of services in the internal market.20 Banks and their customers would not have to suffer higher borrowing costs only because of their place of establishment and irrespective of their real
14 For a description of the US institutional architecture basics, see Gelpern and Veron, IPOL Economic Governance Support Unit (2019). 15 See Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (2015), 117; Kozina, Martinić and Mihalić, CYELP 2017, 215. 16 See Case C‑491/01, The Queen v Secretary of State for Health, British American Tobacco (Investments) Ltd. and Imperial Tobacco Ltd, ECLI:EU:C:2002:741, para. 60; see Case C-217/04, United Kingdom v Parliament and Council, ECLI:EU:C:2006:279, para. 42. 17 Case C‑434/02, Arnold André GmbH & Co. KG v Landrat des Kreises Herford, ECLI:EU:C:2004:800, para. 34; Case C‑210/03, Swedish Match AB and Swedish Match UK Ltd v Secretary of State for Health, ECLI:EU:C:2004:802, para. 33; Joined Cases C‑154/04 and C‑155/04, Alliance for Natural Health and Others v Secretary of State for Health and National Assembly for Wales, ECLI:EU:C:2005:449, para. 32; Case C-66/04, United Kingdom v Parliament and Council, ECLI:EU:C:2005:743, para. 41. 18 See Case C-66/04, United Kingdom v Parliament and Council, ECLI:EU:C:2005:743, para. 41. 19 See Case C-217/04, United Kingdom v Parliament and Council, ECLI:EU:C:2006: 279, para. 42. 20 Recital 3 SRMR.
672
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
creditworthiness.21 It seeks to avoid the fragmentation of the internal market concerning credit institutions, unilateral action to ring-fence banking operations by the Member States, and restrictions to cross-border activities.22 Moreover, such a centralised power of resolution is an integral part of the ongoing 15 process of harmonisation in the field of resolution operated by Directive 2014/59/EU (BRRD) and by the set of uniform provisions on resolution laid down in the SRMR. The uniform application of the resolution regime in the participating Member States would be enhanced as a result of being entrusted to a central authority. Furthermore, the SRM is interwoven with the process of harmonisation in the field of prudential supervision brought about by the establishment of the EBA, the single-rulebook on prudential supervision, and, in the participating Member States, the establishment of the SSM to which the application of Union prudential supervision rules is entrusted. Supervision and resolution are two complementary aspects of the establishment of the internal market for financial services whose application at the same level is regarded as mutually dependent.23 On the basis of all the above elements, also the Council Legal Service concluded in 16 its opinion of 11 September 2013 that: “Article 114 TFEU may be a suitable legal basis for the establishment of the SRM as long as such a mechanism responds to a genuine need of uniform application of the rules on resolution that could not be achieved through other methods of harmonisation.”24 An assessment of the legal framework of the Banking Union and of the legal basis for 17 the SRM has been recently conducted by the German Federal Constitutional Court, which has concluded that if interpreted strictly the framework for the European Banking Union does not exceed the competencies of the European Union. In particular, the establishment of and competencies assigned to the Board by the SRMR raise concerns with regard to the principle of conferral, but they do not amount to a manifest exceeding of competencies if the Board acts strictly within the limits of the tasks and powers assigned to it.25
C. Conditions of resolution I. Scope The Board is responsible for adopting a resolution scheme for those entities and 18 groups which are referred to in Art. 7(2) SRMR.26 Those include entities and groups which are considered significant, or in relation to which the ECB has decided to exercise directly all of the relevant powers.27 In other words, Art. 18(1) SRMR ensures parallelism in terms of scope between the tasks of the SSM and the tasks of the SRM. 28 However, an important difference is that the SRMR gives to the Board direct respon- 19 sibility for all cross-border groups, including those which are not under the direct Recital 4 SRMR. Recital 9 SRMR. 23 Recital 11 SRMR. 24 Council, Opinion of 11 September 2013, available at . 25 BVerfG NJW 2019, 3204. 26 Art. 18(1) SRMR. 27 See Art. 6(4) and (5) SSMR. 28 See also Recitals 14-17 SRMR. 21
22
Emiliano Tornese
673
Art. 18 SRMR
20
21
22 23
24
Resolution procedure
responsibility of the SSM. The reason might be that the co-legislators wanted to centralize the resolution of all cross-border groups at the Union level to address the limits of home-host coordination experienced during the financial crisis. It is worth noticing that Art. 2 SRMR defines a "cross-border group" as a group that has entities established in more than one participating Member States. Therefore, crossborder groups which are established in one participating Member State and in one or more non-participating Member States seem to be excluded from the direct responsibility of the Board. The slight misalignment between the tasks of the SSM and of the Board in relation to cross-border groups, which are less significant, could represent an issue if the SSM and the Board do not have sufficient supervisory data in relation to those groups and therefore are not able to declare that a group is failing or likely to fail. However, this issue should be mitigated by the fact that the SSM and the Board can decide, respectively under Art. 6(5)(b) SSMR and Art. 7(4) SRMR, to exercise directly all the relevant powers over those groups. Moreover, under Chapter 5 SRMR, the Board is entrusted with ample investigatory powers which would allow it to have sufficient supervisory data to trigger the resolution process also on its own initiative.29 The Board shall adopt a resolution scheme also in relation to entities and groups which are referred to in Art. 7(4)(b) SRMR, where the conditions are met. Those entities and groups are less significant institutions (LSIs) and therefore generally not under the direct responsibility of the Board. However, in accordance with Art. 7(4)(a)SRMR, where necessary to ensure the consistent application of high-resolution standards, the Board "may", further to the notification by the relevant national resolution authority, issue a warning where the Board considers that the draft decision prepared by that national resolution authority for one of those entities does not comply with the SRMR (this could also include the scrutiny of the assessment of the public interest test conducted by the national resolution authorities) or with its general instructions referred to in Art. 31(1)(a) SRMR. Art. 7(4)(b) SRMR further adds that the Board may at any time decide, in particular, if its warning is not being appropriately addressed, on its own initiative, after consulting the national resolution authority concerned, or upon request from the national resolution authority concerned, to exercise directly all of the relevant powers with regard to any LSIs. This means that the Board has the ultimate power to supervise the activities of the national resolution authorities in order to ensure the consistency of the framework. The power to resolve those entities centrally by the Board is also ensured under Art. 7(3) SRMR when the resolution action requires the use of the Single Resolution Fund (SRF) or is financed by tools other than those referred to in Art. 21 SRMR and Arts. 24-27 SRMR and/or by the deposit guarantee scheme. This could include for example cases where the resolution needs State aid financing. Therefore, it seems that the objective of the co-legislators was to centralise with the Board all resolution cases involving SRF aid or State aid, to ensure the level playing field in the treatment of creditors under resolution in the internal market30 and to break the link between any bank and its respective sovereign.31 However, this objective could be circumvented, if a national resolution authority can avoid such centralization with the Board by declaring that the pub-
29 In accordance with Art. 10, the SRB shall have the power to obtain from any person, in accordance with Chapter 5 of Title I of Part II SRMR, any information necessary for it to prepare and decide upon a resolution action, including updates and supplements of information provided in the resolution plans. 30 Recital 3 SRMR. 31 Recital 19 SRMR.
674
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
lic interest is not met in relation to a specific LSI and by liquidating it under national insolvency law. Art. 18 (2) SRMR confirms that in those cases where the Board decides to exercise 25 directly its tasks relating to LSIs and intends to assess the conditions for resolution on its own initiative, it should communicate its assessment to the SSM without delay.
II. Role of the Board and the ECB/SSM The Board shall adopt a resolution scheme only when it assesses, in its executive 26 session, on receiving a communication from the ECB, or on its own initiative, that three conditions are met: “(a) the entity is failing or is likely to fail; (b) having regard to timing and other relevant circumstances, there is no reasonable prospect that any alternative private sector measures, including measures by an IPS, or supervisory action, including early intervention measures or the write-down or conversion of relevant capital instruments in accordance with Article 21, taken in respect of the entity, would prevent its failure within a reasonable timeframe; (c) a resolution action is necessary in the public interest.”
It is worth noticing that the executive session of the Board makes the assessment of the three conditions and adopts the resolution scheme even though it is the plenary session that decides on the use of the SRF above certain limits in accordance with Art. 50(1)(c) SRMR. The assessment that the entity is failing or likely to fail (FOLF) is generally made by the ECB as a supervisor, after consulting the Board. The ECB has made this determination in the following cases: Banco Popular Español S.A.,32 ABLV Bank, AS,33 ABLV Bank Luxembourg, SA,34 Banca Popolare di Vicenza Società per Azioni,35 Veneto Banca Società per Azioni,36 and AS PNB Banka.37 The CJEU has clarified the legal nature of this assessment. In particular, in ABLV Bank AS v ECB,38 the CJEU has considered it just a preparatory measure, which does not change the legal status of a bank and does not expose the bank to resolution action. As a factual assessment, it is in no way binding on the Board, but it constitutes the basis for the exclusive power of the Board to adopt a resolution scheme or a decision establishing that resolution is not in the public interest. Therefore, it cannot be challenged under Art. 263 TFEU and form the subject of an action for annulment. Despite being legally non-binding and leaving a wide margin of discretion to the Board, it is difficult to imagine that the ECB assessment will not trigger a decision of the Board. In fact, the publication of such an assessment without a proper follow-up by the 32 See ECB Banking Supervision, FOLTF assessment of Banco Popular Español, 6.6.2017: . 33 See ECB Banking Supervision, FOLTF assessment of ABLV Bank, AS, 23.2.18: . 34 See ECB Banking Supervision, FOLTF assessment of ABLV Bank Luxembourg, SA, 23.2.2018: . 35 See ECB Banking Supervision, FOLTF assessment of Banca Popolare di Vicenza Società per Azioni, 23.6.207: . 36 See ECB Banking Supervision, FOLTF assessment of Veneto Banca Società per Azioni, 23.6.2017: . 37 See ECB Banking Supervision, FOLTF assessment of AS PNB Banka, 15.8.2019: . 38 See Case T-281/18, ABLV Bank AS v ECB, ECLI:EU:T:2019:296, paras. 36-49.
Emiliano Tornese
675
27
28 29
30
31
Art. 18 SRMR
32
33
34 35
36
37
38
39 40
Resolution procedure
Board could have a negative impact on the bank and possibly on financial stability. For this reason, it is important that the determination is made by the ECB after consulting the Board. Where the ECB assesses that the condition that an entity is failing or likely to fail, it shall communicate that assessment to the Commission and the Board. It is possible that the Board has already started preparing for resolution following the communication of early intervention measures in accordance with Art. 13 SRMR. However, it is this communication that formally triggers the power of the Board to assess all conditions for resolution and possibly to adopt a resolution scheme. The power of the ECB to make the assessment that an entity is failing or likely to fail is shared with the Board, which may make such an assessment but only after informing the ECB of its intention, and only if the ECB, within three calendar days of receipt of that information, does not make such an assessment. The objective of the co-legislators was to limit the risk of supervisory forbearance, ensure a prompt resolution or liquidation of the bank, and thereby protect and minimise the use of the financial resources of the SRF and the Deposit Guarantee Schemes (DGSs). For this purpose, they have imposed on the ECB the obligation to provide, without delay, the Board with any relevant information that the Board requests in order to inform its assessment. Moreover, the Board has also strong complementary investigatory powers under Chapter 5 of the SRMR. A similar objective exists in the US where, under the FDIA,39 both the supervisor and the FDIC have the power to trigger resolution. It is interesting to note that while under Art. 32(2) BRRD, this double trigger is simply an option for the Member States, which “may provide that, in addition to the competent authority, the determination that the institution is failing or likely to fail can be made by the resolution authority, after consulting the competent authority,” it is fully granted under Art. 7(3) SRMR and Art. 18(1) SRMR. The assessment of the condition that there is no reasonable prospect that any alternative private sector measures, including measures by an IPS, or supervisory action, including early intervention measures or the write-down or conversion of relevant capital instrument, taken in respect of the entity, would prevent its failure within a reasonable timeframe, shall be made by the Board, in its executive session, or, where applicable, by the national resolution authorities, in close cooperation with the ECB. However, the ECB may also inform on its own initiative the Board or the national resolution authorities concerned that it considers the condition to be met. In this case, the explicit reference to the national resolution authorities, in relation to this condition only, seems to be a mere repetition of the powers already granted under Art. 7 SRMR. The condition can be assessed by both the Board and the ECB and, in practice, it is generally a pre-condition for the determination that a bank is failing or likely to fail, even if its assessment is then confirmed with, or after, the FOLF determination. In fact, the resolution could be considered the final step in a sequence of supervisory actions generally following the adoption of early intervention measures. Given that the supervisor and the resolution authority should intervene at the earliest stage when the financial situation or the solvency of the bank is deteriorating to minimise the impact on the economy, the financial system40, the SRF and the DGSs, one can assume that those authorities have already determined the ineffectiveness of any 39 40
676
Sec. 11(c)(4) of the Federal Deposit Insurance Act. See Recital 5 BRRD.
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
possible preventative measure, including private sector measures or supervisory actions, before the FOLF determination.41 The effectiveness of those measures and actions should be assessed by the ECB and the Board already before, or during, the early intervention phase, when the Board can already exercise its power to require the bank to contact potential purchasers, to require national resolution authorities to draft a preliminary resolution scheme, and therefore to prepare for resolution and for the valuation of the assets and liability of the bank.42 For this purpose, Art. 18(3) SRMR clarifies that the prior adoption of supervisory measures,43 early intervention measures,44 the removal of senior management and management body, or the appointment of a temporary administrator,45 are not a condition for taking a resolution action.46 The crisis prevention measures47 are one of the pillars of the framework established by the BRRD and the SRMR and should be adopted well before the determination that a bank is failing or likely to fail. However, the application of the early intervention measures has been extremely limited so far and their regulatory framework might require some streamlining as mentioned in the BRRD/SRMR Review Report. 48 It is interesting to note that letter (b) includes explicitly among the alternative private sector measures also measures by an Institutional Protection Scheme (IPS). 49 The recent judgment of the General Court in the Tercas case seems to open the door also to alternative measures by the DGSs under Art. 11(3) of Directive 2014/49/EU (DGSD). 50 As a comparison with the US, formal resolution activities by the FDIC begin when a Prompt Corrective Action letter is sent to the failing IDI advising that it is critically undercapitalized or insolvent. The FDIA generally requires that an institution be placed in receivership within 90 days after the institution has been determined to be critically undercapitalized.51 At this time, the Board of Directors of the failing bank allows due diligence from interested possible buyers. However, sometimes, the usual resolution process cannot be fully completed before the institution fails, such as in cases of sudden liquidity problems or fraud. In those cases, the FDIC might not have time to value the assets. Therefore, the FDIC retains the assets of the failing institution while structuring a more immediate solution for the institution’s deposits and other liabilities.52 Due to the fact that a resolution procedure usually is not a one-off event but will take place over a longer period of time, it is possible that the conditions for a resolution that are initially met may subsequently cease to exist. Therefore, an interesting question which arises is at what point in time during a resolution procedure the conditions for resolution must be met and if it is necessary to only positively assess them at the initiation of the resolution process, i.e. at the moment the resolution authority initiates a resolution procedure. See also Recitals 52 and 53 SRMR. Art. 13 SRMR. 43 Art. 16 SSMR and Art. 104 CRD IV. 44 See also the EBA Guidelines on triggers for use of early intervention measures pursuant to Art. 27(4) of Directive 2014/59/EU (EBA/GL/2015/03), 8.5.2015. 45 Arts. 28 and 29 BRRD. 46 Art. 2(1)(40) BRRD. 47 Art. 2(1)(101) BRRD. 48 See the BRRD/SRMR Review Report, p. 6. 49 Art. 2(1)(8) BRRD. 50 See Joined Cases T-98/16, T 196/16 and T-198/16, Italy and Others v Commission, ECLI:EU:T: 2019:167, para. 161. 51 Sec. 38 Federal Deposit Insurance Act. 52 See the timeline of the resolution process in the FDIC Resolutions Handbook, p. 9, available at . 41
42
Emiliano Tornese
677
41
42
43
44
45
46
Art. 18 SRMR 47
Resolution procedure
In its Q&A, the EBA has provided some guidance, clarifying that the conditions for resolution need to be met at that point in time the resolution authority decides to take a resolution action. The decision to place an institution under resolution and the application of the resolution tools chosen at that point in time may require the use of resolution powers at a later date. It should be possible to complete the implementation of a resolution in this way without a new assessment of whether the conditions for resolution are met.53
III. The FOLF determination 48 49
50
51
52
53
The FOLF determination remains the discretionary assessment of the supervisor or the resolution authority. In order to promote convergence of supervisory and resolution practices, the EBA has adopted Guidelines which state that the relevant authorities should decide on the basis of a comprehensive assessment of both qualitative and quantitative objective elements, taking into account all other circumstances and information relevant for the institution. Due to their different roles and interplay with the institutions, the supervisor and the resolution authority would probably follow different practices. However, these practices should be consistent and coordinated and supported by an appropriate exchange of information.54 The supervisor should base its determination primarily on the outcomes of the supervisory review and evaluation process (SREP) as described in Art. 97 of Directive 2013/36/EU (CRD) and as further specified in the EBA Guidelines on common procedures and methodologies for the SREP.55 In addition, the supervisor should take into account the results of the application of supervisory and early intervention measures, recovery options applied by institutions, and the results of the valuation of an institution’s assets and liabilities. The resolution authority should be in a position to carry out its own assessment and base it on the elements evaluated by the supervisor under the SREP assessment (i.e. the institution’s capital position, liquidity position and other requirements for its continuing authorisation). Art. 18(4) SRMR identifies four circumstances for the FOLF determination. An entity shall be deemed failing or likely to fail by the supervisor or the resolution authorities in one or more of them. For the purposes of making a FOLF determination, in accordance with the three circumstances laid down in Art. 18(4)(a)-(c) SRMR, the supervisor and the resolution authority should assess the capital position of an institution, its liquidity position, and any other requirements for continuing authorisation (including governance arrangements and operational capacity). As for its capital position, in accordance with Art. 18(4)(a) and (b) SRMR, an institution should be considered as failing or likely to fail if it does or if there are objective elements to support a determination that in the near future it will infringe own funds requirements, including requirements imposed according to Art. 104(1)(a) CRD, relating to the continuing of the authorisation, in a way that would justify the withdrawal of its 53 EBA, Q&A, Question-ID 2015_2428, 22.7.2016, . 54 See the EBA Guidelines on the interpretation of the different circumstances when an institution shall be considered as failing or likely to fail under Article 32(6) of Directive 2014/59/EU (EBA/GL/2015/07), 26.5.2015. 55 See the EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) (EBA/GL/2014/13), 19.12.2014.
678
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
authorisation by the supervisor, including but not limited to, on grounds that it has incurred or is likely to incur losses that will deplete all or a significant amount of its own funds; or have assets which are less than its liabilities. As recalled in the EBA Guidelines, the assessment of whether an institution is still 54 meeting the requirements of its continuing authorisation is carried out on a continuous basis by the supervisor through the supervisory review and evaluation process (SREP) as described in Art. 97 CRD.56 As referred to in Recital 57 SRMR, the fact that an entity does not meet the require- 55 ments for authorisation should not justify per se the entry into resolution, especially if the entity remains or is likely to remain viable. On the other side, the decision to place an entity under resolution should be taken before a financial entity is balance sheet insolvent and before all equity has been fully wiped out. When assessing the assets and liabilities of the institution in the near future and 56 when assessing whether the institution will comply in the near future with the own funds requirements, the determination should be based on objective elements including among other things: (i)
(ii) (iii) (iv)
the level and composition of own funds held by an institution and whether it meets the minimum and additional own funds requirements imposed on the institution in accordance with Art. 92 of Regulation (EU) No 575/2013 (CRR) and Art. 104(1)(a) CRD; the results of an asset quality review, including a national/Union/SSM review, indicating a significant decrease in asset value leading to infringement of own funds requirements, where available; the results of any valuation conducted in order to inform whether the conditions for resolution are met in accordance with Art. 36(4)(a) BRRD, where available; or the results of any other institution-specific assessment of the value of its assets and liabilities which has been prepared, whether conducted by an independent valuer or resolution authority or any other person, to the extent that the valuation methodology applied is consistent with Art. 36 BRRD, supporting a determination that the assets of the institution are less than its liabilities or that this is likely to occur in the near future.
Elements of the valuation results may be used in the determination of whether 57 the institution infringes or is likely to infringe in the near future the own funds’ requirements set out in CRD and CRR in a way that justifies a withdrawal of its authorisation, where available. Additional elements that should be considered, where they are relevant to the char- 58 acteristics of the bank, include: (i) (ii) (iii)
threats to institution’s capital position and viability stemming from a significant non-temporary increase in the cost of funding of the institution to a level which is unsustainable for the institution; the likely materialisation of the institution’s significant off-balance sheet items (i.e. contingent liabilities) in the near future, causing substantial loss threatening the institution’s capital position and viability; significant adverse developments in the macro-economic environment that could threaten the institution’s capital position and viability, including relevant develop-
56 Guidelines on the interpretation of the different circumstances when an institution shall be considered as failing or likely to fail under Article 32(6) of Directive 2014/59/EU (EBA/GL/2015/07), 26.5.2015, p. 6.
Emiliano Tornese
679
Art. 18 SRMR
(iv)
(v)
59
60
61
62
63
Resolution procedure
ments in interest rates, real estate values or economic growth (such developments should significantly adversely affect the business model of the institution, the outlook for its profitability, capital position and viability); significant deterioration of market perception of an institution reflected by indicators suggesting that the solvency of the institution is severely impaired and its capital position and viability threatened, as reflected in, among other things, a collapsing price-to-book level or a rapidly increasing level of the economic leverage (i.e. the economic leverage measured as the ratio of total assets to the market value of equity); or a significant non-temporary deterioration in the absolute and relative evolution of market indicators including, where available, equity-based indicators (for instance share price and book-to-market equity ratio) or debt-based indicators (for instance credit default swaps or subordinated debt spreads) indicating that an institution is likely to incur losses that could threaten its capital position and viability.
For example, on 23 June 2017, Banca Popolare di Vicenza Società per Azioni 57 and Veneto Banca Società per Azioni58 were declared failing or likely to fail on the basis of Art. 18(4)(a) SRMR because there was material evidence to conclude that they infringed the requirements for continuing authorisation in a way that would justify the withdrawal of the authorisation. In particular, the entities were in breach of the capital requirements. Those breaches were persisting despite measures taken by the banks to address them and the banks were not in a position to generate capital or raise the capital needed. Moreover, the banks experienced a substantial deterioration of their liquidity position.59 On 15 August 2019, the ECB assessed that AS PNB Banka in Latvia was failing or likely to fail in accordance with Art. 18(4)(a) and (b) SRMR.60 The need for additional impairments of its assets led to a significant deterioration in its capital situation to the point that the bank’s assets were less than its liabilities. The bank was unable to satisfy requirements for continuing authorisation and unable to provide assurances that it could comply with capital requirements in the near future. It is worth noticing that the concept of assets and liabilities is defined in the “applicable accounting framework” according to CRR.61 This may also include national Generally Accepted Accounting Principles (GAAP) in some Member States. However, a centralised system like the SSM and the SRM would probably benefit more from a fully harmonised accounting framework applicable to all institutions in the Banking Union. As for its liquidity position, an institution should be considered as failing or is likely to fail if it does or if there are objective elements to support a determination that in the near future it will infringe the regulatory liquidity requirements under the CRR, including requirements imposed according to Art. 105 CRD, for continuing authorisation in a way that would justify the withdrawal of its authorisation by the supervisor; or it will be unable to pay debts and liabilities as they fall due. In particular, the relevant authority should consider, among others, the significant adverse developments affecting the evolution of the institution’s liquidity position and 57 ECB Banking Supervision, FOLTF assessment of Banca Popolare di Vicenza Società per Azioni, 23.6.207: . 58 ECB Banking Supervision, FOLTF assessment of Veneto Banca Società per Azioni, 23.6.207: . 59 SRB Decision, 3.6.2017 (SRB/EES/2017/11) and SRB Decision, 3.6.2017 (SRB/EES/2017/12), p. 10. 60 SRB, Notice summarising the decision taken in respect of AS PNB Banka: . 61 Art. 4(1)(77) CRR.
680
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
sustainability of its funding profile, and its compliance with the minimum regulatory requirements for liquidity; the significant non-temporary adverse evolution of the institution’s liquidity buffer and its counterbalancing capacity; a non-temporary increase in the costs of funding of the institution to an unsustainable level; a significant adverse evolution of the institution’s current and future obligations; the position of the institution in the payment, clearing and settlement systems and any indication of the institution’s difficulties to fulfil its obligations; the developments that would be likely to severely impair the institution’s reputation, in particular significant rating downgrades; the significant adverse developments in the macro-economic environment that could threaten the institution’s financial position and viability; and the significant deterioration in the market perception of an institution reflected by signs of non-temporary deterioration in the absolute and relative evolution of market indicators, including for example, equity-based indicators (share price and book-to-market equity ratio), or debt based indicators (credit default swaps and subordinated debt spreads) indicating that an institution is likely to incur losses or face liquidity problems that could threaten its viability. This was the case for Banco Popular Español S.A.,62ABLV Bank, AS,63 and ABLV 64 Bank Luxembourg, SA.64 In the first case, the liquidity situation of Banco Popular Español S.A. was deteriorating since October 2016 due to the material cash outflow across all customer segments accompanied by several consecutive rating downgrades. The bank attempted to address the liquidity problems by taking various measures, including initiating a private sale process in April 2017. However, the bank had insufficient options to restore its liquidity position. Therefore, in June 2017, the ECB informed the Board about the rapidly deteriorating situation of the bank. The Board requested information about the private sale procedure and initiated the marketing procedure. On 6 June 2017, the ECB reached the conclusion that the bank was failing, or in any case likely to fail in the near future, in accordance and as a consequence of the circumstances established in Art. 18(4)(c) SRMR. On 7 June 2017, one binding offer from Banco Santander S.A. was received and the Board adopted the resolution scheme. In the case of ABLV Bank, on 13 February 2018, the US Department of the Treasury’s 65 Financial Crimes Enforcement Network announced a draft measure to name ABLV Bank an institution of primary money laundering concern pursuant to Section 311 of the Patriot Act.65 Following this announcement, the bank experienced an abrupt wave of withdrawal of deposits and a lack of access to US dollar funding. This resulted in the bank being unable to make payments in US dollars. Subsequently, the ECB instructed the Latvian supervisory authority, the Financial and Capital Markets Commission (FCMC), to impose a moratorium on ABLV Bank, AS to give time to the bank to stabilise its situation. A moratorium was also imposed by the Luxembourg authorities for the subsidiary of the bank in Luxembourg, ABLV Bank Luxembourg, SA. On 23 February 2018, due to the significant deterioration of their liquidity, the ECB determined that the banks were likely unable to pay their debts or other liabilities as they fall due. The banks did not have sufficient funds which were immediately available to withstand stressed outflows of deposits. The Board assessed that resolution action was not in the 62 ECB Banking Supervision, FOLTF assessment of Banco Popular Español, 6.6.2017: . 63 ECB Banking Supervision, FOLTF assessment of ABLV Bank, AS, 23.2.18: . 64 ECB Banking Supervision, FOLTF assessment of ABLV Bank Luxembourg, SA, 23.2.2018: . 65 Sec. 311 USA PATRIOT Act 31 U.S.C. 5318A.
Emiliano Tornese
681
Art. 18 SRMR
66
67
68
69
70
71
72
73
Resolution procedure
public interest. The banks were wound up under the law of Latvia and Luxembourg, respectively. As for other requirements for continuing authorisation, according to Art. 18(4)(a) SRMR, an institution shall be considered as failing or likely to fail when it infringes, or in the near future is likely to infringe, the requirements for the continuing authorisation in a way that would justify the withdrawal of its authorisation by the competent authority pursuant to Art. 18 CRD. For this purpose, the supervisor and/or the resolution authority should consider among other things whether there are serious weaknesses in the institution’s governance arrangements, as well as in its operational capacity and whether these weaknesses have a material impact on the institution’s reliability and capacity to provide banking/investment services. In accordance with Art. 18(4)(d) SRMR, a bank shall be deemed to be failing or likely to fail if extraordinary public financial support is required, except in the particular circumstances laid down in the SRMR.66 Art. 3(1)(29) SRMR defines extraordinary public financial support as any State aid within the meaning of Art. 107(1) TFEU or any other public financial support at supranational level (i.e. SRF aid as per Art. 19 SRMR), which, if provided at a national level, would constitute State aid, that is provided in order to preserve or restore the viability, liquidity or solvency of a bank. In this case, the provision of extraordinary public financial support would be subject to the State aid rules and the scrutiny of the European Commission and possibly trigger the FOLF determination.67 As for the exceptional circumstances when extraordinary public financial support would not trigger a FOLF determination, on the basis of Art. 3(1)(29) SRMR, it is possible to infer that a State aid68 which is not provided to preserve or restore the viability, liquidity or solvency of a bank, while remaining subject to the State aid rules and scrutiny, might not trigger the FOLF determination. Moreover, the limited exceptions apply if the extraordinary public financial support is required to remedy a serious disturbance in the economy of a Member State and preserve financial stability, and it takes the form of a State guarantee to back liquidity facilities provided by central banks in accordance with the central banks' conditions;69 a State guarantee of newly issued liabilities;70 or of a precautionary recapitalization.71 In each of these cases, the measures should be confined to solvent entities, be of a precautionary and temporary nature, be proportionate to remedy the consequences of the serious disturbance; not be used to offset losses that are incurred or likely to be incurred in the near future. Moreover, the SRMR specifies that the precautionary recapitalization measures should be limited to injections necessary to address capital shortfall established in the
See also Recital 57 SRMR. See the Communications adopted by the European Commission on the application of State aid rules to banks: . 68 As for the definition of State aid, see . 69 See Art. 18(4)(d)(i) SRMR. 70 See Art. 18(4)(d)(ii) SRMR. 71 See Art. 18(4)(d)(iii) SRMR. 66
67
682
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
national, Union or SSM-wide stress tests, asset quality reviews72 or equivalent exercises conducted by the ECB, EBA or national authorities, where applicable, confirmed by the competent authority. These measures are conditional on final approval by the Commission under the 74 Union State aid framework. Therefore, when assessing their compatibility with the internal market under Art. 107 TFEU and its Communications,73 the Commission will also assess whether the conditions are met. However, as observed by the Commission in its BRRD/SRMR Review Report,74 there may be a need for further clarification of those conditions and the procedure to grant the extraordinary public financial support, with a view to ensure timeliness and coordination between the relevant authorities. For example, the framework does not clearly specify which authority should confirm 75 that the bank is “solvent” before it receives precautionary recapitalization75, nor does it provide a definition of solvency, and precautionary and temporary nature. Moreover, it does not indicate which authority should identify the losses that the entity has incurred or is likely to incur in the near future, which cannot be covered via precautionary recapitalization. Based on the lessons learned from the first cases,76 best practices have been de- 76 veloped by the Commission together with the ECB and the Board on certain aspects of the procedure, including the role of the stress tests and their interaction with an asset
72 As noted by the SSM, the BRRD does not provide for an asset quality reviews (AQR) as a prerequisite for precautionary recapitalisation. Precautionary recapitalisation is available “to address capital shortfall established in the national, Union or SSM-wide stress tests, asset quality reviews or equivalent exercises conducted by the European Central Bank, EBA or national authorities” (Art. 32(4) BRRD). See the letter of the Chair of the SSM to a Member of the European Parliament: . 73 Communication on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (“2008 Banking Communication”), OJ C 270, 25.10.2008, p. 8; Communication on the recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (“Recapitalisation Communication”), OJ C 10, 15.1.2009, p. 2; Communication from the Commission on the Treatment of Impaired Assets in the Community Banking sector ("the Impaired Assets Communication"), OJ C 72, 26.03.2009, p. 1; Communication from the Commission "The return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules" ("the Restructuring Communication"), OJ C 195, 19.8.2009, p. 9; Communication from the Commission on the application, from 1 January 2011, of State aid rules to support measures in favour of financial institutions in the context of the financial crisis (“2010 Prolongation Communication”), OJ C 329, 7.12.2010, p. 7; Communication from the Commission on the application, from 1 January 2012, of State aid rules to support measures in favour of financial institutions in the context of the financial crisis (“2011 Prolongation Communication”), OJ C 356, 6.12.2011, p. 7; Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis 2013 (“the 2013 Banking Communication”), OJ C 2016, 30.07/2013, p. 1. 74 See the BRRD/SRMR Review Report, p. 5, . 75 Clearly the ECB or the national competent authorities are best placed to confirm the solvency of a credit institution. See also . This was the case for example in the liquidity support and the precautionary recapitalization granted to Banca Monte dei Paschi di Siena S.p.a. respectively in accordance with the State aid decisions of the Commission SA. 47081, Liquidity support to MPS bank, 16.12.2016 and SA 47677, New aid and amended restructuring plan of Banca Monte dei Paschi di Siena, 27.02.2017. 76 See for example also the liquidity support granted to Banca Popolare di Vicenza and Veneto Banca respectively in accordance with the State aid decisions of the Commission SA. 47149, Liquidity support to Banca Popolare di Vicenza,21.12.2016 and SA. 47150, Liquidity support to Veneto Banca, 21.12.2016.
Emiliano Tornese
683
Art. 18 SRMR
Resolution procedure
quality review. 77 However, more legal clarity is indeed desirable and might follow in the context of a more comprehensive review of the BRRD and SRMR. This also implies clarifying the relation between the precautionary recapitalization measures under Art. 18 SRMR and the possible use of alternative measures in order to prevent the failure of a credit institution under Art. 11(3) DGSD. Various options exist to clarify the interaction. For example, one of them could be that alternative measures under Art. 11(3) DGSD are available to those institutions which, also in accordance with the resolution plan, would not meet the public interest test, while the precautionary recapitalization is available to all others if the conditions are met. 77 It is interesting to note that the support measures allowed under Art. 18(4) SRMR correspond to the support measures granted during the financial crisis pre-BRRD and in accordance with the Commission’s State aid Communications. Only impaired assets measures are not explicitly mentioned under Art. 32(4) BRRD and Art. 18(4) BRRD. 78 Moreover, only the precautionary recapitalization measures under (d)(iii) in those Articles are subject to an explicit review clause. This shows the political sensitiveness of the measure at hand.
IV. The Public Interest Test 79 80
81
82
83
The third condition of resolution corresponds to the public interest test, which is assessed exclusively by the Board, or the national resolution authority, where appropriate. Art. 18(5) SRMR states that a resolution action should be considered as in the public interest if it is necessary for the achievement of, and is proportionate to one or more of the resolution objectives referred to in Art. 14 SRMR and winding up of the entity under normal insolvency proceedings would not meet those resolution objectives to the same extent. Therefore, according to the BRRD and the SRMR,78 the winding up under normal insolvency proceedings should be considered the default option by the resolution authority, and used as counterfactual in assessing whether the resolution action is necessary and proportionate to meet one or more of the resolution objectives to the same extent. These objectives are clearly spelled out in Art. 14 SRMR and include the objective to ensure the continuity of critical functions;79 to avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline; to protect public funds by minimizing reliance on extraordinary public financial support; to protect depositors covered by DGSD and investors covered by Directive 97/9/EC;80 and to protect client funds and client assets. These objectives are of equal significance and should be balanced, as appropriate, to the nature and circumstances of each case. When pursuing them, the resolution authorities should seek to minimize the cost of resolution and avoid the destruction of value unless it is necessary to achieve those objectives.81 Once the first two conditions for resolution are met, if the resolution authority assesses that resolution is necessary and proportionate to achieve – better than normal 77 See for example the Commission Staff Working Document “AMC Blueprint” of 14.3.2018, . 78 See Recital 59 SRMR. 79 See Chapter III of Commission Delegated Regulation (EU) 2016/778. 80 Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes, OJ L 84, 26.3.1997, p. 22. 81 See Art. 14(1)-(3) SRMR.
684
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
insolvency proceeding – at least one of the resolution objectives, it is required by law to (“shall”) place the bank under resolution and adopt a resolution scheme. The assessment of the public interest test is key to determine if a bank should be resolved82 or liquidated under the applicable insolvency regime.83 Depending on the circumstances, the two outcomes could have a very different impact on the continuity of critical functions, financial stability, the use of taxpayer money,84 and the protection of depositors and customers, and on the minimization of the overall cost and the preservation of value, including for creditors. While it is not possible to state that one outcome is always better than the other in achieving those objectives,85 it is worth noticing that the FSB has adopted in October 2011 the Key Attributes of Effective Resolution Regimes for Financial Institutions, and standardized resolution specifically to meet them.86 Therefore, it is possible to assume that resolution is to be preferred in those situations where a liquidation under the applicable insolvency regime would imply a higher use of taxpayer money, an expensive payout by the deposit guarantee scheme with a subsequently reduced amount of available resources to protect other depositors, an increased overall cost, or a higher destruction of value, including for shareholders and creditors.87 As also referred to in the FSB Key Attributes,88 the overall objective of “an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.” For example, the minimization of the costs for taxpayers is also at the core of the objectives of the BRRD and the SRMR.89 The co-legislators’ intention seems to confirm this approach going as far as to centralize with the Board the cases of failing banks which would require sources of financing other than those mentioned in Art. 7(3) SRMR. Moreover, also the use of “alternative financing sources” seems to be framed in accordance with Art. 27(9) SRMR. And, this is also the case for the use of alternative financing sources through government stabilisation tools, which is limited to the very extraordinary situation of a systemic crisis and subject to the strict conditions of Art. 37(10) BRRD and Arts. 56-58 BRRD. Therefore, the idea that an insolvency regime could meet to the same extent this specific resolution objective seems to be counterintuitive if it could ultimately result in higher costs or no rewards90 for taxpayers. 82 The SRB has assessed that the public interest test was met in the case Banco Popular Español S.A. See p. 13 of the resolution decision. 83 The SRB has assessed that the public interest test was not met in the case of ABLV Bank, AS (see p. 24 of the resolution decision), ABLV Bank Luxembourg, SA (see p. 14 of the resolution decision), Banca Popolare di Vicenza Società per Azioni (see p. 11 of the resolution decision), Veneto Banca Società per Azioni (see p. 11 of the resolution decision). 84 As an example, a FOLF bank seeking alternative financing sources would be subject to the minimum 8 % bail-in requirement under Art. 27(7) SRMR only if it is placed into resolution. 85 However, jurisdictions like the Unites States have decided that all banks would be resolvable. For example, all IDIs in the US are subject to the competence of the FDIC and therefore cannot be liquidated under normal bankruptcy procedures. 86 FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions, October 2011, . 87 See also Recitals 24, 58 and 61 SRMR. 88 See Preamble of the FSB Key Attributes. 89 See Recitals 1, 5, 8, 31, 67 and 73 BRRD. 90 See Recital 8 BRRD.
Emiliano Tornese
685
84 85
86
87
88
89
Art. 18 SRMR 90
91
92
93
94 95
96
97
Resolution procedure
Moreover, when assessing the public interest test and balancing the resolution objectives, the resolution authority should also avoid unnecessary destruction of value, and seek to minimise the overall costs and losses for creditors,91 including depositors and the DGSs which would then subrogate the rights and obligations of covered depositors. This could mean that, in order to minimize the risk of legal challenges, the resolution authority should also assess whether those creditors would incur greater losses under the applicable insolvency regime than under resolution.92 However, under the SRM a complication derives from the non-harmonization of insolvency law in the EU. In fact, when assessing the public interest test, the Board would have to compare the potential outcome under resolution with the potential one under the insolvency regime, which however is different in each participating Member State. This means that the result might vary depending on the efficiency of the insolvency regimes and that the case for resolution could be stronger in those Member States where the insolvency regime is less efficient. This source of challenge and complexity for the resolution authority was foreseen by the co-legislators, which has mandated the Commission to assess the necessity to improve the efficiency and the effectiveness of the SRM, and in particular whether the Banking Union needs to be completed with the harmonisation at Union level of insolvency proceedings for failed institutions.93 The Commission, in its BRRD/SRMR Review Report, has acknowledged the challenge.94 The challenge is also recognized by all those who are calling for an EU FDIC, the introduction of an administrative liquidation procedure for all banks, or for further harmonization of the insolvency law for credit institutions in the EU.95 As the FDIC is resolving all IDIs in the US in accordance with the FDIA, there is indeed merit in further exploring this possibility also in the EU. An alternative would be to further harmonize the tools and procedures available under national insolvency law when the public interest test is not met to ensure at least a level playing field in the internal market. Once all three conditions for resolution are met, the Board adopts a resolution scheme, the content of which is defined under Art. 23 SRMR. However, as clarified under Art. 19(1) SRMR, where resolution action involves the granting of State aid pursuant to Art. 107(1) TFEU or of SRF aid, the adoption of the resolution scheme should not take place until such time as the Commission has adopted a positive or conditional decision concerning the compatibility of the use of such aid with the internal market. The resolution scheme places the entity under resolution, determines the application of the resolution tools, in particular any exclusion from the application of the bail-in tool, and determines the use of the SRF to support the resolution action in accordance with a Commission decision on SRF Aid. Moreover, in accordance with Art. 28(2) SRMR, where necessary in order to achieve the resolution objectives, the resolution scheme may be amended in accordance with the same procedure provided for under Art. 18 SRMR.
See FSB, Key Attributions, pp. 3 and 6, and Art. 14(2) SRMR. This was for example the conclusion of the SRB in the assessment of the public interest test in the case of Banco Popular. See point 4.4.a. 3 of the resolution decision. 93 See Recitals 94 and 123 SRMR. 94 See BRRD/SRMR Review Report, p. 9. 95 Fernando Restoy, Financial Stability Institute (2019); Deslandes, Dias and Magnus, IPOL Economic Governance Support Unit (2019); Gelpern and Veron, IPOL Economic Governance Support Unit (2019). 91
92
686
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
As clarified by the order of the General Court of 6 May 2019,96 this is the decision 98 against which it is possible to bring an action for judicial review in accordance with Art. 86 SRMR97 and Art. 263 TFEU.98
D. Role of the Commission and the Council The powers to trigger resolution, to place an entity under resolution, and to determine the content of the resolution scheme are probably the most critical ones within the SRM because of the legal effects and the wide margin of discretion they entail.99 In accordance with the established Meroni case law of the CJEU,100 they could not be simply delegated to an agency created by the secondary law, but they had to be ultimately entrusted to an institution of the Union. For this reason, in the Commission proposal of 13 July 2013,101 the power to place an entity under resolution was conferred to the Commission on the basis of a recommendation of the Board. The ECB could have been also a valid alternative. In fact, the BRRD recognizes that the resolution function may be located within a single authority such as the central bank, including where it is also the competent authority for supervision,102 provided that adequate structural arrangements are in place to ensure operational independence and avoid conflicts of interest between the various functions.103 However, the option of the Commission was ultimately retained for political considerations in relation to the possible conflict of interests among monetary, supervision and resolution functions, and the uncertainty concerning the possible legal basis.104 However, in the Council a number of delegations expressed the concern of a potential conflict of interest between the resolution objective of achieving financial stability and the objective to ensure that resolution measures, where they constitute State or SRF aid, are compatible with the internal market.105 Therefore, in order to ensure conformity with the principles established in Art. 3(3) BRRD, the co-legislators required that the Union institutions, when performing the tasks conferred on them by the SRMR, should See Case T-281/18, ABLV Bank AS v ECB, ECLI:EU:T:2019:296, paras. 36-49. See also Recital 120 SRMR. 98 See Case T-280/18, ABLV Bank AS v SRB. 99 Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (2015), 117. 100 See Case 9/56, Meroni & Co. v High Authority of the European Coal and Steel Community, ECLI:EU: C:1958:7. The Meroni judgment was issued in the context of the European Coal and Steel Community (ECSC) Treaty and concerned the validity of decisions of bodies established under Belgian private law adopted on the basis of a conferral of powers by the ECSC High Authority. 101 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council’ COM(2013) 520 final. 102 See Art. 3(3) BRRD. Resolution authorities are located within central banks which are also competent authorities in a number of Member States (including the Netherlands, France, Italy, Belgium, Portugal, Czech Republic, the United Kingdom and Ireland). 103 See the Statement on structural separation between the resolution and supervision functions of the Bank of England: . 104 Resolution powers are not explicitly mentioned under Art. 127(6) TFEU. See also Lastra, Fordham International Law Journal (2013), 1190, at p. 1207. 105 See the Report of the Presidency to the Permanent Representatives Committee, 5.11.2013, p. 9: . 96
97
Emiliano Tornese
687
99
100
101
102
103
Art. 18 SRMR
104
105 106
107
108
Resolution procedure
ensure that appropriate organisational arrangements are in place.106 For this reason, the Commission committed to fully comply with the principles set out in Art. 3 BRRD.107 Finally, the co-legislators decided that the assessment of the discretionary aspects of the resolution decisions taken by the Board should be exercised by the Commission because only institutions of the Union may establish the resolution policy of the Union.108 In addition, given the considerable impact of the resolution decisions on the financial stability of Member States and on the Union as such, as well as on the fiscal sovereignty of Member States, as a compromise, the co-legislators agreed on conferring certain decisions relating to a resolution to the Council. Therefore, it should be for the Council, on a proposal from the Commission, to exercise effective control on the assessment by the Board of the existence of public interest and to assess any material change to the amount of the SRF to be used in a specific resolution action.109 Immediately after the adoption of the draft resolution scheme, the SRB transmits it to the Commission. In order to ensure a “very speedy decision-making process”, the Commission has 24 hours from the transmission of the resolution scheme by the SRB to either endorse the resolution scheme, or object to it with regard to the discretionary aspects of the resolution scheme. The objective of this limited timeframe is to ensure that the resolution process can be executed within a weekend, if necessary. However, despite these tight deadlines and the possibility that the resolution process is executed within a weekend, it is reasonable to assume that the resolution process is started and prepared well ahead and that the Commission, as an observer to the meetings of the SRB,110 checks on an ongoing basis that the resolution scheme to be adopted by the SRB complies fully with the SRMR, balances appropriately the different objectives and interests at stake, respects the public interest and that the integrity of the internal market is preserved.111 In the US, as a comparison, the FDIA generally requires that an institution be placed in receivership within 90 days after the institution has been determined to be critically undercapitalized.112 The timeframe is reduced to 12 hours when the Commission proposes to the Council to object to the resolution scheme on the ground that the resolution scheme adopted by the Board does not fulfill the criterion of public interest, or to approve or object to a material modification of the amount of the SRF provided for in the resolution scheme of the Board. A change is to be considered material when it corresponds to 5 % or more to the amount of the SRF compared with the original proposal of the SRB. In those two cases, the Council should approve or object to the Commission's proposal. But, it cannot amend the Commission’s proposal. This is the compromise reached by the co-legislators which probably aimed at avoiding duplication of work between the Council and the SRB See also Recital 25 SRMR. On 30 July 2014, the President of the Commission sent a letter to the Presidents of the European Parliament and the Council in this respect. 108 See Council Legal Service, Opinion, 7.10-2013: . 109 See Recital 24 SRMR. 110 According to Art. 43(3) SRMR, the Commission participates as observer in the meetings of the SRB, is entitled to participate in the debates, and has access to all documents. Moreover, as specified in Art. 43(10) SRMR, the Commission has the power to obtain from the SRB any information which it deems to be relevant to prepare for resolution. However, despite the specific duty to cooperate and exchange relevant information under Art. 43 SRMR, the SRMR does not explicitly requires that the Commission and the SRB conclude memoranda of understanding. 111 See Recital 26 SRMR. 112 Sec. 38 Federal Deposit Insurance Act. 106
107
688
Emiliano Tornese
Art. 18 SRMR
Resolution procedure
and the Commission, and at attributing to the Council a role of ultimate arbiter between the SRB and the Commission.113 The arbitration function of the Council seems to be confirmed by the fact that the Council has no role in the resolution procedure if the Commission does not propose a modification to the resolution scheme. For this purpose, the Regulation explicitly states that the Council should act by a simple majority. This is however at odds with the requirement that the Council acts unanimously under Art. 108(2) TFEU to declare compatible with the internal market a State aid subject to the scrutiny of the Commission. The co-legislators have conferred to the Council resolution powers because of the considerable potential impact of the resolution decisions on the financial stability of Member States and on the Union as such, as well as on the fiscal sovereignty of Member States.114 This could be the case for example when the SRB declares that the resolution is in the public interest but the Commission objects to it. In this case, the winding up in accordance with the applicable national law could have a high impact on the use of the DGS, and possibly on the use of public funds. For this reason, the Member States in the Council are granted the power to object to the Commission’s objection, and thereby to allow the SRB to resolve the bank. However, it is worth noticing that this safeguard does not seem to exist when the SRB directly declares that a resolution is not in the public interest. In this case, unless the Commission has also the power to object to this SRB determination, the Council seems to have no say in the resolution process, which seems to defeat the initial objective of the co-legislators. Art. 18(7) SRMR states that the resolution scheme may enter into force only if no objection has been expressed by the Council or by the Commission within the period of 24 hours after its transmission by the SRB. It is unclear if it is necessary that the Council or the Commission express their non-objection explicitly, or if it is sufficient that the 24 hours period expires without any objection by the Council and the Commission. The Meroni doctrine and the requirement that the Council or the Commission, as the case may be, provide reasons for the exercise of their power of objection seem to favor the first interpretation. In any case, even if the second interpretation is retained, the resolution scheme, which enters into force after the 24 hours period, should be deemed to be formally adopted either by the Council or the Commission, as the case may be, for the purposes of possible legal challenges before the CJEU.115 Where, within 24 hours from the transmission of the resolution scheme by the SRB, the Council has approved the proposal of the Commission, or the Commission has objected to the other discretionary aspects of the resolution scheme which do not require the involvement of the Council, the SRB has eight hours to modify the resolution scheme in accordance with the reasons expressed by the two institutions without any right of appeal. In addition to the State aid scrutiny and resolution functions, the Commission is also granted the function of protecting the integrity of the internal market. In particular, as is the case under Art. 44(12) BRRD, where the resolution scheme adopted by the SRB provides for the exclusion of certain liabilities in the exceptional circumstances referred to in Art. 27(5) SRMR, and where such exclusion requires a contribution by the SRF or an alternative financing source, the Commission has the power to prohibit or require amendments to the proposed exclusion setting out adequate reasons based on an infringement of the requirements laid down in Art. 27 BRRD and in the delegated act adopted by the Commission on the basis of Art. 44(11) BRRD, in order to protect the See Recital 26 SRMR. See Recital 24 SRMR. 115 See Recital 120 SRMR. 113
114
Emiliano Tornese
689
109
110
111
112
Art. 19 SRMR
State aid and Fund aid
integrity of the internal market and ensure a level playing field – in this case between the Member States which participate in the Banking Union and those which do not participate in it. This implies a third additional procedure within the Commission, which is additional to the other two and needs to be coordinated with them. 113 Where the Commission and the Council object to the placing of an institution under resolution on the ground that the public interest criterion is not fulfilled, the SRM requires under Art. 18(8) SRMR that the bank is wound up in an orderly manner in accordance with the applicable national law. While national law, and in particular insolvency law, is not harmonized in the Union for this purpose, the co-legislators aim to ensure that a bank which is failing or likely to fail does not continue its activities – as a zombie bank – but is liquidated in an orderly manner. Bearing in mind this objective, and the objective of improving the efficiency and effectiveness of the SRM in the context of a possible future review of the SRM,116 the above-mentioned case for a possible harmonization of the insolvency law and proceedings for failed institutions seems compelling in order to ensure the level playing field in the internal market. 114 Once the resolution scheme enters into force, the SRB addresses it to the relevant national resolution authorities and instructs them to take all necessary measures to implement it in accordance with Art. 29 SRMR, by exercising the resolution powers which are entrusted to them in accordance with the BRRD.117 In addition, where State aid or SRF aid is present, the resolution scheme must be in conformity with a decision on that aid taken by the Commission in accordance with Art. 19 SRMR. It is therefore necessary that the State aid and resolution procedure run in parallel, and that the State aid decision is formally adopted before the entry into force of the resolution scheme. As the implementation of the resolution scheme might involve the application of a series of complementary national laws, which are not harmonized at the Union level, it is more efficient that the implementation of the resolution scheme into national law is entrusted to the relevant national authorities. 115 This implies that national judicial authorities is competent, in accordance with their national law, to review the legality of measures adopted by the relevant resolution authorities to implement the resolution scheme, as well as to determine their non-contractual liability.118 Instead, the CJEU has jurisdiction to review the legality of decisions directly adopted by the Board, the Council and the Commission, in accordance with Art. 263 TFEU, as well as for determining their non-contractual liability. In addition, the Court of Justice has, in accordance with Art. 267 TFEU, competence to give preliminary rulings upon request of national judicial authorities on the validity and interpretation of those decisions.119
Art. 19 SRMR State aid and Fund aid 1. Where resolution action involves the granting of State aid pursuant to Article 107(1) TFEU or of Fund aid in accordance with paragraph 3 of this Article, the adoption of the resolution scheme under Article 18(6) of this Regulation shall not take place until such time as the Commission has adopted a positive or conditional decision concerning the compatibility of the use of such aid with the internal market. See Recitals 94 and 123 SRMR. See also Art. 5 SRMR. 118 See Recital 120 SRMR. 119 See Arts. 86 and 87 SRMR. 116
117
690
Seraina Neva Grünewald and Christos V. Gortsos
Art. 19 SRMR
State aid and Fund aid
In performing the tasks conferred on them by Article 18 of this Regulation, Union institutions shall act in conformity with the principles established in Article 3(3) of Directive 2014/59/EU and shall make public in an appropriate manner all relevant information on their internal organisation in this regard. 2. On receiving a communication pursuant to Article 18(1) of this Regulation or on its own initiative, if the Board considers that resolution actions could constitute State aid pursuant to Article 107(1) TFEU, it shall invite the participating Member State or Member States concerned to immediately notify the envisaged measures to the Commission under Article 108(3) TFEU. The Board shall notify the Commission of any case in which it invites one or more Member States to make a notification under Article 108(3) TFEU. 3. To the extent that the resolution action as proposed by the Board involves the use of the Fund, the Board shall notify the Commission of the proposed use of the Fund. The Board's notification shall include all of the information necessary to enable the Commission to make its assessments pursuant to this paragraph. The notification under this paragraph shall trigger a preliminary investigation by the Commission during the course of which the Commission may request further information from the Board. The Commission shall assess whether the use of the Fund would distort, or threaten to distort, competition by favouring the beneficiary or any other undertaking so as, insofar as it would affect trade between Member States, to be incompatible with the internal market. The Commission shall apply to the use of the Fund the criteria established for the application of State aid rules as enshrined in Article 107 TFEU. The Board shall provide the Commission with the information that the Commission deems to be necessary to carry out that assessment. If the Commission has serious doubts as to the compatibility of the proposed use of the Fund with the internal market, or where the Board has failed to provide the necessary information pursuant to a request of the Commission under the second subparagraph, the Commission shall open an in-depth investigation and shall notify the Board accordingly. The Commission shall publish its decision to open an in-depth investigation in the Official Journal of the European Union. The Board, any Member State or any person, undertaking or association whose interests may be affected by the use of the Fund, may submit comments to the Commission within such timeframe as may be specified in the notification. The Board may submit observations on the comments submitted by Member States and interested third parties within such timeframe as may be specified by the Commission. At the end of the period of investigation the Commission shall make its assessment as to whether the use of the Fund would be compatible with the internal market. In making its assessments and conducting its investigations pursuant to this paragraph, the Commission shall be guided by all of the relevant regulations adopted under Article 109 TFEU as well as relevant communications, guidance and measures adopted by the Commission in application of the rules of the Treaties relating to State aid as are in force at the time the assessment is to be made. Those measures shall be applied as though references to the Member State responsible for notifying the aid were references to the Board, and with any other necessary modifications. The Commission shall adopt a decision on the compatibility of the use of the Fund with the internal market, which shall be addressed to the Board and to the national resolution authorities of the Member State or Member States concerned. That decision may be contingent on conditions, commitments or undertakings in respect of the beneficiary.
Seraina Neva Grünewald and Christos V. Gortsos
691
Art. 19 SRMR
State aid and Fund aid
The decision may also lay down obligations on the Board, the national resolution authorities in the participating Member State or Member States concerned or the beneficiary to enable compliance with it to be monitored. This may include requirements for the appointment of a trustee or other independent person to assist in monitoring. A trustee or other independent person may perform such functions as may be specified in the Commission decision. Any decision pursuant to this paragraph shall be published in the Official Journal of the European Union. The Commission may issue a negative decision, addressed to the Board, where it decides that the proposed use of the Fund would be incompatible with the internal market and cannot be implemented in the form proposed by the Board. On receipt of such a decision the Board shall reconsider its resolution scheme and prepare a revised resolution scheme. 4. Where the Commission has serious doubts as to whether its decision under paragraph 3 is being complied with, it shall conduct the necessary investigations. For that purpose, the Commission may exercise such powers as are available to it under the regulations and other measures referred to in the fourth subparagraph of paragraph 3, and shall be guided by them. 5. If, on the basis of the investigations carried out by the Commission, and after giving notice to the parties concerned to submit their comments, the Commission considers that the decision under paragraph 3 has not been complied with, it shall issue a decision to the national resolution authority in the participating Member State concerned requiring that authority to recover the misused amounts within a period to be determined by the Commission. The Fund aid to be recovered pursuant to a recovery decision shall include interest at an appropriate rate fixed by the Commission and shall be paid over to the Board. The Board shall pay any amounts received under the first subparagraph into the Fund and take such amounts into consideration when determining contributions in accordance with Articles 70 and 71. The recovery procedure referred to in the first subparagraph shall respect the right to good administration and the right of access to documents, of the beneficiaries, as laid down in Articles 41 and 42 of the Charter. 6. Without prejudice to the reporting obligations that the Commission may establish in its decision under paragraph 3 of this Article, the Board shall submit to the Commission annual reports assessing the compliance of the use of the Fund with the decision under that paragraph, for the drawing up of which the Board shall make use of its powers under Article 34. 7. Any Member State or any person, undertaking or association whose interests may be affected by the use of the Fund, in particular the entities referred to in Article 2, shall have the right to inform the Commission of any suspected misuse of the Fund incompatible with the decision under paragraph 3 of this Article. 8. The Commission shall be empowered to adopt delegated acts in accordance with Article 93 concerning detailed rules of procedure concerning: (a) the calculation of the interest rate to be applied in the event of a recovery decision in accordance with paragraph 5; (b) the guarantees of the right to good administration and the right of access to documents referred to in paragraph 5. 9. Where the Commission, following a recommendation of the Board or on its own initiative, considers that the application of resolution tools and actions does not 692
Seraina Neva Grünewald and Christos V. Gortsos
Art. 19 SRMR
State aid and Fund aid
respond to the criteria on the basis of which its initial decision under paragraph 3 was made, it may review such a decision and adopt the appropriate amendments. 10. By way of derogation from paragraph 3, on application by a Member State, the Council may, acting unanimously, decide that the use of the Fund shall be considered to be compatible with the internal market, if such a decision is justified by exceptional circumstances. If, however, the Council has not made its attitude known within seven days of the said application being made, the Commission shall give its decision on the case. 11. Participating Member States shall ensure that their national resolution authorities have the powers necessary to ensure compliance with any conditions laid down in a Commission decision pursuant to paragraph 3 and to recover misused amounts pursuant to a Commission decision under paragraph 5. Bibliography Kelyn Bacon, European Union Law of State Aid (3rd edn, Oxford University Press, Oxford 2017); Christos V. Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (Palgrave Macmillan, Springer Nature, Cham/Switzerland 2020); Christos V. Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal aspects of the second main pillar of the (European) Banking Union (5th edn, National and Kapodistrian University of Athens, 2019); Seraina Grünewald and Marije Louisse-Read, ‘How asset management companies can help tackle the NPL crisis – A State aid perspective within the resolution framework’, EBI Working Paper no. 109 (2022); Violeta Iftinchi, ‘State aid and the financial sector: the evolution of the legal framework of State aid law’ in: François-Charles Laprévote, Joanna Gray and Francesco de Cecco (eds), Research Handbook on State Aid in the Banking Sector (Edward Elgar Publishing, Cheltenham 2017), 54; Marije Louisse-Read, Public funding of failing banks in the European Union (Wolters Kluwer, Deventer 2020); Phedon Nicolaides, ‘All Bad Things Must Come to an End’ – The Application of State Aid Rules to the New EU Regime for Bank Resolution’, MJ 23(2016), 222; Franz Jürgen Säcker and Frank Montag (eds), European State Aid Law, A Commentary (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2016); Weijer VerLoren van Themaat and Berend Reuder, European Competition Law, A Case Commentary (2nd edn, Edward Elgar Publishing, Cheltenham 2018); George S. Zavvos and Stella Kaltsouni, ‘The Single Resolution Mechanism in the European Banking Union: Legal foundation, governance structure and financing’ in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar Publishing, Cheltenham 2015), 117. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Notions of State aid and Fund aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
C. Aid notification procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Resolution action involving State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Resolution action involving Fund aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 11 14
D. Functional separation within Union institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
E. Power to adopt a delegated act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
A. Function and background of the provision Resolution action may involve funding from external sources, i.e., funds beyond 1 those mobilized “from within” the bank, e.g. through the sale of high-quality liquid assets or the adoption of the bail-in tool.1 Most external resolution financing will qualify as State aid and is thus subject to prior approval by the Commission under the State aid
1
See Louisse, Public funding of failing banks in the European Union (2020).
Seraina Neva Grünewald and Christos V. Gortsos
693
Art. 19 SRMR
2
3
4
5
State aid and Fund aid
framework.2 Resolution authorities must notify the Commission of their intention to use State aid in the context of a resolution (Art. 108(3) TFEU; Banking Communication). Against this background, Art. 19 SRMR pursues two main functions: (1) The provision determines who within the SRM – the respective NRA or the SRB – is responsible for notifying and seeking approval from the Commission regarding State aid involved in a resolution scheme to be adopted (Art. 19(2) SRMR). (2) It extends the rules applicable to State aid, i.e., aid from State resources to Fund aid, i.e., aid provided through the SRF (see infra, → paras. 6-10 for more details on the distinction). Pursuant to Art. 19(3)-(11) SRMR, the notification procedure laid down in the State aid framework applies by analogy to the SRB when it decides to make use of the SRF to support resolution action. The aim of the provision is to create a level playing field between credit institutions from participating and non-participating Member States in that aid provided by the SRF is subjected to an equal level of scrutiny regarding its compatibility with the internal market. 3 Art. 19(1) SRMR further clarifies that the SRB cannot adopt a resolution scheme under Art. 18(6) SRMR until and unless the Commission has adopted a positive or conditional decision concerning the compatibility with the internal market of State or Fund aid used. As far as State aid is concerned, the provision repeats what is already set out in the TFEU (Art. 108(3) TFEU). The adoption of a resolution scheme is thus contingent on prior approval – at least on a conditional basis – of any aid used by the Commission. This may slow down the resolution proceeding significantly. Given the time constraints (“resolution weekend”), it is absolutely necessary that the Commission or responsible NRA contact the Commission prior to the adoption of a resolution scheme to explore the State or Fund aid issues (“pre-notification contacts”). Art. 19 SRMR vests the Commission with significant powers.4 The Commission can essentially hinder a resolution scheme if it considers the use of the SRF, as proposed by the SRB, as incompatible with the internal market. More often, it may impose conditions for the restructuring of the credit institution, which the SRB must take into account when adopting its resolution scheme. Conditionality is, in principle, more stringent if aid is granted to address a credit institution’s capital shortfall (structural aid, capital aid) than if it is granted to credit institutions without a capital shortfall (non-structural aid, liquidity aid). The procedures outlined in Art. 19 SRMR have remained untested. The only resolution case of the SRB to date, the sale of Banco Popular to Santander in June 2017, 5 did not involve State aid or Fund aid.
2 This framework is established by Arts. 107, 108 and 109 TFEU and regulations as well as all Union Acts, including guidelines, communications and notices, made or adopted pursuant to Art. 108(4) or Art. 109 TFEU (Art. 2(1)(53) BRRD). On the use of asset management companies (AMCs) specifically, see Grünewald and Louisse-Read, ‘How asset management companies can help tackle the NPL crisis – A State aid perspective within the resolution framework’, EBI Working Paper no. 109 (2022). 3 See also Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (2015), 117, at p. 131. To loans for indirect bank recapitalisation (Art. 15 ESMTreaty; Guideline on Recapitalisation of Financial Institutions) and direct bank recapitalisations (Guideline on Financial Assistance for Direct Recapitaliation of Institutions) by the European Stability Mechanism (ESM), the State aid framework applies by analogy as well. 4 See also Zavvos and Kaltsouni, in: Haentjens and Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (2015), 117, at pp. 131-132. 5 See Decision of the Single Resolution Board in its Executive Session of 7 June 2017 (SRB/EES/ 2017/08) concerning the adoption of a resolution scheme in respect of Banco Popular Español, S.A.
694
Seraina Neva Grünewald and Christos V. Gortsos
Art. 19 SRMR
State aid and Fund aid
B. Notions of State aid and Fund aid State aid constitutes any intervention (1) by a State or through State resources (2) which distorts or threatens to distort competition (3) by favouring certain undertakings or sectors on a selective basis and (4) likely affects trade between the Member States (Art. 107(1) TFEU).6 Any aid meeting these conditions is, in principle, perceived as incompatible with the internal market and thus prohibited. However, since the collapse of Lehman Brothers in the fall of 2009, the Commission has scrutinized State aid to the financial sector based on Art. 107(3)(b) TFEU, according to which “aid (…) to remedy a serious disturbance in the economy of a Member State” may be considered as compatible with the internal market. The Commission has issued a number of communications,7 which provide guidance as to how it intends to apply the State aid rules as long as the crisis persists (“crisis communications”).8 Whether resolution financing constitutes State aid according to Art. 107(1) TFEU may not be clear-cut in all cases. While their funds originate from the private sector, the Commission has treated national Deposit Guarantee Schemes (DGSs) and resolution financing arrangements, in principle, as under the control of the State and the decision as to their application as imputable to the State. Resolution financing from DGSs, according to the Commission, thus qualified as State aid if it exceeded traditional payouts and measures according to Art. 109 BRRD.9 This notion was called into question with the recent Tercas ruling, in which the CJEU set a higher standard of proof for the State’s influence or control over privately managed DGSs acting within their private mandates.10 Monetary policy operations in the context of a resolution generally, do not fall within the scope of State aid rules. The same is true for emergency liquidity assistance (ELA), as long as the traditional (“Bagehot”) conditions are observed.11 Moreover, the use of public funds will only qualify as State aid if it confers an advantage that is not available under normal market conditions. An advantage qualifies as available under normal market conditions in the rare case that a resolution authority acts like a hypothetical private operator who pursues only profit and disregards any public policy objectives (“market economy operator/investor principle” or MEOP/MEIP). 12 Art. 19 SRMR introduces the additional notion of Fund aid. The differentiation is necessary as aid provided through the SRF does not – prima facie – constitute State aid within the meaning of Art. 107(1) TFEU, i.e., “aid granted by a Member State or through State resources”. Resolution financing through the SRF is administered by and activated upon the decision of a supranational body, the SRB.13 Accordingly, the BRRD uses the term “extraordinary public financial support” to refer to both notions (Art. 2(28) BRRD). Besides State aid within the meaning of Art. 107(1) TFEU, extraordinary public 6 See also Commission Notice on the notion of State aid as referred to in Art. 107(1) of the Treaty on the Functioning of the European Union, OJ C 262, 19.7.2016, p. 1. 7 Banking Communication (2013); Impaired Assets Communication (2009); Restructuring Communication 2009); Recapitalisation Communication (2008). 8 The Commission has announced that the crisis communications would apply on an exceptional basis, i.e., only as long as the crisis persists, but it has not outlined what a future, more permanent regime would look like. 9 Banking Communication, paras. 63 and 64. 10 Case C-425/19 P of 2 March 2021, ECLI:EU:C:2021:154. 11 Banking Communication, para. 62. On the ELA mechanism, see by means of mere indication Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (2020), at pp. 385-404. 12 See Bacon, European Union Law of State Aid (3rd edn, 2017) at pp. 367-368 with references to case law. 13 Arts. 58 and 60 SRMR.
Seraina Neva Grünewald and Christos V. Gortsos
695
6
7
8
9
Art. 19 SRMR
State aid and Fund aid
financial support encompasses “any other public financial support at the supra-national level, which, if provided for at national level, would constitute State aid”. 10 Art. 19 SRMR ensures that State aid and Fund aid are treated equally, both in material and procedural terms.14 The procedure differs solely with respect to the responsibility – SRB or NRA, respectively – for notifying the aid to the Commission.
C. Aid notification procedure I. Resolution action involving State aid If resolution action involves State aid, it must be notified to the Commission pursuant to Art. 108(3) TFEU – also within the SRM. Art. 19(2) SRMR clarifies that it is the Member State, or the Member States concerned that is/are in charge of notifying the Commission of the potential use of State aid in the context of a resolution scheme. This may be the case, for example, if a sale-of-business transaction is supported by the (still national) DGSs of these Member States. 12 However, given that the SRB is charged with the adoption of the resolution scheme, it also has a role to play. If the SRB considers that resolution actions could constitute State aid according to Art. 107(1) TFEU, it must invite the Member State or Member States concerned to notify the envisaged aid to the Commission under Art. 108(3) TFEU. Art. 19(2) SRMR sets tight time limits for the notification. The SRB’s invitation to notify must be extended on receiving a FOLTF-communication from the ECB pursuant to Art. 18(1) SRMR or on its own initiative, but clearly as soon as resolution action is seriously considered. Moreover, Member States are to notify the Commission “immediately” after receiving the invitation from the SRB. 13 In parallel to inviting the Member State(s) concerned, the SRB notifies the Commission of its invitation to make a notification under Art. 108(3) TFEU. This ensures that the Commission is informed as soon as possible and may take appropriate measures in preparation for a potential State aid approval proceeding. 11
II. Resolution action involving Fund aid The SRB must notify the Commission of any proposed resolution action that involves the use of the SRF. When assessing the compatibility of Fund aid, the Commission must observe the same procedure and criteria as with respect to State aid. Art. 19(3) SRMR essentially replicates Art. 108(3) TFEU15 and the procedures set out in Regulation (EC) No 659/199916 for resolution action involving Fund aid. The SRB must deliver all the information necessary for the Commission to make its assessment. 15 Once the Commission receives notification from the SRB, it opens a preliminary investigation, in the course of which it may request further information from the SRB (Art. 19(3)(2) SRMR). The SRB is obligated to provide the information necessary for the 14
14 See also Iftinchi, in: Laprévote, Gray and de Cecco (eds), Research Handbook on State Aid in the Banking Sector (2017), 54, at p. 77; Nicolaides, MJ 23 (2016), 222, at p. 238. 15 For detailed accounts of Art. 108(3) TFEU see, for example, van Themaat and Reuder, European Competition Law (2nd edn, 2018), at pp. 279-318; Werner, in: Säcker and Montag (eds), European State Aid Law (2016), Art. 108 TFEU, pp. 1509-1552. 16 Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 83, 27.3.1999, p. 1.
696
Seraina Neva Grünewald and Christos V. Gortsos
Art. 19 SRMR
State aid and Fund aid
Commission to decide that (1) there is no aid within the meaning of the EU rules and that the SRF-funded resolution action may be implemented; (2) the Fund aid is compatible with EU rules and may be implemented; or (3) serious doubts remain as to the compatibility of the proposed Fund aid with the internal market. The Commission opens an in-depth investigation if it has serious doubts as to the compatibility of the proposed use of the Fund with the internal market or if the SRB has failed to provide the necessary information requested by the Commission. The decision to open an in-depth investigation is published in the OJ. The SRB, any Member State or any affected person, undertaking or association may submit comments to the Commission. The SRB may submit observations to those comments. Based on all the evidence collected, the Commission decides whether the use of the Fund would be compatible with the internal market (Art. 19(3)(3) SRMR). The decision is addressed to the SRB and the NRA(s) concerned and published in the OJ. It may be (1) positive; (2) contingent on conditions, commitments or undertakings in respect of the beneficiary; or (3) negative (Art. 19(3)(5) SRMR). If the decision is negative, the SRB cannot implement the use of the Fund in the proposed form and must prepare a revised resolution scheme (Art. 19(3) (8) SRMR). If the decision is conditional, the Commission may obligate the SRB, the NRA(s) concerned or the beneficiary to facilitate the monitoring of compliance with the conditions or commitments set out in the decision, for example, by appointing a trustee or other independent person to assist in monitoring (Art. 19(3)(6) SRMR). Practically speaking, the (unlikely) opening of an in-depth investigation would mean that the resolution scheme cannot be adopted within the limited timeframe available for resolution and that the credit institution will have to enter national insolvency proceedings instead. Art. 19(3)(4) SRMR provides that the Commission, when conducting its investigations and deciding on the compatibility of a proposed use of the SRF, be guided by all relevant regulations (adopted pursuant to Art. 109 TFEU) as well as all relevant communications, guidance and measures adopted in application of the State aid rules. Most importantly, this includes the “crisis communications” the Commission has applied since the collapse of Lehman Brothers (see supra, → para. 6). The State aid rules are to be applied as if they referred to the SRB (instead of the Member State(s) responsible for notifying the aid) and with any other necessary modification. The SRB submits to the Commission annual reports assessing the compliance of the use of the Fund with the Commission’s decision; it may make use of its power to request information according to Art. 34 SRMR (Art. 19(6) SRMR). If the Commission has serious doubts as to whether a negative or conditional decision on the use of Fund aid is being complied with, it opens the necessary investigations. For that purpose, it may exercise the powers it is endowed with according to the relevant State aid regulations as well as communications, guidance and measures (Art. 19(4) SRMR). If the investigation brings forward a misuse of funds, the Commission issues a decision to the NRA(s) concerned requesting the recovery of the misused amounts, including interest at an appropriate rate fixed by the Commission. The Fund aid to be recovered is to be paid to the SRB as the administrator of the SRF (Art. 19(5)(1) SRMR). The SRB takes into account the recovered amounts when determining the ex-ante and ex-post contributions to the SRF according to Arts. 70 and 71 SRMR (Art. 19(5)(2) SRMR). The recovery procedure must respect the beneficiary’s rights to good administration and access to documents, as enshrined in Arts. 41 and 42 of the Charter (Art. 19(5)(3) SRMR). Any Member State or any affected person, undertaking or association may inform the Commission of any suspected misuse of Fund aid (Art. 19(7) SRMR). Following a recommendation of the Board or on its own initiative, the Commission may find that the application of resolution tools and actions does not respond to the criSeraina Neva Grünewald and Christos V. Gortsos
697
16
17
18
19
Art. 19 SRMR
State aid and Fund aid
teria based on which its initial Fund aid decision was made. In this case, it may review and amend its Fund aid decision accordingly (Art. 19(9) SRMR). As resolution actions cannot be reversed, such amendments would likely include further or more stringent conditions to be observed by the beneficiary. 20 Art. 19(10) SRMR replicates Art. 108(2)(3) TFEU, providing for the possibility that the Member States themselves may seek control of Fund aid approval. The Council, upon application by a Member State, may unanimously decide that the use of the Fund is to be considered compatible with the internal market, if justified by exceptional circumstances. Unless the Council decides within seven days of the application, the Commission gives its decision on the case. 21 NRAs must be endowed with the necessary powers to ensure compliance with any conditions set out in a Commission Fund aid decision and to recover misused funds according to a Commission decision (Art. 19(11) SRMR).
D. Functional separation within Union institutions The Commission has a double role to play in the SRM. As a resolution authority, it endorses or objects to the SRB’s proposed resolution scheme (Art. 18(7) SRMR). If the proposed resolution scheme involves the use of State aid or Fund aid, it also acts as competition authority and approves or disapproves of the use of such aid. Art. 19(1)(2) SRMR requires that the Commission act in conformity with the principles established in Art. 3(3) BRRD and make public in an appropriate manner all relevant information on its internal organisation in this regard. According to Art. 3(3) BRRD, applied by analogy, the two functions – resolution authority and competition authority – must be structurally separated and subject to separate reporting lines. Within the Commission, the resolution function falls into the remit of DG FISMA, whereas DG COMP is responsible for the competition function. 23 However, the scope of Art. 19(1)(2) SRMR is not limited to the two hats of the Commission. The provision refers to Union institutions generally, thus including the Council – an institution only exceptionally involved in the State aid or Fund aid approval procedure (see supra, → para. 20). 17 For that reason, the provision should have been placed in Art. 18 SRMR instead.18 22
E. Power to adopt a delegated act 24
Art. 19(8) SRMR empowers the Commission to adopt delegated acts which lay down detailed rules concerning (a) the calculation of the interest rate to be applied in case Fund aid must be recovered (see supra, → para. 18); and (b) the guarantees of the right to good administration and the right of beneficiaries of access to documents according to Arts. 41 and 42 of the Charter. The delegation of power is conferred for an indeterminate period of time (Art. 93(2) SRMR). The delegated act as referred to in Art. 19(8) SRMR has not yet been adopted. The provision does not foresee that the adoption procedure involves regulatory technical standards of the EBA; the Commission legislates here – in terms of substance – in its capacity as a competition authority. However, the Com-
The SRB, on the other hand, is not a Union institution in a narrow sense. See Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal aspects of the second main pillar of the (European) Banking Union (5th edn, 2019), at p. 214 (footnote 1015). 17
18
698
Seraina Neva Grünewald and Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
mission may, in accordance with the established practice, consult the EBA (and potentially the SRB) when preparing the draft delegated act (see Recital (115) SRMR).
Art. 20 SRMR Valuation for the purposes of resolution 1. Before deciding on resolution action or the exercise of the power to write down or convert relevant capital instruments, the Board shall ensure that a fair, prudent and realistic valuation of the assets and liabilities of an entity referred to in Article 2 is carried out by a person independent from any public authority, including the Board and the national resolution authority, and from the entity concerned. 2. Subject to paragraph 15, where all of the requirements laid down in paragraphs 1 and 4 to 9 are met, the valuation shall be considered to be definitive. 3. Where an independent valuation in accordance with paragraph 1 is not possible, the Board may carry out a provisional valuation of the assets and liabilities of the entity referred to in Article 2, in accordance with paragraph 10 of this Article. 4. The objective of the valuation shall be to assess the value of the assets and liabilities of an entity referred to in Article 2 that meets the conditions for resolution of Articles 16 and 18. 5. The purposes of the valuation shall be: (a) to inform the determination of whether the conditions for resolution or the conditions for the write-down or conversion of capital instruments are met; (b) if the conditions for resolution are met, to inform the decision on the appropriate resolution action to be taken in respect of an entity referred to in Article 2; (c) when the power to write down or convert relevant capital instruments is applied, to inform the decision on the extent of the cancellation or dilution of instruments of ownership, and the extent of the write-down or conversion of relevant capital instruments; (d) when the bail-in tool is applied, to inform the decision on the extent of the write-down or conversion of eligible liabilities; (e) when the bridge institution tool or asset separation tool is applied, to inform the decision on the assets, rights, liabilities or instruments of ownership to be transferred and the decision on the value of any consideration to be paid to the institution under resolution or, as the case may be, to the owners of the instruments of ownership; (f) when the sale of business tool is applied, to inform the decision on the assets, rights, liabilities or instruments of ownership to be transferred and to inform the Board's understanding of what constitutes commercial terms for the purposes of Article 24(2)(b); (g) in all cases, to ensure that any losses on the assets of an entity referred to in Article 2 are fully recognised at the moment the resolution tools are applied or the power to write down or convert relevant capital instruments is exercised. 6. Without prejudice to the Union State aid framework, where applicable, the valuation shall be based on prudent assumptions, including as to rates of default and severity of losses. The valuation shall not assume any potential future provision of any extraordinary public financial support, any central bank emergency liquidity assistance, or any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms to an entity referred to in Article 2
Christos V. Gortsos
699
Art. 20 SRMR
Valuation for the purposes of resolution
from the point at which resolution action is taken or the power to write down or convert relevant capital instruments is exercised. Furthermore, the valuation shall take account of the fact that, if any resolution tool is applied: (a) the Board may recover any reasonable expenses properly incurred from the institution under resolution, in accordance with Article 22(6); (b) the Fund may charge interest or fees in respect of any loans or guarantees provided to the institution under resolution, in accordance with Article 76. 7. The valuation shall be supplemented by the following information as appearing in the accounting books and records of an entity referred to in Article 2: (a) an updated balance sheet and a report on the financial position of an entity referred to in Article 2; (b) an analysis and an estimate of the accounting value of the assets; (c) the list of outstanding on-balance-sheet and off-balance-sheet liabilities shown in the books and records of an entity referred to in Article 2, with an indication of the respective credits and priority of claims referred to in Article 17. 8. Where appropriate, to inform the decisions referred to in paragraph 5(e) and (f) of this Article, the information in paragraph 7(b) of this Article may be complemented by an analysis and estimate of the value of the assets and liabilities of an entity referred to in Article 2 on a market value basis. 9. The valuation shall indicate the subdivision of the creditors in classes in accordance with the priority of claims referred to in Article 17 and an estimate of the treatment that each class of shareholders and creditors would have been expected to receive, if an entity referred to in Article 2 were wound up under normal insolvency proceedings. That estimate shall not affect the application of the ‘no creditor worse off ’ principle referred to in Article 15(1)(g). 10. Where, due to urgency in the circumstances of the case, either it is not possible to comply with the requirements laid down in paragraphs 7 and 9, or paragraph 3 applies, a provisional valuation shall be carried out. The provisional valuation shall comply with the requirements laid down in paragraph 4 and, in so far as reasonably practicable in the circumstances, with the requirements laid down in paragraphs 1, 7 and 9. The provisional valuation referred to in the first subparagraph shall include a buffer for additional losses, with appropriate justification. 11. A valuation that does not comply with all of the requirements laid down in paragraphs 1 and 4 to 9 shall be considered to be provisional until an independent person as referred to in paragraph 1 has carried out a valuation that is fully compliant with all of the requirements laid down in those paragraphs. That ex-post definitive valuation shall be carried out as soon as practicable. It may be carried out either separately from the valuation referred to in paragraphs 16, 17 and 18, or simultaneously with and by the same independent person as that valuation, but shall be distinct from it. The purposes of the ex-post definitive valuation shall be: (a) to ensure that any losses on the assets of an entity referred to in Article 2 are fully recognised in the books of accounts of that entity; (b) to inform the decision to write back creditors' claims or to increase the value of the consideration paid, in accordance with paragraph 12 of this Article.
700
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
12. In the event that the ex-post definitive valuation’s estimate of the net asset value of an entity referred to in Article 2 is higher than the provisional valuation’s estimate of the net asset value of that entity, the Board may request the national resolution authority to: (a) exercise its power to increase the value of the claims of creditors or owners of relevant capital instruments which have been written down under the bail-in tool; (b) instruct a bridge institution or asset management vehicle to make a further payment of consideration in respect of the assets, rights or liabilities to an institution under resolution, or as the case may be, in respect of the instruments of ownership to the owners of those instruments of ownership. 13. Notwithstanding paragraph 1, a provisional valuation conducted in accordance with paragraphs 10 and 11 shall be a valid basis for the Board to decide on resolution actions, including instructing national resolution authorities to take control of a failing institution or on the exercise of the write-down or conversion power of relevant capital instruments and eligible liabilities in accordance with Article 21. 14. The Board shall establish and maintain arrangements to ensure that the assessment for the application of the bail-in tool in accordance with Article 27 and the valuation referred to in paragraphs 1 to 15 of this Article are based on information about the assets and liabilities of the institution under resolution that is as up to date and complete as is reasonably possible. 15. The valuation shall be an integral part of the decision on the application of a resolution tool or on the exercise of a resolution power or the decision on the exercise of the write-down or conversion power of capital instruments. The valuation itself shall not be subject to a separate right of appeal but may be subject to an appeal together with the decision of the Board. 16. For the purposes of assessing whether shareholders and creditors would have received better treatment if the institution under resolution had entered into normal insolvency proceedings, the Board shall ensure that a valuation is carried out by an independent person as referred to in paragraph 1 as soon as possible after the resolution action or actions have been effected. That valuation shall be distinct from the valuation carried out under paragraphs 1 to 15. 17. The valuation referred to in paragraph 16 shall determine: (a) the treatment that shareholders and creditors, or the relevant deposit guarantee schemes, would have received if an institution under resolution with respect to which the resolution action or actions have been effected, had entered normal insolvency proceedings at the time when the decision on the resolution action was taken; (b) the actual treatment that shareholders and creditors have received in the resolution of an institution under resolution; and (c) whether there is any difference between the treatment referred to in point (a) of this paragraph and the treatment referred to in point (b) of this paragraph. 18. The valuation referred to in paragraph 16 shall: (a) assume that an institution under resolution with respect to which the resolution action or actions have been effected, would have entered normal insolvency proceedings at the time when the decision on the resolution action was taken;
Christos V. Gortsos
701
Art. 20 SRMR
Valuation for the purposes of resolution
(b) assume that the resolution action or actions had not been effected; (c) disregard any provision of extraordinary public financial support to an institution under resolution. Article 1 of Regulation (EU) 2019/877 of the European Parliament and of the Council (SRMR II) (9)Article 20 is amended as follows: (a) in paragraph 1, the words ‘capital instruments’ are replaced by the words ‘capital instruments and eligible liabilities in accordance with Article 21’; (b) paragraph 5 is amended as follows: (i) in point (a), the words ‘capital instruments’ are replaced by the words ‘capital instruments and eligible liabilities in accordance with Article 21’; (ii) points (c) and (d) are replaced by the following: ‘(c)when the power to write down or convert relevant capital instruments and eligible liabilities in accordance with Article 21(7) is applied, to inform the decision on the extent of the cancellation or dilution of instruments of ownership, and the extent of the write-down or conversion of relevant capital instruments and eligible liabilities; (d) when the bail-in tool is applied, to inform the decision on the extent of the writing down or conversion of bail-inable liabilities;’; (iii) in point (g), the words ‘capital instruments’ are replaced by the words ‘capital instruments and eligible liabilities in accordance with Article 21’; (c) in paragraphs 6, 13 and 15, the words ‘capital instruments’ are replaced by the words ‘capital instruments and eligible liabilities in accordance with Article 21’;
Bibliography Phoebus Athanassiou, ‘Valuation in Resolution and the No-Creditor-Worse-Off Principle’, BJIBFL 29 (2014), 16; Victor de Serière and Daphne van der Houwen, ‘”No Creditor Worse Off ” in Case of Bank Resolution: Food for Litigation?’, JIBLR 31 (2016), 376; Christos V. Gortsos, ‘The role of deposit guarantee schemes (DGSs) in resolution financing’, European Banking Institute Working Paper Series 2019 – no. 37; Seraina Neva Grünewald, ‘Legal challenges of bail-in’, ECB Legal Conference 2017 – Shaping a new legal order for Europe: a tale of crises and opportunities (2017), 287; id., The Resolution of Cross-Border Banking Crises in the European Union: A Legal Study from the Perspective of Burden Sharing (Wolters Kluwer Law & Business, Netherlands 2014); Matthias Haentjens, ‘Selected Commentary on the Bank Recovery and Resolution Directive’ in: Gabriel Moss QC, Bob Wessels, and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (Oxford University Press, Oxford 2017), 177; Dieter Huber, ‘Valuation in Advance of Resolution’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 92; Dieter Huber and Georg Merc, ‘The Banking Recovery and Resolution Directive and the EU’s Crisis Management Framework: Principles, Interplay with the Comprehensive Assessment and the Consequences for Recapitalizing Credit Institutions in Crisis Situations’, Financial Stability Report 28 (2014), 75; Rosa María Lastra and Rodrigo Olivares-Caminal, ‘Valuation reports in the Context of Banking Resolution: What are the Challenges?’, European Parliament Economic Governance Support Unit (2018); Georg Merc, ‘Valuation of Difference in Treatment ex-post Resolution – No Creditor Worse Off than under Liquidation (NCWOL)’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 139; Karl-Philipp Wojcik, ‘The Significance and Limits of the ‘No Creditor Worse Off Principle for an Effective Bail-in’, ECB Legal Conference 2015 – From Monetary Union to Banking Union, on the way to Capital Markets Union: New opportunities for European integration (2015), 253. A. Overview of the regulatory framework governing valuation for the purposes of resolution and further work by the Single Resolution Board and the EBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The obligations set out in Art. 20 SRMR and its field of application . . . . . . . . . II. Commission Delegated Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Delegated Regulation adopted by virtue of Art. 36(14) BRRD . . . . . . . . . . . . 2. Delegated Regulation adopted by virtue of Art. 36(15) BRRD . . . . . . . . . . . . 3. Delegated Regulation adopted by virtue of Art. 74(4) BRRD . . . . . . . . . . . . . 4. Delegated Regulation adopted by virtue of Art. 49(4) BRRD . . . . . . . . . . . . . III. The 2019 Board Report “Framework for Valuation”, the EBA “Handbook on Valuation for Purposes of Resolution” and the 2020 document “SRB Valuation Data Set: Instructions” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
702
Christos V. Gortsos
1 1 3 3 4 9 10 11
Valuation for the purposes of resolution
Art. 20 SRMR
B. The ex-ante valuation(s) (Art. 20(1)-(9) and 20(15) SRMR) . . . . . . . . . . . . . . . . . I. General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Objective and purposes of the ex-ante valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. “Valuation 1” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. “Valuation 2” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Valuation date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Other rules and obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 15 20 20 22 24 27 28
C. The provisional and the ex-post definitive valuation (Art. 20(10)-(13) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The provisional valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The ex-post definitive valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The provisions of Art. 20(11)-(12) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Case law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32 32 35 35 38
D. Common provision (Art. 20(14) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
E. The ex-post valuation (Art. 20(16)-(18) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The provisions of Art. 20(16)-(18) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42 42 44
F. On the 2019 Board Report “Framework for Valuation” and EBA’s “Handbook on Valuation for Purposes of Resolution” . . . . . . . . . . . . . . . . . . . . . . . . I. The Board “Framework for Valuation” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The EBA “Handbook on Valuation for Purposes of Resolution” . . . . . . . . . . . . .
48 48 52
A. Overview of the regulatory framework governing valuation for the purposes of resolution and further work by the Single Resolution Board and the EBA I. The obligations set out in Art. 20 SRMR and its field of application The rules governing valuation for the purposes of resolution are laid down in Art. 20 1 SRMR, the content of which is close to that of Arts. 36 and 74 BRRD.1 This Article sets out obligations concerning two aspects: first, the valuation of the assets and liabilities of an institution under resolution – this ex-ante valuation (including the provisional one) is analysed infra, at paras. 15-31 and paras. 32-40; and second, the valuation of the treatment that shareholders and creditors would have received if the institution had been wound up under normal insolvency proceedings – on this ex-post valuation, see infra, → paras. 42-47. In both cases the objective is the protection of shareholders’ and creditors’ rights.2 Art. 20 SRMR applies to entities referred to in Art. 2 SRMR. Accordingly, covered are 2 the following entities established in a participating Member State: credit institutions; parent undertakings, including financial holding companies and mixed financial holding companies, if they are subject to consolidated supervision carried out by the ECB pursuant to Art. 4(1)(g) SSMR; and investment firms and financial institutions if they are covered by the consolidated supervision of the parent undertaking carried out by the
1 On Art. 36 BRRD, see Huber and Merc, Financial Stability Report 28 (2014), 75, at pp. 81-83 and Huber, in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017), 92 and on Art. 74 BRRD, Athanassiou, BJIBFL 29 (2014), 16; Merc, in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (2017). For an analysis of the valuation framework under (mainly) the BRRD and the SRMR, see also Lastra and Olivares-Caminal, European Parliament Economic Governance Support Unit (2018). 2 Recital (63) sent. 1 SRMR.
Christos V. Gortsos
703
Art. 20 SRMR
Valuation for the purposes of resolution
ECB in accordance with the same SSMR Article (hereinafter: the “institutions” or “entities”).
II. Commission Delegated Regulations 1. Delegated Regulation adopted by virtue of Art. 36(14) BRRD 3
By virtue (inter alia) of Art. 36(14) BRRD and on the basis of RTSs developed by the EBA (as in all cases discussed below), the Commission adopted on 23 March 2016 Delegated Regulation (EU) 2016/1075 “supplementing [the BRRD] with regard to regulatory technical standards specifying (…) the requirements for independent valuers (…)”. 3 The relevant rules are laid down in Chapter IV of that delegated act (Arts. 38-41) governing, respectively, the elements of independence; qualifications, experience, ability, knowledge and resources; structural separation; and material common or conflicting interests. 4
2. Delegated Regulation adopted by virtue of Art. 36(15) BRRD 4
5
6
7
8
By virtue of Art. 36(15) BRRD, the Commission adopted on 14 November 2017 Delegated Regulation (EU) 2018/345 “supplementing [the BRRD] with regard to regulatory technical standards specifying the criteria relating to the methodology for assessing the value of assets and liabilities of institutions or entities”.5 This delegated act (commonly referred to as “Regulation on valuation before resolution”) is structured in three Chapters: Chapter I (Arts. 1-6 Delegated Regulation (EU) 2018/345) contains definitions, the general criteria and provisions relating to the valuation date, the sources of information, the impact of group arrangements and the valuation report; Chapter II (Arts. 7-9 Delegated Regulation (EU) 2018/345) governs the criteria for the ex-ante valuation on informing the decision whether the conditions for resolution or those for the write-down or conversion of capital instruments are met (general principles, areas requiring particular attention in the valuation and factors affecting the valuation, respectively);6 and Chapter III (Arts.10-13 Delegated Regulation (EU) 2018/345) deals with the criteria for this valuation on informing all other related decisions and on the provisional valuation (general principles, selection of the measurement basis, specific factors relating to the estimation and discounting of expected cash flows and methodology for calculating and including a buffer for additional losses).7 Two definitions of that delegated act are of primary importance:8 “valuation” means either the assessment of an entity’s assets and liabilities conducted by a valuer pursuant to Art. 36(1) BRRD, or the provisional valuation conducted by the resolution authority or the valuer, pursuant respectively to Art. 36(2) and (9) BRRD; and “valuer” means either the independent valuer within the meaning of Art. 38 of the above-mentioned Commission Delegated Regulation (EU) 2016/1075 or the resolution authority when conducting a provisional valuation.
OJ L 184, 8.7.2016, p. 1. Art. 37 Delegated Regulation (EU) 2016/1075 lays down the definitions. 5 OJ L 67, 9.3.2018, p. 8. 6 See infra, → paras. 22-23. 7 See infra, → paras. 24-26 and paras. 32-34. 8 Art. 1(a) and (b) Commission Delegated Regulation (EU) 2018/345, respectively.
3 4
704
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
3. Delegated Regulation adopted by virtue of Art. 74(4) BRRD On 14 November 2017 as well, the Commission also adopted, by virtue of Art. 74(4) 9 BRRD and on the basis of EBA RTSs, Delegated Regulation (EU) 2018/344 “supplementing [the BRRD] with regard to regulatory technical standards specifying the criteria relating to the methodologies for valuation of difference in treatment in the resolution” 9 (commonly referred to as “Regulation on valuation after resolution”). Following the general provisions laid down in its Art. 1 Regulation on valuation after the resolution, this delegated act governs five aspects (Arts. 2-6 Regulation on valuation after resolution, respectively): the inventory of assets and claims; the valuation’s steps; the determination of the treatment of shareholders and creditors under normal insolvency proceedings; the determination of the actual treatment of shareholders and creditors in resolution; and the valuation report.
4. Delegated Regulation adopted by virtue of Art. 49(4) BRRD The last (but chronologically first) Commission’ delegated act, which is of relevance 10 in this context and was adopted by virtue of Art. 49(4) BRRD and on the basis of EBA RTSs, is Delegated Regulation (EU) 2016/1401 of 23 May 2016 “supplementing [the BRRD] (…) with regard to regulatory technical standards for methodologies and principles on the valuation of liabilities arising from derivatives”.10 The act considers that derivative contracts may represent a significant share of the liability structure of certain credit institutions and their valuation is a complex process given that their value is linked to the value of underlying instruments, assets or entities. Accordingly, in order to avoid moral hazard and ensure the efficiency of the resolution actions, resolution authorities should adopt and implement appropriate methodologies to value liabilities arising from derivative contracts within a timeframe compatible with the swiftness of the resolution process and based on objective and, where practicable, readily available information.11
III. The 2019 Board Report “Framework for Valuation”, the EBA “Handbook on Valuation for Purposes of Resolution” and the 2020 document “SRB Valuation Data Set: Instructions” On 19 February 2019, the Board published a Report entitled “Framework for Val- 11 uation”,12 produced in close cooperation with the EBA. This Framework describes the characteristics of valuation in resolution and, in particular, the expectations from valuers, the characteristics of the valuation report, including explanations of certain assumptions or deviations thereof and the relationship between the implementation of resolution tools and the characteristics of the valuation. This Framework is briefly discussed below, infra, → paras. 48-51. A few days only after the publication of the Board’s Report, on 22 February 2019, the 12 EBA also published a “Handbook on valuation for purposes of resolution”13 by virtue of OJ L 67, 9.3.2018, p. 3. OJ L 228, 23.8.2016, p. 7. 11 Recitals (2) and (5) Commission Delegated Regulation (EU) 2016/1401. 12 Available at: . 13 Available at: . 9
10
Christos V. Gortsos
705
Art. 20 SRMR
Valuation for the purposes of resolution
Art. 29(2) EBAR.14 Chapter 10 of this Handbook on “Management Information Systems” (MISs) was replaced, on 10 March 2020, by the “Valuation Handbook for purposes of resolution – Chapter 10” (EBA/Rep/2020/10),15 which is an integral part thereof. The main elements of this Handbook are presented infra, → paras. 52-54. 13 Following the publication of the above-mentioned “Framework for Valuation” and considering that the definition of a standardised data set covering the minimum data needed for the valuation of credit institutions in resolution is a second key building block of its approach on valuation, the Board published in December 2020 the document “SRB Valuation Data Set: Instructions”.16 These instructions establish a benchmark for credit institutions and internal resolution teams (IRTs) by setting expectations concerning data and the information necessary for valuers to perform independent valuations. They also provide additional guidance on detailed definitions of key topics and describe data definitions in detail. 14 An accompanying explanatory note of the same date aims to provide guidance to credit institutions regarding their MIS capabilities to produce updated, complete and qualitatively adequate information in order to carry out fair, prudent and realistic valuations.17
B. The ex-ante valuation(s) (Art. 20(1)-(9) and 20(15) SRMR)18 I. General principles Since it is important that losses are recognised upon failure of an institution,19 the Board must ensure that a “fair, prudent and realistic” valuation of an institution’s assets and liabilities is carried out before deciding either on a resolution action, or on the exercise of the powers to write-down or convert relevant capital instruments and eligible liabilities in accordance with Art. 21 SRMR. Hence, the valuation must be conducted exante and, if possible, already in the early intervention phase. It must be based on fair, prudent and realistic assumptions at the moment when the resolution tolls are applied.20 The determination of the economic value of assets and liabilities aims at the full recognition of losses, consistent with the resolution objective of protecting public funds by internalising the costs of resolution.21 16 In accordance with the requirement of independence, the valuation must be carried by a person independent of any public authority, including the Board and the national 15
14 OJ L 331, 15.12.2010, p. 12. Under this Article, the EBA may develop new practical instruments and convergence tools to promote common supervisory approaches and practices. 15 Available at: . 16 Available at: . 17 Available at: . 18 Under the BRRD framework, this valuation is governed by Art. 36(1)-(8) and (13) BRRD. 19 Recital (64) sent. 1 SRMR. 20 Art. 20(1) SRMR and Recital (63) sent. 2 and 3 SRMR and Recital (64) sent. 2 SRMR. The value of liabilities should not, however, be affected in the valuation by the institution’s financial state (Recital (64) sent. 3 SRMR). The inclusion of eligible liabilities in accordance with Art. 21 SRMR in Art. 20(1) SRMR (as well as in Art. 20(5)(a) and (g), (6)(13) and (15) SRMR) is the outcome of the amendment of these paragraphs by Art. 1(9) SRMR II (Regulation (EU) 2019/877). On early intervention, see supra the analysis of Art. 13 SRMR. 21 Art. 14(2)(c) SRMR.
706
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
resolution authority (NRA), and from the institution concerned.22 A valuer, which can be a legal or natural person, is deemed to be independent from any relevant public authority and the relevant entity when the following three conditions are met cumulatively: First, possesses the qualifications, experience, ability, knowledge and resources required and can carry out the valuation effectively without undue reliance on any relevant public authority or the relevant entity in accordance with Art. 39 Commission Delegated Regulation (EU) 2016/1075; Second, is legally separated from the relevant public authorities and the relevant entity in accordance with Art. 40 Commission Delegated Regulation (EU) 2016/1075; and Third, has no material common or conflicting interest within the meaning of Art. 41 Commission Delegated Regulation (EU) 2016/1075.23 Furthermore, in order to ensure “structural separation”, the following rules have 17 been established: in relation to natural persons, the independent valuer may not be an employee or contractor of any relevant public authority or the relevant entity and, in relation to legal persons, may not belong to the same group of companies as any relevant public authority or the relevant entity.24 If an independent valuation is not possible, the Board may decide to carry out a “pro- 18 visional” one pursuant to Art. 20(10) SRMR.25 The valuation itself may not be subject to a separate right of appeal. It may, neverthe- 19 less, be subject to an appeal together with a Board’s resolution decision.26
II. Objective and purposes of the ex-ante valuation 1. Introductory remarks The objective of this ex-ante valuation is to assess the value of the assets and liabilities 20 of an institution that meet the conditions for resolution laid down in Arts. 16 and 18 SRMR.27 The valuation is an integral part of the decision on the application of a resolution tool or on the exercise of a resolution power, or of the decision on the exercise of the write-down or conversion power of capital instruments and eligible liabilities in accordance with Art. 21 SRMR.28 Subject to this, if the requirements laid down in Art. 20(1) and (4)-(9) SRMR are met, the valuation is considered to be definitive.29 In order to support and inform the Board’s decisions regarding resolution actions, 21 Art. 20(5) SRMR requires the carrying out of ex-ante valuations for several purposes. These valuations are conducted on a going concern basis and are performed in accordance with the methodology laid down in Delegated Regulation (EU) 2018/345.
Art. 20(1) SRMR. Art. 38 Commission Delegated Regulation (EU) 2016/1075. 24 Art. 40 Commission Delegated Regulation (EU) 2016/1075. 25 Art. 20(3) SRMR; on Art. 20(10) SRMR, see infra, → paras. 32-33. 26 Art. 20(15) sent. 2 SRMR and Recital (63) sent. 4 SRMR. This has been the case in several actions relating to the resolution of the Spanish significant credit institution Banco Popular Español, S.A. (see also infra, → paras. 38-40). For an overview, see the tracker of the European Banking Institute: The Banking Union and Union Courts: overview of cases, available at: . 27 Art. 20(4) SRMR. 28 Art. 20(15) sent. 1 SRMR. 29 Art. 20(2) SRMR. 22
23
Christos V. Gortsos
707
Art. 20 SRMR
Valuation for the purposes of resolution
2. “Valuation 1” The first purpose of the ex-ante valuation is to inform the determination of whether the conditions for resolution or for the write-down or conversion of capital instruments and eligible liabilities in accordance with Art. 21 SRMR are met.30 Even though neither the BRRD nor the SRMR uses this expression, the ex-ante valuation as to this component is commonly referred to as “Valuation 1”. This valuation is principally aimed at determining whether the aggregate value of the institution’s assets exceeds that of its liabilities and whether the conditions for its authorisation are fulfilled (based on the prudential regulations relevant to compliance with minimum capital requirements). It is broadly considered an accounting valuation, because, in order to assist with this determination, it must be closely linked to the accounting principles relevant to the preparation of the institution’s financial statements. 23 The purpose of this valuation is also to ensure that any losses on the institution’s assets are fully recognised at the time when the resolution tools are applied or the power to write-down or convert relevant capital instruments and eligible liabilities in accordance with Art. 21 SRMR is exercised.31 22
3. “Valuation 2” Art. 20(5) SSMR lays down five further purposes of this valuation, which as to these components is commonly referred to as “Valuation 2”. It is apparent that this valuation must be conducted after it has been ascertained that the conditions for resolution are met before resolution actions are implemented. Its first purpose is to inform the decision on the appropriate resolution action to be taken in respect of the institution concerned if the conditions for resolution are met.32 Depending on the appropriate (hypothetical) action of the Board, the other purposes are to inform the following decisions: First, if the power to write-down or convert relevant capital instruments and eligible liabilities in accordance with Art. 21(7) SRMR were to be applied, the decision on the extent of both the cancellation or dilution of instruments of ownership and the write-down or conversion of relevant capital instruments and eligible liabilities;33 Second, if resolution tools were to be applied: in the case of the bail-in tool, the decision on the extent of the writing-down or conversion of bail-inable liabilities;34 in the case of the bridge institution or the asset separation tool, the decision on the instruments of ownership, assets, rights and/or liabilities to be transferred and the decision on the value of any consideration to be paid to the institution under resolution or to the owners of instruments of ownership; and in the case of the sale of business tool, the decision on the instruments of ownership, assets, rights, and/or liabilities to be transferred and the Board’s understanding of what constitutes “commercial terms” for the purposes of Art. 24(2)(b) SRMR.35 25 As in the case of “Valuation 1”, the purpose of this valuation is also to ensure that any losses on the institution’s assets are fully recognised at the moment when the resolution 24
Art. 20(5)(a) SRMR. Art. 20(5)(g) SRMR. 32 Art. 20(5)(b) SRMR. 33 Art. 20(5)(c) SRMR. The specific reference to Art. 21(7) SRMR has been inserted by Art. 1(9)(b)(ii) SRMR II. 34 The term “eligible liabilities” has been replaced by the term “bail-inable liabilities” by virtue of the same point of Art. 1 SRMR II. 35 Art. 20(5)(d)-(f) SRMR. 30 31
708
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
tools are applied or the power to write-down or convert relevant capital instruments and eligible liabilities in accordance with Art. 21 SRMR is exercised.36 In accordance with Art. 10(1) Delegated Regulation (EU) 2018/345, the valuer must 26 assess the impact on the valuation of each resolution action that the Board may adopt to inform the above decisions. In addition, during the dynamic character of the valuation and without prejudice to the valuer’s independence, the Board may consult with the valuer to identify the range of resolution actions being considered, including actions contained in the resolution plan or, if different, any proposed resolution scheme.37
4. Valuation date The valuation date for both Valuations 1 and 2 is defined as the reference date as de- 27 termined by the valuer on the basis of the date as close as possible before the expected date of a decision by the Board to put the entity in resolution or to exercise the power to write-down or to convert capital instruments (and eligible liabilities in accordance with Art. 21 SRMR. In relation to liabilities arising from derivatives, the valuation date is defined as the point in time determined pursuant to Art. 8 Commission Delegated Regulation (EU) 2016/1401.38
III. Other rules and obligations In accordance with Art. 20(6) SRMR,39 the valuation must, first, be based on prudent 28 assumptions, including rates of default and severity of losses, without prejudice to the EU State aid framework, if applicable. In addition, it must not assume any potential future provision of any extraordinary public financial support,40 any central bank emergency liquidity assistance, or any central bank liquidity assistance provided under nonstandard collateralisation, tenor and interest rate terms to an institution from the point at which resolution action is taken or the power to write-down or convert relevant capital instruments and eligible liabilities in accordance with Art. 21 SRMR is exercised. 41 Finally, it must take account of the fact that, if any resolution tool is applied, the 29 Board may recover any reasonable expenses properly incurred from the institution under resolution in accordance with Art. 22(6) SRMR, and the SRF may charge interest or fees in respect of any loans or guarantees provided to the institution under resolution in accordance with Art. 76 SRMR (for the purposes of its use). Since data availability is a fundamental prerequisite, the valuation must be supple- 30 mented by the following information, submitted as appearing in the accounting books and records of the institution concerned:42 first, an updated balance sheet and a report on its financial position; second, an analysis and an estimate of the accounting value of its assets; if appropriate, in order to inform the decisions referred to in Art. 20(5)(e)-(f) Art. 20(5)(g) SRMR. Valuation 1 and 2 Reports are available at: . 38 Art. 8(a) and (c) Delegated Regulation (EU) 2018/345, respectively. 39 Art. 20(6) sent. 1-3 SRMR, respectively. 40 “Extraordinary public financial support” means State aid within the meaning of Art. 107(1) TFEU or any other public financial support at supra-national level, which, if provided at national level, would constitute State aid, and which is provided in order to preserve or restore the viability, liquidity or solvency of a designated entity or of a group of which such an entity is part (Art. 3(1)(29) SRMR). 41 It is reminded that, in accordance with Art. 8(6)(5) SRMR, resolution plans must as well be drawn up upon the assumption that such central bank liquidity assistance is not permitted. 42 Art. 20(7)(a)-(c) and 20(8) SRMR. 36
37
Christos V. Gortsos
709
Art. 20 SRMR
Valuation for the purposes of resolution
SRMR,43 this may be complemented by analysis and estimate of the value of its assets and liabilities on a market value basis; and third, the list of outstanding on-balance and off-balance-sheet liabilities shown in its books and records, with an indication of the respective credits and priority of claims referred to in Art. 17 SRMR. 31 The valuation must indicate the subdivision of the creditors in classes in accordance with the priority of claims referred to in Art. 17 SRMR, by including two estimates: the value of claims of each class according to the applicable insolvency law and, where relevant and feasible, according to the contractual rights conferred on claimants; and the proceeds each class would receive if the entity were wound-up under normal insolvency proceedings.44 It must also indicate an estimate of the treatment that each class of shareholders and creditors would have been expected to receive if the institution concerned were wound up under normal insolvency proceedings. That estimate should not affect the application of the NCWO principle (or safeguard).45
C. The provisional and the ex-post definitive valuation (Art. 20(10)-(13) SRMR)46 I. The provisional valuation On the basis of the concern that complying with all requirements set out in Art. 20 SRMR, including employing an independent valuer, may lead to delays eventually negatively affecting the effectiveness of the resolution process, the SRMR provides that, for reasons of urgency depending on the case’s circumstances, the Board can carry out (or even outsource47) a rapid, provisional valuation when either of the following conditions is met: it is not possible to comply with the requirements laid down in Art. 20(7) and (9) SRMR; or an independent valuation is not possible, as provided for in Art. 20(3) SRMR.48 33 This provisional valuation must comply with the objective laid down in Art. 20(4) SRMR (and, if reasonably practicable, with Art. 20(1), 20(7) and 20(9) SRMR). 49 It must also include a buffer reflecting facts and circumstances that support the existence of additional losses of uncertain amount or timing; in order to avoid double counting of uncertainty, the assumptions supporting the calculation of this buffer must be adequately explained and justified by the valuer.50 32
See supra, → para. 24. Art. 20(9) sent. 1 SRMR and Art. 2(5) Delegated Regulation (EU) 2018/345. 45 Art. 20(9) sent. 1 and 2 SRMR; on the NCWO principle, see infra, → paras. 42-47. 46 Under the BRRD framework, this provisional valuation is governed by Art. 36(2) and (9)-(12) BRRD. 47 See the relevant EBA Q&A at: . 48 Art. 20(10)(1) sent. 1 SRMR and Recital (64) sent. 4 SRMR; on Art. 20(2) SRMR, see supra, → para. 20. 49 Art. 20(10)(1) sent. 2 SRMR. 50 Art. 20(10)(2) SRMR and, Art. 13(1) Delegated Regulation (EU) 2018/345. This purpose of this buffer is to approximate the losses that the valuer expects to occur or have occurred but was not yet possible to precisely estimate in the provisional valuation. In order to determine its size, the valuer must identify factors that may affect expected cash flows as a result of resolution actions to be adopted, eventually by extrapolating either losses estimated for a part of the institution’s assets to the remainder of its balance sheet, or average losses estimated for assets of its peer competitors, subject to necessary adjustments for differences in the business model and the financial structure (Art. 13(2)-(3)Delegated Regulation (EU) 2018/345). 43 44
710
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
Notwithstanding Art. 20(1) SRMR, a provisional valuation conducted in accordance 34 with Art. 20(10)-(11) SRMR51 is deemed to be a valid basis for the Board to decide on resolution actions (including instructing NRAs to take control of a failing institution) or on exercising the write-down or conversion powers of relevant capital instruments and eligible liabilities in accordance with Art. 21 SRMR.52
II. The ex-post definitive valuation 1. The provisions of Art. 20(11)-(12) SRMR A valuation not complying with the requirements laid down in Art. 20(1)-(4) and (9) 35 SRMR is considered to be provisional and applies until a fully compliant valuation has been carried out by an independent person.53 This ex-post definitive valuation must be carried out as soon as practicable and may be carried out separately from the (other expost) valuation referred to in Art. 20(16)-(18) SRMR.54 It may also be carried out simultaneously with it and by the same independent person (hence, by complying with the requirement of independence), but must nevertheless be distinct from it. 55 In this case, the valuation date is defined as the resolution date.56 The purposes of this ex-post definitive valuation are two: ensure that any losses on the 36 institution’s assets are fully recognised in its books of accounts, and inform the decision to write back creditors’ claims or to increase the value of the consideration paid. 57 With regard to this decision, Art. 20(12) SRMR provides that, if the ex-post definitive valuation’s estimate of the institution’s net asset value is higher than the provisional valuation’s estimate, the Board has the discretion (“may”) request the NRA to undertake the following: exercise its power to increase the value of the claims of creditors or owners of relevant capital instruments that have been written down under the bail-in tool; and/or instruct a bridge institution or asset management vehicle to make a further payment of consideration in respect of the assets, rights or liabilities to an institution under resolution, or (as the case may be) in respect of the instruments of ownership to their owners. In respect of Art. 20(11)-(12) SRMR (which corresponds to Art. 36(10)-(11) BRRD) 37 the following is also noted: First, the discretion given to the Board under Art. 20(12) SRMR has a twofold purpose: to avoid an unwarranted disproportionate effect on creditors’ rights in line with Art. 52 CFREU58 and to contribute to the prevention of possible breaches of the NCWO principle (safeguard) as early as possible. Since, nevertheless, it may be legally difficult in some cases to directly annul an effected transaction, the ultimate obligation is the provision of compensation by application of the NCWO principle, by the SRF, on the basis of the results of the ex-post valuation.59 On Art. 20(11) SRMR, see infra, → para. 36. Art. 20(13) SRMR. 53 Art. 20(11)(1) sent. 1 SRMR and Recital (64) sent. 5 SRMR. 54 See infra, → paras. 42-47. 55 Art. 20(11)(1) sent. 2 and 3 SRMR. 56 Art. 3(b) Delegated Regulation (EU) 2018/345. 57 Art. 20(11)(2)(a) and (b) SRMR respectively. 58 OJ C 326, 26.10.2012, p. 391. 59 See the relevant EBA Q&A at: https://eba.europa.eu/single-rule-book-qa/-/qna/view/publicId/2015 _2351. It is noted that a similar discretionary provision is also laid down in Art. 46(3) BRRD, according to which, if capital has been written down, bail-in has been applied and the level of write-down based on the preliminary valuation is found to exceed requirements when assessed against the definitive valuation, a write-up mechanism may be applied to reimburse creditors and then shareholders to the extent necessary. A corresponding provision has not been included in the SRMR. 51
52
Christos V. Gortsos
711
Art. 20 SRMR
Valuation for the purposes of resolution
Second, if the ex-post definitive valuation shows a lower net asset value than the provisional one, the Board may ask for additional write-down or conversion, as necessary. It is for the purpose of minimising the probability of this occurring that the provisional valuation should include the above-mentioned60 buffer for possible additional losses.61
2. Case law The interpretation of Art. 20(11)-(12) SRMR has been submitted to the Court of Justice of the European Union (CJEU). In its Orders of 10 October 2019, the General Court (eighth Chamber) dismissed as inadmissible the (similar but not identical) claims in Aeris Invest v SRB62 and in Algebris (UK) and Anchorage Capital Group v SRB,63 respectively. 39 In the first case, the claimants submitted a request for annulment of the Board’s Decision of 14 September 2018 not to carry out an ex-post definitive valuation in the context of Decision SRB/EES/2017/08 of 7 June 2017 concerning the resolution scheme in respect of Banco Popular Español, S.A., on the basis, inter alia, of the plea in the law concerning the infringement of Art. 20(11) SRMR. In the second case, the claimants submitted a request for annulment of the SRB Decision to the effect that ex-post definitive valuations of Banco Popular Español S.A. were not required pursuant to Art. 20(11) SRMR; inter alia, they relied on the plea in the law relating to an error of law for breach of Art. 20(11) SRMR and/or Art. 20(12) SRMR. 40 In both these cases, the argumentation of the Court on the interpretation of Art. 20(11)-(12) SRMR can be summarised as follows: First, the objective referred to in Art. 20(11)(b) SRMR must always be read in the context of Art. 20(12) SRMR.64 Second, the compensation provided in Art. 20(12) SRMR only applies when the resolution scheme applied to an institution is either the bail-in tool, the bridge institution tool or the asset separation tool. The sale of business tool (applied to Banco Popular Español) is not included in the situations in which compensation may be paid following an ex post definitive valuation under that Article.65 In addition, Art. 20(12) SRMR does not allow compensation for former shareholders and creditors of an institution whose capital instruments have been fully converted, written down and transferred to a third party.66 Finally, a distinction must be made between Valuation 3, provided for in Art. 20(16) SRMR and the ex post definitive valuation, concluding that, in the circumstances of 38
See supra, → para. 33. See the relevant EBA Q&A at: . 62 Case T-599/18, Aeris Invest v SRB, ECLI:EU:T:2019:740 (available in French only). An appeal , of 28 November 2019, asking the Court of Justice to set aside this Order (Case C-874/19 P) was dismissed by the Court on 21 December 2021 (ECLI:EU:C:2021:1040). 63 Case T-2/19, Algebris (UK) Ltd and Anchorage Capital Group LLC v SRB, ECLI:EU:T:2019:741. An appeal, of 28 November 2019, regarding this Order (Case C-934/19 P) was also dismissed by the Court on 21 December 2021 as well (ECLI:EU:C:2021:1042). 64 Case T-599/18, Aeris Invest v SRB, ECLI:EU:T:2019:740, para. 43 and Case T-2/19, Algebris (UK) Ltd and Anchorage Capital Group LLC v SRB, ECLI:EU:T:2019:741, para. 45. 65 Case T-599/18, Aeris Invest v SRB, ECLI:EU:T:2019:740, paras. 46-47 and Case T-2/19, Algebris (UK) Ltd and Anchorage Capital Group LLC v SRB, ECLI:EU:T:2019:741, paras. 47-49. 66 Case T-599/18, Aeris Invest v SRB, ECLI:EU:T:2019:740, para. 48 and Case T-2/19, Algebris (UK) Ltd and Anchorage Capital Group LLC v SRB, ECLI:EU:T:2019:741, para. 50. 60 61
712
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
the two cases, the applicants would potentially be entitled to compensation as a result of that valuation but not the ex post definitive valuation.67
D. Common provision (Art. 20(14) SRMR)68 The Board must establish and maintain arrangements to ensure that the assessment 41 for the application of the bail-in tool (pursuant to Art. 27 SRMR) and the valuations referred to in Art. 20(1)-(15) SRMR are based on updated and (as reasonably possible) complete information about the assets and liabilities of the institution under resolution.69
E. The ex-post valuation (Art. 20(16)-(18) SRMR) I. Introductory remarks The so-called “NCWO principle”, specified in Section 5 (mainly paragraph 5.3) of the 42 2014 Financial Stability Board’s (FSB) “Key Attributes of Effective Resolution Regimes for Financial Institutions”,70 is regarded as the cornerstone of resolution regimes. It provides that “[c]reditors should have a right to compensation where they do not receive at a minimum what they would have received in a liquidation of the firm under the applicable insolvency regime (“no creditor worse off than in liquidation” safeguard)”.71 Under the BRRD, this principle (or safeguard) is governed by Articles 74-75 BRRD. 43 Recital (65) SRMR makes in this respect the following (related) considerations: “In order to ensure that the resolution process remains objective and certain, it is necessary to lay down the order in which unsecured claims of creditors against an institution under resolution should be written down or converted. In order to limit the risk of creditors incurring greater losses than if the institution had been wound up under normal insolvency proceedings, the order to be laid down should be applicable both in normal insolvency proceedings and in the write-down or conversion process under resolution (…)”.72
67 Case T-599/18, Aeris Invest v SRB, ECLI:EU:T:2019:740, paras. 57-61 and Case T-2/19, Algebris (UK) Ltd and Anchorage Capital Group LLC v SRB, ECLI:EU:T:2019:741, paras. 57-62. 68 Under the BRRD framework, this aspect is partly (only with regard to the bail-in tool) governed by Art. 46(4) BRRD. 69 Art. 20(14) SRMR. 70 FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (2014), available at: . 71 On the NCWO principle and its application under EU financial resolution law, see supra the analysis of Art. 15 SRMR and (by way of mere indication) Grünewald, The Resolution of Cross-Border Banking Crises in the European Union: A Legal Study from the Perspective of Burden Sharing (2014), at pp. 92-93; Wojcik, in: ECB Legal Conference 2015 – From Monetary Union to Banking Union, on the way to Capital Markets Union: New opportunities for European integration (2015), 253; de Serière and van der Houwen, JIBLR 31 (2016), 376; Grünewald, in: ECB Legal Conference 2017 – Shaping a new legal order for Europe: a tale of crises and opportunities (2017), 287, at pp. 302-307; Haentjens, in: Moss QC, Wessels, and Haentjens (eds), EU Banking and Insurance Insolvency (2017), 177, at pp. 272-274. See also FSB, Key Attributes Assessment Methodology for the Banking Sector (2016), at pp. 38-39, available at: . 72 See also Recital (62) SRMR linking the principle to the proportional interference with property rights.
Christos V. Gortsos
713
Art. 20 SRMR
Valuation for the purposes of resolution
II. The provisions of Art. 20(16)-(18) SRMR By application of the NCWO principle, for the purposes of determining whether shareholders and/or creditors would have received better treatment if an institution under resolution had entered into normal insolvency proceedings73 and could, hence, claim under that principle, regardless of whether their claims were written down or modified as a result of resolution actions, the Board must ensure that a valuation is carried out by an independent person as soon as possible after the resolution action or actions have been effected.74 Hence, the requirement of independence under Art. 20(1) SRMR must be complied with in this case as well. Accordingly, in order to implement the NCWO principle, the independent valuer must compare the treatment that shareholders and/or creditors received in resolution with the treatment they would have received in a hypothetical insolvency procedure of the institution.75 45 This valuation (commonly referred to as “Valuation 3”), which is conducted on a gone concern basis to a large extent influenced by national insolvency law and practice, is performed in accordance with the methodology laid down in Delegated Regulation No 2018/344. It must be distinct from any other (according to the above-mentioned) valuation and determine the following:76 First, the treatment that shareholders and creditors, or the relevant DGSs, 77 would have received if the institution under resolution, with respect to which the resolution action(s) have been effected, had entered normal insolvency proceedings at the time when the decision on the resolution action was taken; Second, the actual treatment that shareholders and creditors have received in the institution’s resolution; Third (and consequently), whether there is any difference between the two treatments. 46 Since this valuation must (attempt to) determine the treatment actually received by shareholders and creditors existing as of the date of resolution, but immediately preceding any resolution action, and to compare this with an estimate of the outcome resulting from hypothetical insolvency of the entity under normal insolvency proceedings, it must be based on insolvency scenarios reflecting the applicable insolvency law and practice. 47 In addition, the following rules have been established with regard to this ex-post valuation: First, it must be based on two assumptions: the institution under resolution, with respect to which the resolution action(s) have been effected, would have entered normal insolvency proceedings at the time when the decision on the resolution action was taken; and the resolution action(s) had not been effected;78 44
73 “Normal insolvency proceedings” means collective insolvency proceedings entailing the partial or total divestment of a debtor and the appointment of a liquidator or an administrator normally applicable to institutions under national law and either specific to those or generally applicable to any natural or legal person (Art. 2(1)(47) BRRD). 74 Art. 20(16) SRMR and Recital (63) sent. 5 SRMR. 75 If the determination has been made that shareholders and creditors have received, in payment of their claims, less than the amount that they would have received under normal insolvency proceedings, they should be entitled to the payment of the difference, which should be paid by SRF (Recital (64) sent. 6 and 7 SRMR). 76 Art. 20(17)(a)-(c) SRMR. 77 On the contribution of DGSs in the financing of resolution actions under Art. 79 SRMR, see Gortsos, European Banking Institute Working Paper Series 2019 – no. 37 (2019) and the analysis of that Article infra. 78 Art. 20(18)(a) and (b) SRMR.
714
Christos V. Gortsos
Valuation for the purposes of resolution
Art. 20 SRMR
Second, it must disregard any provision of extraordinary public financial support to the institution under resolution.79
F. On the 2019 Board Report “Framework for Valuation” and EBA’s “Handbook on Valuation for Purposes of Resolution” I. The Board “Framework for Valuation” The objective of the Board’s “Framework for Valuation” is the provision of an indication of its expectations regarding the principles and methodologies for valuation reports as laid down in the SRMR (and the BRRD), as well as the main elements of such valuation reports, in order to reduce the level of uncertainty for independent valuers and the Board and enhance the comparability of valuations across future resolution cases. It refers to both “Valuation 2”, either provisional or definitive and to “Valuation 3”, has been drafted taking account of the main valuation methodologies generally applied, as best practices, by independent valuers and considers the methodological options in relation to the use of a specific resolution tool, as laid down in Delegated Regulations (EU) 2018/345 and 2018/344.80 The Framework is mainly addressed to independent valuers. The Board’s expectation is that when exercising their expert judgement, and especially when the above-mentioned objectives are not met, these will be able to clearly explain and justify the assumptions and the methodologies adopted in the valuation report. In this respect, even though the Framework does not restrict valuers’ independence and the exercise on their behalf of professional judgement when performing valuation in a specific resolution case, it provides an indication of the information they may need to conduct valuations, acknowledging the flexibility required to address complex situations, especially when valuations must be conducted under time pressure or under constraints related to the quality of available information, the size of the institution or the complexity of its business model. Credit institutions are also expected to benefit from a better understanding of valuation in resolution, ultimately improving their resolvability. In particular, since the availability of data in an accessible format and the reliability of such data are fundamental prerequisites for the performance of valuations, the ability of their MISs to provide accurate and timely information in the context of resolution preparedness is crucial for valuations’ reliability and robustness.81 The main four Chapters (2-5) of the report deal in particular with the following issues:82 Chapter 2, on valuation methodology, lays down the key characteristics of Valuations 1 and 2, discusses the determination of the valuation objective, and then introduces and describes the main types of valuation methodologies, with particular emphasis on the discounted cash flow (DCF) method (Section 2.4.1), which is generally accepted as the method of economic valuation that incorporates most of the parameters that affect the expected cash flows and discount rates applicable to an institution’s 79 Art. 20(18)(c) SRMR. Non-confidential versions of Valuation 3 Reports are available at: . 80 SRB, Framework for Valuation (2019), at p. 4. 81 SRB, Framework for Valuation (2019), at p. 5. 82 SRB, Framework for Valuation (2019), at pp. 7-14, 15-29, 30-32 and 33-38, respectively. Chapter 6 (pp. 39-57) comprises two Annexes: Annex I contains explanatory tables relating to Chapter 2; Annex II sets out other general considerations regarding the treatment of specific assets and liabilities.
Christos V. Gortsos
715
48
49
50
51
Art. 20 SRMR
Valuation for the purposes of resolution
assets and liabilities. The relatively lengthier Chapter 3, on resolution tools, presents specific considerations regarding each individual resolution tool and how the valuation approach needs to be adapted and Chapter 4, on provisional valuation, addresses the specific considerations arising when such a valuation must be conducted. Finally, Chapter 5 lays down methodological considerations relating to Valuation 3.
II. The EBA “Handbook on Valuation for Purposes of Resolution” The EBA “Handbook on Valuation for Purposes of Resolution” was developed having regard to the recent valuation experience of resolution authorities with resolution events and to the (generally accepted) “International Valuation Standards” (IVS) of 2016 produced by the International Valuation Standards Council (IVSC).83 It is a non-binding instrument, not subject to the “comply or explain” principle,84 addressed to NRAs and to the Board. Its objective is twofold: First, to foster the convergence of practices in the implementation of the valuation process, including in the interaction with valuers; Second, without being a comprehensive and prescriptive valuation manual, to provide a non-exhaustive overview of selected aspects of valuation methodologies that could be used when conducting the valuation in accordance with the EU legal and regulatory framework, and of the related implementing process. 53 Respecting the valuer’s independence and freedom to choose the appropriate valuation approaches or methodologies and acknowledging that the quality and granularity of valuations are constrained by the circumstances of each case, the Handbook aims to outline the main steps in which valuations may be articulated, having regard to the dynamics of resolution strategies and of the execution of the resolution tools, and illustrates the potential application of the most common valuation approaches in accordance with the criteria set out in Commission Delegated Regulation 2018/345.85 54 The main focus is on Valuation 2, which the EBA considers (to be the technically most complex one with the greatest impact on resolution decisions affecting shareholders, creditors and potentially public finances. In this respect, it covers (apart from the general considerations) the single asset/liability granular valuation, the institution’s equity valuation, resolution tool-specific considerations, as well as the process and the report.86 Specific aspects of Valuations 1 and 3 are also dealt with in less detail.87 It is also noted that the new Chapter 10, as in force after the amendments introduced in 2020, addresses the Board’s assessment, in the context of the resolvability assessment, of credit institutions’ capability to swiftly provide data and information to support a robust valuation in the event of resolution. 52
83 The IVSC, a not-for-profit organisation incorporated in the USA with its operational headquarters in London, is the independent global standard-setter for the valuation profession (see at: ). The IVSs are available at: . 84 This principle is laid down in Art. 16(3) EBAR. 85 EBA, Handbook (2019), at p. 6. 86 EBA, Handbook (2019), at pp. 19-80. 87 EBA, Handbook (2019), at pp. 6 et seq. and 81 et seq. respectively.
716
Christos V. Gortsos
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
Art. 21 SRMR Write-down and conversion of capital instruments or eligible liabilities 1. The Board shall exercise the power to write down or convert relevant capital instruments, and eligible liabilities as referred to in paragraph 7a acting under the procedure laid down in Article 18, in relation to the entities and groups referred to in Article 7(2), and to the entities and groups referred to in Article 7(4)(b) and (5), where the conditions for the application of those paragraphs are met, only where it assesses, in its executive session, on receiving a communication pursuant to the second subparagraph or on its own initiative, that one or more of the following conditions are met: (a) where the determination has been made that the conditions for resolution specified in Articles 16 and 18 have been met, before any resolution action is taken; (b) the entity will no longer be viable unless the relevant capital instruments, and eligible liabilities as referred to in paragraph 7a are written down or converted into equity; (c) in the case of relevant capital instruments issued by a subsidiary and where those relevant capital instruments are recognised for the purposes of meeting own funds requirements on an individual basis and on a consolidated basis, unless the write-down or conversion power is exercised in relation to those instruments, the group will no longer be viable; (d) in the case of relevant capital instruments issued at the level of the parent undertaking and where those relevant capital instruments are recognised for the purposes of meeting own funds requirements on an individual basis at the level of the parent undertaking or on a consolidated basis, unless the write-down or conversion power is exercised in relation to those instruments, the group will no longer be viable; (e) extraordinary public financial support is required by the entity or group, except in any of the circumstances set out in point (d)(iii) of Article 18(4). The assessment of the conditions referred to in points (a), (c) and (d) of the first subparagraph shall be made by the ECB, after consulting the Board. The Board, in its executive session, may also make such assessment. 2. Regarding the assessment of whether the entity or group is viable, the Board, in its executive session, may make such an assessment only after informing the ECB of its intention and only if the ECB, within three calendar days of receipt of such information, does not make such an assessment. The ECB shall, without delay, provide the Board with any relevant information that the Board requests in order to inform its assessment. 3. For the purposes of paragraph 1 of this Article, an entity referred to in Article 2 or a group shall be deemed to be no longer viable only if both of the following conditions are met: (a) that entity or group is failing or is likely to fail; (b) having regard to timing and other relevant circumstances, there is no reasonable prospect that any action, including alternative private sector measures or supervisory action (including early intervention measures), other than the write-down or conversion of relevant capital instruments, and eligible liabilities as referred to in paragraph 7a, independently or in combination with resolution
Andreas Witte
717
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
action, would prevent the failure of that entity or group within a reasonable timeframe. 4. For the purposes of point (a) of paragraph 3 of this Article, that entity shall be deemed to be failing or to be likely to fail where one or more of the circumstances referred to in Article 18(4) occur. 5. For the purposes of point (a) of paragraph 3, a group shall be deemed to be failing or to be likely to fail where the group infringes, or there are objective elements to support a determination that the group, in the near future, will infringe its consolidated prudential requirements in a way that would justify action by the ECB or the national competent authority, including but not limited to the fact that the group has incurred or is likely to incur losses that will deplete all or a significant amount of its own funds. 6. A relevant capital instrument issued by a subsidiary shall not be written down to a greater extent or converted on worse terms pursuant to Article 59(3)(c) of Directive 2014/59/EU than equally ranked capital instruments at the level of the parent undertaking which have been written down or converted. 7. If one or more of the conditions referred to in paragraph 1 are met, the Board, acting under the procedure laid down in Article 18, shall determine whether the powers to write down or convert relevant capital instruments and eligible liabilities are to be exercised independently or in combination with a resolution action in accordance with the procedure under Article 18. Where relevant capital instruments and eligible liabilities have been purchased by the resolution entity indirectly through other entities in the same resolution group, the power to write down or convert those relevant capital instruments and eligible liabilities shall be exercised together with the exercise of the same power at the level of the parent undertaking of the entity concerned or at the level of other parent undertakings that are not resolution entities, so that the losses are effectively passed on to, and the entity concerned is recapitalised by, the resolution entity. After the exercise of the power to write down or convert relevant capital instruments or eligible liabilities independently of resolution action, the valuation provided for in Article 20(16) shall be carried out, and point (e) of Article 76(1) shall apply. 7a. The power to write down or convert eligible liabilities independently of resolution action may be exercised only in relation to eligible liabilities that meet the conditions referred to in point (a) of Article 12g(2) of this Regulation, except the condition related to the remaining maturity of liabilities as set out in Article 72c(1) of Regulation (EU) No 575/2013. When that power is exercised, the write down or conversion shall be done in accordance with the principle referred to in point (g) of Article 15(1). 7b. Where a resolution action is taken in relation to a resolution entity or, in exceptional circumstances in deviation from the resolution plan, in relation to an entity that is not a resolution entity, the amount that is reduced, written down or converted in accordance with Article 21(10) at the level of such an entity shall count towards the thresholds laid down in point (a) of Article 27(7) that apply to the entity concerned. 8. Where the Board, acting under the procedure laid down in Article 18 of this Regulation, determines that one or more of the conditions referred to in paragraph 1 of this Article are met, but the conditions for resolution in accordance with Article 18(1) of this Regulation are not met, it shall instruct, without delay, the national resolution authorities to exercise the write-down or conversion powers in accordance with Articles 59 and 60 of Directive 2014/59/EU. 718
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
The Board shall ensure that before national resolution authorities exercise the power to write down or convert relevant capital instruments, and eligible liabilities as referred to in paragraph 7a, a valuation of the assets and liabilities of an entity referred to in Article 2 or a group is carried out in accordance with Article 20(1) to (15). That valuation shall form the basis of the calculation of the write-down to be applied to the relevant capital instruments, and eligible liabilities as referred to in paragraph 7a in order to absorb losses and the level of conversion to be applied to relevant capital instruments in order to recapitalise the entity referred to in Article 2 or the group. 9. Where one or more of the conditions referred to in paragraph 1 are met, and the conditions referred to in Article 18(1) are also met, the procedure laid down in Article 18(6), (7) and (8) shall apply. 10. The Board shall ensure that the national resolution authorities exercise the write-down or conversion powers without delay, in accordance with the priority of claims pursuant to Article 17 and in a way that produces the following results: (a) Common Equity Tier 1 items are reduced first in proportion to the losses and to the extent of their capacity; (b) the principal amount of Additional Tier 1 instruments is written down or converted into Common Equity Tier 1 instruments or both, to the extent required to achieve the resolution objectives set out in Article 14 or to the extent of the capacity of the relevant capital instruments, whichever is lower; (c) the principal amount of Tier 2 instruments is written down or converted into Common Equity Tier 1 instruments or both, to the extent required to achieve the resolution objectives set out in Article 14 or to the extent of the capacity of the relevant capital instruments, whichever is lower. (d) the principal amount of eligible liabilities as referred to in paragraph 7a is written down or converted into Common Equity Tier 1 instruments or both, to the extent required to achieve the resolution objectives set out in Article 14 or to the extent of the capacity of the relevant eligible liabilities, whichever is lower. 11. The national resolution authorities shall implement the instructions of the Board and exercise the write-down or conversion of relevant capital instruments in accordance with Article 29. Bibliography Anna Gardella, ‘Bail-In: Preparedness and Execution’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (2nd edn, Oxford University Press, Oxford 2020), 11; Ayowande McCunn, ‘Temporary write-down CoCos and the incentive to monitor and discipline’ Law and Financial Markets Rev 9/2 (2015), 159; Vittorio Santori and Irene Mercatti, ‘Write-down and Conversion of Capital Instruments’ in M. P. Chiti and V. Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave, Cham 2019), 349; Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’ JFR 1/2 (2015), 226; Karl-Philipp Wojcik, ‘Bail-in in the Banking Union’ CMLR 53 (2016), 91. Also see the literature listed for → Art. 27. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Role in the system of the SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Relation to other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 2
B. Scope, requirements and consequences of write-down or conversion (Art. 21(1) and (7a)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 7 11
C. Procedure (Art. 21(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
Andreas Witte
719
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
D. Point of non-viability (Arts. 21(3)-(5)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
E. Write-down or conversion within groups (Art. 21(6)) . . . . . . . . . . . . . . . . . . . . . . . .
21
F. Interplay with resolution (Arts. 21(7)-(9)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
G. Result to be achieved (Art. 21(10)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
H. Action by the NRAs (Art. 21(11)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
I.
34
Case study: The Banco Popular case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Function and background of the provision I. Role in the system of the SRMR 1
Art. 21 SRMR provides one of the principal tools (the other being Art. 27 SRMR) with which the SRMR intends to achieve one of the primary principles of the resolution regime:1 Namely, that losses occurring within a bank should be borne first and foremost by that bank’s investors (shareholders and creditors). It thus contributes to the fulfilment of the mandate of the FSB’s Key Attributes of Effective Resolution Regimes.
II. Relation to other provisions Art. 21 SRMR power was, in the original 2014 version of the SRMR, formally styled the “write-down and conversion of capital instruments”, whence it acquired its widespread but unofficial abbreviation “WDCCI” which will also be used in the present discussion. The reference to “eligible liabilities” in addition to capital instruments (and other amendments related to this change) was inserted by the “banking package” reform of 20192 (see infra, → para. 8). The WDCCI can be applied either independently of resolution action or in combination with resolution action; the (limited) practice so far typically made use of it in combination with resolution action (see also infra, → para. 23-28 and 34–37). This is facilitated by the far-reaching alignment of the trigger for the WDCCI with the failing-or-likely-to-fail assessment which is a prerequisite of resolution. See on this infra, → para. 19. 3 In economic terms, the WDCCI bears great similarity to the bail-in power under Art. 27 SRMR (and Art. 43 BRRD).3 Both lead to a conversion, cancellation or partial cancellation of rights owned by private investors and thus a direct interference with property.4 They differ, however, in their legal nature (the bail-in is a resolution tool which can only be used where the requirements of Arts. 32 BRRD/18(1) SRMR are met). Until 28 December 2020, when Regulation (EU) 2019/877 became applicable, they also differed in the scope of affected instruments (WDCCI encompasses only AT1 and T2 capital, see para. 1; bail-in encompasses all liabilities, with possibilities of exemptions, 2
See Recital 5 and Arts. 34(1)(a) and (b) BRRD and Arts. 15(1)(a) and (b) SRMR for this principle. Regulation (EU) 2019/877 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 806/2014 as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms, OJ L 150, 7.6.2019, at pp. 226–252. 3 The similarities between the two become evident also from the statutory definition of the bail-in tool in Arts. 3(1)(33) SRMR and 2(1)(57) BRRD. 4 In terms of fundamental and human rights protection such measures will therefore have to be evaluated, in case of judicial review, in the light of Art. 17 CFR and Art. 1 of the First Protocol to the ECHR (right to property). Since different instrument owners will typically be treated differently, an evaluation will also be necessary in the light of Arts. 20 CFR and 14 ECHR. 1
2
720
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
defined in Arts. 44(1) BRRD/27(2) SRMR); but that Regulation brought about the insertion of “eligible liabilities” within the meaning of para. 6 (which in turn refers to Art. 12g(2)(a) SRMR, see annotations thereto) into the scope of the WDCCI. This has largely aligned the scope of application of the two tools. Both the bail-in and the WDCCI can be used in combination (see supra, → para. 2). Art. 47 BRRD makes it clear that many ancillary provisions governing details of the bail-in power apply also to the WDCCI, such as the means of effectuating the exercise of the power (cancellation or transfer of instruments, calculation of conversions etc.). Art. 21 SRMR was evidently modelled after and aligned with Art. 59 BRRD, in line 4 with the general principle of the SRMR to set the legal framework for the application of the BRRD powers for the Member States participating in the Banking Union. As becomes evident from Arts. 21(10) and (11) SRMR and Art. 29(1) SRMR (see annotations thereto), the mode of operation of resolution within the SRM is typically that of implementation of SRB decisions by the NRAs in the exercise of the national laws transposing the BRRD. The process has two stages: An SRB decision, adopted under Union law (the SRMR), which is binding upon the NRA; and a national decision (Verwaltungsakt, acte administratif or whatever the term under the applicable national administrative law is; also ad hoc legislative measures such decrees or other instruments allowed by national law are conceivable) adopted under national law, in the exercise of powers pursuant to the national BRRD transposition. The latter gives effect to the former. This means that, in relation to an instrument holder whose instrument is affected by a WDCCI, the legal basis for the interference with his property is not directly Art. 21 SRMR itself (which is the basis of the SRB decision) but rather the national decision based on the national transposition of Art. 59 BRRD. Art. 21 SRMR should therefore always be read and interpreted in conjunction with Art. 59 BRRD and the national transpositions of the latter. In accordance with well-established case law,5 the national legislation must, to the extent possible under its wording, be interpreted in the light of the BRRD which it transposes, in order to give the fullest possible effect to the objectives of the BRRD. The scope of the WDCCI includes, amongst others, AT1 instruments. AT1 is, in ad- 5 dition, also subject to a write-down and conversion as soon as the CET1 ratio drops below a predefined level of at least 5.125 % (“trigger event”; cf. Arts. 52(1)(n) and 54 CRR). This write-down or conversion, from which these instruments derive their frequently used name “contingent convertibles” (CoCos), is distinct in several respects from the WDCCI power under Art. 21 SRMR. In the WDCCI, the legal basis for the interference with the creditor’s rights is statutory,6 in the case of CoCos it is contractual in nature. The WDCCI is permanent,7 whereas the CoCo conversion can be of only temporary nature with a subsequent write-up of instruments when the situation of the institution improves again.8 Most importantly, the trigger event for the former is distinct from the PONV trigger event for the latter (see below). Art. 21 SRMR is supported by Art. 55 BRRD, which encompasses not just the bail-in 6 power but also the WDCCI. It obliges Member States to legally require issuers which are 5 E.g. Case 14/83, Sabine von Colson and Elisabeth Kamann v Land Nordrhein-Westfalen, ECLI:EU:C: 1984:153. 6 Vis-à-vis creditors, the legal basis for the interference with their claims lies in national law, which becomes applicable for the purposes of an SRB-mandated WDCCI via Arts. 21(10) and (11) (see annotations thereto). 7 Art. 60(2)(a) BRRD. 8 Art. 52(1)(n) CRR and Art. 21 of Commission Delegated Regulation (EU) No. 241/2014 of 7 January 2014 supplementing Regulation (EU) No. 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for Own Funds requirements for institutions, OJ L 74, 14.3.2014, at p. 8.
Andreas Witte
721
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
subject to the BRRD to include contractual recognition clauses in the terms of instruments potentially subject to a bail-in or WDCCI, in addition to the statutory WDCCI power which the BRRD requires national legislators to provide for. The purpose of these contractual clauses is to facilitate the effectiveness of a bail-in or WDCCI in a third country: Under private international law rules such a clause means there is, in addition to the statutory basis for the interference with the instrument owners’ rights, also a contractual basis which third-country courts are more likely to accept.
B. Scope, requirements and consequences of write-down or conversion (Art. 21(1) and (7a)) I. Scope The scope of instruments to which the WDCCI power is applied is delineated in Art. 21(1) SRMR as “relevant capital instruments and eligible liabilities”. The first prong of this pair is defined in Art. 3(1)(51) SRMR (and, identically, in Art. 2(1)(74) BRRD). It thus comprises AT1 and T2 instruments within the meaning of the CRR. In simplified terms, these are instruments which are not common stock (like CET1), but rather subordinated debentures which meet defined criteria, most importantly either perpetuality (AT19) or maturity of at least five years (T210). Even though they constitute, in the private law sense, a liability rather than equity of the issuing institution, they are, for the purposes of regulatory capital, recognised as own funds. 8 The banking package of 2019 brought about a major reform of Art. 21 which consisted of the inclusion of “eligible liabilities” in the scope of instruments subject to the WDCCI. The definition of this term is now provided for in Art. 3(1)(49a), which refers to Art. 12c, Art. 12g(2)(a), and Art. 72a(1)(b) (see annotations thereto). This makes, in effect, a major part of a typical credit institution’s liability base subject to the WDCCI. The scope of instruments which are subject to the WDCCI has thus not been completely aligned with the scope of liabilities subject to the bail-in (see annotations to Art. 27(3)), but the substantive scopes of the bail-in and the WDCCI now overlap to a larger extent than before. This contributes to a further assimilation between the two tools, which, despite their legal differences, are economically very similar and often not clearly distinguished in literature. This assimilation is also confirmed by the stipulation in para. 7a which binds the SRB to the “no creditor worse off than in insolvency” principle (Art. 15(1)(g)), which already applies to the bail-in, also when applying the WDCCI. Para. 7a limits the reference to Art. 15(1)(g) to eligible liabilities and does not extend it to the WDCCI of “relevant capital instruments”; but this would not matter in practice, since the holders of capital instruments are the first in line to bear losses. 9 The fact that the scope of Art. 21 SRMR does not include CET1 instruments does not mean that these instruments remain unaffected in cases of utilisation of Art. 21 SRMR; this would be incompatible with the pecking order established by Arts. 15(1)(a), 21(10) and 17 SRMR and Arts. 34(1)(a) and 108 BRRD, according to which CET1 takes losses first, then AT1, then T2. This means that before effectuating a WDCCI, CET1 instruments are reduced (cancelled, either fully or partially if the latter is sufficient to restore viability). The necessary powers for this are provided under Art. 47(1)(a) BRRD, as transposed into national law. 7
9
Art. 52(1)(g) CRR. Art. 63(g) CRR.
10
722
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
The scope ratione personae of the WDCCI power includes the entities and groups 10 referred to in Art. 7(2) SRMR as well as those falling under the SRB’s jurisdiction under Art. 7(4)(b) SRMR or Art. 7(5) SRMR. This is aligned with the scope ratione personae of the SRB’s resolution powers. Other entities remain within the scope of the WDCCI of the NRAs under the national transposition of the BRRD.
II. Requirements Art. 21(1) SRMR stipulates some procedural requirements for the adoption of a 11 WDCCI decision by the SRB. To provide a more coherent narrative of the procedure, these requirements will be discussed in the annotations to Art. 21(2) SRMR below. With respect to the substantive requirements for the application of the WDCCI 12 power, Art. 21(1) SRMR offers five alternative options: – Conditions for resolution have been met (Art. 21(1)(a) SRMR). This is a reference to Arts. 16 and 18 SRMR. The wording of the SRMR seems to require that the formal determination that these conditions have been met must have been made before exercising the WDCCI power; however, in the light of the purpose of this clause, one would assume that a simultaneous taking of the resolution determination and the WDCCI decision would be sufficient. The wording also requires that the WDCCI power must take effect before resolution action; a mere “logical second” between the two would, however, be sufficient. – Point of non-viability (PONV, Art. 21(1)(b) SRMR). This requirement is spelt out in more detail in Arts. 21(3)-(5) SRMR and will be discussed there. – PONV for capital instruments at subsidiary level (Art. 21(1)(c) SRMR): This item appears redundant at first glance, because it stipulates the same requirement (PONV, which, just like lit. b of Art. 21(1) SRMR, has to be read in the light of Arts. 21(3)-(5) SRMR) as Art. 21(1)(b) SRMR does for all relevant instruments. Nonetheless, Art. 21(1)(c) SRMR is not superfluous because it makes clear that relevant capital instruments issued by a subsidiary11 within a group are subject to WDCCI powers only if the PONV will, without the measure, be reached with respect to the group as a whole Lit. c thus places emphasis on the group, as opposed to entity-level, perspective and allows for the WDCCI of instruments issued by a subsidiary that is not itself at risk of PONV, provided that this risk of non-viability is reached at the level of the group. In addition, for lit. c to be met, the instruments in question must be recognised, from the prudential perspective, for meeting own funds requirements12 both at the individual level of that subsidiary and the consolidated level of the group. Where such a WDCCI of subsidiary instruments takes place, Art. 21(6) SRMR applies. – PONV for capital instruments at parent level (Art. 21(1)(d) SRMR): This item is the mirror image to Art. 21(1)(c) SRMR, with the term PONV to be read in the light of paras 3–5 of Art. 21 SRMR. It provides that relevant capital instruments issued at the level of a parent undertaking 13 of a group can be subject to WDCCI if the PONV has been reached. In other words, lit. d stipulates for the parent what lit. c stipulates for its subsidiaries: Namely, that their capital instruments can be subject to WDCCI on the grounds of the group perspective even if the issuing parent entity itself has Defined in Art. 3(1)(21) SRMR. These follow from Art. 92 CRR for the individual level and for Art. 92 CRR in conjunction with Art. 11 CRR for the consolidated level. 13 Defined in Art. 3(1)(20) SRMR. 11 12
Andreas Witte
723
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
not reached PONV. As a second condition for lit. d to be met, the instruments in question must be recognised, from the prudential perspective, for meeting either the own funds requirements on the parent undertaking’s individual level or on the group’s consolidated level. Note that, contrary to lit. c, the two criteria (recognition at individual or consolidated level) are alternative, not cumulative. The reason for this lies in the fact that in such scenarios, both the individual and the consolidated requirements apply to the parent undertaking whose capital instruments are in question, justifying their enlistment for loss absorption via WDCCI. Extraordinary public financial support is required (Art. 21(1)(e) SRMR). This term is to be interpreted identically to Art. 18(4)(d) SRMR.14 As per the wording of Art. 21(1)(e) SRMR, however, it is not subject to all three counter-exceptions (Arts. 18(4)(d)(i)-(iii) SRMR) where extraordinary public financial support is permissible without triggering resolution, but rather only to the counter-exception of Art. 18(4)(d)(iii) SRMR, i.e., precautionary recapitalisation. Where such precautionary recapitalisation, meeting the requirements of Art. 18(4)(d)(iii) SRMR (which should be interpreted narrowly, owing to their character as an exception), takes place, this does not constitute a WDCCI trigger.
–
C. Procedure (Art. 21(2)) The structure of Art. 21 SRMR is not easily accessible upon first reading; substantive and procedural provisions are intermingled and scattered across the entire provision. In order to provide a coherent narrative of the procedure for the exercise of WDCCI, the procedural provisions of the various paragraphs of Art. 21 SRMR will be discussed in the present section. A chronological overview of the procedure is as follows: 14 The process starts with an assessment of the substantive conditions of Arts. 21(1)(a) to (e) SRMR. The competence for making this assessment is allocated in a differentiated manner: – For the conditions of Arts. 21(1)(a), (c) and (d) SRMR, competence lies first and foremost with the ECB (Art. 21(1)(2) SRMR; but cf. infra, → para. 17), following a mandatory consultation of the SRB. This is only a “primary”15 competence, however; where the ECB is informed by the SRB of the SRB’s intention to apply Art. 21 SRMR, the ECB has three calendar days within which to determine that (at least) one of these conditions is met. If the ECB does not make an assessment within these three calendar days,16 the SRB itself acquires a “secondary” competence to make, in 13
And also to Arts. 59(3)(e) and 32(4)(d) BRRD. This wording was used by the Court of Justice in joined cases C-551, 552/19 P, ABLV Bank AS and Others v ECB, ECLI:EU:C:2021:369, para. 62. The case concerned a failing-or-likely-to-fail assessment under Art. 18 rather than an assessment under Art. 21; but it appears to the present author that the Court’s logic and terminology are transposable to Art. 21. This would have the consequence that an ECB assessment under Art. 21 would be a preparatory act to a subsequent use of the write-down power by the SRB, and not be separately contestable. 16 One would assume that this clause “does not make such an assessment” refers to the outcome of the assessment rather than the process: If the ECB undertakes an assessment but arrives at a negative outcome (conditions for WDCCI not met), the door is still open for a positive outcome by the SRB. The opposing view (only complete inactivity of the ECB without even looking into the matter paves the way for the SRB’s secondary competence) is unconvincing, since Art. 21(2) SRMR requires a formal notification of the ECB by the SRB which will necessarily trigger an assessment process within the ECB which must lead to a conclusion, either positive or negative. 14
15
724
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
executive session (Art. 53 SRMR), this determination.17 For these purposes, the ECB is obliged to share relevant information with the SRB. This split of competences is unusual in the sense that it allows two different authorities to come to the exact same conclusion. From a game theory perspective, one may consider it as having drawbacks as it seems to carry a certain risk of a “chicken game” whereby the two authorities might, even though both believe that the conditions for a WDCCI are present, delay action, hoping that the other might move first and assume political (and possibly also legal) responsibility for the ensuing course of events. The experience with the application of the very similarly structured split of competences under Art. 1818 demonstrates, however, that such fears are unfounded as the authorities do not shy away from utilising their respective powers where the facts of the case make this necessary. – For the conditions of Art. 21(1)(b) and € SRMR, competence lies with the SRB to begin with (argumentum e contrario from Art. 21(1)(2) SRMR). Once the determination referred to in the previous paragraph has been made, the ball 15 is firmly in the SRB’s court. It now has to decide whether to apply the WDCCI power. In the context of this decision, it also has to be determined whether, in addition to the requirements for WDCCI, requirements for resolution are met (cf. Art. 21(7) SRMR). Where this is the case, the SRB is obliged to also adopt a resolution scheme (Art. 21(9) SRMR in conjunction with Arts. 18(6)-(8) SRMR); the WDCCI can then be applied in conjunction with resolution action. Where this is not the case, the SRB instructs the NRAs to undertake a valuation on the basis of which the WDCCI is calculated and then to effectuate the WDCCI by means of exercising their powers under the national transposition of the BRRD (Art. 21(8) SRMR). Either way, the procedure of the SRB in making these decisions is that of Art. 18 16 SRMR (Arts. 21(1),(7) and (9) SRMR), i.e. requiring endorsement of the SRB proposal by the Commission and approval of the Commission by the Council. The reason for this cumbersome process is the same as in resolution cases, namely, that the Meroni line of case law19 does not permit the SRB, in its capacity as an agency established under Art. 114 TFEU, to exercise the wide discretionary powers which are necessarily involved in both resolution and WDCCI. The exercise of the WDCCI therefore needs to be legitimised by means of the authority of the Commission and the Council as primary law institutions of the Union (for details see supra, → Art. 18). The wording of Arts. 21(1)(2) and (2) SRMR seems to imply that the competence lies 17 categorically with the ECB for all entities within the scope ratione materiæ of the SRMR. This is surprising, considering that for some of these entities (namely the cross-border LSI groups, see Art. 7(2)(b) SRMR), the competent authority which has the up-to-date information for making such an assessment is the respective NCA, not the ECB. There is, therefore, room for a teleological argument according to which, against the wording of Art. 21 SRMR, the competence for making the assessment referred to in Art. 21(1)(2) SRMR lies with the NCA rather than the ECB. The parallel problem arises for the FOLTF assessment under Art. 18 SRMR; see annotations thereto and to Art. 7(2) SRMR.
17 The dichotomy between primary and secondary competence alluded to here is of purely procedural rather than substantive nature: The SRB is competent if and only if the ECB does not exercise its competence. In terms of the substantive effects, a determination made by the SRB is of no lesser quality than one made by the ECB. 18 See fn 15. 19 Case 9/56, Meroni v High Authority, ECLI:EU:C:1958:7.
Andreas Witte
725
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
D. Point of non-viability (Arts. 21(3)-(5)) Arts. 21(3) to (5) SRMR provide further elaborations on the concept of non-viability, which constitutes the key component of the substantive requirements of Arts. 21(1) (a)-(d) SRMR. The logical structure of this elaboration is somewhat confusing because it takes the form of a cascade: Art. 21(3) SRMR elaborates upon the concept of non-viability in Art. 21(1) SRMR; Arts. 21(4) and (5) SRMR, in turn, elaborate upon one of the criteria of Art. 21(3) SRMR. This structure mirrors that of Art. 59 BRRD. 19 Art. 21(3) SRMR offers two alternative criteria for the interpretation of the PONV criterion: – Art. 21(3)(a) SRMR speaks of a situation of a bank or group which meets the definition of failing-or-likely-to-fail (FOLTF). Art. 21(4) SRMR (with an explicit reference to Art. 18(4) SRMR) and Art. 21(5) SRMR (with wording which mirrors Art. 18(4) (a) SRMR) leave no doubt that the interpretation of the FOLTF criterion for this purpose is aligned with that for resolution purposes.20 For details see the annotations to Art. 18 SRMR. – Art. 21(3)(b) SRMR is where the PONV criterion gains particular relevance, because this is where it becomes substantially wider than the resolution criteria under Art. 32 SRMR. It establishes the criterion that the WDCCI power may be exercised where there is no reasonable prospect that any action, including alternative private sector measures or supervisory action (including early intervention measures), other than the write-down or conversion of relevant capital instruments, independently or in combination with resolution action, would prevent the failure of the entity or group within a reasonable timeframe. This wording indicates that the WDCCI is of a subsidiary nature in a twofold sense: Private sector action (e.g. measures provided for by the entity in its own recovery plan) or supervisory action (both of a regular supervisory and of an early intervention nature21) take precedence over the WDCCI and exclude its availability if they offer a reasonable prospect of avoiding failure. The WDCCI is, however, not subsidiary to resolution action.22 The term “failure” as used in Art. 21 SRMR for the event which the WDCCI aims to prevent appears at first glance to be narrower than FOLTF, because Art. 21 SRMR refers only to a certain “failure” rather than only the likelihood of it. However, it must be kept in mind that the wording of Art. 21 SRMR embeds the term “failure” in the context of an overall assessment of whether the future “failure” can be prevented. This necessarily entails an evaluation of a future development. The wording should thus not be overinterpreted in the direction of assuming a narrower breadth of the term “failure” for the purposes of Art. 21 SRMR. The WDCCI is excluded only if the alternative action prevents the future failure within a reasonable timeframe. That term is not defined, and the vague wording as well as Recital 53 SRMR imply that the competent authority has a margin of discre18
20 One cannot help but conclude that the SRMR takes an abundance of caution to make it unambiguously clear that the trigger for resolution is a sufficient (though not necessary) condition for concluding that the trigger for WDCCI is also met. This statement becomes evident, inter alia, in Art. 21(1)(a) SRMR, at a logically lower level in Art. 21(3) SRMR, and at an even lower level also in Arts. 21(4) and (5) SRMR. 21 The most important legal bases for such action are, for entities within the scope of the SRM, Art. 16 SSMR for regular supervisory action and the national transpositions of Arts. 27–29 BRRD for early intervention measures. The authority competent for taking such action would, in both cases, be the supervisory authority, i.e. for the entities that fall within the scope of the SRM in most (but not all) cases the ECB. 22 Rather vice versa: Resolution is subsidiary to the WDCCI. This becomes apparent from Art. 18(1)(b) SRMR.
726
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
tion in determining which timeframe it would consider “reasonable”. It is feasible to draw parallels to Art. 27 BRRD, where the similarly vague term “near future” is, in the (scant) practice available so far, mostly equated with roughly twelve months; but such parallels should not be taken as a hard rule, in particular since crisis situations often require swift action. The competent authority may, without errors of discretion, be of the opinion that the remedial action must have a reasonable prospect of bringing a quick end to the crisis situation in order to prevent the crisis from being dragged on.23 In summary, it can be said that in spite of the lengthy paragraphs devoted by the 20 BRRD and SRMR to the definition of the PONV, this determination leaves a wide margin of discretion to the authority making this determination on the basis of a complex assessment. This discretion is not unlimited, but in line with general case law,24 judicial review of the assessment will be limited to examining the accuracy of the findings of fact and law made by the authority concerned and to verifying, in particular, that the action taken is not vitiated by a manifest error or misuse of powers and that it clearly did not exceed the bounds of its discretion. It becomes clear from the legal texts that any situation which suffices for FOLTF also suffices for PONV, which is unsurprising considering the references in the statutory texts to the possibility to apply resolution tools and the WDCCI in combination. It is, however, also arguable from the legal wording that PONV is the wider term and goes beyond FOLTF, which is entirely plausible considering the subsidiary nature of resolution over which the WDCCI takes precedence if it is sufficient to avoid the failure of the entity or group in question.
E. Write-down or conversion within groups (Art. 21(6)) Art. 21(6) SRMR is a reflection of the “multiple point of entry” approach whereby 21 resolution and related powers such as the WDCCI are applied not only at the level of the parent entity of a group, but at the levels of several entities within the group. 25 It provides that where this approach is applied, capital instruments issued by a subsidiary shall not be converted or written down on worse terms than those issued by the parent. The provision (which corresponds to Art. 59(7) BRRD) thus expresses a preference for loss allocation to the shareholders and creditors of the parent. They should not receive better treatment than those of subsidiaries. The rule applies, however, only to equally ranked instruments. That rank is the one partially defined, partially presupposed by Art. 21(10) SRMR: CET1 ranks lowest, followed by AT1 and T2. As a consequence, it is permissible, for instance, to write down holders of subsidiary-level AT1 at worse terms than holders of parent-level T2. The reference to Art. 59(3)(c) BRRD was copied from Art. 59(7) BRRD, but can be 22 confusing in the SRM context in many cases: Under the provision referred to, the appro23 In Art. 27 BRRD (and similarly, in Arts. 32(4)(a)-(c) BRRD and 18(4)(a)-(c) SRMR), the “near future” relates to the time within which the event that is to be avoided can be expected; in Arts. 59(4)(b) BRRD and 21(3)(b) SRMR, on the other hand, the “reasonable timeframe” refers to the time until the action which is aimed to avoid that event takes effect. In spite of their superficially similar wordings, the concepts of “near future” and “reasonable timeframe” are therefore of fundamentally different nature. 24 In lieu of many other rulings to this effect: Case T-187/06, Ralf Schräder v CPVO, ECLI:EU:T: 2008:511, para. 59. 25 This is to be contrasted with the “single point of entry” approach where powers operate only at the level of the parent. The choice of single versus multiple point of entry is a fundamental one which is to be made for each group individually; it is thus reflected prominently in the resolution planning (Art. 8 SRMR).
Andreas Witte
727
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
priate authorities (i.e., those exercising the WDCCI) of the parent entity and of the subsidiary shall reach a joint decision on the application of the WDCCI. In purely intraSRM relations, this joint decision does not take place since all NRAs involved are subject to the instructions of the SRB, which determines the conversion and write-down rates; the SRB would not be expected to reach a joint decision with itself.26 The joint decision does, however, remain in place with respect to WDCCIs that concern both the SRM and non-SRM EEA Member States, in which case the SRM will enter into a joint decision with the non-SRM EEA resolution authority.27
F. Interplay with resolution (Arts. 21(7)-(9)) Art. 21(7) SRMR obliges the SRB to decide, if the requirements for a WDCCI are met, whether that instrument is to be applied independently or in conjunction with resolution action. Since both resolution action and the WDCCI decision follow Art. 18 SRMR procedure, the two can be decided “in one go”. The following bifurcation should be obvious but is nonetheless governed in detail in the text of the SRMR. If the WDCCI requirements are met but the resolution requirements are not, the SRB instructs the NRA to effectuate this WDCCI by means of exercising its powers under the national BRRD transposition, undertaking a valuation of assets and liabilities in accordance with Art. 20(8) SRMR. If the requirements for both WDCCI and resolution are met, a resolution scheme is adopted together with the WDCCI decision (Art. 21(9) SRMR). 24 Subparas. 2 and 3 were added to para. 7 by the banking package amendments of 2019. Subpara. 2 provides that in group cases where entities within a group that is under resolution purchased or hold each other’s capital instruments or eligible liabilities, the WDCCI shall be applied at parent level. This is intended to ensure that, in economic effect, the losses are upstreamed to the entity which is under resolution. The provision is thus, ultimately, another embodiment of the “single point of entry” objective whereby, in spite of the separate legal personalities of the individual group entities under corporate law, the group should, from an economic perspective, be seen as a monolithic whole and losses concentrated at the level of the resolution entity, which will typically be its parent. 25 By contrast to subpara. 2 of para. 7, subpara. 3 governs a case where the WDCCI is used independently rather than in conjunction with resolution action. It stipulates that in such scenarios, the valuation which is mandatory in resolution pursuant to Art. 20(16) has to be carried out also in the WDCCI. The purpose of this valuation is to permit the subsequent comparison for assessing whether the “no creditor worse off than in insolvency” condition is complied with (see supra, → para. 8). If this is not the case, those creditors which are worse off than they would be in insolvency are entitled to compensation for the shortfall pursuant to Art. 76(1)(e) SRMR. The provision is, thus, another embodiment of the idea that the WDCCI, in spite of legal differences, is economically very similar to the bail-in in resolution, where the same rules apply. The same principle is also emphasised in para. 7a. 26 The reference in Art. 21(7a) to Art. 72c(1) of the CRR (as amended by the banking package) is confusingly written. It means that the requirement of Art. 72c(1) of the CRR (remaining maturity of at least one year) does not have to be met for a liability to fall within the scope of the WDCCI. In other words, during the going concern liabilities with a liability of less than one year do not (as per Art. 72c(1) of the CRR) count towards the fulfilment of the minimum liabilities requirement (“MREL”) (because legislators as23
26 27
728
Art. 31(2) SRMR. Art. 5(1) SRMR and Recital 91 SRMR in conjunction with Arts. 59(3)(c) and 92 BRRD.
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
sume that it is not sufficiently certain that these liabilities will be available for loss absorption when the need arises), but that they are still subject to the WDCCI to the extent they are, as a matter of fact, available at the time of WDCCI. Para. 7b further confirms the increased alignment between the WDCCI and resolu- 27 tion (especially the bail-in tool) which has repeatedly been mentioned as one of the key takeaways from the 2019 banking package reform. It states, in essence, that loss absorption that has been achieved by means of the WDCCI counts towards the minimum amount of loss absorption which must have been achieved via bail-in before the Single Resolution Fund may contribute monies. Paras. 8 and 9 are of little substantive content. In effect, they reaffirm that the 28 WDCCI may apply either in conjunction with resolution (para. 9) or without it (para. 8), and that in either case the determination of WDCCI is to be made under the same procedure as for resolution (Art. 18). A substantive conclusion that can be inferred from para. 8 is that, as far as relations to private investors are concerned, the legal basis for the write-down or conversion of instruments or liabilities which they hold is not Art. 21 SRMR but rather the national transposition of the BRRD, which the NRA applies as against them in fulfilment of the SRB’s instruction to the NRA. This has implications for the appropriate avenue of judicial review for the exercise of the WDCCI (see infra, → para. 33 and footnotes thereto).
G. Result to be achieved (Art. 21(10)) Art. 21(10) SRMR defines the outcome which the WDCCI is legally mandated to achieve, including, most importantly, the rank of capital instruments. It requires that, first, CET1 (usually shares) is reduced in proportion to the losses and the extent of its capacity. Since CET1 is not a “relevant capital instrument” for the purposes of WDCCI (see supra, → para. 9), this is not, strictly speaking, a case of WDCCI, but must take place ahead of the WDCCI. The necessary powers to effectuate this cancellation of instruments of ownership are provided in the transposing legislation of Art. 47(1)(a) BRRD. Following this treatment of CET1 instruments, the next in line to bear losses are holders of AT1. It has to be either written down or converted into CET1, or both. The choice between these options, as well as the amount of the write-down or the ratio of conversion, is to be determined on the basis of a valuation performed under Art. 20 SRMR. Following this treatment of AT1 instruments, T2 is next in line. It, too, has to be written down or converted to the maximum extent possible to achieve the overall amount of write-down and conversion determined under Art. 20 SRMR valuation that has not yet been achieved by means of writing down or converting (or, in the case of CET1, reducing) the instruments which, in this pecking order, ranked below it (i.e. were converted, written down or reduced before). Liabilities other than AT1 and T2 can, following the 2019 amendments, also be subject to the WDCCI; legislatively, this was achieved, in para. 10, by the insertion of lit. d. The substantive difference to the situation before this change is, however, not as significant as it may seem at first. Even under the previous situation, it was clear that the same economic outcome could be achieved by combining the WDCCI with resolution: If, following the WDCCI, the entity or group in questions is still FOLTF, it is possible to initi-
Andreas Witte
729
29
30
31
32
Art. 21 SRMR
Write-down and conversion of capital instruments or eligible liabilities
ate resolution immediately thereafter.28 In the context of this resolution, the bail-in tool (Art. 27 SRMR) becomes available (together with the other resolution tools), which extends to any liability not excluded under Art. 27(3) or Art. (5) SRMR. Lit. d now provides an avenue for achieving the same result directly via the WDCCI without the need for cumulation with a bail-in.
H. Action by the NRAs (Art. 21(11)) 33
Art. 21(11) SRMR obliges the NRAs to implement the instructions of the SRB by exercising the WDCCI in accordance with Art. 29 SRMR. The doctrinal consequence is that, legally speaking, the legal basis for the interference with the rights of holders of relevant capital instruments is not Art. 21 SRMR, but rather the national transposition of the BRRD (Art. 59 BRRD for write-down or conversion of AT1 and T2, Art. 47(1)(a) SRMR for the cancellation of shares under the treatment of CET1). The structure is, as was already mentioned in para. 4, that of a two-step process.29 The SRB adopts a decision instructing the NRA to exercise its powers; then the NRA follows 30 this instruction by adopting a national measure on the basis of the national transposition of the BRRD. This national measure, rather than the SRB decision, is from where the interference with investors’ rights derives its legal legitimacy. This legal edifice is somewhat surprising, since the status of the SRMR as a directly applicable act of Union law31 would have made it possible to include legal bases in it which would allow for a direct interference with investors’ rights by the SRB decision itself without recourse to an act adopted by the NRA. The legislators of the SRMR decided against this technique.
28 Question ID 2016_2956 on the EBA’s Single Rulebook Q&A, accessible at . The similarities between the two become evident also from the statutory definition of the bail-in tool in Arts. 3(1)(33) SRMR and 2(1)(57) BRRD. 29 This two-step structure has an impact on the availability and avenue of judicial review: Investors affected by a WDCCI who seek judicial review should challenge the national act of the NRA in national courts in order to avoid finality of this act in accordance with national administrative law. The national court has jurisdiction to review the NRA act, but since this NRA act was adopted in fulfilment of the SRB instruction, annulling it would be tantamount to an annulment of the SRB decision. As a result, the national court is obliged to refer the question to the Court of Justice of the EU by means of Art. 267 TFEU if it intends to strike down the NRA act: Case 314/85, Foto-Frost v Hauptzollamt Lübeck-Ost, ECLI:EU:C: 1987:452. Similarly, the requirements for a suspension of the NRA act by the national courts by way of interim relief are aligned to the (very strict) requirements for interim relief in Union law: Joined Cases C-143/88 and C-92/89, Zuckerfabrik Süderdithmarschen AG v Hauptzollamt Itzehoe and Zuckerfabrik Soest GmbH v Hauptzollamt Paderborn, ECLI:EU:C:1991:65. – A direct challenge of the SRB decision in the Court of Justice under Art. 263 TFEU will usually be admissible but insufficient, since it does not eliminate the risk of the NRA measure achieving finality in accordance with national administrative law. For the analogous situation in supervisory law, where a two-step edifice can also occur, see Witte, JFR 1/2 (2015), 226. 30 The use of the term “implement” in Art. 29 SRMR is unfortunate, because it is a hopelessly overused word in European law terminology with a wide range of possible meanings. It is often used in order to refer to the national legislative act of adopting a statute transposing a Directive into national law (Art. 288 TFEU). In the present case, however, it refers to the administrative act of the adoption of a measure, by an NRA on the basis of already existing national legislation, bringing into force the effects prescribed by the SRB decision. This act is essentially executive rather than legislative in nature. 31 Art. 288(2) TFEU.
730
Andreas Witte
Write-down and conversion of capital instruments or eligible liabilities
Art. 21 SRMR
I. Case study: The Banco Popular case To give a flavour of the interplay between the WDCCI and resolution action, a brief summary of the resolution of Banco Popular Español S.A. in June 2017 will be given.32 This Spanish credit institution, whose competent supervisory authority was the ECB and whose NRA the Spanish FROB, was valued, as per the Art. 20 SRMR valuation, at a negative 2bn euros in the baseline scenario and a negative 8.2bn euros in the most adverse scenario. It was determined to be FOLTF by the ECB. In a first step, FROB, following an instruction from the SRB, cancelled the entirety of Banco Popular’s shares, with an aggregate amount of about 2.1bn euros (fully paid-up). This was done in the exercise of the Spanish transposition of Art. 47(1)(a) BRRD. In order to keep the overall equity of Banco Popular constant, a voluntary reserve was established on the equity & liabilities side of its balance sheet in which this cancelled amount was included. Subsequently, the entirety of the bank’s AT1 capital, consisting of six different emissions with an aggregate amount of about 1.3bn euros, was converted into share capital of that amount.33 This was an exercise of the WDCCI and constituted, from the corporate law perspective, a capital increase. Immediately thereafter, these newly created shares were also written down to zero, again in the exercise of WDCCI and again accompanied by the establishment of a voluntary reserve on the equity & liabilities side of the balance sheet. In a fourth step, the outstanding T2 capital, consisting of eight emissions totalling about 684mn euros, were, in the exercise of WDCCI and constituting a capital increase from the corporate law perspective, converted into shares of that amount. These actions had left Banco Popular as an entity with a share capital of 684mn euros.34 Subsequently, resolution tools were applied, whereby FROB undertook an open tender procedure in which interested third parties could, under appropriate confidentiality arrangements, obtain information about Banco Popular and submit bids. Only one bid, by Banco Santander, was submitted, and FROB (as instructed by the SRB) used its powers under the Spanish transposition of Art. 38 BRRD to transfer all the shares which had resulted from the conversion of T2 into shares to Banco Santander. This did not require the consent of the shareholders (the converted T2 holders), as it occurred on the basis of a statutory power. The share price was a nominal one euro.35 Following that transfer, Santander undertook a 7.1bn capital increase to ensure the proper capitalisation following the integration of Banco Popular (which continued to exist as a legal entity) in its scope of consolidation.36 The Banco Popular case study demonstrates that, even though WDCCI and resolution tools are legally distinct regimes, they can (and often will) be used in conjunction, within one process even though at legally distinct “logical seconds”. News coverage of 32 This outline is based on the information released by FROB, available at . 33 It is emphasised by FROB (p. 9 of the document cited in the previous fn.) that at the time of this conversion, there were no shareholders in the company, pre-existing shareholders already having been written off. As a result, the sensitive question of the conversion rate (how many shares do AT1 holders receive for the nominal of their claims, thereby diluting pre-existing shareholders?) could be avoided (see last sentence of Art. 47(1) BRRD). 34 The necessary changes to the bylaws of Banco Popular were effectuated directly by FROB on a statutory legal basis, avoiding the need for a decision of the organs of Banco Popular. 35 Which did not prevent FROB from ruling, in accordance with Arts. 20(6) SRMR and 38(4) BRRD, how that euro was to be used: First for the recovery of the costs of the SRB and FROB, then to the holders of the affected ex-T2 instruments. 36 .
Andreas Witte
731
34
35
36
37
Art. 22 SRMR
General principles of resolution tools
the events did not draw a clear distinction, but presented the entire process as one set of actions taken to “bail-in” (in a nontechnical sense) Banco Popular’s investors and transfer the remaining entity to another bank, allowing the continuation of the activities. The 2019 “banking package” reform further approximated the WDCCI to a bail-in under resolution.
Art. 22 SRMR General principles of resolution tools 1. Where the Board decides to apply a resolution tool to an entity or group referred to in Article 7(2) or to an entity or group referred to in Article 7(4)(b) and (5) where the conditions for the application of those paragraphs are met, and that resolution action would result in losses being borne by creditors or their claims being converted, the Board shall instruct the national resolution authorities to exercise the power to write down and convert relevant capital instruments in accordance with Article 21 immediately before or together with the application of the resolution tool. 2. The resolution tools referred to in point (b) of Article 18(6) are the following: (a) (b) (c) (d)
the sale of business tool; the bridge institution tool; the asset separation tool; the bail-in tool.
3. When adopting the resolution scheme referred to in Article 18(6), the Board shall take into consideration the following factors: (a) the assets and liabilities of the institution under resolution on the basis of the valuation pursuant to Article 20; (b) the liquidity position of the institution under resolution; (c) the marketability of the franchise value of the institution under resolution in the light of the competitive and economic conditions of the market; (d) the time available. 4. The resolution tools shall be applied to meet the resolution objectives specified in Article 14, in accordance with the resolution principles specified in Article 15. They may be applied either individually or in any combination, except for the asset separation tool which may be applied only together with another resolution tool. 5. Where the resolution tools referred to in point (a) or (b) of paragraph 2 of this Article are used to transfer only part of the assets, rights or liabilities of the institution under resolution, the residual entity referred to in Article 2 from which the assets, rights or liabilities have been transferred, shall be wound up under normal insolvency proceedings. 6. The Board may recover any reasonable expenses properly incurred in connection with the use of the resolution tools or powers in one or more of the following ways: (a) as a deduction from any consideration paid by a recipient to the institution under resolution or, as the case may be, to the owners of instruments of ownership; (b) from the institution under resolution, as a preferred creditor; or (c) from any proceeds generated as a result of the termination of the operation of the bridge institution or the asset management vehicle, as a preferred creditor.
732
Jens-Hinrich Binder
Art. 22 SRMR
General principles of resolution tools
Any proceeds received by national resolution authorities in connection with the use of the Fund shall be reimbursed to the Board. Bibliography Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements, and Tools’ in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, Oxford 2016), Ch. 2; Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014); Tobias H. Tröger, ‘Too Complex to Work: A Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime’, JFR 4 (2018), 35. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Mandatory write-down and conversion of capital instruments (Art. 22(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The toolbox (Art. 22(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Aspects to be taken into account for the adoption of a resolution scheme (Art. 22(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. General principles for the application of the toolbox (Art. 22(4) SRMR) . . . . V. Residual entity to be wound up under normal insolvency proceedings in the case of partial transfers (Art. 22(5) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Recovery of expenses by the SRB (Art. 22(6) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . .
2 2 3 4 9 14 15
A. Introduction Art. 22 SRMR – in part, a verbatim adaptation of Art. 37 BRRD – defines, or pur- 1 ports to define, ‘general principles’ for the application of the resolution tools specified in Arts. 24‑27 SRMR. To a considerable extent, however, the provision merely ties together more special provisions, and reiterates principles expressed elsewhere in the Regulation. This is certainly the case with regard to the principle of mandatory write-down and conversion of capital instruments in Art. 22(1) SRMR (see infra, → para. 2) and with the list of resolution tools in Art. 22(2) SRMR (see infra, → para. 3), which do not add any substantive content to the relevant provisions elsewhere. Specifically, Art. 22 SRMR does not add substance to the ‘general principles’ for the operation of the SRMR laid down in Art. 6 SRMR, or the ‘general principles governing resolution’ in Art. 15 SRMR. By contrast, Art. 22(3) SRMR, the only subpara. without precedent in Art. 37 BRRD, defines a number of aspects to be considered by the SRB when initiating resolution actions under the procedure set out in Art. 18 SRMR which have not expressly been addressed in other provisions, although most are so evident that they hardly need special mention (see infra, → paras. 4–8). In terms of their relevance for the design of resolution actions, the most important provisions are included in Art. 22(4)-(6) SRMR. Importantly, Art. 22(4) SRMR stipulates that the resolution tools, with the exception of the asset separation tool (Art. 26 SRMR), may be used in any combination whatsoever (see infra, → paras. 9–13). Art. 22(5) SRMR then stipulates the general rule that the entity under resolution, following a partial transfer of assets, rights or liabilities pursuant to Arts. 24 or 25 SRMR, has to be wound up under normal insolvency proceedings (see infra, → para. 14). Finally, Art. 22(6) SRMR lays down principles for the recovery of expenses incurred by the SRB in the course, and as a result, of resolution (see infra, → para. 15).
Jens-Hinrich Binder
733
Art. 22 SRMR
General principles of resolution tools
B. The principles I. Mandatory write-down and conversion of capital instruments (Art. 22(1) SRMR) 2
Art. 22(1) SRMR requires the SRB to direct the NRAs to exercise their write-down and conversion powers under Art. 21 SRMR ‘immediately before or together with the application of the resolution tool’, in all cases where the application of a resolution tool ‘would lead to losses being borne by creditors or their claims being converted’. This merely repeats the conditions for the application of the write-down and conversion powers stipulated in Art. 21(1) SRMR (supra, → Art. 21 paras. 7-12), the hierarchy of claims defined in Art. 17(1) SRMR in conjunction with Art. 48 BRRD (supra, → Art. 17 paras. 20–28), as well as the principle that implementation of resolution actions rests with the NRAs under the direction of the SRB (Art. 29 SRMR). It should be noted that the treatment of shareholders and other holders of instruments of ownership issued by the institution under resolution is not addressed by Art. 22(1) SRMR, but follows from Art. 17 SRMR in conjunction with Arts. 47 and 48(1)(a) BRRD. For further information, readers are referred to the commentaries to these provisions.
II. The toolbox (Art. 22(2) SRMR) 3
Art. 22(2) SRMR lists the four resolution tools, namely (a) the sale of business tool (as specified in Art. 24 SRMR), (b) the bridge institution tool (Art. 25 SRMR), (c) the asset separation tool (Art. 26 SRMR), and (d) the bail-in tool (Art. 27 SRMR). Beyond the definition of the list of resolution tools, Art. 22(2) SRMR – also referred to in Art. 3(1)(9) SRMR – has no substantive content.
III. Aspects to be taken into account for the adoption of a resolution scheme (Art. 22(3) SRMR) 4
Art. 22(3) SRMR, which itself has no precedent in the BRRD, lists a number of aspects for consideration by the SRB when adopting resolution schemes under Art. 18 SRMR. Effectively, the aspects reflect factual constraints for the design and implementation of resolution actions bound to be of relevance in all such actions. Their significance is almost too obvious as to merit special attention. Taken together, the aspects listed in Art. 22(3) SRMR can be said to be key determinants for the choice and calibration of resolution tools in the circumstances, all the more so because – unlike structural aspects relating to the business model, funding arrangements and group structures – they are constantly changing, highly interdependent with the respective market environment, and cannot therefore be anticipated with certainty prior to the financial problems of the relevant entity. In fact, depending on the circumstances, unanticipated developments in relation to the aspects identified in Art. 22(3) SRMR may well require ad hoc changes to the strategies and approaches identified in resolution planning, and thus severely impair the authorities’ capacity to deal with crisis scenarios swiftly and effectively. An illus-
734
Jens-Hinrich Binder
Art. 22 SRMR
General principles of resolution tools
trative case in point is the resolution of Banco Popular Español S.A., in 2017, which deviated substantially from the preferred strategy identified in earlier resolution plans. 1 Among the various aspects listed, the assets and liabilities of the institution under resolution (Art. 22(3)(a) SRMR), are the most obvious determinant for the choice and calibration of resolution actions. This does not just apply in the case of a bail-in, whose dimension is a direct function of the size of the financial problems encountered by the institution under resolution (cf. Art. 27(13) SRMR; supra, → Art. 27 paras. 32-41), but will also determine whether and on which conditions, in the circumstances, the institution could alternatively be transferred to a private acquirer under a sale of business transaction pursuant to Art. 24 SRMR. In addition to balance sheet position, the liquidity position of the institution under resolution (Art. 22(3)(b) SRMR) can also be expected to play a crucial role in the design and calibration of resolution actions. Specifically, the liquidity reserves of the relevant institution will define the short-term viability of the ongoing operations of the institution, and thus, ultimately, the urgency of the matter. If the liquidity position is already severely impaired, e.g., because of depositors or short-term debt investors running on the bank, it may not even be possible to postpone the implementation of resolution actions to a weekend, which, as a rule, is preferable because that would allow sufficient time to implement credible solutions outside trading hours. The resolution of Banco Popular Español S.A. is a case in point also in this respect, in that the timing of the resolution, in the middle of a working week, was attributable to a ‘significant deterioration of the bank’s liquidity position’ in the immediate run-up to resolution.2 It should be noted that the relevant institution’s liquidity position is likely to depend on a number of (interrelated) variables, including the quality of its balance sheet, the availability of collateral and, thus, short-term funding options, the perception of market participants as to the institution’s activities and risk profile, and the franchise value. With regard to the marketability of the franchise value of the institution under resolution, Art. 22(3)(c) SRMR itself recognises that this position will change ‘in the light of the competitive and economic conditions of the market’. Specifically, the franchise value probably has to be expected to change in view of the available information on the balance sheet and liability position, and market reactions to that information. The ‘marketability’ will be relevant, in particular, in cases where a sale of business is to be pursued. Finally, the time available, addressed in Art. 22(3)(d) SRMR, is indeed a crucial determinant for the design and implementation of resolution actions. Just like the other aspects listed in Art. 22(3) SRMR, this position cannot, and should not, be interpreted as separate from the others. As noted before, the time available for the design and initiation of the resolution actions will crucially determine the financial position in general and the liquidity position in particular, which in turn will be the function of a variety of different variables (see supra, → para. 6) that may change rapidly in a dynamic crisis scenario.
1 Contrast SRB, Decision of 7 June 2017 concerning the adaption of a resolution scheme in respect of Banco Popular Español, S.A. (SRB/EES/2017/08), with id., ‘Banco Popular – 2016 Group Resolution Plan’, . 2 Cf. ECB, Press Release: ‘ECB determined Banco Popular Español S.A. was failing or likely to fail’ (7 June 2017), .
Jens-Hinrich Binder
735
5
6
7
8
Art. 22 SRMR
General principles of resolution tools
IV. General principles for the application of the toolbox (Art. 22(4) SRMR) 9
In very general terms, Art. 22(4) SRMR, first, stipulates that the resolution tools ‘shall be applied to meet the resolution objectives specified in Art. 14 [SRMR], in accordance with the resolution principles specified in Art. 15 [SRMR]’. Given that the very term ‘resolution’ is defined, in Art. 2(1)(1) BRRD in conjunction with Art. 3(2) SRMR, as ‘the application of a resolution tool (…) in order to achieve one or more of the resolution objectives’, and given that the need to observe the ‘resolution principles’ in this context follows directly from the wording of Art. 15 SRMR, this provision is clearly redundant. More important, by contrast, is the principle expressed in the second sentence of Art. 22(4) SRMR, whereby the resolution tools ‘may be applied either individually or in any combination, except for the asset separation tool which may be applied only together with another resolution tool’.
As illustrated by this principle, ‘resolution’ under the SRMR (as well as under the BRRD), unlike winding-up in traditional insolvency laws, is not conceived as a fix procedure, but rather as a (largely open-ended) process, with maximum discretion for the resolution authority in order to ensure as much flexibility as possible for the protection of the public interest. This is fully in line with applicable international standards3 and, at the same time, highlights the crucial responsibility of the resolution authority in terms of both the economic outcome of resolution and the impact on stakeholders. 11 Importantly, the choice between the different resolution tools, and the calibration of any combination between them, is only restricted in a few respects, including, in particular, the requirement that a minimum of 8 % of eligible liabilities be bailed-in in Art. 27(7)(a) SRMR (infra, → Art. 27 paras. 159-165) and the limitations on the availability of the asset separation tool stipulated by Art. 22(4) SRMR. As a result, it is obvious that each resolution case is bound to be more or less unique in nature, always reflecting the SRB’s assessment of what outcome would serve best the resolution objectives defined in Art. 14 SRMR. In allowing a maximum degree of discretion in this regard, Art. 22(4) SRMR, inevitably, also leaves a high degree of uncertainty in legal and economic terms. While resolution plans have to indicate resolution strategies (cf. Art. 8(9)(j) SRMR) and thus provide at least some indication of how the relevant institution could be dealt with in resolution, the relevant decisions always have to be taken (and revised) ad hoc, in view of changes both within the institution and in the market environment and taking into account the aspects listed in Art. 22(3) SRMR (see supra, → paras. 4–8). 12 The resulting uncertainty will be a problem particularly within the context of the bail-in tool, as it renders ex ante pricing of designated bail-in-able debt instruments highly complex, if not outright impossible.4 Whether or not this could, and should, be avoided by means of a more prescriptive approach is an open question, given the need to adjust to highly diverse business models, organisational and financial arrangements and, as the case may be, complex coordination problems characteristic of internationally active banking groups, but the consequences are problematic nonetheless. 13 The special status of the asset separation tool (Art. 26 SRMR), in this context, reflects the insight that its application, by definition, will relieve the institution in resolution from problem assets and thus result in undue benefits both for the entity itself and 10
3 See, in particular, FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014), Principle 3.2. And see, for further discussion, Binder, in: Binder and Singh (eds), Bank Resolution – The European Regime (2015), para. 2.18. 4 See, for a detailed discussion, Tröger, JFR 4 (2018), 35, at pp. 47–69.
736
Jens-Hinrich Binder
Art. 22 SRMR
General principles of resolution tools
its stakeholders. These have to be offset through the simultaneous application of other resolution tools that should mitigate the resulting competitive advantage.5
V. Residual entity to be wound up under normal insolvency proceedings in the case of partial transfers (Art. 22(5) SRMR) Pursuant to Art. 22(5) SRMR (adapted from Art. 37(6) BRRD), in the case of a partial 14 transfer of assets, rights or liabilities of the relevant institution either under the sale of business tool (Art. 24 SRMR) or to a bridge institution (Art. 25 SRMR), the residual entity has to be ‘wound up under normal insolvency proceedings’. The principle directly follows from the policy to simulate the economic outcome of traditional insolvency procedures as far as possible, and to substitute such procedures only where their effects would be incompatible with the overarching objective to protect systemic stability (supra, → Art. 15 paras. 3–7).6 As a partial transfer of assets, rights or liabilities under Arts. 24 or 25 SRMR are meant to insulate the systemic parts of the relevant business, the residual entity usually can be liquidated without negative implications for systemic stability. At the same time, the winding-up will facilitate the allocation of losses to shareholders and residual creditors under general insolvency law, which is fully consistent with the general principles governing the allocation of losses stipulated in Art. 15(1)(a) and (b) SRMR.
VI. Recovery of expenses by the SRB (Art. 22(6) SRMR) Art. 22(6) SRMR stipulates a number of options for the recovery of ‘reasonable ex- 15 penses’ by the SRB. In the case of a sale of business under Art. 24 SRMR, these may be deducted from the consideration paid by the recipient under Art. 24(2)(b) SRMR in conjunction with Art. 38(2), (3) and (4) BRRD. Alternatively and if other resolution tools are applied, the expenses may be claimed by the SRB, as a preferred creditor, from the institution under resolution (Art. 22(6)(b) SRMR). Finally, the expenses may be deducted from the proceeds generated as a result from the termination of a bridge institution (see Art. 25(2)(a) SRMR in conjunction with Art. 38(5)-(9) BRRD) or the termination of an asset management vehicle (which, as such, is not subject to specific provisions in either Art. 26 SRMR or Art. 42 BRRD). Pursuant to Art. 20(6)(a) SRMR, the expenses incurred by the SRB have to be taken into account also by the valuation for the purposes of resolution. It is worth noting that Art. 22(6) SRMR, beyond the qualification that all expenses be ‘reasonable’, does not specify any limits for the recovery, and does not prescribe any procedural aspects of the recovery either. This may provoke litigation by aggrieved creditors of the entity in resolution, who may claim that excessive expenses unduly diminished their positions in connection with claims for compensation under Art. 20(16)-(18) SRMR as well as Art. 76(1)(e) SRMR (cf. supra, → Art. 15 para. 27). Finally, Art. 22(6)(2) SRMR requires that proceeds received by NRAs in connection 16 with the use of the SRF be reimbursed to the SRB. Such payments can arise in a number of scenarios for the use of the SRF defined in Art. 76(2) SRMR.
5 6
See Recital 72 SRMR (Recital 66 BRRD). Cf. Recital 59 SRMR.
Jens-Hinrich Binder
737
Art. 23 SRMR
Resolution Scheme
Art. 23 SRMR Resolution Scheme* The resolution scheme adopted by the Board under Article 18 shall establish, in accordance with any decision on State aid or Fund aid, the details of the resolution tools to be applied to the institution under resolution concerning at least the measures referred to in Article 24(2), Article 25(2), Article 26(2) and Article 27(1), to be implemented by the national resolution authorities in accordance with the relevant provisions of Directive 2014/59/EU as transposed into national law, and determine the specific amounts and purposes for which the Fund shall be used. The resolution scheme shall outline the resolution actions that should be taken by the Board in relation to the Union parent undertaking or particular group entities established in the participating Member States with the aim of meeting the resolution objectives and principles as referred to in Articles 14 and 15. When adopting a resolution scheme, the Board, the Council and the Commission shall take into account and follow the resolution plan as referred to in Article 8 unless the Board assesses, taking into account the circumstances of the case, that the resolution objectives will be achieved more effectively by taking actions which are not provided for in the resolution plan. In the course of the resolution process, the Board may amend and update the resolution scheme as appropriate in light of the circumstances of the case. For amendments and updates the procedure laid down in Article 18 shall apply. In addition, the resolution scheme shall provide, where appropriate, for the appointment by the national resolution authorities of a special manager for the institution under resolution pursuant to Article 35 of Directive 2014/59/EU. The Board may establish that the same special manager is appointed for all of the entities affiliated to a group where that is necessary in order to facilitate solutions redressing the financial soundness of the entities concerned. Bibliography Jérôme Deslandes, Cristina Dias and Marcel Magnus, ‘Liquidation of Banks: Towards an ‘FDIC’ for the Banking Union?’, IPOL Economic Governance Support Unit (2019); Anna Gelpern and Nicolas Veron, ‘An Effective Regime for Non-viable Banks: US Experience and Considerations for EU Reform’, IPOL Economic Governance Support Unit (2019); Fernando Restoy, ‘How to improve crisis management in the banking union: a European FDIC?’, Financial Stability Institute (2019).
A. Introduction Art. 23 SRMR requires first that, where resolution action involves the granting of State aid pursuant to Art. 107(1) TFEU or of SRF aid, the resolution scheme adopted in accordance with Art. 18 SRMR complies with any decision on State aid or SRF aid adopted in accordance with Art. 19 SRMR. 2 As clarified under Art. 19(1) SRMR, in this case, the adoption of the resolution scheme should not take place until such time as the Commission has adopted a positive or conditional decision concerning the compatibility of the use of such aid with the internal market. Therefore, in order to avoid potential inconsistencies between the two de1
* The information and views set out in this publication are those of the author and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of this study. Neither does the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein.
738
Emiliano Tornese
Art. 23 SRMR
Resolution Scheme
cisions, it is important to ensure sufficient ex ante cooperation between the Board and the Commission in accordance with Art. 30 SRMR. As referred to in Art. 30 SRMR, such ex ante cooperation would also be important in the resolution planning phase under Art. 8 SRMR. This is because when adopting a resolution scheme, the Board, the Council and the Commission should take into account and follow the resolution plan as referred to in Article 8 – also sometimes called a “Presumptive Path” – unless the Board assesses, taking into account the circumstances of the case, that the resolution objectives will be achieved more effectively by taking actions which are not provided for in the resolution plan.1 In fact, the resolution scheme should outline the resolution actions that should be taken by the Board with the aim of meeting the resolution objectives and principles as referred to in Arts. 14 and 15 SRMR. The resolution objectives and principles referred to in Arts. 14 and 15 SRMR should also be the key criteria for the assessment of the resolution scheme by the European Commission under Art. 18 SRMR. Under Art. 23 SRMR, the resolution scheme should establish the details of the resolution tools to be applied to the institution under resolution. These should “include2” “at least3” the sale of business tool (Art. 24(2) SRMR), the bridge institution tool (Art. 25(2) SRMR), the bail-in tool (Art. 27(1) SRMR), and the asset separation tool (Art. 26(2) SRMR). The scheme should also make it possible to assess whether the conditions for the write-down and conversion of capital instruments are met.4 The wording seems to suggest that the Board could use tools other than the ones mentioned above in the SRMR. This could include for example the instruction to the NRAs, in the event of a partial transfer of assets of an institution under resolution to a private purchaser or to a bridge institution, to wind up under normal insolvency proceedings the residual part of the institution under resolution. 5 However, the Meroni caselaw of the CJEU6 would limit any further extension of the scope of the powers of the Board. Art. 18(6) SRMR seems to exclude any direct liquidation tool 7 for the Board in case the public interest test is not met and the institution is not placed under resolution. The SRMR provides full discretion to the Board on the choice of the resolution tool in the resolution plan and the resolution scheme taking into account the circumstances of the case. Recital (85) of the SRMR clarifies that the best method of resolution should be chosen depending on the circumstances of the case and for that purpose all of the resolution tools should be available. Art. 22(4) SRMR only prescribes that the resolution tools should be applied to meet the resolution objectives specified in Art. 14 SRMR, in accordance with the resolution principles specified in Art. 15 SRMR, and they may be applied either individually or in any combination, except for the asset separation tool which may be applied only together with another resolution tool – to prevent an undue competitive advantage for the failing entity.8 However, it is worth considering whether there should be in theory a preferred order among the tools, as a guide to the Board and Recital (67) of the SRMR. Recital (66) of the SRMR. 3 Art. 23 SRMR. 4 Recital (66) of the SRMR. 5 Art. 22(5) SRMR. 6 See Case 9-56, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community, ECLI:EU:C:1958:7. The Meroni judgment was issued in the context of the European Coal and Steel Community (ECSC) Treaty and concerned the validity of decisions of bodies established under Belgian private law adopted on the basis of a conferral of powers by the ECSC High Authority. 7 Fernando Restoy, Financial Stability Institute (2019); Deslandes, Dias and Magnus, IPOL Economic Governance Support Unit (2019); Gelpern and Veron, IPOL Economic Governance Support Unit (2019). 8 Recital (72) of the SRMR. 1
2
Emiliano Tornese
739
3
4
5
6
Art. 23 SRMR
7
8
9
10
Resolution Scheme
the NRAs when preparing the resolution plan and the resolution scheme: in particular, whether the sale of business tool should always be the preferred option and thus incentivised as a strategy, whether the bridge institution tool should be used when there is not a buyer and pending an IPO or sale of the new legal entity, whether the open bank bailin should be the last resort option to restructure a bank as a going concern when it is “too big to be sold” unless it complements the other two options,9 and whether the asset separation tool could be combined only with the resolution tools or also with other national liquidation tools. Under Art. 18(9) SRMR, the resolution scheme should be addressed to the relevant NRAs and should instruct those authorities, which should take all necessary measures and resolution actions to implement it in accordance with Art. 29 SRMR, by exercising resolution powers in accordance with the relevant provisions of BRRD as transposed into national law. As the implementation of the resolution scheme might involve the application of a series of complementary national laws, which are not harmonized at the Union level, it is more efficient that the implementation of the resolution scheme into national law is entrusted to the relevant national authorities. This implies that national judicial authorities is competent, in accordance with their national law, to review the legality of measures adopted by the relevant resolution authorities to implement the resolution scheme, as well as to determine their non-contractual liability. 10 Instead, the CJEU has jurisdiction to review the legality of decisions directly adopted by the Board, the Council and the Commission, in accordance with Art. 263 TFEU, as well as for determining their non-contractual liability. In addition, the Court of Justice has, in accordance with Art. 267 TFEU, competence to give preliminary rulings upon request of national judicial authorities on the validity and interpretation of those decisions.11 The resolution scheme should also determine the specific amounts and purposes for which the SRF should be used. The SRMR is prescriptive in defining the powers of the Board on the use of the SRF not only for political considerations, but also to comply with the requirements of the Meroni case-law.12 According to Recital (101) SRMR, the SRF should not be used for any purpose other than the efficient implementation of resolution tools and resolution powers. And, although not defined in the Regulation, the least-cost principle is required by Recital (85) SRMR, which states that “when deciding on the resolution scheme, the Board, the Council and the Commission should, to the extent possible, respectively opt for the scheme that is the least costly for the SRF”. A clear definition of the least cost principle in the Regulation would complement the requirements of Art. 27(7) and (8) SRMR and would certainly help the Board in determining the use of the SRF to support the resolution action in accordance with Arts. 18(6) and 76 SRMR. A separate and open question is whether, on the basis of the wording of Arts. 18(6) and 23 SRMR, the Board has the obligation to assess and determine if the use of the SRF is possible, necessary and proportionate, or not, in a particular resolution case. In the course of the resolution process, the Board may also amend and update, in accordance with the same procedure of Art. 18 SRMR, the resolution scheme as appropriate in light of the circumstances of the case. While the power to appoint a special manager is not directly and explicitly granted to the Board under the SRMR, Art. 23 SRMR requires that the resolution scheme pro-
Recitals (74) and (75) of the SRMR. Recital (120) of the SRMR. 11 Arts. 86 and 87 SRMR. 12 Recitals (20), (24), (26), (33), (78), (79), (85) of the SRMR and Arts. 18, 19, 27(7), 50(1), 52(2) and (3), 76 and 77 SRMR. 9
10
740
Emiliano Tornese
Art. 24 SRMR
Sale of business tool
vide, where appropriate, for the appointment by the NRAs of a special manager for the institution under resolution pursuant to Art. 35 BRRD. In order to facilitate the coordination of the implementation of the resolution scheme 11 for (cross-border) groups, Art. 23 SRMR provides that the Board may establish that the same special manager is appointed for all of the entities affiliated to a group where that is necessary in order to facilitate solutions redressing the financial soundness of the entities concerned.
B. The resolution scheme As of today, the Board has adopted only one resolution scheme.13 This is the case of 12 Banco Popular Español S.A. on 7 June 2017.14 The resolution scheme was endorsed the same day by the Commission.15 First, the resolution scheme establishes (1) the competence of the Board in accor- 13 dance with Art. 7 SRMR. It then includes (2) a description of the institution under resolution, its difficulties and the attempted measures to address them and it refers to the applicable national insolvency law as counterfactual to the resolution plan. It also describes (3) the resolution procedure involving the ECB, the Board, and the Commission under Art. 18 SRMR, (4) the valuation process under Art. 20 SRMR, and (5) the deviation from the resolution plan. Second, in accordance with Art. 18(6) SRMR, the resolution scheme (1) places the in- 14 stitution under resolution, and (2) describes that the conditions for resolution under Art. 18(1) SRMR have been met. The analysis is conducted in light of the resolution objectives referred to in Art. 14 SRMR. The resolution scheme then describes (3) the selection and application of the resolution tools to the institution under resolution, and (4) the necessary steps for its execution. In particular, it includes the instructions to the NRA (i) to inform and consult the employee representatives in accordance with Art. 15 SRMR, (ii) to take all necessary measures to proceed with its executive and implementation in accordance with Arts. 18(9) and 29 SRMR, and (iii) to provide on a frequent basis the Board with all information on its execution to ensure its monitoring in accordance with Art. 28 SRMR. The resolution scheme is addressed to the NRA and it is published in accordance with Art. 29(5) SRMR.
Art. 24 SRMR Sale of business tool 1. Within the resolution scheme, the sale of business tool shall consist of the transfer to a purchaser that is not a bridge institution of the following: (a) instruments of ownership issued by an institution under resolution; or (b) all or any assets, rights or liabilities of an institution under resolution.
13 The access to documents held by the Board in relation to resolution decisions is provided for under Art. 90 SRMR. Moreover, the Board has published a series of relevant non-confidential documents on its website. 14 Decision to take resolution action in respect of Banco Popular Español S.A., OJ C 222, 11.7.2017, p. 3. The non-confidential version of the resolution decision has been published on the Board’s official website: . 15 Commission Decision (EU) 2017/1246 of 7 June 2017 endorsing the resolution scheme for Banco Popular Español S.A., OJ L178, 11.7.2017, p. 15.
Jens-Hinrich Binder
741
Art. 24 SRMR
Sale of business tool
2. Concerning the sale of business tool, the resolution scheme shall establish: (a) the instruments, assets, rights and liabilities to be transferred by the national resolution authority in accordance with Article 38(1) and (7) to (11) of Directive 2014/59/EU; (b) the commercial terms, having regard to the circumstances and the costs and expenses incurred in the resolution process, pursuant to which the national resolution authority shall make the transfer in accordance with Article 38(2), (3) and (4) of Directive 2014/59/EU; (c) whether the transfer powers may be exercised by the national resolution authority more than once in accordance with Article 38(5) and (6) of Directive 2014/59/EU; (d) the arrangements for the marketing by the national resolution authority of that entity or those instruments, assets, rights and liabilities in accordance with Article 39(1) and (2) of Directive 2014/59/EU; (e) whether the compliance with the marketing requirements by the national resolution authority is likely to undermine the resolution objectives in accordance with paragraph 3 of this Article. 3. The Board shall apply the sale of business tool without complying with the marketing requirements laid down in point (e) of paragraph 2 when it determines that compliance with those requirements would be likely to undermine one or more of the resolution objectives and in particular where the following conditions are met: (a) it considers that there is a material threat to financial stability arising from or aggravated by the failure or likely failure of the institution under resolution; and (b) it considers that compliance with those requirements would be likely to undermine the effectiveness of the sale of business tool in addressing that threat or achieving the resolution objective specified in point (b) of Article 14(2). Bibliography Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements, and Tools’, in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (2016), Ch. 2; id., ‘The Relevance of the Resolution Tools Within the Single Resolution Mechanism’, in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (2019), Ch. 13; id., Proportionality at the Resolution Stage: ‘Calibration of Resolution Measures and the Public Interest Test’, EBOR 21 (2020), 453; Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions (2011/2014); Philipp Paech, ‘The Value of Financial Market Insolvency Safe Harbours’, Oxford Journal of Legal Studies 36 (2016), 855-884. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Substantive and procedural requirements pertaining to the Sale of Business Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Basic structure and uses of a Sale of Business (Art. 24(1) SRMR) . . . . . . . . . . . . II. Structuring a Sale of Business: The mandatory content of the Resolution Scheme (Art. 24(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Definition of instruments, assets, rights and liabilities to be included in transfer (Art. 24(2)(a) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Required consent and disapplication of general company and securities law (Art. 24(2)(a) SRMR in conjunction with Art. 38(1)(2) BRRD) . . . . . . 4. Requirements pertaining to the Purchaser (Art. 24(2)(a) SRMR in conjunction with Art. 38(1), (7)-(9) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. “Safeguards” applicable in relation to a Sale of Business transaction (Art. 24(2)(a) SRMR in conjunction with Arts. 38(10), 73-80 BRRD) . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Treatment of shareholders and creditors in partial transfers . . . . . . . . . . . . .
742
Jens-Hinrich Binder
1 2 2 4 4 5 8 9 11 11 12
Art. 24 SRMR
Sale of business tool
c) Valuation of difference in treatment and compensation rights for shareholders and creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Protection for counterparties, including in the event of a partial transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Commercial terms for the transfer and marketing requirements (Art. 24(2)(b) and (3), (3) SRMR and Arts. 38(1), (7-11) and 39(1) and (2) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Repeated and reverse transfers (Art. 24(2)(c) SRMR in conjunction with Art. 38(5) and (6) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 14 20 27
A. Introduction Art. 24 SRMR – to a large extent by way of reference to the requirements in Arts. 38 1 and 39 of the BRRD – lays down the framework for the application of the Sale of Business tool under the auspices of the BRRD. In conjunction with Arts. 18(6)(b), 23, 28 and 29 SRMR, the application of the tool will be determined by the Resolution Scheme (Art. 24(2) SRMR, see infra, → paras. 4-27), whereas the implementation will rest with the NRAs in accordance with the national provisions implementing the relevant provisions of the BRRD (see, generally, infra, → Art. 29 paras. 4-14). The Sale of Business tool has been applied, for the first time within the SRM, in the case of Banco Popular Español S.A. in June 2017. A non-confidential version of the relevant Resolution Scheme is available online1 and can be used as a reference for potential uses and problems in this regard.
B. Substantive and procedural requirements pertaining to the Sale of Business Tool I. Basic structure and uses of a Sale of Business (Art. 24(1) SRMR) Art. 24(1) SRMR, a verbatim adoption of Art. 38(1)(1) BRRD, defines the basic struc- 2 ture and the two alternative uses of Sale of Business transactions. While not expressly stated in the provision, the key objective in both alternatives is identical, namely: to protect systemically relevant commercial activities (“critical functions”, cf. Art. 2(1)(35) BRRD and Art. 14(2)(a) SRMR, see supra, → Art. 14 para. 5) by shielding them against the failure of institute, and by transferring them on to an acquirer (“the Purchaser”) – usually, another credit institution already licensed within the relevant jurisdiction – who can be trusted to continue the relevant operations without disruptions. With the Sale of Business tool, the European framework incorporates a set of powers that have been in use in a number of jurisdictions, including, in particular, the United States, for some time, long before the global financial crisis.2 While such powers originally had been developed for, and applied to, smaller and medium-sized institutions,3 such transfers have also been recommended as potential solutions to problems involving systemically relevant in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions.4 Ideally, a Sale of Business should facilitate the continuation of “critical functions” 1 See Decision of the Single Resolution Board in its Executive Session of 7 June 2017 concerning the adoption of a resolution scheme in respect of Banco Popular Español S.A. (…) (SRB/EES/2017/08), available at . 2 See, further, Binder, ‘Resolution: Concepts, Requirements, and Tools’, para. 2.47. 3 See ibid., para. 2.50. 4 FSB, ‘Key Attributes’, para. 3.3.
Jens-Hinrich Binder
743
Art. 24 SRMR
Sale of business tool
without any interruption, which in turn should help to avoid contagious runs by depositors or other creditors/investors. 3 As stipulated by Art. 24(1) SRMR, a Sale of Business transaction, at the discretion of the SRB,5 can take either the form of a share deal or an asset deal. In the first alternative, some or all “instruments of ownership” are transferred to the acquirer. In the latter, the transfer involves “all or any assets, rights or liabilities of an institution under resolution”. It hardly needs explanation that this latter alternative, conceptually, is best placed to accomplish the overall objective – to protect systemically relevant activities and business relationships rather than the failing institution itself as a company, as it facilitates a calibration of the tool in a way that protects only those commercial relationships which actually are deemed of systemic relevance. By comparison with a transfer of shares, the failing firm and its debt relationships are thus left untouched, which would facilitate a subsequent liquidation of the company, wherein the losses would be borne by shareholders and those creditors whose claims against the failing firm had not been included in the transfer. While a partial “asset deal” Sale of Business can thus be characterised as the most straightforward form from a conceptual basis, its feasibility can nonetheless be jeopardized in more complex institutions, where the ad hoc identification of systemically relevant business activities and the relevant assets, rights and liabilities pertaining to them may be difficult. In such circumstances, either a comprehensive transfer of all assets, rights and liabilities belonging to the institute under resolution or, alternatively, a transfer of shares and other instruments of ownership may provide a more practical alternative, even though it does not differentiate between relevant and not or less relevant commercial activities.
II. Structuring a Sale of Business: The mandatory content of the Resolution Scheme (Art. 24(2) SRMR) 1. Overview 4
Art. 24(2) SRMR defines the mandatory content of a Resolution Scheme concerning the application of the Sale of Business tool, mainly by way of reference to the relevant provisions in the BRRD and the corresponding provisions in national law transposing the BRRD. First and foremost, the Resolution Scheme has to define which instruments, assets, rights and liabilities are to be transferred (see infra, → paras. 5-6). In this context, the provision also serves to incorporate the substantive and procedural requirements pertaining to Sale of Business transactions defined by the BRRD. These include, in particular, provisions as to the necessary consent to the transaction and the disapplication of general company and securities law (see infra, → para. 8), and requirements pertaining to the Purchaser (see infra, → paras. 9 and 10); the application of substantive “safeguards” as defined by Chapter VII of Title IV of the BRRD (see infra, → paras. 11-19). Furthermore, the Resolution Scheme has to define the “commercial terms” for the transfer required by the relevant provisions in the BRRD, and the terms for the “marketing” of the instruments, assets, rights and liabilities in conjunction with the relevant provisions of the BRRD, or, in certain circumstances, provide for exemptions in this context (see infra, → paras. 20-26). The Resolution Scheme also has to make provisions for the repeated application of the transfer powers (see infra, → para. 27).
5
744
Cf. Art. 22(4), sent. 2 SRMR.
Jens-Hinrich Binder
Art. 24 SRMR
Sale of business tool
2. Definition of instruments, assets, rights and liabilities to be included in transfer (Art. 24(2)(a) SRMR) Pursuant to Art. 24(2)(a) SRMR, the Resolution Scheme shall establish which instru- 5 ments, assets, rights and liabilities are to be included in the transfer. Given that the Sale of Business transaction may take the form of either a share deal or an asset deal, different scenarios are possible: If the SRB decides to implement a share deal Sale of Business, the Resolution Scheme 6 will merely have to identify the relevant shares and other instruments of ownership. 6 These may be either existing shares or other relevant instruments, in which case the relevant ISIN may be given. Alternatively, if the Resolution Scheme – as will often be the case – provides also for the write-down and/or conversion of shares and capital instruments, the instruments newly created as a result may be specified in other terms. 7 If, by contrast, the SRB decides to structure the Sale of Business as an asset deal, the 7 content will depend on whether a comprehensive transfer of all assets, rights and liabilities or a partial transfer is intended. In the first case, a general reference (to “all” such positions) should be considered as sufficient. In the latter case, however, the relevant assets, rights and liabilities would have to be specified, not just in view of the wording of Art. 24(2)(a) SRMR, but also in the interest of legal certainty, as both NRAs – in implementing the transfer pursuant to Art. 29(1) SRMR and the national provisions implementing Arts. 35 and 72 of the BRRD (see, further, infra, → Art. 29 paras. 4-14 – and parties affected by the transfer need absolute clarity as to its scope. This illustrates further the difficulty to structure a partial Sale of Business, especially in the case of large and complex institutions where systemically relevant and less relevant commercial activities are carried out within the same legal entity and where it will be difficult to distinguish between different categories ad hoc.
3. Required consent and disapplication of general company and securities law (Art. 24(2)(a) SRMR in conjunction with Art. 38(1)(2) BRRD) Pursuant to Art. 38(1)(2) BRRD, referred to in Art. 24(2)(a) SRMR, the transfer does 8 not require the consent of the shareholders of the institution under resolution or any other third party other than the Purchaser. The provision protects the administrative power to implement Sale of Business transactions against impediments that could otherwise apply under the applicable private laws. To that end, any potentially relevant restrictions under the applicable company or securities laws are expressly waived. In some jurisdictions, for example, a sale of significant parts of the company’s assets will require the consent of shareholders8 which, if it were applicable also in resolution scenarios, would at least delay, if not jeopardize, a swift application of the Sale of Business Tool.
4. Requirements pertaining to the Purchaser (Art. 24(2)(a) SRMR in conjunction with Art. 38(1), (7)-(9) BRRD) If and to the extent that the Purchaser takes over the regulated activities covered by 9 the transfer, it will require a license. For activities covered by the CRD IV/CRR regime, 6 For a definition of the term, see Art. 2(1)(61) BRRD, whereby “‘instruments of ownership’ means shares, other instruments that confer ownership, instruments that are convertible into or give the right to acquire shares or other instruments of ownership, and instruments representing interests in shares or other instruments of ownership.” 7 Cf., e.g., the Resolution Scheme adopted with regard to Banco Popular Español S.A. (supra, → para. 1), at p. 22 (transfer of “New Shares II”). 8 E.g., section 179a of the German Stock Corporation Act.
Jens-Hinrich Binder
745
Art. 24 SRMR
Sale of business tool
this follows from Art. 8 CRD IV, which is implicitly referred to in Art. 38(7) sent. 1 BRRD (“the appropriate authorisation to carry out the business it acquires”). However, Art. 38(7) sent. 2 BRRD, whereby an application for authorisation, in this context, “shall be considered in a timely manner”, appears to envisage that the necessary license could also be applied for, and granted, in connection with a Sale of Business transaction. In other words, the provision appears to be designed specifically in order to facilitate the acquisition and on-going operation by a hitherto unlicensed Purchaser. It is difficult to see that this option could play a meaningful role in future cases, however. If a Sale of Business transaction is to accomplish the overall policy objective to help continue the provision of “critical functions” without interruptions (see supra, → para. 2), the Purchaser will need both relevant commercial experience and relevant organisational arrangements in place so as to accommodate the on-going operation of the relevant activities. If the Purchaser does not meet either condition, the risk that defaults are merely postponed rather than avoided would appear significant enough as to render the Sale of Business counterproductive. For these reasons, transferring systemically important banking business (and the relevant assets, rights and liabilities) to a private sector Purchaser who has not previously operated a licensed banking business probably has to be ruled out a limine. 10 In the context of a share deal Sale of Business, Art. 38(8)-(9) BRRD provide for adjustments to the general framework for the regulatory assessment of acquirers of qualifying holdings pursuant to Arts. 22-25 CRD IV. As required by Art. 38(8) BRRD, the competent authority “shall carry out the assessment (…) in a timely manner that does not delay the application of the Sale of Business tool and prevent the resolution action from achieving the relevant resolution objectives”. Within the SSM, responsibility for the assessment of qualifying holdings generally has been allocated to the ECB (Arts. 4(1)(c) and 15 SSMR), but NCAs retain the power to process relevant applications, carry out the substantive assessment, and prepare an ECB decision pursuant to Arts. 85 and 86 of the SSM‑FR. Art. 38(9) BRRD then follows up with substantive and procedural provisions designed so as to facilitate the swift and effective implementation of transfer of shares irrespective of a pending assessment of qualifying holdings. Specifically, it prescribes that (a) the transfer has immediate legal effect;9 (b) during the assessment, the acquirer’s voting rights attached to the relevant shares or other instruments of ownership are suspended and vested solely in the resolution authority;10 and (c) during the assessment, penalties and other measures for infringing the requirements for acquisitions and disposals of qualifying holdings prescribed by Arts. 66-68 CRD IV shall not apply.11 Art. 38(9)(d) BRRD then prescribes a duty for the competent authority – within the SSM, the ECB – to notify both the resolution authority (the SRB) and the acquirer promptly of its decision to approve or oppose the transfer. If the transfer is approved, the voting rights attached to the relevant instruments shall be deemed to be fully vested in the acquirer immediately upon receipt of the decision.12 If, however, the transfer is opposed, the relevant voting rights shall remain in full force and effect, while the resolution authority may require the acquirer to divest the relevant instruments “within a divestment period determined by the resolution authority having taken into account pre-
Art. 38(9)(a) BRRD. Art. 38(9)(b) BRRD, which prescribes, further, that the resolution authority ‘shall have no obligation to exercise any such voting rights and which shall have no liability whatsoever for exercising or refraining from exercising any such voting rights’. 11 Art. 38(9)(c) BRRD. 12 Art. 38(9)(e) BRRD. 9
10
746
Jens-Hinrich Binder
Art. 24 SRMR
Sale of business tool
vailing market conditions”, failing which penalties and other sanctions can be imposed.13 In practice, it is hardly conceivable that any transfer of shares should ever be opposed along these lines, as the acquirer will most likely be scrutinised in cooperation between the SRB, the ECB and national authorities prior to the implementation. For obvious reasons, any other outcome would conflict with the objective of the transaction, so that there are strong incentives to select the acquirer carefully and with due regard to its financial and organisational capacity to assume the relevant business and maintain its ongoing operation.
5. “Safeguards” applicable in relation to a Sale of Business transaction (Art. 24(2)(a) SRMR in conjunction with Arts. 38(10), 73-80 BRRD) a) Introduction Pursuant to Art. 38(10) BRRD, referred to in Art. 24(2)(a) SRMR, any transfer in rela- 11 tion to a Sale of Business transaction shall be subject to the “safeguards” prescribed by Chapter VII of Title IV (Arts. 73-80) BRRD. The relevant provisions in the BRRD, which include both substantive and procedural requirements, provide for the protection of certain rights of shareholders and creditors generally, as well as for counterparties in certain types of contractual relationships. Specifically in the context of partial transfers of assets, rights and liabilities, the safeguards are designed so as to “preserve legitimate capital market arrangements”,14 i.e., established contractual arrangements, which have become standard market practice and in turn reflect the parties’ desire to minimise their credit (and, to some extent, liquidity) exposure against each other. Essentially, the safeguards serve either of two objectives. Some of them seek to ensure consistency between the economic outcome of resolution actions with those of a hypothetical insolvency liquidation of the institution in resolution, and thus complement – and operationalise – the “general principles” defined in Art. 15 SRMR and, in particular, the ‘no creditor worse off ’ principle prescribed in Art. 15(1)(g) SRMR (see supra, → Art. 15 paras. 27-33). Other provisions focus on the protection of counterparties and arrangements deemed to be of systemic relevance. b) Treatment of shareholders and creditors in partial transfers As for the treatment of shareholders and creditors generally, Art. 73(a) BRRD 15 reaf- 12 firms, for partial transfers of assets, rights and liabilities, the principle that ‘the shareholders and those creditors whose claims have not been transferred, receive in satisfaction of their claims at least as much as what they would have received if the institution under resolution had been wound up under normal insolvency proceedings’. In other words, Art. 24(2)(a) SRMR in conjunction with Arts. 38(10), 73(a) BRRD requires the SRB to assess the economic outcome of partial transfers on the position of shareholders and creditors by comparison to their treatment in a hypothetical insolvency liquidation, and to ensure that their ultimate position does not fall below what they would be entitled to receive in a hypothetical insolvency liquidation. Prima facie, this is, effectively, a restatement of the “no creditor worse off ” principle (Art. 15(1)(g) SRMR), as well as of the economic implications of the hierarchy of claims defined in Art. 17 SRMR in conjunction with Arts. 47 and 48 BRRD. The background is to be found in Art. 38(4)(b) 13 See, for details, Art. 38(9)(f)(i)-(iii) BRRD. Note that during the divestment period, the provisions on voting rights and exemptions from general penalties in Art. 38(9)(b) and (c) BRRD also apply. 14 Cf. Recital 95 BRRD. 15 Note that Art. 73(b) BRRD does not apply to the Sale of Business tool.
Jens-Hinrich Binder
747
Art. 24 SRMR
Sale of business tool
BRRD, whereby any consideration paid by the purchaser has to benefit the residual institution itself (which then shall be liquidated in normal insolvency proceedings, as per Art. 22(5) SRMR, so that the relevant payments will benefit its creditors and, possibly, the shareholders indirectly). If taken literally, it would follow from Art. 73(a) BRRD that the SRB, when negotiating terms with a prospective purchaser, must ensure that the agreed consideration would be sufficient so as to make up for any loss that the residual estate has suffered as a result of the partial transfer. As the negotiations usually will take place under severe time constraints and as, further, the value of the assets, rights and liabilities subject to the transfer will often be uncertain, the decision whether or not to accept a certain price will inevitably be highly discretionary, and the restrictions arising out of Art. 73(a) BRRD in this context will be rather weak. In this context, the exemptions to the “marketing requirement” defined in Art. 24(3) SRMR (see infra, → paras. 23–25) also have to be taken into account. Notwithstanding this specific background, the level of protection afforded to shareholders and creditors thus hardly goes beyond the general principle that shareholders and creditors must not be exposed to losses that would exceed those to be expected in a hypothetical insolvency liquidation, which will have to be determined on the basis of an ex-post valuation (see infra, → para. 22). c) Valuation of difference in treatment and compensation rights for shareholders and creditors 13
Formally as part of the “safeguards” set out in Chapter VII of the BRRD, Art. 74 BRRD defines the requirement to carry out an ex post valuation in order to determine the difference (if any) between the economic outcome of resolution actions and the hypothetical outcome of an insolvency liquidation and thus prepares the ground for the compensation rights for shareholders and creditors laid down in Art. 75 BRRD. The provisions are not exempted from the reference to Art. 38(10) BRRD, but both the valuation of difference in treatment and compensation rights have been addressed separately in the SRM (cf. Art. 20(17)-(18) SRMR on valuation and Art. 76(1)(e) SRMR on the use of the Fund, respectively; see supra, → Art. 20 paras. 42-47 and → Art. 76 paras. 4-8). d) Protection for counterparties, including in the event of a partial transfer
14
Arts. 76-79 BRRD provide for special protection of certain types of established market arrangements between credit institutions and other market participants. While not expressly stated as such,16 the provisions are clearly motivated by systemic stability considerations, as the application of the Sale of Business tool to only parts of the assets, rights or liabilities pertaining to such arrangements could likely cause unanticipated losses to the relevant counterparties, which could then trigger systemic contagion. Pursuant to Art. 76(1)(a) BRRD, the relevant provisions are expressly designed to apply in the event of partial transfers, but Art. 76(1)(b) BRRD extends the scope also to any other case where resolution authorities use their general powers to operationalise, and enforce, the terms of resolution actions generally under Art. 64(1) BRRD. The range of protected activities is defined in Art. 76(2) BRRD and includes: (a) security arrangements; (b) title transfer financial collateral arrangements; (c) set-off arrangements; (d) netting arrangements; (e) covered bonds, and (f) certain structured finance arrangements. By virtue of Art. 76(3) BRRD, the protection applies irrespective of the number of parties
16
748
But cf., again, Recital 95 BRRD and supra, → para. 10.
Jens-Hinrich Binder
Art. 24 SRMR
Sale of business tool
involved and of whether the relevant arrangements are contractual in nature or arise out of the applicable law. For financial collateral, set-off and netting agreements as defined in Art. 76(2)(b), (c) and (d) BRRD, Art. 77(1) BRRD expressly prohibits the application of the Sale of Business tool to only some, but not all, of the rights and liabilities included in the respective agreements, i.e., those rights and liabilities relating to which the parties are entitled to set-off or to net in the event of one party’s default. Effectively, the provision thus requires to respect the integrity of the relevant arrangements. However, by virtue of Art. 77(2) BRRD, in order to ensure the availability of covered deposits, the resolution authority may transfer such deposits without other assets, rights and liabilities that are part of the same arrangement remain permissible, as do transfers of such assets, rights or liabilities without the corresponding covered deposits (Art. 77(2) BRRD). Similarly, by virtue of Art. 78(1) BRRD, resolution actions must respect the integrity of security arrangements; transfers of assets, rights or liabilities must not lead to the separation of assets (or the benefit of such assets) and the liabilities thereby secured. In order to ensure the availability of covered deposits, however, Art. 78(2) BRRD provides for exemptions similar to those set out in Art. 77(2) BRRD (see supra, → para. 14). Finally, Art. 79(1)(a) BRRD prohibits a partial transfer of only some but not all assets, rights or liabilities which constitute or form part of structured finance arrangements and covered bonds of which the institution under resolution is a party, while Art. 79(1) (b) BRRD prohibits the termination or modification of such assets, rights or liabilities through the use of resolution powers. In addition, Art. 80 BRRD requires resolution authorities to protect the operation of trading, clearing and settlement systems when implementing a partial transfer or using resolution powers to cancel or amend relevant contractual arrangements. Specifically, Art. 80(2) BRRD expressly protects the finality and enforceability of transfer orders, the use of funds, securities or credit facilities, and collateral arrangements as covered by the Settlement Finality Directive of 1998.17 Taken together, the safeguards summarised above reflect a long-standing policy to protect specific financial market arrangements by way of carve-outs from both the application of general insolvency laws and special bank insolvency regimes. Within Europe, relevant provisions have been introduced since the 1990s, first through the Settlement Finality Directive (see supra, → para. 18) and subsequently through the Financial Collateral Arrangements Directive of 2002.18 While attributable to international standards, the justification of such protection – which effectively privileges the claims of professional market participants to the disadvantage of other creditors in insolvency – has increasingly been questioned.19 However, the safeguards applicable under Chapter VII of the BRRD still reflect that broader trend, and are entirely consistent with the respective Directives.
17 Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems, OJ L 166, 11.6.1998, p. 45. 18 Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, OJ L 168, 27.6.2002, p. 43. 19 See, for an excellent review and analysis, Paech, Ox. J. Leg. Stud. 36:4 (2016), 855.
Jens-Hinrich Binder
749
15
16
17
18
19
Art. 24 SRMR
Sale of business tool
6. Commercial terms for the transfer and marketing requirements (Art. 24(2)(b) and (3), (3) SRMR and Arts. 38(1), (7-11) and 39(1) and (2) BRRD) Art. 38(2)-(4) BRRD, referred to in Art. 24(2)(b) BRRD, lay down requirements for the consideration to be negotiated with the purchaser in each case of a Sale of Business transaction. Pursuant to Art. 38(2) BRRD, any transfer of assets, rights or liabilities, in the execution of a Sale of Business transaction, “shall be made on commercial terms, having regard to the circumstances, and in accordance with the Union State aid framework”. While the term “commercial terms” is not defined in the Directive, both the reference to the Union State aid framework in Art. 38(2) BRRD and the broader systematic context of the provision make clear that the requirements serve a twofold purpose, which is also reflected in the “marketing requirements” applicable by virtue of Art. 24(2) (d) SRMR in conjunction with Art. 39(1) and (2) BRRD (see infra, → paras. 21-25): First, it is designed to ensure that the purchaser itself does not unduly benefit from overly generous terms; in this regard, the requirement complements the State aid regime and seeks to prevent distortions of competition between the purchaser and its peers as a result of the application of the Sale of Business tool. Secondly, as illustrated by the requirements laid down in Art. 38(4) BRRD, the provision seeks to ensure that losses in value caused to either the shareholders (in the event of a “share deal” Sale of Business) or the institution under resolution itself (in the event of an “asset deal” transaction) are duly compensated, which in turn should reinforce the principle that the economic outcome of resolution actions should reflect (at least) the outcome of liquidation under general insolvency laws (see, generally, supra, → Art. 15 para. 3). Conceptually, as far as the impact of Sale of Business transactions on shareholder and creditor rights are concerned, the provision thus ties in with the broader proportionality requirement stipulated in Art. 18(5) SRMR.20 In this context, Art. 38(3) BRRD expressly requires the authorities to base their assessment of the terms on a valuation of the institution’s financial position. This ties in with the requirements on valuation defined in Art. 20(5)(f) SRMR (Art. 36(4)(f) BRRD), whereby the valuation, inter alia, serves the purpose “to inform the decision on the assets, rights, liabilities or instruments of ownership to be transferred and to inform the Board's understanding of what constitutes commercial terms for the purposes of Article 24(2)(b) (SRMR)”. Consequently, Art. 38(4) BRRD requires that any consideration paid by the purchaser should benefit either the shareholders or holders of other instruments of ownership (in the case of a “share deal” transaction) or the institution under resolution itself (in the case of an “asset deal” transaction; see also supra, → para. 11). 21 The two objectives defined in the previous paragraph are also reflected in the “marketing requirements” laid down in Art. 39(1) and (2) BRRD (referred to in Art. 24(2) (d) SRMR), which can therefore be conceptualized as a procedural complement to the substantive requirement of “commercial terms”. Pursuant to Art. 39(1) BRRD, when applying the Sale of Business tool, the authority “shall market, or make arrangements for the marketing of the assets, rights, liabilities, shares or other instruments of ownership of that institution that the authority intends to transfer. Pools of rights, assets, and liabilities may be marketed separately.” The relevant criteria are then laid down in Art. 39(2) BRRD, whereby 20
20 For a detailed analysis of the role of proportionality in bank resolution, see Binder, EBOR 21 (2020), 453. On the functional link between the ‘marketing’ of assets, rights and liabilities, shareholders’ rights and the proportionality principle, cf. also Recital 50 BRRD.
750
Jens-Hinrich Binder
Art. 24 SRMR
Sale of business tool
“Without prejudice to the Union State aid framework, where applicable, the marketing referred to in paragraph 1 shall be carried out in accordance with the following criteria: (a) it shall be as transparent as possible and shall not materially misrepresent the assets, rights, liabilities, shares or other instruments of ownership of that institution that the authority intends to transfer, having regard to the circumstances and in particular the need to maintain financial stability; (b) it shall not unduly favour or discriminate between potential purchasers; (c) it shall be free from any conflict of interest; (d) it shall not confer any unfair advantage on a potential purchaser; (e) it shall take account of the need to effect a rapid resolution action; (f) it shall aim at maximising, as far as possible, the sale price for the shares or other instruments of ownership, assets, rights or liabilities involved. Subject to point (b) of the first subparagraph, the principles referred to in this paragraph shall not prevent the resolution authority from soliciting particular potential purchasers. Any public disclosure of the marketing of the institution or entity referred to in point (b), (c) or (d) of Article 1(1) of this Directive that would otherwise be required in accordance with Article 17(1) of Regulation (EU) No 596/2014 may be delayed in accordance with Article 17(4) or (5) of that Regulation.”
While Art. 39(2)(1)(a) BRRD seeks to protect the (potential) purchaser, the remain- 22 der of the requirements clearly are geared towards preventing competitive distortions (in particular, points (b) and (d)) on the one hand and towards the maximisation of value on the other hand. However, the provisions (in particular, in subpara. (1) point (e) and in subparas. (2) and (3)) also reflect the need to realign those fundamental objectives with the need to plan, and implement, resolution actions swiftly and effectively. This highlights fundamental problems affecting all types of resolution actions: Almost inevitably, given the sensitive nature of banking businesses, resolution actions will have to be conceived under severe time constraints, even in cases where the financial problems affecting the relevant institution are detected at an early stage. In such circumstances, a reliable valuation of the relevant institution’s financial position, on which the marketing process and the negotiations over the consideration to be paid by the purchaser could and should be based, may prove impossible to obtain in the available timeframe. At the same time, especially in (but not restricted to) market environments affected by more general economic distress, compliance with the “marketing requirements” will frequently be hampered by the lack of funds available for investment among potential purchasers, by uncertainty about the quality of the relevant portfolio and potential risks associated with it, or a general lack of trust in view of distressed asset prices (or any combination thereof). The case of Banco Popular Español offers ample illustration also in this regard, with a rather vague provisional valuation used as the basis for the choice and calibration of resolution actions on the one hand21 and a very speedy marketing process, which was effectively reduced to a few working days.22 All the more important in view of the foregoing are the exemptions from the “mar- 23 keting requirements” permitted by the Regulation. As noted before, Art. 39(2)(1)(c) BRRD itself requires the resolution authority to “take account of the need to effect a rapid resolution action”, in an implicit recognition that the two fundamental objectives – the avoidance of competitive distortions and the protection of value in the interest of 21 Cf. Deloitte, “Hippocrates Provisional Report (Sale of Business Scenario) (6 June 2017), available at . 22 Cf. Resolution Decision (supra, n. 1), paras. 31-38 (initiation of the marketing process on 3 June 2017, binding offer by purchaser on 7 June 2017). The SRB’s marketing decision is available at .
Jens-Hinrich Binder
751
Art. 24 SRMR
Sale of business tool
shareholders and creditors – must always be balanced against the necessity to structure and implement resolution actions as swiftly and effectively as possible in order to prevent contagious knock-on effects. In the event of a conflict between the overarching objective to protect systemic stability and other policy considerations, the former thus is designed to prevail also in this context. By the same token, Art. 24(3) SRMR (effectively, an almost verbatim adoption from the corresponding provision in Art. 39(3) BRRD) expressly allows a deviation from the “marketing requirements” in cases of a “material threat to financial stability arising from or aggravated by the failure or likely failure of the institution under resolution”, and where the SRB “considers that compliance with those requirements would be likely to undermine the effectiveness of the Sale of Business tool in addressing that threat or achieving the resolution objective specified in point (b) of Art. 14(2) [SRMR]”, i.e., “to avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline”. 24 The range of circumstances that can amount to a “material threat to financial stability” and the elements to be considered when assessing the effectiveness of the Sale of Business tool in this regard have been specified further in EBA Guidelines pursuant to Art. 39(4) BRRD,23 which provides useful illustration of conflicts between the need to ensure swift and effective solutions and the two objectives pursued through the “marketing requirements” (see supra, → paras. 19 and 21). Pursuant to para. 3 of the Guidelines, “When assessing whether there is a material threat to financial stability arising from or aggravated by the failure or likely failure of the institution under resolution in the context of the requirement to market the institution relating to the application of the sale of business tool, resolution authorities should consider the impact on other institutions and financial markets including infrastructure providers and non-financial institution customers. Resolution authorities should in particular consider, but not limit themselves to, factual circumstances that are relevant for the risk that marketing the institution under resolution may result in aggravating uncertainty and a loss of market confidence. These circumstances should include at least any of the following: (a) the risk of a systemic crisis, as evident from the number, size or significance of institutions that are at risk of meeting the conditions for early intervention or the resolution conditions or at risk of undergoing an insolvency procedure, or as evident from public financial support to institutions or extraordinary liquidity facilities provided by central banks; (b) the risk of a discontinuance of critical functions or a significant increase in prices for the provision of these functions as evident from changes in market conditions for these functions or their availability, or the expectation of counterparties and other market participants in this respect; (c) the withdrawal of short-term funding or deposits; (d) decreases in share prices of institutions or in prices of assets held by institutions, in particular where they can have an impact on the capital situation of institutions; (e) a reduction in short or medium-term funding available to institutions; (f) an impairment to the functioning of the interbank funding market, as particularly apparent from an increase in margin requirements and a decrease in collateral available to institutions; (g) increases in prices for credit default insurance or a decrease in ratings of institutions or other market participants that are relevant with respect to the financial situation of institutions.”
25
Pursuant to para. 4 of the Guidelines, “elements relating to the effectiveness of the Sale of Business tool and to financial stability” are defined as follows:
23 EBA, “Guidelines on factual circumstances amounting to a material threat to financial stability and on the elements related to the effectiveness of the sale of business tool under Article 39(4) of Directive 2014/59/EU”, 7 August 2015 (EBA/GL/2015/04).
752
Jens-Hinrich Binder
Art. 24 SRMR
Sale of business tool
“(a) With regard to the requirement of transparency stipulated in point (a) of Article 39(2) of Directive 2014/59/EU, the risk that marketing to a wider circle of potential purchasers and that the disclosure of risks and valuations or the identification of critical and non-critical functions in respect of the institution under resolution may result in additional uncertainty and in a loss of market confidence. In particular, preparations for the marketing process should not increase the risk that the institution may enter resolution. (b) With regard to the principle of non-discrimination established by point (b) of Article 39(2) of Directive 2014/59/EU, the fact that certain potential purchasers may be more likely to ensure financial stability, in particular due to factors such as their financial or market position, their structure and business model, which may facilitate the business integration and the legal and organisational feasibility or may have positive effects on the time required for the implementation of the resolution action and the expectation that critical functions can be continued. Resolution authorities should take into account the needs and expectations of counterparties, infrastructure providers, depositors and liquidity providers and those of the wider market. (c) Resolution authorities should ensure that arrangements to ascertain that parties involved in the marketing process are free from conflicts of interest as stipulated by point (c) of Article 39(2) of Directive 2014/59/EU do not impede the practicability and the timely implementation of the resolution action. Resolution authorities should take into account that, given the limited number of service providers, advisers and potential purchasers in the market, a certain risk of conflicts of interests may be inherent to the sales process. (d) When assessing whether advantages to potential purchasers are unfair within the meaning of point (d) of Directive 2014/59/EU, resolution authorities should take into account that the resolution objectives and the need for rapid action may justify incentivising purchasers or limiting their risk, in particular in the context of the use of the financing arrangements for these purposes as mentioned in Article 101(1) of Directive 2014/59/EU. (e) When aiming to maximise the sale price as required by point (f) of Directive 2014/59/EU, resolution authorities should take into account the need for rapid action, which may be in conflict with prolonged price negotiations or bidding processes, and the resolution objectives, in particular the continuance of critical functions, which may be in conflict with maximising the sale price for certain business areas. In addition, resolution authorities should take into account that certain potential purchasers may be more likely to ensure financial stability, in particular due to factors such as their financial or market position, their structure and business model. 6. When the resolution authority assesses the need to effect a rapid resolution action in accordance with point (e) of Directive 2014/59/EU, it should pay particular regard to the continuance of critical functions, the confidence of depositors and the public, the functioning of infrastructures and the trading times in relevant markets.”
All in all, given that the scope of application of the SRMR is restricted to institutions 26 at least of regional systemic relevance, it is probably safe to assume that exemptions under Art. 24(3) SRMR may be invoked in rather many potential resolution cases. Even if it is decided not to rely on the formal exemption, the discretionary elements built into the substantive and procedural framework for the marketing of the relevant assets, rights and liabilities appear to be sufficiently flexible as to allow speedy implementation even where this comes with substantial reductions in terms of the consideration ultimately agreed with the purchaser. The case of Banco Popular Español, where a transaction price of only one nominal Euro was accepted (following a substantial haircut of shareholders’ and creditors’ rights) although the valuation of the relevant entity had not ruled that its net asset value prior to resolution was actually positive, provides useful illustration also in this regard. Against this backdrop, scrutiny of the terms of the transaction by the European Commission under the State Aid regime is thus likely to provide more effective restrictions than the “marketing requirements” in many potential cases.
Jens-Hinrich Binder
753
Art. 25 SRMR
Bridge Institution Tool
7. Repeated and reverse transfers (Art. 24(2)(c) SRMR in conjunction with Art. 38(5) and (6) BRRD) 27
Pursuant to Art. 24(2)(c) SRMR, the Resolution Scheme finally has to determine whether the transfer powers may be exercised by the national resolution authority more than once in accordance with Art. 38(5) and (6) BRRD. Pursuant to Art. 38(5) BRRD, the transfer powers may be exercised “more than once in order to make supplemental transfers of shares or other instruments of ownership issued by an institution under resolution or, as the case may be, assets, rights or liabilities of the institution under resolution.” Pursuant to Art. 38(6) BRRD, the resolution authority may, “[f]ollowing an application of the sale of business tool, (…) with the consent of the purchaser, exercise the transfer powers in respect of assets, rights or liabilities transferred to the purchaser in order to transfer the assets, rights or liabilities back to the institution under resolution, or the shares or other instruments of ownership back to their original owners, and the institution under resolution or original owners shall be obliged to take back any such assets, rights or liabilities, or shares or other instruments of ownership.” While the Recitals to the BRRD remain silent as to the potential uses of these powers, they can obviously serve to recalibrate the portfolio subject to the transfer. It is conceivable that the powers may be used, for example, to take into account an amended assessment of which contractual relationships deserve special protection in view of potential contagion risks, or to recalibrate the value of the transferred portfolio in order to reflect a correction to the provisional valuation. While this can be legitimate and even outright necessary to accomplish the resolution objectives, it should be noted that the “commercial terms” requirement under Art. 24(2)(b) SRMR and the need to ensure consistency with the economic outcomes of insolvency liquidation remain unaffected, so that the implications of repeated and reverse transfers on the residual institution have to be taken into account when making the relevant decisions.
Art. 25 SRMR Bridge Institution Tool 1. Within the resolution scheme, the bridge institution tool shall consist of the transfer to a bridge institution of any of the following: (a) instruments of ownership issued by one or more institutions under resolution; (b) all or any assets, rights or liabilities of one or more institutions under resolution. 2. With regard to the bridge institution tool, the resolution scheme shall establish: (a) the instruments, assets, rights and liabilities to be transferred to a bridge institution by the national resolution authority in accordance with Article 40(1) to (12) of Directive 2014/59/EU; (b) the arrangements for the setting up, the operation and the termination of the bridge institution by the national resolution authority in accordance with Article 41(1), (2), (3) and (5) to (9) of Directive 2014/59/EU; (c) the arrangements for the marketing of the bridge institution or its assets or liabilities by the national resolution authority in accordance with Article 41(4) of Directive 2014/59/EU. 3. The Board shall ensure that the total value of liabilities transferred by the national resolution authority to the bridge institution does not exceed the total value of the
754
Jens-Hinrich Binder
Art. 25 SRMR
Bridge Institution Tool
rights and assets transferred from the institution under resolution or provided by other sources. Bibliography Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements, and Tools’, in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, 2016), Ch. 2; id., ‘The Relevance of the Resolution Tools Within the Single Resolution Mechanism’, in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, 2019), Ch. 13; id., Proportionality at the Resolution Stage: Calibration of Resolution Measures and the Public Interest Test, EBOR 21 (2020), 453; Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2011/2014). A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Substantive and procedural requirements pertaining to the Bridge Institution Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Structural characteristics and use of a Bridge Institution (Art. 25(1) SRMR) II. Application of the Bridge Institution tool: The mandatory content of the Resolution Scheme (Art. 25(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Definition of instruments, assets, rights and liabilities to be included in the transfer; further aspects (Art. 25(2)(a) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . a) The scope of the transfer: instruments, assets, rights and liabilities to be included . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Other aspects pertaining to the implementation process . . . . . . . . . . . . . . . . . (i) Consideration to be paid by Bridge Institution (Art. 25(2)(a) SRMR in conjunction with Art. 40(4) BRRD) . . . . . . . (ii) Repeated, reverse and onward transfers (Art. 25(2)(a) SRMR in conjunction with Art. 40(5)-(7) BRRD) . . . (iii) Protection of certain counterparties through “safeguards” (Art. 25(2)(a) SRMR in conjunction with Art. 40(10), 73-80 BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iv) Effective separation between Bridge Institution and residual institution under resolution; liability of management body and senior management (Art. 25(2)(a) SRMR in conjunction with Art. 40(11) and (12) BRRD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Ongoing operation and termination of the Bridge Institution (Art. 25(2)(a) and (b) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. “Marketing” of the Bridge Institution or its assets and liabilities (Art. 25(2)(c) SRMR in conjunction with Art. 41(4) BRRD) . . . . . . . . . . . . . .
1 2 2 5 5 6 6 7 8 11 13
14 15 20
A. Introduction Art. 25 SRMR – to a large extent by way of reference to the requirements in Arts. 40 1 and 41 of the BRRD – lays down the framework for the application of the Bridge Institution tool under the auspices of the SRM. Just as the Sale of Business tool, which allows functionally similar resolution strategies, Bridge Institutions have been incorporated into the European framework for the resolution by way of adaptation from international standards (see infra, → para. 4). In conjunction with Arts. 18(6)(b), 23, 28 and 29 SRMR, the application of the tool will be determined by the Resolution Scheme (Art. 25(2) SRMR, see infra, → paras. 5-20), whereas the implementation will rest with the NRAs in accordance with the national provisions implementing the relevant provisions of the BRRD (see, generally, infra, → Art. 29 paras. 4-14).
Jens-Hinrich Binder
755
Art. 25 SRMR
Bridge Institution Tool
B. Substantive and procedural requirements pertaining to the Bridge Institution Tool I. Structural characteristics and use of a Bridge Institution (Art. 25(1) SRMR) 2
Bridge Institutions are legal entities established by public authorities in order to assume either shares or other instruments of ownership or, alternatively, assets, rights and liabilities of a failing bank – or, indeed, potentially more than one failing bank1 – so as to facilitate the on-going provision of systemically relevant, or “critical”, functions (Art. 25(1) SRMR)2. As such, the Bridge Institution tool is functionally similar to the Sale of Business tool: Both tools facilitate the insulation of systemically relevant business activities from the remainder of the failing institution (or group of institutions), by way of either a “share deal” or an “asset deal” (cf. supra, → Art. 24 para. 3) at the discretion of the SRB. If structured in the form of an “asset deal”, the residual institution can then be liquidated under general insolvency laws, facilitating the allocation of losses to shareholders and those creditors whose claims are not included in the transfer. Specifically, Bridge Institutions can provide a useful alternative to a Sale of Business transaction in cases where, due to distressed market conditions and/or uncertainty as to the value of the relevant portfolio (cf., again, supra, → Art. 24 para. 3), no suitable purchaser can be found within the available time.3 All this is reflected in the definition of the term in Art. 40(2) BRRD (referred to in Art. 25(2)(b) SRMR), whereby a Bridge Institution is “a legal person that meets all of the following requirements: (a) it is wholly or partially owned by one or more public authorities which may include the resolution authority or the resolution financing arrangement and is controlled by the resolution authority; (b) it is created for the purpose of receiving and holding some or all of the shares or other instruments of ownership issued by an institution under resolution or some or all of the assets, rights and liabilities of one or more institutions under resolution with a view to maintaining access to critical functions and selling the institution or entity referred to in point (b), (c) or (d) of Article 1(1).”
3
Importantly, unlike Sale of Business transactions, transfers of shares or of assets, rights and liabilities to a Bridge Institution are intended to provide an interim solu-
1 Cf. Art. 41(9) BRRD – given the complexity of the tool, it would appear unlikely that this option will be used under the auspices of the SRM for the time being. 2 Cf., for a definition of “critical functions”, Art. 2(1)(35) BRRD (applicable by virtue of Art. 3(2) SRMR): “activities, services or operations the discontinuance of which is likely in one or more Member States, to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations”. 3 Cf. Binder, in: Binder and Singh (eds), Bank Resolution: The European Regime, para. 2.49.
756
Jens-Hinrich Binder
Art. 25 SRMR
Bridge Institution Tool
tion rather than a permanent solution.4 The Bridge Institution – hence the term – is intended to “bridge” the period of time during which a permanent resolution can be facilitated, either through a sale of the relevant portfolio by the Bridge Institution to a private acquirer, or through its gradual, orderly liquidation in a way that minimizes the adverse impact on other market participants and financial stability as a whole.5 Within the Banking Union, the application of the Bridge Institution tool is particularly dependent on the effective cooperation between the SRB and NRAs (and other national authorities), as the establishment, on-going operation, and the termination of Bridge Institutions are to be carried out by the NRAs in accordance with the terms set out in the Resolution Scheme. Just as the Sale of Business tool, Bridge Institutions have been advocated in interna- 4 tional standards developed in response to the financial crisis. Specifically, they have been recommended in the Key Attributes of Effective Resolution Regimes for Financial Institutions, which in turn reflect past experience, particularly in US banking regulation.6
II. Application of the Bridge Institution tool: The mandatory content of the Resolution Scheme (Art. 25(2) SRMR) 1. Overview Art. 25(2) SRMR defines the mandatory content of a Resolution Scheme concerning 5 the application of the Sale of Business tool, mainly by way of reference to the relevant provisions in the BRRD and the corresponding provisions in national law transposing the BRRD. First and foremost, the Resolution Scheme is required to determine which instruments, assets, rights or liabilities are to be transferred to the Bridge Institution – and, thus, the scope of the application of the tool, including, for that purpose, additional provisions addressing the implementation process (see infra, → paras. 6-14). Moreover, the Resolution Scheme has to make provisions relating to operational aspects of the Bridge Institution (see infra, → paras. 15-19), as well as for the “marketing” of the Bridge Institution or its assets and liabilities (see infra, → para. 20).
2. Definition of instruments, assets, rights and liabilities to be included in the transfer; further aspects (Art. 25(2)(a) SRMR) a) The scope of the transfer: instruments, assets, rights and liabilities to be included Pursuant to Art. 25(2)(a) SRMR, the Resolution Scheme has to establish which in- 6 struments, assets, rights or liabilities are to be transferred to the Bridge Institution “in 4 See, to that effect, Recital 60 BRRD: “As an institution which is wholly or partially owned by one or more public authorities or controlled by the resolution authority, a bridge institution would have as its main purpose ensuring that essential financial services continue to be provided to the clients of the failing institution and that essential financial activities continue to be performed. The bridge institution should be operated as a viable going concern and be put back on the market when conditions are appropriate and within the period laid down in this Directive or wound up if not viable.” And see Art. 41(2) BRRD: “Subject to any restrictions imposed in accordance with Union or national competition rules, the management of the bridge institution shall operate the bridge institution with a view to maintaining access to critical functions and selling the institution or entity referred to in point (b), (c) or (d) of Article 1(1), its assets, rights or liabilities, to one or more private sector purchasers when conditions are appropriate and within the period specified in paragraph 4 of this Article or, where applicable, paragraph 6 of this Article.” 5 See Recital 65 BRRD and Art. 41(2) BRRD. 6 FSB, Key Attributes (2011/2014), paras. 3.2(vii) and (ix) and 3.4. See also Binder, in: Binder and Singh (eds), Bank Resolution: The European Regime, para. 2.05.
Jens-Hinrich Binder
757
Art. 25 SRMR
Bridge Institution Tool
accordance with Art. 40(1) to (12) of [the BRRD]”. The provision, as such, is structurally identical with the corresponding provision for the application of the Sale of Business tool in Art. 24(2)(a) SRMR. Just as with a Sale of Business transaction, the transfer to a Bridge Institution can be structured, in the discretion of the SRB, as a “share deal” or as an “asset deal” (cf., for further details, supra, → Art. 24 paras. 5-7). However, unlike in a Sale of Business transaction, the selection of instruments, assets, rights or liabilities by the SRB is less likely to be determined with a view to improving the marketability of the relevant portfolio, and more likely to be made exclusively with regard to the systemic relevance of the business activities affected by the transfer. However, when defining the scope of the transfer, care must be taken to ensure “that the total value of liabilities transferred by the national resolution authority to the bridge institution does not exceed the total value of the rights and assets transferred from the institution under resolution or provided by other sources.” (Art. 25(3) SRMR, replicating Art. 40(3) BRRD).
This requirement reflects the general objective that the Bridge Institution should, in principle, be able to operate as a “viable going concern”, which ideally can be “put back on the market when conditions are appropriate”.7 b) Other aspects pertaining to the implementation process 7
The reference to Art. 40(1)-(12) BRRD, in this context, is misleading, as these provisions do not refer to the selection of instruments, assets, rights or liabilities subject to the transfer, but lay down requirements pertaining to a wide range of operational issues. Despite the focus on the specification of instruments, assets, rights and liabilities subject to the transfer, Art. 25(2) SRMR should therefore be construed as referring also to those operational aspects covered by Art. 40 BRRD that have not been taken up in other provisions of Art. 25 SRMR. Among the provisions in Art. 40(1)-(12) BRRD, the following are of particular relevance for the preparation of the application of the Bridge Institution tool: (a) requirements pertaining to the consideration to be paid by the Bridge Institution (Art. 40(4) BRRD; see infra, → para. 8), (b) requirements pertaining to repeated and reverse transfers (Art. 40(5)-(7) BRRD, see infra, → para. 9), as well as requirements addressing the protection of certain counterparties (Art. 40(8) BRRD, see infra, → para. 10) and the on-going operation of regulated services (Art. 40(9) and (10) BRRD, see infra, → para. 11). (i) Consideration to be paid by Bridge Institution (Art. 25(2)(a) SRMR in conjunction with Art. 40(4) BRRD)
8
Pursuant to Art. 40(4) BRRD, “any consideration paid by the Bridge Institution” shall benefit either the owners of the relevant shares or other instruments of ownership subject to the transfer (in the case of a “share deal” transaction), or the residual institution under resolution (in the case of an “asset deal” transaction). The interpretation of this provision is not entirely clear. Unlike the Sale of Business tool, where the transfer is expressly required to be made on “commercial terms”, subject to detailed “marketing” requirements (supra, → Art. 24 paras. 20-26), neither the SRMR nor the BRRD lay down any specific provisions governing the calculation and payment of a consideration in return for the transferred portfolio. References to such consideration in both legal instruments are rare, and accidental. Specifically, Art. 20(5)(3) SRMR (a verbatim adaptation from Art. 36(4)(e) BRRD) provides that one of the purposes of the valuation to be carried out in accordance with Art. 20 SRMR is, 7
758
Cf. Recital 65 BRRD.
Jens-Hinrich Binder
Art. 25 SRMR
Bridge Institution Tool
“when the bridge institution tool (…) is applied, to inform the decision on the assets, rights, liabilities or shares or other instruments of ownership to be transferred and the decision on the value of any consideration to be paid to the institution under resolution or, as the case may be, to the owners of the shares or other instruments of ownership”.
Moreover, pursuant to Art. 36(12)(b) SRMR (cf. Art. 20(11)(b) BRRD), “[i]n the event that the ex-post definitive valuation's estimate of the net asset value of an entity referred to in Article 2 is higher than the provisional valuation's estimate of the net asset value of that entity, the Board may request the national resolution authority to: (…) instruct a bridge institution or asset management vehicle to make a further payment of consideration in respect of the assets, rights or liabilities to an institution under resolution, or as the case may be, in respect of the instruments of ownership to the owners of those instruments of ownership.”
As reflected by these provisions, the payment of consideration by a Bridge Institution 9 is evidently conceived as a means of compensation, benefiting either (a) the residual institution (in the case of an “asset deal” transfer) or (b) its shareholders and owners of other instruments of ownership, for the loss in value caused by the transfer. The payment of consideration by the Bridge Institution is thus part of the broader objective to ensure that the economic outcome of resolution actions should simulate the results of a hypothetical insolvency liquidation of the failing institution to the maximum extent possible (supra, → Art. 15 paras. 3-7). The requirements pertaining to a consideration to be paid by a Bridge Institution have to be construed accordingly. In the event of a partial transfer of assets, rights and liabilities, the residual institution, following the application of the Sale of Business tool or a transfer to a Bridge Institution, is to be liquidated.8 At any rate, all creditors (as well as the shareholders) ultimately should receive, upon completion of the resolution action, (at least) what they would have received in hypothetical insolvency liquidation.9 In this context, it should be noted that any net proceeds generated upon the termination of the Bridge Institution have to benefit the shareholders of the credit institution (Art. 41(8), subpara. (2) BRRD, applicable by virtue of Art. 25(2)(b) SRMR). In the event of an “asset deal” transfer, the consideration to be paid by the Bridge Institution thus serves to reallocate the value of the transferred portfolio to the residual institution, where the consideration will become part of the insolvency estate to be distributed among creditors and, possibly, shareholders. In a “share deal” scenario, by contrast, the failing institution, at least for the time being, survives, but shareholders and investors in other instruments of ownership are expropriated and will receive the consideration to be paid by way of compensation. In order to facilitate consistency with these general principles, both the SRB and the 10 NRAs implementing a Resolution Scheme will have to ensure that the consideration equals, but does not exceed, the value of the relevant portfolio. In practical terms, at any rate, the payment of any consideration will depend on the funding structure of the Bridge Institution. As prescribed by Art. 25(2)(b) SRMR in conjunction with (the national laws transposing) Art. 41(1), subpara. (1) (e) and (f) BRRD, Bridge Institutions are required to obtain the authorisation necessary to carry out regulated activities and, in this context, to comply with the relevant prudential requirements, including own funds requirements, under the CRD IV and the CRR, but in this regard, exemptions apply pursuant to Art. 41(1), subpara. (2) (see infra, → para. 16). The required capital levels, then, will at least to some extent be accomplished through a bail-in of liabilities (→ Art. 27(1)(b)(i) SRMR; infra, → Art. 27 paras. 22-26), preceded by a write-down and/or conversion of capital instruments. Against this backdrop, it is at least question8 9
Cf. Art. 22(5) and Recital 69 SRMR (Art. 37(6) and Recital 60 BRRD). See, for creditors, Art. 15(1)(g) SRMR (Art. 34(1)(g) BRRD).
Jens-Hinrich Binder
759
Art. 25 SRMR
Bridge Institution Tool
able whether Bridge Institutions, as a rule, can be expected to command sufficient funds to pay any consideration commensurate to the value of the portfolio transferred to them during the early stages of resolution, i.e., prior to any sale of assets and/or other realization of value by the Bridge Institution in due course. Rather, the payment of any consideration is likely to be made out of proceeds generated through the on-going operation and/or sale of at least parts of the relevant portfolio by the Bridge Institution in due course. (ii) Repeated, reverse and onward transfers (Art. 25(2)(a) SRMR in conjunction with Art. 40(5)-(7) BRRD) 11
Pursuant to Art. 40(5) BRRD, defining the conditions for repeated transfers, “[w]hen applying the bridge institution tool, the resolution authority may exercise the transfer power more than once in order to make supplemental transfers of shares or other instruments of ownership issued by an institution under resolution or, as the case may be, assets, rights or liabilities of the institution under resolution.”
Art. 40(6) BRRD then lays down the conditions for reverse and onward transfers, whereby “[f]ollowing an application of the bridge institution tool, the resolution authority may: (a) transfer rights, assets or liabilities back from the bridge institution to the institution under resolution, or the shares or other instruments of ownership back to their original owners, and the institution under resolution or original owners shall be obliged to take back any such assets, rights or liabilities, or shares or other instruments of ownership, provided that the conditions laid down in paragraph 7 are met; (b) transfer, shares or other instruments of ownership, or assets, rights or liabilities from the bridge institution to a third party.”
Art. 40(7) BRRD allows transfers pursuant to Art. 40(6)(a) BRRD only in the following circumstances: “(a) the possibility that the specific shares or other instruments of ownership, assets, rights or liabilities might be transferred back is stated expressly in the instrument by which the transfer was made; (b) the specific shares or other instruments of ownership, assets, rights or liabilities do not in fact fall within the classes of, or meet the conditions for the transfer of shares or other instruments of ownership, assets, rights or liabilities specified in the instrument by which the transfer was made. Such a transfer back may be made within any period, and shall comply with any other conditions, stated in that instrument for the relevant purpose.”
12
All three provisions cited above facilitate the implementation of the Bridge Institution tool, as well as subsequent calibrations to its use in the circumstances and transfers made during the sale of assets by the Bridge Institution. They are thus ancillary in nature. The Resolution Scheme itself, adopted pursuant to Arts. 18 and 23 SRMR, is probably unlikely to include detailed provisions as to their use in the circumstances. It is conceivable, however, that they could be invoked in the context of subsequent amendments to the Resolution Scheme pursuant to Art. 23(3) SRMR, or instructions to the NRAs pursuant to Art. 28(2) SRMR.
760
Jens-Hinrich Binder
Art. 25 SRMR
Bridge Institution Tool
(iii) Protection of certain counterparties through “safeguards” (Art. 25(2)(a) SRMR in conjunction with Art. 40(10), 73-80 BRRD) As is the case with regard to the Sale of Business tool (Art. 24(2)(a) SRMR), the appli- 13 cation of the Bridge Institution is subject to a range of so-called “safeguards”, i.e., provisions limiting certain legal effects in order to protect specific counterparties from adverse consequences of the implementation of the tool. The relevant norms are discussed in the context of the Sale of Business tool (supra, → Art. 24 paras. 11-19). (iv) Effective separation between Bridge Institution and residual institution under resolution; liability of management body and senior management (Art. 25(2)(a) SRMR in conjunction with Art. 40(11) and (12) BRRD) Art. 40(11) BRRD, also applicable by virtue of Art. 25(2)(a) SRMR, reinforces the ef- 14 fectiveness of the transfer by stipulating that shareholders or creditors, upon completion of the transfer, cease to have any rights over or in relation to the assets, rights or liabilities included in the transfer. Art. 40(12) BRRD then continues to limit the liability of members of the management body and senior management towards the shareholders and creditors of the residual institution under resolution.
3. Ongoing operation and termination of the Bridge Institution (Art. 25(2)(a) and (b) SRMR) Pursuant to Art. 25(2)(b) SRMR, the Resolution Scheme also has to define
15
“the arrangements for the setting up, the operation and the termination of the bridge institution by the national resolution authority in accordance with Article 41(1), (2), (3) and (5) to (9) [BRRD].”
Moreover, Art. 40(9) and (10) BRRD, applicable by virtue of Art. 25(2)(a) SRMR, make provisions for the on-going operation of business activities by the Bridge Institution. By virtue of Art. 40(9) BRRD, the Bridge Institution is generally to be considered a continuation of the institution under resolution for the purposes of the licenses of that institution, while Art. 40(10) BRRD protects membership rights in, and access to, financial market infrastructures (payment, clearing and settlement systems, stock exchanges), as well as investor compensation schemes and deposit guarantee schemes. General requirements for the establishment and the operation of Bridge Institutions 16 are then laid down in Art. 41(1) BRRD, whereby the legal structure, the composition and remuneration of the management board, and the business strategy of Bridge Institutions are subject to approval by the resolution authority. Art. 41(1), subpara. (1) (e) and (f) BRRD also subject the Bridge Institution to the applicable licensing and on-going regulatory requirements for those services that are assumed by it under the CRD IV and/or MiFID II, while short suspensions following the beginning of the operation may be possible pursuant to Art. 41(1), subpara. (2). With regard to the on-going operation of the Bridge Institution, Art. 41(2) BRRD reiterates the general objective to “operate the Bridge Institution with a view to maintaining access to critical functions and selling [the institute or its assets, rights and liabilities” as soon as the market environment allows (see, generally, supra, → paras. 2-3). In line with the notion of Bridge Institutions as an interim solution, Art. 41(3) BRRD 17 provides that Bridge Institutions cease to operate as such as soon as one of a number of alternative conditions for its termination is met: (a) a merger of the Bridge Institution with another entity, (b) the Bridge Institution ceases to meet the conditions set out in Art. 41(2) BRRD, (c) the sale of all or substantially all of the Bridge Institution’s assets, rights or liabilities to a third party, (d) the expiry of the mandatory time limits (to be Jens-Hinrich Binder
761
Art. 25 SRMR
Bridge Institution Tool
discussed see infra, → para. 18), or (e) the complete winding-down of the Bridge Institution’s assets and the complete discharge of its liabilities. In the circumstances referred to in points (c) and (d), the Bridge Institution shall then be wound up under normal insolvency proceedings (Art. 40(8), subpara. (1) BRRD). 18 In this context, Art. 41(5) and (6) in conjunction with Art. 41(2)(d) BRRD defines mandatory time limits for the termination of the Bridge Institution. As a rule, the operation of the Bridge Institution has to be terminated “as soon as possible and in any event two years” after the transfer of assets, rights and liabilities (Art. 41(5) BRRD). However, Art. 41(6) BRRD allow for extensions of that period for one or more additional one-year periods if that extension “(a) supports the outcomes referred to in point (a), (b), (c) or (e) of paragraph 3; or (b) is necessary to ensure the continuity of essential banking or financial services.”
Any extension must be reasoned, including a “detailed assessment of the situation, including of the market conditions and outlook, that justifies the extension” (Art. 41(7) BRRD). 19 While the BRRD leaves the relevant decisions to the discretion of the resolution authority, it follows both from Art. 25(2)(b) SRMR and the general principles on the delineation of powers between the SRB and the NRAs set out in Arts. 28 and 29 SRMR that the competency to define not just the modus operandi, but also to decide on the termination of the Bridge Institution is allocated to the SRB rather than the NRAs. As the latter will depend on (changes in) the market environment that cannot always be anticipated at the time the Resolution Scheme is adopted, relevant decisions are likely to take the form of amendments to the Resolution Scheme pursuant to Art. 23(3) SRMR, or instructions to the NRAs pursuant to Art. 28(2) SRMR.
4. “Marketing” of the Bridge Institution or its assets and liabilities (Art. 25(2)(c) SRMR in conjunction with Art. 41(4) BRRD) 20
Pursuant to Art. 25(2)(c) SRMR, the Resolution Scheme also has to define the “arrangements for the marketing of the bridge institution or its assets or liabilities by the national resolution authority in accordance with Article 41(4) [BRRD]”.
Given the rather vague terms of Art. 41(4) BRRD, which merely requires “that the bridge institution or the relevant assets or liabilities are marketed openly and transparently, and that the sale does not materially misrepresent them or unduly favour or discriminate between potential purchasers”
and that “[a]ny such sale (…) be made on commercial terms, having regard to the circumstances and in accordance with the Union State aid framework”,
it is questionable to which degree the Resolution Scheme itself can, and should, define detailed requirements in this regard. As the marketability of the relevant assets or liabilities – or, indeed, the Bridge Institution as a whole – will depend on market conditions difficult to anticipate at the time the Resolution Scheme is adopted, the Scheme itself will probably have to be confined to rather general terms in this respect. It would then be for the management board of the Bridge Institution and the relevant NRA to organise and implement the marketing process in due course. In this process, the relevant decisions – in view of the general delineation of powers between the NRAs and the SRB – should be coordinated with the SRB, which may influence the process through amend-
762
Jens-Hinrich Binder
Art. 26 SRMR
Asset separation tool
ments to the Resolution Scheme pursuant to Art. 23(3) SRMR, or instructions to the NRAs pursuant to Art. 28(2) SRMR.
Art. 26 SRMR Asset separation tool 1. Within the resolution scheme, the asset separation tool shall consist of the transfer of assets, rights or liabilities of an institution under resolution or a bridge institution to one or more asset management vehicles. 2. Concerning the asset separation tool, the resolution scheme shall establish: (a) the assets, rights and liabilities to be transferred by the national resolution authority to an asset management vehicle in accordance with Article 42(1) to (5) and (8) to (13) of Directive 2014/59/EU; (b) the consideration for which the assets, rights and liabilities are to be transferred by the national resolution authority to the asset management vehicle in accordance with the principles established in Article 20 of this Regulation, with Article 42(7) of Directive 2014/59/EU and with the Union State aid framework. Point (b) of the first subparagraph shall not prevent the consideration having nominal or negative value. Bibliography Emilios Avgouleas and Charles Goodhart, ’An Anatomy of Bank Bail-ins: Why the Eurozone Needs a Fiscal Backstop for the Banking Sector’, in: G. Barba Navaretti et al. (eds), European Economy: Banks, Regulation, and the Real Sector (2016), 75; Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements, and Tools’, in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution – The European Regime (Oxford University Press, 2016), Ch. 2; id., ‘The Relevance of the Resolution Tools Within the Single Resolution Mechanism’, in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, 2019), Ch. 13; Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2011/2014); Marco Lamandini, Giuseppe Lusigniani and David Ramos Muñoz, ‘Does Europe Have What It Takes to Finish the Banking Union?’, 24 Colum. J. Eur. L. (2018), 233. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Substantive and procedural requirements pertaining to the Asset Separation tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Structural characteristics and use of the Asset Separation tool within the Banking Union (Art. 26(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Application of the Asset Separation tool: The mandatory content of the Resolution Scheme (Art. 26(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 2 2 7
A. Introduction Art. 26 SRMR – to a large extent by way of reference to the requirements in Arts. 42 1 BRRD – lays down the framework for the application of the Asset Separation tool under the auspices of the SRM. While the use of designated asset management vehicles in order to facilitate the restructuring of individual banks and banking systems suffering from high levels of non-performing loan portfolios has been promoted both by international standards and within Europe in recent years (see infra, → para. 2), it is nonetheless questionable whether – and if so, how – the instrument can be activated within the SRM, however (see infra, → paras. 4-6). Similar to Arts. 24 and 25 SRMR (on the Sale of Business and the Bridge Institution tool, respectively), Art. 26 SRMR defines the manda-
Jens-Hinrich Binder
763
Art. 26 SRMR
Asset separation tool
tory content of a Resolution Scheme in this regard (see infra, → paras. 7-8), whereas implementation is left to the NRAs and will be governed largely by the national laws transposing the BRRD.
B. Substantive and procedural requirements pertaining to the Asset Separation tool I. Structural characteristics and use of the Asset Separation tool within the Banking Union (Art. 26(1) SRMR) 2
Art. 26(1) SRMR defines the tool, in very general terms, as involving the “transfer of assets, rights or liabilities of an institution under resolution or a bridge institution to one or more asset management vehicles.”
The use of designated asset management vehicles thus may help to remove problem portfolios from banks’ balance sheets, which may facilitate their orderly restructuring outside the regulated entity and help to free up regulatory capital with a view to restore the relevant bank’s capacity to provide new loans. The tool has also been recommended by the Financial Stability Board’s “Key Attributes” in 2011/2014.1 As reflected in that document, the use of designated asset management vehicles generally has come to be accepted as an effective remedy particularly in the context of structural systemic banking crises, where substantial parts of national banking systems are affected by high levels of non-performing loans and affected banks need to restore their ability to finance the real sector.2 At the European level, the creation of the tool ties in with more recent initiatives to establish strategies and a technical framework for the solution of structural problems with non-performing loans at various levels, including, in particular, two legislative proposals released by the European Commission in 2018,3 which formed part of a broader Action Plan to Tackle Non-Performing Loans in Europe.4 3 Pursuant to Art. 42(2) BRRD, applicable by virtue of Art. 26(2)(a) SRMR, an asset management vehicle for the purposes of both instruments is defined as an entity which “(a) (…) is wholly or partially owned by one or more public authorities which may include the resolution authority or the resolution financing arrangement and is controlled by the resolution authority [and] (b) (…) has been created for the purpose of receiving some or all of the assets, rights and liabilities of one or more institutions under resolution or a bridge institution.”
FSB, Key Attributes, para. 3.2 (viii). For a review of the literature, see Binder, in: Binder and Singh (eds), Bank Resolution: The European Regime, para. 2.52. For more recent recommendations, see, e.g., Avgouleas and Goodhart, in: Barba Navaretti et al., European Economy, 84; Lamandini, Lusignani and Muňoz, 24 Colum. J. Eur. L. (2018), 233, 257. 3 Commission, Proposal for a Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral, COM(2018) 135 final. And see Commission Staff Working Document: “AMC Blueprint” of 14 March 2018 (SWD) (2018) 72 final. See also Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures, OJ L 111/4. For further discussion on these and related initiatives by the ECB and EBA, cf. Lamandini, Lusignani and Muňoz, 24 Colum. J. Eur. L. (2018), 233, 257. 4 Press Release, Council of the EU, Council Conclusions on Action Plan to Tackle Non-Performing Loans in Europe (July 11, 2017) (Press Release 459/17). 1
2
764
Jens-Hinrich Binder
Art. 26 SRMR
Asset separation tool
Art. 42(3) BRRD then requires the vehicle to “manage the assets transferred to it with a view to maximising their value through eventual sale or orderly wind down.”
As reflected in these provisions, the Asset Separation tool almost inevitably will have 4 to be implemented within the context of a broader national strategy for the restructuring of individual banks or, indeed, regional or national banking systems, with a high level of involvement by governmental authorities, which is consistent with their use in earlier cases in several jurisdictions.5 As such strategies regularly involve at least some temporary commitment of public funds and in the light of potential distortions for other market participants without access associated with it, the use of the Asset Separation tool is subject to a number of restrictive conditions. Pursuant to Art. 42(5) BRRD, the application of the tool is permissible only if “(a) the situation of the particular market for those assets is of such a nature that the liquidation of those assets under normal insolvency proceedings could have an adverse effect on one or more financial markets. (b) such a transfer is necessary to ensure the proper functioning of the institution under resolution or bridge institution; or (c) such a transfer is necessary to maximise liquidation proceeds.”
While defined in rather vague terms, the provision clearly reflects the exceptional 5 character of resolution strategies involving the application of the Asset Separation tool as a means to avoid systemic repercussions that could arise as a result of the outright application of other elements of the resolution toolbox in market environments where, due to structural problems and/or the general condition of the economy, a more market-oriented solution would seem inappropriate. This interpretation is reinforced by Art. 22(4), sentence 2 SRMR (Art. 37(5) BRRD), whereby the tool may be used only in combination with another resolution tool. This is to ensure loss participation of shareholders and creditors of the relevant institution(s), and to avoid distortions to competition for the relevant institution(s). 6 Moreover, the use of the tool is subject to scrutiny under the EU State Aid regime (Art. 26(2), subpara. (1)(b) SRMR), which comes with complex implications for the design of strategies to implement asset management vehicles. 7 Against this backdrop, it is probably fair to assume that the Asset Separation tool will 6 play only a limited role – if any at all – in resolution actions under the auspices of the SRM. Given the need to involve the respective national authorities, which ultimately have to structure (and back-stop) the creation and operation of asset management vehicles, it is hardly conceivable that the tool could be used ad hoc in resolution scenarios on the initiative of the SRB alone, once an institution has been identified as “failing or likely to fail” for the purposes of Art. 18(1)(a) SRMR.8 Rather, Member States with structural problems in their respective banking sectors are likely to implement asset management vehicles as part of a strategy to prevent the application of the resolution toolbox, e.g., by invoking the exception for precautionary recapitalisations under Art. 18(4), subparagraph (1)(d)(iii) SRMR.9 Moreover, it has to be noted that neither the BRRD nor Art. 26 See, again, Binder, in: Binder and Singh (eds), Bank Resolution: The European Regime, para. 2.52. Cf. Recital 72 SRMR = Recital 66 BRRD. 7 See, for a useful discussion of the relevant conditions and their implications, Commission Staff Working Document: “AMC Blueprint” of 14 March 2018 (SWD(2018) 72 final, 28. 8 Cf. also Art. 6(6) SRMR, which prohibits decisions by the SRB that would come with consequences for national budgets. 9 Cf. also Commission Staff Working Document: “AMC Blueprint” of 14 March 2018 (SWD(2018) 72 final, 28. 5
6
Jens-Hinrich Binder
765
Art. 26 SRMR
Asset separation tool
SRMR provide any detailed substantive or procedural framework for the implementation of the tool, which further restricts its practical use.
II. Application of the Asset Separation tool: The mandatory content of the Resolution Scheme (Art. 26(2) SRMR) As noted before – and unlike the corresponding regimes for the implementation of the Sale of Business and Bridge Institution tools (Arts. 24 and 25 SRMR), respectively – the substantive and procedural framework for the implementation of the Asset Separation tool is rather vague. To the extent that more specific requirements are stipulated, the relevant provisions essentially mirror the corresponding regime for the Bridge Institution tool in Art. 25 SRMR. In terms of its scope of application, Art. 26(2), subparagraph (1)(a) SRMR first requires the Resolution Scheme to specify the assets, rights and liabilities to be included in the transfer in accordance with Art. 42(1)-(5) and (8)-(13) BRRD. In addition to the restrictions discussed supra, → paras. 3-5, this, first, involves requirements pertaining to the legal nature and ongoing operation of the relevant asset management vehicle, which resemble the corresponding provisions of Art. 41(1) BRRD on the Bridge Institution (cf. supra, → Art. 25 paras. 15 and 26). For a useful analysis of potential strategies in this regard, readers are referred to the 2018 Commission Staff Working Document on an “AMC Blueprint”.10 Art. 42(8) BRRD then facilitates the acquisition of assets, rights and liabilities from a Bridge Institution. Art. 42(9) and (10) BRRD allow for repeated and reverse transfers of assets, rights and liabilities by the asset management vehicle and to the institution under resolution, respectively, which mirrors the provisions in Art. 40(5) and (6) BRRD for Bridge Institutions (cf. → Art. 25 paras. 11 and 12). By virtue of Art. 42(11) BRRD, the transfer of assets, rights and liabilities is subject to the “safeguards” protecting certain stakeholders in the case of partial property transfers stipulated in Chapter VII of Title IV BRRD (for an analysis of which, see supra, → Art. 24 paras. 11-19). Finally, Art. 42(12) and (13) BRRD set out principles for the effective separation between the asset management vehicle and residual institution under resolution and the liability of management body and senior management, which mirror the corresponding provisions for the Bridge Institution tool in Art. 40(11) and (12) BRRD (supra, → Art. 25 para. 14). 8 By contrast, only very limited guidance is provided as to the calculation of the financial terms of the transfer (Art. 26(2), subparagraph (1)(b) SRMR). In this regard, much will depend on the circumstances of each case, in particular: the value of the relevant portfolio on the one hand and the market environment on the other hand, as well as the restrictions following from the State Aid regime, which will determine the management and ultimate sale of the portfolio. Again, a useful analysis in this regard can be found in the 2018 Commission Staff Working Document on an “AMC Blueprint”, to which readers are referred.11 7
10 11
766
Ibid., in particular pp. 41-76. Ibid., in particular pp. 69-75.
Jens-Hinrich Binder
Art. 27 SRMR
Bail-in tool
Art. 27 SRMR Bail-in tool 1. The bail-in tool may be applied for any of the following purposes: (a) to recapitalise an entity referred to in Article 2 of this Regulation that meets the conditions for resolution to the extent sufficient to restore its ability to comply with the conditions for authorisation (to the extent that those conditions apply to the entity) and to continue to carry out the activities for which it is authorised under Directive 2013/36/EU or Directive 2014/65/EU, where the entity is authorised under those Directives, and to sustain sufficient market confidence in the institution or entity; (b) to convert to equity or reduce the principal amount of claims or debt instruments that are transferred: (i) to a bridge institution with a view to providing capital for that bridge institution; or (ii) under the sale of business tool or the asset separation tool. Within the resolution scheme, concerning the bail-in tool, the following shall be established: (a) the aggregate amount by which bail-inable liabilities must be reduced or converted, in accordance with paragraph 13; (b) the liabilities that may be excluded in accordance with paragraphs 5 to 14; (c) the objectives and minimum content of the business reorganisation plan to be submitted in accordance with paragraph 16. 2. The bail-in tool may be applied for the purpose referred to in point (a) of paragraph 1 only if there is a reasonable prospect that the application of that tool, together with other relevant measures including measures implemented in accordance with the business reorganisation plan required by paragraph 16 will, in addition to achieving relevant resolution objectives, restore the entity in question to financial soundness and long-term viability. Any of the resolution tools referred to in Article 22(2)(a), (b) and (c), and the bail-in tool referred to in point (d) of that paragraph, shall apply, as appropriate, where the conditions laid down in the first subparagraph are not met. 3. The following liabilities, whether they are governed by the law of a Member State or of a third country, shall not be subject to write-down or conversion: (a) covered deposits; (b) secured liabilities including covered bonds and liabilities in the form of financial instruments used for hedging purposes which form an integral part of the cover pool and which, in accordance with national law, are secured in a way similar to covered bonds; (c) any liability that arises by virtue of the holding by an institution or entity referred to in Article 2 of this Regulation of client assets or client money, including client assets or client money held on behalf of UCITS as defined in Article 1(2) of Directive 2009/65/EC or of AIFs as defined in Article 4(1)(a) of Directive 2011/61/EU of the European Parliament and of the Council, provided that such client is protected under the applicable insolvency law; (d) any liability that arises by virtue of a fiduciary relationship between an entity referred to in Article 2 (as fiduciary) and another person (as beneficiary), pro-
Christos Hadjiemmanuil
767
Art. 27 SRMR
(e) (f)
(g)
(h)
Bail-in tool
vided that such beneficiary is protected under the applicable insolvency or civil law; liabilities to institutions, excluding entities that are part of the same group, with an original maturity of less than seven days; liabilities with a remaining maturity of less than seven days, owed to systems or operators of systems designated in accordance with Directive 98/26/EC of the European Parliament and of the Councilor to their participants and arising from the participation in such a system, or to CCPs authorised in the Union pursuant to Article 14 of Regulation (EU) No 648/2012 and third-country CCPs recognised by ESMA pursuant to Article 25 of that Regulation; a liability to any one of the following: (i) an employee, in relation to accrued salary, pension benefits or other fixed remuneration, except for the variable component of remuneration that is not regulated by a collective bargaining agreement; (ii) a commercial or trade creditor arising from the provision to the institution or entity referred to in Article 2 of goods or services that are critical to the daily functioning of its operations, including IT services, utilities and the rental, servicing and upkeep of premises; (iii) tax and social security authorities, provided that those liabilities are preferred under the applicable law; (iv) deposit guarantee schemes arising from contributions due in accordance with Directive 2014/49/EU. liabilities to entities referred to in point (a), (b), (c) or (d) of Article 1(1) of Directive 2014/59/EU that are part of the same resolution group without being themselves resolution entities, regardless of their maturities, except where those liabilities rank below ordinary unsecured liabilities under the relevant national law of the participating Member State governing normal insolvency proceedings applicable on 28 December 2020; in cases where that exception applies, the Board shall assess whether the amount of items complying with Article 12g(2) is sufficient to support the implementation of the preferred resolution strategy.
Point (g)(i) of the first subparagraph shall not apply to the variable component of the remuneration of material risk takers as identified in Article 92(2) of Directive 2013/36/EU. 4. The scope of the bail-in tool referred to in paragraph 3 of this Article shall not prevent, where appropriate, the exercise of the bail-in powers to any part of a secured liability or a liability for which collateral has been pledged that exceeds the value of the assets, pledge, lien or collateral against which it is secured or to any amount of a deposit that exceeds the coverage level provided for in Article 6 of Directive 2014/49/EU. The Board shall ensure that all secured assets relating to a covered bond cover pool remain unaffected, segregated and with enough funding. Without prejudice to the large exposure rules in Regulation (EU) No 575/2013 and Directive 2013/36/EU, and in order to provide for the resolvability of entities and groups, the Board shall instruct the national resolution authorities to limit, in accordance with Article 10(11)(b) of this Regulation, the extent to which other institutions hold bail-inable liabilities, save for liabilities that are held at entities that are part of the same group. 5. In exceptional circumstances, where the bail-in tool is applied, certain liabilities may be excluded or partially excluded from the application of the write-down or conversion powers where: 768
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
(a) it is not possible to bail-in that liability within a reasonable time notwithstanding the good faith efforts of the relevant national resolution authority; (b) the exclusion is strictly necessary and is proportionate to achieve the continuity of critical functions and core business lines in a manner that maintains the ability of the institution under resolution to continue key operations, services and transactions; (c) the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, in particular as regards eligible deposits held by natural persons and micro, small and medium-sized enterprises, which would severely disrupt the functioning of financial markets, including of financial market infrastructures, in a manner that could cause a serious disturbance to the economy of a Member State or of the Union; or (d) the application of the bail-in tool to those liabilities would cause a destruction in value such that the losses borne by other creditors would be higher than if those liabilities were excluded from bail-in. The Board shall carefully assess whether liabilities to institutions or entities that are part of the same resolution group without themselves being resolution entities and that are not excluded from the application of write-down and conversion powers under point (h) of paragraph (3) should be excluded or partially excluded under points (a) to (d) of the first subparagraph to ensure the effective implementation of the resolution strategy. Where a bail-inable liability or class of bail-inable liabilities is excluded or partially excluded under this paragraph, the level of write-down or conversion applied to other bail-inable liabilities may be increased to take account of such exclusions, provided that the level of write-down and conversion applied to other bail-inable liabilities complies with the principle laid down in point (g) of Article 15(1). 6. Where a bail-inable liability or class of bail-inable liabilities is excluded or partially excluded pursuant to paragraph 5, and the losses that would have been borne by those liabilities have not been passed on fully to other creditors, a contribution from the Fund may be made to the institution under resolution to do one or both of the following: (a) cover any losses which have not been absorbed by bail-inable liabilities and restore the net asset value of the institution under resolution to zero in accordance with point (a) of paragraph 13; (b) purchase instruments of ownership or capital instruments in the institution under resolution, in order to recapitalise the institution in accordance with point (b) of paragraph 13. 7. The Fund may make a contribution referred to in paragraph 6 only where: (a) a contribution to loss absorption and recapitalisation equal to an amount not less than 8 % of the total liabilities including own funds of the institution under resolution, measured at the time of resolution action in accordance with the valuation provided for in Article 20(1) to (15), has been made by shareholders, the holders of relevant capital instruments and other bail-inable liabilities through write-down, conversion or otherwise; and (b) the contribution from the Fund does not exceed 5 % of the total liabilities including own funds of the institution under resolution, measured at the time of resolution action in accordance with the valuation provided for in Article 20(1) to (15). Christos Hadjiemmanuil
769
Art. 27 SRMR
Bail-in tool
8. The contribution of the Fund referred to in paragraph 7 of this Article may be financed by: (a) the amount available to the Fund which has been raised through contributions by entities referred to in Article 2 of this Regulation in accordance with the rules laid down in Directive 2014/59/EU and in Article 67(4) and Articles 70 and 71 of this Regulation; (b) where the amounts referred to in point (a) of this paragraph are insufficient, amounts raised from alternative funding means in accordance with Articles 73 and 74. 9. In extraordinary circumstances, further funding may be sought from alternative financing sources after: (a) the 5 % limit specified in point (b) of paragraph 7 has been reached; and (b) all unsecured, non-preferred liabilities, other than eligible deposits, have been written down or converted in full. 10. As an alternative or in addition, where the conditions laid down in points (a) and (b) of paragraph 9 are met, a contribution may be made from resources which have been raised through ex-ante contributions in accordance with Article 70 and which have not yet been used. 11. For the purposes of this Regulation, Article 44(8) of Directive 2014/59/EU shall not apply. 12. When taking the decision referred to in paragraph 5, due consideration shall be given to: (a) the principle that losses should be borne first by shareholders and next, in general, by creditors of the institution under resolution in order of preference; (b) the level of loss absorbing capacity that would remain in the institution under resolution if the liability or class of liabilities were excluded; and (c) the need to maintain adequate resources for resolution financing. 13. The Board shall assess, on the basis of a valuation that complies with the requirements of Article 20(1) to (15), the aggregate of: (a) where relevant, the amount by which bail-inable liabilities must be written down in order to ensure that the net asset value of the institution under resolution is equal to zero; and (b) where relevant, the amount by which bail-inable liabilities must be converted into shares or other types of capital instruments in order to restore the Common Equity Tier 1 capital ratio of either: (i) the institution under resolution; or (ii) the bridge institution. The assessment referred to in the first subparagraph shall establish the amount by which bail-inable liabilities need to be written down or converted in order to restore the Common Equity Tier 1 capital ratio of the institution under resolution, or, where applicable, establish the ratio of the bridge institution taking into account any contribution of capital by the Fund pursuant to point (d) of Article 76(1), and to sustain sufficient market confidence in the institution under resolution or the bridge institution and enable it to continue to meet, for at least one year, the conditions for authorisation and to continue to carry out the activities for which it is authorised under Directive 2013/36/EU or Directive 2014/65/EU. 770
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
Where the Board intends to use the asset separation tool referred to in Article 26, the amount by which bail-inable liabilities need to be reduced shall take into account a prudent estimate of the capital needs of the asset management vehicle as appropriate. 14. Exclusions under paragraph 5 may be applied either to completely exclude a liability from write-down or to limit the extent of the write-down applied to that liability. 15. The write-down and conversion powers shall comply with the requirements on the priority of claims laid down in Article 17 of this Regulation. 16. The national resolution authority shall immediately submit to the Board the business reorganisation plan received in accordance with Article 52(1), (2) and (3) of Directive 2014/59/EU from the management body or the person or persons appointed in accordance with Article 72(1) thereof. Within two weeks from the date of submission of the business reorganisation plan, the relevant national resolution authority shall provide the Board with its assessment of the plan. Within one month from the date of submission of the business reorganisation plan, the Board shall assess the likelihood that the plan, if implemented, will restore the long term viability of an entity referred to in Article 2. The assessment shall be completed in agreement with the national competent authority or the ECB, where relevant. Where the Board is satisfied that the plan would achieve that objective, it shall allow the national resolution authority to approve the plan in accordance with Article 52(7) of Directive 2014/59/EU. Where the Board is not satisfied that the plan would achieve that objective, it shall instruct the national resolution authority to notify the management body or the person or persons appointed in accordance with Article 72(1) of that Directive of its concerns and require the amendment of the plan in a way that addresses those concerns in accordance with Article 52(8) of that Directive. In both cases this shall be done in agreement with the national competent authority or the ECB, where relevant. Within two weeks from the date of receipt of such a notification, the management body or the person or persons appointed in accordance with Article 72(1) of Directive 2014/59/EU shall submit an amended plan to the national resolution authority for approval. The national resolution authority shall submit to the Board the amended plan and its assessment of such plan. The Board shall assess the amended plan, and shall instruct the national resolution authority to notify the management body or the person or persons appointed in accordance with Article 72(1) of Directive 2014/59/EU within one week whether it is satisfied that the plan, as amended, addresses the concerns notified or whether further amendment is required. The Board shall communicate the group business reorganisation plan to EBA. Bibliography Kern Alexander, ‘Bank Resolution Regimes: Balancing Prudential Regulation and Shareholder Rights’, Journal of Corporate Law Studies 9 (2009), 61; Jens Verner Andersen, Pamela Lintner and Susan Schroeder, ‘Denmark–Andelskassen: Resolution Via Bridge Bank and Bail-in Including of Uninsured Depositors’ in: World Bank (ed), Bank Resolution and “Bail-in” in the EU: Selected Case Studies Pre and Post BRRD (World Bank Group, Washington D.C. 2016), 24; Gabriele Apfelbacher, Michael Kern and Valentin Pfisterer, ‘Know Your Rank’, International Financial Law Review 34 (2015-16), 60; Tomas Arons, ‘Recognition of Debt Restructuring and Resolution Measures under the European Union Regulatory Framework’, International Insolvency Review 23 (2014), 57; Ioannis G Asimakopoulos, ‘The Veneto Banks Resolution: It Shall Be Called Liquidation’, European Company Law 15 (2018), 156; Phoebus Athanassiou, ‘Valuation in Resolution and the “No-Creditor-Worse-Off Principle”’, BJIBFL 29 (2014), 16; Emilios Avgouleas and Charles Goodhart, ‘Critical Reflections on Bank Bail-ins’, JFR 1 (2015), 3; Emilios Avgouleas and Charles Goodhart, ‘An Anatomy of Bank Bail-ins: Why the Eurozone Needs a Fiscal
Christos Hadjiemmanuil
771
Art. 27 SRMR
Bail-in tool
Backstop for the Banking Sector’, European Economy 2 (2016), 75; Emilios Avgouleas and Douglas W. Arner, ‘The Eurozone Debt Crisis and the European Banking Union: Hard Choices, Intolerable Dilemmas, and the Question of Sovereignty’, International Lawyer 50 (2016-2017), 29; Valia Babis, ‘State Helps Those Who Help Themselves: State Aid and Burden-Sharing’, Law and Financial Markets Review 10 (2016), 167; Valia Babis, ‘The Impact of Bank Crisis Prevention, Recovery and Resolution on Shareholder Rights’, Law and Financial Markets Review 6 (2012), 387; Valia Babis, ‘What Is a Bank Resolution Measure – and What is Not?’, Law and Financial Markets Review 10 (2016), 54; Chris Bates and Simon Gleeson, ‘Legal Aspects of Bank Bail-ins’, Law and Financial Markets Review 5 (2011), 264; Peter Benczur, Giuseppina Cannas, Jessica Cariboni, Francesca Di Girolamo, Sara Maccaferri and Marco Petracco Giudici, ‘Evaluating the Effectiveness of the New EU Bank Regulatory Framework: A Farewell to Bail-out?’, Journal of Financial Stability 33 (2017), 207; Jens-Hinrich Binder, ‘Bank Bail-In and Disputed Claims: Can It Cope? The Case For and Against a Vis Attractiva Resolutionis’, EBI Working Paper No 32 (2019); Jens-Hinrich Binder, ‘Cross-Border Coordination of Bank Resolution in the EU: All Problems Resolved’, ECFR 13 (2016), 575; Jens-Hinrich Binder, ‘Proportionality at the Resolution Stage: Calibration of Resolution Measures and the Public Interest Test’, EBOR 21 (2020), 453; Jens-Hinrich Binder, ‘Resolution: Concepts, Requirements, and Tools’ in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution: The European Regime (Oxford University Press, Oxford 2016), 25; Jens-Hinrich Binder, ‘Wunderkind Is Walking? The Resolution of Banco Popular as a First Test for the Single Resolution Mechanism’, Oxford Business Law Blog (14 June 2017); Jens-Hinrich Binder, ‘The Relevance of the Resolution Tools Within the SRM’ in: Mario P Chiti and Vittorio Santoro (eds), The Palgrave Handbook on the European Banking Union Law (Palgrave Macmillan, Cham 2019), 299; Jens-Hinrich Binder, Michael Krimminger, María J. Nieto and Dalvinder Singh, ‘The Choice between Judicial and Administrative Sanctioned Procedures to Manage Liquidation of Banks: a Transatlantic Perspective’, Capital Markets Law Journal 14 (2019), 178; Marco Bodellini, ‘To Bail-In, or to Bail-Out, That is the Question’, EBOR 19 (2018), 365; Concetta Brescia Morra, ‘The New European Union Framework for Banking Crisis Management: Rules versus Discretion’, ECFR 16 (2019), 349; Claudia Buch and Benjamin Weigert, ‘Legacy Problems in Transition to a Banking Union’ in: Thorsten Beck (ed), Banking Union for Europe: Risks and Challenges (Centre for Economic Policy Research, London 2012), 25; Danny Busch, ‘Governance of the European Banking Union's Single Resolution Mechanism’, EBLR 28 (2017), 447; Danny Busch, Mirik BJ van Rijn and Marije Louisse, ‘How Single is the Single Resolution Mechanism?’, EBLR 30 (2019), 577; Paul Callelo and Ervin, Wilson, ‘From Bail-out to Bail-in’, The Economist 28 January (2020); Domenico Carolei, ‘The Single Resolution Mechanism: A First Analysis’, Bocconi Legal Papers 4 (2014), 197; Veronica Carriero, ‘Bank Rescues and Legal Challenges: The Case of Bail In’, EBLR 28 (2017), 635; Sabino Cassese, ‘A New Framework of Administrative Arrangements for the Protection of Individual Rights’ in: ECB Legal Conference 2017: Shaping a New Legal Order for Europe: a Tale of Crises and Opportunities (ECB, Frankfurt am Main 2017), 239; Amelie Champsaur, ‘Under Pressure’, International Financial Law Review 36 (2017), 51; John C. Coffee, ‘Bail-ins versus Bail-outs: Using Contingent Capital to Mitigate Systemic Risk’, The Center for Law and Economic Studies, Columbia University School of Law Working Paper No. 380 (2010); John C. Coffee, ‘Systemic Risk After Dodd-Frank: Contingent Capital and the Need for Regulatory Strategies Beyond Oversight’, CLR 111 (2011), 795; Thomas Conlon and John Cotter, ‘Anatomy of a Bail-in’, Journal of Financial Stabilityl 15 (2014), 257; Thomas Conlon and John Cotter, ‘Subordinate Resolution – An Empirical Analysis of European Union Subsidiary Banks’, Journal of Common Market Studies 57 (2019), 857; Fabrizio Crespi, and Danilo V Mascia, Bank Funding Strategies: The Use of Bonds and the Bail-in Effect (Palgrave Macmillan, Cham 2018); Małgorzata Agnieszka Cyndecka, ‘Once an Aid Recipient, Always an Aid Recipient: The Post-Crisis State Interventions in the Banking Sector and Beyond’, European State Aid Law Quarterly 17 (2018), 192; Samuel Da-Rocha-Lopes, Thorsten Beck, and André F. Silva, ‘Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins’, EBA Staff Paper No 1 (2018); Paul Davies, ‘Liquidity Safety Nets for Banks’, Journal of Corporate Law Studies 13 (2013), 287; Paul Davies, The Fall and Rise of Debt: Bank Capital Regulation After the Crisis’, EBOR 16 (2015), 491; Pierre de Gioia Carabellese and Daoning Zhang, ‘Bail-in Tool and Bank Insolvency: Theoretical and Empirical Discourses around a New Legal (or Illegal) Concept’, EBLR 30 (2019), 487; Rolef De Weijs, ‘Too Big To Fail as a Game of Chicken with the State: What Insolvency Law Theory Has to Say about TBTF and Vice Versa’, EBOR 14 (2013), 203; Giovanni Dell' Ariccia, Maria Soledad Martinez Peria, Deniz O. Igan, Elsie Addo Awadzi, Marc C. Dobler and Damiano Sandri, ‘Trade-offs in Bank Resolution’, IMF Staff Discussion Note SDN/18/02 (2018); Mathias Dewatripont, ‘European Banking: Bailout, Bail-in and State Aid Control’, International Journal of Industrial Organization 34 (2014), 37; Andreas Dombret and Patrick S Kenadjian (eds), The Bank Recovery and Resolution Directive: Europe’s Solution for “Too Big to Fail” (De Gruyter, Berlin an Boston 2013); Christian Duve and Philip Wimalasena, ‘Who Decides Whether Bail-in is Legal? What Comes after Cyprus and Greece?’, Law and Financial Markets Review 9 (2015), 177; Joachim Erhardt, Johannes Lόbbers and Peter N. Posch, ‘Bail-in and Asset Encumbrance – Implications for Banks’ Asset Liability Management’, Journal of Banking Regulation 18 (2017), 149; Federico Fabbrini, ‘On Banks, Courts and International Law: The Intergovernmental Agreement on the
772
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
Single Resolution Fund in Context’, MJ 21 (2014), 444; Dennis Faber, Niels Vermunt, Jason Kilborn, Tomas Richter and Ignacio Tirado, Ranking and Priority of Creditors (Oxford University Press, Oxford 2016); Vanessa Finch and David Milman, Corporate Insolvency Law: Perspectives and Principles (3rd edn, Cambridge University Press, Cambridge 2017; Dominik Freudenthaler, ‘Write-down or Conversion of Capital (WDCC) Instruments’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 99; Paolo Fucile, ‘Resolution Framework and the Protection of Fundamental Rights’ in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, Cheltenham 2019), 259; Ana Rita Garcia, ‘Portugal–Banco Espirito Santo, S.A.: Resolution Via a Bridge Bank Including a Re-Transfer’, in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 52; Anna Gardella, ‘Bail-in and the Financing of Resolution within the SRM Framework’ in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 373; Anna Gardella, ‘Bail-in and the Two Dimensions of Burden-Sharing’ in: ECB Legal Conference 2015: From Monetary Union to Banking Union, on the Way to Capital Markets Union, New Opportunities for European Integration (ECB, Frankfurt am Main 2015), 205; Martin Gelter and Geneviève Helleringer, ‘Fiduciary Principles in European Civil Law Systems’ in: Evan J. Criddle, Paul B. Miller and Robert H. Sitkoff (eds), Oxford Handbook of Fiduciary Law (Oxford University Press, Oxford 2018), para. 31; Simon Gleeson, ‘Bank Resolution and Bail-ins in the Context of Bank Groups’, Law and Financial Markets Review 6 (2012), 61; Simon Gleeson, ‘The Single Resolution Mechanism and the EU Crisis Management Tools’ in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, Cheltenham 2019), 216; Charles Goodhart and Emilios Avgouleas, ‘A Critical Evaluation of Bail-in as a Bank Recapitalisation Mechanism’ in: Franklin Allen, Elena Carletti and Joanna Gray (eds), Bearing the Losses from Bank and Sovereign Default in the Eurozone (FIC Press, Philadelphia 2014), 65; Jeffrey N. Gordon and Wolf-Georg Ringe, ‘Bank Resolution in the European Banking Union: A Transatlantic Perspective on What It Would Take’, CLR 115 (2015), 1297; Christos V. Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal Aspects of the Second Main Pillar of the (European) Banking Union, working paper (5th edn, 30 April 2019); Martin R. Götz, Jan Pieter Krahnen and Tobias Tröger, ‘Taking Bail-in Seriously – The Looming Risks for Banking Policy in the Rescue of Monte dei Paschi di Siena’, SAFE Policy Letter 54 (10 February 2017); Christoph Grabenwarter (ed), European Convention on Human Rights – Commentary (C.H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden 2014); Michele Graziadei, ‘Virtue and Utility: Fiduciary Law in Civil Law and Common Law Jurisdictions’ in: Andrew S. Gold and Paul B. Miller (eds), Philosophical Founcations of Fiduciary Law (Oxford University Press, Oxford 2014), 287; Seraina Neva Grünewald, The Resolution of Cross-Border Banking Crises in the European Union: A Legal Study from the Perspective of Burden Sharing (Kluwer Law International, Alphen aan den Rijn 2014); Seraina Neva Grünewald, ‘Legal Challenges of Bail-in’, in: ECB Legal Conference 2017: Shaping a New Legal Order for Europe: a Tale of Crises and Opportunities (ECB, Frankfurt am Main 2017), 287; Christos Hadjiemmanuil, ‘Bank Resolution Financing in the Banking Union’ in: Jens-Hinrich Binder and Dalvinder Singh (eds), Bank Resolution: The European Perspective (Oxford University Press, Oxford 2016), 177; Christos Hadjiemmanuil, ‘Bank Stakeholders’ Mandatory Contribution to Resolution Financing: Principle and Ambiguities of Bail-in’, in ECB Legal Conference 2015: From Monetary Union to Banking Union, on the Way to Capital Markets Union, New Opportunities for European Integration (ECB, Frankfurt am Main 2015), 225; Christos Hadjiemmanuil, ‘Limits on State-Funded Bailouts in the EU Bank Resolution Regime’, European Economy: Banks, Regulation and the Real Sector 2016-2, 91; Christos Hadjiemmanuil, ‘Monte dei Paschi: A Test for the European Policy Against Bank Bailouts’, Oxford Business Law Blog (2 May 2017) ; Christos Hadjiemmanuil, ‘Special Resolution Regimes for Banking Institutions: Objectives and Limitations’ in: Wolf-Georg Ringe and Peter M. Huber (eds), Legal Challenges in the Global Financial Crisis: Bail-Outs, the Euro and Regulation (Hart Publishing, Oxford and Portland, Oregon 2014), 209; Christos Hadjiemmanuil, ‘The Euro Area in Crisis, 2008–18’ in: Fabian Amtenbrink and Christoph Herrmann (eds), The EU Law of Economic and Monetary Union (Oxford University Press, Oxford 2020), 1253; Matthias Haentjens, ‘SNS Reaal: Resolution via Nationalization and Bail-in’ in: World Bank (ed), Bank Resolution and “Bail-in” in the EU: Selected Case Studies Pre and Post BRRD (World Bank Group, Washington D.C 2016), 45; Matthias Haentjens, ‘Judicial Review of Resolution Action’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 159; Matthias Haentjens, ‘The Changing Role of the Judiciary in Insolvency: The Case of Bank Resolution’ in: Rebecca Parry and Paul J. Omar (eds), Banking and Financial Insolvencies: The European Regulatory Framework (INSOL Europe, Nottingham and Paris 2016), 13; Robby Houben, and Werner Vandenbruwaene, Single Resolution Mechanism (Intersentia, Cambridge and Antwerp 2017); David Howarth and Lucia Quaglia, ‘The Steep Road to European Banking Union: Constructing the Single Resolution Mechanism’, Journal
Christos Hadjiemmanuil
773
Art. 27 SRMR
Bail-in tool
of Common Market Studies 52 (2014), Annual Review, 125; Thomas Huertas, ‘The Case for Bail-ins’, Wharton Financial Institutions Center, Working Paper No 17 (2012); Thomas Huertas, ‘The Road to Better Resolution: From Bail-Out to Bail-In’ in: Miroslav Beblavý, David Cobham and L'udovít Ódor (eds), The Euro Area and the Financial Crisis (Cambridge University Press, Cambridge 2011), 243; Thomas Huertas, ‘Will Bust Banks Be Born Again by Bail-In?’, Butterworths Journal of International Banking and Financial Law 34 (2019), 224; Eva Hüpkes, ‘The Legal Aspects of Bank Insolvency: A Comparative Analysis of Western Europe, the United States and Canada’ (Kluwer Law International, The Hague 2000); Eva Hüpkes, ‘Adequate Loss-Absorbing and Recapitalisation Capacity of G-SIBs in Resolution’, in: ECB Legal Conference 2015: From Monetary Union to Banking Union, on the Way to Capital Markets Union, New Opportunities for European Integration (ECB, Frankfurt am Main 2015), 199; Jeremy Jennings-Mares, ‘The Bail-in Tool’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 111; Bart PM Joosen, ‘Bail-in Mechanisms in the Bank Recovery and Resolution Directive’ in: Saskia MC Nuijten, Bart PM Joosen and Patrick Clancy, The Bank Recovery and Resolution Directive and the Single Resolution Mechanism: Reports 2014 (Eleven International Publishing, The Hague 2017), 23; Bart PM Joosen, ‘Regulatory Capital Requirements and Bail in Mechanisms’ in: Matthias Haentjens and Bob Wessels (eds), Research Handbook On Crisis Management in the Banking Sector (Edward Elgar, Cheltenham 2015), 175; Nikoletta Kleftouri, ‘European Union Bank Resolution Framework: Can the Objective of Financial Stability Ensure Consistency in Resolution Authorities’ Decisions?’, ERA Forum 18 (2017), 263; Peter Klimek, Sebastian Poledna, J. Doyne Farmer and Stefan Thurner, ‘To Bail-out or to Bail-in? Answers from an Agent-Based Model’, Journal of Economic Dynamics and Control 50 (2015), 144; Eleni Koumidou, ‘Bail-in Nightmares: The Cypriot Bail-in Paradigm in the Light of the Italian and Spanish Cases’, European Company Law 15 (2018), 43; Gerry G. Kounadis, ‘Striking the Correct Balance Between Imposing a Suspension of Close-out Netting Rights While Preserving Legal Certainty and Market Integrity in View of the Bank Recovery and Resolution Directive 2014/59/EU’, JIBLR 30 (2015), 228 and 276; Jan Pieter Krahnen and Laura Moretti, ‘Bail-in Clauses’ in: Ester Faia (ed), Financial Regulation: A Transatlantic Perspective (Cambridge University Press, Cambridge 2015), 125; Axel Kunde, ‘Legal Constraints on Resolution Measures and the Application of the Bail-in Tool under BRRD and SRMR’ in: ECB Legal Conference 2015: From Monetary Union to Banking Union, on the Way to Capital Markets Union, New Opportunities for European Integration (ECB, Frankfurt am Main 2015), 249; Marco Lamandini, David Ramos and Javier Solana, ‘The ECB (ECB) Powers as a Catalyst for Change in EU Law, Part 2: SSM, SRM, and Fundamental Rights’, Columbia Journal of European Law 23 (2017), 199; Ross Leckow, ‘The IMF/World Bank Global Insolvency Initiative – Its Purpose and Principal Features’ in: David S. Hoelscher (ed), Bank Restructuring and Resolution (Palgrave Macmillan, Basingstoke 2006), 184; Matthias Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, International and Comparative Law Quarterly 66 (2017), 107; Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, Cheltenham 2019); Gianni Lo Schiavo, ‘Burden Sharing Arrangements vs. Shareholders and Creditors: Kotnik, Dowling and the Current State Aid Policy in the Banking Sector’, EBOR 19 (2018), 581; Stefano Lucchini et al., ‘State Aid and the Banking System in the Financial Crisis: From Bail-out to Bail-in’, Journal of European Competition Law and Practice 8 (2017), 88; Nikos G. Maragopoulos, ‘Minimum Requirement for Own Funds and Eligible Liabilities (MREL): A Comprehensive Analysis of the New Prudential Requirement for Credit Institutions’, ECEFIL Working Paper No 1016/16 (February 2016); Edoardo Martino, ‘The Bail‑in Beyond Unpredictability: Creditors’ Incentives and Market Discipline’, EBOR21 (2020), 789; Georg Merc, ‘Valuation of Difference in Treatment ex-post Resolution – No Creditor Worse Off than under Liquidation (NCWOL)’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 139; Stefano Micossi, Ginevra Bruzzone and Miriam Cassella, ‘Bail-in Provisions in State Aid and Resolution Procedures: Are they Consistent with Systemic Stability?’, CEPS Policy Brief No 318 (21 May 2014); Stefano Micossi, Ginevra Bruzzone and Miriam Cassella, ‘Fine-Tuning the Use of Bail-in to Promote a Stronger EU Financial System’, CEPS Special Report No 136 (April 2016); Andrea Miglionico, ‘The Restructuring of Monte Dei Paschi di Siena: A Controversial Case in the EU Bank Resolution Regime’, EBLR 30 (2019), 469; Maria Rosaria Miserendino, ‘State Aid for the Banking Sector: What Has Changed after the New BRRD and SRM Regulation’, European State Aid Law Quarterly 17 (2018), 204; Niamh Moloney, ‘European Banking Union: Assessing Its Risks and Resilience’, Common Market Law Review 51 (2014), 1609; Phedon Nicolaides, ‘All Bad Things Must Come to an End: The Application of State Aid Rules to the New EU Regime for Bank Resolution’, MJ 23 (2016), 222; Phedon Nicolaides, ‘Extraordinary Public Financial Support for Banks Is Not So Extraordinary After All’, MJ 24 (2017), 343; Paul C. Noller, ‘Evaluating the Credibility of the European Bank Bail-in Commitment’, Atlantic Economic Journal 46 (2018), 471; Marcello Pericoli and Massimo Sbracia, ‘A Primer on Financial Contagion’, Banca d’Italia, Temi di Discussione No 407 (June 2001); Thomas Philippon and Aude Salord, ‘Bail-ins and Bank Resolution in Europe: A Progress Report’, Geneva Reports on the World Economy,
774
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
Special Report No 4 (International Center for Monetary and Banking Studies / Centre for Economic Policy Research, March 2017); Philipp Poyntner and Thomas Reininger, ‘Bail-in and Legacy Assets: Harmonized Rules for Targeted Partial Compensation to Strengthen the Bail-in Regime’, Oesterreichische Nationalbank Working Paper No 224 (2018); Lucia Quaglia and Aneta Spendzharova, ‘The Conundrum of Solving “Too Big to Fail” in the European Union: Supranationalization at Different Speeds’, Journal of Common Market Studies 55 (2017), 1110; David Ramos Muñoz, ‘Bank Resolution and Insolvency Ranking and Priorities’ in: ECB Legal Conference 2017: Shaping a New Legal Order for Europe: a Tale of Crises and Opportunities (ECB, Frankfurt am Main 2017), 256; Nicholas Raschauer, ‘Ruling of the Austrian Constitutional Court on the Lex-Specialis Restructuring HBINT and the Imposed Expiry of Guarantees From the State of Carinthia’ in: World Bank (ed), Bank Resolution and “Bail-in” in the EU: Selected Case Studies Pre and Post BRRD (World Bank Group, Washington D.C. 2016), 15; Wolf-Georg Ringe, ‘Bail-in Between Liquidity and Solvency’, American Bankruptcy Law Journal 92 (2018), 299; WolfGeorg Ringe and Jatine Patel, ‘The Dark Side of Bank Resolution: Counterparty Risk through Bail-in’, EBI Working Paper No 31 (2019); Nouriel Roubini and Brad Setser, Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies (Council on Foreign Relations, Washington D. C 2004); Wolf Sauter, ‘Proportionality in EU Law: A Balancing Act?’, Cambridge Yearbook of European Legal Studies 15 (2013), 439; Silvia Scatizzi, ‘Failing or Likely to Fail but No Resolution – A Possible Point of View’ in: ESCB Legal Conference 2018 (ECB, Frankfurt am Main 2018), 149; William A. Schabas, The European Convention on Human Rights – A Commentary, (Oxford University Press, Oxford 2015); Michael Schillig, ‘Bank Resolution Regimes in Europe – Part I: Recovery and Resolution Planning, Early Intervention’, EBLR 24 (2013), 751; Michael Schillig, ‘Bank Resolution Regimes in Europe – Part II: Resolution Tools and Powers’, EBLR 25 (2014), 67; Michael Schillig, ‘BRRD/SRM, Corporate Insolvency Law and EU State Aid – the Trifurcated EU Framework for Dealing with Banks in Distress’ in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, Cheltenham 2019), 238; João Domingues Semeano and Marien Ferdinandusse, ‘The Fiscal Impact of Financial Sector Support Measures: Where Do We Stand a Decade On from the Financial Crisis?’, ECB Economic Bulletin No 6 (2018), 47; Dominik Skauradszun, ‘Legal Protection against Decisions of the Single Resolution Board Pursuant to Article 85 Single Resolution Mechanism Regulation’, European Company and Financial Law Review 15 (2018), 123; Joseph Sommer, ‘Why Bail-In? And How!’, FRBNY Economic Policy Review 20 (2014), 207; Tobias H. Tröger, ‘Regulatory Influence on Market Conditions in the Banking Union: the Cases of Macro-Prudential Instruments and the Bail-in Tool’, EBOR 16 (2015), 575; Tobias H. Tröger, ‘Too Complex to Work: A Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime’, Journal of Financial Regulation 4 (2018), 35; Tobias H. Tröger, ‘Why MREL Won’t Help Much: Minimum Requirements for Bail-In Capital as an Insufficient Remedy for Defunct Private Sector Involvement under the European Bank Resolution Framework’, Journal of Banking Regulation 21 (2020), 64; Paul Tucker, ‘Solving Too Big Too Fail: Where Do Things Stand on Resolution’, speech at the Institute of International Finance 2013 Annual Membership meeting (Washington, D.C. 12 October 2013) ; Roberto Ugena Torrejón, ‘Restructuring, Resolution and Insolvency: The Shifting of Tasks from Judicial to Administrative Authorities’ in: ECB Legal Conference 2017: Shaping a New Legal Order for Europe: a Tale of Crises and Opportunities (ECB, Frankfurt am Main 2017), 235; Hubert de Vauplane, ‘Procedural Aspects of the Bail-in Mechanism: Conflict Between Public and Private Interest’, Butterworts Journal of International Banking and Financial Law 27 (2012), 572; Marco Ventoruzzo and Giulio Sandrelli, ‘O Tell Me The Truth About Bail-In: Theory and Practice’, ECGI Law Working Paper No 442/2019 (March 2019); Karl-Philipp Wojcik, ‘Bail-in in the Banking Union’, Common Market Law Review 53 (2016), 91; Karl-Philipp Wojcik, ‘The Significance and Limits of the “No Creditor Worse Off ” Principle for an Effective Bail-in’ in: ECB Legal Conference 2015: From Monetary Union to Banking Union, on the Way to Capital Markets Union, New Opportunities for European Integration (ECB, Frankfurt am Main 2015), 253; Steve Peers, Tamara Hervey, Jeff Kenner and Angela Ward (eds.), The EU Charter of Fundamental Rights: A Commentary (C.H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2014); Napoleon Xanthoulis, ‘Single Resolution Fund and Emergency Liquidity Assistance: Status Quo and Reform Perspectives on Emergency Financial Support in the Banking Union’ in: Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar, Cheltenham 2019), 273; Emilie Yoo, ‘Failing or Likely to Fail but No Resolution – What Then?’ in: ESCB Legal Conference 2018 (ECB, Frankfurt am Main 2018), 139; George S. Zavvos and Stella Kaltsouni, ‘The Single Resolution Mechanism in the European Banking Union’ in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Edgar, Cheltenham 2015), 117; Jianping Zhou, Virginia Rutledge, Wouter Bossu, Marc Dobler, Nadege Jassaud and Michael Moore, ‘Resolving Systemically Important Financial Institutions: Mandatory Recapitalization of Financial Institutions Using “Bail-Ins”’ in: Charles Enoch (ed), From Fragmentation to Financial Integration in Europe (International Monetary Fund, Washington, D.C. 2014), 433; Jolanta Zombirt, ‘Bail-in: Fully-Fledged Illusion’, Polish Quarterly of International Affairs 25 (2016), 137.
Christos Hadjiemmanuil
775
Art. 27 SRMR
Bail-in tool
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Economic function of the bail-in tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. SRMR provisions on the bail-in tool: Relationship with the BRRD . . . . . . . . . .
1 2 5
B. “Purposes” and conditions of application of the bail-in tool . . . . . . . . . . . . . . . . . I. First possibility: Use of bail-in for the recapitalization of the failing entity . . . 1. Condition for the use of bail-in for the recapitalization of the failing entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incompatibility with the other resolution tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Second possibility: Use of the bail-in tool in combination with another resolution tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Mandatory content of the resolution scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 12
C. Extent, scope, and sequencing of bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Extent of bail-in: Establishment of the aggregate amount . . . . . . . . . . . . . . . . . . . . II. Scope of the bail-in tool: Liabilities amenable to write-down or conversion 1. Exclusions of liabilities from bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Bail-inable liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. MREL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Discretionary limits on interbank holdings of bail-inable liabilities . . . . . . III. Implementation of bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Relevant resolution powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Allocation of losses and the sequencing of bail-in . . . . . . . . . . . . . . . . . . . . . . . . .
31 32 42 43 44 47 51 52 52 56
D. Mandatory exclusion of liabilities from bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Covered deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Secured liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Client assets and client money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Liabilities from fiduciary relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Short-term interbank liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Short-term liabilities arising from participation in payment and securities settlement systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Liabilities to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Liabilities to suppliers of critical goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Tax and social security liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Contributions to deposit guarantee schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Intra-group liabilities of a resolution group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64 67 70 77 83 93
15 19 22 27
96 100 103 106 107 108
E. Discretionary exclusion of liabilities from bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Conditions justifying discretionary exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Constraints on resolution authorities’ discretion to exclude . . . . . . . . . . . . . . 2. Impracticability of bail-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Continuity of critical functions and core business lines . . . . . . . . . . . . . . . . . . . 4. Avoidance of widespread contagion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Avoidance of destruction of value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Group resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Effect of discretionary exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Possibility of partial exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Effect of discretionary exclusions on the treatment of other bail-inable liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111 114 115 120 124 130 136 139 140 140
F. The resolution financing waterfall and the contribution of the SRF . . . . . . . . . . I. Burden-sharing and the financing waterfall of resolution actions . . . . . . . . . . . . II. The funding contribution of the SRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Condition for use of the SRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Purpose of the contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Decision-making procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Minimum bail-in requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Upper limit of the SRF’s contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Funding of the SRF’s contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145 146 147 150 153 156 159 166 171
142
G. Business reorganization plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 I. Preparation and approval of the business reorganization plan . . . . . . . . . . . . . . . 180 II. Content of the business reorganization plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
776
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
A. Introduction Art. 27 SRMR is the SRMR’s longest, and arguably most contentious, provision. It es- 1 tablishes, specifically with reference to the Banking Union and its SRM, the conditions and manner of application of the bail-in tool, the fourth and last of the resolution “tools” (that is, restructuring methods) that resolution authorities can utilize for the resolution of failing banks in accordance with Union law.1 Conceived in the wake of the Global Financial Crisis, the bail-in tool is a major innovation of the resolution regime introduced with the BRRD.2 It empowers the resolution authorities to force a failing or failed bank’s immediate stakeholders (specifically, its shareholders and certain, but not all, creditors) to contribute to the financial cost of resolution through a write-down or conversion of their claims against the bank. Bail-in is thus designed to provide an innovative and drastic response to the problem of resolution financing. At the same time, it is meant to strengthen market discipline by abolishing the public subsidy that banks’ stakeholders enjoyed in the past as a result of bailouts.3
I. Economic function of the bail-in tool The continuation of the activities of a loss-making bank, with potentially negative 2 net worth, following its resolution will typically require an injection of new funds. Traditionally, in the absence of a voluntary private solution, this could only be achieved by means of a publicly financed bailout; however, as attested by the developments of the Global Financial Crisis, bank bailouts, in addition to other defects, can have disastrous fiscal consequences. The bail-in tool responds to this concern in a novel and ambitious way.4 It attempts to return the failed bank, or its surviving part, to full solvency and financial viability5 without, or with minimal, recourse to outside funding, especially by way of State aid. For this purpose, it combines in a distinctive way three, not necessarily convergent, elements: the internalization of past losses by the bank’s existing stakeholders; the bank’s drastic financial restructuring and recapitalization, as necessary for its continuation in whole or in part, also with resources belonging to Art. 37(3) BRRD and Art. 22(2) SRMR. Arts. 43–55 BRRD. The directive treats the bail-in tool in much greater detail than the other three resolution tools. 3 For early legal commentary on bail-in (including the provisions of the draft and final BRRD), see: Gleeson, LSE Financial Markets Group Special Paper No. 205 (2012); Grünewald, The Resolution of CrossBorder Banking Crises in the European Union: A Legal Study from the Perspective of Burden Sharing (2014), at pp. 42–45; Bliesener, in: Dombret and Kenadjian (eds), The Bank Recovery and Resolution Directive: Europe’s Solution for ‘Too Big To Fail’? (2013), at pp. 189–227; Kenadjian, in: Dombret and Kenadjian (eds), The Bank Recovery and Resolution Directive: Europe’s Solution for ‘Too Big To Fail’? (2013), at pp. 229–257; and Joosen, paper presented at the Netherlands Association for Comparative and International Insolvency Law Annual Conference (6 November 2014) . 4 On the general case for bail-in and the specification of preconditions for its successful application, see Zhou, Rutledge, Bossu, Dobler, Jassaud and Moore, IMF Staff Discussion Note No SDN/12/03 (24 April 2012). For a rather skeptical approach, see Avgouleas and Goodhart, Journal of Financial Regulation 1 (2015), at pp. 3–29. 5 Evidently, in order to survive as an operating entity, in addition to its financial restructuring, the failed bank will also need to take steps to correct flaws in its organization and business practices, so as to avoid a repetition of past mistakes and a reversion to its previous loss-making condition. Accordingly, the BRRD provides that, when bail-in leads to the old legal person’s recapitalization, this must draw (within one month) and, following official approval, implement a suitable business reorganization plan. The resolution authority may appoint one or more persons for this purpose. The reorganization plan must be compatible with the restructuring plan submitted by the institution to the Commission for State-aid purposes. Arts. 51–52 BRRD; and Art. 27(16) SRMR. See infra, → paras. 179–187. 1 2
Christos Hadjiemmanuil
777
Art. 27 SRMR
Bail-in tool
the existing stakeholders; and the mandatory character of the relevant intervention. All of these constitute typical features of the liquidation and/or reorganization proceedings of general insolvency (or pre-insolvency) law; but they do not normally operate in tandem, since the participation of a business entity’s stakeholders in its recapitalization on a mandatory basis is far from common. When participation is optional, though, stakeholders will usually lack incentives to contribute to the bank’s recapitalization. Instead, they may consider it preferable to hold out, refusing not only to finance meaningful restructuring efforts, but even to absorb accrued losses, in the expectation that the State will step in to provide support in order to avert a disorderly bank collapse with potentially grave systemic and social implications. Under the bail-in approach, however, holding out is no longer possible for the bank’s stakeholders. Bail-in allocates losses to the stakeholders authoritatively, thus impeding their externalization to taxpayers. In this manner, it reinforces market discipline and protects fiscal interests. 3 More than that, bail-in ensures the failed bank’s financial restructuring and restoration to solvency. For the failed bank to survive as a viable entity, the absorption of past losses is not sufficient. To retain the confidence of the market and be able to resume normal business activity, it must further display a relatively high level of capitalization. This will also be necessary in order to meet its regulatory requirements. For this reason, bail-in is not limited to the absorption of past losses, but is also applied to recapitalize forcibly the institution, marshalling for this purpose liability holders’ resources, which are converted into equity. Bail-in is, accordingly, functionally equivalent to a US-style pre-packaged bankruptcy. It enables the lawful continuation of the banking business following financial restructuring, thus avoiding a value-destructing piecemeal liquidation. The difference is that bail-in is externally mandated and does not require the majority consent of the classes of liability-holders affected thereby. It is an effective method for avoiding the technical constraints of the general company and insolvency law; but to the extent that it ignores the normal principles of insolvency law, it is bound to raise major objections and questions regarding the protection of private rights. 4 It should be noted that the contribution of shareholders and eligible liability-holders can be achieved either through a write-down of their claims or through the conversion of claims or debt instruments into equity either in the existing legal entity or in a bridge bank. Technically, in the European resolution framework, the authorities’ power to write-down or convert capital instruments (meaning equity and any other instruments included in the definition of own funds,6 some of which may be issued in the form of debt claims, e.g., perpetual and subordinated bonds) is treated separately 7 from the bail-in tool, that is, the power to write-down or convert into equity the bank’s liabilities.8 But this is only due to the fact that the former power, but not the latter, can also be exercised by the resolution authorities without formally placing the ailing bank in resolution9 – effectively, as an alternative, pre-resolution intervention. Otherwise, however, it is almost impossible to treat the power to write-down or convert capital instruments separately from bail-in, and “bail-in” is typically used as a short form for the exercise of either power.
Arts. 25–91 CRR. Arts. 59–62 BRRD and Art. 21 SRMR. 8 Arts. 43–55 BRRD and Art. 27 SRMR. 9 Art. 59(1), (3) BRRD and Art. 21(1) SRMR. 6
7
778
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
II. SRMR provisions on the bail-in tool: Relationship with the BRRD Essentially, Art. 27 SRMR reprises with specific reference to the BU’s SRM the provi- 5 sions of Arts. 43, 44, and 46(1)–(2) BRRD, which define the objective and scope of the bail-in tool, and the assessment of the aggregate amount of bail-in in a particular case. The reason for the duplication is that, as a directive without direct applicability, the BRRD cannot provide a legal basis for the application of the bail-in tool in the resolution schemes of the SRB, thus necessitating the replication of the relevant provisions, with appropriate modifications, in a regulation. In the event, textually, 13 of the 16 paragraphs of Art. 27 SRMR, replicate, mostly verbatim, the corresponding provisions of the BRRD. The main exceptions concern: – the second subparagraph of paragraph 1 on the mandatory content of the resolution scheme, which has no direct parallel in the BRRD; – paragraph 11, which excludes the application of Art. 44(8) BRRD, a provision setting a less demanding alternative condition for the use of resolution funds in support of bail-in-based resolution actions; – paragraph 15, a norm operating in combination with Art. 17 BRRD, and whose equivalent in the BRRD is set out at a higher-level of abstraction as one of the general principles governing resolution; and – paragraph 16 on the administrative process with regard to the business reorganization plan that must accompany the application of the bail-in tool, a largely procedural provision, specific to the SRM’s two-level organizational structure. Significantly, neither Art. 27 nor any other provision of the SRMR address the more 6 detailed aspects of the implementation of bail-in, which are dealt with extensively in the BRRD, or the ancillary matters of national concern. Specifically, the SRMR is silent with regard to the matters covered by the following provision of BRRD: – Art. 43(1) BRRD, according to which Member States must ensure that NRAs have all the necessary powers to implement bail-in; – Art. 43(4) BRRD, according to which the application of bail-in must be possible whether the legal form of the entity under resolution is retained or it is changed; – Art. 44(1) BRRD, which prevents Member States from excluding from bail-in any liabilities unless these are covered by one of the mandatory or discretionary grounds for exclusion defined at the European level; – Art. 44(11) BRRD, giving a mandate to the Commission for the issuance of delegated acts specifying the circumstances when discretionary exclusions of liabilities for bail-in appear necessary; – Art. 44(12) BRRD, requiring NRAs to give advance notification of any discretionary exclusions to the Commission and enabling the latter to object to such exclusions, if these make necessary a contribution to the financing of the relevant resolution action on the part of a resolution fund; – the new Art. 44a BRRD, as inserted by BRRD II, setting conditions on the selling of subordinated eligible liabilities to retail clients; – the various provisions of Arts. 46–52 BRRD, on the implementation of the bail-in tool, which envisage: the possibility of an ex post write-up of liabilities written down on the basis of a provisional valuation’s estimate of the necessary extent of bail-in, which a subsequent definitive valuation proved to be excessive; arrangements to ensure that the bail-in decisions are based on up to date and comprehensive information about the assets and liabilities of the institution under resolution; the treatment of shareholders in bail-in or in the write-down or conversion of capital instruments; the sequence of write-down and conversion of capital instruments and liabilities Christos Hadjiemmanuil
779
Art. 27 SRMR
Bail-in tool
subject to bail-in; the treatment of derivatives in bail-in; the rate of conversion of debt to equity; the recovery and reorganization measures accompanying bail-in; and the preparation and content of the business reorganization plan that should be submitted by the institution under resolution soon after the application of the bail-in tool; – the ancillary provisions of Arts. 53–55 on the effect of the application of the bail-in tool and the powers of implementation of the resolution scheme in national law; the removal of procedural impediments to bail-in; and the mandatory inclusion in newly issued debt instruments of institutions subject to the resolution regime of contractual clauses recognizing the effects of a potential application of bail-in tool; and – the ancillary provisions of Arts. 56–58 on the provision by Member States of extraordinary public financial support to the resolution of certain institutions by way of so-called “government financial stabilisation tools” – namely, the public equity support tool, which involves the contribution of the State in the recapitalization of the institution under resolution, and the temporary public ownership tool, which involves its (temporary) nationalization. 7 The reason for SRMR’s silence is that all of the above does not concern the exercise of administrative powers by a Union agency such as the SRB, but the execution of its bailin-based resolution schemes by the relevant NRAs at the national level. As this task is carried out by the NRAs wearing their national administrative mantle and in accordance with their domestic law, the national rules transposing the BRRD are considered to be sufficient.10 This, however, means that, to a much greater extent than any other part of the SRMR, the provisions of Art. 27 SRMR on the bail-in tool are elliptical and acquire their full meaning only when read in conjunction with the aforementioned norms of the BRRD.
B. “Purposes” and conditions of application of the bail-in tool 8
In its resolution decision made in accordance with the procedure of Art. 18 SRMR in relation to a failing entity under its jurisdiction,11 the SRB may select the bail-in tool if it considers that it is the most appropriate tool for achieving the resolution objectives. For less significant failing entities, for which the resolution decision is taken at a national level, the selection of the bail-in tool will be a matter for the relevant NRA, 12 subject only to the provisions on cooperation within the SRM.13 In both cases, the tool’s deployment will be regulated by the provisions of Art. 27(1)–(15) SRMR. Even though they refer solely to the former scenario, these provisions apply also to the latter; this is because of an express stipulation elsewhere in the SRMR to the effect that, in relation to groups and entities falling within the jurisdiction of NRAs, any references to the SRB in 10 Art. 17(1) SRMR refers explicitly to the need to comply with Arts. 47–48 BRRD when the resolution scheme envisages the application of the bail-in tool. More generally, the continuing relevance of the BRRD for the implementation of resolution actions decided under the SRMR is stressed in Recitals (18), sent. 1, (28) sent. 4, (29) sent. 1, (52) sent. 1, and (66) sent. 2 SRMR and Arts. 23(1), and 29(1) SRMR. 11 Art. 7(2), (3)(2), (4)(b), and (5) SRMR. The entity in question may be a credit institution established in a Member State participating in the Banking Union, or a parent undertaking of a credit institution, investment firm, or financial institution established in a Member State, where such a legal person is established in a participating Member State and covered by the ECB’s consolidated supervision of significant credit institutions’ groups within the framework of the SSM; Art. 2 SRMR. 12 Art. 7(3)(1)(e) SRMR. 13 Arts. 7(3)(5), (4)(a) and 31 SRMR.
780
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
Art. 27(1)–(15) SRMR must be read as references to that NRA. 14 They are, accordingly, relevant for all resolution procedures within the Banking Union. Consistently with the SRMR’s drafting approach, the present analysis of Art. 27 SRMR only mentions the use of bail-in decisions of the SRB, but applies mutatis mutandis to its application by Banking Union’s NRAs.15 The utilization of the bail-in tool in a resolution scheme is not fully discretionary. The 9 identification of the preferred resolution strategy in the entity’s resolution plan does not predetermine the selection of resolution tools in the actual resolution decision; but the latter must be reasoned and informed by a concrete assessment of what appears to be appropriate and proportional under the circumstances.16 With regard to the bail-in tool, in particular, Art. 21(1)–(2) SRMR sets out certain additional conditions, which shape the tool’s selection and the manner in which it can be utilized. More precisely, Art. 27(1)(1) SRMR sets out two “purposes” for which the bail-in 10 tool may be applied. These purposes are neither coterminous nor strictly comparable to the resolution “objectives” of Art. 14 SRMR (i.e., continuity of critical functions, preservation of financial stability, minimization of reliance on extraordinary public financial support, protection of depositors, and protection of client funds and client assets). An evident difference concerns the scope of the two terms: the resolution objectives guide the SRB’s decisions on resolution actions and the application of resolution tools generally, while the purposes of Art. 27 SRMR are specific to the selection and application of the bail-in tool. There is also a difference of quality, because, unlike the resolution objectives which connote the final economic and social interests served by the resolution framework, the so-called purposes of the bail-in tool merely describe the technical outcomes at which its application must be directed. Essentially, the two purposes chart two distinct paths for the application of the bail- 11 in tool. Each of the two is available under certain conditions, which must be satisfied in addition to the general conditions for resolution,17 and leads to a particular form of corporate restructuring of the entity in resolution. The enumeration is exhaustive, and would appear to restrict the SRB’s choices; in practice, however, it primarily serves to distinguish between, on the one hand, the use of the bail-in tool as an independent, stand-alone resolution technique for the failed entity’s recapitalization and continuation as a going concern and, on the other hand, its use in combination with, and in support of, any of the other three resolution tools,18 thus enabling more complex forms of mandatory restructuring. The preamble of the SRMR explains the existence of the two possibilities by reference to a need “to ensure the necessary flexibility to allocate losses to creditors in a range of circumstances”.19 For this purpose, it is deemed Art. 7(3)(4) SRMR. I.e. the NRAs designated by the participating Member States; Art. 3(1)(3) SRMR. The NRAs of nonparticipating Member States may apply the bail-in tool on the basis of the closely equivalent, and for the most part textually identical, provisions of Arts. 43(2)–(3), 44(2)–(7), (9)–(10) and 46(1)–(2) BRRD. The approach is significantly different only in relation to the provision of Art. 44(8) BRRD, whose application by the SRB or the Banking Union NRAs is excluded by Art. 27(11) SRMR. 16 Recital (45) SRMR and Recital (49) BRRD, third sent. The proportionality principle applies both with regard to the “entry level” question regarding the placement of an institution under resolution and to more specific “implementation level” decisions, concerning the content of the resolution scheme, including the selection and calibration of the resolution tools; see Binder, EBOR 21 (2020), at pp. 463–470. 17 Art. 18(1) SRM. 18 Art. 22(2)(a)–(c) SRMR. 19 Recital (74) SRMR. Note that the recital specifically refers to the allocation of “losses”, presumably excluding the facilitation of the restructuring through the write down or conversion of claims over and above the measures of losses already accrued. This is not consistent with the operative texts of the SRMR and the BRRD. 14
15
Christos Hadjiemmanuil
781
Art. 27 SRMR
Bail-in tool
appropriate to make the bail-in tool available “both where the objective is to resolve the failing entity as a going concern if there is a realistic prospect that the entity viability may be restored, and where systemically important services are transferred to a bridge entity and the residual part of the entity ceases to operate and is wound down”.
I. First possibility: Use of bail-in for the recapitalization of the failing entity The first path involves the utilization of the bail-in tool for the restoration of the financial structure of the institution under resolution itself, that is, its recapitalization to an extent adequate for ensuring its legal survival and the uninterrupted continuation of its business operations.20 The result is frequently described as “going-concern resolution”21 or “open-bank bail-in”.22 The phraseology can create some confusion with regard to the relationship between the legal and economic implications of the resolution, since alternative forms of resolution (dubbed “gone concern resolution” or “closed-bank bail-in”, respectively) are also intended to ensure the continuity of the failed bank’s intermediation functions (thus figuratively “keeping the bank open”), even if the old corporate shell goes into liquidation.23 In any event, an express provision in the BRRD clarifies that the use of bail-in for the going-concern resolution of particular entities is compatible with reorganization measures involving changes in those entities’ legal form.24 13 When applying the bail-in tool for this purpose, the aim is to recapitalize the institution, that is, to rebalance its financial structure by replenishing its own funds and/or restore the ratio of own funds to its total and/or risk-weighted liabilities, not merely to improve the term structure or other characteristics of its liabilities. The intended result is achieved through the mandatory write-down or conversion into equity of 12
Art. 27(1)(1)(a) SRMR. In BRRD/SRMR parlance, the expression “going concern” is used to connote the continuing operation of the old bank, in contrast to its winding up; see Recitals (59), (74)–(75) SRMR and Recital (68) and, less clearly, Recitals (8), (46), and (65) BRRD. In related EBA and SRB documents, the term is opposed to “gone-concern resolution”, which involves the continuation of part of the old bank’s business and/or the management of its asset portfolio by another legal person, while the old bank’s residual legal person is dissolved. 22 The European distinction between going concern and gone concern resolution is equivalent to that drawn in the FSB’s G-SIB resolution framework draws a distinction between “open-bank bail-in”, involving the recapitalisation of the failed entity itself, and “closed-bank bail-in”, leading to the capitalization of a new newly established entity or bridge institution to which certain assets and liabilities from the entity in resolution have been transferred; FSB, “Principles on Bail-in Execution” (21 June 2018). In both cases, the key consideration in determining whether or not a bank remains a “going concern” or “open bank” would appear to be the continuity of the old legal person. 23 For this reason, it is regrettable that current usage at both the European and international levels has abandoned an earlier, and more nuanced, employment of the same terms in the joint IMF-World Bank Global Bank Insolvency Initiative, where “going concern” was used in a purely economic sense to refer to the uninterrupted continuation of a failed bank’s business lines as an operating unit (“open banking operation”), while “gone concern” signified piecemeal liquidation (i.e., cessation of activities, collection of the estate’s assets and distribution of proceeds by way of liquidation dividends). On that understanding of the terms, the banking business would be considered to be a going concern as long as it was carried on without interruption of business activities by another entity (purchaser or bridge bank), even in situations where the original legal entity was dissolved. Thus, it would be anything but oxymoronic to contemplate the possibility of, so to speak, “going-concern liquidation”, where the business survives as an operating bundle of assets and liabilities under new legal ownership while the old legal vehicle eventually disappears. See IMF and World Bank, “An Overview of the Legal, Institutional, and Regulatory Framework for Bank Insolvency” (17 April 2009), especially at p. 15 (para. 9 and note 7). 24 Art. 43(4) BRRD. 20
21
782
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
liability items of the failed entity’s balance sheet to the requisite extent, thus ensuring its continuation and restoration to economic soundness. The level of the necessary recapitalization, and thus the extent of bail-in, is deter- 14 mined by three more specific and partially overlapping criteria, all of which must be satisfied once bail-in has produced its results. Thus, the execution of the bail-in operation must raise the capital position of the entity in question to a level sufficient to simultaneously: (a) enable it to comply with the prudential regulatory regime’s minimum conditions for continuing authorisation; (b) if it is authorized as a credit institution under the CRD IV25 or an investment firm under MiFID II,26 enable it to continue to carry out the activities covered by its authorization or; and, last but not least, (c) sustain sufficient market confidence in it. The measure of recapitalization required to meet the first criterion can be determined objectively, by reference to the provisions of the CRR. 27 The remaining two criteria bring into the picture the entity’s commercial ability to carry out its business and participate effectively in the financial markets. They essentially demand the restoration of the entity’s so-called economic capital to a level commensurate to the scale of its activities and its risk profile. The relevant considerations go beyond the formal regulatory capital requirements, and require the SRB to assess the factual situation from a market-based viewpoint, taking into account environmental conditions, thus widening its margin of appreciation. The SRB’s determination of the sufficient measure of capitalization, however, binds it and sets both a floor and a ceiling for its resolution decision: the recapitalization should not stop at a level that is deemed insufficient, but should neither go beyond what is considered to be necessary, because this would render the resolution action disproportionate.
1. Condition for the use of bail-in for the recapitalization of the failing entity According to Art. 27(2)(2) SRMR, the bail-in tool may be employed for the first of 15 the two permissible purposes, that is, the recapitalization of the institution under resolution, only if there is a reasonable prospect that its application, in combination with any other relevant measures (including measures implemented in accordance with the business reorganisation plan required by Art. 27(16) SRMR), will, in addition to achieving relevant resolution objectives, restore the entity in question to financial soundness and long-term viability. The condition thus introduced has three aspects. Firstly, the criterion of “financial soundness and long-term viability” indicates that 16 it will not be sufficient to stabilize the failing entity to the minimum extent necessary for avoiding contagion or disruption of the financial intermediation function, if this does not also entail the return of the entity to a normal financial condition, which does not raise further regulatory or economic concerns. It should be noted that, while the expressions “financial soundness”, “viability”, “full viability”, and “long-term viability” are used sporadically in the BRRD and the SRMR to indicate a sound financial condition, they are not terms of art with a precise technical meaning. In practice, the criterion appears to overlap to a very considerable degree with the calibration of the necessary recapitalization when this path is followed. As mentioned above, this should be aimed at covering to a sufficient extent the entity’s needs for economic, as well as regulatory, capital. In other words, for the bail-in tool to be applied for this purpose, it is indispensable that, following the implementation of the resolution scheme, the entity will find itself in possession of sufficient economic capital and will benefit from sufficient market Directive 2013/36/EU. Directive 2014/65/EU. 27 Regulation (EU) No 575/2013.
25 26
Christos Hadjiemmanuil
783
Art. 27 SRMR
Bail-in tool
confidence. It is hardly conceivable, however, that a bank with these characteristics may nonetheless fail the condition of financial soundness and long-term viability, at least insofar as these depend on the entity’s financial structure. 17 Secondly, while the condition may be of little added value in terms of specifying the intended capital outcomes of the bail-in operation, it clarifies that the application of the tool is embedded in a wider restructuring programme. While the prescribed recapitalization may constitute the immediate and crucial financial plank, further steps, both financial and organizational, may be necessary in order to address the underlying deficiencies that caused the entity’s failure and restore its overall organizational and operational soundness within an appropriate timeframe. Over and above the exercise of resolution powers by the relevant NRAs as necessary for the implementation of the resolution scheme, these steps will include internal restructuring measures as set out in the entity’s business reorganization plan (and in the restructuring plan that the entity may be required to submit to the Commission’s DG COMP, in accordance with the State aid framework), which must be executed by its management in accordance with the applicable norms of national private law. This interpretation of the condition of Art. 27(2)(2) SRMR is supported by the preamble of the SRMR, which further points to the replacement of the entity’s management as one of the further measures that will be normally appropriate when the bail-in tool is used in this manner.28 18 Thirdly, the condition requires that, in order to apply the bail-in tool for the recapitalization of the institution under resolution, the SRB must be satisfied that there is a “reasonable prospect”29 that the bail-in operation combined with the additional measures set out in the resolution scheme (in other words, the overall restructuring programme) will succeed in restoring the entity’s long-term viability. This assessment will be based, not only on hard evidence, but also on a range of reasonable hypotheses. Moreover, a finding of a “reasonable prospect” entails much less than full conviction, and it is conceivable that it does not even require a preponderance of probabilities (more than 51 per cent chance), thus allowing the SRB a wide margin of appreciation. In any event, if the SRB concludes that the entity’s restoration to long-term viability is impossible or highly unlikely, the first path is not open. This excludes the use of bail-in as a long-shot “gamble for resurrection” of the old entity.
2. Incompatibility with the other resolution tools When applied for the purpose of recapitalizing the institution under resolution, the bail-in tool must be used independently of the other three resolution tools. This is implicit in the text of Art. 27(2)(2) SRMR, which contemplates the use of bail-in for this purpose in combination with other “relevant measures”, but not with other “resolution tools”. Conceivably, the relevant measures accompanying bail-in could include the application of another resolution tool, on the formal ground that the term “measures” grammatically includes “crisis management measures”,30 which, in turn, includes “resolution actions”, whose definition encompasses “the application of a resolution tool”.31 But there are good reasons to believe otherwise. 20 To start with, it is clear from the provisions’ text that the primary case of “relevant measures” are measures envisaged by the business reorganization plan that the entity it19
Recital (75) SRMR. In the preamble of the Recital (74) SRMR, as well as in the Commission’s draft instrument, this is described as a “realistic” prospect. 30 Art. 2(102) BRRD. 31 Art. 3(10) SRMR and Art. 2(40) BRRD. 28
29
784
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
self (or the person appointed by the NRA to administer the entity) must submit to the resolution authorities.32 These, however, will be measures of business reorganization and financial restructuring taking place in private law, rather than measures of public nature. Moreover, there are strong arguments a contrario from the text of the second subparagraph of Art. 27(2), which envisages specifically the combined use of bail-in and any other resolution tools, but only on the condition that the recapitalization purpose does not apply. The use of the bail-in tool for the purpose of recapitalizing the existing entity would 21 be totally incompatible with a partial (rather than full) transfer of its assets, rights, and liabilities by way of application of the sale of business tool or the bridge institution tool, because such partial transfer would necessitate the winding up of the entity under normal insolvency proceedings,33 thus precluding altogether its recapitalization as a going concern. This leaves three possibilities, namely, the use of the sale of business tool for the purpose of transferring to the acquiring institution the instruments of ownership of the institution under resolution or the totality of its balance sheet, the use of the bridge institution tool for the same purpose, and the use of the asset separation tool. While there is nothing to exclude the application of the bail-in tool in order to recapitalize the existing institution under resolution or its universal successor in title, the correct legal ground for this type of operation should be found in the second subparagraph of Art. 27(2) SRMR, rather than the first subparagraph, and, accordingly, the operation would fall within the second purpose, or path for the application, of the bail-in tool.
II. Second possibility: Use of the bail-in tool in combination with another resolution tool If the first path envisaged by Art. 27(1)(1) SRMR cannot be followed, because the 22 SRB concluded that there is no reasonable prospect that bail-in will succeed in restoring the institution under resolution to financial soundness, the bail-in tool may nonetheless be used in accordance with the second path. This involves the application of the bail-in tool in combination with another resolution tool. Any suitable combination of bail-in with the other three tools34 will be possible in this eventuality.35 Thus, bail-in may be used in support of the transferral of the failed entity’s systemically important activities to a bridge institution,36 third-party purchaser under the sale of business tool,37 or asset management company under the asset separation tool,38 while the legal person and residual part of the failed entity itself are placed in liquidation. In the typical case of a bridge institution, it is not enough to ensure that the transferred liabilities are backed by an equal sum of good assets; the conversion of part of the transferred liabilities will still be necessary, in order to enable the bridge institution to meet the requirements for authorisation as a credit institution under the CRR. Specifically, the SRMR’s text envisages the reduction of the principal amount or 23 conversion into equity of claims or debt instruments transferred either to a bridge institution, with a view to provide capital for the latter, or under the sale of business or the Art. 27(16) SRMR and Arts. 51–52 BRRD. Art. 22(5) SRMR. 34 Art. 22(2)(a)–(c) SRMR. 35 Art. 27(2)(2) SRMR. 36 Arts. 3(1)(31) and 25 SRMR. 37 Arts. 3(1)(30) and 24 SRMR. 38 Arts. 3(1)(32) and 26 SRMR. 32
33
Christos Hadjiemmanuil
785
Art. 27 SRMR
Bail-in tool
asset separation tool.39 Note that the text of the operative provision is much wider than that of Recital (74) of the SRMR’s preamble, where only the bridge institution option is envisaged when the second path is followed. This reflects the original text of the draft BRRD,40 but is inconsistent with the directive’s final text and the parallel text of the SRMR. One wonders, whether the final clause of Recital (74), according to which, in this scenario, “the residual part of the entity ceases to operate and is wound down” also gives the reader an unduly restrictive impression of the possible outcomes. This is because the winding up of the institution under resolution is regulated by Art. 37(6) BRRD on the “General principles of resolution tools”, which mandates the winding up of the institution under resolution within a reasonable timeframe only in situations where the sale of business tool or the bridge institution tool are used on a stand-alone basis for the transfer of part of the institution’s assets, rights or liabilities, but not in other cases, such as the use of the bail-in tool in combination with another resolution tool. 24 Technically, when the affected claims or debt instruments are converted into “equity” or “capital”, the resulting instruments will be in the form of shares or other types of capital instruments falling within the CRR’s definition of Common Equity Tier 1 (CET1) instruments.41 While the text mentions explicitly the possibility of bailing-in liabilities for capital-generation purposes only in relation to bridge institutions, it also includes a general reference to the conversion of claims or debt instruments into equity; this should be understood as authorizing the conversion of liabilities also with a view to recapitalizing the purchasing entity under the sale of business tool or the asset management vehicle under the asset separation tool.42 On the other hand, the text does not allow for the recapitalization of the transferring entity, that is, the institution under resolution itself, because it only envisages the conversion of transferred instruments, thus rendering any liabilities left behind unamenable to bail-in. (Conceivably, an argument could be made to the effect that the provision could tolerate the recapitalization of the institution under resolution itself in situations where the sale of business or the asset separation tools have been used to transfer its ownership, on the ground that “instruments that are transferred” includes those “transferred” to the acquiring group by way of its acquisition of ownership and control, but this would be rather tortuous.) 25 As for the reduction of the principal amount of transferred claims, this operates as a form of allocating prior losses. Thus, the combined effect of the partial write-off and the transfer would be to determine the residual economic value of the relevant claims and then transfer them from the original, but no longer creditworthy, issuer to a new, surrogate debtor entity; bail-in is used to achieve the first purpose, while one of the other tools enables the transfer. 26 The second path constitutes a radical solution to the problem of capitalization of successor operating entities (as distinct from that of the institution under resolution itself). These legal entities may be capitalized through the forcible restructuring of transferred liabilities, even though they are neither the actual contractual counterparties of the affected claimholders, nor the universal successors in title of those counterparties, since frequently the institutions under resolution will remain behind, to be liquidated as separate and unaffiliated legal persons (the evident exception being the application the sale of business or bridge institution tools for the transferral of instruments of ownership in the institution under resolution,43 which may thus survive as a subsidiary Art. 27(1)(1)(b) SRMR. Art. 37(2)(b) draft BRRD text, COM (2012) 280 final (6 June 2012). 41 Arts. 3(1)(45) and 27(13)(2)(b) SRMR. 42 See infra, → paras. 39–40. 43 Arts. 24(1)(a) and 25(1)(a) SRMR.
39 40
786
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
institution in the post-resolution group). Despite its innovative character, this approach raises few objections in principle. Generally speaking in domestic systems of private law the assignment or transferral of liabilities to a new debtor is not possible without the consent of the creditor, due to the fact that the quality and recoverability of claims depends on the individual characteristics of the debtor, who is not accordingly substitutable without risk to the creditor; but the argument does not hold in the context of an already insolvent or impecunious debtor. Thus, other things being equal, the mandatory nature of the transfer appears unobjectionable from the point of view of the protection of the claimholders’ rights, without engaging in the balancing of interests. Even outside the remit of insolvency law, modern regulatory law envisages in certain cases, especially in the insurance field, the mandatory or supervisor-approved transfer of whole portfolios of (contingent) liabilities on prudential grounds, without need for counterparties’ consent to the novation of the individual underlying contracts.44 On the other hand, the change of the contractual nature of the surviving claims and the conversion of debt claims into the equity of the new debtor for the purpose of its capitalization implies the forcible imposition on liability-holders of losses, or at least of increased risks, due to the change in the form and priority of their claims, potentially in excess of their due share in the allocation of past losses. Typically, even in the context of insolvency proceedings, the conversion of claims would not be possible without at least a majority-based decision of the relevant class of claimholders. (Conversely, the shareholders could always refuse to be diluted and prefer to go into piecemeal liquidation, rather than accepting a scheme of arrangement or another restructuring plan.) The radical aspect of bail-in rests on the twin aspects of mandatory conversion and disregard for the identity of the corporate person carrying on the financial activity.
III. Mandatory content of the resolution scheme According to Art. 27(1)(2) SRMR, when applying the bail-in tool (and regardless of the purpose of its application), the SRB is required to specify in the resolution scheme three particular elements, all of which are further regulated in the remaining paragraphs of the same Article. Firstly, the resolution scheme must determine the aggregate amount by which the liabilities subject to bail-in should be reduced or converted. In this respect, the SRB’s assessment must follow the directions of Art. 27(13) SRMR. Secondly, the resolution scheme must specify the liabilities that may be excluded from bail-in in accordance with paragraphs (5) through (14) of Art. 27 SRMR. Unlike paragraph (3), which prevents automatically the exercise of bail-in with regard to certain categories of liabilities, the paragraphs mentioned here, which occupy the largest part of the Article, enable the SRB to exclude particular groups of otherwise eligible liabilities on a discretionary basis, but always within limits and subject to conditions. Finally, the resolution scheme must establish the objectives and minimum content of the business reorganisation plan that the management body, or the person or persons appointed to control the institution under resolution,45 must submit to the relevant NRA, and through it to the SRB. The procedure for the submission and approval of the business reorganization plan is set out in Art. 27(16) SRMR. 44 E.g., Pt VIII of the Financial Services and Markets Act 2000 (UK). See Clyde & Co, ‘Insurance Transfers in Europe’ (June 2012); and, with regard to the supervisory approval of cross-border transfers of insurance portfolios, Art. 39 of Solvency II Directive. 45 By the relevant NRA, in accordance with Art. 29(1) SRMR, and Art. 72(1)(2) BRRD.
Christos Hadjiemmanuil
787
27
28
29
30
Art. 27 SRMR
Bail-in tool
C. Extent, scope, and sequencing of bail-in 31
When applying the bail-in tool for the absorption of a failing bank’s past losses and/or the sufficient capitalization of the post-resolution operating entity, the SRB must comply with a set of specific norms set out in the SRMR and the BRRD, which constrain its choices regarding the potential outcomes and the ways in which these may be pursued. More generally, the bail-in must be implemented in a way that serves the general resolution objectives and respects the resolution principles and the property rights of affected claimholders. This raises complex issues, some of which are not fully clarified in the legislative texts, including due to the continuing relevance of national rules of contract and insolvency law.
I. Extent of bail-in: Establishment of the aggregate amount As mentioned above,46 whenever the SRB applies the bail-in tool, it must specify in its resolution scheme the aggregate amount by which the liabilities of the institution in question need to be written down or converted.47 In this way, the SRB in effect defines the overall extent, or scale, of the bail-in of the pre-resolution stock of liabilities. 48 It should be noted that the provision refers specifically to bail-inable liabilities.49 This suggests that the aggregate amount does not include the SRB’s intended reduction of the institution’s regulatory capital instruments.50 The same conclusion can be drawn more directly from Arts. 47(3) and 48(1) BRRD, which differentiate between capital instruments, on the one hand, and bail-inable liabilities, on the other, and establish that the aggregate amount does not include the amount of write-down or conversion of capital instruments. Accordingly, the overall contribution of the various stakeholders to the financing of resolution (that is, the total amount of bail-in in the wider sense of the term) is higher than the aggregate amount and consists of two layers: (a) the amount by which the institution’s own funds instruments must, in the SRB’s view, be affected; and (b) the aggregate amount of write-down or conversion of bail-inable liabilities, which must presumably be calculated after taking into account the previous layer.51 33 The SRB’s assessment of the aggregate amount is not a matter of free and subjective evaluation, but a structured assessment that must conform to the more detailed requirements of Art. 27(13) SRMR,52 a provision which replicates Art. 46(1)–(2) BRRD. The provision stipulates that the SRB’s estimation of the aggregate amount must be based on 32
See supra, → para. 28. Art. 27(1)(2)(a) SRMR. 48 The term “aggregate amount” is defined in Art. 3(1)(48) SRMR, but reappears only once in the text, in Art. 27(1)(2)(a) SRMR. However, the whole of Art. 27(13) SRMR (to which the definition in Art. 3 SRMR explicitly refers) is dedicated to the assessment of the relevant amount. 49 Art. 27(1)(2)(a) SRMR, as amended by Regulation (EU) 2019/877, OJ 2019 L 150/226. The original text referred to “eligible liabilities”, a term that has now been redefined and is used in a different context. The issue is discussed in detail infra, → paras. 44–46. 50 These are the “own funds instruments” of Art. 4(1)(119) CRR, which include three distinct classes of instruments: Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), and Tier 2. In the terminology of the BRRD and the SRMR, the AT1 and Tier 2 instruments are also referred to collectively as “relevant capital instruments”; Art. 2(1)(74) BRRD and Art. 3(1)(51) SRMR. 51 Art. 47(3)(b)–(c) BRRD. 52 Indeed, the formal technical definition of “aggregate amount” establishes explicitly that this represents the SRB’s assessment of the necessary write down or conversion of liabilities subject to bail-in, “in accordance with Art. 27(13)”; Art. 3(48) SRMR. 46 47
788
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
a valuation complying with the requirements of Art. 20(1)–(15) SRMR.53 The reference is to the valuation of the failing entity’s assets and liabilities that must be carried out by an independent valuer as a prerequisite for the SRB’s decision on the launching of resolution action or the exercise of the power to write-down or convert capital instruments, generally referred to as “valuation before resolution”. In practice, this comprises two distinct valuations, the so-called “Valuation 1”, a largely accounting exercise, whose purpose is limited to the confirmation of whether the entity under consideration is failing or likely to fail,54 and “Valuation 2”, which involves the entity’s economic valuation for the purpose of determining the type, scale, and parameters of the appropriate resolution action.55 Evidently, it is Valuation 2 that must be used by the SRB for the establishment of the aggregate amount. In situations where it is not feasible to conduct an independent valuation meeting all the requirements set out in Art. 20 SRMR, the reference is to the provisional Valuation 2 that the SRB must carry out on the basis of paragraph (10) of that Article. The aggregate amount is calculated, always with reference to the results of Valuation 2, as the sum of two more specific figures. The first figure represents the estimate of the amount by which pre-resolution liabilities must be reduced in value (that is, written down) in order to bring the (presumably negative) net asset value of the institution under resolution back to zero.56 Accordingly, the amount exists only if, following the write-down of all pre-resolution capital items, the net worth of the institution under resolution remains negative (that is, its assets cannot cover its liabilities). In this sense, it represents an allocation of past losses to the institution’s liability-holders.57 The second figure reflects the volume of liabilities that must be converted into equity (shares or other types of capital instruments) in order to ensure that the post-resolution operating entity will be adequately capitalized following the implementation of bail-in.58 Depending on the chosen resolution strategy the relevant entity, with regard to which the second figure must be assessed, will be either the original credit institution as reshaped following the implementation of the resolution action or, where the bail-in tool is applied in combination with the bridge institution tool, the successor bridge institution. In either case, the critical indicator is that entity’s prospective CET1 capital ratio,59 as distinct from other capital measures (such as the minimum total capital ratio, or the capital ratio as augmented by Pillar II requirements and/or the various capital buffers).60 This should presumably be calculated by applying the norms of the CRR on the entity’s envisaged post-resolution balance sheet. Depending on the circumstances, only one of the two amounts may be relevant (for instance, due to the fact that at the time of resolution the failing institution retains some positive economic value, thus rendering the first amount inapplicable). Art. 27(13)(1) SRMR. In pursuance of Art. 36(4)(a) BRRD; and Art. 20(5)(a) SRMR. 55 In particular, Recital (1) Commission Delegated Regulation (EU) 2018/345 of 14 November 2017 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for assessing the value of assets and liabilities of institutions or entities, OJ L 67, 9.3.2018, p. 8; EBA, ‘Handbook of Valuation for Purposes of Resolution’ (22 February 2019), at pp. 10–12; and SRB, ‘Framework for Valuation’ (February 2019), at pp. 4 and 7–8. 56 Art. 27(13)(1)(a) SRMR. 57 Art. 27(13)(1)(a) SRMR. 58 Art. 27(13)(1)(b) SRMR. 59 Art. 27(13)(2) SRMR. 60 Under the CRR, institutions must at all times satisfy a CET1 ratio of 4.5 %; Art. 92(1)(a) CRR. 53
54
Christos Hadjiemmanuil
789
34 35
36
37
Art. 27 SRMR
Bail-in tool
Even though the first subparagraph of Art. 27(13) SRMR suggests that the calibration of the recapitalization of the failing entities should be solely aimed at boosting the surviving entity’s CET1 capital ratio, the second subparagraph opens the way to a higher estimate and, accordingly, more extensive conversion of debt to equity. Specifically, after stating that the SRB’s assessment aims at establishing the amount write-down and conversion necessary for restoring the CET1 capital ratio (a redundant point, since this is already stated in the previous subparagraph, albeit only in relation to the amount of conversion), the provision adds that the amount of the recapitalization must also satisfy certain bank- and context-specific criteria, which reflect the purposes of the bail-in tool as set out in Art. 20(1)–(2) SRMR.61 Specifically, it must suffice to “sustain sufficient market confidence” in the surviving entity and to “enable it to continue to meet, for at least one year, the conditions for authorisation and to carry out the activities for which it is authorised under [CRD IV] or [MiFID II]”.62 To a significant extent, these criteria concretize the aforementioned condition for the use of the bail-in tool for recapitalization purposes, namely, that there is a reasonable prospect that it will restore the entity to long-term viability. 63 There is considerable overlap between the various criteria, because the upfront restoration of the capital ratio to healthy levels by way of bail-in should in principle be sufficient to guarantee a comfortable time-window for normal operations, which, in turn, should cement the market confidence. Nonetheless, the legislator probably intended to cover the probable scenario where, in the post-resolution phase, the entity continues to incur significant losses, due to ongoing credit problems and restructuring costs, which tend to impair once again its capital position.64 Art. 27(13) SRMR thus allows (albeit in a rather self-contradictory manner, since the calculation in accordance with the first subparagraph does not include this element, which only appears in the second subparagraph65) the inclusion in the aggregate amount of the SRB’s estimate of the further capital needs that are likely to occur within a horizon of no less than twelve months. 39 Where the bail-in tool is employed with a view to capitalizing a bridge institution, to properly assess the aggregate amount of bail-in the SRB must take into account any contribution of capital that the SRF is due to make in pursuance of the resolution scheme. 66 Implicitly, the same rule applies when the SRF is intended to contribute to the recapitalization of the institutions under resolution itself.67 This will result in a lower aggregate amount. A minimum level, however, is effectively set by the provision of Art. 27(7) SRMR, according to which capital contributions from the SRF are only permissible when the institution’s own stakeholders have made a contribution to loss absorption and recapitalization of no less than 8 % of total liabilities, including own funds, by way of bail-in (including the write-down or conversion of capital instruments).68 38
See supra, → paras. 8–26. Art. 27(13)(2) SRMR. 63 Art. 27(2)(1) SRMR. See supra, → paras. 15–18. 64 The relevant clause is derived from the text of Art. 41(2) of the draft BRRD. There, it was meant to inform the decision on the reduction (that is, write-down) of liabilities, rather than their conversion to equity, and did not specify the relevant time horizon. Neither the explanatory memorandum nor the preamble to the draft BRRD shed any light on the clause’s intended role, which remains, accordingly, a matter for conjecture. 65 The draft BRRD did not itemize the two more specific amounts that compose the aggregate amount in the final text; Art. 46(1) BRRD and Art. 27(13)(2) SRMR. Accordingly, there was no tension between the two descriptions of the aggregate amount, as in the final text. 66 Art. 27(13)(2) SRMR, in conjunction with Art. 76(1)(d) SRMR. 67 Art. 76(1)(f) SRMR. 68 See infra, → paras. 159–165. 61
62
790
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
While the first two subparagraphs of Art. 27(13) SRMR solely apply to the assessment 40 of the aggregate amount when the bail-in tool is used in isolation or in combination with the bridge institution tool,69 the third subparagraph is intended to guide the assessment when the bail-in tool is used in combination with the asset separation tool.70 In this context, it should be noted that the asset management vehicles71 to which assets, rights, or liabilities are transferred do not need to meet the requirements for authorisation as credit institutions. Accordingly, in contrast to bridge institutions, they do not require any particular level of regulatory capital. Even so, in order to be able to operate effectively, they must possess an appropriate level of economic capital. For this reason, the provision under discussion authorizes specifically the SRB to include in its calculation of the aggregate amount of bail-in “a prudent estimate of the capital needs of the asset management vehicle as appropriate”.72 The wording of the provision, which was not included in the Commission’s proposal but replicates the BRRD’s text,73 is curious, because it only refers to the need to “reduce” liabilities, that is, to write them down, as distinct from converting them into equity. While the term “to reduce” could conceivably be interpreted to include situations where the nominal value of liabilities is diminished simply because part thereof has been converted into capital instruments, this interpretation would be inconsistent with its use elsewhere in the SRMR, where the reduction of capital instruments or liabilities is clearly distinguished from their conversion.74 At first sight, the provision appears to require that the transfer of liabilities to the asset management vehicle should not be so extensive as to jeopardize its capital position. On this reading, the post-resolution value of transferred liabilities should be sufficiently below the value of the transferred assets, as priced for the transaction, so as to leave the asset management vehicle with a sufficient layer of capital; if liabilities of higher original value were transferred, they should be partially written down in order to achieve this result. However, this interpretation entails an iniquitous and clearly disproportionate result, namely, that the capitalization of the asset management vehicle can be financed by way of bail-in, but only through the final expropriation of (part of) the old liability-holders, without any compensation in the form of equity in the asset management vehicle, so as to provide them with an opportunity to participate in the potential upside of the collection or, at least, to recover the difference in value between the transferred assets and their reduced claims.75 As already suggested,76 it would be preferable to interpret the provisions as allowing the conversion of liabilities also into capital instruments in the asset management vehicle (or, for that matter, the acquirer bank under the sale of a business tool). Indeed, Art. 27(1)(b) SRMR recognizes specifically the conversion into equity of claims transferred to the acquiring institution (whether a purchaser under the sale of business tool, a bridge institution, or an asset management vehicle) as a “purpose” of the bail-in tool when this is used in combination with another resolution tool. However, See also Recital (74) SRMR and Recital (68) and Art. 46(1), (2)(1) BRRD. Art. 42 BRRD; and Art. 26 SRMR. 71 Arts. 2(1)(56), and 42(2) BRRD. 72 Art. 27(13)(3) SRMR. 73 Art. 46(2)(2) BRRD. 74 Arts. 21(10)(a), 21(7b), and 27(1)(1)(b), and (2)(a) SRMR. 75 In this context, the possibility of write-back of claims in pursuance of Art. 20(12) SRMR would not, in principle, be available, because the shortfall between the value of the transferred assets and the value of the claims retained by the liability holders is not due to a difference in the valuation of assets between the provisional and the the ex post definitive valuation, but to a deliberate decision of the SRB, as authorized under Art. 27(13)(3) SRMR. This would leave the NCWO safeguard of Art. 15(1)(g) SRMR and Arts. 73– 75 BRRD as the only (and highly doubtful) source of potential compensation. 76 See supra, → para. 24. 69
70
Christos Hadjiemmanuil
791
Art. 27 SRMR
Bail-in tool
it draws a distinction between the use of bail-in “with a view to providing capital for [a] bridge institution” and its use under the sale of business tool or the asset separation tool, as to which it does not provide any further clarification. All things considered, the text is unsatisfactory, since it fails to elucidate the way in which the SRB should assess the amount of the conversion in relation to the asset separation tool. In a similar manner, the text remains totally silent on the calculation of the aggregate amount and its component parts when bail-in is used in combination with the sale of business tool. 41 Note that, in various documents where they discuss the application of the bail-in tool, the Commission, the EBA, and the SRB tend to use expressions such as “taking losses”, “allocation of losses”, and “loss absorption” in a rather loose way, without differentiating between the allocation of actually accrued losses (that is, losses that have already crystallized or been recognized at the point of non-viability, and which are reflected in the first amount mentioned above) and the SRB-mandated contribution of liability-holders to the recapitalization of the institution’s operations and the resulting creation of a buffer against possible, or even foreseeable, but not yet existing losses (which are reflected in the second amount). This manner of speaking makes the already complex discussions of the operational details of bail-in even more confusing!
II. Scope of the bail-in tool: Liabilities amenable to write-down or conversion 42
The application of the bail-in tool entails the write-down or conversion of the failed institutions’ existing liabilities. Technically, the activation of the tool is not necessary for the bail-in (in the extended sense of the term) of those liabilities that qualify as own fund instruments (CET1, Additional Tier 1, or Tier 2 instruments) under the CRR, 77 because these can be written down or converted in pursuance of the power of Art. 21 SRMR. Other liabilities can be bailed-in only through a formal application of the bailin tool78 (with the important forthcoming exception of liabilities which are issued by entities belonging to a resolution group to the group’s designated resolution entity in accordance with a single-point-of-entry resolution plan79). Significantly, however, bail-in cannot be applied to all liabilities.
1. Exclusions of liabilities from bail-in 43
While at first sight, the legislative scheme appears to be highly indiscriminate with regard to the bail-in of failed institutions’ liabilities,80 in reality the situation is more nuanced and the modalities of the bail-in tool set significant limits to its scope. Thus, as will be discussed in due course, broad categories of liabilities are excluded automatically from bail-in, and thus exempt from participation in loss-absorption, as a result of provisions of general application in the BRRD and the SRMR.81 In addition, even liabilities that are in principle bail-inable may be excluded by the SRB on a discretionary basis if, in view of the concrete circumstances of the case in hand, this appears justified by certain considerations.82 In this sense, the resolution regime Arts. 28–29, 31, 52, and 63 CRR and Art. 3(1)(45), (46)–(47) SRMR. The transfer of any liability, without any further change in its original terms, is, of course, possible through the application of any of the other three resolution tools. 79 Art. 21 SRMR, as amended. See infra, → para. 139. 80 Art. 44(1) BRRD. 81 Art. 44(2) BRRD and Art. 21(3)–(4) SRMR. See infra, → paras. 64–110. 82 Art. 44(3), (9)–(10) BRRD and Art. 27(5), (12), (14) SRMR. See infra, → paras. 111–139. 77 78
792
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
contains significant discretionary elements, which place in question its automaticity and uniformity of application.
2. Bail-inable liabilities The original text of Art. 27 SRMR referred to bail-in as the write-down or conversion 44 of “eligible liabilities”.83 Based on its technical definition, the term “eligible liabilities” included all liabilities and, possibly, capital instruments of an institution subject to the resolution regime, in so far as these (a) do not qualify as CET1, Additional Tier 1, or Tier 2 instruments under the CRR, and (b) are not excluded from the scope of the bail-in tool by virtue of a mandatory exclusion under Art. 27(3) SRMR.84 As part of the so-called “Banking Reform package”85 and its parallel amendments of 45 the BRRD and the SRMR, which are commonly referred to as “BRRD II”86 and “SRMR II”,87 the term “eligible liabilities” was substituted throughout Art. 27 SRMR and the corresponding provisions of the BRRD by the new term “bail-inable liabilities”, without, however, any change whatsoever in the technical definition.88 Accordingly, the substitution of the new term for the old one, which applies from 28 December 2020, 89 does not involve a change in the scope of the bail-in tool, as defined in Art. 27 SRMR. It should be noted in this regard that the term “eligible liabilities” has not been eliminated, but has been given, instead, a new technical definition90 and new use in the context of group resolution planning. In particular, the redefined term is used in relation to the prepositioning of financial claims between group entities in view of single-point-of-entry (SPE) resolution strategies,91 as well as the implementation of such strategies through the use of write-down and conversion power under Art. 21 SRMR. These powers will in the future be exercisable, not only in relation to capital instruments, but also to “eligible liabilities” as redefined, when these are issued internally within a resolution group, with non-resolution entities as issuers and the resolution entity or an existing shareholder as buyers-claimants.92 In this case, it will in the future be possible to exercise the power to write down or convert the eligible liabilities independently of a resolution action. This
83 Art. 27(1)(2)(a) and (13) SRMR, with regard to the establishment of the aggregate amount of bail-in; and Art. 27(7)(a) SRMR, with regard to the SRF’s potential funding contribution. In relation to the envisaged imposition of limits on interbank exposures to instruments amenable to bail-in, Art. 27(4)(3) SRMR, included an effectively coterminous reference to “liabilities eligible for a bail-in tool”. 84 Original text of Art. 3(1)(49) SRMR, reflecting the original text of Art. 2(1)(71) BRRD. 85 The Banking Reform package (also known as “Risk Reduction package”) is a set of extensive legislative amendments to the prudential and resolution regimes (namely, the CRD IV, the CRR, the BRRD, and the SRMR), originally proposed by the Commission in late 2016 and eventually enacted in mid-2019; COM(2016)850 through COM(2016)854 (23 November 2016); and Directives (EU) 2017/2399, (EU) 2019/878, and (EU) 2019/879, and Regulations (EU) 2019/876 and (EU) 2019/877. For a succinct description of the key elements, see ‘Deutsche Bank, Deutsche Bundesbank, Monthly Report (June 2019), at pp. 31–49. 86 Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending the Bank Recovery and Resolution Directive as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC, OJ L 150, 7.6.2019, p. 296 (“BRRD II”). 87 Regulation (EU) 2019/877 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 806/2014 as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms, OJ L 150, 7.6.2019, p. 226 (“SRMR II”). 88 Art. 3(49) SRMR, as replaced by SRMR II and Art. 2(71) BRRD, as replaced by BRRD II. 89 Art. 2(2) SRMR II and Art. 3(1)(2) BRRD II. 90 Art. 3(49a) SRMR, as inserted by SRMR II, and Art. 2(71a) BRRD, as inserted by BRRD II. 91 See, in particular, Arts. 12c to 12h SRMR, as inserted by SRMR II. Cf. Recital (84) SRMR and Recitals (17)–(19) SRMR II. 92 Art. 21(1), (7), and (7a) SRMR, as amended, replaced, or inserted, respectively, by SRMR II.
Christos Hadjiemmanuil
793
Art. 27 SRMR
Bail-in tool
will often render formal resort to the bail-in tool unnecessary for the implementation of SPE-based group resolution plans. 46 In both the BRRD and the SRMR, the definitions of what were originally called “eligible liabilities” and are now named “bail-inable liabilities” include explicitly (but improbably), beyond true liabilities, “capital instruments”, always provided these do not qualify as own fund (CET1, Additional Tier 1, or Tier 2) instruments. The formulation is rather odd and begs the question of the precise nature and categories of the instruments that the legislator had in mind. A related entry in EBA’s Single Rulebook Q&A, which reflects the Commission’s interpretations of the BRRD, does not shed much light on this issue. Specifically, asked by a national authority, whether the possibility of exceptionally excluding certain liabilities from bail-in on a discretionary basis also applies to “relevant capital instruments”, the Commission notes curtly that the pertinent provision “refers only to eligible liabilities”, whose definition “clearly excludes regulatory capital instruments”.93 This, however, does not address the true textual difficulty. The national authority’s question referred to “relevant capital instruments”, which in the terminology of the resolution regime means Additional Tier 1 and Tier 2 instruments,94 that is, to instruments qualifying as own funds (or “regulatory” capital instruments) and which can be written down or converted in any event, including in a pre-resolution scenario, in pursuance of the write-down power of Art. 21 SRMR. In contrast, the “capital instruments” which come within the definition of bail-inable liabilities are precisely those which do not qualify as own funds. It must still be asked, accordingly, what exactly are these “non-regulatory” capital instruments, to which the definition refers. The answer must be sought in the provisions of the CRR. Like the BRRD and the SRMR, the CRR leaves the general category “capital instruments” undefined. Nonetheless, it employs the technical term “other capital instruments” to denote capital instruments that do not qualify as CET1, Additional Tier 1, or Tier 2 instruments.95 As such, the “other capital instruments” coincide with the capital instruments referred to in the resolution regime’s definition of bail-inable liabilities. This appears to imply the existence of an autonomous category of capital instruments, apparently distinguishable from liabilities due to its equity-like characteristics, whose membership is then divided into instruments which qualify as own fund instruments and others that do not. However, the legislative descriptions of the three classes of own fund instruments clearly show that this is not the case. Each class is defined to include so-called “capital instruments” (meeting different conditions in each case) and various other items.96 This implies that the term “capital instruments” is generally narrower, not broader, than that of own funds (or regulatory capital) instruments. Moreover, the “capital instruments” which form the bulk of Tier 2 instruments, in reality consist of subordinated debt instruments, that is, of liabilities, rather than equity-like items. This leads to the conclusion that the term “capital instruments” describes, in effect, items (whether equity-like or in the form of liabilities) which are in principle eligible for inclusion in an institution’s calculation of own funds, while the “other capital instruments” are these same instruments to the extent that they cannot be included in the calculation, including, in particular, the already amortized part of subordinated debt instruments with a remaining maturity of less than five-years.97 The latter, however, being in any event instruments in the form of liabilities, would fall within the scope of the bail-in instrument regardless of such technical characterization! EBA, Single Rulebook Q&A, q. 2015_2433 (30 October 2015). Art. 2(1)(74) BRRD and Art. 3(1)(51) SRMR. 95 Art. 4(1)(116) CRR. 96 Arts. 26(1)–(2), 28–29, 51, 52(1) and 62–63 CRR. 97 Art. 64 CRR. 93 94
794
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
3. MREL If a credit institution does not possess bail-inable liabilities in amounts that suffice 47 to fully cover its past losses and its recapitalization to the prescribed level, its resolution by way of bail-in becomes impossible. However, the resolution framework’s mandatory exclusion of particular classes of liabilities from bail-in could incentivize credit institutions to engage in strategic behaviour with a view to insulate the bulk of their funding from the effects of bail-in. In particular, credit institutions might restructure their liability side by replacing funding instruments amenable to bail-in with ones that are legally non-bail-inable. To counter this perverse incentive, and as an indispensable precondition for the effective employment of the bail-in tool, the European legislation imposes on banks a regulatory requirement to maintain in their balance sheets a sufficient volume of bail-inable liabilities.98 The issue was first addressed by the Commission in its proposal for the BRRD, 48 which included provisions on a “minimum requirement for liabilities subject to the write-down and conversion powers” for credit institutions and banking groups.99 In the final text of the BRRD100 as in the SRMR,101 this is designated as a “minimum requirement for own funds and eligible liabilities” (“MREL”).102 The MREL obliges credit institutions to meet, at all times, a minimum amount of own funds and bail-inable liabilities expressed as a percentage of their total liabilities and own funds.103 The MREL must be set separately for each credit institution as part of the resolution planning process,104 always in view of certain general criteria, which do not include, however, a numerical minimum level or default indicator.105 Recital (83) SRMR. Art. 39 draft BRRD text, COM (2012) 280 final (6 June 2012). 100 Art. 45 BRRD. 101 Art. 12 SRMR. 102 The SRMR’s provisions on MREL are placed in the chapter concerning resolution planning in general; Pt II, Title I, ch 1 SRMR. In contrast, the equivalent provisions of the BRRD are set out in the section on the bail-in tool (as its second subsection, placed immediately after the subsection on the objective and scope of the bail-in tool, and before those on its implementation and on ancillary provisions); Title V, ch V, section 5, subsection 2 BRRD. Thus, the systematic organization of the BRRD makes abundantly clear the MREL’s specific and exclusive link to this particular resolution tool. 103 Art. 45(1) BRRD and Art. 12(4) SRMR. 104 Art. 45(7)(2) BRRD and Art. 12(9) sent. 1 SRMR. The individuation of the MREL takes place in the context of resolution planning. For institutions whose resolution plan is drawn by the SRB, the resolution plan must specify the level of the MREL and the deadline for reaching that level (if applicable); Art. 8(9) (o)–(p) SRMR. Relevant decisions are taken by the SRB in its executive session; Art. 54(2)(c) SRMR. For less significant institutions, the specification of the MREL falls within the responsibility of NRAs; Art. 7(3) (d) SRMR. 105 Art. 45(6) BRRD and Art. 12(6)–(7) SRMR. The criteria were operationalized with the help of regulatory technical standards prepared by the EBA on the basis of Art. 45(2) BRRD, EBA/RTS/2015/05 (2015), and enacted in amended form by the Commission as Commission Delegated Regulation (EU) 2016/1450 of 23 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities, OJ L 237, 3.9.2016, p. 1. On the Commission’s amendments to the EBA’s draft RTS, see EBA Opinion on RTS on MREL, EBA/Op/2016/02 (9 February 2016). With specific reference to credit institutions within the Banking Union, the SRB in cooperation with the SRM’s NRAs adopted in 2016 a preliminary approach, based on “informative” MREL targets; SRB, ‚ ‘MREL: Approach Taken in 2016 and Next Steps’ [2016]. This was followed in 2017 by a more concrete policy and the adoption of the first binding decisions on MREL for major banking groups; SRB, ‘Minimum Requirement for Own Funds and Eligible Liabilities (MREL): SRB Policy for 2017 and Next Steps’ (20 December 2017). The policy was further developed in 2018; SRB, ‘Minimum Requirement for Own Funds and Eligible Liabilities (MREL): 2018 SRB Policy for the First Wave of Resolution Plans’ (20 November 2018); and ‘Minimum Requirement for Own Funds and Eligible Liabilities (MREL): 2018 SRB Policy for the Second Wave of Resolution Plans’ (16 January 2019). 98
99
Christos Hadjiemmanuil
795
Art. 27 SRMR
Bail-in tool
A functionally equivalent but technically divergent requirement for global systemically important institutions (G-SIIs) was adopted by the FSB shortly after the enactment of the two European instruments in the form of a “total loss-absorbing capacity” (“TLAC”) standard.106 Designed to ensure that resolution authorities can resolve failing G-SIIs in an orderly and immediate manner by way of bail-in, the TLAC standard defines a minimum loss-absorbing and recapitalization capacity that should be readily available at all times in the form of bail-inable instruments and liabilities. The implementation of the TLAC standard in the European Union has taken the form of a statutory obligation (so-called “Pillar 1 requirement”) applicable exclusively to G-SIIs. Inserted in the CRR as part of the Banking Reform package, this requirement is directly applicable, with effect from 27 June 2019.107 The adoption of the TLAC standard has necessitated a fundamental revision and expansion of the MREL-related provisions in the BRRD and the SRMR.108 The new provisions cover the greater part of the BRRD II and SRMR II instruments. The relevant provisions have been incorporated in the BRRD by replacing the original Art. 45 BRRD with new text and inserting the new Arts. 45a to 45m BRRD, with the deadline for transposition into national laws set for 28 December 2020109; and in the SRMR, by replacing the old Art. 12 SRMR with new text and inserting the new Arts. 12a to 12k SRMR, all of which will become effective on that same day.110 50 In combination, the exclusion of certain types of liabilities and the MREL may lead to a bifurcated liability structure, with banks seeking to confine the issuance of bail-inable liabilities to the level necessary for meeting their specific MREL, while tending to finance the remainder of their balance sheet preferably with non-bail-inable instruments. 49
4. Discretionary limits on interbank holdings of bail-inable liabilities 51
A converse problem concerns the possibility that a high concentration of bail-inable instruments issued by a particular bank in the hands of another entity (such as a bank, financial institution, shadow bank or institutional investor) might lead to the collapse of the latter entity due to losses from holding the instruments, should the issuing bank fail, thus providing a channel of contagion. In order to ensure resolvability by way of bail-in without thereby engendering contagion, the BRRD enables resolution authorities to impose limits on the amounts of bail-inable liabilities of a particular institution held by other institutions within the scope of the resolution regime, as long as the latter are not members of the same group as the issuing institution.111 In the same vein, Art. 27(4) SRMR authorizes the SRB to give to the NRAs instructions to exercise this power. 112 The limits on interbank exposures to bail-inable liabilities imposed on this basis operate 106 FSB, ‘Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution. Total Loss-absorbing Capacity (TLAC) Term Sheet’ (9 November 2015). 107 Arts. 92a–92b CRR, as inserted by Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012, OJ L 150, 7.6.2019, p. 1 (“CRR II”), Art. 1(47), in conjunction with Art. 3(3)(c)CRR II (establishing the day of effect). Art. 494 CRR, as replaced by Art. 1(128) CRR II, contains transitional provisions. 108 Cf. Recitals (1)–(11), (17), and (24) BRRD II and Recitals (1)–(10), (15), and (21) SRMR II. 109 Art. 3(1)(1)–(2) BRRD II. 110 Art. 2(2) SRMR II. See Haentjens, comment on Arts. 12 to 12k SRMR. 111 Art. 44(2)(5) BRRD. 112 Art. 27(4)(3) SRMR, in conjunction with Art. 10(11)(b) SRMR.
796
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
in addition to the usual limits on large exposures under the CRD IV/CRR prudential regime.
III. Implementation of bail-in 1. Relevant resolution powers The implementation of the bail-in tool is carried out by way of the write-down or 52 conversion of bail-inable liabilities. This takes place at the national level under the responsibility of the relevant NRA. For this purpose, the NRA, acting on the basis and within the confines of the decision on the adoption of the resolution scheme (or its amendment or update, as the case may be) taken by the SRB under Art. 18 SRMR, 113 must exercise the write-down or conversion powers vested upon it by the national legislation transposing the BRRD.114 In this regard, it should be observed that the technical definition of the term “write- 53 down and conversion powers” in Art. 3(44) SRMR is patently flawed, since it equates them with “the powers referred to in Art. 21” – a provision which does not include a description of such powers, but merely refers to “the power to write down or convert relevant capital instruments”, as distinct from liabilities. This is astonishing, given that in the SRMR the term plays no role in relation to the independent use of the write-down and conversion of capital instruments, but appears exclusively in relation to the bail-in tool,115 which is defined precisely as “the mechanism for effecting the exercise of the write-down and conversion powers in relation to liabilities of an institution under resolution”.116 It is, thus, evident that the effective definition is that given in Art. 2(66) BRRD, according to which the powers in question are those referred to in Arts. 59(2) and 63(1)(e)–(i) BRRD. In combination, the write-down and conversion powers defining the bail-in tool 54 are those resolution powers that enable the NRAs: (a) to reduce (including to reduce to zero) or cancel the nominal amount of shares or other instruments of ownership of the institution under resolution,117 (b) to write down relevant capital instruments (and in the future intra-group “eligible liabilities” under the new definition of the term) or to convert them into shares or other instruments of ownership of the same or another institution,118 (c) to require the institution under resolution to issue new shares or other instruments of ownership or other capital instruments,119 (d) to reduce (including to reduce to zero), the principal amount of, or the outstanding amount due in respect of, bail-inable liabilities,120 (e) to convert bail-inable liabilities into shares or other instruments of ownership of the same or another institution,121 and
113 The NRA is obliged to operate in accordance with the instructions of the SRB and take all measures necessary for implementing the resolution scheme; Recitals (26)(2) final sent. and (42) SRMR. 114 Art. 59(2) and 63(1)(e)–(i) BRRD. 115 Recital (73) and Arts. 3(33), 12, 17, and 27(5) SRMR. 116 Art. 3(33) SRMR. 117 Art. 63(1)(h) BRRD. 118 Art. 59(2) BRRD. 119 Art. 63(1)(i) BRRD. 120 Art. 63(1)(e) BRRD. 121 Art. 63(1)(f) BRRD.
Christos Hadjiemmanuil
797
Art. 27 SRMR
Bail-in tool
(f) to cancel debt instruments, with the exception of secured ones122 (since these are excluded from bail-in on a mandatory basis123). 55
Together with the related powers (g) to transfer shares or other instruments of ownership issued by an institution under resolution,124 and (h) to amend or alter the maturity, amount of interest, and/or date on which interest becomes payable of debt instruments and other liabilities issued by the institution, except for secured liabilities,125 these powers constitute the legal armoury for the actual execution by way of NRA administrative acts of the SRB’s bail-in-based resolution schemes.
2. Allocation of losses and the sequencing of bail-in The allocation of losses to particular liability-holders may be decided by the SRB (which has general decision-making power with regard to all aspects of the resolution action126) or by the relevant NRA itself, if the SRB has left the matter open (a possibility justified by the fact that the concrete allocation of losses is not part of the mandatory content of the resolution scheme selecting the bail-in tool127). In either case, the SRMR prescribes detailed requirements for the exercise of the write-down and conversion powers and a specific sequencing that must be followed when bailing-in the various classes of capital instruments and liabilities. The relevant provisions are highly complex and confusing.128 Dispersed in various places of the BRRD/SRMR framework, they contain a maze of express and even implicit cross-references and a number of overlapping norms, whose precise relationship is scarcely clarified. 57 To start untying the knot, one must start from the provision of Art. 27(15) SRMR. This does not contain any independent norm but simply states that the write-down and conversion powers must comply with the requirements on the order of priority of claims laid down in Art. 17 SRMR – a redundant point, since this is plainly evident from the text of the latter provision, to which one should immediately turn. 58 Art. 17 SRMR individuates the first and second general principles governing resolution,129 according to which shareholders of the institution under resolution are the first to bear losses, while creditors must bear losses after the shareholders in accordance with the order of priority of their claims, subject only to the express derogations introduced by the BRRD/SRMR resolution framework.130 The provision relates specifically 56
Art. 63(1)(g) BRRD. Art. 44(2)(b) BRRD and Art. 27(4)(b) SRMR. 124 Art. 63(1)(c) BRRD. 125 Art. 63(1)(j) BRRD. 126 Recitals (26)(2) sent. 5 and (42) sent. 1 and Arts. 7(2) and 18(9) sent. 2 SRMR. 127 In accordance with Art. 27(1)(2) SRMR; see supra, → paras. 27–30. 128 See Binder, comment on Art. 17 SRMR, paras. 2–4. 129 Art. 15(1)(a)–(b) SRMR and Art. 34(1)(a)–(b) BRRD. 130 In the BRRD, the second principle specifies that the priority of claims is that applicable in normal insolvency proceedings, with any derogations confined to express provisions in that directive’s own text. In its SRMR reincarnation, the same principle requires that the priority of claims be established pursuant to Art. 17 SRMR and the derogations be included in the SRMR; Art. 17 SRMR, however, incorporates by express reference the provisions of Arts. 47–48 BRRD, thus bringing the SRMR in line with the BRRD. 122
123
798
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
and exclusively to the application of the bail-in tool. 131 It governs all decisions of the SRB and the Commission involving the application of the bail-in tool (including decisions to exclude certain liabilities on a discretionary basis) and directing the relevant NRAs to exercise their write-down and conversion powers accordingly, as well as the NRAs’ actual exercise of those powers. Substantively, the provision requires the authorities to implement bail-in in accordance with, on the one hand, the special provisions of Arts. 47–48 BRRD concerning the treatment of shareholders in bail-in and the sequencing of write-down and conversion of various categories of capital instruments and liabilities and, on the other hand, the reverse order of priority of claims132 as laid down in the failed institutions’ national insolvency law (including the national norms transposing Art. 108 BRRD). 133 The two sets of norms are incorporated by reference without any express indication of their relative ordering. However, it is evident that the provision’s intention is simply to give effect also for the purposes of the SRMR to the sequencing of write-down or conversion of capital instruments and liabilities in the BRRD. The latter’s already highly complex system must thus be followed. Essentially, the network of provisions relating to the sequencing of bail-in in the two 59 instruments requires that, following the mandatory exclusion from bail-in of the liabilities mentioned in Art. 27(3) SRMR and any discretionary (whether full or partial) exclusion of additional (and in principle bail-inable) liabilities, as provided for in the resolution scheme on the basis of Art. 27(5) SRMR, capital instruments and remaining bailinable liabilities must be written down or converted in the order prescribed by Art. 48(1) BRRD, with the hierarchy of claims under national insolvency law playing a residual but essential role, in so far as they determine the sequencing of bailing-in with regard to liabilities within each of the fourth (subordinated debt) and the fifth (other bail-inable liabilities) ranks of that order. In short, the bail-in of capital instruments and bail-inable liabilities must be carried 60 out in the following order: – cancellation or transfer of Common Equity Tier 1 items (including shares which have been issued as a result of the conversion of contingent convertible bonds, or “CoCos”, in accordance with their contractual terms, with such conversion taking place prior to the write-down); – reduction through write-down or conversion of the principal amount of Additional Tier 1 instruments “to the extent required and to the extent of their capacity”; – reduction of the principal amount of Tier 2 instruments “to the extent required and to the extent of their capacity”; – reduction to the extent required of the principal amount of subordinated debt that does not count as Additional Tier 1 or Tier 2 capital; and finally, 131 Art. 17(1) SRMR. Defying the logical relationship and natural sequencing of the norms, the provision has been placed after the SRMR’s provisions on the resolution objectives and general principles (Arts. 14–15 SRMR) but before that on the resolution procedure (Art. 18 SRMR), even though in substance it is exclusively concerned with the implementation of the bail-in tool, and should thus either form part of Art. 27 SRMR or follow it. 132 Art. 17(1) SRMR speaks of the “reverse order of priority” of claims, while Art. 15(1)(b) SRMR and Art. 34(1)(b) BRRD refer to the “order of priority”. Arts. 48(d)–(e) and 108 BRRD employ the terms “hierarchy” and “priority ranking” of claims, respectively. Despite the loose use of terms, it is indisputable that “priority” in any insolvency-related context connotes the comparatively superior or privileged position of the relevant class of claims and that, accordingly, losses should in all cases allocated in reverse order of priority, that is, should start with more junior instruments and move step-by-step to more senior ones. 133 To reduce uncertainty and facilitate the taking of decisions at the supranational level, Member States participating in the Banking Union are required to notify the Commission and the SRB of the ranking of claims in national insolvency law on 1 July of every year and also immediately after any change of ranking; Art. 17(2)(1) SRMR.
Christos Hadjiemmanuil
799
Art. 27 SRMR
Bail-in tool
–
reduction to the extent required of the principal amount of, or outstanding amount payable in respect of, the rest of bail-inable liabilities, in accordance with the hierarchy of claims in normal insolvency proceedings.134 61 The implementation of bail-in with regard to shares and other capital instruments in accordance with the prescribed sequencing must comply with an extensive set of requirements, set out in confusing and overlapping terms in Arts. 47 and 59–60 BRRD. 62 As for bail-inable liabilities, Art. 108 BRRD includes mandatory norms which harmonize certain elements of the national hierarchies of claims in insolvency in ways that increase their complexity, but also the transparency and certainty of the sequencing of bail-in. 63 Taking all things into consideration and depending on the complexity of the liability side of the relevant institution’s balance sheet, the actual application of the sequencing in real-life cases can be very complex and may give rise to doubts, both due to open-ended descriptions in the BRRD itself and for reasons relating to significant variations in the order of priority of claims in national insolvency laws. To increase certainty and uniformity of application of the provisions, the BRRD mandates the EBA to issue guidelines on certain aspects of the process.135 In execution of the legislative mandates, the EBA issued a package of guidelines on 5 April 2017.136 Applicable by resolution authorities in accordance with the “comply or explain” principle,137 the three sets of guidelines elucidate the scope and sequencing of bail-in of capital instruments and bail-inable liabilities, as well as the choice between the write-down and the conversion of debt instruments and the setting of rates of conversion of debt instruments into equity.
D. Mandatory exclusion of liabilities from bail-in Art. 27(3) SRMR138 excludes automatically from the scope of the bail-in tool certain categories of liabilities. The exclusions apply regardless of the relevant liabilities’ governing law, that is, even if the liabilities exist by virtue of the law of a third country. From this perspective, the matter is treated as pertaining to, or being related to, the order of priority in insolvency, which is governed by the law of the insolvency proceedings (lex concursus), rather than the proper law of the individual contracts within the insolvent estate (lex contractus). 65 The specific effect of the provision is to prevent the writing down or conversion into equity of any liabilities belonging to the enumerated categories. The excluded liabilities, however, may still be affected by the SRB’s resolution action, if the latter combines bail-in with another resolution tool, since their exclusion does not prevent their transferral from the original debtor institution to a successor entity such as a purchaser under the sale of business tool, a bridge bank, or an asset management vehicle. 64
The sequencing is discussed in detail by Binder, comment on Art. 17 SRMR, paras. 20–28. Arts. 47(6), 48(6), and 50(4) BRRD. 136 EBA, Final Guidelines concerning the interrelationship between the BRRD sequence of write-down and conversion and the CRR/CRD, EBA/GL/2017/02 (5 April 2017) (also referred to as “Guidelines on treatment of liabilities in bail-in”), adopted under Art. 48(6) BRRD; EBA, Final Guidelines on the rate of conversion of debt to equity in bail-in, EBA/GL/2017/03 (5 April 2017), adopted under Art. 50(4) BRRD; and EBA, Final Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments, EBA/GL/2017/04 (5 April 2017), adopted under Art. 47(6) BRRD. 137 Art. 16(3) EBAR. The provision applies both to the NRAs and the SRB, the Council, and the Commission; Recital (18) sent. 3 and Art. 5(2)(2) sent. 2 and 3 SRMR. 138 The text of the provision is essentially identical to that of Art. 44(2) BRRD. 134
135
800
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
– – – – – – – – – – –
In summary, the provision protects from bail-in the following categories of liabilities: 66 “covered deposits” (that is, deposits protected under the Union’s deposit-guarantee system); secured liabilities, including covered bonds; client assets and client money; liabilities owed in a fiduciary capacity; short-term interbank liabilities; pending liabilities to payment and securities settlement systems; liabilities to employees; liabilities to suppliers of goods and services which are critical to the institution’s daily functioning; tax and social security liabilities; contributions to deposit guarantee schemes (DGSs); and liabilities of the institution under resolution to members of the same resolution group which are not themselves resolution entities.139
I. Covered deposits The first exclusion applies to “covered deposits”, in the technical sense of deposits 67 benefiting from the protection of a DGS in accordance with the DGSD,140 known as “eligible deposits”,141 but only in so far as these do not exceed that directive’s coverage level of € 100,000 per depositor per credit institution.142 The exclusion is intended to protect depositors,143 thus promoting one of the general objectives of resolution.144 It should be noted that, even if covered deposits were not excluded, and thus re- 68 mained amenable to write down or conversion, any shortfall in the post-bail-in value of the relevant claims in comparison to the covered deposits’ original nominal value would be payable to the claim holders from the SRF in accordance to the principle that no creditor should be left worse off than under normal insolvency proceedings (“no creditor worse off” or “NCWO” principle). This is because in the benchmark scenario of liquidation the claims from the covered deposits are recoverable in full and with almost immediate effect, albeit not from the estate of the failed institution itself, but by way of payout from the relevant DGS, which, as a result, is subrogated to the original deposit holders’ claims in the insolvency proceedings. Accordingly, the exclusion leaves practically unaffected the position of the holders of covered deposits. On the other hand, subjecting covered deposits to bail-in and then providing compensation under the NCWO safeguard would transfer the actual cost of the deposit guarantee from the relevant DGS to the SRF. The combination of the exclusion of covered deposits with the provision of Art. 79 SRMR, which provides for the contribution of DGSs to the financing of resolution actions, avoids this possibility. Non-covered deposits, including the part of eligible deposits exceeding the € 100,000 69 limit, remain subject to bail-in.145 Nonetheless, eligible deposits of natural persons and Art. 27(3)(1)(a)–(h) SRMR, as amended or inserted by SRMR II. Directive 2014/49/EU. 141 Art. 3(1)(12) SRMR, which refers to Art. 2(1)(4)DGSD. 142 Art. 3(1)(11) SRMR, which refers to Art. 2(1)(5) DGSD. For deposit holders in joint accounts, the protection applies severally to each holder, so that the first € 100,000 of each holder’s share in the account are covered; Art. 7(1)–(2) DGSD. 143 Recitals (76) sent. 4 and (81) sent. 1 SRMR. 144 Art. 14(2)(d) SRMR; and Art. 31(2)(d) BRRD. 145 Art. 27(4)(1) SRMR. 139
140
Christos Hadjiemmanuil
801
Art. 27 SRMR
Bail-in tool
micro, small, and medium-sized enterprises, as well as deposits which would be eligible deposits of such person but for the fact that they were made with non-EU branches of the institutions under resolution, benefit from the priority ranking of Art. 108(1)(a) BRRD. For this reason, such deposits may be bailed-in only after ordinary unsecured creditors have taken full losses.146 Alternatively, in exceptional circumstances, the SRB may exclude them on a discretionary basis.147
II. Secured liabilities The second exclusion covers all secured liabilities issued by the failed institution. The preamble of the SRMR draws a clear distinction between, on the one hand, unsecured liabilities and, on the other, secured, collateralised, or otherwise guaranteed liabilities.148 The former should be amenable to bail-in to the widest extent possible, even though the exclusion of certain subcategories is considered justified based on special considerations. In contrast, the subjection of the latter to bail-in is characterized as “not appropriate”,149 without any reservation – apparently for reasons related to their inherent legal status and special treatment in insolvency law, but possibly also due to the significance of the full and unconditional recognition of security rights for the smooth operation and liquidity of the financial system.150 71 The technical definition of secured liabilities, as set out in the BRRD, covers any liability “where the right of the creditor to payment or other forms of performance is secured by a charge, pledge or lien, or collateral arrangements”, with the important addition that this includes “liabilities arising from repurchase transactions and other title transfer collateral arrangements”,151 despite the fact that in such arrangements the collateralization of the debtor institution's obligation takes the legal form of a putative sale of the collateral to the creditor, thus obscuring the distinction between transfers of property and pledges by way of security. 72 The exclusion of secured liabilities must be read in the light of the Financial Collateral Directive’s regime for the uniform recognition of financial collateral arrangements within the Union.152 This covers arrangements whereby cash, financial instruments, or credit claims are used as collateral when both the collateral provider and the collateral taker are public authorities or firms belonging to the financial sector broadly understood, or when one of them belongs to the aforementioned sectors and the other is a legal person or unincorporated firm or partnership, unless national law excludes the latter possibility.153 The provision of financial collateral is effective whether this is provided to the collateral taker in the form of a transfer of title, including a repurchase agreement (repo) or that of a security interest, as long as that provision can be evidenced in writing.154 The only perfection requirement which national law may impose in this relation is that the cash or instruments should be delivered, transferred, held, registered, 70
Arts. 17 and 27(15) SRMR. Art. 27(5)(b) SRMR; see infra, → para. 135. See also EBA, Single Rulebook Q&A, q. 2015_2191 (26 October 2018). 148 Recital (76) SRMR and Recital (70) BRRD. 149 Recital (76) sent. 1 SRMR and Recital (70) sent. 1 BRRD. 150 See also Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, as amended (“Financial Collateral Directive”), OJ L 168, 27.6.2002, p. 43. 151 Art. 2(1)(67) BRRD. 152 Recitals (3) and (5) Financial Collateral Directive. 153 Art. 1 Financial Collateral Directive. 154 Arts. 1(5), 2(1)(a)–(c), (g) and (2)–(3), and 4 Financial Collateral Directive. 146 147
802
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
or otherwise designated so as to be in the possession or under the control of the collateral taker, or of a person acting on his behalf thus excluding any further formalities.155 As all financial collateral arrangements which satisfy the conditions of the Financial Collateral Directive must be recognized as a matter of Union law, it is evident that the obligations that they support must always count as secured liabilities for the purposes of the resolution regime too. The secured liabilities under discussion must be distinguished from accounts of the 73 institution under resolution covered by a cash collateral arrangement. The term “cash collateral” refers to money represented by a credit to an account, or similar claim for the repayment of money, including money market deposits, over which the account holder or claimant has relinquished control (that is, cannot freely dispose of the relevant sums) in order to secure a debt owed to the bank where the account is retained.156 While the obligations secured by the cash collateral are undoubtedly secured obligations, they constitute liabilities of the account holder, not of the institution under resolution, from whose perspective they constitute assets.157 As for the liability to the account holder for the monies represented by the account, this is an unsecured liability, amenable to bail-in. For the avoidance of doubt and in view of the great significance of collateralized obli- 74 gations in modern financial markets, it is stated explicitly that the exclusion of secured liabilities includes “covered bonds”. These are debt securities (bonds) issued by financial institutions and collateralized by a distinct pool of earning assets, such as mortgages or sovereign bonds; in the event of the issuing institution’s insolvency, the relevant assets, known as the “cover pool”, are separated from the insolvent estate and used to serve on a priority basis the bondholders’ claims for principal and accrued interest.158 The prototype of this arrangement, which is recognized by the national law of several Member States, is the German Pfandbrief security, whose first appearance dates back to 1769. For the purposes of the SRMR, covered bonds are technically defined in the BRRD by reference to an incidental description of certain instruments (as distinct from a formal definition) in another European directive.159 The exclusion from bail-in extends to the Recitals (9)–(10) and Art. 3 Financial Collateral Directive. Recital (18) and Art. 2(1)(d) Financial Collateral Directive and Case C‑156/15, Private Equity Insurance Group SIA v Swedbank AS, ECLI:EU:C:2016:851, paras. 31–33, 37–39, and 43–44. 157 Cf. Art. 2(1)(f) Financial Collateral Directive, defining “relevant financial obligations”. 158 The arrangement has many elements in common with securitization transactions, such as mortgagebacked securities (MBS), asset-backed securities (ABS), or, more generally, collateralized debt obligations (CDO). The key difference is that in the aforementioned transactions the underlying assets are transferred by the originating financial institution to a separate special-purpose vehicle (SPV), in whose name the bonds are issued to the investors, while in the case of covered bonds both the underlying assets and the liabilities arising from the bonds remain on its balance sheet. One consequence of this arrangement is that, without the explicit exclusion, the liabilities from the covered bonds would be in principle amenable to bail-in; in contrast, the problem does not arise in SPV-based securitization, because the SPV is not affected by the insolvency or restructuring of the originating financial institution (and vice versa, for which reason SPVs are said to be “bankruptcy remote” from the originating institutions’ groups). 159 Art. 2(1)(96) BRRD, with reference to Art. 52(4)(1) Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32 (“UCITS IV Directive”). The latter provision, without using the term “covered bonds”, provides an effective definition as follows: “bonds ... issued by a credit institution which has its registered office in a Member State and is subject by law to special public supervision designed to protect bond-holders. In particular, sums deriving from the issue of those bonds shall be invested in accordance with the law in assets which, during the whole period of validity of the bonds, are capable of covering claims attaching to the bonds and which, in the event of failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.” 155
156
Christos Hadjiemmanuil
803
Art. 27 SRMR
Bail-in tool
obligations from the covered bonds themselves, as well as to financial instruments160 used for hedging purposes which form an integral part of the cover pool, but only if under their governing national law these are secured in a way similar to covered bonds. The protection of covered bonds is enhanced by a special provision in Art. 27(4) SRMR, which requires the SRB to ensure that all secured assets relating to the cover pool remain unaffected by the resolution action, segregated, and with enough funding.161 75 According to the interpretation of the Commission's DG FISMA, the exclusion of secured liabilities only covers liabilities secured or guaranteed by assets of the institution under resolution; in contrast, liabilities guaranteed by third parties are not exempt from bail-in.162 Importantly, this interpretation also allows the liabilities benefiting from State guarantees to be written down or converted into equity.163 State guarantees of bank liabilities were used extensively to support the banking system during the GFC; more generally, they are a standard form of State intervention during systemic crises, whose use is also recognized in the SRMR itself.164 In contrast to that form of liquidity support, if a failing bank had received liquidity support in the form of emergency liquidity assistance (ELA) from its national central bank (NCB), the resulting liabilities to that NCB are excluded from bail-in, because ELA is always extended against collateral.165 76 It should be noted that, despite their automatic exclusion, secured liabilities may not be protected in full, since, in accordance with Art. 27(4) SRMR, the exclusion is limited to only that part of the amount due that matches the value of the collateral or guarantee received by the liability-holders, while any amount in excess of that value remains available for bail-in.166
III. Client assets and client money 77
The third exclusion shelters liabilities arising by virtue of the fact that the institution under resolution holds client assets or client money, but only if the relevant clients enjoy protection under the applicable norms of national insolvency law. The exclusion is directly linked to the protection of client funds and client assets as one of the five resolution objectives identified in Art. 14 SRMR.167 It is also related to the provisions of the regulatory regime for securities services, which imposes on financial firms providing investment services the organizational duty to safeguard client assets (in the sense of portfolios of positions in securities and derivative instruments) and client funds.168
As defined in Art. 3(1)(38) SRMR, which reference to Art. 4(1)(50) CRR. Art. 27(4)(2) SRMR. 162 EBA, Single Rulebook Q&A, q. 2015_1779 (6 February 2015); and q. 2016_2951 (25 November 2016). 163 EBA, Single Rulebook Q&A, q. 2017_3119 (3 February 2017). 164 Art. 18(4)(d)(ii) SRMR and Art. 32(4)(d)(ii) BRRD. 165 EBA, Single Rulebook Q&A, q. 2015_2435 (2 December 2016). In the Commission's view, even if there is a shortfall of collateral, the remaining part of the NCB’s claim can be excluded from bail-in by the SRB if one of the exceptional circumstances which under Art. 27(5) SRMR may justify the discretionary exclusion of liabilities from bail-in applies; EBA, Single Rulebook Q&A, q. 2015_2435 (2 December 2016. However, it is difficult to imagine situations where these circumstances would be relevant to ELA-related claims. 166 Art. 27(4)(1) SRMR. 167 Art. 14(2)(1)(e) SRMR; and Art. 31(2)(1)(e) BRRD. The terms “funds” and “money” are clearly synonymous. 168 Art. 16(9), (11) MiFID II. 160 161
804
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
The terms “client assets” and “client money” (or “client funds”) are not defined, 78 and their exact meaning is uncertain. The two classes overlap, since monetary amounts belonging to clients are also assets of the latter, and maybe subsumed to the client-asset category (assuming that this exists) in national law.169 For the rest, it is not entirely clear, when money appearing on a failed institution’s accounts as owed to a client should be classified as client funds. In the case of investment firms, the safeguarding of client assets and funds takes place through their segregation and placement in separate client accounts (both cash and securities accounts), which are typically operated, not by the investment firms themselves, but by third-party systems or banks. In the event of an investment firm’s insolvency, depending on the applicable national law, the client may have proprietary rights or direct recourse to the money and securities in the relevant accounts, rather than a mere indirect interest (in which case the client would only be able to prove his claim as a creditor in the insolvency proceedings). In all cases, an investment firm is not allowed to use client funds for its own account; accordingly, the distinction between funds belonging to it and those belonging to its clients can usually be drawn without much difficulty.170 In contrast, credit institutions are allowed to use client funds. This begs the question of how to distinguish between deposits, on the one hand, and client money or funds, on the other.171 EBA’s Single Rulebook Q&A contains a view to the effect that the terms “client assets” 79 and “client money” must be read in the context of a three-way legal distinction, made throughout the BRRD, between covered deposits, deposits exceeding the coverage level (uncovered deposits), and other types of liabilities that arise by virtue of the holding by an institution of client assets or client money.172 This interpretation is unsatisfactory and inaccurate, however. It does not draw a distinction between client assets and other non-deposit liabilities (e.g. , debt instruments, trade receivables, etc.). In so far as the BRRD is concerned, the legislative text clearly differentiates covered deposits from other eligible deposits, and all deposits from other unsecured liabilities173; but it does not support the three-way distinction suggested in the Single Rulebook Q&A. Moreover, in both the BRRD and the SRMR client assets and client money are undoubtedly treated as a distinct category – but not necessarily as one which is mutually exclusive with deposits (so that the two concepts cannot overlap), much less as a tertium quid which, alongside with covered and non-covered deposits, exhausts the possibilities. In fact, other pronouncements in the Single Rulebook Q&A accept, inconsistently, both that client money can exist in the EBA, Single Rulebook Q&A, q. 2015_2111 (6 July 2015). Art. 16(9) MiFID II. On the law governing the proprietary aspects of securities holdings, see European Commission, ‘Communication on the Applicable Law to the Proprietary Effects of Transactions in Securities’, COM (2018) 89 final (12 March 2018). 171 The ambiguous status of such liabilities provides an explanation for the fact that, in the calculation of institutions’ ex ante contributions to resolution financing arrangements, while client assets or client money held by investment firms (that is, the assets identified in their client accounts) are excluded from the liability base against which the contributions are assessed (always provided that the client is protected under the applicable insolvency law), no similar relief is offered with regard to client assets or client money held by credit institutions; Art. 5(1)(e) Commission Delegated Regulation (EU) 2015/63 of 21 October 2014 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to ex ante contributions to resolution financing arrangements, OJ L 11, 17.1.2015, p. 44. 172 EBA, Single Rulebook Q&A, q. 2015_2191 (26 October 2018). Non-covered deposits (which are outside the scope of the first mandatory exception relating to deposits) cannot qualify as client funds or assets. Accordingly, their protection does not form part of the fifth resolution objective of Art. 14(2) SRMR; and they are evidently unaffected by the exclusion discussed presently; EBA, Single Rulebook Q&A, q. 2015_2191 (26 October 2018). 173 Recital (111) and Arts. 44(2)(4) and 108(1) BRRD; and Art. 27(4)(1) SRMR. 169
170
Christos Hadjiemmanuil
805
Art. 27 SRMR
Bail-in tool
form of deposits (so that the two terms may partially overlap) and that, in strict terms, client assets and money are not liabilities at all. 80 In particular, deposits linked to securities accounts are often accounted in banks’ accounts as on-balance-sheet liabilities. According to another entry in the Single Rulebook Q&A, such deposits can still count as client’s money, but only if “there is proof that the investor has already given the order to invest, at the moment of the entry into resolution, and [always] provided that the client is protected by the applicable national insolvency law”; in contrast, if the investor has not yet ordered the investment, they should be treated as simple deposits and benefit, if at all, by the first exclusion.174 This suggests a pyramid of protection within the deposit category, with deposits which also count as client money being totally excluded, while other deposits are excluded only in so far as they are covered, and for the rest they simply benefit from the priority of Art. 108 BRRD. 81 Significantly, the exclusion mentions explicitly client assets or client money held on behalf of undertaking for collective investments in transferable securities (UCITS) 175 and alternative investments funds (AIFs).176 A variant of the question already encountered arises in a particularly acute form in this context, namely, whether a part of the members’ or unit-holders’ pool of investments that a UCITS may hold in a deposit account with a credit institution is shielded from bail-in or not. In the Commission’s view, cash deposited by a UCITS with a credit institution can be qualified as “client money”, provided that the credit institution acts as a depositary for the UCITS.177 82 Strangely (and in contrast to the Commission’s aforementioned legal interpretations), an entry in the Single Rulebook Q&A endorses casually the view that the assets and money held by a credit institution on behalf of UCITS are not owned by the institution, but are the property of the UCITS’ investors.178 On this view, the purpose of the explicit reference in the provision is to leave no scope for doubt! However, this interpretation is patently incorrect, at least in so far as funds in cash accounts are concerned. In particular, it clashes with the treatment of the relevant assets and money as liabilities of the institution under resolution in the legislative text. Moreover, in the same sentence in which it endorses the view of the NCA which submitted the relevant question that the assets and money held on behalf of UCITS are not “owned” by the institution under resolution, the Commission adds that these cannot be bailed-in provided that the client UCITS are protected under the applicable insolvency law. This is inconsistent, because if the assets and money in question constituted in the eyes of European law direct property rights of the third parties (as distinct from mere contractual claims against the institution under resolution, as recognized under the law of obligations), their treatment under national insolvency law should be immaterial: they would operate erga omnes and their non-protection under national law would amount to an unjustifiable expropriation in favour of the creditors of the insolvent institution; such failure to protect recognized property rights could not be validated by the European legislator. Thus, the most reasonable interpretation is that the assets and funds held on behalf of UCITS are subject to bail-in as a property of the institution under resolution which is owed to the depositing UCITS (hence, as liabilities), except if national insolvency law treats them as assets held EBA, Single Rulebook Q&A, q. 2015_1826 (8 May 2015). As defined in Art. 1(2) UCITS IV Directive. 176 Art. 4(1)(a) Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011, p. 1 (“AIFM Directive”). 177 EBA, Single Rulebook Q&A, q. 2015_1825 (24 July 2015). 178 EBA, Single Rulebook Q&A, q. 2016_3022 (3 February 2017). 174
175
806
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
in the name of the institution but for the benefit of the UCITS or its ultimate claimants under a trust, fiduciary, or similar relationship which renders the beneficiaries’ interest (quasi-) proprietary. Finally, it is very difficult to accept that funds kept by a UCITS in deposit accounts are its property (as distinct from contractual claims), since those funds can, without doubt, be used freely by the credit institution up to the point the account-holding UCITS decides to withdraw them.
IV. Liabilities from fiduciary relationships The fourth excluded category comprises of all liabilities arising by virtue of a fiduciary relationship involving the institution under resolution as fiduciary and another party as beneficiary, provided that the beneficiary is protected under the applicable national insolvency or civil law. This is the second of three cases179 where the exclusions as defined in the BRRD and the SRMR leave room for varying treatment of liabilities which from a European perspective would appear to fall within the same category, depending on the approach of the applicable national insolvency (and civil) law. In this instance, however, the reliance on national laws is inescapable. Since fiduciary relationships are demarcated, not by their subject-matter, but by their recognition as relationships of this type under the applicable law of obligations, national law is, in effect, constitutive of the category. From a linguistic perspective, the description employed by the European legislator is peculiar, in so far as civil law systems (which constitute the vast majority of EU’s national systems of law) do not have a unitary concept of fiduciary relationships. The terms used are better understood in the context of common law systems. Nonetheless, there is no reason whatsoever to assume that the exception is confined to the latter. Turning to the intension of the terms, it is clear that the exception is not primarily directed to the fiduciary duties (that is, the particularly extensive and intense duties of care and loyalty) that the institution under resolution is deemed to owe to particular parties, but to the situations where a third party’s interest in certain assets under the institution’s control is protected in a proprietary or quasi-proprietary way. In English law and other common law systems, fiduciary relationships, which include trusts and a variety of trust-like relationships, are recognized as a distinct category of legal relationships, which are classified as non-contractual and are treated according to a separate body of legal principles, the law of equity. In practice, situations where one party to a contractual relationship is deemed to owe fiduciary duties to the other are very common, and fiduciary relationships are an inherent component of many commercial and financial transactions and the law of business organizations. However, in situations of this type the contractual and fiduciary aspects are examined separately. A fiduciary relationship such as a trust that involves the holding of assets generates both equitable obligations of the trustee, who is required to deal with the trust property for the benefit of the beneficiary, and an equitable interest, or beneficial ownership, of the latter in that property. Beneficial ownership effectively splits the title over the property into two facets, a legal title and an equitable title. In the event of the trustee’s insolvency, the latter justifies the separation of the trust property from the trustee’s
179
ties.
The other two encompass: client assets and funds; and liabilities to tax and social security authori-
Christos Hadjiemmanuil
807
83
84
85
86
87
Art. 27 SRMR
Bail-in tool
own assets and return to the beneficial owner.180 To the extent that an institution under resolution is in the position of trustee in an English-style trust relationship, where the beneficiary’s interest is of quasi-proprietary nature, the exception requires the exclusion of the trust property from bail-in and the preservation of the beneficiary’s claim. This result should occur even if the applicable insolvency law (that is, the insolvency law of the home country of the institution under resolution181) does not know English-style trust relationships, the reason being that the exception gives effect to the protection offered either under the applicable insolvency law or under the applicable civil law.182 88 In contrast to the position under English law, the treatment of fiduciary relationships in civil law systems gives rise to two difficulties with regard to the application of the exception.183 Firstly, in civil law systems, any “fiduciary” duties that may be owed in a commercial context will invariably be of a contractual nature (and the fiduciary merchant or financial intermediary will receive remuneration for its efforts). Moreover, the relevant duties will arise either by virtue of specific requirements in legislative texts or through the judicial interpretation of general clauses in civil and commercial codes and their application to particular commercial contexts, often without any use of fiduciary terminology and rhetoric. As a result, there is no recognizable general category of fiduciary duties; instead, the most that can be said about such duties is that they occupy the most exacting end in a continuum of standards of commercial and professional behaviour. They can involve a heightened duty of care, a duty to account, and, in particular, a duty of loyalty to the counterparty-client, whose interests the fiduciary must serve even when they are in conflict with its own interests. All this, however, means that the demarcation line is rather ill-defined. Secondly, civil law systems follow a unitary concept of property, which does not leave room for a distinction between legal and beneficial ownership. Thus, it is not evident, what sort of protection the beneficiary could possibly enjoy in the form of proprietary rights, as distinct from civil liability claims. 89 For the application of the exception, the problem of demarcation of fiduciary relationships may be attenuated by the fact that, in essence, the exclusion is confined to trust-like arrangements where the fiduciary duties relate to the holding and/or management of an identifiable pool of assets (which can exist in a variety of forms, including positions in securities or other non-monetary assets, monetary claims against third parties, but also funds held in account). In contrast, even though many professional services provided by credit institutions and investment firms to their clients (such as investment advice, order execution, etc.) are said to be subject to “reinforced fiduciary duties”, which frequently reflect European regulatory requirements,184 the relevant relationships do not 180 According to the Cork Report, the property held by the insolvent entity on trust for others never passes to the liquidator as representative of the general body of creditors, because the latter only takes on the entity’s “free assets”; ‘Report of the Review Committee on Insolvency Law and Practice’ (Cmnd 8558, 1982) (“Cork Report”), para. 1042. On the treatment of assets covered by a trust on the trustee’s insolvency, see generally Finch and Milman, Corporate Insolvency Law: Perspectives and Principles (3rd ed., 2017), at pp. 553–569. 181 Art. 10 Winding-Up Directive, as amended. 182 Alternatively, if the beneficiary’s right is characterized as a right in re aliena (encumbrance), then the protection should be offered by the applicable insolvency law even if trust relationships are not recognized domestically, by virtue of the reservation in favour of third parties' rights in re in Art. 21 Winding-Up Directive. 183 On the place and operation of fiduciary obligations in civil law systems, see Graziadei, in: Gold and Miller (eds), Philosophical Founcations of Fiduciary Law (2014), at pp. 287–301; and Gelter and Helleringer, in: Criddle, Miller and Sitkoff (eds), Oxford Handbook of Fiduciary Law (2018), para. 31. 184 E.g., European Commission, ‘Green Paper on Retail Financial Services in the Single Market’, COM (2007) 226 final (30 April 2007), 12.
808
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
involve the direct assumption of financial liabilities by the intermediaries, while in case of breach of the fiduciary duties, the clients’ resultant claims for damages are unlikely to enjoy protection under national insolvency law. Where a fiduciary relationship involves the holding of assets on behalf of a counter- 90 party or client, in civil law systems, where beneficial ownership is unknown, the latter may have direct recourse to the property on one of two alternative grounds: either because the fiduciary institution never acquired title over the assets; or because the applicable law recognizes the beneficiary’s property rights at the point of insolvency. The statute-based trusts of certain civil law systems offer a clear example of the 91 first possibility. To enable solutions functionally equivalent to the English trust within a very different legal environment, these trusts are set up as separate legal entities, with property of their own, which is managed by the trustee, but does not belong to its estate and is not covered by its insolvency. In situations of this type, the assets should not be included in the balance sheet of the institution under resolution or provide the ground for the recognition of corresponding liabilities, whose “exclusion” from bail-in is, accordingly, technically superfluous. Indeed, any “protection” that the applicable insolvency law may offer in this case will most probably consist precisely in the separation of the relevant assets from the institution’s estate and the preservation of their value pending their return to the institution’s counterparty, not in his capacity as a beneficiary of the fiduciary relationship, but in that of the assets’ true owner. It is probably with an eye to this setting that EBA’s Single Rulebook Q&A suggests 92 that the exclusion under consideration “concerns third-party-owned assets; who owns the assets will depend on the applicable contractual law.”185 This view, however, disregards the second possibility, which is exemplified by the Treuhand of German law. This is a contractual relationship, under which full ownership over the relevant property passes to the fiduciary (Treuhänder), who can validly transfer good title to a third person even where this constitutes a breach of its interior relationship with the transferor (Treugeber). If the Treuhänder has violated its obligations, the Treugeber or third-party beneficiary of the arrangement may only claim damages for breach of contract (although specific performance is possible as long as the property is still in the hands of the former). Despite the non-proprietary character of the relationship, in the event of insolvency of the Treuhänder, the transferor or the third-party beneficiary can request the relevant property’s separation from its estate. This result, however, depends on an exceptional relinquishment of the distinction between obligations and property. One can generalize from this example and conclude that, even in situations where the governing law of the contract does not give contra omnes effect to an arrangement whereby a party has transferred property or a sum of money to an institution under resolution for the economic purpose of providing security to the latter or in the expectation that the property will be applied solely for a specific purpose, the exclusion will still apply if the insolvency law of the institution’s home country, which governs its winding up, recognizes the transferor’s claim on the property (as distinct from a mere right to file a claim as a general creditor).
V. Short-term interbank liabilities The fifth exclusion concerns liabilities with an original maturity of less than seven 93 days owed by the institution under resolution to credit institutions and investment firms, with the exception of those belonging to its own group. In other words, interbank 185
EBA, Single Rulebook Q&A, q. 2016_3023 (9 December 2016).
Christos Hadjiemmanuil
809
Art. 27 SRMR
Bail-in tool
liabilities are bail-inable only if their original (as distinct from remaining) maturity is of six days or less. The preamble justifies the exclusion by the need to contain the risk of systemic contagion.186 This would be exacerbated, if the failure of one institution was allowed to inflict direct and immediate losses to its counterparts in the interbank bank or to disrupt the payments system; from this perspective, it is irrelevant that the transmission of losses does not take the classical form of the debtor institution’s default followed by its liquidation, but that of the write-down or conversion of its obligations due to bail-in. 94 EBA’s Single Rulebook Q&A clarifies that non-collateralized sight deposits of other credit institutions (excluding those that belong to the same group with the institution under resolution) fall within the exclusion, because they are withdrawable of demand, that is, by definition mature from the very first moment.187 95 Interbank liabilities with longer maturities are fully available for bail-in, always provided that they are unsecured (because secured ones fall within the scope of the second exclusion). However, in order to prevent contagion and to limit the transmission of substantial losses, credit institutions should not be allowed to build excessively large positions in the bail-inable liabilities of particular interbank counterparties. Otherwise, upon the failure of the issuing institution, the SRB would be forced to choose between two unenviable options: either bailing-in the claims of large interbank counterparties, thus hastening the transmission of risk; or excluding those claims from bail-in on a discretionary basis, thus protecting systemic stability, but at the cost of rendering the resolution of the issuing institution much more difficult, if not impossible. Accordingly, in order to promote the resolvability of credit institutions in a manner that does not jeopardize systemic stability, Art. 27(4) SRMR envisages limits on the volume of individual interbank exposures. Specifically, the legislation requires the SRB to instruct the NRAs to set limits on the extent to which bail-inable liabilities of a particular institution may be held by institutions outside its group.188 This rule operates in parallel to the general limits on large exposures of the banking prudential regime.189
VI. Short-term liabilities arising from participation in payment and securities settlement systems 96
The sixth exclusion is directly related to the fifth, since they are both intended to reduce the risk of systemic contagion.190 While the previous exclusion concerns direct bilateral interbank obligations, this one extends the protective effect of automatic exclusion from bail-in to any liabilities assumed by the institution under resolution in the course of its participation in multilateral financial infrastructures such as payment and securities clearing and settlement systems. To fall within the scope of the exclusion, such systems must be designated by the Member State whose law governs their set up and operation for the purposes of the Settlement Finality Directive. 191 This condition essentially aligns the scope of the exclusion with the protection from the effects of insolvency offered by that directive to payment and settlement orders which Recital (76) sent. 7 SRMR and Recital (70) sent. 8 BRRD. EBA, Single Rulebook Q&A, q. 2015_2469 (10 June 2016). 188 Art. 27(4)(3) in conjunction with Art. 10(11)(b) SRMR. 189 Arts. 387–403 CRR. 190 Recital (76) sent. 7 SRMR and Recital (70) sent. 8 SRMR. 191 Art. 2(a)(1) Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems, OJ L 166, 11.6.1998, p. 45 (“Settlement Finality Directive”), as amended. 186
187
810
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
have crossed the designated systems. Technically, the systems to which the exclusion refers comprise multiparty systems operating in accordance with common rules and standardized arrangements, whose purpose is to carry out the clearing or execution of “transfer orders”,192 defined as instructions by participants requiring the transfer to recipients of amounts of money by means of book entries in bank accounts, instructions resulting in the assumption or discharge of payment obligations under the rules of the systems, or instructions requiring the transfer of title to, or interests in, securities by means of book entries or otherwise.193 In exceptional cases, justified by considerations of systemic risk, formal two-party arrangements may also be designated.194 Whereas the provision’s original text referred exclusively to liabilities owed to systems 97 designated under the Settlement Finality Directive, their operators, or their participants, the 2019 amendment of the SRMR as part of the Banking Reform package has added to the exclusion liabilities owed to central counterparties (CCPs).195 Beyond European CCPs authorized by the national competent authorities of their home State under EMIR,196 the revamped exclusion further applies to third-country CCPs, as long as these are recognized by ESMA under EMIR’s “equivalence” regime.197 The exclusion applies to all liabilities which arose through the use of a system or 98 CCP, regardless of whether these are owed to the relevant system itself, to its operator (that is, the entity legally responsible for its operation198), or to the other participants (participating credit institutions, investment firms, or public authorities, the system’s central counterparty, if any, a settlement agent, a clearinghouse, or a clearing member of a CCP199). The fact that a transfer of funds or securities is intended to be settled through a particular system is not sufficient in itself. This is because the exclusion applies to liabilities “arising from” the participation in systems. The wording suggests that the actual obligation must be undertaken by use of the system, not merely designated for performance through it.200 Thus, for the exclusion to apply, the relevant transaction must have been entered into through a trading platform offering clearing services, a clearing system, or a CCP; instructions for the intended transfer must have already crossed the relevant system; or a net position must have been established by the system, following the netting of mutual rights and liabilities. Liabilities assumed by the institution under resolution through its participation in 99 designated systems are excluded if their remaining maturity at the time of the SRB’s resolution action is of less than seven days. In other words, while the exclusion of interbank liabilities in the previous exclusion is defined by reference to their original maturity, in the present case the critical factor is the length of the residual maturity of Art. 2(a)(1)–(2) Settlement Finality Directive. Art. 2(i) Settlement Finality Directive. 194 Art. 2(a)(3) Settlement Finality Directive. 195 Art. 27(3)(f) SRMR, as replaced by SRMR II. The new provision is applicable from 28 December 2020 onwards; Art. 2(2) SRMR II. 196 Art. 14 EMIR. 197 Art. 25 EMIR, as amended. 198 Art. 2(p) Settlement Finality Directive. 199 Art. 2(f) Settlement Finality Directive. 200 Interpreting the Settlement Finality Directive, the CJEU has concluded that, since the concept of “system” relates to a formal arrangement between three or more participants for the clearing or execution of transfer orders between them, the meaning of a “transfer order” is limited to instructions entailing financial obligations given by participants, through the system, to other participants, which are responsible for executing them. Accordingly, instructions given by third parties to a participant, such as a payment order given to a credit institution by the holder of an ordinary current account for the transfer of funds to another credit institution, is not covered, regardless of whether it was intended for execution through the system. Case C-639/17, SIA ‘KPMG Baltics’ v SIA ‘Ķipars AI’, ECLI:EU:C:2019:31. 192
193
Christos Hadjiemmanuil
811
Art. 27 SRMR
Bail-in tool
the obligations. For example, if the institution under resolution had purchased (or sold) listed securities through a clearing system with a settlement of up to T+6 (which will be universally the case for spot transactions, whose settlement day is typically T+2), the transaction will be executed regardless of the intervening commencement of the resolution action and the institution’s obligation to pay the purchase price (or to deliver the securities) will not be bail-inable.201
VII. Liabilities to employees The seventh exclusion relates to claims against the institution under resolution by its employees which arise from the employment relationship itself. The exclusion is notionally justified by the need to ensure the continuity of critical functions.202 It nonetheless covers the totality of the institution’s personnel, whether serving in the critical functions and retained by the post-resolution operation, or laid off.203 101 With regard to its material scope, the exclusion mentions accrued salary, pension benefits, or other fixed remuneration, but exempts the variable component of remuneration that is not regulated by a collective bargaining agreement. From a grammatical point of view, the formulation is infelicitous, because the inclusion of the qualification “fixed” in the main clause would tend to imply a contrario that the scope of the exclusion does not cover any type of variable remuneration, to start with. The intention and the true meaning of the provision, however, is in little doubt: variable compensation, such as performance-related compensation or bonuses, is excluded if it accrued by virtue of a collective labour agreement; but it remains, subject to bail-in if it was individually negotiated. That this case is supported by the preamble, which draws a clear distinction between those liabilities for pension benefits attributable to variable remuneration which arise from collective bargaining agreements and those which do not.204 In the same context, the preamble postulates that, in order to honour pension entitlements, the bail-in tool should not apply to the institution’s liabilities to a pension scheme.205 The necessary implication is that the reference in the main text to liabilities to “an employee ... in relation to pension benefits” should be read to include a liability to the employee’s occupational pension scheme or pension trustee. With regard to the terms “accrued salary” and “remuneration”, which are not defined in the European texts, EBA’s Single Rulebook Q&A considers that they should be interpreted in accordance with the national law governing the employment relationship, depending on whose provisions the exclusion could potentially encompass liabilities from continued payment of wages in case of illness, holiday pay, compensation for a worker who was unable to exercise his right to paid annual leave on account of incapacity for work, and so on.206 102 A special rider modifies the scope of the exclusion when the employees to whom liabilities are owed are identified as “material risk-takers” of the institution under resolution, in accordance with the provisions of the CRD IV on institutions’ remuner100
EBA, Single Rulebook Q&A, q. 2017_3219 (1 December 2017). Recital (76) sent. 5 SRMR. 203 In combination with the justification provided for the exclusion of pension-related liabilities in Recital (76) sent. 6 SRMR, which has nothing to do with the continuity of critical functions, this consideration suggests that the true reason for the exclusion may have less to do with the objectives of resolution as such, as with socio-political considerations and the related general preferences of national insolvency laws. 204 Recital (76) sent. 6 SRMR. 205 Recital (76) sent. 6 SRMR. 206 EBA, Single Rulebook Q&A, q. 2015_1770 (30 January 2015). 201
202
812
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
ation policies.207 The reference is not, as one might think, to a technical definition of material risk-takers in the CRD, because none exists, and the term does not even appear anywhere in the directive’s text; instead, the rider in the SRMR points to the identification of “categories of staff including senior management, risk-takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk-takers, whose professional activities have a material impact on their risk profile,” with regard to whom credit institutions are required to adopt and apply remuneration policies reflecting a number of principles set out in the CRD.208 For any employees belonging to those categories, the rider in the SRMR disapplies the mandatory exclusion from bail-in in so far as the variable component of remuneration is concerned. In other words, all variable remuneration of such material risk-takers remains liable to bail-in, including when it is attributable to collective agreements. This is intended to give effect to the principles that, with regard to persons exercising directorial, senior managerial, or other responsibilities with substantial risk implications for the credit institutions which employ them, the remuneration practices must be conducive to sound and effective risk management and not incentivize excessive risk-taking, and (with more immediate relevance to the issue under discussion) the basic fixed remuneration must primarily reflect the relevant professional experience and organisational responsibility of those persons, while their variable remuneration should reward a sustainable and risk-adjusted performance – which in the case of a failed institution, they have evidently failed to achieve.209
VIII. Liabilities to suppliers of critical goods and services The eighth exclusion concerns liabilities to suppliers. Specifically, the exclusion covers 103 claims of commercial or trade creditors arising from the provision to the failing institution of goods or services which are critical to the daily functioning of its operations. It is expressly stated that the relevant services include IT services, utility and rental bills, and liabilities relating to the servicing and upkeep of premises. Like the exclusion of liabilities from employee compensation (but with greater cogency, given that in this case an actual link must be established), the exclusion is justified by the need to maintain operational relationships which are indispensable in order for the institution to continue to provide its critical functions.210 Despite the fact that the text does not specify, which operations of the institution 104 are relevant for the exclusion’s purposes, the provision could be read as referring solely to operations whose continuation is envisaged, even temporarily, in the resolution scheme. A blanket application of the exclusion so as to include liabilities from supplies of goods and services supporting discontinued lines of activities, units which are poised to cease their operation imminently, or premises which will not be used any longer, would run contrary to the continuity rationale and the rule of construction, according to which statutory exceptions must be interpreted strictly. Concerning the materiality 207 Art. 27(3)(2) SRMR and Art. 44(2)(2) BRRD, with references to Art. 92(2) CRD IV. Reflecting lessons drawn from the Global Financial Crisis of 2008–09, the provisions on remuneration policies are aimed at ensuring the incentive-compatibility of the risk-related decisions of a bank’s decision-makers; Arts. 92–96 CRD IV. 208 Art. 92(2)CRD IV. 209 Art. 92(2)(a), (g)CRD IV. 210 Recital (76) sent. 5 SRMR. It is usual for national insolvency laws to establish a general preference in favour of the insolvent entity’s commercial suppliers on similar grounds, although the precise scope may vary.
Christos Hadjiemmanuil
813
Art. 27 SRMR
Bail-in tool
of the supply for the daily functioning of the institution, however, it must be observed that “critical” is an evaluative term. This means that the “mandatory” exclusion of the relevant liabilities does not operate in as automatic a way as one might expect, but presupposes an ad hoc assessment of the actual situation (even though certain types of services will tend to be considered critical almost as a matter of course). 105 On the question, whether, in view of the non-exhaustive character of the list of goods and services in the legislative text, it might be possible to exclude from bail-in liabilities arising from the provision of financial services, if these are critical to the institution, the EBA’s Single Rulebook Q&A gives a negative answer. The relevant entry, which records the opinion of the Commission, points out that the exclusion is intended to capture creditors who provide goods or services of an operational, rather than a financial nature, and should not be interpreted as covering liabilities critical to an institution’s funding needs.211
IX. Tax and social security liabilities 106
The ninth exclusion comprises liabilities to tax and social security authorities when these are preferred under the applicable law. The exclusion reflects standard super-preferences of the national insolvency laws which the resolution regime does not want to upset. It also serves to protect important fiscal interests and avoid the transfer of losses to taxpayers and contributors to social safety-nets. The material scope of the exclusion is strictly coextensive with the scope of the protections afforded under the several national insolvency laws, thus eschewing any harmonization.
X. Contributions to deposit guarantee schemes 107
The tenth exclusion concerns contributions to national deposit guarantee schemes in accordance with the DGSD.212 The exclusion is justified by the need to ensure the continuous financing of DGSs, which should not be disrupted by the resolution action. It should be recalled that the latter has the specific objective of ensuring the continuity, as opposed to discontinuation, of the institution under resolution or, at least, its banking operations, including its deposit-taking function. Even when the old legal entity is placed in liquidation, this does not change the economic reality of operational continuity or the fact that the eligible deposit liabilities remain legally binding and continue to enjoy the protection of the relevant DGS. Hence, allowing the accrued but unpaid contributions to be used for the institution’s restructuring would constitute an implicit subsidy (no matter how small) to the post-resolution entity, in violation of the norms of equal competition. Moreover, bailing-in the unpaid liabilities from contributions would effectively amount to an unjustified and uncertain increase of the relevant DGS’s contribution to resolution financing, over and above the measure prescribed by the rules establishing the resolution financing waterfall.213
EBA, Single Rulebook Q&A, q. 2015_2434 (18 November 2016). Art. 10(1), (3)–(4), (8) DGSD. 213 See infra, → para. 146. 211
212
814
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
XI. Intra-group liabilities of a resolution group An eleventh exclusion, whose aim is to ensure the effectiveness of group resolu- 108 tion,214 was inserted in the SRMR and the BRRD in 2019 as part of the Banking Reform package.215 Group resolution operates by clearly identifying in group resolution plans one or more entities (the parent undertaking of the whole group or the parents of the relevant consolidated subgroups, or “resolution groups”, respectively) which serve as “resolution entities”, that is, as entities in relation to which resolution action must be taken and the resolution tools applied, should a failure occur at any level within their resolution group.216 A resolution entity is expected to serve as a financing conduit for the whole of its resolution group. For this purpose, it issues own fund instruments and debt liabilities to external investors and transfers the proceeds from the issue to the other group entities (which are typically operating subsidiaries); in return, the latter issue their own liabilities to the resolution entity. The resolution group’s obligations to third parties are thus concentrated in the resolution entity and are subject to a consolidated MREL requirement, which is calculated and applied at its level. To cover this requirement, which is commonly described as “external MREL”, the resolution entity will henceforth need to issue strictly bail-inable liabilities exclusively to external third-party investors.217 In turn, the other group entities will be required to cover their individual MREL requirement, or “internal MREL”, by issuing (whether directly or indirectly) fully subordinated liabilities to the resolution entity.218 This financing structure makes it possible to absorb the losses of, and recapitalize, failing operating subsidiaries by writing down or converting the internal MREL instruments held by the resolution entity, whose resulting losses are then passed on to the external investors by bailing-in their holdings of external MREL instruments to the extent necessary. In this manner, the group’s operating subsidiaries remain intact as legal persons and can continue their activities without interruption. The effectiveness of this solution depends on the ability of the bail-in tool to up- 109 stream the group’s operating losses from the subsidiaries to the resolution entity, and from that entity to liability-holders outside the group. For this purpose, bail-in must operate in one direction only. The whole strategy would be jeopardized if this assumption did not hold, and losses could flow back to the subsidiaries due to a countervailing bail-in of claims that these happen to have against the resolution entity. For this reason, the new exclusion, which complements the Banking Reform package’s novel and very complex set of provisions on MREL and group resolution and must be read in their light,219 exempts automatically from bail-in liabilities, regardless of their maturity, to entities belonging to the same resolution group as the institution under resolution without being themselves resolution entities.220 In simpler terms, the exclusion protects any claims of a resolution group’s operating subsidiaries against the institution under resolution (presumably, the resolution entity), regardless of their maturity. As defined in Art. 2(1)(42) BRRD. Art. 27(3)(1)(h) SRMR, as inserted by SRMR II, and Art. 44(2)(1)(h) BRRD, as inserted by BRRD II. 216 See the definitions of “group resolution plan”, “resolution group”, and “resolution entity” in Art. 31(1)(7), (24a)–(24b) SRMR, as inserted by SRMR II, and Art. 2(1)(43), (83a)–(83b) BRRD, as inserted by BRRD II. 217 Arts. 12c–12f SRMR, as inserted by SRMR II, with reference to CRR, Arts. 72a–72c, as inserted by CRR II. 218 Art. 12g SRMR, as inserted by SRMR II. 219 Arts. 8, 12, 12a–12k SRMR, as amended, replaced, or inserted by SRMR II, and Arts. 12–13, 45, 45a–45m BRRD, as amended, replaced, or inserted by SRMR II. 220 Art. 27(3)(1)(h) SRMR. 214
215
Christos Hadjiemmanuil
815
Art. 27 SRMR 110
Bail-in tool
In order not to upset the legal treatment and, in particular, the place in the creditors’ hierarchy of liabilities issued prior to the new provision’s entry into force on 28 December 2020,221 the exclusion does not apply to liabilities which, under the national insolvency law of a participating Member State as it applied on that day, rank below ordinary unsecured liabilities.222 Where the exception applies, the SRB is required to assess whether the remaining internal MREL instruments of the entities affected by it are sufficient to support the implementation of the group resolution plan’s preferred resolution strategy.223 Moreover, in an eventual group resolution action, if certain intra-group liabilities remain bail-inable in principle due to the transitional provision, the SRB is empowered to assess whether they should nonetheless be excluded on a discretionary basis, in order to ensure the effective implementation of the preferred resolution strategy. 224
E. Discretionary exclusion of liabilities from bail-in Beyond the categories of liabilities that are excluded automatically from bail-in, as detailed in the previous section, the SRB (or, in the case of less significant institutions under resolution, the responsible NRA) may also decide to exclude on an ad hoc, discretionary basis additional classes of liabilities. The liabilities thus excluded could, for instance, comprise non-covered deposits, or liabilities guaranteed by third parties (which, as we have seen, are not protected by the mandatory exclusion of “secured liabilities”).225 112 The discretionary exclusion of liabilities is supposed to be an exception, not the default position. Thus, Art. 27(5) SRMR authorizes the SRB to exclude, or partially exclude, certain liabilities in so-called “exceptional circumstances”, if any of the following four conditions are satisfied: 111
(a) it is not possible to bail-in those liabilities within a reasonable time, notwithstanding the good faith efforts of the NCA responsible for implementing the resolution scheme; (b) “the exclusion is strictly necessary and proportionate to achieve the continuity of critical functions and core business lines in a manner that maintains the ability of the institution under resolution to continue key operations, services and transactions”; (c) “the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, in particular as regards eligible deposits held by natural persons and micro, small and medium-sized enterprises, which would severely disrupt the functioning of financial markets, including of financial market infrastructures, in a manner that could cause a serious disturbance to the economy”; or (d) bailing-in those liabilities would result in additional destruction of value, whose effect would be to impose on other creditors even higher losses than in the case of non-exclusion.226 113
Whenever a bail-inable liability or class of bail-inable liabilities is excluded on a discretionary basis, the SRB may choose to compensate for the financial effect of Art. 2(2) SRMR II. Art. 27(3)(1)(h) SRMR. 223 Art. 27(3)(1)(h) SRMR. 224 Art. 25(5)(2) SRMR, as replaced by SRMR II, and Art. 44(3)(2) BRRD, as replaced by BRRD II. 225 See supra, → para. 75. 226 Recital (77) and Art. 27(5)(1) SRMR, replicating verbatim the conditions of Art. 44(3)(1) BRRD. 221 222
816
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
the exclusion by increasing the level to which other bail-inable liabilities are written down or converted, always provided that the NCWO principle is not thereby violated.227
I. Conditions justifying discretionary exclusions If used selectively and on ad hoc grounds, the discretionary exclusion of a potentially 114 wide range of bail-inable liabilities would turn bail-in into a largely optional tool, whose use and scope depends on the resolution authorities’ ex post evaluation of prevailing conditions in the financial and real economy. This would increase the flexibility of the resolution process, but at the cost of reducing its automaticity and rule-bound character, thus rendering its operation highly indeterminate ex ante and liable to bargaining and time inconsistency. It would simultaneously vest the resolution authorities with wide discretionary power, raising significant questions about the legitimacy of the resolution regime and its compatibility with the Union norms against delegation, as developed on the basis of the CJEU’s controversial Meroni doctrine.228 For this reason, but primarily due to their fundamental policy choice to make bail-in the cornerstone of the European approach to resolution, the drafters of the BRRD and the SRMR placed significant constraints on the discretion that resolution authorities enjoy in this respect.
1. Constraints on resolution authorities’ discretion to exclude At the most prosaic level, the relevant provisions make the exercise of the power 115 to exclude liabilities contingent on the presence of exceptional circumstances. 229 In itself, this limitation is of little value, given that any number of grounds can justify an ad hoc finding that the situation of a particular institution is “exceptional”. However, the legislation narrows down the grounds on which an exclusion may be justified by linking the exceptional circumstances to four alternative conditions, at least one of which must be satisfied. In essence, these conditions delineate the permissible purposes of discretionary exclusions by reference to particular outcomes of the resolution action that these must be calculated to avoid or to accomplish, as the case may be. To constrain the resolution authorities’ interpretative discretion, the Commission 116 is empowered to adopt delegated acts specifying the circumstances when exclusion is necessary to achieve the four purposes.230 Presently, the conditions and their relation to the exceptionality of the circumstances are individuated in Commission Delegated Regulation (EU) 2016/860,231 which binds the decision-making of both the NRAs and the SRB.232 Through very detailed requirements, this delegated act seeks to thoroughly
227 Art. 27(5)(3) SRMR, as renumbered and amended by SRMR II, with reference to Art. 15(1)(g) SRMR. 228 Case 9-56, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community, ECLI:EU:C:1958:7. On the compatibility of the SRB’s discretionary decision-making with Meroni, see comment on → SRMR Art. 29 paras. 40–48. 229 Art. 44(3)(1) BRRD and Art. 27(5)(1) SRMR. 230 Art. 44(11) BRRD. 231 Commission Delegated Regulation (EU) 2016/860 of 4 February 2016 specifying further the circumstances where exclusion from the application of write-down or conversion powers is necessary under Art. 44(3) of Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms, OJ L 144, 1.6.2016, p. 11, issued in pursuance of Art. 44(11) BRRD. 232 Art. 1(2) Commission Delegated Regulation 2016/860.
Christos Hadjiemmanuil
817
Art. 27 SRMR
Bail-in tool
structure the decision-making of resolution authorities, thus achieving the consistent application of bail-in across the EU.233 117 In terms of substance, Commission Delegated Regulation (EU) 2016/860 interprets and operationalizes the four conditions in a very restrictive way. The instrument follows the overarching principle that bail-in should be applied to all bail-inable liabilities, unless an exclusion is practically unavoidable; and emphasizes that the resolution authorities should strive to minimize exclusions already at the stage of resolution planning.234 While recognizing the need for a certain degree of flexibility, it insists that resolution authorities should not exclude liabilities or deviate from the pari passu treatment of creditors of equal rank except if, and to the extent that, the exclusion appears strictly necessary and proportionate.235 118 According to the Commission Delegated Regulation (EU) 2016/860, a decision to exclude a liability or class of liabilities must always be made with a view to achieving one or more of the general resolution objectives.236 The grounds for the decision may not be limited to the nature and characteristics of the institution under resolution seen in isolation, nor to any general factors such as the prevailing market conditions, circumstances of failure and level of loss, even though such matters can be taken into account as relevant considerations.237 The decision must, instead, be grounded on a case-specific analysis showing that the statutory conditions identified above are actually fulfilled in the case at hand at the time of resolution action.238 119 The assessment leading to a decision to exclude liabilities must be well founded. Particularly solid justification is expected from the resolution authorities when the proposed exclusions produce a funding gap that must be filled with resolution fund money.239 In that case, the reasoning must be sufficiently detailed to enable the Commission to assess the situation and, potentially, to object to the proposed exclusions within a very short time-frame. 240 If the proposed exclusions concern liabilities previously assumed to be available for loss absorption and recapitalization, and thus allowed to count towards the MREL, the reasons provided should include an explanation of why the exceptional circumstances dictating their exclusion could not have been foreseen at the time of resolution planning.241 Specifically, the resolution authorities must expound the exceptional circumstances which emerged since the moment of resolution planning and justify the exclusion at the moment of the resolution action, and explain why there is a need for the exclusion and, in particular, why the exceptional circumstances leading to it could not be foreseen during the resolution planning phase or, if the need for the exclusion was provided for in the resolution plan, how they had addressed this need so as to avoid it constituting an impediment to resolvability.242
2. Impracticability of bail-in 120
The exclusion of certain liabilities could be justified exceptionally when, under the prevailing circumstances, it is impossible for the relevant NRA to achieve their Recital (1) sent. 1 Commission Delegated Regulation 2016/860. Recital (1) sent. 2–4 Commission Delegated Regulation 2016/860. 235 Recitals (2)–(3), (5) Commission Delegated Regulation 2016/860. 236 Art. 4(5) with reference to Art. 31(2) Commission Delegated Regulation 2016/860. 237 Recitals (11)–(12) Commission Delegated Regulation 2016/860. 238 Art. 4(2), (4), sent. 1 Commission Delegated Regulation 2016/860. 239 On the potential funding contribution of the SRF, see infra, → paras. 147–178. 240 Recital (7) and Art. 4(6), (8)–(11) Commission Delegated Regulation 2016/860. 241 Recital (8) and Art. 4(7) Commission Delegated Regulation 2016/860. 242 Art. 4(7)(a)–(c) Commission Delegated Regulation 2016/860. 233
234
818
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
write-down or conversion within a reasonable timeframe. In essence, this ground covers a number of practical and legal reasons for which bail-in of particular classes of liabilities is impracticable. One could expect that, as the resolution regime matures and adequate resolution planning identifies remaining uncertainties and increases preparedness for the implementation of bail-in-based resolution strategies, including by way of fully-loaded MREL requirements, this ground will lose some of its significance and it will become increasingly difficult for resolution authorities to invoke it.243 The criterion of impracticability is time-critical, because, depending on the cir- 121 cumstances, even short implementation delays and uncertainties can turn an otherwise sensible and effective resolution strategy into a disorderly failure.244 Accordingly, the question here is not whether the bailing-in of the liabilities concerned is altogether impossible, but whether it does not appear possible to evaluate the liabilities in order to determine the write-down amount and/or to execute the necessary implementing steps at the national level within a reasonable time, despite the relevant NRA’s best efforts.245 Factors that should be taken into account in determining what is a reasonable time-frame include the need to publish the bail-in decision and determine the bail-in amount and its allocation to various classes of creditors and the implications of delaying such a decision in terms of market confidence and the potential market reactions. 246 In many cases, this will suggest a particularly tight time-frame. The obstacles to bailing-in particular liabilities must be judged by reference to the 122 applicable national law. Assuming that the liabilities in question are governed by the law of a Member State and that the BRRD has been transposed properly, there should be no legal or administrative barrier to giving effect to the resolution plan by bailing-in all bail-inable liabilities. The situation may be different in the case of liabilities governed by the law of a third country.247 The revamped requirements for the contractual recognition of bail-in in instruments issued under third-country laws should help to minimize this problem.248 Any remaining obstacle could be identified and mitigated in advance, in the resolution planning phase. This can be achieved, in particular, through an appropriate determination of MREL requirements, utilizing the power of the SRB (and in the case of less significant institutions, of the NRAs) to preclude liabilities issued under third-country laws from counting towards an institution’s MREL, if unconvinced that the governing law will give effect to a decision to bail-in these liabilities.249 In this sense, while a residual risk continues to exist,250 the room for reliance on governing-law factors to justify discretionary exclusions is gradually becoming narrower. The impracticability of bail-in may be due to practical, as distinct from legal, 123 obstacles. This may be true, in particular, in the case of contingent liabilities (such as off-balance-sheet items or undrawn commitments), whose value cannot be determined with any certainty at the time of the resolution action. Over time, this problem should become less acute, due to the gradual maturation and strengthening of the resolution planning process. A fully-fledged resolution plan must include processes for ensuring the availability of the information on which the feasibility of the requisite valuations
Recitals (13) sent. 2–3 and (14) sent. 1 Commission Delegated Regulation 2016/860. Recital (13) sent. 1 Commission Delegated Regulation 2016/860. 245 Recital (14) sent. 2–4 and Arts. 5(1) and 6(1) Commission Delegated Regulation 2016/860. 246 Art. 6(2) Commission Delegated Regulation 2016/860. 247 Cf. Art. 67 BRRD. 248 Art. 55 BRRD, as replaced by BRRD II. 249 Art. 11(17) SRMR. See also Art. 10(10)(j) SRMR, as amended by SRMR II, and Art. 17(5)(j) BRRD, as amended by BRRD II. 250 Recital (15) Commission Delegated Regulation 2016/860. 243
244
Christos Hadjiemmanuil
819
Art. 27 SRMR
Bail-in tool
depends.251 It must also address remaining obstacles in the context of the removal of an impediment to resolvability and the determination of the MREL.252 The identification of appropriate valuation techniques might also help. 253 Again, if the resolution authorities fail to take steps to mitigate the problem, over time its foreseeability may become an impediment to its invocation as a basis for discretionary exclusions. Similar considerations apply, mutatis mutandis, to the discretionary exclusion of derivatives.254 In this context, however, the BRRD alleviates the problem by stipulating that derivatives should be bailed-in following a close-out and identifying valuation methodologies for determining the netted amount.255 Thus, if an efficient mechanism for the reporting of positions is in place, conveying all necessary information to the SRB and the NRAs in advance of the resolution action, it would be possible to conduct a credible valuation without delay. The matter is addressed by the SRB through the development of granular reporting requirement standards, especially the Liability Data Report (LDR).256 If these means cannot ensure the effective inclusion of certain categories of derivatives in bail-in, the matter could be addressed in the context of the removal of impediments to resolvability by requiring the institutions to divest the relevant exposures.257
3. Continuity of critical functions and core business lines The second ground on which the SRB may decide to exclude from bail-in a liability or a class of liabilities is that this is strictly necessary and proportional to the objective of ensuring the continuity of an institution’s or group’s “critical functions” and “core business lines”.258 Both terms refer to the wider significance of particular activities, services, and operations of the institution under resolution, but each of them approaches the issue from a different perspective.259 125 The concept of critical functions encompasses activities, services, or operations of the institution under resolution or its group, the discontinuance of which is likely to disrupt the supply of essential services to the real economy or undermine financial sta124
Art. 5(2)(a) Commission Delegated Regulation 2016/860. Art. 5(2)(b) Commission Delegated Regulation 2016/860. 253 Recital (16) sent. 3 and Art. 4(8)(b) Commission Delegated Regulation 2016/860. 254 Recital (17) Commission Delegated Regulation 2016/860. 255 Art. 49(2)–(4) BRRD and Commission Delegated Regulation (EU) 2016/1401 supplementing Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms with regard to regulatory technical standards for methodologies and principles on the valuation of liabilities arising from derivatives, OJ L 228, 23.8.2016, p. 7, issued on the basis of Art. 49(5) BRRD. 256 See now SRB, Guidance on the 2021 Liability Data Report, version 1.01 (2 October 2020). 257 Art. 10(11)(d) SRMR. 258 For the purposes of the European resolution regime, the terms “critical functions” and “core business lines” are defined in the Art. 2(1)(35) and (36) BRRD, respectively. In pursuance of Art. 2(2) BRRD, detailed criteria for the identification of the critical functions and core business lines of particular institutions and groups are established in the Commission Delegated Regulation (EU) 2016/778 of 2 February 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to the circumstances and conditions under which the payment of extraordinary ex post contributions may be partially or entirely deferred, and on the criteria for the determination of the activities, services and operations with regard to critical functions, and for the determination of the business lines and associated services with regard to core business lines, OJ L 131, 20.5.2016, p. 41, Arts. 6 (regarding critical functions) and 7 (regarding core business lines). See also FSB, ‘Recovery and Resolution Planning for Systemically Important Financial Institutions: Guidance on Identification of Critical Functions and Critical Shared Services’ (16 July 2013). For detailed discussion, see Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal Aspects of the Second Main Pillar of the (European) Banking Union (5th ed, 2019), at pp. 154–156. 259 See Recital (11) and Art. 2(2)–(3) Commission Delegated Regulation 2016/778, containing rather murky definitions of “functions” and “business lines”. 251
252
820
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
bility.260 Accordingly, whether a function is “critical” or not depends on its importance for the financial system and the wider economy, without taking into account the institution’s own business goals or the function’s contribution to the institution’s costs of operation or profitability.261 Critical functions may consist of deposit taking, lending and loan services, payment, clearing, custody, and settlement services, wholesale funding markets activities, and capital markets and investments activities.262 A particular function will be considered critical if its sudden disruption is likely to have a material negative impact on affected counterparties, give rise to contagion, or undermine general market confidence due to the function’s systemic relevance and the systemic relevance of the relevant institution or group in providing that function.263 In the SRB’s view, in the case of lending, the focus should be on potential new lending, rather than the current stock of outstanding loans; and in that of capital market and wholesale funding activities, on the role of the institution as liquidity provider to the market at national and/or EU level and its importance for the smooth functioning of interbank funding markets, respectively.264 Considerations relevant to the determination that a particular function is “critical” include the size, market share, external and internal interconnectedness, complexity, or cross-border provision of the relevant services and operations; a key factor, however, is the function’s non-substitutability.265 The test for the latter is whether the institution can be replaced in the provision of the relevant function in an acceptable manner and within a reasonable time-frame, thereby avoiding systemic problems for the real economy and the financial markets.266 In contrast to critical functions, core business lines are identified on the basis of their 126 internal significance for the institution under resolution and its group as sources of revenue, profit or franchise value.267 Of itself, the continuity of core business lines is not a purpose of the resolution process and cannot provide an independent ground for exclusions. However, the maintenance of a core business line through the continuation of relevant operations, services, and transactions can provide a ground for discretionary exclusions if it is essential for achieving the resolution objectives, including the continuity of critical functions.268 As one of the main resolution objectives,269 the continuity of critical functions 127 provides a primary justification for exceptions from bail-in. We have already seen that the mandatory exception of certain liabilities to employees and commercial claims relating to goods and services is justified precisely on this ground.270 Depending on the actual circumstances, however, further exceptions may be required to achieve the continuity objective. Since the matter can only be fully determined by taking into consideration an institution’s specific situation at the time of resolution,271 it is left to 260 Art. 2(1)(35) BRRD. On the SRM’s operational approach to the identification of critical functions, see SRB, “‘Critical Functions: SRB Approach in 2017 and Next Steps’ (2017). The SRB notes that the analysis should focus on the impact on the real economy and/or financial stability of a specific function, not of the whole bank; SRB, ‘Critical Functions: SRB Approach in 2017 and Next Steps’ (2017), para. 12. 261 Recital (18) sent. 3 and Art. 7(4) Commission Delegated Regulation 2016/860. 262 Recital (4) sent. 3 Commission Delegated Regulation 2016/778. 263 Art. 6(1) Commission Delegated Regulation 2016/778. 264 SRB, ‘Critical Functions: SRB Approach in 2017 and Next Steps’ (2017), para. 12. 265 Art. 2(1)(35) BRRD and Art. 6(2) Commission Delegated Regulation 2016/778. 266 Art. 6(3) Commission Delegated Regulation 2016/778. 267 Art. 2(1)(36) BRRD. 268 Recital (18) sent. 5 and Art. 7(5) Commission Delegated Regulation 2016/860. 269 Art. 14(2)(1)(a) SRMR and Recital (45) and Art. 31(2)(1)(a) BRRD. 270 Recital (76) sent. 5 and Art. 27(3)(g)(i)–(ii) SRMR. See supra, → para. 100. 271 After all, even the identification of goods and services that are critical to the daily functioning of an institution’s operations leaves some interpretative discretion to the resolution authorities.
Christos Hadjiemmanuil
821
Art. 27 SRMR
Bail-in tool
the resolution authorities for ex post determination. Nonetheless, this does not mean that the requirements of exceptionality, including the element of unpredictability, will be satisfied automatically if a liability relates somehow to a critical function. Two parameters are important here: first, the possibility that the issue should have been addressed in the pre-resolution phase; and second, the link between the liabilities in question and the critical functions, that is, the way in which the continuation of the latter depends on the preservation of the former. 128 The continuity objective plays a major role in the context of resolution planning. An institution’s or group’s recovery plan must identify critical functions. 272 Their self-reporting is assessed by the resolution authorities and the results feed into the resolution plan. The latter must include a demonstration of how critical functions could be legally and economically separated, as necessary to ensure continuity upon the institution’s failure, as well as a description of the processes for determining their value and marketability.273 Moreover, an institution’s resolvability is judged by reference to the ability of the preferred resolution strategy to ensure the continuity of its critical functions. 274 If the resolvability analysis leads to the conclusion that the present organization of the institution does not permit the achievement of this objective, the SRB can always instruct the relevant NRA to take appropriate measures. These can include the scaling down or cessation of certain activities, the restriction or prevention of the development of particular business lines, changes in the legal or operational structures of the institution or its group, etc.275 As long as the resolution planning process has taken place in the envisaged manner, the continuity should normally be achievable by mere application of the resolution plan (for instance, through the application of the sale of business tool), without the need for discretionary exclusions. Accordingly, to invoke continuity as a ground for discretionary exclusions, the resolution authorities should be able to explain the reasons for which this has not happened or to identify intervening, unforeseen circumstances of material systemic significance. 129 The analysis, however, cannot stop at the need to maintain the relevant functions. To justify an exclusion, it is also imperative for the resolution authorities to conclude that the exclusion of the particular liability or class of liabilities is necessary and proportionate to preserve those functions. This could be the case, if the continuation of the critical function depends on the ongoing availability of funding or on the participation of counterparties, such as hedging counterparties, infrastructures, or service providers, who would be prevented or dissuaded from continuing to transact with the institution under resolution if the relevant liabilities were bailed-in; or if the critical function concerns a service provided by the institution to third parties whose provision depends on the uninterrupted performance of the liability.276 More specifically, the exclusion of liabilities issued for risk management (hedging) purposes requires that the hedge is recognized for prudential purposes and is essential for maintaining operations related to critical functions, as well as that it would be impossible, if the hedge were unwound, to replace it on reasonable terms within the time required for maintaining the critical 272 Annex, Section A, point (7) BRRD. To support institutions in the identification of critical functions and enhance the consistency of resolution plans, the SRM has developed a standardised reporting template and associated guidance for institutions; SRB, reporting template Z.07.01 FUNC1(‘Critical Functions Template’) and ‘Guidance on the Critical Functions Report’, with the most recent amendments introduced in 2019. 273 Art. 8(9)(c), (g) SRMR and Recital (25) sent. 2 and Art. 10(7)(c), (g) BRRD. 274 Art. 10(3)(1) sent. 2 and (in relation to the resolvability of banking groups) Art. 10(4)(1) SRMR and Art. 15(1)(2) BRRD. 275 Art. 10(11)(a), (e)–(f) SRMR; and Art. 17(5)(a), (e)–(f) BRRD, as amended by BRRD II. 276 Art. 7(1) Commission Delegated Regulation 2016/860.
822
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
function.277 Similarly, the exclusion of liabilities with a view to maintaining a funding relationship presupposes that it would be impossible for the institution to replace the funding within the time required for maintaining the critical function.278 In all cases, the resolution authorities should be able to show, why the excluded liabilities are more relevant for the continuity of the critical functions in question than liabilities which are not offered similar protection from bail-in.279
4. Avoidance of widespread contagion The third ground for discretionary exclusions concerns the prevention of conta- 130 gion.280 Contagion may take the form of direct knock-on effects, if the losses suffered by counterparties of the institution under resolution due to the write-down of their claims are of such a scale as to undermine those counterparties’ own solvency and/or ability to continue their operations.281 Alternatively, the second-order effects may be of informational nature, as where the bail-in is perceived by market participants at large as a signal of general financial distress, thus causing a wider loss of market confidence, or may relate to the bail-in’s impact on the prevailing market conditions through second-order portfolio and pricing adjustments made by the affected parties and others. Both of these mechanisms are contemplated by the applicable European norms, under the headings of “direct contagion” and “indirect contagion”, respectively.282 The prevention of contagion is part of the second general objective of the resolu- 131 tion, namely, the avoidance of significant adverse effects on financial stability. 283 In the definition of the resolution objectives, however, financial stability is expressly stated to encompass, alongside the prevention of contagion, the maintenance of market discipline.284 The two considerations will frequently point to contrary solutions, and need to be reconciled. In fact, the main justification for bail-in is that, by preventing the externalization of the losses of bank failure to the State, it contributes greatly to the restoration of market discipline.285 Simultaneously, however, by removing the implicit State guarantees of bank liabilities, it increases those claims’ inherent riskiness (and hence the claimholders’ own risk of failure) and makes market participants more sensitive to negative developments, with potential systemic repercussions. Despite these effects, it is a fundamental policy of the European resolution regime to promote the internalization of losses and the financial restructuring of failed institutions with the stakeholders’ own resources, which must be mobilized for this purpose by way of bail-in to the maximum extent feasible under the circumstances. To reconcile this policy with the need to avoid contagion, rather than relying on case-specific ex post balancing, the resolution regime addresses the issue upfront, at the design level, by incorporating in the bail-in tool the generally applicable mandatory exclusions. As a second line of defence, any foreseeable adverse effects that the application of resolution tools and Recitals (19)–(20) and Art. 7(2) Commission Delegated Regulation 2016/860. Art. 7(3) Commission Delegated Regulation 2016/860. 279 Art. 4(9) Commission Delegated Regulation 2016/860. 280 On the nature and channels of financial contagion, see, generally, Pericoli and Sbracia, Banca d’Italia, Temi di Discussione No 407 (2001) and Goodhart and Illing (eds), Financial Crises, Contagion, and the Lender of Last Resort: A Reader (2002), pt. III (chs. 14–19). 281 Hypothetically, this mechanism may produce domino effects, with the failure of the institution’s counterparties precipitating, in their turn, further insolvencies in successive rounds. In practice, this is highly unlikely, since the scale of the losses transmitted is bound to diminish rapidly with each iteration. 282 Recitals (24)–(25) and Art. 3 Commission Delegated Regulation 2016/860. 283 Art. 14(2)(1)(b) SRMR and Art. 31(2)(1)(b) BRRD. 284 Art. 14(2)(1)(b) SRMR and Art. 31(2)(1)(b) BRRD. 285 See, e.g., Huertas, Safe to Fail: How Resolution Will Revolutionise Banking (2014). 277
278
Christos Hadjiemmanuil
823
Art. 27 SRMR
Bail-in tool
powers could have on the financial system, market confidence, or the real economy are expected to be addressed in the resolution planning phase, in the context of the resolvability assessment.286 Theoretically, these arrangements should limit considerably the residual risk of contagion – a risk accepted as unavoidable in the application of bail-in.287Against this background, the legislation permits discretionary exclusions to avoid the risk of contagion only when that risk exceeds a certain level of probability and severity. Specifically, under the third statutory ground, the discretionary exclusion of liabilities is permissible only if the threatened contagion is widespread, would severely disrupt the functioning of financial markets, including financial market infrastructures, and could thereby cause a serious disturbance to the real economy.288 132 The resolution authorities must, accordingly, assess whether bailing-in the particular liabilities is likely to produce effects of this nature and order either through direct transmission or through the channels of indirect contagion.289 With regard to direct contagion, the resolution authorities are required to assess the interconnectedness of the institution under resolution with its counterparties.290 More specifically, they are required to consider the presence of exposures that, if included in the bail-in, could cause knock-on failures, as well as the systemic importance of the counterparties that are at risk of failing.291 Given that the test is one of widespread, systemic impact, the likelihood that bailing-in the liabilities will cause the failure or distress of one or more other financial institutions will not be enough, if the consequences for the banking system as a whole are not significant.292 A more open-ended and holistic approach will be warranted when assessing the risk of indirect contagion, because this can arise in a diffuse manner and through multiple channels. The resolution authorities will, accordingly, need to take into account a variety of relevant factors. Commission Delegated Regulation 2016/860 identifies a number of such relevant factors, or indicators.293 These include: – the number of natural persons directly and indirectly affected by the bail-in; – the number, size, interconnectedness, and functions of counterparties affected by the bail-in, including non-bank financial institutions; – the ability of the counterparties to access alternative service providers; – the number, size, and interconnectedness of institutions with similar characteristics as the institution under resolution, in so far as that could give rise to widespread loss of confidence in the banking sector or the broader financial system; – the visibility and press coverage of the resolution action; – the number, size, or significance of institutions that are at risk of meeting the conditions for early intervention or the conditions of failing or likely to fail; – widespread significant decreases in the share prices of institutions or in the prices of assets held by institutions, in particular where they can have an impact on the capital situation of the latter;
Annex, Section C, points (24)–(28) BRRD. Recital (22) sent. 1 Commission Delegated Regulation 2016/860. 288 Art. 27(5)(1)(c) SRMR and Art. 44(3)(1)(c) BRRD. 289 Recital (22) sent. 3–4 Commission Delegated Regulation 2016/860. The recital suggests that the resolution authorities’ assessment of the probability and potential impact of contagion should be based on appropriate methodologies, including quantitative analysis; Recital (22) sent. 4 Commission Delegated Regulation 2016/860. 290 Art. 8(1)(1) Commission Delegated Regulation 2016/860. 291 Art. 8(1)(2) Commission Delegated Regulation 2016/860. 292 Recital (24) sent. 2–3 Commission Delegated Regulation 2016/860. 293 Art. 8(2) Commission Delegated Regulation 2016/860. 286
287
824
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
–
the likelihood that a significant number of counterparties would withdraw funding or cease making transactions with other institutions following the bail-in of the relevant liabilities, or that markets would cease functioning properly, in particular in the event of generalised loss of market confidence or panic; – the likelihood of widespread withdrawal of short-term funding or deposits in significant amounts; – the risk of a significant discontinuance of critical functions or a significant increase in prices for the provision of such functions, as evidenced from changes in market conditions for such functions or their availability, or the expectation of counterparties and other market participants; – general and widespread significant reduction in short- or medium-term funding available to institutions; – significant impairment to the functioning of the interbank funding market, as apparent from a significant increase of margin requirements and decrease of collateral available to institutions; and – widespread and significant increases in prices for credit default insurance or deterioration in credit ratings of institutions or other market participants which are relevant for the financial situation of institutions.294 Some of these factors reflect the pernicious aggregate direct impact of bail-in on 133 wider classes of claimholders (such as natural persons and other financial institutions), even when the bail-in of individual claims is systemically insignificant. Another group of factors points to the risk of information-based contagion and/or of a generalized collapse of confidence. A final group concerns the operation of retail and wholesale funding markets and the risk that bail-in may precipitate or deepen a loss of confidence in them, leading to the disruption of liquidity supply to parts or the whole of the banking system, higher collateral requirements, or the fire-sale of assets by institutions facing liquidity shortfalls.295 Significantly, the prevailing market conditions and the general state of the banking industry (number, size, or significance of institutions at risk of meeting the conditions for early intervention, or the conditions of failing or likely to fail) are recognized as relevant factors.296 This implies that the exceptional circumstances justifying discretionary exclusions are more likely to occur when the national or pan-European banking system as a whole is under stress. Evidently, the liabilities covered by the discretionary exclusion must play a distinctive 134 role in the chain of causation of systemic contagion. This consideration has two implications. Firstly, the contagion must not be attributable to the failure of the institution in itself, but must result from the application of the bail-in tool to the excluded liabilities or, at least, be significantly aggravated by it.297 Secondly, bailing-in the excluded liabilities must be more likely to cause widespread contagion than bailing-in the remaining bail-inable liabilities.298 The text of the clause establishing this ground for exclusions includes a reference 135 to “widespread contagion, in particular as regards eligible deposits held by natural
Art. 8(2) Commission Delegated Regulation 2016/860 (partially reordered list). Recital (25) sent. 2 Commission Delegated Regulation 2016/860 singles this out as an important channel of indirect contagion. 296 Recital (23) sent. 1 and Art. 10(2), points (d)–(g), (i)–(l) Commission Delegated Regulation 2016/860. 297 Recital (23), sent. 4 Commission Delegated Regulation 2016/860. 298 Recital (22) sent. 3 and Art. 4(10)(b) Commission Delegated Regulation 2016/860. 294
295
Christos Hadjiemmanuil
825
Art. 27 SRMR
Bail-in tool
persons and micro, small and medium-sized enterprises”.299 On the same issue, the preamble of the SRMR notes that, in assessing the need for discretionary exclusions, consideration should be given “to the consequences of a potential bail-in of liabilities stemming from eligible deposits held by natural persons and micro, small and mediumsized enterprises above the coverage level provided for in [the DGSD]”. 300 The formulation could create the impression that a discretionary exclusion of those deposits could be justified on the basis of the negative consequences that their bailing-in could have for the relevant classes of depositors. While this may prove to be a de facto factor in resolution-related decision-making, it is not supported by the aforementioned operative provision, which goes on to specify that the widespread contagion must result in severe disruption of the function of financial markets. Accordingly, from a strict-construction viewpoint, the parenthetical reference to the deposits in question should be taken to point primarily to situations where the bail-in of such eligible deposits could cause generalized panic in the retail market and a disruptive depositors’ run on banks at large.
5. Avoidance of destruction of value The fourth ground on which discretionary exclusions may be justified is that the bail-in of the relevant liabilities would result in the destruction of value, so as to leave other creditors with even higher losses than in the case of non-exclusion. This ground instantiates the general principle that, in pursuing the resolution objectives, the resolution authorities, the Council, and the Commission shall seek to minimize the cost of resolution and to avoid unnecessary destruction of value.301 137 It is evident that in itself a liability’s write-down or conversion results necessarily, not in destruction of value, but in an increase in the net value of the institution under resolution. Nonetheless, there will be many instances where the non-performance of certain liabilities according to their original terms will generate indirect losses by undermining the viability of a line of activity or disrupting profitable relationships. 302 Depending on the circumstances, the non-performance of liability may automatically trigger corresponding losses or replacement costs, leaving the institution in an even worse position than before. For instance, where bailing-in a liability leads inevitably to the close-out of the corresponding derivative, the losses incurred as a result may exceed the benefit from the non-payment of the liability.303 138 In such cases, the discretionary exclusion of the relevant liabilities or classes of liabilities will be justifiable, always provided that the resolution authorities can establish that the exclusion is certain or highly likely to result in an improvement of the overall financial situation, thus necessitating a lower contribution to bail-in by the non-excluded creditors.304 In this context, the determination of the resolution authorities must be informed by the valuation for the purposes of resolution (Valuation 2),305 on the basis 136
299 Art. 27(5)(1)(c) SRMR and Art. 44(3)(1)(c) BRRD. “Micro, small and medium-sized enterprises” are defined by exclusive reference to their annual turnover in Art. 2 (107) BRRD, in conjunction with Annex, Art. 2(1) Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ L 124, 20.5.2003, p. 36. 300 Recital (77) sent. 3 SRMR. 301 Art. 14(2)(2) SRMR and Art. 31(2)(2) BRRD. 302 Recital (26) sent. 1 Commission Delegated Regulation 2016/860 gives the example of liabilities forming part of a successful business line, whose sale as an ongoing operating unit can add significant value to the institution under resolution. 303 Recital (27) sent. 2 Commission Delegated Regulation 2016/860. 304 Art. 27(5)(1)(d) SRMR and Art. 9(1) Commission Delegated Regulation 2016/860. 305 See supra, → para. 33; and in relation to the valuation of derivatives, Commission Delegated Regulation (EU) 2016/1401.
826
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
of which the alternative outcomes for all creditors must be compared and evaluated. 306 In any event, the exclusion cannot be based on speculations about a potential increase in value,307 but must rely on immediately existing concrete evidence, enabling the quantification of outcomes.
6. Group resolution SRMR II has now added a supplementary legal basis for discretionary exclusions.308 139 The new provision mandates the SRB to carefully assess the case for exclusion of the intra-group liabilities of a group’s resolution entity, when these are not already excluded under the relevant mandatory exclusion due to the technical transitional limitation of the latter’s scope,309 as discussed previously.310 While the provision states explicitly that the SRB’s assessment should be aimed at ensuring the effective implementation of the group resolution strategy, it refrains from turning this residual situation into an independent ground for discretionary exclusions. Instead, it requires the SRB to link a proposed exclusion to one or another of the four basic conditions, or grounds, analysed above.
II. Effect of discretionary exclusions 1. Possibility of partial exclusion The SRB may choose to exclude the liabilities affected by its decision completely 140 or only partially.311 In the latter case, only part of the liabilities’ amount will be subjected to write-down or conversion, with the remainder continuing to constitute a claim against the post-resolution entity in the original legal form. If the partial exclusion of a class of liabilities would suffice to achieve the relevant objective, this option should be preferred.312 Art. 27(14) SRMR states that the discretionary exclusion of liabilities under 141 Art. 27(5) SRMR may be applied either to completely exclude a liability from writedown or to limit the extent of the write-down applied to that liability. Since the basic provision covers explicitly the option of partial exclusion of liabilities from both writedown and conversion, the provision of Art. 27(14) SRMR is largely repetitious. Its main intent may be to clarify that, in the case of the write-down, the exclusion can take the form of a decision to apply a different rate or percentage of write-down in comparison to other liabilities of the same rank; but this is no different from excluding part of the liabilities in question and then writing down the remainder at the same rate with other liabilities of equal ranking. In either case, the unequal (more favourable) treatment would be grounded on the resolution authority’s exercise of its discretionary power to exclude.313
Art. 9(2) Commission Delegated Regulation 2016/860. Recital (27) sent. 4 Commission Delegated Regulation 2016/860. 308 Art. 25(5)(2) SRMR, as replaced by SRMR II, and Art. 44(3)(2) BRRD, as replaced by BRRD II. 309 Art. 25(3)(1)(h) SRMR. 310 See supra, → para. 110. 311 Art. 27(5)(1) SRMR. 312 Recital (5) sent. 2 and Art. 4(3) Commission Delegated Regulation 2016/860. 313 Art. 48(2) BRRD. 306
307
Christos Hadjiemmanuil
827
Art. 27 SRMR
Bail-in tool
2. Effect of discretionary exclusions on the treatment of other bail-inable liabilities As a general matter, and leaving aside exclusions aimed at avoiding the destruction of value, the discretionary exclusion of otherwise bail-inable liabilities generates a funding gap, which must be filled from other sources in order to meet the aggregate amount. For this reason, Art. 27(5) SRMR enables the SRB to combine the discretionary exclusion of certain liabilities with a decision to increase the level of write-down or conversion applied to other bail-inable liabilities.314 143 The increase may be calibrated to fully or partially restore the funding balance. However, the burden placed upon any particular creditor or class of creditors may never be increased beyond the point where the NCWO principle, which defines the ceiling of each creditor’s contribution, would be breached.315 The NCWO ceiling compresses further an already limited stock of bail-inable liabilities, making it more probable that these will not suffice for the financing of the resolution. In view of this concern, Art. 27(12) SRMR stipulates that the decision to exclude certain liabilities must pay due consideration to the level of loss-absorbing capacity that would remain after the proposed exclusion and the need to maintain adequate resources for resolution financing. 316 In effect, the provision suggests that the appropriateness of discretionary exclusions must be evaluated by reference, not only to the purposes that they serve, but also to their impact on the financial feasibility of the bail-in-based restructuring of the institution under resolution. 144 Echoing the general principles governing resolution,317 Art. 27(12) SRMR addresses in a rather indirect way another important issue: it identifies as a necessary consideration for the discretionary exclusion of liabilities the principle that losses should be borne first by the shareholders of the institution under resolution, followed, in general, by its creditors in order of preference.318 The evident intention of the provision is to prevent the discretionary exclusion of junior liabilities as long as more senior ones remain subject to bail-in. Nevertheless, the reference to the creditors’ hierarchy is framed in less than absolute terms (“in general”), which do not rule out occasional deviations. Under certain circumstances, the grounds for discretionary exclusions might conceivably provide justifications for such deviations. On the other hand, in the general principles governing resolution the requirement for the respect of the creditors’ hierarchy admits only express exceptions elsewhere in the SRMR.319 It is very questionable, whether the conditions for discretionary exclusions could be construed as express grounds for deviation. 142
F. The resolution financing waterfall and the contribution of the SRF 145
Due to the exclusion (both mandatory and discretionary) of a wide range of liabilities, the application of bail-in may be insufficient to fully cover the estimated funding gap of the institution under resolution (that is, to fully absorb past losses and to ensure the recapitalization of the surviving entity up to the level necessary for its 314 Recital (78) sent. 1 and Art. 27(5)(3) SRMR, as inserted by SRMR II (which replicates precisely the original text of Art. 27(5)(2) SRMR). 315 Art. 27(5)(3) SRMR, with reference to Art. 15(1)(g) SRMR. 316 Art. 27(12)(b)–(c) SRMR. 317 Art. 15(1)(a)–(b) SRMR and Art. 34(1)(a)–(b) BRRD. 318 Art. 27(12)(a) SRMR. 319 Art. 15(1)(b) SRMR.
828
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
continuing operation). To fill the remaining gap, injections of new money from external sources will be necessary. It should be stressed that the exclusion of liabilities from bail-in constitutes the sole reason for which such a situation may occur. The exclusions not only deplete the pool of resources available for loss absorption and recapitalization but also leave an increased volume of liabilities on the balance sheet. If all capital instruments and liabilities were fully subject to bail-in according to their ranking, the injection of outside money would never be necessary, because the failed institution’s liabilities would be allowed to shrink to the full extent necessary for achieving the absorption and internalization of losses. Liability-holders would be treated in the bail-in-based restructuring in roughly the same way as in normal liquidation proceedings. At the limit, old shareholders would be totally eliminated, while the former liability-holders would retain, in strict accordance to their order of priority, debt and/or equity claims of equal value to the residual pool of good assets. They would thus receive the equivalent of the dividend that they would expect in insolvency, albeit not always in monetary form (whiles eschewing the need to absorb the costs of the liquidation). Of course, so robust an approach would be inconsistent with the public-interest objectives of resolution. In situations of deep insolvency or of extensive presence of non-performing exposures on the asset side of the balance sheet, the old credit institution would effectively cease to exist in a recognizable form; and even though its resolution might be conducted in an orderly manner, it would not achieve the objectives of systemic stabilization and financial continuity. In this sense, the protection of a large proportion of existing claims constitutes a condition for the success of the resolution process more broadly understood. Nonetheless, it remains the case that the exclusions, both mandatory and discretionary, reduce to a great extent the efficacy of bail-in as a solution to the problem of financial restructuring and will often necessitate resort to external, typically official, funding support. It is to this issue that we must now turn.
I. Burden-sharing and the financing waterfall of resolution actions According to the European resolution regime’s basic principle, the resolution 146 of failed credit institutions must be financed to the extent possible from private sources, both internal (existing stakeholders of the bank) and external (willing acquirers and/or investors of new capital). Any public contribution to the financing of the resolution action (that is, any contribution essentially equivalent to bailout funding) can only be made after the existing stakeholders have contributed to burden-sharing through complete or, at least, substantial bailing-in of their claims, in accordance with a prescriptive financing waterfall. (There are reasons to doubt, whether the scheme is practicable and can be applied faithfully ex post, especially in the event of a crisis of systemic proportions, but this is not the place to discuss its merits.) The overall intention of the waterfall is, on the one hand, to impede the provision of public financing support (bailouts) or, when this is unavoidable, to reduce the scale of the support to the minimum possible amount and, on the other hand, to insulate the taxpayer by localizing the funding burden and any resulting losses in the banking sector. In a nutshell: – As detailed in previous sections, prior to the activation of external resources, the bail-inable claims of existing stakeholders must be written down or converted in accordance with a statutorily prescribed sequence and the reverse order of priority of national insolvency law,320 always subject to the principle that “no creditor shall incur greater losses than would have been incurred if the [institution under reso320
Arts. 7(1) and 27(1)–(5), (13) SRMR and Arts. 46–50 and 108 BRRD. See supra, → paras. 56–63.
Christos Hadjiemmanuil
829
Art. 27 SRMR
–
Bail-in tool
lution] had been wound up under normal insolvency proceedings” (“no creditor worse off” or “NCWO” principle).321 In this context, the relevant DGS (a mechanism funded through levies on credit institutions, thus localizing the relevant costs in the banking industry) may be required to contribute to the financing of a member bank’s resolution.322 However, the DGSs’ contribution to open-bank resolution financing is strictly limited to the amounts that it would need to expend in order to honor the guarantee of covered deposits, if the failed bank had been wound up under normal insolvency proceedings.323 Specifically, when the bail-in tool is applied, the relevant DGS is automatically liable for a contribution to the funding of the resolution action.324 In principle, the contribution of the DGS is equal to the amount by which the covered deposits would have been written down in order to absorb the accrued losses of the institution under resolution, if, rather than being excluded from bail-in, they were bailed-in on an exactly equal footing with other liabilities with the same level of priority under national insolvency law.325 However, the amount of the contribution is subject to two distinct caps: firstly, the contribution may not exceed the losses that the DGS would have incurred if the institution under resolution had been placed in liquidation 326 (in which case the DGS would have needed to pay out covered depositors and be subrogated to their claims in the liquidation proceedings327); and secondly, the liability of the DGS is capped at 50 % of its target level in accordance with the DGSD.328 By virtue of the first cap, the NCWO principle applies to the DGS’s contribution in a roughly similar manner as to creditors whose claims are included in the bail-in. It must be noted in this connection that the BRRD’s partial harmonization of the insolvency hierarchy gives superpriority to covered deposits in the national insolvency proceedings.329 Specifically, rather than being treated pari passu with non-covered deposits and other senior liabilities, covered deposits, and also the claims of DGSs resulting from their subrogation to the depositors’ claims following the payout of covered deposits,, are placed in the highest priority rank, followed by the non-covered part of eligible deposits from natural persons and micro, small and medium-sized enterprises, with other senior liabilities coming third. Accordingly, in the counterfactual scenario of liquidation, the relevant DGS is only liable to suffer permanent losses if the extinction of all other classes of liabilities is insufficient to cover the institution’s accrued losses (plus the costs of the liquidation process). In a bail-in scenario, this implies that the DGS’s contribution will only be forthcoming
321 Art. 15(1)(g) SRMR. The principle is applied by the NRAs in accordance with national law transposing the BRRD; Art. 27(1)(3) SRMR, in conjunction with Art. 34(1)(g) and 74–75 BRRD. 322 Presently, the national DGSs operating under the DGSD perform this function in relation to their respective members. In the future, these DGSs may be replaced by a single DGS for the whole Banking Union (“EDIS”); European Commission, ‘Proposal for a Regulation amending Regulation (EU) 806/2014 in order to establish a European Deposit Insurance Scheme’, COM(2015) 586 final (24 November 2015). On the status of the EDIS proposal as of the time of writing, see Council, ‘Presidency Progress Report on the Strengthening of the Banking Union’, 8335/20 ADD 1 (29 May 2020), paras. 7–12. 323 Art. 109 BRRD. 324 Recital (81) and Arts. 17(2)(2) and 79(1)(1) SRMR, in conjunction with Art. 109(1) BRRD. 325 Art. 109(1)(1)(a) BRRD. 326 Recital (110) and Art. 79(5)(3) SRMR. 327 Art. 79(1)(2) SRMR. 328 Art. 79(5)(2) SRMR, in conjunction with Art. 10(2) DGSD. 329 Art. 108(1) BRRD, as renumbered by Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy, OJ L 345, 27.12.2017, p. 96.
830
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
–
–
following a notional complete wiping out by way of write-down of all bail-inable liabilities, including all senior debt and all non-covered deposits. This can reduce tremendously the significance of the DGSs potential contribution. The second cap is evidently directed at protecting the DGSs from excessive concentrated losses, which would deplete their resources with immediate effect, thus testing market confidence at a potentially critical time. In any event, the contribution of the DGSs is exclusively aimed at the absorption of past losses, and cannot be extended to the recapitalization of the institution under resolution or a bridge institution.330 If due to the exclusion of certain liabilities the application of bail-in does not suffice, the SRM’s Single Resolution Fund (once again, a banking-industry-funded mechanism) can make a contribution to the recapitalization costs, or provide liquidity assistance as necessary, subject to strict conditions and up to a specific limit. Thus, the SRF can step in and contribute to the recapitalization of the institution under resolution only after a contribution amounting to no less than 8 % of total liabilities, including own funds, has been made by way of bail-in by stakeholders other than covered depositors.331 In addition, the scale of the SRF’s capital contribution is limited to no more than 5 % of total liabilities.332 The matter is discussed in greater detail below. If even after all the aforementioned sources of resolution financing have been exhausted (either because they were depleted, or because they reached the limits of their potential contribution) the institution remains undercapitalized, or illiquid, but the continuation of its operations appears imperative for reasons of systemic stability, recapitalization with public funds (whether national or pan-European) may be considered.333
II. The funding contribution of the SRF Despite its strong anti-bailout stance, the European resolution regime recognizes that, 147 in many cases where the public interest dictates an open-bank solution, the deployment of official financial support will be unavoidable. In order to regularize and control the provision of public support and to ensure that the relevant costs are internalized by the banking sector itself, the BRRD requires the Member States to establish pre-funded resolution funds (“resolution financing arrangements”) at the national level.334 The SRMR goes one step further by providing for the establishment of the SRF as the single resolution fund for the whole Banking Union, into which the national resolution funds of the participating countries will gradually fold.335 This was considered necessary in order to break the perverse feedback mechanism (or “diabolical loop”) linking the euro area’s sovereigns and their respective national banking sectors.336 During the crises which engulfed a number of peripheral economies of the euro area in 2010–15, it became evident that a State’s precarious fiscal condition could fuel a loss of market confidence towards its domestic banks, while, conversely, the possibility that these banks might need to be Art. 109(1)(3) BRRD. Art. 27(7)(a) SRMR. 332 Arts. 27(7)(b) SRMR, subject, however, to Art. 27(9) SRMR. 333 Art. 37(10)(a) BRRD. 334 Arts. 100–105 BRRD and Art. 68 SRMR. 335 Art. 67(1) SRMR, in conjunction with the Intergovernmental Agreement on the transfer and mutualisation of contributions to the Single Resolution Fund (IGA) (21 May 2014). 336 Recitals (19) sent. 2 and 4 SRMR. 330
331
Christos Hadjiemmanuil
831
Art. 27 SRMR
Bail-in tool
propped-up further undermined that State’s fiscal credibility. Indeed, the Banking Union project was launched specifically with a view to decoupling the financing of resolution from national public finances.337 The creation of the SRF is an essential component of this project – even though, for it to reach completion, the integration of the other elements of the resolution financing waterfall is also necessary. This would require the replacement of the national DGSs with a single, Banking-Union-wide European deposit insurance scheme (“EDIS”)338 and, most importantly, the mutualization of direct fiscal interventions in support of resolution actions through the creation of a common “fiscal backstop”.339 148 Operating under the control of the SRB,340 the SRF is pre-funded with ex-ante contributions levied from credit institutions in proportion to their liabilities less covered deposits,341 with a view to accumulate an amount corresponding to its target level of above 1 % of the total covered deposits of all credit institutions authorised in the Banking Union.342 It can also raise ex-post contributions to cover losses and costs incurred by its use in resolution actions, and even resort to alternative financing sources, if this proves necessary.343 From these resources, it can provide funding by way of capital injections whenever the recapitalization costs cannot be passed on fully to the failed institutions’ creditors, thus leaving a funding gap to be filled.344 When the post-resolution institution is likely to face liquidity stress, it may also provide liquidity support or guarantee its liabilities.345 149 The provisions of Art. 27(6)–(11) SRMR regulate the potential utilization of the SRF for the purpose of recapitalizing the institution under resolution and, more specifically, the relationship between the stakeholder’s participation in burden-sharing by way of bail-in and the SRF’s funding contribution. The provisions constitute a central and consequential plank of the resolution regime’s overall financing arrangements.
337 See Hadjiemmanuil, in: Amtenbrink and Herrmann (eds), The EU Law of Economic and Monetary Union (2020), at pp. 1326–1332. 338 See supra, fn. 322. 339 Presently, it is possible for the ESM to support the recapitalization of banks with fiscal resources, but only indirectly, that is, by extending a loan to the relevant national government, which can then use the borrowed funds to finance on its own account the necessary bank recapitalization actions (“indirect recapitalization instrument”); Art. 15 ESM Treaty and ESM Guideline on financial assistance for the recapitalization of financial institutions (8 October 2014). As a result of this back-to-back financing structure, the national government is saddled with additional debt while also bearing the full risk of the investment in the recapitalized institution. The direct recapitalization of credit institutions by the ESM is also possible under the “direct recapitalization instrument” (“DRI”); ESM Guideline on financial assistance for the direct recapitalisation of institutions (8 December 2014). However, the conditions for the use of this instrument are exceptionally unfavorable, since the requesting government must acknowledge formally that it is “unable to provide financial assistance to the institutions in full without very adverse effects on its own fiscal sustainability”; and even then, the requesting government must make a contribution to the recapitalization on its own account; Arts. 3(2)(a) and 9 ESM Guideline on financial assistance for the direct recapitalisation of institutions (8 December 2014). These conditions render the DRI practically unusable. 340 The SRB is the legal owner of the Fund and administers its resources through appropriate investments; Arts. 67(3) and 75 SRMR. 341 Art. 70 SRMR. 342 Art. 69(1) SRMR. 343 Arts. 71–74 SRMR. 344 Art. 76(1)(d)(f) SRMR. 345 Art. 76(1)(a)–(b) SRMR.
832
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
1. Condition for use of the SRF Under Art. 27(6) SRMR,346 a contribution from the SRF is possible only if a two- 150 pronged condition is satisfied, namely, that: (a) a bail-inable liability or a class of bailinable liabilities has been fully or partially excluded from bail-in on a discretionary basis347; and (b) the losses that those liabilities would have borne have not been passed on fully to other creditors. In view of the condition’s first prong, one should conclude that access to SRF funding 151 would be unavailable when the option to exclude certain liabilities in exceptional circumstances has not been exercised. This is puzzling, because it suggests that the institution under resolution or the successor entity may receive more advantageous treatment if bail-in is applied with a certain laxity than if it is applied exhaustively and without exception, but the bail-inable liabilities are simply insufficient. From a practical viewpoint, assuming that resolution planning has been carried on effectively and, in particular, that the MREL requirement have been properly calibrated and enforced, one would expect the sufficiency of bail-inable liabilities not to be a problem, unless the institution under resolution has suffered extraordinarily large losses immediately prior to its collapse. The situation may be different, however, in the transition to the full loading of MREL requirements. In any event, the conceptual paradox remains. The second prong of the condition, that is, the non-reallocation of the burden to 152 other creditors by way of a more extensive bail-in of their claims, may be satisfied due to the dearth of other liabilities, to the operation of the NCWO principle, which sets a limit on the extent of bail-in of particular claims, or, simply, to a discretionary decision of the SRB not to inflict inordinately heavy losses on senior creditors, out of fear that this secondary effect might work against the objectives of resolution, thus defeating the very purpose of the discretionary exclusion.348 Since the provision refers to ‘the losses that would have been borne by [the excluded] liabilities’, the relevant amount is not the amount by which the excluded liabilities would have contributed to the absorption of past losses of the institution under resolution, as distinct from the costs of its recapitalization, but the amount of the losses that would have been suffered by the liability-holders if the relevant liabilities had not been excluded. This should be calculated as the estimated diminution in those liabilities’ actual economic value in the counterfactual scenario of their inclusion in bail-in. In the case of write down, this would be equal to the liabilities’ nominal value (or, in the case of partial exclusion, the excluded part); and in the case of conversion, to the shortfall of the value of the newly issued capital instruments in comparison to the value of the original nominal claim.
2. Purpose of the contribution When the condition analysed above is satisfied, the SRM may activate the SRF. The 153 latter may make a funding contribution to the institution under resolution for the purpose of covering accrued losses that have not been absorbed by bail-inable liabilities 346 Art. 27(6) SRMR, as replaced by SRMR II. The new text is almost identical to the original, the only difference being the substitution of the term “bail-inable liablities” for the original “eligible liabilities”. See supra, → paras. 44–45. 347 In pursuance to Art. 27(5) SRMR. 348 Recital (78) sent. 2 SRMR mentions losses that “cannot be passed to other creditors”, a phrasing which might exclude the second possibility; but the operative provision of Art. 27(6) SRMR is more flexible and refers to losses that “have not been passed on fully to other creditors”. The recital cannot be taken as an authoritative guide to interpretation, because it also mentions a quantitative limit to the SRF’s contribution which cannot be found in the operative text, thus suggesting that it explicates an early version of the legislative text, which was subsequently modified. See infra, fn. 388.
Christos Hadjiemmanuil
833
Art. 27 SRMR
Bail-in tool
and/or recapitalizing the institution under resolution by purchasing instruments of ownership or capital instruments. The extent of the contribution will be determined in either case by reference to the SRB’s assessment of the required amounts in accordance with Art. 27(13) SRMR,349 to which the provision under discussion points specifically. The capital contribution of the SRF is subject to a disinvestment obligation of the SRB, which may not retain its position in the recapitalized institution for a period exceeding five years.350 154 Very significantly, however, while Art. 27(13) SRMR envisions explicitly the application of bail-in either for the recapitalization of the institution under resolution or for the capitalization of its successor bridge bank,351 Art. 27(6) SRMR only mentions the institution under resolution itself, thus apparently precluding the use of the SRF in support of the capitalization of a bridge bank. A way out of the impasse is offered by Art. 76 SRMR, which sets out the wider purposes for which the SRF may be used. These expressly include the making of contributions to a bridge bank or an asset management vehicle.352 They also encompass, but as a separate point, the making of contributions to the institution under resolution when the bail-in tool is applied and certain liabilities have been excluded on a discretionary basis, which is precisely the situation envisaged by Art. 27(6) SRMR.353 It is thus clear that the SRF can participate in the capitalization of a bridge bank, including when the bail-in tool has been applied for the partial achievement of this purpose.354 The existence of a distinct legal basis for the recapitalization of the institution under resolution itself is explicable by the fact that the survival of the old entity raises peculiar State aid issues that do not apply in the case of the transfer of that entity’s financial activities to a new entity such as a bridge bank, in which the old shareholders do not have any interest.355 The implication of the separate treatment of the recapitalization of the institution under resolution is that the provisions (and thresholds) of paragraphs (7) through (10) of Art. 27 SRMR,356 which relate specifically to contributions of the SRF in pursuance of paragraph (6), are also limited to the recapitalization from the SRF of the institution under resolution, and do not apply when the SRF used for any other purpose. 155 Moreover, while the provision of Art. 27(6) SRMR is explicitly and exclusively concerned with contributions from the SRF aimed at addressing the failed institution’s capital needs, this does not preclude the provision of liquidity assistance and/or guarantees of the institution’s assets or liabilities is also possible, if this appears necessary in order to ensure the effective application of the resolution scheme.357
3. Decision-making procedure 156
The activation of the SRF for the financing of a bail-in-based resolution action has important procedural repercussions. To start with, the provision of aid from the SRF in See supra, → paras. 32–41. Art. 76(4) SRMR, in conjunction to Art. 76(1)(f) SRMR. 351 Art. 27(13)(1)(b) SRMR. See also Art. 27(1)(1)(b)(i) SRMR. 352 Art. 76(1)(d) SRMR. 353 Art. 76(1)(f) SRMR. 354 In pursuance of Art. 27(1)(1)(b)(i) SRMR. 355 For this reason, while no particular limit is placed on the use of the SRF for the capitalization of a bridge bank, Art. 76(3) SRMR prohibits the direct use of the SRF for the absorption of losses or recapitalization of the institution under resolution, and only allows its indirect use for this purpose, as part the application of the bail-in waterfall, subject to the “principles” of Art. 27 – that is, to the condition of Art. 27(6) SRMR and the related constraints of Art. 27(7)–(10) SRMR. 356 See infra, → paras. 159–178. 357 Recital (100) sent. 1 and Art. 76(1)(a)–(b), (g) SRMR. 349
350
834
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
support of a resolution action is equated with State aid, thus automatically triggering the Commission’s scrutiny. Thus, Art. 19 SRMR requires the SRB to give to the Commission (DG COMP) prior notification of any intended use of the SRF and to refrain from finally adopting the relevant resolution scheme until it receives positive or conditional confirmation from the Commission of its compatibility with the internal market.358 In exceptional circumstances, the same article enables the Council, acting on an application by a Member State, to displace the Commission and declare itself that the use of the SRF is compatible with the internal market, but a decision to this effect may only be reached by unanimity.359 Art. 19 SRMR further includes detailed provisions on the Commission’s assessment of the proposed SRF aid and, if the latter is approved subject to conditions or requirements, the monitoring and enforcement by the Commission of compliance on the part of the SRB, the relevant NRA, or the beneficiary, as the case may be.360 All these provisions are evidently relevant also in the case where the SRF aid is based on Art. 27(6) SRMR. Depending on its scale, the intention to use SRF aid may also have repercussions for 157 the SRB’s own procedure for the adoption of the resolution scheme. Responsibility for the adoption of resolution schemes normally lies with the SRB’s (extended) executive board, which comprises the SRB’s Chair, the four full-time members appointed at the European level, and the member(s) representing the relevant NRA(s). 361 Nonetheless, if the resolution action requires SRF support of more than € 5 billion,362 the decision on the use of the SRF may be referred to the plenary session,363 which includes the representatives of all NRAs as voting members.364 Specifically, Art. 50 SRMR provides that, in such eventuality, any member of the plenary session may call a meeting of the plenary within three hours from the submission of the draft resolution scheme prepared by the executive session to the plenary session, which will decide the matter.365 In addition, Art. 50 SRMR empowers the plenary session to evaluate the application 158 of the resolution tools and, especially, the use of the Fund and to provide guidance to the executive session on any subsequent resolution decisions, if in the previous 12-month period the net accumulated use of the SRF has reached the aforementioned threshold of € 5 billion.366 In the same scenario, the plenary session is responsible for deciding on the replenishment of the SRF’s resources with ex-post contributions and certain other means of financing.367
4. Minimum bail-in requirement According to Art. 27(7) SRMR, a contribution from the SRF to the institution under 159 resolution can only be made after that institution’s existing stakeholders have been bailed-in to a very substantial extent. Specifically, the contribution of the holders of share capital, other capital instruments, and bail-inable liabilities to loss absorption and recapitalization by way of write down or conversion of their respective claims or otherwise must amount to at least 8 % of the value of the institution’s total liabilities, inArt. 19(1)(1), (3)(1) SRMR. Art. 19(10) SRMR. 360 Art. 19(3)–(7), (9) SRMR. See comment on → SRMR Art. 19 paras. 14–21. 361 Art. 53(1)–(4) SRMR. 362 The threshold includes both capital injections and the provision of liquidity support, but the latter is subject to a 0.5 weighting, thus increasing, and potentially doubling, the nominal threshold. 363 Art. 50(1)(c) SRMR. See comment on → SRMR Art. 50 paras. 14–18. 364 Art. 49 SRMR. 365 Art. 50(2)(2) SRMR. 366 Art. 50(1)(d) SRMR. 367 Art. 50(1)(e) SRMR. 358 359
Christos Hadjiemmanuil
835
Art. 27 SRMR
Bail-in tool
cluding own funds.368 This amount must be calculated on the basis of the prescribed valuation for the purposes of resolution (so-called “Valuation 2”) of the institution’s assets and liabilities.369 The expression “total liabilities, including own funds”, which appears repeatedly in the legislative text,370 could be read as covering only those own-fund items which retain the form of liability, but not the instruments of ownership. Such a reading, however, is incompatible with the further specification in the present occasion, as well as in two instances in the BRRD, that the relevant contribution is made “by shareholders, the holders of the relevant capital instruments and other bail-inable liabilities”,371 which suggests conclusively that the comparator is the institution’s total balance sheet as seen from the liability side, rather than the total sum of its liabilities properly so called. Significantly, however, the minimum 8 % contribution must be calculated by reference to the time of resolution action, 372 thus excluding historical losses which have already been absorbed by the shareholders through a reduction in own funds prior to the carrying out of Valuation 2.373 For this purpose, it should be immaterial, whether the historical losses have been covered by way of write-down of the relevant liabilities or through the creation of provisions. With regard to group resolution, Art. 21(7b) SRMR clarifies that, if the resolution action is taken in relation to a group’s resolution entity 374 (or, in exceptional circumstances and in deviation from the resolution plan, to a group entity that is not a resolution entity), the amount that is written down or converted at the level of that entity must count towards the 8 % threshold as applicable to the entity concerned.375 160 There is nothing to suggest that the minimum 8 % contribution must represent a total loss for the relevant stakeholders. Depending on their priority ranking and whether or not the 8 % contribution exceeds the amount required for the absorption of past losses, thus further covering part of the recapitalization costs, it will be possible to satisfy the 8 % condition by means of partial write-down or conversion of their claims,376 thus enabling the SRF to provide any additional funds required for the recapitalization. 161 As an alternative to the minimum 8 % contribution as described above, the BRRD allows the national resolution financing arrangements of the Member States to make a contribution to the recapitalization of an institution under resolution if (a) the stakeholders have contributed by way of bail-in an amount not less than 20 % of the riskweighted assets (an amount which, due to the contraction of the assets’ values as a result of risk-weighting, will often be smaller than the 8 % of nominal, unweighted volume of the liabilities), (b) the relevant resolution financing arrangement has accumulated by way of ex-ante contributions more than 3 % of covered deposits of the national banking system, and (c) the institution under resolution has total assets below € 900 billion on a consolidated basis.377 In so far as the resolution actions of the SRM relating to banks
Recital (78) and Art. 27(7)(a) SRMR, as amended by SRMR II. Recital (80) sent. 1 and Art. 27(7)(a) SRMR, in conjunction to Art. 20(1)–(15) SRMR. On the nature of this valuation, see supra, → para. 33. 370 Recital (78) SRMR, Recital (9) SRMR II, Art. 12c(4)–(5), (7)(a) SRMR, as inserted by SRMR II, and Art. 27(7) SRMR. 371 Art. 27(7)(a) SRMR and Arts. 37(10)(a) and 44(5)(a) BRRD, as amended by BRRD II. 372 Art. 27(7)(a) SRMR. 373 Recital (80) sent. 2 SRMR. 374 As defined in Art. 3(1)(24a) SRMR, as inserted by SRMR II. 375 Art. 21(7b) SRMR, as inserted by SRMR II. 376 According to Art. 27(7)(a) SRMR, the contribution of the stakeholders can be made “through writedown, conversion or otherwise”. 377 Art. 44(5)(a) and (8) BRRD, respectively. 368
369
836
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
within the Banking Union are concerned, however, Art. 27(11) SRMR excludes this possibility, leaving the 8 % threshold as the sole benchmark. For the reason set out above (namely, that Art. 27(6) SRMR only applies to going- 162 concern resolution, and not to the capitalization of a bridge bank), the minimum requirement of 8 % bail-in should not apply to bridge banks. Nevertheless, burden-sharing will be necessary in the case of bridge banks too, due to the stipulations of the Banking Communication, which regulates the provision of State aids to credit institutions. 378 The Banking Communication, which predates the BRRD-SRMR regime, envisages burden-sharing by the existing stakeholders in a manner very similar and, by and large, functionally equivalent to the application of the bail-in tool as a prerequisite to the approval of any type of official restructuring aid.379 However, burden-sharing under the Banking Communication presents two important differences from the bail-in tool: it is limited to an institution’s shareholders, other holders of capital instruments, and subordinated creditors,380 but explicitly excludes any mandatory contributions by senior debt holders381; and it does not require any particular minimum level of contribution to loss-absorption by the stakeholders before the State aid can be activated. It must be noted that the view expounded here is incompatible with an early inter- 163 pretation originating from the Commission and incorporated in the EBA’s Single Rulebook Q&A. It is there stated that “in a bail-in context, any contribution of the resolution fund can only be made (i) after there has been bail-in of at least 8 % of the total liabilities, and (ii) only to cover losses not absorbed by liabilities which are excluded by the resolution authority pursuant to Art. 44(3) [BRRD, or Art. 27(5) SRMR]”. 382 The reference on this and many other instances to “losses” tout court, and the absorption thereof, is unhelpful and confusing, because it obscures the critical distinction between the application of bail-in for the purpose of absorbing accrued losses with write-downs and the recapitalization of the surviving operation, as to which the bail-in should contribute by means of the conversion of claims into equity investments with a positive value. Furthermore, this manner of addressing the issues fails to draw the equally important distinction between the recapitalization of the institution under resolution as such and that of a bridge bank, which is a separate, newly established legal entity, with altogether different ownership. The same entry in the Q&A rightly observes that, as regards the use of resolution fund money, Art. 44(5) BRRD is lex specialis in relation to Art. 101(2), which prohibits the direct use of resolution fund money for the absorption of historical losses.383 The same applies, undoubtedly, to the relationship between the corresponding provisions of Arts. 27(7) and 76(3) SRMR. As lex specialis, however, the provision of Art. 27(7) SRMR should be applied with strict reference to the particular subject-matter that it is said to regulate, namely, the recapitalization of the institution under resolution, as distinct from the capitalization of the bridge bank. In a more recent entry to the Q&A,384 the Commission adopts a more nuanced line 164 of argumentation, which could be reconciled with the present analysis. The entry expresses the view that, despite the aforementioned prohibition on the direct absorption of historical losses, in a situation where not all losses can be absorbed by way of bail-in it 378 Commission Communication on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (“Banking Communication”), OJ C 216, 30.7.2013, p. 1. 379 Banking Communication, paras. 15–20 and 40–46. 380 Banking Communication, paras. 40–41. 381 Banking Communication, para. 42. 382 EBA, Single Rulebook Q&A, q. 2015_2172 (2 December 2016). 383 EBA, Single Rulebook Q&A, q. 2015_2172 (2 December 2016). 384 EBA, Single Rulebook Q&A, q. 2018_3699 (2 March 2018).
Christos Hadjiemmanuil
837
Art. 27 SRMR
Bail-in tool
would be possible to use resolution fund moneys for the absorption of the remainder; but this could only happen once the stakeholders have made their minimum 8 % contribution by way of bail-in, and only when the transfer of losses to the resolution fund takes an indirect form, such as the funding of the difference between the value of the assets and the (higher) value of liabilities transferred to a bridge bank.385 This would be consistent with the second sentence of Art. 101(2) BRRD, which permits the indirect transfer of part of the losses of an institution to the resolution financing arrangement, provided that the principles set out in Art. 44 BRRD are applied386 – “principles” in this case taken by the Commission to mean the minimum 8 % contribution. 165 Leaving aside the question of what counts as a “principle” of Arts. 44 BRRD and Art. 27 BRRD, the important point here is that the Commission implicitly accepts that, when applying the bail-in tool, bridge banks should be treated differently from the institutions under resolution themselves. On the other hand, the Commission’s analysis does not address the third possibility, namely, that a bail-in of less than 8 % is sufficient to cover past losses, although not to recapitalize the existing institution or to capitalize a bridge bank. In this case, while it would be patently impermissible to recapitalize the institution under resolution with SRF funds unless the creditors’ contribution equalled or exceeded 8 % of total liabilities, the 8 % benchmark should be irrelevant for the capitalization of the bridge bank, which, on the present view, might be carried out without any mandatory contribution by the old institution’s creditors beyond what is needed for the absorption of historical losses.387 Any further contribution should be treated as discretionary and should be decided in light of the prevailing circumstances.
5. Upper limit of the SRF’s contribution The SRF’s contribution to the recapitalization of the institution under resolution is subject to an upper limit of 5 % of total liabilities, including own funds.388 The relevant amount is measured on the same basis as the minimum 8 % contribution of stakeholders examined above.389 Since the contribution whose conditions are set by Art. 27(7) SRMR is exclusively aimed, according to the immediately preceding paragraph, at the institution’s loss absorption and recapitalization needs,390 this also applies to its cap. The 5 % cap is, accordingly, limited to the SRF’s capital contribution and does not apply to the provision of liquidity support. 167 Exceptionally, in “extraordinary circumstances” capital support beyond the 5 % limit may be provided to the institution through the SRF.391 The type of circumstances that the legislation alludes to is not specified, but their extraordinary nature must, apparently, be evidenced by the seriousness of the situation from the perspective of financial stability. Clear examples would be the simultaneous failure of multiple systemically important institutions as a result of a financial crisis that engulfs the European or na166
EBA, Single Rulebook Q&A, q. 2018_3699 (2 March 2018). Art. 101(2) sent. 2 BRRD and Art. 76(3) sent. 2 SRMR. 387 In other words, in the case of a bridge bank, it is sufficient that the creditors have covered the first of the two figures of which the aggregate amount of Art. 27(13) SRMR is composed; see supra, → paras. 34–37. 388 Art. 27(7)(b) SRMR. Recital (78) sent. 2 SRMR refers to an additional limit to the SRF’s contribution, that is, “the means available to the [SRF] and the amount that can be raised through ex-post contributions within three years”; this reference in the preamble, however, is not given effect in the operative text. It is evident that the reference was replicated from Recital (73) BRRD, which, however, reflects the operative provision of Art. 44(6)(b) BRRD – a point which the corresponding provision of Art. 27(7) SRMR has left out. 389 See supra, → para. 159. 390 Art. 27(6) SRMR. 391 Recital (79) and Art. 27(9) SRMR. 385
386
838
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
tional banking system as a whole, or the undertaking of a resolution action in the context of an ESM-financed country assistance programme.392 In accordance with Art. 27(9) SRMR, the provision of support in excess of the 5 % 168 cap may only happen by tapping specific sources of financing393 and is subject to a harsh precondition, namely, that all unsecured, non-preferred liabilities, other than eligible deposits,394 have been written down or converted in full. The reference to “unsecured, non-preferred” liabilities may create some confusion, 169 because of the recent introduction of a new class of credit institutions’ debt instruments, described as “non-preferred senior” debt. Initially introduced in France in 2016,395 the class was recognized soon afterward as a distinct rank in the pan-European harmonized insolvency hierarchy of the BRRD by means of a special amending directive.396 The class comprises unsecured debt instruments with an original maturity of at least one year and without embedded derivatives, whose contractual documentation and, where applicable, the prospectus accompanying their issuance refer explicitly to their insolvency rank. While nominally forming part of the issuing credit institution’s senior debt liabilities, in fact these instruments rank below its usual senior debt instruments, albeit still above its subordinated debt, followed by the various categories of capital instruments.397 While credit institutions may issue senior debt in either form, only these “senior non preferred” instruments count towards the minimum TLAC requirement applicable to the largest banks (G-SIBs) or the subordination requirements imposed that resolution authorities may impose on a case-by-case basis.398 While the terms used might create the impression that the liabilities referred to in Art. 27(9) SRMR coincide with the new class, this is patently not correct, because the text of the provision predates considerably the creation of the latter and has never been amended. Accordingly, the reference should be read as encompassing every liability of a credit institution, unless it is secured, preferred according to the normal order of insolvency priorities, or excluded on a mandatory basis under Art. 27(3) SRMR. This implies that, for a capital contribution in excess of 5 % to be at all possible, the discretionary exclusion of certain liabilities, which under Art. 27(6) SRMR is a prerequisite for the making of a capital contribution from the SRF,399 must be strictly limited to the full or partial exclusion of the non-DGS-covered part of eligible deposits. In view of the above, the provisions of Art. 27(6)–(7), (9) SRMR, taken as a whole, 170 delineate two distinct paths towards the recapitalization with SRF aid of the institution under resolution: either the partial bail-in of no less than 8 % of total liabilities may be complemented by a contribution of the SRF of up to 5 %; or, in extraordinary circumstances, the full bail-in of all unsecured and non-preferred liabilities, excluding eligible deposits and any mandatorily excluded liabilities, may be followed by an uncapped SRF-based capital contribution. 392 Cf. Art. 30(6) SRMR, which requires the SRB to cooperate with a public financial assistance facility such as the European Stability Mechanism (ESM), in particular when the extraordinary circumstances under discussion prevail. 393 Art. 27(9)–(10) SRMR. See infra, → paras. 172–175. 394 The exempted eligible deposits may include corporate deposits; EBA, Single Rulebook Q&A, q. 2016_2953 (25 November 2016). 395 Art. L.613-30-3 para. I.4 Code monétaire et financier (France), as amended. 396 Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy, OJ L 345, 27.12.2017, p. 96. 397 Art. 108(3) BRRD, as inserted by Directive (EU) 2017/2399. 398 While the descriptor “senior non-preferred” is not used in the amended BRRD, it appears repeatedly in the preamble, Recitals (10)–(12) and (14), of Directive (EU) 2017/2399. 399 See also Recital (79) SRMR.
Christos Hadjiemmanuil
839
Art. 27 SRMR
Bail-in tool
6. Funding of the SRF’s contribution Art. 27(8) SRMR determines the permissible sources of funding of the SRF’s contribution to the recapitalization of the institution under resolution. In principle, this must be financed out of the available amount of ex-ante and/or extraordinary ex-post contributions raised from the Banking Union’s credit institutions through their respective NRAs and transferred to the SRF in pursuance of the Intergovernmental Agreement of 21 May 2014 on the transfer and mutualisation of contributions to the Single Resolution Fund (IGA).400 Since these contributions are subject to upper limits (that is, they cannot exceed annually 0.125 % and 0.375 %, respectively, of the total amount of covered deposits of all credit institutions authorized in the countries of the Banking Union401), the available amount of contributions may be insufficient to finance the contribution, especially if prior resolution actions have depleted the SRF’s resources. In this eventuality, the provision enables the SRF to have recourse to “alternative funding means in accordance with Arts. 73 and 74 [SRMR]”.402 172 Not all of the sources of funding identified in Art. 27(8) SRMR can be utilized for the full amount when extraordinary circumstances justify a capital contribution in excess of the normally applicable 5 % limit. In this case, Art. 27(9) SRMR provides that the SRF may seek funding for that part of the contribution which surpasses the 5 % threshold from “alternative financing sources”, without further elaboration. Despite the inconsistent terminology, there is little doubt that the “alternative financing sources” of the provision in question are, in principle, identical to the alternative funding means of the preceding paragraph. The BRRD and the SRMR contain 17 references to sources of funding that can be used in support of resolution actions when the amounts that the SRF or the national resolution financing arrangements of non-Banking Union Member States have raised from credit institutions by way of ex-ante or ex-post contributions have been depleted or used up to the permissible limit.403 These use a variety of formulations to point to the supplementary sources, but no systematic pattern can be deduced. There are inconsistencies across the preamble and the operative part of the same instrument, 404 across equivalent provisions of the BRRD and the SRMR,405 and across the rendition of the same provisions in different official languages.406 The only reasonable conclusion is that the formulations are not used as distinct technical terms, but colloquially, and that their meaning overlaps and points to the sources of funding referred to in broad, and rather evasive, terms in Arts. 73 and 74 SRMR. 173 Always with regard to the funding of the required amount in excess of the 5 % threshold, and as an alternative or in addition to having resort to the aforementioned sources of funding, Art. 27(10) SRMR enables the SRF to tap any remaining resources raised through ex-ante contributions from credit institutions. In combination, the two para171
Art. 27(8)(a) SRMR, in conjunction with Arts. 67(4) and 70–71 SRMR. Art. 70(2) and Art. 71(1)(2) SRMR, respectively, in conjunction with Art. 69(1) SRMR. 402 Art. 27(8)(b) SRMR. 403 Recital (74) and Arts. 37(10), 44(6), 44(7), 44(12), 105, and 106(1) BRRD and Recitals (79) and (107) and Arts. 18(7), 27(8), 27(9), 50(1), 52(3), 72(1), 73 and 74 SRMR. 404 Art. 27(9) SRMR refers to “alternative funding sources”, but Recital (79) SRMR, which covers the same ground, talks instead of “alternative funding means” – the formulation used in Art. 27(8)(b) SRMR. 405 Art. 27(8)(b) SRMR refers to “alternative financing means”, while the equivalent provision of Art. 44(6)(c) BRRD mentions “alternative funding sources”. 406 Where the English text uses four formulations (alternative funding means, alternative financing sources, alternative financing means, additional financial means), the German uses only three (alternative Finanzierungsmöglichkeiten, alternative Finanzierungsquellen, zusätzliche Finanzmittel), while the French, no less than six (moyens de financement alternatifs, sources de financement alternatives, financement supplémentaire, fonds alternatifs, autre moyen de financement, autres moyens financiers). 400 401
840
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
graphs suggest that the amount in excess of 5 % of total liabilities can be funded from alternative financing sources or existing ex-ante contributions, but not from ex-post contributions. This is peculiar, because Art. 73(2) SRMR stipulates anyhow that the amounts that the SRF raises by accessing alternative funding means must be fully recouped through the levying of contributions, including ex-post contributions, from credit institutions. On closer examination, it appears that the alternative funding means that can be 174 used to complement the SRF’s existing or immediately accessible resources from credit institutions’ contributions, when the latter are depleted or when a particular resolution action hits the 5 % limit, fall under two broad categories: the borrowing of funds from the private sector and/or the engagement in other financial transactions (for instance, the arrangement of credit lines or guarantees and other credit enhancements), which the SRB may undertake on a purely contractual basis407; and the mobilization of official resources of fiscal nature.408 To secure the ready availability of additional funds from either of these sources, the SRB is explicitly mandated to arrange standby facilities, especially with official counterparties.409 A special case of fiscal funding means is envisaged in Art. 37(10) BRRD, in accordance with which, in the very extraordinary situation of a systemic crisis, resolution actions may be funded through the use of the government financial stabilisation tools itemized in the directive.410 These encompass: the public equity support tool, which involves the direct participation of national governments in the recapitalization of the institution under resolution411; and the temporary public ownership tool, under which the institution is nationalized.412 Consistently with Art. 27(7) SRMR, the use of the government financial stabilisation tools is conditional upon a minimum 8 % contribution by the existing stakeholders of the institution’s concerned, while also requiring State aid approval.413 These fiscal tools are thus seen as an extension of the application of the bail-in tool.414 In all cases, but for different reasons, both the private and public alternative funding 175 means may be used to provide interim financing, of short to medium term, which, unless it is recovered in any other way, must be repaid from levies imposed on the banking industry. This is established explicitly in the SRMR in so far as private funding means are concerned.415 Regarding the contribution of fiscal funding means, it was always understood that the public sector should only provide bridge financing, and (leaving aside the special case of the government financial stabilization tools416) the banking industry should be liable to repay the relevant amounts over time by means of levies, including ex-post contributions to the SRF. In this manner, any fiscal intervention Recital (102) sent. 3 and Art. 73(1) SRMR. Art. 73(1) and 74 SRMR. The former provision refers to borrowing from “other third parties”, which may include national governments and European public institutions. 409 Art. 74 SRMR. 410 Art. 37(10) BRRD, in conjunction with Arts. 56–58 BRRD. See also Recital (19) sent. 5–6 SRMR. 411 Art. 57 BRRD. 412 Art. 58 BRRD. 413 Art. 37(10) BRRD. 414 In the architecture of the BRRD, the provisions on the government financial stabilization tools (Arts. 56–58) are included in the concluding subsection 4 (“Bail-in tool: ancillary provisions”) of Title IV, Ch IV, section 5 (Arts. 43–58) on “The bail-in tool”. 415 Art. 73(2)–(3) SRMR. 416 With regard to these tools, Arts. 57(3) and 58(3) BRRD require that the State’s resulting participation in the capital of the institutions concerned must be transferred to the private sector as soon as commercial and financial circumstances allow. Accordingly, the amount paid for the acquisition of the relevant capital instruments will be recuperated, if at all, through their sale to the private acquirers, thus leaving open the possibility of fiscal losses. 407
408
Christos Hadjiemmanuil
841
Art. 27 SRMR
Bail-in tool
should be fiscally neutral over the medium term, thus averting the transfer of losses to taxpayers.417 176 To ensure the sufficiency of the fiscal resources (other than the government financial stabilization tools) backing up the SRF’s contribution-based resources during its initial build-up phase, it was decided early on that bridge financing would be made available from national sources or from the ESM.418 For this purpose, a system of bridge financing arrangements was introduced in 2016, whereby the countries of the Banking Union provided harmonized loan facilities to the SRB to back their respective national compartments of the SRF in the event of funding shortfalls arising from resolution actions within their territory.419 The ESM could also provide a modicum of European-level support for bank restructuring efforts – albeit not to the SRF, but to fiscally constrained national governments pursuing the restructuring of their domestic banking systems. 420 177 Due to the fragmentary and non-credible nature of such interim arrangements, however, it was all along envisaged that a common fiscal backstop would be developed during the transitional phase to provide a reliable and enduring source of last-resort liquidity to the SRF.421 Eventually, on 4 December 2018, the Eurogroup reached an agreement on the need to enhance the role of the ESM, including by assigning to it the task of providing the common backstop to the SRF.422 The proposed reform was subsequently incorporated in the draft revised text of the ESM Treaty, which envisages a new instrument, the “backstop facility”.423 On 3 December 2019, the Eurogroup approved the supporting draft legal documentation424 and set the absolute limit of the amount that the ESM could lend to the Statement of Eurogroup and ECOFIN Ministers on the SRM Backstop (18 December 2013). Statement of Eurogroup and ECOFIN Ministers on the SRM Backstop (18 December 2013). 419 ECOFIN, ‘Statement on Banking Union and Bridge Financing Arrangements for the Single Resolution Fund’ (press release, 8 December 2015) and SRB, ‘Banking Union – Single Resolution Board Completes Signature of Loan Facility Agreements with All 19 Participating Member States’ (press release, 8 February 2017). 420 From its inception, the ESM was enabled to support indirectly the restructuring of the national banking systems of fiscally constrained countries, by extending loans to their governments, which could then use the borrowed funds to recapitalize failing banks; Art. 15 ESM Treaty and ESM Guideline on financial assistance for the recapitalization of financial institutions. This approach, however, saddles the (already fiscally pressed) recipient countries with additional debt. Accordingly, the direct recapitalization of failing banks with ESM moneys, if the relevant national government cannot carry on this task without jeopardizing its own fiscal viability, was contemplated. The direct recapitalization instrument (DRI) was thus inserted in the toolkit of ESM financial assistance instruments on 8 December 2014 (that is, before the European resolution framework’s entry into effect and the creation of the SRF); ESM Board of Governors Resolution, SG/BoG/ 2014/05/04 (8 December 2014) and ESM Guideline on financial assistance for the direct recapitalisation of institutions (8 December 2014). However, the DRI’s exceptionally harsh preconditions ensured that countries would be disinclined to apply for this type of assistance, preferring instead the indirect recapitalization route. See Hadjiemmanuil, in: Amtenbrink and Herrmann (eds), The EU Law of Economic and Monetary Union (2020), 1326, at p. 1334. 421 Statement of Eurogroup and ECOFIN Ministers on the SRM Backstop (18 December 2013). 422 Eurogroup, ‘Eurogroup Report to Leaders on EMU Deepening’ (press release, 4 December 2018), and annexed ‘Terms of Reference of the Common Backstop to the Single Resolution Fund’ (4 December 2018). 423 Art. 18A Draft revised text of the Treaty establishing the European Stability Mechanism, as agreed by the Eurogroup (14 June 2019) (“Draft revised ESM Treaty”). 424 Draft ESM Guideline on the backstop facility to the SRB for the SRF (“draft Backstop Guideline”); draft ESM Pricing Guideline; draft ESM Board of Governors Resolution for the nominal cap and the provisions on the procedure for the verification of compliance with the condition of the permanence of the legal framework for bank resolution; ESM Board of Governors Resolution granting the backstop facility and determining the key financial terms and conditions thereof and for the termination of the backstop facility; and draft ESM Board of Governors Resolution regarding annulment of the instrument for the direct recapitalisation of institutions. These documents will be formally adopted by the ESM decision-making body once the amended ESM Treaty has entered into force. At this point, the DRI (see supra, fn. 420) will be terminated. 417
418
842
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
SRB under the backstop facility at € 68 billion – a figure significantly higher than the expected nominal value of the SRF’s target level of 1 % of total covered deposits in 2024, which is estimated in the range of € 55 billion.425 Intended to be used only as a last resort when the SRF is depleted and unable to borrow funds from other sources at acceptable rates, the backstop facility will be based on a revolving credit line opened by the ESM in favour of the SRB.426 Particular loans or disbursements under the credit line will still require ad hoc approval by the ESM’s Board of Directors (which consists of high-level representatives of the euro area countries’ finance ministries) deciding by mutual agreement. 427 In emergency situations, however, a special voting rule will apply, whereby decisions can be reached by a qualified majority of 85 % of the votes cast (with voting rights allocated according to each country’s participation in the ESM’s authorized capital stock).428 Any disbursements to the ESM will be repayable with moneys from credit institutions’ contributions over a period of three years, which can be extended to up to five years, thus ensuring fiscal neutrality. Non-euro area countries such as Bulgaria and Croatia participating in the Banking Union on the basis of the close cooperation mechanism429 will have to contribute to the financing of the backstop alongside the ESM through parallel and proportional credit lines.430 The backstop facility was originally intended to come into effect in 2024, simultaneously with the completion of the SRF’s built-up of prepaid contributions up to the target level and the transition towards the full mutualization of national contributions in accordance with the IGA. However, the possibility of earlier introduction was left open, if by late 2020 the Banking Union had achieved sufficient progress with regard to risk reduction in the banking sector.431 On this basis, and with the benefit of a joint report by the Commission, the ECB, and the SRB, which showed all riskreduction indicators to have improved significantly in the meantime,432 on 30 November 2020 the Eurogroup decided to bring forward the introduction of the backstop facility to the beginning of 2022.433 Beyond the intrinsic significance of the financial arrangements, the reliance of the 178 SRF’s financial framework on the provisions of the IGA and the ESM Treaty, that is, two intergovernmental instruments operating outside the framework of the EU Treaties, has a little-noticed but nonetheless portentous consequence for the future development 425 Letter of Eurogroup President Mário Centeno to Euro Summit President Charles Michel, 5 December 2019. 426 Art. 18A(1)–(3) Draft revised ESM Treaty. 427 Art. 18A(5) Draft revised ESM Treaty. 428 Art. 18A(6)(1), in conjunction with Art. 2(7) and Annex II Draft revised ESM Treaty. 429 Art. 7 SSMR. 430 Art. 18A(10) Draft revised ESM Treaty and Art. 13 draft Backstop Guideline. 431 Art. 18A(10) Draft revised ESM Treaty and Art. 13 draft Backstop Guideline and annexed ‘Term Sheet on the European Stability Mechanism Reform’ (4 December 2018). 432 European Commission, ECB and SRB, ‘Monitoring Report on Risk Reduction Indicators’ (November 2020). 433 Eurogroup, ‘Statement of the Eurogroup in Inclusive Format on the ESM Reform and the Early Introduction of the Backstop to the Single Resolution Fund’ (press release, 30 November 2020), paras. 1–3 and 12. The legal feasibility of the early introduction of the backstop stability depended on the prior signing and ratification of the revised ESM Treaty, which had been stalled for a whole year due to unrelated Italian reservations. The withdrawal of these reservations cleared the way for the revised ESM Treaty’s accelerated signing and ratification, with a view to complete all necessary national procedures within 2021; Eurogroup, ‘Statement of the Eurogroup in Inclusive Format on the ESM Reform and the Early Introduction of the Backstop to the Single Resolution Fund’ (press release, 30 November 2020), para. 1. Minor consequential amendments to the IGA, bringing forward the mutualization of ex-post contributions to the SRF, should be completed within the same time frame; Eurogroup, ‘Statement of the Eurogroup in Inclusive Format on the ESM Reform and the Early Introduction of the Backstop to the Single Resolution Fund’ (press release, 30 November 2020), paras. 12–13.
Christos Hadjiemmanuil
843
Art. 27 SRMR
Bail-in tool
of European resolution policy and the role that this assigns to the bail-in tool. Specifically, the IGA sought to lock in the bail-in requirements of the BRDD and the SRMR and turn them into permanent and unalterable legal fixtures of bank crisis management. To this effect, the IGA made the transfer of contributions to the SRF and their use on a mutualized basis contingent upon “the permanence of a legal framework on resolution, whose rules are equivalent to, and lead at least to the same result of those under the [SRMR]”, including, notably, the rules on the application of the bail-in tool and the specific thresholds that they establish in relation to the mandatory bail-in of shareholders and creditors.434 This provision of the IGA has been incorporated by express reference in the revised ESM Treaty, which also renders the launch and continuing availability of the backstop facility conditional upon the permanence of the SRMR’s existing legal framework.435 As if the two instruments’ threatened “nuclear option” of withdrawing the SRF’s financial resources was not sufficient to dissuade proposals for the relaxation of the resolution framework’s substantive safeguards, the national capitals insisting on them have further sought to pre-empt the position of the Council, in the event that such proposals were actually tabled. The IGA is thus accompanied by a declaration committing the contracting parties and observers of the intergovernmental conference to resist any such proposal in the Council, unless they all agree otherwise.436
G. Business reorganization plan 179
In accordance with Arts. 51–52 BRRD, the application of the bail-in tool for the purpose of recapitalizing the institution under resolution (that is, for the first of the two purposes of the bail-in tool437) necessitates the production of a business reorganization plan, setting out an appropriate strategy for the institution’s restoration to long-term viability.
I. Preparation and approval of the business reorganization plan 180
Under the BRRD, the business reorganization plan must be prepared by the institution’s management body or the special administrator(s) appointed by its NRA in accordance with Art. 72(1) BRRD, either for the general purpose of managing the institution on its behalf or with the specific objective of drawing up and implementing that plan, as the case may be.438 The draft plan must be submitted to the NRA within a month from the taking of the resolution action or, exceptionally, within two months, if the NRA decides to extend the deadline.439
Art. 9(1) IGA. Art. 18A(8)–(9) Draft revised ESM Treaty. 436 Paras. 9–10 Declaration No 1 IGA. As observed by Wojcik, Common Market Law Review 53 (2016), 91, at p. 104: “All this is rather curious. It means that EU Member States pre-establish outside the framework of the EU Treaties and in a formal way their position and action within the Council of Ministers in case of a legislative proposal.” Interestingly, while not purporting to pre-empt future actions, the Eurogroup’s statement announcing the accelerated introduction of the ESM’s backstop facility underlines the commitment to the further strengthening of banks’ loss absorbing capacity and the minimum 8 % bail-in threshold and, in addition, suggests that the State-aid framework applicable to banks might need to be tightened. 437 Art. 27(1)(1)(a) SRMR. See supra, → paras. 12–21. 438 Art. 51(2) BRRD, in conjunction with Art. 72(1) BRRD. 439 Art. 52(1) sent. 1 (3) BRRD. 434
435
844
Christos Hadjiemmanuil
Art. 27 SRMR
Bail-in tool
The NRA, which for this purpose must act in agreement with the institution’s supervisory authority, has one month from the date of submission in which to assess the plan’s likelihood of success and either approve it or require its amendment in a way that addresses its concerns.440 In the latter case, a revised plan must be submitted within two weeks, and the NRA has one week to approve it or require its further amendment. 441 The plan as finally approved must be implemented by the institution’s management body or the person(s) appointed by the NRA, who are also required to submit a progress report at least semi-annually throughout the process of reorganization.442 Subsequent revisions of the plan are possible only where they appear necessary to the NRA, acting in agreement with the supervisory authority.443 Art. 27(16) SRMR adapts the assessment process as set out in Art. 52 BRRD to the specificities of the SRM. Thus, in situations where the SRB has applied the bail-in tool for the recapitalization of an institution under its authority, the relevant NRA remains responsible for receiving the plan, but must immediately transmit it to the SRB. 444 Within the following two weeks, the NRA must communicate to the SRB its own assessment of the plan. The SRB’s assessment of the plan’s likelihood of success must be completed within one month from the date of the plan’s submission and always in agreement with the relevant NCA or the ECB, depending on who has the supervisory responsibility.445 If the SRB is satisfied that the plan can bring the institution back to longterm viability, it must allow the NRA to approve it; if not, it must instruct the NRA to notify the institution’s management body or the special administrator(s) appointed by the NRA, as the case may be, of its concerns and to require the plan’s amendment in a way that addresses them. In either case, the agreement of the NCA or the ECB is necessary.446 In situations where the SRB requires the plan’s amendment, the two-week period for the submission of the revised plan and the one-week period for its assessment apply just as in a purely national resolution process under the BRRD, the only difference being that the notifications between the institution and the SRB are not direct, but take place through the relevant NRA, whose transmission of the revised plan to the SRB must be accompanied by its own assessment of it.447 With specific reference to group resolution, the BRRD provides that, in situations where the bail-in tool is applied to more than one entities within a group, the plan must be prepared at the level of the Union parent institution, cover all institutions in the group, and submitted to the group-level resolution authority (which, depending on the circumstances, may be the SRB itself).448 Where the SRB has responsibility, Art. 27(16) SRMR requires the SRB to communicate the group business reorganization plan to the EBA.449
Art. 52(7)–(8) BRRD. Art. 52(9) BRRD. 442 Art. 52(10) BRRD. 443 Art. 52(11) BRRD. 444 Art. 27(16)(1) SRMR. 445 Art. 27(16)(2) SRMR. 446 Art. 27(16)(3) SRMR. 447 Art. 27(16)(4) SRMR. 448 Art. 52(2) BRRD and Art. 5(1) SRMR. 449 Art. 27(16)(5) SRMR. 440
441
Christos Hadjiemmanuil
845
181
182
183
184
Art. 27 SRMR
Bail-in tool
II. Content of the business reorganization plan As already mentioned,450 according to Art. 27(1)(2) SRMR, the resolution scheme adopted by the SRB must establish the objectives and minimum content of the business reorganisation plan.451 This requirement must be read in conjunction with the provisions of the BRRD on the content of business reorganization plans. These provisions establish certain mandatory elements that must be present in all cases, and thus operate as a floor to the SRB’s specification of the minimum content in its resolution schemes. 186 Specifically, according to the BRRD, the business reorganization plan must include a detailed diagnosis of the factors and problems that caused the institution’s failure, a description of the intended recovery and reorganization measures, and a timetable for implementation.452 The measures identified in the plan may include the reorganization of the institution’s business, changes to its operational systems and infrastructures, the termination of loss-making activities, the restructuring of activities so as to make them competitive, or the sale of assets and/or business lines.453 In all cases, the proposed measures must be able to restore the institution as a whole or, at least, parts of its business, to long-term viability within a reasonable timeframe. The plan must be grounded on realistic assumptions as to the economic and financial market conditions under which its implementation is likely to happen, take into account both best-case and worst-case scenarios, identify key vulnerabilities, and compare assumptions with appropriate sector-wide benchmarks.454 If the institution’s resolution benefits from some type of public support, thus requiring approval by the Commission under the European State aid framework, the content of the business reorganization plan must be compatible with the restructuring plan that the institution needs to submit to the Commission under that framework.455 187 The mandatory minimum content of the business reorganization plan and the related progress reports is defined in greater detail in a regulatory technical standard prepared by EBA and enacted by the Commission in the form of Commission Delegated Regulation (EU) 2016/1400.456 According to this instrument, the plan must identify and address the causes of the institution's failure and set out how the institution will be restored to long-term viability. The reorganisation strategy should be prudent and take into account the strengths and weaknesses of the institution, the relevant market, and the macro-economic situation. A related set of EBA guidelines specifies the minimum criteria for the approval of business reorganization plans, including the appropriateness of the strategy contained therein, the credibility of the assumptions on which they are based, the inclusion of concrete performance indicators, and the consistency with other 185
See supra, → para. 30. Art. 27(1)(2)(c) SRMR. 452 Art. 52(5) BRRD. 453 Art. 52(6) BRRD. 454 Art. 51(4) BRRD. 455 Art. 52(1) sent. 2 BRRD. 456 Commission Delegated Regulation (EU) 2016/1400 of 10 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the minimum elements of a business reorganisation plan and the minimum contents of the reports on the progress in the implementation of the plan, OJ L 228, 23.8.2016, p. 1. The instrument was adopted on the basis of mandates in Art. 52(12) BRRD. 450 451
846
Christos Hadjiemmanuil
Art. 28 SRMR
Monitoring by the Board
public policy objectives and rules, and provides guidance on the coordination between resolution and supervisory authorities in the assessment process.457
Art. 28 SRMR Monitoring by the Board 1. The Board shall closely monitor the execution of the resolution scheme by the national resolution authorities. For that purpose, the national resolution authorities shall: (a) cooperate with and assist the Board in the performance of its monitoring duty; (b) provide, at regular intervals established by the Board, accurate, reliable and complete information on the execution of the resolution scheme, the application of the resolution tools and the exercise of the resolution powers, that might be requested by the Board, including on the following: (i) the operation and financial situation of the institution under resolution, the bridge institution and the asset management vehicle; (ii) the treatment that shareholders and creditors would have received in the liquidation of the institution under normal insolvency proceedings; (iii) any ongoing court proceedings relating to the liquidation of the assets of the institution under resolution, to challenges to the resolution decision and to the valuation or relating to applications for compensation filed by the shareholders or creditors; (iv) the appointment, removal or replacement of evaluators, administrators, accountants, lawyers and other professionals that may be necessary to assist the national resolution authority, and on the performance of their duties; (v) any other matter that is relevant for the execution of the resolution scheme including any potential infringement of the safeguards provided for in Directive 2014/59/EU that may be referred to by the Board; (vi) the extent to which, and manner in which, the powers of the national resolution authorities referred to in Articles 63 to 72 of Directive 2014/59/EU are exercised by them; (vii) the economic viability, feasibility, and implementation of the business reorganisation plan provided for in Article 27(16). The national resolution authorities shall submit to the Board a final report on the execution of the resolution scheme. 2. On the basis of the information provided, the Board may give instructions to the national resolution authorities as to any aspect of the execution of the resolution scheme, and in particular the elements referred to in Article 23 and to the exercise of the resolution powers. 3. Where necessary in order to achieve the resolution objectives, the resolution scheme may be amended. The procedure laid down in Article 18 shall apply.
457 EBA, Guidelines on business reorganisation plans, EBA/GL/2015/21 (2015). Adopted on the basis of Art. 52(13) BRRD, these guidelines are addressed to NRAs and NCAs and operate on the basis of the “comply or explain” principle.
Christos Hadjiemmanuil
847
Art. 28 SRMR
Monitoring by the Board
A. Monitoring by the SRB of the NRAs’ execution of resolution schemes . . . . . . .
1
B. NRAs’ obligation to cooperate and provide information . . . . . . . . . . . . . . . . . . . . .
6
C. SRB instructions to the NRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
D. Amendment of the resolution scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
A. Monitoring by the SRB of the NRAs’ execution of resolution schemes In the case of failing institutions and groups subject to the SRB’s direct responsibility 1, the SRMR allocates to the SRB the responsibility for the launching of the resolution action and the preparation of the resolution scheme.2 However, under the SRMR’s two-level resolution process, the SRB is not responsible for the actual execution of the resolution scheme, which takes place instead of under the responsibility of the relevant NRAs,3 which for this purpose must exercise the resolution powers vested upon them by the national legislation transposing the BRRD.4 This system of indirect execution, which is regulated by Art. 29 SRMR,5 raises an evident principal-agent problem, since there can be no advance certainty that the NRAs will apply the SRB’s resolution schemes faithfully and in every particular. Accordingly, for the system to operate reliably in accordance with the legislative articulation of roles, the principal (that is, the SRB) must be in a position to verify the degree of conformity of the agent’s (the NRAs’) actions with its resolution schemes and, when these actions are not consistent with the latter, to take steps to correct the situation. 2 Art. 28 SRMR establishes the normative framework for the SRB’s monitoring of the NRA’s implementation of the resolution schemes and, in combination with Art. 29(2)– (4) SRMR, the administrative powers for corrective action. Taken together, the two Arts. individuate the general duty of close cooperation between the SRB and the NRAs6 in the specific context of the resolution scheme execution. 3 Specifically, the opening sentence of Art. 28 SRMR imposes on the SRB a positive duty to closely monitor the execution of its resolution schemes.7 Because of this provision, it would be a dereliction of duty for the SRB to leave the NRAs unsupervised, assuming that they will perform loyally and accurately their implementation function under the SRMR, or to select to review the situation only sporadically and/or retrospectively. The SRB is, instead, required to actively perform appropriate monitoring on a continuous basis from the moment that the resolution scheme is adopted until it is fully imple1
1 Namely, significant institutions, any less significant institutions that the ECB has exceptionally decided to supervise directly, and all cross-border banking groups; Art. 7(2) SRMR. 2 The SRB’s adoption of the resolution scheme is subject to the approval of the Commission and, in certain respects, the Council; Art. 18(1), (6)‒(8) SRMR. 3 For this reason, the SRB decisions on the adoption of resolution schemes are addressed, not to the institutions concerned, but to their NRAs. See, eg, Decision of the SRB in its Executive Session of 7 June 2017 (SRB/EES/2017/08) concerning the adoption of a resolution scheme in respect of Banco Popular Español, SA, (the “Insitution”) with a Legal Entity Identifier: 80H66LPTVDLMOP28XF25, addressed to FROB. 4 Arts. 18(9), sent. 2, 23(1) and 29(1) SRMR. 5 See infra, → Art. 29 para. 1 et seq. 6 Arts. 30(2) and 31(1) sent. 1 SRMR. 7 Art. 28(1) sent. 1 SRMR.
848
Christos Hadjiemmanuil
Art. 28 SRMR
Monitoring by the Board
mented. As a logical corollary, it is the responsibility of the SRB to organize its internal working arrangements in a manner likely to achieve the performance of this task. 8 For the rest, the main purpose of Art. 28(1) SRMR is to impose on the NRAs detailed 4 obligations to furnish information to the SRB, thus enabling the latter to keep their implementation actions under close watch. With regard to the possibility of corrective steps, Art. 28(2)‒(3) SRMR confers on 5 the SRB the powers, first, to address to the NRAs instructions in relation to the execution of the resolution schemes9 and, second, to revise its original plans by amending the resolution scheme itself, if this appears necessary for the achievement of the resolution objectives.10 These forms of later-stage intervention ensure the SRB’s overall control of the resolution action’s implementation phase while preserving the indirect nature of its involvement. In contrast, Art. 29(2) SRMR introduces a more intrusive reserve power, whereby, when an NRA fails to apply its decisions, the SRB may simply sidestep it and address orders directly to the institution under resolution.11
B. NRAs’ obligation to cooperate and provide information For the most part, the text of Art. 28(1) SRMR is addressed to the NRAs, which are 6 placed under a general duty to cooperate with the SRB and assist it in the performance of its monitoring function in relation to the execution of its resolution scheme. 12 This duty is ancillary to the NRAs’ duty under Art. 29 SRMR to implement the resolution decisions that the SRB addresses to them. It is evident that the SRB’s performance of its monitoring function depends first and 7 foremost on its ability to gain a clear understanding of the developing situation and to observe whether the NRAs actually comply with its resolution schemes. For this reason, it is necessary to overcome information asymmetries and blind spots and ensure full access to the available information. For this reason, the provision supplements the NRA’s general duty of cooperation with a much more detailed obligation to provide relevant information to the SRB.13 The obligation is framed by reference to the content, quality, and periodicity of the 8 information. To start with, the SRB need not address to the NRAs one-off requests for information, but may require them to submit particular types of information periodically, at regular intervals established at its discretion. In qualitative terms, any information submitted by the NRAs must be “accurate, reliable and complete”. Thematically, the information covered by the obligation must relate to the execution of the resolution scheme, the application of the resolution tools, and the exercise of the resolution powers. Within this range, the precise scope of the information that an NRA is required to supply is determined by the SRB, which can formulate its requests for information according to its needs and priorities. Nonetheless, the legislative text outlines by way of 8 Ensuring the performance of the monitoring task is the responsibility of the SRB in its executive session, except if the organization of the task necessitates a modification of the agency’s internal structures, for which responsibility lies with the plenary session; Arts. 49(1)(p), and 54(1)(b) SRMR. 9 Art. 28(2) SRMR. 10 Art. 28(3) SRMR. 11 See infra, → Art. 29 paras. 6, 34–39. 12 Art. 28(1)(1) sent. 2 (a) SRMR. See also Art. 15(2) SRB Decision of 17 December 2018 (SRB/PS/ 2018/15) establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (“COFRA”). 13 Art. 28(1)(1) sent. 2 (a) SRMR.
Christos Hadjiemmanuil
849
Art. 28 SRMR
Monitoring by the Board
an indicative14 list the matters that the NRAs are expected to report. By illustrating the general objects of the NRAs’ obligation, the list serves simultaneously, albeit obliquely, to define the scope of the SRB’s own monitoring responsibility. The types of information itemized in the list include15: (a) the extent and manner of exercise of resolution powers by the NRA concerned; (b) the appointment, removal, or replacement of evaluators, administrators, accountants, lawyers, and other professionals assisting the NRA, and the performance of their duties; (c) the operation and financial situation of the institution under resolution, the bridge institution and the asset management vehicle; (d) the economic viability, feasibility, and implementation of the business reorganisation plan; (e) the potential treatment of shareholders and creditors in the counterfactual scenario of the failed institution’s liquidation under normal insolvency proceedings; (f) any other matter that is relevant for the execution of the resolution scheme, including any potential infringement of the safeguards provided for in the BRRD16; and (g) any ongoing court proceedings relating to the liquidation of the assets of the institution under resolution, to challenges to the resolution decision and to the valuation, or to applications for compensation filed by the shareholders or creditors. As a final informational contribution to the SRB’s monitoring work, once they have completed their execution of the resolution scheme the NRAs are required to submit to the SRB a final report on the matter.17 10 According to the SRB’s decision on the SRB-NRA cooperation framework (commonly referred to as “COFRA”),18 to perform their obligation to provide to the SRB the information mentioned above, including the final report, the NRAs can seek the assistance of the relevant IRT.19 9
C. SRB instructions to the NRAs 11
Art. 28(2) SRMR grants to the SRB an important power of intervention with regard to the implementation of its resolution schemes. Specifically, the SRB is empowered to address instructions to the NRAs on any aspect of the execution of these schemes. The provision refers explicitly that to any of the elements mentioned in Art. 23 SRMR, which regulates the content of the resolution scheme. Relevant matters include: the details of the resolution tools to be applied to the institution under resolution20; the specific amounts and purposes for which financial assistance may be provided by the SRF21; and 14 In view of the introductory words employed in the legislative text (“including on the following”), it is natural to consider the list either as merely indicative (that is, non-exhaustive) or as inclusive (in the sense of bringing within the scope of the obligation matters which would otherwise be outside its scope, thus enlarging the natural meaning of the basic description). As a matter of logic, however, the presence in the list of a catch-all reference to “any other matter that is relevant for the execution of the resolution scheme” excludes the possibility that a matter relevant to the SRB’s monitoring has been left outside and turns, in effect, the list exhaustive. 15 The presentation does not follow the order of the legislative text. 16 Arts. 73‒80 BRRD. These include the “no creditor worse off ” safeguard of Art. 75 BRRD. 17 Art. 28(1)(2) SRMR. See also Art. 15(4) COFRA. 18 COFRA, adopted in pursuance of Art. 31(1)(1) sent. 1 SRMR. See infra, → Art. 31 paras. 9–14. 19 Art. 15(4) COFRA. 20 Art. 23(1) SRMR. 21 Art. 23(1) SRMR.
850
Christos Hadjiemmanuil
Art. 28 SRMR
Monitoring by the Board
the appointment of a special manager for the institution under resolution.22 It thus becomes clear that the instructions can be used by the SRB to achieve a more exhaustive specification of the intended intervention. The instructions can also be used to guide the precise exercise by the NRAs of the resolution powers23 through which this intervention will be implemented.24 Linking the SRB’s power to give instructions with the NRAs’ obligation to supply information on the execution of the resolution scheme, as set out in the previous paragraph,25 the text states that instructions are given “[o]n the basis of the information provided [by the NRAs]”.26 It is hardly plausible, however, that the instructions can only be given in response to information derived from the NRAs, as distinct from information derived from other sources or the SRB’s own information collection and ongoing assessment of the situation. The SRB may use this power to react to a situation where an NRA misinterprets, applies in a mistaken way, or even willingly flouts its decision on the resolution scheme. One might consider that the latter possibility is beyond the scope of the provision, because the SRMR treats separately and explicitly the situation of non-compliance by an NRA in Art. 29(2) SRMR. That provision, however, has a more specific intent, namely, to confer on the SRB the power to intervene in the execution of the resolution plan by addressing orders directly to the institution under resolution.27 There is no reason for which the availability of a reserve power of direct intervention should impede the SRB to use its power under discussion to command the recalcitrant NRA to take particular steps to correct the situation, especially since this type of intervention is more consistent with the SRMR’s general system of indirect execution of resolution schemes. The SRB’s power to address instructions, however, is neither limited to, nor primarily concerned with, the correction of instances of observed non-compliance or faulty compliance on the part of the NRAs. It can also be used to individuate the details of the execution of the original scheme and to provide more specific guidance to the NRAs concerned at a more advanced stage of the resolution process – possibly, in order to take into account novel or more specific information and the developing circumstances. Used in this manner, the SRB’s instructions reduce the residual discretion of the NRAs in relation to matters that the original scheme left unspecified or under-defined. 28 On the other hand, the power of instruction cannot be used legitimately in order to correct or amend existing aspects of the original scheme that the SRB now considers obsolete or inappropriate. A revision of the substance of the original scheme, as distinct from the further elaboration of the manner of its execution, would constitute an amendment, which could only be effected in accordance with the procedural requirements set out in the next, and final, paragraph of Art. 28 SRMR. Due to their institution-specific subject-matter, the instructions in relation to the execution of the resolution scheme must be adopted by the SRB in its extended executive session, which includes representatives of the NRAs involved.29 In the terminology used Art. 23(5) SRMR. That is, the powers available to the NRAs under the national legislation transposing the Arts. 63‒72 BRRD. 24 Art. 28(2) SRMR, in fine. 25 Art. 28(1) SRMR. 26 Art. 28(2) SRMR. 27 Art. 29(2)(1) SRMR. 28 Conceivably, the SRB’s guidelines and general instructions may also constrain the discretion of the NRAs, if these happen to concern the implementation of resolution schemes. See Art. 31(1)(2)(a) SRMR; and Art. 5a(3) COFRA. 29 Arts. 53(3)‒(4) and 55 SRMR. 22
23
Christos Hadjiemmanuil
851
12
13
14
15
Art. 28 SRMR
Monitoring by the Board
within the SRM and given legal basis in COFRA, the instructions that the SRB may issue in pursuance of Art. 28(2) SRMR are classified under the wider category of “specific instructions”, that is, instructions related to the tasks of particular NRAs in connection to specific entities or groups under direct SRB responsibility, which are addressed to the relevant NRAs.30 According to COFRA, when the SRB addresses a specific instruction to an NRA, it is required to support its decision with reasons and make available to the NRA “relevant supporting documentation and any other information or documentation available to it, which is necessary under applicable law and/or EU law for [the NRA] to comply with the instruction”.31 The provision is of clear significance in the present case. Furthermore, the decision containing the instruction must specify a reasonable time limit for its implementation; the time limit must be set in view of existing restrictions under the relevant national administrative and procedural law, which the NRA concerned must report to the SRB in advance.32 The instructions of the SRB must be implemented by the recipient NRA in the same manner as the resolution scheme itself, that is, in accordance with the provisions of Art. 29 SRMR.33 In the same vein, where an NRA fails to comply with an instruction under Art. 28(2) SRMR, the reserve power of the SRB to address orders directly to the institution under resolution comes into play.34 16 Notwithstanding that they are carried out as administrative measures of national law and are issued under the NRAs’ own name, the actions taken by the NRAs in compliance with the instructions of the SRB cannot be imputed to the NRAs’ autonomous decision-making power. This raises significant problems relating to the attribution of the relevant decisions to the national or the supranational decision-making level and, consequently, the proper procedural treatment of legal disputes relating to their content and validity. A brief outline of the problem can be found in the analysis of Art. 29 SMRM.35
D. Amendment of the resolution scheme 17
The concluding provision of Art. 28(3) SRMR enables the amendment of resolution schemes, if this appears necessary in order to achieve the resolution objectives. 36 As the achievement of these objectives37 is not an all-or-nothing matter, but a question of degree and balancing,38 the SRB may use its power of amendment in order to optimize the resolution scheme as appropriate in the light of the more precise information gained during the execution phase and its ongoing assessment of the situation. The SRB’s dissatisfaction with the way in which the relevant NRAs implement their decisions is a conceivable, but by no means the central, scenario where an amendment may be advisable. 30 Art. 6(1)‒(2) COFRA. In addition to the instructions issued by the SRB under Art. 28(2) SRMR, the category includes instructions in pursuance of Arts. 8(3), 10(11), 12(5) and (7) (as replaced by SRMR II), 15(4), and 21(8) SRMR. For the identity of reason, and despite the lack of an explicit reference in Art. 6(2) COFRA, the category also covers instructions issued under Art. 22(1) and 27(16) SRMR. These specific instructions constitute, in their turn, one of the five categories of “legal instruments” of the SRB, as defined in COFRA; Art. 2(p) COFRA. The other categories of SRB legal instruments are: guidelines and general instructions; guidance notes; warnings; and recommendations; Arts. 5a‒5b and 7‒8 COFRA. Essentially, the legal instruments coincide with the formal decisions addressed to the NRAs by means of which the SRB performs its controlling role within the SRM and ensures its consistent functioning. 31 Art. 6(3) COFRA. 32 Art. 11(2) sent. 1-3 COFRA. 33 Art. 11(1) COFRA. 34 Art. 11(3) COFRA. 35 See infra, → Art. 29 paras. 15–33. 36 Art. 28(3) sent. 1 SRMR. 37 As defined in Arts. 3(1)(8) and 14(2) SRMR. 38 Cf. Art. 14(3) SRMR.
852
Christos Hadjiemmanuil
Art. 28 SRMR
Monitoring by the Board
Any number of technical or economic parameters, including intervening considerations relating to the wider economic and legal environment, can be of potential relevance to the success of the resolution effort, thus justifying the amendment of the resolution scheme, even though it is hardly practicable or credible for the SRB to revise its original decisions without good and substantial reason. The procedure for the amendment of a resolution scheme is identical to that for 18 its original adoption.39 Accordingly, immediately after its adoption by the SRB in an extended executive session, the amendment will need to be transmitted to the Commission for its endorsement. 40 The involvement of the Council will also be necessary if the Commission is not satisfied that the proposed amendment meets the public interest criterion, or if the amendment relates to the SRF’s funding participation and the Commission seeks to modify the amount of assistance proposed by the SRB.41 The extraordinarily strict timeframe for the approval of resolution schemes42 also applies to the procedure for their amendment, since the legislative provision does not draw any distinction in this respect. The same is true the requirement that the Commission and the Council, as the case may be, should provide reasons for the exercise of their power of objection. 43 Strangely, notwithstanding some differences in the linguistic formulation, the power 19 to retrospectively change course granted to the SRB by the provision under discussion coincides entirely in terms of its scope and effect with that of another SRMR provision, namely, that of the fourth paragraph of Art. 23 SRMR. The wording of the latter, to the effect that, “[i]n the course of the resolution process, the Board may amend and update their solution scheme”,44 is more explicit with regard to two quite evident points, namely, that the SRB is the subject of the power of amendment and that any amendment must take place in the course of the resolution process, that is, before the completion of the execution of the resolution scheme. Furthermore, rather than referring merely to amendments, Art. 23 SRMR mentions “amendments and updates”. The drafters’ variable turns of phrase, however, cannot hide the fact that, at the end of the day, the substance of the two provisions is identical. A final difference is that under Art. 23 SRMR the power is exercisable “as appropriate in light of the circumstances of the case”, while under Article 28 SRMR, “where necessary in order to achieve the resolution objectives”. Again, despite the different formulation, there is little difference in substance between the two provisions, because the appropriateness of a resolution action, including the resolution scheme, is in all cases linked to its necessity and proportionality for the achievement of one or more of the resolution objectives.45 The two provisions thus duplicate unnecessarily the same power of the SRB. Good 20 drafting would require the elimination of one or the other. This is not the only instance of redundant text in the SRMR,46 which is marred at several points by sloppy, convoluted, and inconsequential drafting. In the present case, the explanation for the repetition relates to the two provisions’ antecedents in the Commission’s original proposal.47 Ac39 Art. 28(3) sent. 2 SRMR, with reference to Art. 18 SRMR (meaning, in practice, to Art. 18(6)‒(7), (9)‒(10) SRMR). 40 Art. 18(6)(1)–(2) SRMR. 41 Art. 18(6)(3)–(4) SRMR. 42 Art. 18(6)(1)–(3),(5) and (7) SRMR. 43 Art. 18(6) SRMR. 44 Art. 23(4) sent. 1 SRMR. 45 Cf. Recital (67) SRMR and Arts. 6(5), 14(1), 18(5), and 23(2)-(3) SRMR. 46 For instance, Art. 27(5) SRMR contains a mere reference to the requirements on the priority of claims in Art. 17 SRMR, which, in turn, does not contain specific rules, but points to the relevant provisions of the BRRD; and Art. 31(1) sent. 1 SRMR duplicates part of the normative content of Art. 30(2) SRMR. 47 COM (2013) 520 final (10 July 2013), draft SRMR text, Arts. 20(2) and 25(3).
Christos Hadjiemmanuil
853
Art. 29 SRMR
Implementation of decisions under this Regulation
cording to that proposal, the placement of an institution under resolution would be decided by the Commission, acting on its own initiative or following a communication by the ECB or an NRA indicating the institution’s impending failure or a recommendation by the SRB to place the institution under resolution.48 The Commission’s decision should specify the framework of the resolution tools to be applied49 and should be addressed to the SRB, which, taking over from the Commission, should draft the resolution scheme within the parameters set by the latter.50 The SRB would be nonetheless able to recommend to the Commission to amend the framework of the resolution tools.51 In this scheme, there were two separate decisions that could be amended: the Commission’s decision on the framework52; and the SRB’s more specific and technical resolution scheme.53 The elimination of the Commission’s power to determine the framework of the resolution tools and its replacement by the procedure of Art. 18 SRMR, which assigns to the SRB the responsibility for drafting the resolution schemes as stand-alone instruments that include the choice of resolution tools and confines the Commission to the more limited role of endorsing the relevant SRB’s decisions or objecting to them, rendered the draft provision on the amendment of the Commission’s now extinct decision meaningless. This should have led to the removal of the relevant paragraph from the final text of Art. 25 SRMR.54 Instead, the text was simply redrafted to refer to the SRB’s own decision, creating the present duplication.
Art. 29 SRMR Implementation of decisions under this Regulation 1. National authorities shall take the necessary action to implement decisions referred to in this Regulation resolution, in particular by exercising control over the entities and groups referred to in Article 7(2), and the entities and groups referred to in Article 7(4)(b) and (5) where the conditions for the application of those paragraphs are met, by taking the necessary measures in accordance with Article 35 or 72 of Directive 2014/59/EU and by ensuring that the safeguards provided for in that Directive are complied with. National resolution authorities shall implement all decisions addressed to them by the Board. For those purposes, subject to this Regulation, they shall exercise their powers under national law transposing Directive 2014/59/EU and in accordance with the conditions laid down in national law. National resolution authorities shall fully inform the Board of the exercise of those powers. Any action they take shall comply with the Board's decisions pursuant to this Regulation. When implementing those decisions, the national resolution authorities shall ensure that the applicable safeguards provided for in Directive 2014/59/EU are complied with. 2. Where a national resolution authority has not applied or has not complied with a decision by the Board pursuant to this Regulation or has applied it in a way which Art. 16(6) draft SRMR. Art. 16(7) sent. 1 draft SRMR. 50 Art. 16(8) sent. 1 draft SRMR. 51 Art. 16(12) draft SRMR. 52 Art. 25(3) draft SRMR. 53 Art. 20(2) draft SRMR. 54 Just as it led to the elimination in what is now Art. 23(4) SRMR, fourth para of a requirement to the effect that any amendment of the SRB’s resolution scheme should remain within the four corners of the Commission’s decision. 48
49
854
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
poses a threat to any of the resolution objectives under Article 14 or to the efficient implementation of the resolution scheme, the Board may order an institution under resolution: (a) in the event of action pursuant to Article 18, to transfer to another person specified rights, assets or liabilities of an institution under resolution; (b) in the event of action pursuant to Article 18, to require the conversion of any debt instruments which contain a contractual term for conversion in the circumstances provided for in Article 21; (c) to adopt any other necessary action to comply with the decision in question. The Board shall adopt a decision referred to in point (c) of the first subparagraph only if the measure significantly addresses the threat to the relevant resolution objective or to the efficient implementation of the resolution scheme. Before deciding to impose any measure the Board shall notify the national resolution authorities concerned and the Commission of the measure it intends to take. That notification shall include details of the envisaged measures, the reasons for those measures and details of when the measures are intended to take effect. The notification shall be made not less than 24 hours before the measures are to take effect. In exceptional circumstances where it is not possible to give 24 hours' notice, the Board may make the notification less than 24 hours before the measures are intended to take effect. 3. The institution under resolution shall comply with any decision taken referred to in paragraph 2. Those decisions shall prevail over any previous decision adopted by the national resolution authorities on the same matter. 4. When taking action in relation to issues which are subject to a decision taken pursuant to paragraph 2, national resolution authorities shall comply with that decision. 5. The Board shall publish on its official website either a copy of the resolution scheme or a notice summarising the effects of the resolution action, and in particular the effects on retail customers. The national resolution authorities shall comply with the applicable procedural obligations provided for in Article 83 of Directive 2014/59/EU. Bibliography Fabian Amtenbrink, ‘The Application of National Law by the European Central Bank: Challenging European Legal Doctrine?’, in: ECB Legal Conference 2019: Building Bridges: Central Banking Law in an Interconnected World (ECB, Frankfurt am Main 2019), 136; Karen Banks, ‘Incorrect Implementation of EU Directives: What Effects for the ECB and the CJEU, and What mechanisms for Rectification?’, in: ECB Legal Conference 2019: Building Bridges: Central Banking Law in an Interconnected World (ECB, Frankfurt am Main 2019), 121; Lena Boucon and Daniela Jaros, ‘The Application of National Law by the European Central Bank within the EU Banking Union’s Single Supervisory Mechanism: A New Mode of European Integration?’, European Journal of Legal Studies, Special Issue 10 (2018), 155; Filipe Brito Bastos, ‘Judicial Review of Composite Administrative Procedures in the Single Supervisory Mechanism: Berlusconi’, CMLR 56 (2019), 1355; id., ‘Derivative Illegality in European Composite Administrative Procedures’, CMLR 55 (2018), 101; id., ‘The Borelli Doctrine Revisited: Three Issues of Coherence in a Landmark Ruling for EU Administrative Justice’, Review of European Administrative Law 8 (2015), 269; Rene Brunner, ‘Dual Remedy Against State Aid Decisions’, European State Aid Law Quarterly 18 (2019), 413; Merijn Chamon, EU Agencies: Legal and Political Limits to the Transformation of the EU Administration (Oxford University Press, Oxford 2016); id., ‘The Empowerment of Agencies Under the Meroni Doctrine and Article 114 TFEU: Comment on United Kingdom v. Parliament and Council (Short-Selling) and the Proposed Single Resolution Mechanism’, ELR 39 (2014), 380; Florin Coman-Kund and Fabian Amtenbrink, ‘On the Scope and Limits of the Application of National Law by the European Central Bank within the Single Supervisory Mechanism’, BFLR 33 (2018), 133; Sergio Alonso de León, Composite Administrative Procedures in the European Union (Iustel Publicaciones, Madrid 2017); Federico Della Negra and René Smits, ‘The Banking Union and Union Courts: Overview of Cases as at 1 September
Christos Hadjiemmanuil
855
Art. 29 SRMR
Implementation of decisions under this Regulation
2021’, European Banking Institute website, available at: ; Yves Herinckx, ‘Judicial Protection in the Single Resolution Mechanism’, in: Robby Houben and Werner Vandenbruwaene (eds), The Single Resolution Mechanism (Cambridge University Press, Cambridge 2017), 77; Herwig C.H. Hofmann, ‘Composite Decision Making Procedures in EU Administrative Law’, in: Herwig C.H. Hofmann and Alexander H. Türk (eds), Legal Challenges in EU Administrative Law: Towards an Integrated Administration (Edward Elgar Publishing, Cheltenham 2009), 136; Alexander Kornezov, ‘The Application of National Law by the ECB – A Maze of (Un)Answered Questions’, in: ESCB Legal Conference 2016 (ECB, Frankfurt am Main 2017), 270; Gianni Lo Schiavo, ‘The ECB and Its Application of National Law in the SSM’, in Gianni Lo Schiavo (ed), The European Banking Union and the Role of Law (Edward Elgar Publishing, Cheltenham 2019), 177; id., ‘A Judicial Re-Thinking on the Delegation of Powers to European Agencies under EU Law? Comment on Case C-270/12 UK v Council and Parliament’, German Law Journal 16 (2015), 315; Phedon Nicolaides and Nadir Preziosi, ‘Discretion and Accountability: The ESMA Judgment and the Meroni Doctrine’, Bruges European Economic Research Papers No 30/2014 (2014); Miro Prek, ‘Mutual Judicial Deference? The Delineation of the (Interpretative) Competence of European and National Courts in the Judicial Review of ECB Acts Based on National Law’, in: ECB Legal Conference 2019: Building Bridges: Central Banking Law in an Interconnected World (ECB, Frankfurt am Main 2019), 129; Jolien Timmermans, ‘Guess Who? The SRB as the Accountable Actor in Legal Review Procedures’, Review of European Administrative Law 12 (2019), 155; Koen Verhoest, ‘Agencification in Europe’, in: Edoardo Ongaro and Sandra van Thiel (eds), The Palgrave Handbook of Public Administration and Management in Europe (Palgrave Macmillan, Basingstroke 2018), 327; Koen Verhoest et al. (eds), Government Agencies: Practices and Lessons from 30 Countries (Palgrave Macmillan, Basingstroke 2012); Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’, JFR 1 (2015), 226; id., ‘The Application of National Banking Supervision Law by the ECB: Three Parallel Modes of Executing EU Law?’, MJ 21 (2014), 89. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. NRA responsibility for the execution of the resolution scheme . . . . . . . . . . . . . . I. Indirect implementation of SRB decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope of the NRAs’ duty to implement SRB decisions . . . . . . . . . . . . . . . . . . . . . . . . III. Means of performance of the duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 4 8 10
C. Nature and reviewability of the NRAs’ implementing acts . . . . . . . . . . . . . . . . . . . I. Composite administrative procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Reviewability and jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Procedural restrictions of national proceedings under the BRRD . . . . . . . . . . . . IV. Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 15 19 23 25
D. Civil liability for actions taken in the course of implementation . . . . . . . . . . . . .
29
E. SRB’s power of direct intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
F. Discretionary decisions of the SRB and the Meroni doctrine . . . . . . . . . . . . . . . . .
40
G. Publicity of the resolution scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
A. Introduction 1
In the SRM, the resolution of institutions and groups subject to the SRB’s direct responsibility (meaning primarily the EBU’s significant institutions and cross-border banking groups1) is carried out as a two-stage process, whereby the specification of the appropriate resolution action is clearly distinguished from its implementation. Each of
1 Technically, the class of relevant institutions include: all significant institutions within the EBU; any less significant institutions that the ECB may have exceptionally decided to supervise directly; all crossborder groups, as defined in Art. 3(1)(24) SRMR (that is, banking groups whose member entities are established in more than one participating States); any less significant institutions over which the SRB has decided to exercise direct responsibility; and the less significant institutions and groups from the countries (if any) which have decided to assign to the SRB direct responsibility for their whole banking sector; Art. 7(2)(4)(b) and (5) SRMR.
856
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
these aspects, or stages, of the resolution action2 is entrusted to a different level of the mechanism. The launching of the resolution action and the determination of its content is decided 2 at the European level by the SRB, subject to the approval of the Commission and, in certain respects, the Council.3 In particular, the SRB is responsible for determining whether the entity or group meets the conditions for resolution and, if this is the case, for adopting the requisite resolution scheme.4 By its decision on the resolution scheme, the SRB places the entity under resolution, determines the applicable resolution tools, and, where appropriate, activates the SRF’s contribution to the funding of the resolution action.5 The SRMR obliges the SRB to specify the intended intervention in considerable detail in the resolution scheme.6 Narrower technical aspects and implementation details may be left open for determination in the course of the scheme’s execution; alternatively, the SRB may choose to address in the resolution scheme any aspect of the resolution action that it considers appropriate. In principle, the SRB’s direct role in the resolution action is concluded with the final- 3 ization of its decision on the resolution scheme and the latter’s formal endorsement by the Commission.7 The actual execution of the resolution scheme and the exercise for this purpose of the pertinent resolution powers is a responsibility, not of the SRB, but of the relevant NRAs, acting in accordance with the national legal provisions transposing the BRRD.8 For this reason, the SRB does not address the decision on the adoption of the resolution scheme to the institution affected thereby, but to its domestic NRA. 9 From this point onwards, the SRB is generally confined to the exercise of indirect control in the form of monitoring the actions of the NRAs and the issuance of instructions to them under Art. 28 SRMR.10 Art. 29(1) SRMR complements the picture by establishing the general obligation of the NRAs to implement the decisions of the SRB and the interrelationship between European and national law in this context (see infra, → paras. 4–33). Despite this obligation, it is always conceivable that an NRA may fail to implement or implement in an improper manner the decisions of the SRB. To provide a remedy for situations of deficient implementation, Art. 29(2)–(4) SRMR establishes a reserve power enabling the SRB to bypass non-complying NRAs and address orders directly to the private entities concerned (see infra, → paras. 34–48). Almost as an af-
2 The term “resolution action” is applied in the SRMR both to the decision to place an entity under resolution and to the application of a resolution tool or the exercise of one or more resolution powers, thus encompassing both the making of the relevant decision and its implementation; Art. 3(1)(10) SRMR. 3 Art. 18(1)(6)‒(8) SRMR. 4 Art. 18(1) SRMR. 5 Art. 18(6) SRMR. 6 The minimum mandatory content of the resolution scheme encompasses the essential parameters of the intended intervention by way of application of the chosen resolution tools, as well as the specific amounts and purposes for which SRF moneys may be used; Arts. 23(1), 24(2), 25(2), 26(2), and 27(1)(2) SRMR. Where appropriate, the resolution scheme must provide for the appointment by the relevant NRA of a special manager for the institution under resolution; Art. 23(5) SRMR. In the case of group resolution, the resolution scheme must set out the overall configuration of the resolution actions to be taken in relation to the Union parent undertaking or particular group entities established in the EBU; Art. 23(2) SRMR. 7 See, e.g., Commission Decision (EU) 2017/1246 of 7 June 2017 endorsing the resolution scheme for Banco Popular Español S.A., OJ C 178, 6.6.2017, p. 15. 8 Arts. 18(9) sent. 2, 23(1), and 29(1) SRMR. 9 See, e.g., Decision of the SRB in its Executive Session of 7 June 2017 concerning the adoption of a resolution scheme in respect of Banco Popular Español, SA, (the “Institution”) with a Legal Entity Identifier: 80H66LPTVDLMOP28XF25, addressed to FROB (SRB/EES/2017/08). 10 Art. 28(1)–(2) SRMR.
Christos Hadjiemmanuil
857
Art. 29 SRMR
Implementation of decisions under this Regulation
terthought, Art. 29(5) SRMR contains provisions on the publicity of the resolution scheme or, at least, its effects on third parties (see infra, → paras. 49–51).
B. NRA responsibility for the execution of the resolution scheme I. Indirect implementation of SRB decisions Art. 29 SRMR is specifically concerned with the implementation stage of the composite decision-making procedures11 relating to the resolution of institutions falling under the SRB’s direct responsibility. At this stage, the relevant NRAs are called to implement the SRB’s resolution scheme in accordance with its terms and any further instructions addressed to them by the SRB.12 In this context, Art. 29(1) SRMR stipulates that the NRAs shall take the necessary action to implement decisions referred to in the SRMR and, more specifically, all decisions addressed to them by the SRB.13 To comply with this obligation, the NRAs must cooperate with the SRB, take all the necessary steps under national administrative law to implement its decisions, take control of the institution under resolution as necessary,14 implement the resolution tools and apply the resolution measures envisaged in the resolution scheme by exercising their resolution powers under national law transposing the BRRD,15 or, where the SRB finds that the resolution of the failing entity is not in the public interest, initiate the national insolvency proceedings. In accordance with the provisions of Art. 28 SRMR, the SRB must closely monitor the execution of the resolution scheme by the NRAs, relying for this purpose on information that the NRAs are obliged to submit to it, and may give instructions to them if this appears necessary.16 The SRB may only intervene directly and apply itself the resolution tools and measures if the NRAs fail to comply with its decisions.17 5 The SRMR’s system of indirect implementation of the decisions taken at the European level by the SRB fundamentally follows (subject to certain modifications) the general model of indirect application of European measures by the national authorities of the Member States. Indeed, in the Union’s institutional structure, the default position is that the measures adopted at the European level, including those which are directly applicable, rely for their actual execution on the administrative efforts of the authorities of the Member States. Raised to the status of a general principle of EU law, this model obliges the Member States to ensure the effective implementation of the European measures in their territory by taking national administrative action as necessary. 18 The requisite administrative acts are adopted in accordance with the procedural and substantive rules of the applicable national law, but always subject to the need to ensure the effective 4
11 Hofmann, in: Hofmann and Türk (eds), Legal Challenges in EU Administrative Law: Towards an Integrated Administration (2009), 136; and de León, Composite Administrative Procedures in the European Union (2017). 12 Arts. 18(9) sent. 2, 23(1), and 29(1) SRMR; and Art. 11(1) SRB Decision of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15) (“COFRA”). On the COFRA, see Hadjiemmanuil, comment on Art. 31 SRMR, paras. 9–14. 13 Art. 29(1)(1) SRMR. 14 Art. 29(1)(1) sent. 1 SRMR. 15 Art. 29(1)(2) SRMR. 16 See supra, → Art. 28 paras. 1 et seq. 17 Art. 29(2)–(4) SRMR; see infra, → paras. 34–39. 18 Joined Cases 205–215/82, Deutsche Milchkontor GmbH and others v Germany, ECLI:EU:C:1983:233, para. 17.
858
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
and uniform application of the European provisions. The system relies for its effectiveness on the Member States’ duty of sincere cooperation and, if this fails, the ex post enforcement mechanism of infringement proceedings; but it can be enhanced with contemporaneous mechanisms of control of the national implementation efforts by the EU institution or body responsible for the relevant subject-matter. These mechanisms may involve the monitoring of the actions of the relevant national authorities and/or the issuance of instructions to them. This model of indirect implementation of European decisions is relied upon to a large extent by the SSMR19 and more consistently by the SRMR in order to ensure the effectiveness, coherence, and uniformity of the actions taken by the EBU’s two mechanisms. Art. 29(1) SRMR, in conjunction with Art. 28 SRMR, contains an explicit articulation of this approach in relation to the execution of resolution schemes. This has important implications for the nature and content of the legal acts adopted by the SRB and the NRAs in this context. An alternative method of implementation, used with increasing frequency in areas 6 governed by regulations, involves the vesting on the relevant EU institution or body of direct powers of application of the European provisions, that is, with powers to adopt administrative acts addressed directly to the private persons or entities affected thereby, thus by-passing altogether the national authorities. As discussed in detail below (see infra, → paras. 34–39), this possibility is used exceptionally in Art. 29 SRMR as a reserve power, aimed at ensuring effective execution of the SRB’s decisions in situations where the relevant NRAs fail to take action or take action which does not comply with the SRB’s instructions.20 In the EBU, a unique third possibility is being used, namely, the direct exercise by an 7 EU institution such as the ECB of administrative powers with regard to individual credit institutions. In this specific context, the ECB (which in its other activities is governed solely by the procedural and substantive rules of EU law and is judicially accountable exclusively to the CJEU) issues individual administrative acts in accordance with the relevant national legislation transposing provisions in directives.21 Despite its centrality in the supervisory architecture instituted by the SSMR, this third model is not used in the SRMR.
II. Scope of the NRAs’ duty to implement SRB decisions According to the text of Art. 29(1) SRMR, the material scope of the NRAs’ duty to 8 implement encompasses “decisions referred to in [the SRMR]”.22 Oddly, the provision Arts. 6(3), (5)(a) and 9(1)(3) SRMR. See Witte, MJ 21 (2014), 89, at pp. 97–105. Art. 29(2)–(4) SRMR. 21 Arts. 4(3)(1), and 16(2) SRMR. This arrangement is largely unprecedented and constitutes a major innovation of the SSMR. See Witte, MJ 21 (2014), 89, at pp. 105–109. Nonetheless, the application of national law by an EU institution such as the ECB raises complex questions concerning the scope of the applicable national legislation, the significance of national jurisprudence for the interpretation of that legislation by the ECB, and the ECB’s appropriate stance in situations of non-transposition or inadequate transposition at the national level of the relevant provisions in directives. See generally: Kornezov, in: ESCB Legal Conference 2016 (2017), 270; Coman-Kund and Amtenbrink, BLFR 33 (2018), 133; Boucon and Jaros, European Journal of Legal Studies, Special Issue 10 (2018), 155; Lo Schiavo, in: Lo Schiavo (ed), The European Banking Union and the Role of Law (2019), 177; and the contributions of Banks, Prek, and Amtenbring in: ECB (ed), ECB Legal Conference 2019: Building Bridges: Central Banking Law in an Interconnected World (Frankfurt 2019), 121, 129, and 136, respectively. On the significance of national judicial interpretations of the applicable national provisions, see Cases T-133/16 to T-136/16, Caisse régionale de crédit agricole mutuel Alpes Provence v ECB, EU:T:2018:219. 22 Art. 29(1) sent. 1 SRMR. 19
20
Christos Hadjiemmanuil
859
Art. 29 SRMR
Implementation of decisions under this Regulation
further demands that NRAs implement “all decisions addressed them by the [SRB]”. 23 The latter stipulation is essentially redundant, because the SRB’s decision-making powers derive in their entirety from the SRMR, so that all SRB decisions addressed to an NRA are grounded on that regulation and are, whether explicitly or implicitly, and whether in specific or general terms, referred to therein. Conversely, the decisions under the SRMR that the NRAs will be competent to implement are precisely those emanating from the SRB. The main exception concerns Commission decisions approving the State aid elements of resolution schemes (including the provision of financial assistance by the SRF). These may include conditions that the NRAs must take into consideration and may need to implement.24 To enable the enforcement of such conditions by the NRAs, the SRMR requires specifically the Member States to vest them with the necessary powers.25 9 A more difficult question is whether the decisions covered by Art. 29(1) SRMR are limited to those taken in the course of the main resolution process (that is, those defining resolution actions and related crisis management measures 26) or include, in addition, decisions taken in the pre-resolution phases (that is, in the context of resolution planning and early intervention). A systematic reading of the provision would support the first view, since the provision is placed in the final article of the regulation’s chapter on resolution,27 rather than in the general provisions.28 Moreover, there is no explicit link between the provision and those relating to resolution planning or early intervention. On the other hand, a grammatical interpretation of the provision might lead to a different conclusion, because the provision refers to “all” decisions that the SRB addresses to the NRAs and, somewhat more elusively, to “decisions referred to in [the SRMR]”, thus casting its net widely. Admittedly, the means by which the provision expects the NRAs to perform their duty are limited, as discussed below, to their use of resolution powers; but this is framed in non-exclusive terms (“in particular”). In practice, the NRAs failure to implement other decisions of the SRB (e.g., concerning measures ensuring the resolvability of particular institutions, the prohibition of distributions, the application of the MREL, or the raising of contributions to the SRF29) would constitute a violation of specific duties under the relevant provisions or of their general duty of close cooperation under Arts. 30(2) and 31(1) SRMR and, more generally, of their duty of loyal cooperation under Art. 4(3) TEU. Conceivably, the main practical implication of a wide reading might be to turn non-compliance with those SRB decisions which are not connected to the resolution process per se into a ground for the exercise of the SRB’s reserve power of direct intervention.30 This, however, is not possible, because that power is exercisable solely in the form of orders addressed to “an institution under resolution” – that is, as part of the main resolution process.31
Art. 29(1) sent. 2 SRMR. Art. 19(3)(5)–(6) SRMR. 25 Art. 19(11) SRMR. 26 Art. 2(1)(102) BRRD. 27 Part II, “Specific provisions”, Title I, “Functions within the SRMR and procedural rules”, Chapter 3, “Resolution” (Arts. 14–19) SRMR. 28 Part I, “General provisions” (Arts. 1–7) SRMR. 29 Arts. 9(10)–(12), 10a (as inserted by SRMR II), 12(5), (7) (as replaced by SRMR II), and 70(1) or 71(1)(1) sent. 1 (as the case may be) SRMR. 30 Art. 29(2)–(4) SRMR. See infra, → paras. 34–39. 31 Art. 29(2)(1) SRMR. 23 24
860
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
III. Means of performance of the duty As for the means whereby the NRAs may carry out their duty to implement the 10 resolution scheme and related decisions of the SRB, the SRMR points explicitly to the exercise of their powers under national law transposing the BRRD.32 More specifically (and by way of unnecessary duplication, since the relevant powers are a subset of the wider class of NRA powers set out in the BRRD), the text refers 33 to the NRAs’ powers to assume control over the institution under resolution by replacing its management body with a special manager,34 as well as to exercise themselves, either directly or through specially appointed persons, all the powers of the shareholders and the management body and to manage and dispose of the assets and property of the institution under resolution.35 Even though there is no further specification of the applicable powers, it is obvious 11 that, essentially, these coincide with the resolution powers provided for in Chapter VI of Title IV BRRD.36 These encompass a very wide and intrusive range of powers to intervene in the corporate and contractual affairs of institutions under resolution, including powers to access information, to take control of the institution under resolution and exercise rights and powers conferred upon its shareholders and management body, to transfer its shares or other instruments of ownership, to transfer its rights, assets, and/or liabilities, to reduce the principal amount of liabilities, convert them into equity, or alter their maturity, and to cancel or reduce the nominal amount of shares or other instruments of ownership.37 The SRMR notes that the relevant powers of the NRAs must be exercised in ac- 12 cordance with the conditions (evidently, both procedural and substantive) laid down in national law.38 In this regard, in yet another manifestation of repetitiveness and surplusage, the text stresses twice and in almost identical terms that, when executing the European decisions, the NRAs must comply with “the safeguards provided for in [the BRRD]”.39 These are set out in Arts. 73–80 BRRD and cover: the application of the no-creditor-worse-off (“NCWO”) principle in the case of bail-in40; the equal treatment of shareholders and creditors and the protection of counterparties in the case of partial transfers41; the protection of title transfer financial collateral, set-off and netting arrangements, and, more generally, security arrangements42; the protection of structured
Art. 29(1)(2) sent. 1 SRMR. Art. 29(1)(1) sent. 1 SRMR. 34 Art. 35 BRRD. 35 Art. 72(1) BRRD. 36 Title IV, “Resolution”, Chapter VI, “Resolution powers” (Arts. 63–72) BRRD. Strictly speaking, the power of appointment of a special manager under Art. 35 BRRD is not a resolution power, because it is set in a separate chapter of that directive (Title IV, Chapter III BRRD) and is available not only in relation to institutions under resolution, but also in relation to institutions placed in liquidation, if the national insolvency law provides for the appointment of insolvency management. Moreover, various other provisions in Title IV, Chapter 4, “Resolution tools” (Arts. 37–58) and Chapter 5, “Write down or conversion of capital instruments and eligible liabilities” (Arts. 59–62) BRRD may provide the ground for the conferral of administrative powers to the NRAs. Nonetheless, all these powers are essentially subsumed under the more generic resolution powers of Title IV, Chapter VI BRRD, including, in particular, the general powers of Art. 63 BRRD and the ancillary powers of Art. 64 BRRD. 37 Art. 63(1) BRRD. 38 Art. 29(1)(2) sent. 1 SRMR. 39 Art. 29(1)(1) sent. 1, (1)(3) SRMR. 40 Arts. 73(b) and 74–75 BRRD. 41 Arts. 73(a) and 76 SRMR. 42 Arts. 77–78 SRMR. 32 33
Christos Hadjiemmanuil
861
Art. 29 SRMR
Implementation of decisions under this Regulation
finance arrangements and covered bonds43; and the prohibition of disruption of trading, clearing, and settlement systems, especially through the cancellation, amendment, or non-enforceability of relevant transfer orders and collateral and netting arrangements. 44 The text does not include any reference to the BRRD’s provisions on the NRAs’ procedural obligations and duty of professional secrecy,45 or to the judicial protections that must be available at the national level.46 Nonetheless, there can be no doubt that these are also applicable, if for not any other reason, simply because the national provisions transposing those obligations form an essential part of the conditions of national law that, as mentioned above, the NRAs are required to comply with whenever they exercise their powers. 13 In addition, the text stipulates that any action taken by the NRAs must comply with the decisions of the SRB.47 Since the actions under discussion consist anyhow in the execution of the relevant SRB decisions, the only meaning of the stipulation can be that it is not sufficient for the NRAs to bring about the intended effect, but they also need to comply with the decisions in an operational sense, that is,they must exercise their national powers in the manner suggested by the SRB and communicated to them in an appropriate form. If not included in the resolution scheme itself, guidance on the resolution scheme’s execution and, in particular, on the manner in which NRAs are expected to exercise their resolution powers may be included in specific or general instructions of the SRB. The former relate to a particular entity or group and are addressed to the relevant NRAs, while the latter set uniform terms for the performance of tasks and the adoption of resolution decisions by all NRAs.48 The issuance by the SRB’s extended executive session (that is, the executive session with the participation of the representatives of the NRAs immediately concerned by the resolution action 49) of specific instructions in relation to the execution of resolution actions is explicitly provided for in the SRM’s internal cooperation framework (COFRA).50 The SRB must support its specific instructions with reasons, relevant supporting documentation, and any other documentation or information that the NRAs may need in order to comply with the instructions in accordance with EU or national law.51 The recipient NRA must implement the SRB’s specific instructions within a reasonable time limit, which is set by the SRB after consulting that NRA and taking into account any restrictions under the applicable national administrative and procedural law.52 Due to the identity of the relevant considerations, the same requirements should apply when the SRB’s directions to the NRAs are included in the resolution scheme itself. 14 Finally, repeating an information requirement already set out in Art. 28(1) SRMR, Art. 29(1) SRMR obliges NRAs to keep the SRB fully informed of the actual exercise of their powers.53
Art. 79 SRMR. Art. 80 SRMR. 45 Title IV, Chapter VIII, “Procedural obligations” (Arts. 81–84) BRRD. 46 Title IV, Chapter IX, “Right of appeal and exclusion of other actions” (Arts. 85–86) BRRD. 47 Art. 29(1)(2) sent. 3 SRMR. 48 Arts. 5a(1) and 6(1) COFRA. 49 Art. 53(1)–(2) SRMR; and Art. 2(n) COFRA. 50 Art. 6(2) sent. 2(e)-(g) COFRA. 51 Art. 6(3) COFRA. 52 Art. 11(2) COFRA. 53 Art. 29(1)(2) sent. 2 SRMR. Art. 11(2) sent. 5 COFRA establishes a related obligation of NRAs to inform the SRB of the way in which they implement specific instructions. 43
44
862
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
C. Nature and reviewability of the NRAs’ implementing acts I. Composite administrative procedure The measures taken by the NRAs for the purpose of implementing the resolutions 15 schemes, decisions, or instructions of the SRB are final administrative acts altering the legal position of private parties (namely, the institution under resolution and/or its various stakeholders) in a binding, and potentially negative, way. As already mentioned, their immediate legal basis lies in the national legislation transposing the BRRD, which vests the NRAs with the requisite resolution powers.54 Nonetheless, while nominally the relevant powers belong to the NRAs and are exercised by them, their actual use is predetermined by the SRB. More precisely, the SRB adopts formal decisions under EU law, which it addresses to the NRAs. These decisions prefigure the ensuing national administrative acts. To the extent that the SRB decisions dictate in specific terms the substantive content of such national acts, they exhaust the discretion that the applicable national provisions entrust to the NRAs; the latter, being under a duty to implement faithfully the SRB’s commands, lose their decisional autonomy with regard to the relevant issues.55 Overall, the system operates as a composite administrative process, whereby public authorities operating at different levels (the European and the national) take back-to-back decisions in a manner that leaves the ultimate decision-maker (that is, the relevant NRA) bereft of meaningful discretion on the matter at hand. This can blur the picture with regard to the attribution of responsibility for the administrative intervention to one or the other authority and the appropriate venues for judicial review. The SRMR delineates the means of judicial control of administrative acts adopted 16 under its provisions. In particular, the legislative text notes CJEU’s jurisdiction to review the legality of the decisions of the SRB, to give preliminary rulings on their validity and interpretation upon request of national judicial authorities, and to determine the SRB’s non-contractual liability for illegal decisions.56 Assuming that the scope of Art. 29(1) SRMR is limited to the execution of crisis management measures, 57 which cannot be appealed before the SRM’s internal Appeal Panel,58 the CJEU’s jurisdiction effectively exhausts the avenues for seeking legal relief against the SRB in the present context. For their part, national judicial authorities are expected to review, in accordance with their national law, the legality of decisions adopted by the NRAs and to determine their non-contractual liability.59 This seemingly neat division of jurisdiction follows strictly the general system of separate and mutually exclusive procedures of judicial review for Union and national acts. However, it does not enlighten us as to the procedural significance of the dependence of the national decisions on those taken at the European level. The decisional entanglement of the two tiers of the SRM renders problematical the identification of the appropriate forum and form of a potential challenge and, related to it, the standing of different categories of potential applicants for review. In so far as the SRM’s internal interactions are concerned, challenges against the SRB’s 17 decisions by the recipient Member States and/or their NRAs are always possible. The Recital (28) and Art. 29(1)(2) sent. 1 SRMR. See, e.g., Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C:2019:1036, paras. 55–58, on the national adminstrative acts of NRAs implementing the SRB’s assessments of individual institutions‘ ex ante contributions to the SRF. 56 Recital (120) sent. 2–3 and Arts. 86(1)–(2) and 87(3)–(5) SRMR; and Arts. 263 and 267 TFEU. 57 See supra, → paras. 8–9. 58 Art. 85(3)(1) SRMR. 59 Recital (120) sent. 4 SRMR. 54
55
Christos Hadjiemmanuil
863
Art. 29 SRMR
Implementation of decisions under this Regulation
same applies to challenges by the EU institutions. However, the practical significance of such “internal” challenges would appear to be rather limited. 18 Of much greater significance are the “external” challenges to the validity and execution of the SRB’s instructions and/or the NRAs’ execution thereof by the private persons concerned, namely, the institutions under resolution and their stakeholders. In this connection, one may ask several interrelated questions: Precisely which acts are reviewable at the instance of affected private parties, the decisions of the SRB, the implementing acts of the NRAs, or both? Who has sufficient interest and standing to bring proceedings? What is the applicable standard of review, and whose decision-making is the target – and do the same criteria apply in respect to these issues at both the European and the national levels? Presently (as of September 2021) these questions cannot be answered in a definite way, due to the dearth of authoritative judicial interpretations of the SRMR (with the exception of several decisions on contributions to the SRF). Thus, the following paragraphs constitute no more than a provisional mapping exercise. The situation, however, is likely to become much clearer in the light of the CJEU’s forthcoming judgments in the long series of actions relating to the resolution of Banco Popular60 and certain other pending cases.
II. Reviewability and jurisdiction 19
In composite administrative procedures, involving sequential decision-making at the supranational and national levels, the imputation to one or the other level of the final effect on the legal position of the affected parties has significant implications for the allocation of jurisdiction to the CJEU or the national courts and the scope and nature of the judicial review. In this regard, composite procedures must be distinguished along two axes: firstly, whether they are initiated or motivated by a preparatory act of the relevant national authority, which occasions a final decision by an EU institution or body, or vice versa; and secondly, whether the preparatory decision at one level is binding on the final decision-maker at the other level or, on the contrary, leaves the issue open for discretionary determination by the final decision-maker. A line of decisions of the CJEU culminating in the recent Berlusconi case61 – an EBU case concerning the assessment by the SSM of the acquisition of a qualifying holding in a credit institution 62– establishes that each combination has different jurisdictional consequences.63 60 Between June 2016 and May 2020, no less than 97 cases were lodged before the General Court in relation to that event; see the list in Della Negra and Smits, ‘The Banking Union and Union Courts: Overview of Cases as at 1 September 2021’, available at: . 61 Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023. See Bastos, CMLR 56 (2019), 1355. 62 Arts. 4(1)(c), and 15 SSMR; and Arts. 85–87 SSM‑FR. This is classified as one of the “common procedures” in SSM‑FR, Part V. The CJEU describes it as a “specific cooperation mechanism” in Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, para 48. In his opinion, AG Manuel Campos Sánchez-Bordona utilizes throughout the term “composite administrative procedure”; ECLI:EU:C:2018:502. 63 A good example from the SRM is that of the informational inputs of the NRAs to the SRB’s assessment of institutions’ ex ante contributions to the SRF (which must be classified as acts preparatory to a final decision of an EU body), as compared to the actions of the NRAs with regard to the implementation of the final assessments (which are national administrative acts of largely non-discretionary nature, since they are confined to the notification of the assessments to the institutions concerned and the collection of the relevant sums, without any possibility of re-examination of the assessments); see Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C:2019:1036, paras. 37–54 and 55–61, respectively.
864
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
–
Art. 29 SRMR
In a “bottom-up” scenario such as that at issue in Berlusconi, where an EU institution adopts the final act following a preparatory decision of a national authority but without being bound by it, only the CJEU is competent to review that act. 64 This follows from the general norm of exclusive jurisdiction of European courts for the review of the legality of acts adopted by EU institutions and bodies. In the past, it was unclear, whether the CJEU’s jurisdiction encompassed the collateral review of the national preparatory decision. The idea was resisted on the ground that this would bring the CJEU within the domain of national law. Nonetheless, the Berlusconi judgment now establishes that the CJEU has exclusive jurisdiction to examine “any defects vitiating the preparatory acts or proposals of the national authorities that would be such as to affect the validity of th[e] final decision”.65 This is justified by reference to the need for effective judicial protection of the persons concerned, which requires that the whole procedure be subject to single judicial review proceedings, conducted by the Union courts alone once the decision bringing the procedure to an end has been adopted.66 On their part, national courts should refrain from reviewing the preparatory acts, because the availability of parallel proceedings at the national and European levels would create the risk of divergent judicial assessments of that part of the composite procedure; this would compromise the CJEU’s exclusive jurisdiction to assess the final (European) decision, especially in situations where the latter follows (and is, accordingly, premised upon) the national authority’s analysis and proposals.67 In full contrast to the previous scenario, in bottom-up proceedings where the national preparatory decisions are binding on the European decision-makers, according to the seminal Borelli case effective judicial protection is unavailable at the supranational level: the CJEU lacks jurisdiction to review the national decisions, while the validity of the final Union acts is unaffected by any irregularity by which those national decisions are tainted.68 This leaves the responsibility in the hands of the national courts, which are called to rule on the legality of the national preparatory decisions “on the same terms on which they review any definitive measure adopted by the same national authority”.69 To ensure effective judicial protection in these circumstances, the national courts must consider the relevant actions for annulment admissible, even if the national rules of procedure would suggest otherwise.70 The insistence of the CJEU on jurisdictional exclusivity and unitary review proceedings disappears when the dispute concerns “top-down” composite procedures, where
–
–
Case C‑64/05 P, Sweden v Commission, ECLI:EU:C:2007:802, paras. 93 and 94. Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, para.44; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C: 2019:1036, para. 39. 66 Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, para. 49; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C: 2019:1036, para. 42. 67 Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, paras. 48–51; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C: 2019:1036, paras. 51–53. 68 Case C-97/91, Oleificio Borelli SpA v Commission, ECLI:EU:C:1992:491, paras. 9-10 and 12; and Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, para. 45. On Borelli, see Hofmann, in: Hofmann and Türk (eds), Legal Challenges in EU Administrative Law: Towards an Integrated Administration (2009), 136, at pp. 153-155; Bastos, Review of European Administrative Law 8 (2015), 269; and Bastos, CMLR 55 (2018), 101. 69 Case C-97/91, Oleificio Borelli SpA v Commission, ECLI:EU:C:1992:491, para. 13; and Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, para. 46. 70 Case C-97/91, Oleificio Borelli SpA v Commission, ECLI:EU:C:1992:491, para. 13; and Case C-219/17, Berlusconi and Fininvest v Banca d'Italia, ECLI:EU:C:2018:1023, para. 46. 64
65
Christos Hadjiemmanuil
865
Art. 29 SRMR
Implementation of decisions under this Regulation
the national authorities adopt operative administrative decisions in pursuance of a prior decision of an EU institution or body. It is clear that, in this scenario, the national decisions are subject to the exclusive jurisdiction of the national courts; but the national courts are not allowed to review incidentally the motivating measure of EU law, even if this has influenced the final decision or determines its content with binding effect.71 Accordingly, in order to establish derivative illegality, a preliminary reference to the CJEU will be necessary.72 At the same time, parallel proceedings for the annulment of the motivating measure may be brought by way of an action before the General Court, always subject to the Union rules on admissibility and standing. 20 The case law outlined above leads comfortably to the conclusion that both the instructions of the SRB and the measures of the NRAs executing them are reviewable in principle. The situation under discussion is the reverse of that of the supervisory procedure of the SSM at issue in Berlusconi in a double sense: the procedure is topdown, rather than bottom-up; and, quite unlike the ECB, here the final decision-makers, namely, the NRAs, have little or no discretion and serve essentially as hierarchically subordinate local agents of the SRB. 21 In so far as any detrimental changes in the legal position of the institutions under resolution and, depending on the content of the measures, of particular stakeholders of those institutions (shareholders, liability holders, counterparties, etc.) are concerned, the operative measures are, evidently, the decisions taken by the NRAs under national law. Calculated to produce direct and enforceable legal results in relation to third parties, these decisions fall patently within the range of reviewable acts under effectively every national system of administrative law. The institutions under resolution and any other parties to which these measures are directed will thus be able to challenge them before the national administrative courts. To the extent, however, that these decisions are adopted by the NRAs on a non-discretionary basis and in performance of their duty to comply with the directions of the SRB, as incorporated in the resolution scheme or in general or specific instructions, the applicants for review will fail to show that they were ultra vires, unless they also attack collaterally the motivating decision of the SRB. 73 Since the national courts lack the competence to evaluate even incidentally the legality of Union acts, this will necessitate a preliminary reference to the CJEU. 74 22 Simultaneously, the same applicants may impugn the motivating decisions of the SRB directly at the European level, by commencing an action for their annulment before the General Court.75 In fact, many applicants, and certainly the institution under resolution, will find it necessary or, at least, strongly advisable to pursue this avenue. The reason is that the incidental contestation of the legality of the SRB’s decisions in national proceedings does not impede them from acquiring finality once the two-month time
71 Case 314/85, Foto-Frost v Hauptzollamt Lübeck-Os, ECLI:EU:C:1987:452, para. 17; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C: 2019:1036, paras. 58–60. 72 Case C–521/04 P(R), Tillack v Commission, ECLI:EU:C:2005:240, paras. 38–39; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C:2019:1036, para. 61. 73 An independent challenge to the decisions of the NRAs may thus be brought only where the allegation of invalidity rests on an intervening procedural or, less likely, substantive fault of the relevant NRA, unconnected to the content of the SRB’s instructions. 74 Recital (120) sent. 3 SRMR; and Art. 267 TFEU; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C:2019:1036, para. 61. 75 Art. 86(2) SRMR. See also Case 294/83, Les Verts v European Parliament, ECLI:EU:C:1986:166, para. 23.
866
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
limit for a direct challenge has lapsed.76 If a decision of an EU institution or body is not published or notified to the parties affected thereby, it is for the latter to request a copy of the full text within a reasonable period from the time that they became aware of its existence. This is bound to be the case for the resolution scheme and instructions of the SRB, at least with regard to affected parties other that the institution under resolution itself. In this situation, the two-month time limit for bringing an action for annulment will start only once the applicant has acquired precise knowledge of the decision’s content and of the reasons on which it is based.77 After the expiration of the time limit, the European decisions become definitive as against any persons with reference to whom they must be considered to be individual decisions.78 As a result, these persons lose the right to invoke the illegality of the decisions before the national courts.79 More generally, a party is only allowed to impugn collaterally in national proceedings the validity of a measure of EU law which constitutes the basis of the national decision concerning it if it has brought an action for that measure’s annulment within the prescribed time limits, or if it has not brought an action because it was doubtful that it had standing.80 All in all, this approach to the admissibility of actions for annulment adds to the complexity and uncertainty of the resolution regime, due to the total lack of clarity as to the categories of persons who have standing to challenge resolution measures (as discussed below). Moreover, it incentivizes the commencement of parallel proceedings at both levels – a totally undesirable result.
III. Procedural restrictions of national proceedings under the BRRD Proceedings against the implementing decisions of the NRAs before the competent 23 national courts will be conducted in accordance to the substantive conditions and rules of procedure of domestic administrative law. Nonetheless, since the contested decisions concern the implementation of EU law, they will need to meet the minimum guarantees of Art. 47 CFREU.81 More concretely, the relevant proceedings fall within the ambit of the provisions on national judicial remedies of the BRRD.82 Consequently, the national proceedings must be able to ensure an effective remedy in the form of a right of appeal in favor of persons negatively affected by the acts of the NRAs. 83 In cerArt. 236(6) TFEU. Case T-494/17, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Commission & SRB, order of 19 November 2018, ECLI:EU:T:2018:804, paras. 33–34, 39–41. The case concerned an action for the annulment of SRB decisions on the calculation of ex ante contributions to the SRF; but the same considerations apply to SRB decisions on resolution schemes and specific instructions to NRAs. 78 The SRB’s resolution schemes and specific instructions to NRAs fall within this category. General instructions, being measures of general application, are not amenable to direct challenge by institutions and/or their stakeholders. 79 Joined Cases T-244/93 and T-486/93, TWD Textilwerke Deggendorf GmbH v Commission, ECLI: EU:T:1995:160, para. 103; and Case C-239/99, Nachi Europe GmbH v Hauptzollamt Krefeld, ECLI:EU:C: 2001:101, paras. 35–37. 80 Case C-135/16, Georgsmarienhütte GmbH v Bundesrepublik Deutschland, ECLI:EU:C:2018:582, paras. 14–18; and Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C:2019:1036, paras. 63–69. See Brunner, European State Aid Law Quarterly 18 (2019), 413. 81 Art. 51(1) CFREU, in conjunction with Art. 47 CFREU. 82 Title IV, Chapter IX, “Right of appeal and exclusion of other actions” (Arts. 85–86) BRRD. Beyond these general provisions, the BRRD contains special norms on appeals against: valuations for resolution; the write down or conversion of capital instruments; the transfers of assets, rights, and liabilities of the institution under resolution; and the publication of administrative penalties. Arts. 36(13), 60(2)(b), 66(6) (a)–(b), and 112(1) BRRD, respectively. 83 Recital (88) and Art. 85(3) sent. 1 BRRD. 76
77
Christos Hadjiemmanuil
867
Art. 29 SRMR
Implementation of decisions under this Regulation
tain cases, this might necessitate a more relaxed stance with regard to the admissibility of the relevant actions and the standing of the applicants as compared to purely national administrative disputes. 24 At the same time, the restrictions imposed by the BRRD on the available remedies will also be applicable. The directive allows Member States to require prior judicial approval of the implementation of crisis management measures, but only if the applicable procedure is expeditious (meaning that the court should give its decision within 24 hours).84 The ex post right of appeal is also restricted procedurally, both because the review must be expeditious and, more importantly, because the national courts are bound by the resolution authorities’ economic assessments of the facts.85 The restrictive effect of the BRRD may be even graver with regard to the availability of interim relief, since its provisions not only disallow the automatic suspension of the enforcement of the contested decision, but go even further by introducing rebuttable presumption that it would be against the public interest.86 Finally, with regard to the available remedies, the BRRD establishes that, where a resolution measure has been carried out by means of transfers and transactions, thus resulting in the creation of new rights in favor of the acquiring third parties, its annulment should leave these transfers unaffected and the protection afforded to the applicant should be limited to compensation for damages.87
IV. Standing The fact that the decisions of the SRB and the NRAs are in principle amenable to judicial review does not open a procedural avenue for challenges by all potentially interested parties. Questions of standing must also be addressed.88 The issue of standing may not be treated in the same way in national as in EU law. However, as mentioned above, in matters relating to the implementation of EU law, the national courts are under an obligation to comply with European standards of effective judicial protection. Accordingly, a national procedural approach that renders judicial protection nugatory or applies more restrictive criteria than those applicable by the CJEU may be in itself contrary to EU law. 26 It is trite law that persons other than the addressee are entitled to impugn a European decision by bringing an action for its annulment before the General Court only if they are directly and individually affected by it.89 To satisfy this criterion, the act under attack must affect the applicants for annulment individually “by reason of certain attributes which are peculiar to them or by reason of circumstances in which they are differentiated from all other persons”.90 It must also affect the applicants directly, in the sense that it is a final determination of the position of the relevant EU institution or 25
Art. 85(1) BRRD, in conjunction with Recital (92) sent. 2 BRRD. Art. 85(3) sent. 2 BRRD. 86 Art. 85(4)(1) BRRD. 87 Art. 85(4)(2) BRRD. 88 Herinckx, in: Houben and Vandenbruwaene (eds), The Single Resolution Mechanism (2017), 77, at pp. 102–108; Timmermans, Review of European Administrative Law 1 (2019), 155, at pp. 167–169; and with regard to standing to challenge the supervisory decisions of the ECB, Witte, JFR 1 (2015), 226, at pp. 257–261. 89 Art. 263(4) TFEU. 90 Case C-25/62, Plaumann v Commission, ECLI:EU:C:1963:17. 84
85
868
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
body, as distinct from a preparatory or intermediate measure,91 which brings about a distinct change in the legal situation of the applicants and leaves no discretion to the national authorities who are called to implement it.92 The resolution schemes93 and specific instructions of the SRB present all these characteristics: they lay down definitely and formally the position of the SRB; their immediate binding effect exhausts the discretion of the addressee NRAs with regard to the matters in hand; and they are calculated to alter in specific ways the situation of the institutions under resolution and other private parties ultimately concerned.94 The question, though, is, which parties beyond the institution under resolution itself have direct and individual interest sufficient to give them standing to challenge these resolution-related decisions of the SRB. Note that, in the post-resolution context the right of the institution under resolution to bring proceedings may be of little practical significance, because the institution will at that stage be represented by officials appointed by the NRA itself in pursuance of Art. 35 BRRD, if it has not been taken over already by a new owner. These persons will lack incentives to challenge the relevant decisions. At present, it is still doubtful, if in these circumstances it is possible for any of the institution’s old stakeholders (former management or shareholders) to step in and bring proceedings against the SRB or the relevant NRA. A similar question has been raised before the CJEU in the Trasta Komercbanka case 95 27 in relation to the decision of the ECB to withdraw a bank’s license. The bank was subsequently placed in liquidation, with the consequence that, in accordance with national law, the power of representation of its board of directors was assumed by the liquidator. In these circumstances, it was unclear whether the former board of directors and/or shareholders were eligible to bring actions for annulment against the ECB decision. The General Court concluded that the board had lost the power to challenge the decision; this did not deprive the bank of its right to effective judicial protection because the decision could be impugned on its behalf by the liquidator.96 Conversely, the shareholders were, in the General Court’s view, eligible, because, by being effectively prevented from exercising their rights as members in order to get the institution to bring an action, they had acquired a separate individual interest to bring proceedings.97 On appeal, the CJEU analyzed the situation in very different terms. The court first found that, where the ECB has decided to withdraw the authorization of a credit institution, in the absence of EU rules on the matter, it is for that institution’s national law to determine which corporate body has the power to bring an action in its name; nonetheless, the national law cannot nullify the credit institution’s right to an effective legal remedy and to a
91 Case 60/81, IBM v Commision, ECLI:EU:C:1981:264, paras. 9–12; Case C-362/08 P, Internationaler Hilfsfonds eV v Commission, ECLI:EU:C:2010:40, paras. 51–52; and Case T-687/18, Pilatus Bank plc v ECB, ECLI:EU:T:2019:542, paras. 17–20, 23–27. 92 Case C-132/12 P, Stichting Woonpunt v Commission, ECLI:EU:C:2014:100, para. 68. 93 In relation to resolution schemes, it may be wondered, whether the culmination of the proceedings at the European level relates to the decision by which the SRB adopts the scheme or the decision under Art. 18(7) SSRM by which the Commission endorses it. The numerous actions for annulment brought before the General Court in relation to the resolution of Banco Popular do not follow a consistent approach with regard to the identification of the defendant, suggesting that the applicants had divergent views, or were simply at a loss, on this point. 94 In contrast, should the SRB choose to provide direction on the manner in which NRAs must implement resolution measures by means of general instructions, the applicants would be unlikely to meet the test of direct and individual concern. 95 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, ECLI:EU:C: 2019:923. 96 Case T‑247/16, Trasta Komercbanka AS v ECB, ECLI:EU:T:2017:623, paras. 35–36. 97 Case T‑247/16, Trasta Komercbanka AS v ECB, ECLI:EU:T:2017:623, paras. 57, 62.
Christos Hadjiemmanuil
869
Art. 29 SRMR
Implementation of decisions under this Regulation
fair hearing, as protected under Art. 47 CFREU.98 In the words of AG Juliane Kokott, with whose opinion the court concurred, “the existence of a purely formal possibility of a remedy cannot be sufficient if the legal framework conditions are designed such that de facto that possibility cannot be utilised”.99 From this perspective, the liquidator’s right to contest the withdrawal of the bank’s license was clearly insufficient to provide the requisite legal protection: it was not part of his remit and, in fact, structural conflicts of interest, inherent in his position as the authorities’ appointee, militated against the exercise of this right.100 Overturning the decision of the General Court, the CJEU concluded that the aforementioned consideration justified the maintenance of the former board of directors’ power of representation for the specific purpose of challenging the withdrawal of the license.101 On the contrary, the CJEU denied standing to the institution’s shareholders. The intense effect of the decision of the ECB on the shareholders’ economic interest in securing the bank’s survival, which the General Court had taken into account in its judgment,102 was not a legal effect, but a factual one, and as such it could not establish a separate interest to bring proceedings.103 Nor were the shareholders’ status and ownership rights under company law directly affected by the withdrawal of the license: the relevant legal effects occurred in the context of the national liquidation proceedings, which took place after the withdrawal of the license and, in any event, were not required by EU law.104 While the Trasta Komercbanka case concerns challenges to the supervisory withdrawal of authorization of a credit institution under the SSMR, very similar issues relating to the appropriate representation of the failed bank and the standing of its shareholders arise, mutatis mutandis, in connection to challenges to the decisions of the SRB and the NRAs concerning the content and execution of resolution actions under the SRMR. The main difference is that the argument to the effect that the withdrawal of the bank’s license does not directly affect the status and ownership rights of its shareholders is clearly inapplicable in the case of resolution actions, since these necessarily entail negative legal effects of this nature, which are directly and exclusively attributable to the resolution process as such. The forthcoming flood of decisions concerning the resolution of Banco Popular is likely to shed light on these issues. 28 A separate question is whether other stakeholders negatively affected by particular measures implementing the resolution scheme, such as holders of capital instruments other than shares, holders of convertible instruments and senior non-preferred bonds, liability holders whose claims have been bailed-in or transferred, and counterparties whose relationship with the institution under resolution were interrupted, also have standing. While the answer depends on the precise terms of the actual directions addressed by the SRB to the NRAs, as a general matter it will be more difficult for these 98 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, ECLI:EU:C: 2019:923, paras. 57–59. 99 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, opinion of AG Kokott, ECLI:EU:C:2019:323, para. 69. 100 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, ECLI:EU:C: 2019:923, paras. 60–77, with reference to a similar judgment of the ECtHR in Capital Bank AD v. Bulgaria, CE:ECHR:2004:0909DEC004942999, which, in the case of a banking institution represented by liquidators, recognized the right of the institution‘s former management to bring an individual application before the ECtHR for the purposes of Art. 34 ECHR. 101 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, ECLI:EU:C: 2019:923, paras. 78–79. 102 Case T‑247/16, Trasta Komercbanka AS v ECB, ECLI:EU:T:2017:623, paras. 66–67. 103 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, opinion of AG Kokott, ECLI:EU:C:2019:323, paras. 114, 121–122; and ECLI:EU:C:2019:923, paras. 105–110. 104 Joined Cases C-663/17 P, C-665/17 P and C-669/17 P, ECB v Trasta Komercbanka AS, opinion of AG Kokott, ECLI:EU:C:2019:323, para. 119; and ECLI:EU:C:2019:923, paras. 113–114.
870
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
persons to prove direct and individual concern. An obstacle faced by all prospective applicants, with the exception of the institution under resolution itself, is that it can be a matter of dispute, whether with reference to them the SRB decision affecting their interests constitutes an individual decision or a measure of general application.105 In the latter case, they will have standing only if they are considered to belong to a closed group of persons, which were identifiable at the time when the decision was taken. Normally, however, shareholders and creditors should be regarded as mere members of a class, lacking standing to bring an action for annulment before the CJEU.106 If this is correct, the persons affected in these capacities may still be able to bring proceedings at the national level against the NRAs’ implementing measures and raise the illegality of the SRB decision collaterally. Evidently, this will only be possible if the domestic rules on admissibility and standing are less restrictive than those of EU law.
D. Civil liability for actions taken in the course of implementation The execution of the resolution scheme and other SRB decisions may be the source 29 of civil liability for the SRB and the NRAs.107 The relevant provisions of the SRMR affirm the SRB’s obligation to make good any damage caused by it or by its staff in the performance of their resolution functions.108 They further obligate the SRB to compensate NRAs for damages that these have been ordered to pay by a national court, or that they have undertaken to pay, with the SRB’s consent, in pursuance of an amicable settlement, where the relevant obligation emanates from acts or omissions committed by the NRAs in the course of the resolution of institutions under the SRB’s direct responsibility, except where these acts or omissions constitute a violation of EU law or of a decision of the SRB, the Council, or the Commission that the NRAs have committed intentionally or with a manifest and serious error of judgment.109 The CJEU is given exclusive jurisdiction to hear claims under either heading.110 The second heading of liability of the SRB, which involves the indemnification of the 30 NRAs for acts and omissions in the course of resolution actions on a non-fault basis, is directly linked to the NRAs’ obligation to implement the SRB’s decisions. The allocation of the financial responsibility to the SRB applies even to decisions as to which the NRAs retain discretion, suggesting that in this context the NRAs operate as effective agents of the SRB. Reinforcing the image, any decisions tainted by non-compliance are excluded and the NRA bears sole responsibility for them. Regarding cases of wrongful decisions taken by an NRA in the execution of instruc- 31 tions of the SRB, the illegality will be imputed exclusively to the SRB, to the SRB and the NRA jointly, or solely to the NRA, depending on whose decision it taints. From the perspective of the internal allocation of risks and liabilities, this will make little difference, since in all cases the SRB bears eventual financial responsibility, either because it is itself liable in damage to the parties harmed by the decision or because it will need to compensate the NRA. Procedurally, however, there may be difficulties, 105 Joined Cases C-622/16 P to C-624/16 P, Scuola Elementare Maria Montessori v Commission, ECLI: EU:C:2018:873, para. 36. 106 Herinckx, in: Houben and Vandenbruwaene (eds), The Single Resolution Mechanism (2017), 77, at p. 103; and Timmermans, Review of European Administrative Law 1 (2019), 155, at pp. 167–168. 107 See Herinckx, in: Houben and Vandenbruwaene (eds), The Single Resolution Mechanism (2017), 77, at pp. 109-111; and Timmermans, Review of European Administrative Law 1 (2019), 155, at pp. 170-171. 108 Art. 87(3) SRMR, replicating Art. 340(2) TFEU on the non-contractual liability of the Union. 109 Art. 87(4) SRMR. 110 Art. 87(5) SRMR.
Christos Hadjiemmanuil
871
Art. 29 SRMR
Implementation of decisions under this Regulation
because different fora are responsible in each case and, in the case of joint liability, the claimant will need to proceed against each defendant separately, because the SRB cannot be joined as a defendant in an action brought against an NRA before its national courts. Moreover, the mental elements required by the national law of torts in order to establish the liability of an NRA may be different than those used to hold EU institutions or bodies liable for unlawful acts. The situation is patently unsatisfactory, since it leads to procedural fragmentation and inconsistent results. 32 Concerning actions for compensation from the SRF for breaches of the NCWO principle, which are not premised on an allegation of illegal behavior or fault by any authority, doubts have been expressed, whether these should be brought at the European level, as an aspect of the non-contractual liability of the SRB, or at the national level, against the NRA implementing the resolution action.111 33 The SRB’s obligation to indemnify the NRAs does not extend, as mentioned above, to situations of intentional or egregious violations of EU law or non-compliance with SRB’s instructions on the part of the NRAs. In this sense, the exception largely overlaps with the violation of the NRAs’ duty to implement faithfully and properly the decisions of the SRB in pursuance of Art. 28(1) SRMR. While the SRMR’s operative provisions merely remove the SRB’s indemnity, a recital in the preamble goes further by asserting that, in case of non-compliance with European instructions, the Member State concerned may be liable to make good any damage caused to private parties, including the institution under resolution and any creditor of its group, in accordance with the relevant caselaw.112
E. SRB’s power of direct intervention 34
To ensure the faithful and effective execution of resolution schemes, the SRMR grants the SRB substantial reserve powers of intervention. To start with, the SRB is vested with a potentially intrusive power to address to the relevant NRAs instructions on any aspect of the schemes’ implementation.113 This power, which stays within the four corners of the general system of indirect implementation of European acts, is used to complement the resolution schemes by providing further guidance as to the way in which the NRAs are required to implement it. The same power may also be exercised to demand corrections where an NRA does not execute the resolution scheme in the expected manner.114 Nonetheless, and despite the NRAs’ duty to implement SRB decisions, the indirect approach to implementation may flounder as a result of an NRA’s inaction or recalcitrance. In order to assuage this problem, Art. 29(2)‒(4) SRMR introduces a specific extraordinary power of the SRB to intervene in situations where an NRA fails to properly implement the resolution scheme or any other decision addressed to it. Based on this power, the SRB can circumvent the uncooperative NRA and address orders directly to the institution under resolution to take certain actions. The text is framed by reference to situations of non-compliance by NRAs with SRB decisions, without further specification. However, since the orders that the SRB may issue under this provision can be addressed exclusively to “institutions under resolution”,115 it follows 111 For the latter view, see Herinckx, in: Houben and Vandenbruwaene (eds), The Single Resolution Mechanism (2017), 77, at pp. 110-111. 112 Recital (96) SRMR. 113 Art. 28(2) SRMR. 114 See → Art. 28 paras. 13–14. 115 Art. 29(2)(1) SRMR.
872
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
that the power exists solely in connection to the implementation of resolution actions, 116 as distinct from decisions related to resolution planning or crisis prevention (concerning, for instance, the removal of impediments to resolvability, or the levying of contributions to the SRF117). The SRB’s power of direct intervention is exercisable when an NRA fails to apply its decisions or does not comply with them or, alternatively, when it applies them “in a way which poses a threat to resolution objectives under Art. 14 [SRMR] or the efficient implementation of the resolution scheme”.118 The second ground is puzzling. If the NRA has actually applied the SRB’s decisions according to their terms, any resulting risk to the resolution objectives should be attributed to the choices of the SRB itself and, accordingly, would not constitute an appropriate ground for by-passing the NRA. If, on the other hand, the risk or inefficiency can be imputed to the NRA because it has acted within its margin of discretion in relation to matters left unspecified by the SRB, it would be in principle inappropriate for the latter to deploy immediately its power of direct intervention: it should choose, instead, to address to the NRA further instructions under Art. 28(2) SRMR, thus respecting the SRMR’s general system of indirect implementation. This only leaves the situation where the SRB has been vocal but the NRA has failed to follow its instructions – a situation coinciding with the first ground. It should thus be accepted that the power is essentially limited to situations of lethargic or recalcitrant implementation on the part of the relevant NRAs and that the second ground should be relied upon by the SRB only sparingly, if at all, as an independent (as distinct from supporting) reason for direct intervention.119 The intervention envisaged by Art. 29(2) SRMR consists of a decision addressed by the SRB to the institution under resolution ordering the latter to transfer to another person specified rights, assets, or liabilities, to convert into equity contractually convertible debt instruments, or to adopt any other action necessary for addressing the perceived threat to the resolution objectives or to the efficient implementation of the resolution scheme.120 Procedurally, the direct intervention takes the form of a decision of SRB’s extended executive session.121 Before taking this decision, the SRB must notify the NRA concerned and the Commission, detailing the proposed measures and giving reasons.122 In the absence of an emergency, such notification must take place at least 24 hours before the decision comes into effect.123 Under the SRM’s internal arrangements, the NRA concerned is required to respond by explaining in a reasoned statement, why it has failed to comply with the SRB’s original decision. Once adopted, the addressee institution is under an obligation to comply with the SRB’s order, which prevails over any contrary decisions of the relevant NRA.124 In the event of non-compliance, the SRB can impose a fine on the institution.125 Similarly, any
116 The text of Recital (87) SRMR and the place of Art. 29(2) SRMR in the order of the regulation’s operative provisions lead to the same conclusion. See also supra, → para. 9. 117 Arts. 10(11) and 70–71 SRMR, respectively. 118 Recital (87) sent. 2 and Art. 29(2)(1) SRMR. 119 Significantly, the SRM’s internal cooperation framework only envisages the first possibility (noncompliance); Art. 11(3) sent. 1 COFRA. 120 Art. 29(2)(1)(a)–(c) SRMR, in conjunction with Art. 29(2)(2) SRMR. 121 Art. 53(1)–(2) SRMR; and Art. 11(3) sent. 1 COFRA. 122 Art. 29(2)(3) SRMR; and Art. 11(3) sent. 2 COFRA. 123 Art. 29(2)(4) SRMR. 124 Art. 29(3) SRMR. 125 Art. 38(2)(c) SRMR.
Christos Hadjiemmanuil
873
35
36
37
38
Art. 29 SRMR
Implementation of decisions under this Regulation
further action by the NRA in relation to the same issues must not deviate from the SRB’s decision.126 39 The direct intervention does not involve the substitution of the SRB for the NRAs in the exercise of their resolution powers under national law transposing the BRRD, but the exercise of a distinct, extraordinary power under a directly applicable regulation. This is consistent with the SRMR’s more general avoidance of the conundrum of the application of national law by an EU body such as the SRB.127 Of course, to properly calibrate its orders to the institutions concerned and to ensure their effectiveness, the SRB will need to take cognizance of those institutions’ legal situation and capacity under national private law, otherwise the institutions may have a good excuse for resisting the orders.128 But this does not change the picture with regard to the characterization of the intervention as a directly applicable measure of EU law, or its amenability to review by the CJEU in accordance to the same criteria regarding the standing of applicants and the validity of the impugned act as would apply to any other EU measure of individual application.
F. Discretionary decisions of the SRB and the Meroni doctrine 40
The power of the SRB under Art. 29(2) SRMR to address orders directly to the institution under resolution raises a more general problem of potential unconstitutionality when seen in the light of the Union’s principle of institutional balance and, more precisely, the CJEU’s controversial Meroni doctrine.129 Promulgated by the CJEU at a very early stage of the integration process, when bodies and agencies had not yet appeared in the institutional landscape, Meroni established, in effect, a constitutional norm against the delegation by the institutions of the EU of discretionary powers entrusted to them in accordance with primary law. The CJEU’s ruling entertained the possibility of delegation of particular tasks to private parties, unaffiliated to the Union’s institutional architecture ‒ and thus, a fortiori, to the bodies and agencies, such as the SRB, that the Union itself created in later years.130 However, such delegation may only involve “clearly defined executive powers the exercise of which can, therefore, be subject to strict review in the light of objective criteria determined by the delegating authority”. In contrast, the delegation of “a discretionary power, implying a wide margin of discretion which may, according to the use which is made of it, make possible the execution of actual economic policy” is impermissible.131 The reason suggested by the CJEU was that “[a] delegation of the first kind cannot appreciably alter the consequences involved in the exercise of the powers concerned, whereas a delegation of the second kind, since it replaces the choices of the delegator by the choices of the delegate, brings about an actual transfer of responsibility”.132 Unlike the situation in the Meroni case, the Union’s bodies and agencies are Recital (87) sent. 3 and Art. 29(4) SRMR. Art. 5(2)(1) SRMR. This is in contrast to the major institutional novelty of the SRMR, namely, the empowerment of the ECB, an EU institution, to take supervisory decisions based on national law transposing directives; Art. 4(3) SSMR. See Witte, MJ 21 (2014), 89, at pp. 105–109. 128 Cf. Art. 41(3) SRMR. 129 Case 9-56, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community, ECLI:EU:C:1958:7. 130 Case 9-56, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community, ECLI:EU:C:1958:7, ECR1957/1958, p. 151. 131 Case 9-56, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community, ECLI:EU:C:1958:7, ECR 1957/1958, p. 152. 132 Case 9-56, Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community, ECLI:EU:C:1958:7, ECR 1957/1958, p. 152. 126
127
874
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
established by way of secondary EU legislation. Any discretionary powers that they happen to have are thus the result of a legislative conferral to them, and not of delegation by the original holder of the decision-making responsibility, namely, the Commission. However, the CJEU failed to draw any distinction between legislative conferral and ad hoc administrative delegation and framed the Meroni doctrine in a manner that precludes, at least in principle, the assignment to the EU bodies and agencies of discretionary powers allowing them to make autonomous decisions on matters of policy. The Meroni doctrine may be seen as a major plank of the general principle of insti- 41 tutional balance, which seeks to preserve the Treaties’ scheme concerning the EU institutions’ roles and competencies; nonetheless, the doctrine stands in the way of the rationalization of the European administration through the creation of specialist bodies, invested with full capacity to perform complex regulatory tasks in particular fields. 133 The “agencification” of the public administration is, however, a trend that has been followed the world over134 – no less by the Union itself, which, notwithstanding Meroni, now relies on a large constellation of bodies and agencies for the performance of its various tasks.135 This has forced the CJEU to revisit, albeit not to overturn, Meroni in its seminal ESMA judgment of 2014,136 a case with major implications for the present discussion.137 The case related to the validity of certain powers of direct intervention vested on the European Securities and Markets Authority (ESMA) by the Short Selling Regulation. 138 Art. 28 of that instrument enables ESMA to adopt binding measures of general application with a view to regulating or banning temporarily the activity of short selling, in situations where the orderly functioning and integrity of financial markets and the stability of the European financial system are under threat. Contending that the relevant provision confers on ESMA an unduly large measure of discretion of political nature, in violation of the principles of EU law alluded above, the UK brought an action for its annulment. However, the CJEU found that the provision was, in fact, compatible with EU law. The ESMA decision declared unambiguously that, despite the lack of an express legal 42 basis in the Treaties,139 the EU legislature may delegate powers to the Union’s bodies and agencies. In support of this conclusion, the court referred twice 140 to the TFEU’s provisions on judicial review granting the CJEU jurisdiction to review acts of the bodies, offices, and agencies established by the Union legislature which are intended to produce legal effects vis-à-vis third parties141 – something inconceivable, if those agencies were not allowed to issue such acts in the first place.142 Legitimizing to a certain extent the 133 For detailed discussion, see Chamon, EU Agencies: Legal and Political Limits to the Transformation of the EU Administration (2016), at pp. 175‒258. 134 See Verhoest et al. (eds), Government Agencies: Practices and Lessons from 30 Countries (2012). 135 See, e.g., Verhoest, in: Ongaro and van Thiel (eds), The Palgrave Handbook of Public Administration and Management in Europe (2018), 327. 136 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18 (variably referred to in the literature as either “ESMA” or “Short Selling” case). For comments, see Chamon, ELR 39 (2014), 380; Nicolaides and Preziosi, Bruges European Economic Research Papers No 30/2014 (2014); and Lo Schiavo, German Law Journal 16 (2015), 315. 137 See Chamon, ELR 39 (2014), 380, at pp. 399‒402. 138 Art. 28 Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps [2012] OJL86/1 (“Short Selling Regulation”). 139 This is in contrast to the express provisions of Arts. 290‒291 TFEU, introduced by the Lisbon Treaty, which enable the delegation of powers to the Commission. 140 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras. 65 and 80. 141 Arts. 263, 265, 267, and 277 TFEU. 142 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras. 79–81.
Christos Hadjiemmanuil
875
Art. 29 SRMR
Implementation of decisions under this Regulation
agencification trend, the court concluded that, in the pursuit of specific policy objectives, the Council may delegate regulatory powers to EU bodies with specific technical expertise. In terms that have direct resonance for the SRM, the court considered that the provision under scrutiny should not be seen in isolation but “as forming part of a series of rules designed to endow the competent national authorities and ESMA with powers of intervention to cope with adverse developments which threaten financial stability within the Union and market confidence”, adding that “those bodies have a high degree of professional expertise and work closely together in the pursuit of the objective of financial stability within the Union”.143 43 The CJEU’s validation of the legislators’ institutional choice to rely on regulatory agencies did not remove altogether the shackles of Meroni. On the contrary, the court insisted on the doctrine’s continuing applicability, thus formally disallowing the delegation to EU bodies and agencies of discretionary power implying a wide margin of discretion on matters of policy. Nonetheless, a detailed examination of the specific powers granted to ESMA led the CJEU to the conclusion that these pass the Meroni test,144 because they are precisely delineated and their exercise is circumscribed by various conditions and criteria which limit that authority’s discretion, and is amenable to judicial review in the light of the objectives established by the delegating authority (that is, the EU’s co-legislators).145 In particular: ESMA’s powers can be exercised only in exceptional circumstances of systemic risk, and even then, only when no competent national authority has taken adequate action to address the threat to the financial system; to exercise them, ESMA must be satisfied that the situation meets a significant number of cumulative conditions set out in the legislation; ESMA cannot act in isolation, but must consult the ESRB or other relevant bodies and notify the competent national authorities; the measures adopted are temporary and must be reviewed at appropriate intervals; and the Commission is empowered to adopt delegated acts to further specify the conditions for the exercise of the powers.146 44 In view of the very specific and highly contextual nature of the considerations that the court relied upon, it has been rightly observed that one could not easily translate its approach into an abstract general rule.147 We still lack an explicitly articulated legal test for distinguishing wide discretionary powers from precisely delineated ones, and almost everything seems to hang on an empirical, case-by-case assessment of the particular decisional environment. To perceive the actual direction of the jurisprudence, however, we could do better than remaining fixated on the formulas ritually repeated in the case law, noticing instead the cases’ actual outcome. From this perspective, the ESMA decision is the most visible part of a broader shift towards a light-touch review of the delegation of powers to EU bodies and agencies. Thus, while it is true that the CJEU’ retention of Meroni’s basic premise of non-delegation of wide discretion may potentially provide a basis for very restrictive approaches, the doctrine’s concrete application in ESMA was rather relaxed. The court paid limited attention to the fact that the conditions triggering ESMA’s power are quite generic, that the responsibility for finding out whether they are met is entrusted to ESMA itself, and that the factors informing its subsequent intervention are equally imprecise, thus conferring to ESMA a wide margin of discretion or appreciation. Moreover, despite the CJEU’s finding that ESMA’s decisions are subject to effective judicial review, the aforementioned parameCase C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, para. 85. Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras. 44‒54. 145 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras. 45 and 53. 146 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras. 46‒52. 147 Chamon, ELR 39 (2014), 380, at p. 394. 143
144
876
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
ters of its mandate preclude in practice a hard judicial scrutiny of the final decisions. The European judiciary’s endorsement of agency-based discretionary decision-making was already evident in earlier jurisprudence of the Court of First Instance (as it then was), which recognized openly that, “where a [Union] authority is called upon, in the performance of its duties, to make complex assessments, it enjoys a wide measure of discretion, the exercise of which is subject to limited judicial review”, whose scope would essentially be limited “to examining the accuracy of the findings of fact and law made by the authority concerned and to verifying, in particular, that the action taken by the authority is not vitiated by a manifest error or misuse of powers and that it clearly did not exceed the bounds of its discretion”.148 In light of the “manifest error” test as well as the CJEU’s specific analysis of ESMA’s powers under the Short Selling Regulation, one wonders to what extend ESMA is truly and effectively “amenable to judicial review in the light of the legislator’s objectives”, in the sense of being prevented from pursuing policy choices of its own choosing. In this regard, the supposedly decisive distinction is that between the selection of policy objectives, which agencies cannot legitimately undertake, and the assessment of the factual situation and choice of appropriate technical responses in view of the relevant policy choices of the institutions, as to which they enjoy a broad margin of appreciation. However, the dividing line is almost imperceptible and wide open to ex post rationalizations.149 Overall, the outcome of the various cases, including ESMA, suggests that the Meroni doctrine continues to be honoured in name, but a more pragmatic, ad hoc approach prevails in actual reality, leaving us in a muddled but rather permissive setting. The significance of this development for the present discussion cannot be overstated. 45 In the context of the EBU, the Meroni question mark (accompanied by the tentative answer in ESMA) hangs over all cases where the SRMR vests on the SRB a power to affect the legal situation of private parties in a binding way.150 The power of the SRB under Art. 29(2) SRMR to address orders directly to the institution under resolution is a clear example, but the issue can be analysed in almost identical terms in relation to any other power that the SRMR entrusts to the SRB as final discretionary decision-maker. It is immaterial whether the relevant decisions relate to particular institutions or take the form of measures of general application. Moreover, the same considerations apply when the SRB decisions are not directly applicable to private parties, but are implemented indirectly by the NRAs (to the extent, of course, that the decisions exhaust the NRAs discretion on the matter at hand), even though the procedural and jurisdictional implications of indirect implementation cannot be disregarded. For instance, the power under
148 T-187/06, Schräder v Community Plant Variety Office (CPVO), ECLI:EU:T:2008:51, para. 59 (confirmed on appeal by the CJEU, Case C‑38/09 P, Schräder v CPVO, ECLI:EU:C:2010:196, para. 77). 149 In Case T‑96/10, Rütgers Germany GmbH v European Chemicals Agency (ECHA), ECLI:EU:T: 2013:109, para. 134, the General Court appeared to be totally oblivious of the supposedly critical distinction between policy and executive decisions, since it accepted that an agency enjoyed broad discretion “in a sphere which entails political, economic and social choices on its part”. On appeal, the CJEU did not touch upon this particular issue, but explicitly endorsed the view that the agency enjoyed broad discretion, whose exercise was subject to limited judicial review; Case C‑290/13 P, Rütgers Germany and Others v ECHA, ECLI:EU:C:2014:2174, paras. 24‒27. 150 The ECB’s discretionary powers under the SRMR do not raise a similar difficulty, because the ECB is an EU institution and its supervisory powers are legally grounded on a specific Treaty provision; Art. 106 TFEU. Accordingly, the transfer to the ECB of discretionary powers may only raise constitutional objections in relation to the outer limits set by the Treaty text on its supervisory capacity.
Christos Hadjiemmanuil
877
Art. 29 SRMR
Implementation of decisions under this Regulation
Art. 28(2) SRMR to address to the NRAs binding instructions on the execution of the resolution scheme may be analysed from the same angle.151 46 Overall, the ESMA judgment, decided in the midst of the legislative process leading to the adoption of the SRMR, provides considerable reassurance that the arrangements on the administration of resolution tasks at the Union level are by-and-large compatible with the Meroni doctrine. The decision establishes beyond doubt that an agency such as the SRB is in principle capable of exercising delegated responsibilities by adopting measures that are legally binding on individuals.152 With more immediate relevance to Art. 29(2) SRMR, it further establishes that the SRB can be vested with reserve powers, enabling it to override the NRAs in exceptional circumstances identified in the legislation. On the other hand, it does not provide clear guidance on the degree of precision that the legislative conditions and institutional controls must display for the SRB’s exercise of these powers to be foolproof. 47 In this connection, it is worth comparing the CJEU’s relaxed assessment of ESMA’s powers under the Short Selling Regulation in ESMA with the opinion of the Council’s Legal Service on the compatibility with Meroni of the delegation of powers to the SRB, as set out in the draft SRMR.153 Preceding by a few months the publication of the CJEU’s decision, the Legal Service’s general reading of Meroni was for the most part consistent with it.154 Nonetheless, in contrast to the CJEU’s unreserved validation of ESMA’s powers of intervention, the Legal Service, adopting a more restrictive approach, expressed considerable scepticism as to the SRB’s proposed discretionary powers. 155 While not objecting to the delegation of decision-making powers to the SRB per se, it highlighted the lack of precision of the conditions and criteria delineating these powers.156 In view of the lack of detailed description in the legislative text, as well as the fact that various 151 There are numerous other instances where the SRMR confers expressly on the SRB autonomous decision-making powers with an effect on third parties. These include the powers: to replace NRAs in the direct exercise of resolution tasks in relation to particular entities and groups (Art. 7(4)(b) SRMR); to request an institution’s assistance in the drawing of resolution plans (Art. 8(8) SRMR); to give instructions on impediments to resolvability (Art. 10(10)‒(13) SRMR); to prohibit distributions of profits above a maximum distributable amount (Art. 12a SRMR, as inserted by SRMR II); to determine the MREL for credit institutions and banking groups (Art. 12(1), (4)‒(5) SRMR, as replaced by SRMR II); to apply the MREL to resolution entities (Art. 12a SRMR, as inserted by SRMR II); to address guidelines and general instructions and requests for information to NRAs (Art. 31(1) SRMR); to request information from credit institutions, their employees, or third parties to which they have outsourced functions (Art. 34 SRMR); to carry out general investigations and on-site inspections (Arts. 35‒36 SRMR); and to lend amounts out of the SRF to other resolution financing arrangements in non-EBU Member States (Art. 72(3) SRMR). 152 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, para. 106. Moreover, the decision confirms that Art. 114 TFEU is a proper legal basis for the establishment of common regulatory frameworks (such as the SRM) and the empowerment of Union agencies (such as the SRB); Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, paras. 97‒117. See also the opinion of the Council’s Legal Service on the draft SRMR, “Examination of the Proposed Legal Basis” (13524/13, 11 September 2013), available at: . 153 Opinion of the Council’s Legal Service on the draft SRMR, “Delegation of Powers to the Board” (14547/13, 7 October 2013), available at: . 154 Opinion of the Council’s Legal Service on the draft SRMR, “Delegation of Powers to the Board” (14547/13, 7 October 2013), paras. 5‒11. 155 One must note in this regard that the final SRMR has in fact expanded the SRB’s powers in the resolution stage. In the draft, the placement of a failing entity under resolution and the specification of the framework of the applicable resolution tools were supposed to be decided by the Commission; Art. 16(6) Draft SRMR, COM(2013) 520 final (10 July 2013). In contrast, in the final text the power to assess whether a failing entity should be placed under resolution and, if so, to draw the resolution scheme is entrusted to the SRB, unencumbered by any prior decision of the Commission; Art. 18(1)‒(6) SRMR. 156 Opinion of the Council’s Legal Service on the draft SRMR, “Delegation of Powers to the Board” (14547/13, 7 October 2013), paras. 22‒23, 25‒28, 30‒31, 36, 41‒44, 53‒54, 57, 59‒60, 63, 65‒66, 72‒73, and 75.
878
Christos Hadjiemmanuil
Implementation of decisions under this Regulation
Art. 29 SRMR
criteria could be balanced against one another, the Council’s Legal Service was worried that the granting of discretionary powers might give the SRB the opportunity to define the Union’s resolution policy – a function that should be preserved for the institutions.157 In the resolution stage, the powers of the SRB include: the placement of an institu- 48 tion under resolution and the adoption of the resolution scheme158; the amendment of the resolution scheme159; the issuance of instructions to NRAs on the execution of the resolution scheme160; and the exercise of the reserve powers of direct intervention under Art. 29(2) SRMR. Due to the great significance of these issues for the overall direction of the resolution process, the wide discretion given to the SRB allows it to shape the Union’s resolution policy to a much higher degree than ESMA could influence the policy stance on short selling. Nonetheless, the most important of these decisions (that is, those concerning the adoption and amendment of the resolution scheme) are not final, but require the Commission’s endorsement to become effective. This should effectively bring them outside the scope of the Meroni doctrine, which is concerned with final decisionmaking with immediate legal effects, as distinct from the preparatory steps within a composite procedure.161 The situation is different with regard to the SRB’s reserve powers under Art. 29(2) SRMR (as well as its powers of instruction under 28(2) SRMR), because in this case the SRB’s discretion with regard to the specification of the substantive content of these measures goes hand in hand with its responsibility for their formal adoption. The overbroad delineation of the criteria for the exercise of these powers – which in the case of Art. 29(2) SRMR includes the execution by an NRA of the resolution scheme “in a way which poses a threat to any of the resolution objectives under Art. 14 [SRMR] or to the efficient implementation of the resolution scheme”‒ could provide a ground for holding the powers incompatible with Meroni. Should the matter ever arise in the course of judicial proceedings, it is likely that the existence of procedural safeguards, including the SRB’s duty to give reasons, in combination with the availability of judicial review in accordance with Art. 86 SRMR, will be considered sufficient to justify the delegation to the SRB of such an ill-defined power. A more cogent argument might be that the SRB’s power of intervention can only be used to ensure the more effective application of an already existing resolution scheme. The latter, however, has necessarily received the Commission’s sanction; and it defines the parameters of the resolution action in considerable detail, so that there is little risk that the SRB’s discretion, however unconstrained by legislative conditions, can have major policy repercussions. Be this as it may, in view of the aforementioned lack of a meaningful legal test, the matter is left open for eventual determination by the courts. In conclusion, disputes as to the
157 Opinion of the Council’s Legal Service on the draft SRMR, “Delegation of Powers to the Board” (14547/13, 7 October 2013), paras. 15‒16, 75. 158 Art. 18(1)‒(6) SRMR. 159 Art. 28(3) SRMR. 160 Art. 28(2) SRMR. 161 This also follows from the opinion of the Council’s Legal Service, according to which: “[w]ere the Board simply to address recommendations to the Commission, the eventual policy choice would rest with the Commission and there could be no incompatibility with the Meroni case-law”; Opinion of the Council’s Legal Service on the draft SRMR, ‘Delegation of Powers to the Board’ (14547/13, 7 October 2013), para. 17. In view of its insistence on the EU institutions’ prerogatives regarding the definition of policy, it is remarkable that the Legal Service could find no reason to object if the SRB were allowed to shape policy in substance, as long as it did not adopt itself the formal decisions. This inconsistency, which taints the Meroni doctrine as a whole, is inherent in the TFEU’s formalistic approach to delegated powers. In the banking field, this is exemplified in the preparation by the EBA of regulatory and implementing technical standards, which are then adopted, typically without amendment, as delegated or implementing acts of the Commission under Arts. 290‒291 TFEU.
Christos Hadjiemmanuil
879
Art. 29 SRMR
Implementation of decisions under this Regulation
constitutionality of SRB’s discretionary powers are very unlikely, but, until the CJEU has an opportunity to decide relevant cases, not theoretically inconceivable.
G. Publicity of the resolution scheme Art. 29(5) SRMR, the article’s concluding paragraph,, establishes the framework of publicity of resolution actions. The relevant requirements are addressed to both the SRB and the NRAs. 50 Specifically, the SRB is required to publish on its official website a copy of the resolution scheme or a notice summarizing the effects of the resolution action, and especially its effects on retail customers.162 The text does not provide specific indications regarding the criteria on which the SRB should base this choice. Theoretically, the preferred option should evidently be the publication of the resolution scheme in full form, because only this serves the principles of full transparency and effective exercise by persons adversely affected by the resolution action of their right to legal protection. Nonetheless, there is little doubt that in practice the SRB’s primary concern will be to maintain the secrecy of confidential information,163 including commercially sensitive information whose disclosure would harm the interests of third parties, such as the acquirer of the institution under resolution or of its business or assets, as the case may be.164 Consequently, while nominally the basic position is the full publication of the resolution scheme, one can surmise that this will invariably be resisted, on the ground that the scheme (and/or the valuation report on which it is based) contains such confidential information. The matter has already generated a long and important series of decisions of the SRB’s Appeal Panel.165 If the SRB decides for reasons of confidentiality or for any other reason to refrain from publishing, or to publish in redacted form only, the resolution scheme, it is obliged to include in its notice a summary of the effects of the intended resolution measures.166 Even though the text singles out the effects on retail customers, the provision should be read as requiring the SRB’s to disclose information sufficiently detailed to enable all parties directly affected by the resolution action to understand fully the resulting changes in their legal position. 51 On their part, the NRAs are called to comply with their obligations under the BRRD with regard to the notification and publication of resolution actions.167 The relevant NRA is, accordingly, required to notify the institution under resolution, as well as the competent supervisory authorities with responsibility for that institution and for its branches, the relevant central bank, deposit guarantee scheme, competent ministry, macro-prudential authorities, and EU institutions and ESAs, as well as the operators of systems in which the institution participates, of the content of the applicable resolution measures and the date on which these become effective.168 The notifications must include a copy of the administrative acts whereby the relevant resolution powers are ex49
Art. 29(5) sent. 1 SRMR. Art. 88 SRMR; and with regard to the NRAs, Art. 84 BRRD. See also Art. 339 TFEU. 164 For detailed discussion of the confidential information covered by the SRB’s duty of professional secrecy, see Gortsos, comment on Art. 88 SRMR. 165 See, in particular, the decisions of the Appeal Panel on the disclosure of documents (resolution scheme and valuation report) in Cases 38/17 to 43/17, decisions of 28 November 2017, Case 45/17, decision of 19 June 2018, and Case 2/2018, decision of 23 March 2018. 166 Art. 29(5) sent. 1 SRMR. 167 Art. 29(5) sent. 2 SRMR, with reference to Art. 83 BRRD. 168 Art. 83(2)‒(3) BRRD. 162 163
880
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
ercised.169 In addition, the NRA must ensure the wider publicity of the resolution action and the notification of the stakeholders of the institution under resolution by means of the publication of copies of the relevant instruments or of a notice summarizing the effects of the resolution action on its official website, on the website of the competent supervisory authority (presumably, both the ECB and the local NCA, if different from the NRA), and on the website of the institution under resolution.170 Last but not least, if the shares and/or debt instruments of the institution under resolution are traded publicly in a regulated market, the NRA must disclose the requisite information to the investing public by using the regulated market’s standard mechanism for disclosures.171 If not, the NRA must inform the known shareholders and creditors of the institution under resolution individually.172
Art. 30 SRMR Obligation to cooperate and information exchange within the SRM 1. The Board shall inform the Commission of any action it takes in order to prepare for resolution. With regard to any information received from the Board, the members of the Council, the Commission as well as the Council and the Commission staff shall be subject to the requirements of professional secrecy laid down in Article 88. 2. In the exercise of their respective responsibilities under this Regulation, the Board, the Council, the Commission, the ECB and the national resolution authorities and national competent authorities shall cooperate closely, in particular in the resolution planning, early intervention and resolution phases pursuant to Articles 8 to 29. They shall provide each other with all information necessary for the performance of their tasks. 3. The ECB or the national competent authorities shall transmit to the Board and the national resolution authorities the group financial support agreements authorised and any changes thereto. 4. For the purposes of this Regulation, the ECB may invite the Chair of the Board to participate as an observer in the Supervisory Board of the ECB established in accordance with Article 19 of Regulation (EU) No 1024/2013. Where deemed to be appropriate the Board may appoint another representative to replace the Chair for that purpose. 5. For the purposes of this Regulation, the Board shall appoint a representative which shall participate in the Resolution Committee of EBA established in accordance with Article 127 of Directive 2014/59/EU. 6. The Board shall endeavour to cooperate closely with any public financial assistance facility including the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), in particular in the extraordinary circumstances referred to in Article 27(9) and where such a facility has granted, or is likely to grant, direct or indirect financial assistance to entities established in a participating Member State. 7. Where necessary, the Board shall conclude a memorandum of understanding with the ECB and the national resolution authorities and the national competent authorities describing in general terms how they will cooperate under paragraphs 2 and 4 in Art. 83(3) BRRD. Art. 83(4) BRRD. 171 Art. 83(4)(d) BRRD. 172 Art. 83(5) BRRD. 169
170
Christos Hadjiemmanuil
881
Art. 30 SRMR
Obligation to cooperate and information exchange within the SRM
the performance of their respective tasks under Union law. The memorandum shall be reviewed on a regular basis and shall be published subject to the requirements of professional secrecy. Bibliography Dariusz Adamski, ‘Memoranda of Understanding in the Governance of European Financial Institutions’, ELR 45 (2020), 100; Christos V Gortsos, The Single Supervisory Mechanism (SSM): Legal Aspects of the First Pillar of the European Banking Union (Nomiki Bibliothiki, Athens 2015); Alberto de Gregorio Merino, ‘Memoranda of Understanding: A Critical Taxonomy’, in: ECB (ed), Building Bridges: Central Banking Law in an Interconnected World. ECB Legal Conference 2019 (Frankfurt 2019), 253; Christos Hadjiemmanuil, ‘The Euro in Crisis: 2008–2018’ in: Fabian Amtenbrink and Christoph Herrmann (eds), The EU Law of Economic and Monetary Union (Oxford University Press, Oxford 2020), 1253; Anastasia Karatzia and Theodore Konstadinides, ‘The Legal Nature and Character of Memoranda of Understanding as Instruments Used by the European Central Bank’, ELR 44 (2019), 447; Klaus Lackhoff, Single Supervisory Mechanism: European Banking Supervision by the SSM. A Practitioner's Guide (C. H. Beck/Hart/Nomos, Munich/Oxford/Baden-Baden 2017); Nikos Maragopoulos, ‘Cross-Border Supervision and Resolution of Significant Banking Groups in the Context of the European Banking Union’ (PhD thesis, Panteion University, Athens 2019); Roberto Ugena, ‘Confidentiality Clauses in MoUs: The Implications of the Absence of a Definition for Confidential Information’, in: ECB (ed), Building Bridges: Central Banking Law in an Interconnected World. ECB Legal Conference 2019 (Frankfurt 2019), 249. A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. General duty of close cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
C. SRB cooperation with the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
D. Cooperation between the SRM and the SSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Transmission to the SRM of intra-group financial support agreements . . . . . . II. SRB participation in the ECB’s Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Memorandum of understanding on SRM-SSM cooperation . . . . . . . . . . . . . . . . .
15 16 17 19
E. SRB cooperation with the EBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
F. SRB cooperation with the ESM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
A. Introduction 1
The issue of cooperation is of key importance for the effective and consistent operation of a two-level and highly complex administrative system, such as the one established by the SRMR. While ultimate resolution decision-making has been centralized at the European level, it is not internalized within a single organization. On the contrary, the resolution process has come to involve a variety of actors operating through a maze of joint work streams and joint or composite decision-making procedures. The authorities directly involved in the resolution process in accordance with the SRMR include resolution authorities at both the European and national levels (namely, the SRB and the NRAs), the Commission and the Council, but also the Banking Union’s banking supervisors (that is, the ECB and the NCAs), whose input and cooperation is essential, both in the resolution planning phase and in the run-up to resolution. The EBA and other authorities play a supplementary role in certain cases. The involvement of all these actors necessitates the specification of the roles played by, and the interactions between, relevant authorities at every step of the process. The result is the continuous mingling of substantive with function-assigning and procedural stipulations all along the SRMR. A further layer of complexity is due to the fact that the banking sector comprises many groups with multinational operating presence. Resolution planning in relation and the preparation of resolution actions to such groups necessitates ongoing cooperation between the resolution authorities of the Banking Union and their counterparts in the non-participating Member States and third countries. Such cross-border cooperation 882
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
often takes the form of joint decision-making in resolution colleges. At a more basic level, even when the authorities involved can perform their tasks and reach decisions independently of one another, the accuracy, quality, and effectiveness of their actions depend on their unimpeded access to all pertinent information, which, in turn, requires continuous and extensive exchange of information between them. A great number of provisions in the SRMR and the BRRD specify the objective, 2 sequencing, and content of authorities’ interactions and require the exchange of information in particular settings. Over and above such issue-specific provisions, however, the SRMR includes a special chapter on “cooperation”, which addresses issues of more general organizational nature. The fourth of six chapters containing “specific provisions” in relation to “functions within the SRM functions and procedural rules”,1 this is placed after the chapters on the three phases of the resolution process (resolution planning, early intervention, and resolution per se) but before those on the exercise of investigatory powers and the application of penalties by the SRB. On a systematic reading of the regulation, its provisions can be clearly seen to apply to all phases and aspects of the resolution process. Of the chapter’s four Articles (Arts. 30 through 33 SRMR), the first two concern the structures of cooperation between the various authorities involved in the operation of the SRM, and are thus focused on the Banking Union’s internal arrangements.2 The remaining two relate to the resolution regime’s cross-border aspects, namely: the cooperation between the SRM and resolution authorities of countries outside the Banking Union (the non-participating Member States and third countries)3; and the recognition of non-European resolution proceedings and the enforcement of decisions taken by third-countries’ authorities performing resolution-related functions. 4 Art. 30 SRMR is by no means limited, or even primarily directed, to its title’s pro- 3 fessed subject matter, that is, to cooperation and information exchange “within the SRM”. Of course, in contrast to the SSM, whose composition is set out explicitly in the SSMR,5 the precise membership of the SRM is not set out clearly anywhere in the text. In a narrow sense, which is used by the SRB itself, the SRM is formed solely of the SRB and the NRAs.6 In a wider, more functional sense, the SRM could be said to include, alongside the resolution authorities, the Council and the Commission.7 What is quite clear, however, is that the other authorities involved incidentally in the operation of the resolution regime, such as the ECB, the NCAs, the EBA, the ESM, etc. do not form part of the SRM and the SRB’s interactions with them do not take place “within the SRM”, even if they promote its purposes. In this sense, the title of the present Article is misleading, 8 and the provision which truly governs the structures of cooperation within the SRM is Art. 31 SRMR, which organizes the close cooperation between the SRB and the NRAs in a strongly hierarchical manner.
1 Pt II SRMR, “Specific provisions”, Title I, “Functions within the SRM and procedural rules”. Title I is the sole title of Part II; this has always been the case, starting with the Commission’s original proposal (COM(2013) 520 final, 10 July 2013), suggesting that the reference to “Title I” is inadvertent. 2 Arts. 30–31 SRMR. 3 Art. 32 SRMR. 4 Art. 33 SRMR. 5 Art. 6(1) sent. 1 SSMR. 6 SRB, ‘Annual Report 2019’ (2020), at p. 10. 7 In this vein, Art. 1(2) sent. 2 SRMR refers to the SRB, together with the Council, the Commission, and the NRAs, as the authorities responsible for applying the resolution rules and procedure within the framework of the SRM. However, the provision does not state that the SRM is composed of all these authorities. 8 In the Commission’s draft SRMR, the Article bore the more apposite title: “Obligation to cooperate”; COM (2013) 520 final (10 July 2013), Art. 27 Draft SRMR.
Christos Hadjiemmanuil
883
Art. 30 SRMR 4
Obligation to cooperate and information exchange within the SRM
In very rough terms, Art. 30 SRMR is equivalent to Art. 3(1)–(5) SSMR on cooperation. Its seven paragraphs set out disparate norms on the SRB’s interactions with a number of European and national authorities at distinct phases of the resolution process and for a variety of purposes.9 One paragraph imposes, on the European and national authorities participating in the SRM (in the wide sense identified above) and the SSM, a general duty to closely cooperate with one another on resolution-related matters. 10 Another concerns the submission of information to the Commission and the Council.11 Three paragraphs regulate the relations between the SSM and the SRM.12 The remaining two paragraphs concern the SRB’s relations with the EBA and the ESM.13 Even with regard to the relationships that they cover, it is evident that the provisions are neither exhaustive nor fully systematic.
B. General duty of close cooperation The provision of Art. 30(2) SRMR is a broad umbrella clause, encapsulating the principle of close cooperation between the authorities of the SRM and the SSM at all phases of the resolution process (resolution planning, early intervention, and resolution).14 The provision adapts for the two-level institutional architecture of the Banking Union the BRRD’s requirement of close cooperation between national authorities exercising resolution and supervisory functions.15 In specific terms, it stipulates that, with regard to the exercise of the responsibilities allocated to them by the SRMR, the Board, the Council, the Commission, the ECB, the NRAs, and the NCAs must cooperate closely.16 Many of the relations covered by the duty of close cooperation involve horizontal cooperation between the Union institutions and the SRB. To the extent that it applies to vertical relations, however, the duty is supposed to reflect the principle of sincere cooperation of Art. 4(3) TEU, in accordance with which the Union and the Member States must assist each other in carrying out tasks which flow from the Treaties and the Member States must refrain from any measure which could jeopardize the attainment of the Union’s objectives.17 6 More concretely, the provision requires the full and unimpeded exchange of relevant information between the aforementioned parties, which must transmit to one another all information available to them and necessary for the performance of the recipient authorities’ tasks.18 This highlights the fact that the required cooperation concerns primarily the exchange of information, followed by taking cognizance of the other participants’ views and decisions and the avoidance of incoherent and/or disruptive actions. In view of Art. 30(2) SRMR, the coordination of work streams, data collection efforts, and policies is evidently possible and even welcome, but not mandatory, unless some other provision so requires. The direct provision of assistance by the supervisory authorities to the SRM and/or the participation of the named authorities in composite decision-mak5
9 The common (and purely nominal, since no further explanation is given) justification for the relevant norms is the effectiveness of the resolution process; Recital (89) SRMR. 10 Art. 30(2) SRMR. 11 Art. 30(1) SRMR. 12 Art. 30(3)–(4), (7) SRMR. 13 Art. 30(5) and (6) SRMR. 14 Recital (89) sent. 3–5 and Art. 30(2) SRMR. 15 Art. 3(4) BRRD. 16 Art. 30(2) sent. 1 SRMR. 17 Recital (88) SRMR. 18 Art. 30(2) sent. 2 SRMR.
884
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
ing procedures is only required (and allowed) when specifically provided for in the SRMR, as in the case of requests of information and on-site inspections,19 or of the resolution procedure of Art. 18 SRMR.
C. SRB cooperation with the Commission The first sentence of Art. 30(1) SRMR concerns specifically the interactions between 7 the SRB and the Commission in the run-up to the taking of resolution actions. More precisely, the provision requires the SRB to inform the Commission of any action that it takes in preparation for a formal resolution procedure.20 The words used to identify the matters subject to notification (“action [taken] in order to prepare for resolution”) might be interpreted, in extremis, to include all resolution planning actions. Nonetheless, this construction is negated by the fact that, throughout the text of the regulation, the phrase “to prepare for resolution” is consistently and exclusively used with reference to steps taken by the SRB during the early intervention phase in order to set the ground for a looming resolution action.21 Furthermore, since the actions in question are explicitly of preparatory nature, the reportable matters are not limited to formal decisions of the SRB (such as a requirement addressed to the institution concerned to contact potential acquirers22), but should also comprise the substance of its informal preparations and the provisional conclusions, timing plans, and proposed resolution strategies reached internally by its staff or submitted to it by the relevant NRA.23 The provision complements the obligation of the SRB to transmit information to the 8 Commission in pursuance of the general duty to exchange information as discussed above,24 as well as a number of more specific stipulations in other Articles of the regulation, which envisage the notification by the SRB to the Commission of: – any information received from the ECB or the NCAs concerning the adoption of early intervention measures with regard to an institution25; – the (draft) resolution scheme at an early point, so as to allow time for a proper assessment26; – any other information that the Commission deems relevant for the performance of its tasks throughout the resolution phase27; – the communication of any information that the Commission (DG COMP) may need in order to assess the compatibility of the Art. 107 TFEU of a proposed resolution action involving the granting of State aid.28 The obligation to supply information to the Commission in accordance with these 9 provisions are reinforced in a very significant way by the fact that the Commission is
Art. 34(6) sent. 1 and Art. 36(1) SRMR, respectively. Art. 30(1) sent. 1 SRMR. 21 Recital (52) sent. 3 and Arts. 13(2)–(3), (5) and 88(1)(3) SRMR. The text of the regulation in other official language confirms this conclusion. 22 Art. 13(3)(1) SRMR. 23 See also Art. 6(1)–(4), (6) SRMR, where the SRB and the other authorities participating in the SRM are described repeatedly as “making decisions or taking actions”, and generating “actions, proposals, and policies”, thus suggesting that the actions may be informal. 24 Art. 30(2) sent. 2 SRMR. See also Recital (56) sent. 3 SRMR. 25 Art. 13(1)(2) SRMR. 26 Arts. 18(7)(1) and 54(2)(d) SRMR. 27 Art. 18(10) sent. 1 SRMR. 28 Art. 19(3)(2) SRMR. 19
20
Christos Hadjiemmanuil
885
Art. 30 SRMR
Obligation to cooperate and information exchange within the SRM
entitled to participate in all formal meetings of the SRB (whether in plenary or executive session) as a permanent observer and to have access to all documents.29 10 By its nature, the information that the SRB may transmit to the Commission or the Council in the run-up and during the resolution procedure is bank-specific, private, and unavoidably sensitive (at least initially). It is thus covered by the resolution regime’s requirements of confidentiality (or professional secrecy).30 To ensure that it will not be divulged by the potential recipients, the second sentence of Art. 30(1) SRMR expands the scope ratione personae of the SRB’s duty of confidentiality under Art. 88 SRMR, so as to cover them. Specifically, the members and staff of the Commission and the Council are equated the members and staff of the SRB itself in so far as any information received from the latter. The reference to the Council and to “any” information, but also the evident purpose of the clause under discussion, suggest that this expansion of the duty of confidentiality does not cover only the information transmitted in pursuance of the preceding clause (that is, information concerning the preparatory actions of the SRB), but applies to all information communicated by the SRB to the two institutions during the early intervention and resolution phases. The draft SRMR included a clearly worded provision to this effect,31 but this did not find its way in the final text. 11 In 2019, the Commission and the SRB signed an MoU32 on the modalities of their cooperation and information exchange.33 The MoU is not meant to modify the applicable legal regime or to authorize or prohibit any actions of the participating parties other than the exchange of information as necessary to ensure the effective application of the resolution regime.34 Its arrangements are premised on the idea that an efficient, effective, and timely cooperation process requires speed of action and smooth interactions in the course of the crisis management process, both of which can be promoted by clarifying in advance the modalities and content of the mutual sharing of information.35 The MoU structures the SRB’s interactions with the Commission’s DG FISMA, but does not apply
Art. 43(3) SRMR. Art. 88 SRMR and Art. 84 BRRD. See infra, → Art. 88 paras. 1 et seq. 31 COM (2013) 520 final, Art. 28(2) Draft SRMR. 32 For a taxonomy of MoUs, distinguishing between MoUs concluded between European and thirdcountry authorities within the framework of public international law, MoUs concluded within the framework of Union law (whether between European institutions and bodies, or between such European authorities and the authorities of the Member States, or between the Member States themselves), and MoUs concluded in the context of economic policy and financial assistance outside the framework of Union law, see Gregorio Merino, in: ECB Legal Conference 2019. Building Bridges: Central Banking Law in an Interconnected World (2019), 253, at pp. 253–257. According to Gregorio Merino, MoUs of the second category (which is of concern here) are an expression of the principle of sincere cooperation. In certain cases (as in the case of the ECB-SRB MoU, discussed infra, → paras. 19–25), their conclusion is envisaged in secondary legislation. Even so, they are atypical acts, which follow atypical procedures and are characterized by flexibility. Despite the fact that they set out “soft” or incomplete obligations, which are not supported by complete means of enforcement, they are not totally bereft of normativity: they are generally seen as binding and are systematically applied by the signatories; they may be invoked before the CJEU; and they cannot class with the formal norms of Union law or constitute a parallel legal order, see Gregorio Merino, in: ECB Legal Conference 2019. Building Bridges: Central Banking Law in an Interconnected World (2019), 253, at pp. 258–260. On the reviewability of MoUs, see Adamski, ELR 45 (2020), 100, at pp. 100–112. 33 ‘Memorandum of Understanding between the Commission and the Single Resolution Board in respect of Certain Elements of Cooperation and Information Exchange Pursuant to the Single Resolution Mechanism Regulation’ (1 August 2019) (‘Commission-SRB MoU’), at: . 34 Paras. 3.1–3.2 Commission-SRB MoU. 35 Para. 1 Commission-SRB MoU. 29
30
886
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
to its contacts with DG COMP in relation to the application of the State aid rules in relation to resolution schemes in pursuance of Art. 19 SRMR.36 With regard to institutional representation, the MoU calls on the SRM to include 12 representatives of the Commission as observers, not only in its plenary and executive sessions, as required by the SRMR, but also in its various substructures.37 Substantively, it regulates the cooperation between the two parties from the point 13 when an institution’s financial condition starts to deteriorate rapidly until the actual resolution phase, identifying critical information that must be communicated to the Commission at each stage and pointing out that the Commission will progressively increase its involvement as the situation deteriorates.38 The MoU contains special provisions on the confidentiality of sensitive information communicated from one party to the other.39 In this context, it is noticeable that it requires the SRB to treat as sensitive any information received from the Commission pursuant to its provisions.40 In relation to the post-resolution stage, the MoU envisages the cooperation of the parties in external communication with interest groups and the media, 41 as well as the coordination of their response in the event of legal challenges to the resolution scheme.42 Other provisions of the MoU provide for: the need for the SRB to acknowledge the 14 role of the Commission in the Unions external relations and to inform and consult it when carrying on international activities or entering into MoUs with third-country authorities or international bodies43; the holding of meetings at management and staff level and the written exchange of views as a means of sustaining the relationship of good cooperation44; and the collaboration of the parties with regard to the development of their human resources, through knowledge exchange, including in the form of trainings, conferences and workshops.45 Remarkably, in addition to its main administrative functions, the MoU recognizes a more general policy-making role for the SRB, whose technical assistance may be sought by the Commission on matters relevant for the Banking Union, the interpretation of European law concerning resolution, and even the preparation of formal legislative proposals.46
D. Cooperation between the SRM and the SSM As already mentioned, three paragraphs of Art. 30 SRMR govern aspects of the coop- 15 eration between the SSM and the SRM. The three provisions are of very different nature and significance, since one concerns a narrow duty of the SSM to provide information to the SRM, another regulates a specific procedural issue, while the third provides the basis Para. 2.2 Commission-SRB MoU. Para. 5 Commission-SRB MoU. 38 Para. 8 Commission-SRB MoU. 39 Para. 11 Commission-SRB MoU. 40 Para. 11.3 sent. 4 Commission-SRB MoU. On the treatment of confidential information in MoUs, see Ugena, in: ECB Legal Conference 2019. Building Bridges: Central Banking Law in an Interconnected World (2019), 249. 41 Para. 6.2 Commission-SRB MoU. 42 Para. 9.7 Commission-SRB MoU. 43 Para. 7 Commission-SRB MoU. 44 Para. 9.1 Commission-SRB MoU. 45 Para. 11 Commission-SRB MoU. 46 Paras. 9.2–9.4 Commission-SRB MoU. See also SRB, ‘Annual Report 2019’ (2020), at p. 26, according to which the SRB provided expertise and technical support to the Commission in relation to the implementation of the Banking Reform package and the legislative work on deposit insurance. In similar manner, the SRB offered advice and technical assistance to the Council and the Eurogroup; ibid. 36
37
Christos Hadjiemmanuil
887
Art. 30 SRMR
Obligation to cooperate and information exchange within the SRM
for a fundamental structuring of SSM-SRM relations by means of a memorandum of understanding.
I. Transmission to the SRM of intra-group financial support agreements 16
Art. 30(3) SRMR requires the ECB or the NCAs, as the case may be, to transmit to the Board or the NRAs any intra-group financial support agreements underpinning banking groups’ recovery plans that they have authorised in pursuance of the relevant provisions of the BRRD,47 as well as any subsequent changes. The provision adapts for the two-level institutional architecture of the Banking Union the provision of Art. 22 BRRD. For the rest, it is largely redundant, since the SRMR does not replicate any other of the BRRD’s extensive provisions on intra-group financial support, and its practical effect would anyhow follow from the text of that provision of the BRRD.
II. SRB participation in the ECB’s Supervisory Board To ensure a more effective interaction between the cooperating parties and facilitate the performance of their tasks under the SRMR, Art. 30(4) SRMR enables the ECB to invite the SRB’s Chair to attend meetings of its Supervisory Board as an observer. 48 A provision elsewhere in the SRMR establishes the converse right of the ECB to participate through a representative in meetings of the plenary and executive sessions of the SRB. 49 The two provisions are not fully symmetrical, since the ECB has an automatic right to participate in all SRB meetings and access to all documents, while the ECB is not required to invite the SRB’s Chair in the meetings of its Supervisory Board, but simply has the discretion to do so. Nonetheless, the provision establishes an expectation that the SRB will be represented in resolution-relevant discussions, especially in crisis situations, where an institution’s situation is deteriorating. Following the highlighting of the legislative asymmetry in a report by the European Court of Auditors,50 this expectation has been formalized. Specifically, in 2018 the two parties agreed that the SRB’s Chair will henceforth be invited in all ECB Supervisory Board meetings with resolution interest, that is, those involving deliberations on group recovery plans, group financial support, the rapid deterioration of an institution’s financial condition, early intervention measures, or the determination that an institution is failing or likely to fail.51 18 The SRB is represented ex officio by its Chair, except in situations where the SRB deems it appropriate to appoint another representative. The legislation does not provide indications of the circumstances where this might be the case; but the text is framed 17
Arts. 7(5) and 19–26 BRRD. The reference to “the Supervisory Board of the ECB established in accordance with Art. 19 of Regulation (EU) No 1024/2013” is a patent mistake, since Art. 19 SSMR refers to the institutional independence of the ECB and the NCAs. The reference should, instead, be to Art. 26(1) SSMR. On the ECB’s Supervisory Board, see supra, → Art. 26 paras. 1 et seq.; Gortsos, The Single Supervisory Mechanism (SSM): Legal Aspects of the First Pillar of the European Banking Union (2015), at pp. 240–254; Lackhoff, Single Supervisory Mechanism: European Banking Supervision by the SSM. A Practitioner's Guide (2017), at pp. 60–71. 49 Art. 43(3) SRMR. 50 European Court of Auditors, ‘Single Resolution Board: Work on a Challenging Banking Union Task Started, But Still a Long Way to Go’ (Special Report No 23, 2017), para. 142. 51 Para. 5.1 ‘Memorandum of Understanding between the Single Resolution Board and the European Central Bank in respect of Cooperation and Information Exchange’ (22 December 2015; revised on 30 May 2018). 47 48
888
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
in terms suggesting that this should be an exceptional situation, justified by special considerations. Accordingly, a blanket assignment of the SRB’s representation tasks to another person would be questionable.
III. Memorandum of understanding on SRM-SSM cooperation To formalize and structure the cooperation of the authorities belonging to the SRM with those of the SSM, Art. 30(7) SRMR provides for the drawing up and regular revision of a multilateral MoU. Specifically, it enables the SRB to conclude with the ECB, the NRAs, and the NCAs an MoU describing in general terms how they will cooperate in the performance of their resolution-related tasks, thus operationalizing (inter alia) the aforementioned52 provisions of Art. 30(2) and (4) SRMR.53 Although the provisions mention that the SRB “shall” conclude an MoU on these lines, the qualification “where necessary” effectively leaves to the SRB room for discretion. Once adopted, the MoU must be reviewed on a regular basis and published, but only subject to the requirements of professional secrecy – meaning that in the published text potentially sensitive provisions may be redacted.54 Redactions could apply, for instance, to revelatory methodological provisions, if any. The provision of Art. 30(7) SRMR overlaps to a great extent with that of Art. 34(5) SRMR, which enables the exact same authorities to draw up MoUs establishing a procedure for the exchange of information between them.55 It is thus reasonable to implement both by means of a single instrument. In practice, the legislative provisions have been used as the legal ground for the adoption not of a multilateral MoU, but of a bilateral MoU between the SRB and the ECB, the original version of which was signed on 22 December 2015. Two years later, the European Court of Auditors published a report containing an unfavourable assessment of that MoU, which was considered to be not comprehensive enough and unable to ensure the automatic and full sharing of information and the full coordination of actions, especially during the early intervention phase.56 In view of this criticism and their growing experience with the operation of the resolution framework, the SRB and the ECB acknowledged the need for improvements. Therefore, on 30 May 2018, they signed a revised MoU.57 The SRB-ECB MoU covers the cooperation and exchange of information between the SRB and the supervisory function of the ECB in relation to all banking groups under the ECB’s direct supervisory responsibility.58 In terms of legal effect, it is intended to serve as a simple statement of intent, which does not create any directly or indirectly enforceable rights and which the parties apply on a best-effort basis.59 Significantly, interactions between the two authorities in pursuance of the MoU do not require formalities or the channeling of contacts through the senior management, but can take See supra, → paras. 5–6 and 17–18. Art. 30(7) sent. 1 SRMR. 54 Art. 30(7) sent. 2 SRMR. 55 Art. 34(5) sent. 1 SRMR. 56 European Court of Auditors, ‘Single Resolution Board: Work on a Challenging Banking Union Task Started, But Still a Long Way to Go’ (Special Report No 23, 2017), paras. 130–142, 155. 57 ‘Memorandum of Understanding between the Single Resolution Board and the European Central Bank in respect of Cooperation and Information Exchange’ (22 December 2015; revised on 30 May 2018; ‘SRB-ECB MoU’), at: . 58 Recital (2) and paras. 1.1 and 2.1 SRB-ECB MoU. 59 Para.4.1 SRB-ECB MoU. 52
53
Christos Hadjiemmanuil
889
19
20
21
22
Art. 30 SRMR
Obligation to cooperate and information exchange within the SRM
the form of direct contacts between the relevant units and responsible persons, 60 thus contributing to closer coupling of the two administrations. 23 To reduce the reporting burden on credit institutions while ensuring the ready availability of relevant data for resolution purposes, and consistent with Art. 31(1) SRMR, the MoU provides that the SRB may access on a continuous basis all the supervisory information of the SSM, of which it must make full use before addressing a request for additional information directly to those institutions.61 The detailed provisions on information exchange envisage the automatic sharing of a long list of data and information, which essentially includes all essential assessments and analyses with regard to individual institutions but becomes more thorough in the case of institutions in distress. 62 In so far as some available piece of information is not shared automatically, its communication requires the submission of a formal written request.63 However, the parties are required to transmit on their own motion information that they deem to be necessary for the performance of the other party’s responsibilities.64 As expected, the MoU includes provisions on confidentiality and data protection with regard to the exchanged information.65 In contrast to the Commission-SRB MoU, however, it does not require the parties to automatically treat the information received from the other party as sensitive, but simply restricts the disclosure of any information which is inherently confidential. Moreover, the transmission by the parties of confidential information to the national authorities of their respective mechanisms is explicitly allowed.66 24 The MoU includes arrangements for the administrative coordination of the SRB and the ECB. These must align their recovery planning and resolution planning work cycles; they must consult one another with regard to proposed actions in recovery plans, the content of resolution plans, and any decisions on the grant of simplified obligations and waivers in the course of recovery and resolution planning; and they must intensify their cooperation when dealing with a distressed institution.67 Their cooperation further extends to other matters, such as the ECB’s common procedures, the calculation of institutions’ ex ante contributions to the SRF, the conduct of on-site inspections, and the preparation of the SRB’s annual work programme.68 Specifically with regard to the SRB’s appointment of external valuers in preparation of a potential resolution, the ECB must be informed in advance; and if it has any indication of potential conflict of interests, it must communicate it to the SRB immediately.69 25 The MoU further addresses issues of cooperation with regard to: external communications with interest groups and the media70; exchange of information with regard to the establishment, suspension, and termination of close cooperation agreements between the ECB and NCAs of Member States whose currency is not the euro71; cooperation with the authorities of the non-Banking Union Members States and third countries72; and knowledge exchange.73 To comply with the requirement of the SRMR, the MoU Para. 6.1.1 SRB-ECB MoU. Recital (8) and para. 1.3 SRB-ECB MoU. 62 Para. 7.2 and Annex SRB-ECB MoU. The 2018 revision has changed profoundly this part of the MoU. 63 Para. 7.3 SRB-ECB MoU. 64 Para. 7.4 SRB-ECB MoU. 65 Paras. 13–14SRB-ECB MoU. 66 Recital (10) and para. 13.4(2) SRB-ECB MoU. 67 Para. 8 SRB-ECB MoU. 68 Paras. 9.1–9.3, 9.5 SRB-ECB MoU. 69 Para. 9.6 SRB-ECB MoU. 70 Para. 6.2 SRB-ECB MoU. 71 Para. 10 SRB-ECB MoU. 72 Paras. 11–12 SRB-ECB MoU. 73 Para. 15 SRB-ECB MoU. 60
61
890
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
provides for its review by the parties every two years and its amendment by mutual consent.74
E. SRB cooperation with the EBA The provision of Art. 20(5) SRMR relates to the SRB’s participation in the resolu- 26 tion-related work of the EBA. In its capacity as pan-European banking regulator, the EBA performs a variety of roles, including in the area of resolution. Of evident significance for the operation of the SRM is the promulgation by the EBA of regulatory and implementing technical standards, guidelines, and recommendations,75 which structure the decision-making of the SRB and the NRAs (as well as the Commission and the Council, when they exercise resolution-related functions).76 The SRB is also affected by the EBA’s exercise of coordinating responsibilities with regard to the administration of the European resolution regime. The following functions of the EBA stand out in this regard: – The EBA contributes to the establishment of coherent and coordinated crisis management and resolution regime, the development and coordination of recovery and resolution plans, the development of best practices for the resolution of failing institutions, and the assessment of the need for appropriate resolution financing instruments.77 – It is responsible for the development of a Union resolution handbook, setting out best practices and high-quality methodologies and processes for resolution, taking into account the work of the SRB.78 – It operates a mediation mechanism for the settlement of disagreements between resolution authorities in relation to cross-border group resolution planning.79 – It conducts peer reviews of resolution authorities, including peer reviews of the exchange of information between the SRB and the resolution authorities of non-participating Member States and of their joint activities in relation to the resolution of cross-border groups.80 – Most importantly, the EBA has a wide power to request financial authorities to supply information, including periodic information in specified formats or by way of comparable templates,81 and serves as a pan-European information hub for the information thus received.82 In particular, it maintains a central database of administrative penalties imposed on institutions and other private parties for breaches of their obligations under the resolution regime.83 – Also with regard to the collection of information, an important practical aspect of the EBA’s work involves the development in collaboration the ECB with the EBA Para. 17 SRB-ECB MoU. Arts. 10–16, 16a 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, OJ 2010 L 331/12 (‘EBAR’), as amended. 76 Recital (18) sent. 3 and Art. 5(2)(2) sent, 1–3 SRMR. 77 Arts. 8(1)(i), 24(2), 25(1), (2), and 27 EBAR. 78 Arts. 8(1)(ab), and 29(2)(2) sent. 2 and 3 EBAR. 79 Art. 19 EBAR, in conjunction with Arts. 8(2)–(4), 13(4)–(6), 18(5)–(6), (6a), (7), 20(5), (7), and 45h(4)–(5) BRRD, and Art. 5(2)(2) sent. 4 SRMR. 80 Arts. 25(1a) and 30 EBAR. 81 Art. 35(1)–(5) EBAR. 82 Art. 31(2)(f) EBAR. 83 Art. 113 BRRD. 74
75
Christos Hadjiemmanuil
891
Art. 30 SRMR
Obligation to cooperate and information exchange within the SRM
of streamlined taxonomies and formats for the mandatory periodic reporting of supervisory and resolution-related data by credit institutions. This activity aims at the integration of reporting requirements, thus avoiding the duplication of reporting requests, increasing banks’ capacity for more frequent data reporting, improving data quality, and permitting the seamless and automated use of data by the authorities.84 27 In view of the importance of the EBA’s functions, the SRMR requires the SRB (as well as the Council and the Commission) to cooperate closely with it and respond to its requests for information.85 The same obligation is imposed on NRAs by the BRRD.86 In addition, the SRMR establishes a number of positive obligations of the SRB to submit information to the EBA. Thus, the SRB must notify the EBA of any cooperation arrangement that it may conclude with the resolution authorities of third countries.87 Moreover, it is required to submit to the EBA bank-specific information on various aspects of the resolution process. With regard to the resolution planning phase, these include: any finding that an institution or group is not resolvable88; the measures proposed by the institution or group concerned with a view to achieving resolvability89; any decision to apply simplified obligations in relation to the drafting of resolution plans90; and the individual MREL requirement of each institution or group.91 In the context of a bail-in-based resolution action, the SRB is required to transmit to the EBA the business reorganization plan that must be prepared by the management of the institution under resolution.92 The SRB must also keep the EBA informed of the imposition on an institution or other concerned party of fines or periodic payments for failure to supply information or submit to general investigations or on-site inspections, or, in the case of an institution under resolution, failure to comply with a decision addressed directly by the SRB to it, as well as the lodging and final outcome of any appeal against such fines and periodic payments.93 To enable the transmission of the aforementioned categories of bank-specific information, or any other piece of confidential information, the information gateways of the SRMR cover explicitly the sharing of information of the members of the SRM with the EBA.94 28 Within this framework, Art. 30(5) SRMR is exclusively concerned with the institutional representation of the SRB in the EBA’s structures and, in particular, the EBA’s Resolution Committee, the permanent internal committee responsible for the preparation of decisions on BRRD-related matters, including the drafting of relevant regulatory and implementing technical standards.95 The provision entitles the SRB to appoint a representative as a full time member of the Resolution Committee.96 This provision of the SRMR must be read in conjunction with a related provision of the regulation establishing the EBA, in accordance with which, whenever resolution-related matters come for discussion in the EBA’s Board of Supervisors, the SRB’s Chair has the right to attend the See SRB, ‘Annual Report 2019’ (2020), at pp. 22–23. Recitals (18) sent. 4 and (89) sent. 1 and Art. 5(2)(2) sent. 3 SRMR. 86 Art. 128 BRRD. 87 Art. 33(4) SRMR. 88 Art. 10(3)(2) and 10(4)(2) SRMR, respectively. 89 Art. 10(9)(1) sent. 2 SRMR. 90 Art. 11(10) SRMR. 91 Art. 12(6) SRMR, as replaced by SRMR II. 92 Art. 27(16)(3) SRMR. 93 Art. 41(1)(3) SRMR, with reference to Arts. 38–39 SRMR. 94 Art. 88(6) SRMR. 95 The Resolution Committee is established under Art. 127 BRRD in conjunction with Art. 41 EBAR. 96 Art. 30(5) SRMR. 84
85
892
Christos Hadjiemmanuil
Obligation to cooperate and information exchange within the SRM
Art. 30 SRMR
meetings as observer, while the representatives of the NRAs are entitled to accompany the representatives of their countries’ NCAs, but without exercising voting rights. 97 In practice, a full-time board member of the SRB chairs the EBA’s Resolution Committee and participates as observer in the Board of Supervisors and the Standing Committee on Regulation and Policy.98 Other provisions of the SRMR envisage the reciprocal participation of the EBA in the 29 structures of the SRB. Thus, the SRB is expected to invite the EBA to be represented with an observer whenever the discussion concerns matters with regard to which the BRRD mandates the development of technical standards and guidelines.99
F. SRB cooperation with the ESM Art. 30(6) SRMR concerns the special situation where, due to the large scale of the 30 failing institution’s funding gap, which the SRF cannot fill without breaching the permissible quantitative limit on its interventions, a bail-in-based resolution action cannot be fully and effectively implemented without tapping alternative financing sources for the remainder. In this scenario, it is permissible to seek European or national public financial assistance100 if the resolution takes place in the context of “extraordinary circumstances”. The meaning of this term is not further specified in the legislative text, but undoubtedly includes situations of system-wide stress and crisis, affecting the economy of the euro area as a whole or, at least, the economy of the Member State concerned. Alternatively, European public financial assistance may be provided to the banking sector as a part of a country-assistance programme, such as the seven programmes launched between 2010 and 2015, during the debt crisis engulfing the euro area, in support of Greece, Ireland, Portugal, Spain, and Cyprus.101 The European assistance may include funds earmarked for the direct or indirect financing of the restructuring of the national banking sector. An initial collective mechanism for the provision of assistance to countries of the 31 euro area in severe financial distress was established in June 2010 in the form of the European Financial Stability Facility (EFSF). This was a temporary special purpose vehicle, incorporated as an entity of private law under the laws of Luxembourg and financed by issuing bonds on the back of guarantees provided on a pro rata basis by the euro area countries.102 The EFSF was replaced by a permanent mechanism, the European Stability Mechanism (ESM) in 2012. 103 In contrast to the EFSF, the ESM was set up as an international financial institution on the basis of a treaty between the euro area countries, which sits outside the Union treaty framework.104 The ESM can support the refinancing of a country’s banking sector through two instruments: the indirect bank recapitalization instrument, whereby money is lent to the national government Art. 40(6)(2)–(3) EBAR. SRB, ‘Annual Report 2019’ (2020), at p. 27. 99 Recital (35) sent. 3–4 SRMR and Arts. 51(3) and 53(1)(3) sent. 1 SRMR. 100 Support by the national governments can be provided under the government financial stabilization tools, that is, the public equity support tool and the temporary public ownership tool, envisaged in Arts. 56–58 BRRD. 101 See Hadjiemmanuil, in: Amtenbrink and Herrmann (eds), The EU Law of Economic and Monetary Union (2020), 1253. 102 EFSF Framework Agreement (7 June 2010); and ‘Decision of the 16 Euro Area Member States’ (7 June 2010). 103 Treaty establishing the ESM, signed on 2 February 2012 (ESM Treaty) (effective 27 September 2012). 104 Compatibility of the ESM Treaty with the EU Treaties framework was achieved by means of the amendment of Art. 136 TFEU, to which a new para. (3) was inserted. 97 98
Christos Hadjiemmanuil
893
Art. 30 SRMR
Obligation to cooperate and information exchange within the SRM
to finance its banking restructuring programme105; and the direct recapitalization instrument (DRI), under which the ESM can finance directly the restructuring of banks, but only on terms which are very unattractive for the country seeking to mobilize its assistance and continue to implicate it in the resolution financing costs.106 The provision of public financial assistance at the European level will be further institutionalized with the activation of the ESM’s new “backstop facility” at the start of 2022.107 The DRI will then be discontinued and the ESM will assume a more concrete and immediate responsibility in resolution financing as the ultimate source of funding (or lender of last resort) for the SRF. Specifically, under the backstop facility (a stand-by facility which the ESM will grant to the SRB), the ESM will stand ready to provide bridging finance for resolution actions; whenever the conditions for activation of the facility are met, the request for a loan will be coming from the SRB, thus dissociating the provision for assistance from the finances of any particular national government.108 32 At the time of the SRMR’s enactment, the use of the ESM as a fiscal backstop to the SRF was still highly uncertain. On the other hand, the ESM’s role in the financing of bank restructuring actions was already clearly established in law, and actually tried out in existing country programmes.109 Accordingly, the text of Art. 30(6) SRMR reflects explicitly the expectation that the ESM will henceforth constitute a key funding mechanism for bank restructuring and resolution, especially in the event of systemic crises. The ESM’s involvement would require cooperation between the SRB and the ESM during the preparation and implementation of the relevant country assistance programmes, especially due to the fact that these must be based on strict conditionality. Compliance with the conditionality of ESM country programmes is monitored jointly by the ESM and the Union institutions during the programmes’ lifetime. While the SRB is not directly involved in programme monitoring, the longer-term and phased-in nature of the relevant interventions may, depending on the circumstances, necessitate further interactions during the implementation stage. In contrast to country programmes, potential ESM loans to the SRB under the new backstop facility will not be subject to the requirement of strict conditionality.110 Continuing interaction with the ESM will be evidently required in this case, simply by virtue of the fact that the SRB will be an immediate transacting party. 33 In view of the above, Art. 30(6) SRMR provides that the SRB must seek to cooperate closely with any public financial assistance facility which may grant or has already granted direct or indirect financial assistance to institutions within the Banking Union.111 The EFSF and the ESM are included explicitly in the parties with which the SRB is required to cooperate. In view of the fact that the EFSF does not provide any further financial assistance following the activation of the ESM, which also took over its ex105 Art. 15 ESM Treaty; and ESM Guideline on financial assistance for the recapitalization of financial institutions. 106 ESM Board of Governors Resolution SG/BoG/ 2014/05/04 (8 December 2014); and ESM Guideline on financial assistance for the direct recapitalisation of institutions (8 December 2014). 107 Eurogroup, ‘Statement of the Eurogroup in Inclusive Format on the ESM Reform and the Early Introduction of the Backstop to the Single Resolution Fund’ (press release, 30 November 2020), paras. 1–3 and 12. 108 Art. 18A Draft revised text of the Treaty establishing the European Stability Mechanism, as agreed by the Eurogroup (14 June 2019) (“draft revised ESM Treaty”), Draft revised ESM Treaty. 109 Spain (2012), Cyprus (2013). The experience of the EFSF-financed programmes for Ireland (2010), Portugal (2011), and Greece (2012) was also highly pertinent. 110 See, however, the residual conditions on disbursements in the Art. 18A(8)–(9) Draft revised ESM Treaty; and Art. 4(7) Draft ESM Guideline on the backstop facility to the SRB for the SRF (4 December 2019) (‘Draft Backstop Guideline’). 111 Recital (89) sent. 6 and Art. 30(6) SRMR.
894
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
isting staff and operations, the reference to it is essentially obsolete, leaving the ESM and the national fiscal authorities, as the case may be, as the key interlocutors. A related recital in the SRMR’s preamble provides that a representative of the ESM may be invited in appropriate occasions to attend the meeting of the SRB.112 The provision parallels a provision in the SSMR, which imposes a similar duty of 34 cooperation on the ECB.113 The only difference is that, while the relevant obligation of the ECB (which participates in the negotiation and monitoring of country programmes) is framed in absolute terms (“shall cooperate closely”), that of the SRB is expressed on milder, best-effort terms (“shall endeavour to cooperate closely”).
Art. 31 SRMR Cooperation within the SRM 1. The Board shall perform its tasks in close cooperation with national resolution authorities. The Board shall, in cooperation with national resolution authorities, approve and make public a framework to organise the practical arrangements for the implementation of this Article. In order to ensure effective and consistent application of this Article, the Board: (a) shall issue guidelines and general instructions to national resolution authorities according to which the tasks are performed and resolution decisions are adopted by national resolution authorities; (b) may at any time exercise the powers referred to in Articles 34 to 37; (c) may request, on an ad hoc or continuous basis, information from national resolution authorities on the performance of the tasks carried out by them under Article 7(3); (d) shall receive from national resolution authorities draft decisions on which it may express its views, and, in particular, indicate the elements of the draft decision that do not comply with this Regulation or with the Board's general instructions. For the purposes of evaluating resolution plans, the Board may request national resolution authorities to submit to the Board all information necessary, as obtained by them in accordance with Article 11 and Article 13(1) of Directive 2014/59/EU, without prejudice to Chapter 5 of this Title. 2. Article 13(4) to (10) and Articles 88 to 92 of Directive 2014/59/EU shall not apply to relations between national resolution authorities. The joint decision and any decision taken in the absence of a joint decision as referred to in Article 45(9) to (13) of Directive 2014/59/EU shall not apply. The relevant provisions of this Regulation shall apply instead. Bibliography Christos Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal Aspects of the Second Main Pillar of the (European) Banking Union (working paper, 5 th ed, 30 April 2019); id., European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (Palgrave Macmillan, Springer Nature, Cham, Switzerland 2020); A. Joanne Kellermann and Myrte Meijer Timmerman Thijssen, ‘Bank Resolution within the European Banking Union: From Bail-Out to Bail-In’, in: International Monetary Fund, Law and Financial Stability (International Monetary Fund, Washington, DC, 2020), 10; Nikos Maragopoulos, ‘Cross-Border Supervi-
112 113
Recital (35) sent. 5 SRMR. Art. 3(5) SSMR.
Christos Hadjiemmanuil
895
Art. 31 SRMR
Cooperation within the SRM
sion and Resolution of Significant Banking Groups in the Context of the European Banking Union’ (PhD thesis, Panteion University of Political and Social Sciences, Athens 2019). A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Hierarchical character of the envisaged cooperation . . . . . . . . . . . . . . . . . . . . . . . . .
3
C. Cooperation Framework (“COFRA”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Subject-matter of COFRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. General principles of cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 11 12
D. Guidelines and general instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
E. Scope and dimensions of the close cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Internal tasks concerning significant institutions and the role of IRTs . . . . . . . II. Information gathering and transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. NRA involvement in formal SRB procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Execution of resolution schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. SRB’s oversight of NRA resolution planning and decisions concerning LSIs VI. Cooperation in relation to the SRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Policy development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 21 24 29 33 34 40 43 49
F. Disapplication of BRRD rules on cross-border banking groups and resolution colleges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
A. Introduction Art. 31 SRMR regulates the relationships between the SRB and the national resolution authorities of the Member States participating in the BU (NRAs). 1 The title (“Cooperation within the SRM”) parallels that of Art. 6 SSMR (“Cooperation within the SSM”). Nonetheless, the structure of the two provisions and their function within their respective legal frameworks are quite dissimilar, since a very significant aspect of Art. 6 SSMR, namely, the overall division of tasks between the supranational and the national components of the SSM, is treated separately in the SRMR.2 This leaves cooperation stricto sensu as the exclusive subject matter of Art. 31 SRMR. The envisaged cooperation extends to all three phases of the resolution process, namely: resolution planning; early intervention; and resolution per se, including the execution of the SRB’s resolution schemes by the relevant NRAs at the national level.3 2 The text of the Article is primarily addressed to the SRB. It opens with a stipulation of general nature, instructing the SRB to perform its various tasks in close cooperation with the NRAs.4 In itself, the sentence is superfluous, because at this level of generality the requirement is already included in Art. 30(2) SRMR, in accordance to which an obligation of close cooperation is owed by a much wider spectrum of authorities exercising responsibilities under the SRMR.5 It nonetheless serves as a launching pad for a set 1
For the technical definition of “national resolution authority”, see Art. 8. Art. 6 SSMR regulates the division of tasks between the ECB and the national competent authorities (NCAs) within the SSM, the general responsibility of the ECB for the effective and consistent functioning of the mechanism, and the manner of cooperation of the ECB with the NCAs. In contrast, in the SRMR the division of resolution-related tasks between the authorities operating at the two levels is treated separately (Art. 7 SRMR) from that of the organization of cooperation between them (Art. 31 SRMR). 3 Recital (89) sent. 4–5 SRMR. Art. 28 SRMR establishes a detailed framework for the SRB’s monitoring of the execution of its resolution schemes by NRAs. 4 Art. 31(1)(1) sent. 1 SRMR. 5 Art. 30(2) sent. 1 SRMR. The general obligation of cooperation and its instantiations in more specific provisions of the SRMR reflect the Treaty principle of sincere cooperation, whereby the Union and the Member States are under a mutual obligation to “assist each other in carrying out the tasks which flow from the Treaties”; Art. 4(3) TEU; and Recital (88) SRMR. 1
2
896
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
of more specific norms, which differentiate the organization and content of relations between the SRB and the NRAs from their cooperation with any other authority mentioned in Art. 30(2) SRMR. In particular, Art. 31 SRMR mandates the SRB to establish a formal framework on the practical arrangements underpinning its cooperation with the NCAs (see infra, → paras. 9–14).6 In addition, it grants the SRB a set of powers whose overall effect is to guarantee the SRB’s ability to maintain the reigns of the SRM’s operation and to exercise effective oversight, if not full control, of the NRAs (see infra, → paras. 3–8 and 15–18).7 Finally, the provision disapplies, in so far as the BU’s resolution authorities are concerned, certain provisions of the BRRD on resolution planning and preparation in relation to cross-border banking groups, according to which the resolution authorities of the relevant Member States must engage in joint decision-making and participate in resolution colleges (see infra, → paras. 50–51).8
B. Hierarchical character of the envisaged cooperation The evident justification for the provision of Art. 31 SRMR is that a seamless cooper- 3 ation between the relevant authorities, including with regard to the exchange of information, contributes to the timeliness, the accuracy, and hence the effectiveness of their respective actions.9 Beyond considerations of effectiveness per se, however, the specific manner in which the legislative text concretizes the obligation of cooperation shows clearly that the provision further aims to promote the coherence and uniformity of resolution actions.10 Indeed, the uniformity, or consistency, of the resolution process across the BU – meaning, essentially, the avoidance of divergent national approaches ‒ constitutes a primary and self-standing legislative objective of the SRMR.11 National variations based on notions of autonomous policy- and decision-making and subsidiarity only have a place in the resolution process to the extent that the transposition of the BRRD, which governs the actual implementation of resolution actions in each participating Member State, entails the exercise of national discretions. For the attainment of uniformity, the legislation does not simply encourage diffuse 4 coordination between the authorities participating in the SRM, but insists on the streamlining of their substantive decision-making and guarantees the SRB’s capacity to exercise vertical control, based on clearly defined lines of authority. Due to this general approach, which is intended to ensure, horizontally, the consistent treatment of banks across the BU and, vertically, the faithful and effective implementation of SRB decisions by NRAs, the operation of the SRM acquires a highly hierarchical configuration. 12 This trait of the SRM is reinforced by the peculiar internal governance arrangements of the SRB itself (and especially the voting rules),13 which place the officials appointed at the Art. 31(1)(1) sent. 2 SRMR. Art. 31(1)(1) and (1)(3) SRMR. 8 Art. 31(2) SRMR. 9 Recital (89) sent. 4 SRMR. 10 Recital (87) sent. 1 SRMR. 11 The primacy of uniformity as legislative objective is reflected in both the SRMR’s long title and its opening provision; Art. 1(1) SRMR. It is precisely this objective which justifies the centralization of the resolution process; Recital (11) sent. 3 and Art. 1(2) SRMR. 12 Characteristically, the legislation entrusts explicitly and exclusively to the SRB the responsibility for the effective and consistent functioning of the SRM, thus eschewing any diffusion of responsibility between the various authorities participating in the mechanism. Recital (87) and Art. 7(1) SRMR. 13 The unusual institutional set up is recognized in the SRMR’s text, which notes that the SRB is “a specific Union agency with a specific structure, corresponding to its specific tasks,” and “departs from the model of all other agencies of the Union”; Recital (31) sent. 1 and Art. 42(1) sent. 2 SRMR. 6 7
Christos Hadjiemmanuil
897
Art. 31 SRMR
Cooperation within the SRM
Union level (namely, the Chair and the four full-time members of the SRB14) firmly at the helm.15 5 The hierarchical nature of the SRB-NRAs cooperation is intimately linked to the peculiar distribution of resolution-related powers and tasks between the SRM’s two levels. As a starting point, the SRMRs assigns responsibility to the SRB and the NRAs for particular categories of credit institutions and groups along similar, albeit not identical, lines to the SSMR’s division of supervisory responsibilities between the ECB and the NCAs, respectively. The SRB is thus given so-called “direct” responsibility 16 for the largest, socalled “significant”, banks and banking groups whose supervision is carried on by the ECB, but also for any less significant groups with a presence in more than one Banking Union countries.17 This leaves to the NRAs primary (“direct”) responsibility only for the smaller, less significant institutions (“LSIs”) and single-country groups.18 Significantly, however, the allocation of responsibilities by reference to the classification of credit institutions does not imply the demarcation of distinct areas of administrative jurisdiction, with each authority operating and deciding autonomously within its respective area. Instead, the SRMR entrusts in all cases specific functions in the resolution process to both levels. These functions are not symmetrical. On the contrary, the SRMR’s detailed arrangement of powers and tasks underlies the institutional primacy of the SRB, in a manner that tilts the mechanism in a highly hierarchical direction. Specifically, with regard to significant institutions and all cross-border groups, the SRM’s two-tiered structure entails the centralization of the essential decision-making tasks in the SRB and confines the NRAs to supporting and implementing roles.19 The NRAs are meant to contribute to the SRB’s decision-making processes additional human and organizational resources, local knowledge, and domestic administrative powers of execution; they thus serve as “agents”, rather than interlocutors, of the SRB. The arrangement has been justly
Arts. 43(1)(a)‒(b) and 56 SRMR. The peculiar governance and decision-making procedures of the SRB, which exclude the representatives of the NRAs from many decisions, departs in significant ways from the model of other EU agencies. This is openly and emphatically affirmed in the SRMR itself, which, in a highly unusual (and rather vacuous) turn of phrase, refers to “a specific structure, corresponding to [the SRB’s] specific tasks”; Recital (31) sent. 1 and Art. 42(1) sent. 2 SRMR. For the rest, the uniqueness of the institutional situation is explained by reference to the need “to ensure a swift and effective decision-making process”; Recital (31) sent. 1 SRMR. On the implications for the NRAs’ participation in decision-making concerning particular institutions, see infra, → paras. 29–32. 16 The description “direct [SRB or NRA] responsibility” does not appear in Art. 7 SRMR, which allocates responsibilities in specific terms (that is, for particular tasks in relation to particular categories of credit institutions). However, it is used as a term of art in the legal instrument regulating the cooperation between the SRB and the NRAs; see Art. 2(g)–(h) SRB Decision of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15) (“COFRA”). This phraseology creates the (inaccurate) impression that the authorities at the two levels of the SRM operate in distinct fields of administrative jurisdiction, delineated ratione personae. 17 Art. 7(2) SRMR, in conjunction with Art. 6(4)–(5) SSMR. Unlike the ECB’s supervisory jurisdiction, the SRMR gives the SRB direct responsibility for “other cross-border groups”, that is, less significant banking groups with entities in at least two Banking Union countries; Arts. 3(1)(24), and 7(2)(b) SRMR. 18 Art. 7(3) SRMR. However, the SRB is responsible for the adoption of the resolution scheme even in relation to banks under an NRA’s primary responsibility whenever the envisaged resolution action requires financing from the SRF; Art. 7(3)(e) SRMR. Theoretically, a participating Member State may request the SRB to take over responsibility for its domestic LSIs – an option that no country has exercised up till now; Art. 7(5) SRMR. 19 The NRAs assist the SRB in resolution planning and the preparation of resolution decisions; and they implement the resolution schemes adopted by the SRB, using for this purpose their powers under national law implementing the BRRD. Recital (28) and Art. 29(1) SRMR. 14
15
898
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
described as a hub-and-spoke system,20 with the SRB serving as the system’s core and brain and the NRAs as its local eyes and arms. Even with regard to the LSIs, the SRMR’s allocation of primary responsibility to the NRAs is qualified by the retention by the SRB of significant powers of guidance, oversight, and intervention. In particular, despite the SRMR’s prima facie allocation of resolution tasks, it is always possible for the SRB to step in and assume responsibility for an LSI, if it considers this necessary for ensuring the consistency of the resolution standards.21 This is a substantial reserve power, which the SRB can use at its discretion in order to ensure that its views prevail over any contrary approach of an NRA even in the case of LSIs.22 In this context, the main purpose of structured arrangements on cooperation is to 6 support the SRB’s decision-making and to ensure the faithful implementation of its choices at the national level.23 This is evident in Art. 31 SRMR, where the close cooperation is conceived, not as a set of interactions between equals, but as a top-down relationship, where the predominance of the SRB is felt all along. In particular, the SRB’s inherent leadership within the SRM is buttressed by the stipu- 7 lations of the second and third subparagraphs of Art. 31(1) SRMR, which enable it to provide methodological direction to the NRAs and vest it with powers guaranteeing SRB’s effective control over their actions, no less in the field of their own direct responsibility.24 Specifically, in order to ensure the effectiveness and consistency of the close cooperation,25 the SRB is vested with the following powers: (a) It can address to the NRAs guidelines and general instructions, which the latter should comply with when performing their tasks and adopting resolution decisions.26 (b) It may exercise at any time the investigatory powers referred to in Arts. 34 to 37 SRMR.27 (c) It may require NRAs to submit, on an ad hoc or continuous basis, information on the performance of their tasks in relation to institutions under their direct responsibility (LSIs).28 (d) It is entitled to receive from the NRAs drafts of their intended decisions, upon which it can express its views and, in particular, indicate issues of non-compliance with the SRMR or its own general instructions.29
20 Kellermann and Timmerman Thijssen in: International Monetary Fund, Law and Financial Stability (2020), 10, at p. 15. 21 Art. 7(4)(b) SRMR. 22 The wording of the Art. 4(1) SSMR states that the ECB is “exclusively competent” to carry out the essential prudential supervisory tasks in relation to all credit institutions in the BU. This has provided a textual basis for the CJEU’s finding that, in performing their supervisory tasks in relation to the LSIs, the NCAs do not operate in their own name, but merely assist the ECB to perform these tasks by way of decentralized implementation; Case C-450/17 P Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:C:2019:372, paras. 32, 37‒41. Even though the SRMR does not describe likewise the SRB’s competence in terms of “exclusivity”, the SRB is given effective overall control in almost all respects. 23 The latter point makes pertinent the SRMR’s references to the Treaties’ duty of loyal cooperation. 24 The centrality of the SRB’s role within the SRM is prefigured by Art. 7(1) SSMR, which allocates to the SRB the responsibility for the effective and consistent functioning of the SRM, and confirmed consistently by the various provisions on the successive phases of the resolution process. 25 Art. 31(1)(2) SRMR. 26 Art. 31(1)(2)(a) SRMR. 27 Art. 31(1)(2)(b) SRMR. 28 Art. 31(1)(2)(c) SRMR. 29 Art. 31(1)(2)(d) SRMR.
Christos Hadjiemmanuil
899
Art. 31 SRMR
Cooperation within the SRM
(e) It may require NRAs to transmit to it all information necessary for the evaluation of resolution plans, which the NRAs can collect from the relevant institutions and groups on the basis of national provisions implementing the BRRD.30 8
Significantly, the powers under discussion are not exclusively concerned with the implementation of the SRB’s resolution decisions, but apply much more widely and are directed to structuring the day-to-day frontline work of the NRAs at all phases of the resolution process,31 as well as ensuring that the SRB retains effective overall control (“oversight”) of NRA actions in relation to LSIs. These powers exist alongside the SRB’s more narrowly targeted powers under other provisions of the SRMR, notably: its powers of monitoring and instruction in relation to the execution of its resolution schemes by the NRAs32; its reserve power of direct intervention in cases of non-implementation or faulty implementation of its decisions by the NRAs 33; and its reserve power of intervention in relation to LSIs under the direct responsibility of the NRAs, when the latter do not comply with the SRMR or the SRB’s general instructions.34
C. Cooperation Framework (“COFRA”) Complementing the numerous provisions which regulate the interactions between the SRB and the NRAs in particular phases of the resolution process, Art. 31(1) SRMR requires the SRB, acting in cooperation with the NRAs, to approve and make public a framework for the organization of the practical arrangements effectuating close cooperation within the SRM.35 In this manner, the relations between the resolution authorities at the two levels are projected to acquire a structured and formal character. Procedurally, the responsibility for the adoption of the decision establishing the cooperation framework belongs to the SRB’s plenary session.36 Since the latter includes representatives of all NRAs as voting members37 and takes its decisions by simple majority,38 this assures the required involvement of the NRAs in the specification of the framework. 10 In execution of the legislative mandate, the SRB adopted an initial decision on the cooperation framework (referred to by the SRB as “COFRA”) in June 2016. 39 This was replaced by the currently applicable version in December 2018.40 The COFRA builds on the SRMR’s provisions on cooperation and decision-making by specifying the mode of participation and role of the actors in the relevant procedures. The procedural arrangements in the COFRA complement the rules of procedure of the SRB’s plenary and executive sessions and other SRB decisions of procedural nature, should any be 9
Art. 31(1)(3) SRMR, with reference to Arts. 11 and 13(1) BRRD. Recital (89), sent. 4–5 SRMR. 32 Art. 28(1)–(2) SRMR. 33 Art. 29(2) SRMR. 34 Art. 7(5)(b) SRMR. 35 Art. 31(1)(1) sent. 2 SRMR. 36 Art. 50(1)(q) SRMR. 37 Art. 49 SRMR. 38 Art. 52(1) SRMR. 39 Decision of the Plenary Session of the Board of 28 June 2016 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and national resolution authorities (SRB/PS/2016/07), . 40 SRB Decision of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15) (“COFRA”), . 30
31
900
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
adopted.41 The COFRA performs within the SRM a role roughly equivalent to that of the SSM‑FR42 in the SSM. However, compared to the latter, its provisions are wanting in precision and detail.
I. Subject-matter of COFRA The COFRA sets out 12 general principles of cooperation,43 followed by specific 11 procedural rules on the various aspects of the interaction between the SRB and NRAs. The matters covered include: – the language arrangements between the SRB and NRAs44; – the nature and procedures for adoption of so-called “legal instruments” of the SRB45; – the consultation of relevant NRAs as part of the SRB’s decision-making in relation to institution-specific decisions46; – the implementation of SRB decisions by the NRAs and the SRB’s monitoring thereof47; – the cooperation of the SRB with relevant NRAs in relation to entities and groups under its direct responsibility, including: – the procedures for the assumption by the SRB of direct responsibility for particular entities and groups, as well as for the termination of such direct responsibility48; – the terms of operation, staffing, and coordination of the internal resolution teams (IRTs), with mixed composition from the SRB’s own staff and the staff of the relevant NRAs, which may be formed in accordance with Art. 83(3)–(4) SRMR for the purpose of supporting the SRB in the execution of its resolution tasks in relation to particular entities or groups49; – the decision-making procedures concerning resolution planning, including the adoption of measures to address or remove impediments to resolvability, the
41 Art. 1(2)(1) COFRA, with reference to: SRB Decision of 24 June 2020 adopting the Rules of Procedure of the Board in its Plenary Session (SRB/PS/2020/15); and SRB Decision of 24 June 2020 adopting the Rules of Procedure of the Board in its Executive Session (SRB/PS/2020/14). 42 ECB Regulation (EU) No 468/2014 of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM‑FR) (ECB/2014/17), OJ 2014 L 141/1. 43 Art. 3 COFRA. 44 Art. 4 COFRA. The provision establishes that, subject to specific agreements on language arrangements between the SRB and individual NRAs, the operational working language within the SRM is English; Art. 4(1) COFRA. On SRM’s language arrangements, see Gortsos, comment on Art. 81 SRMR. 45 “General Principle” introducing Part II, Title 2 COFRA, and Arts. 5a and 6–8 COFRA. 46 Art. 9 COFRA. 47 Arts. 10–15 COFRA. 48 Arts. 16–23 COFRA. These provisions relate primarily to the procedures for establishing whether, and for which period of time, an institution or group falls within the SRB’s direct responsibility on the basis of Art. 7(2)(b) SRMR (concerning “other cross-border groups”, that is, non-systemically-important cross-border groups) and Art. 7(4)(b) SRMR (concerning the reserve power of the SRB to replace an NRA in the exercise of its resolution tasks in relation to particular LSIs under its direct responsibility). In contrast, the direct responsibility of the SRB on the basis of Art. 7(2)(b) SRMR (concerning systemically important institutions supervised by the ECB) and Art. 7(5) SRMR (concerning the delegation by participating Member States of the exercise of all resolution tasks in relation to their domestic entities and groups) is automatic and does not raise noteworthy procedural problems. See Wojcik, comment on Art. 7 SRMR. 49 Arts. 24–26 COFRA.
Christos Hadjiemmanuil
901
Art. 31 SRMR
Cooperation within the SRM
application of simplified obligations, and the determination of MREL, as well as early intervention50; the SRB’s oversight of the NRAs’ performance of their resolution tasks in relation to LSIs under their direct responsibility, including the submission by NRAs to the SRB of draft decisions and draft resolution plans for assessment, and the SRB’s power to request NRAs to report, on a regular or ad hoc basis, relevant information 51; the cooperation of the SRB with relevant NRAs within the framework of resolution colleges or European resolution colleges52; cooperation in relation to the collection of information from entities and groups under the SRB’s direct responsibility, and the conduct of general investigations and on-site inspections53; and cooperation regarding the SRF, including, in particular, the raising of contributions in accordance with Arts. 69‒71 SRMR.54
–
– – –
II. General principles of cooperation COFRA enunciates the general principles of close cooperation between the SRB and the NRAs. Notably, these principles require the SRB and the NRAs to cooperate in good faith in the exercise of their respective powers and tasks under the SRMR. 55 The NRAs must lend their support to the SRB in the performance of tasks in relation to entities and groups under its direct responsibility56; and they must inform in advance the SRB of the measures they intend to take in relation to those under their own responsibility (namely, the LSIs) and must coordinate closely with it when taking these measures.57 The SRB must give sufficient notice to the NRAs of any proposed changes to its work plan, if these are likely to have a significant impact on the exercise of their task. 58 13 The SRB and the NRAs must consult with each other prior to making decisions on the substance of any particular issue; such consultation must take place at an appropriate stage of the decision-making process, so as to enable the deciding party to take into consideration the views expressed by the other side.59 They must also exchange promptly and accurately all information required for the performance of their respective tasks.60 While their oral and written internal communications must always take place without undue delay and in an accurate manner, an intensification of their cooperation is expected whenever the condition of an entity or group deteriorates.61 14 The cooperation between the two tiers of the SRM also extends to their external communications with interest groups and the media; in particular, the issuance of public statements relating to the recovery and resolution of entities and groups is conditional on their mutual agreement.62 In relation to banks within the SRB’s direct responsibility, the responsibility for day-to-day interactions with other relevant authorities 12
Arts. 27–31 COFRA. Arts. 32–35 COFRA. 52 Arts. 36a‒36b, 37‒38 COFRA. 53 Arts. 39–41 COFRA. 54 Art. 42 COFRA. 55 Art. 3(1) COFRA. 56 Art. 3(2) COFRA. 57 Art. 3(3) COFRA. The principle is given specific content in Arts. 32‒35 COFRA. 58 Art. 3(5) COFRA. 59 Art. 3(6) COFRA. 60 Art. 3(7) COFRA. 61 Art. 3(8) COFRA. 62 Art. 3(9) COFRA. 50 51
902
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
is divided, with the SRB retaining responsibility for contacts with Union institutions and agencies and the NRAs bearing responsibility for contacts with other national authorities, keeping the SRB informed in a timely manner.63 Finally, the SRB and the NRAs must cooperate in the event of legal challenges, whether at the European or at the national level.64
D. Guidelines and general instructions According to the second subparagraph of Art. 31(1) SRMR, in order to ensure the 15 operational effectiveness and consistency of the SRM, the SRB must address to the NRAs guidelines and general instructions, to which the NRAs must conform when carrying out their tasks and adopting resolution decisions.65 Despite the imperative terms (“shall”) of the text, this is in effect a discretionary power, rather than an obligation, of the SRB. Its purpose is to enable the SRB to carry out its responsibility for the effective and consistent functioning of the SRM.66 This is just one amongst several provisions in the SRMR empowering the SRB to give binding instructions to the NRAs. Two of the other provisions link explicitly the SRB’s powers of instruction to the same purpose (that is, the effectiveness and consistency of the resolution process). 67 What differentiates the present provision from the rest is its more general character and the nature of the envisaged instructions. Thus, while the more narrowly focused provisions permit the issuance of instructions in relation to the handling of individual entities or groups (that is, cover the issuance of so-called “specific” instructions), the guidelines and general instructions under discussion may only be of general nature, must be addressed to all NRAs, and may not relate to a particular entity or group. In this sense, in contrast to the SRB’s specific instructions, which must be categorized as individual administrative acts, the instruments issued on the basis of Art. 31(1) SRMR are quasi-regulatory instruments in the nature of measures of general application. The only other reference to general instructions in the SRMR concerns specifically 16 situations of non-compliance by NRAs with general instructions relating to LSIs under the NRAs’ direct responsibility.68 There is no textual basis, however, for considering that the subject matter of the instruments envisaged by Art. 31(1) is limited to the NRAs’ field of direct responsibility (LSIs). Accordingly, the SRB may address to the NRAs guidelines and general instructions in order to provide methodological direction and/or to structure procedurally and substantively their actions both in relation to their preparatory actions and (theoretically autonomous) decision-making concerning LSIs (thus also promoting cross-country consistency) and in relation to their auxiliary tasks concerning institutions under the SRB’s direct responsibility.69 The procedural steps for the SRB’s issuance of guidelines and instructions are spec- 17 ified in the COFRA, which subsumes these instruments in the wider class of “legal
Art. 3(11)(1) COFRA. Art. 3(12) COFRA. 65 Art. 31(1)(2)(a) SRMR. 66 Art. 7(1) SRMR. 67 Art. 8(3) SRMR (relating to the preparation of draft resolution plans) and Art. 12(7) SRMR, as replaced by SRMR II (relating to the determination of the MREL). 68 Art. 7(4)(a) SRMR. 69 Art. 5a(3) COFRA. 63
64
Christos Hadjiemmanuil
903
Art. 31 SRMR
Cooperation within the SRM
instruments” of the SRM,70 alongside the SRB’s specific instructions,71 warnings,72 and recommendations.73 The guidelines and general instructions are issued by the SRB on its own initiative or following a proposal by NRAs.74 To draw them up, the SRB must take into consideration all relevant circumstances, including the potentially applicable provisions of national law.75 Responsibility for final adoption rests with the SRB’s restricted executive session,76 which comprises only the SRB’s Chair and the four full-time members appointed at the European level.77 However, the NRAs are involved in the drafting through their participation in the plenary session and its substructures (committees and task forces); and prior to their final adoption, the instruments must be submitted in draft form to the plenary session for comment.78 In this regard, the procedure for the adoption of guidelines diverges from that for general instructions: the restricted executive session may adopt the final guidelines in the face of contrary views expressed in the plenary session, as long as it provides explanations for any deviations from these views79; in contrast, general instructions may only be adopted if supported by a majority of the plenary session.80 18 The other major difference between guidelines and general instructions concerns the consequences of non-compliance by the NRAs. Art. 31(1) SRMR refers to the two types of instrument indistinctively; and the language used implies that both are binding on the NRAs81 – a point reinforced by the COFRA, which requires the NRAs to “ensure that they follow and comply with the SRB guidelines and general instructions”.82 In cases of non-compliance, the relevant NRA must provide explanations to the SRB’s restricted executive session in the form of a reasoned statement. 83 It should be noted, however, that the SRB may issue a warning to the recalcitrant NRA only in the event of a breach of general instructions.84 The probable intention of the different treatment is to render guidelines non-binding, as their name suggests, and merely apply to them the “complyor-explain” principle; but this is not stated clearly. At the same time, a warning for failure to apply a general instruction may only be issued in relation to the NRAs’ handling of LSIs under their direct responsibility.85 In contrast, the SRMR fails to specify any Art. 2(p) COFRA. Specific instructions may be given to the relevant NRAs in the context of resolution planning or the execution of the resolution scheme concerning individual entities or groups under the SRB’s direct responsibility; Arts. 8(3), 12(7) (as replaced by SRMR II), and 28(2) SRMR; and Art. 6 COFRA. 72 Warnings may be addressed to particular NRAs if they fail to comply with the SRMR or the SRB’s general instructions in the performance of their tasks concerning individual LSIs under their direct responsibility; Art. 7(4)(a) SRMR; and Art. 7 COFRA. 73 Recommendations to the NRAs may be issued in relation to the recognition and enforcement of resolution proceedings conducted by third-country resolution authorities concerning third-country banks; Art. 33(2) SRMR; and Art. 8 COFRA. The NRAs are required to comply with such recommendations or to explain in a written statement the reasons for their non-compliance; Art. 33(4) SRMR. 74 Art. 5a(6) COFRA. 75 Recitals (11)–(12) COFRA. 76 Art. 5a(1) COFRA. 77 Art. 53(1)(1) sent. 1 SRMR. The SRMR uses exclusively the term “executive session”; the descriptor “restricted” is introduced by Art. 2(m) COFRA. 78 Art. 5a(4)–(5) COFRA. 79 Art. 5a(4) sent. 2 COFRA. 80 Art. 5a(5) sent. 2 COFRA. 81 The text states in the indicative mood (which in legislative texts typically expresses an imperative) that the NRAs’ tasks are performed according to the SRB’s guidelines and general instructions, without drawing any distinction between the two; Art. 31(1)(2)(a) SRMR. 82 Art. 12(1), sent. 1 COFRA. 83 Art. 12(2) COFRA. 84 Art. 7(4)(a) SRMR; and Art. 12(3) COFRA. 85 Art. 7(4)(a) SRMR, in conjunction with Art. 7(3) SRMR; and Art. 7 COFRA. 70
71
904
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
means of enforcement for general instructions concerning the NRAs’ supporting tasks in the SRB’s field of direct responsibility; this renders the difference between that subcategory of general instructions and mere guidelines practically indiscernible.
E. Scope and dimensions of the close cooperation The SRB’s cooperation with the NRAs takes a variety of forms, depending on the 19 precise phase of the resolution process and the specific procedural steps pertaining thereto, as prescribed by the SRMR and/or the BRRD. In broad terms, the following dimensions of cooperation will be relevant at different points: – the mutual exchange of relevant information and/or the joint gathering of information (including through the NRAs’ provision of assistance in investigations conducted by the SRB); – the joint or coordinated performance of internal tasks concerning institutions under the SRB’s direct responsibility, including day-to-day resolution planning with regard to particular entities or groups and the preparation of the SRB’s response to situations of potential or impending bank failure (early intervention measures and resolution actions); – the participation of the NRAs, in the manner prescribed in each case by the SRMR, in the formal decision-making procedures leading to the adoption of binding final decisions by the SRB; – the participation of NRA representatives in the decision-making bodies (plenary session of SRB and extended executive session86) of the SRB; – the execution at the national level of SRB decisions and resolution schemes; – the SRB’s oversight of the NRAs’ performance of resolution tasks in relation to LSIs under their direct responsibility; – cooperation in relation to the SRF; and – the wider cooperation in relation to capacity development, exchange of personnel, and training, policy analysis, the development of the resolution framework (that is, policy development), and participation in legislative preparatory works and dialogues. Many of these areas of cooperation are regulated by other provisions of the SRMR or 20 are not formalized at all in the legislative text (although the COFRA may have something to say about them). Beyond providing a general framework for the close cooperation and a legal basis for the adoption of the COFRA, Art. 31(1) SRMR contains specific provisions in relation to two of the aforementioned areas, namely, the gathering and transmission of information and the SRB’s oversight of the NRAs’ performance of resolution tasks in relation to LSIs.
I. Internal tasks concerning significant institutions and the role of IRTs The NRAs assist the SRB in the performance of its internal tasks in relation to 21 significant institutions and cross-border banking groups under its direct responsibil-
86 When taking decisions in relation to individual institutions, the executive session meets in “extended” formation, which includes the SRB representatives of the relevant NRAs; Art. 53(2)–(4) SRMR; and for the designation “extended”, Art. 2(n) COFRA.
Christos Hadjiemmanuil
905
Art. 31 SRMR
Cooperation within the SRM
ity.87 In this context, the NRAs are involved in the preparation and implementation of SRB decisions during the planning and preparatory phases and, especially, in the execution of the resolution scheme during the actual resolution phase. In particular, the NRAs support the SRB in the development of resolution policy, the gathering and/or verification of information, data analysis, and the assessment of the situation of individual institutions. They implement the decisions of the SRB on measures to ensure resolvability and the MREL. They also assist the SRB in the performance of investigations and on-site inspections, or carry them out on its behalf. To give effect to the decisions of the SRB, the NRAs exercise their administrative powers under national law, including the national norms transposing the BRRD. In all these respects, they act in accordance to the SRB’s instructions. 22 The internal resolution team (IRT) of Art. 83(3)–(4) SRMR88 constitutes the main forum for day-to-day cooperation and communication between the SRB and the NRAs in relation to individual institutions.89 IRTs are established by the SRB’s extended executive session after consulting the relevant NRAs.90 They are headed by a senior staff member of the SRB, but otherwise have a mixed composition of SRB staff and staff of the relevant NRA.91 In this sense, they essentially constitute an integrated administrative structure for the carrying out of the frontline resolution tasks and the preparation of final resolution decisions.92 Since 2016, IRTs are in operation for every single institution under the SRB’s direct responsibility,93 although in some cases these may be “bundled” IRTs, responsible for more than one institution.94 The method of operation of IRTs is defined in the COFRA95 and a much more comprehensive internal document, the Resolution Planning Manual, which the SRB has produced to provide detailed methodological and procedural guidance to the IRTs.96 Another internal document, the Crisis Management Manual, provides guidance to IRTs once an institution is in critical condition.97 The SRB’s power to direct the actions of IRTs was formalized as part of COFRA’s 2018 revision; this introduced the so-called “guidance notes” as a special form of internal SRB documents, which the SRB may address to the IRTs.98 Notwithstanding the strict structuring of their activities by means of the aforementioned documents and the broader need to ensure the consistency and efficiency of work streams across the SRM,99 the IRTs are meant to operate to the extent possible on the basis of consensus among their members; and the NRA staff members retain autonomy regarding the orgaRecital (28) and Arts. 29(1) and 31(1) SRMR. See Gortsos, comment on Art. 83 SRMR. 89 COFRA’s revised text of 2018 makes this explicit; Art. 24(3) sent. 1 COFRA. The role of IRTs in the SRM is analogous to that of the joint supervisory team (JSTs) established in relation to entities and groups under the ECB’s supervisory responsibility in the SSM; Arts. 2(6) and 3–6 SSM‑FR. 90 Art. 24(3) sent. 1 COFRA. 91 Art. 83(3)–(4) SRMR; and Art. 25(1) COFRA. 92 The tasks of SRTs are described in general terms in Art. 24(4) COFRA. According to Art. 27 COFRA, the resolution processes laid down in Arts. 28‒31 COFRA (corresponding to Arts. 10‒13 SRMR) shall be carried out through the IRTs. These include: resolution planning and assessment of resolvability; preparation of SRB decisions to apply simplified obligations in relation to the drafting of resolution plans; the determination of the MREL; and early intervention and crisis preparedness. 93 SRB, ‘Annual Report 2016’ (2017), at p. 27. 94 SRB, ‘2015 Annual Report’ (2016), at p. 14; and Art. 24(3) sent. 3 COFRA. 95 Arts. 24–26 COFRA. 96 SRB, ‘Work Programme 2020’ (2019), at p. 17. 97 SRB, ‘2015 Annual Report’ (2016), at p. 14. 98 Art. 5b(1) COFRA. Guidance notes are issued by the restricted executive session after obtaining the views of the plenary session and subject to providing explanations for any deviations from these views; Art. 5b(2) COFRA. 99 Art. 24(2) sent. 2 COFRA. 87
88
906
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
nization and execution of their activities and responsibilities under the agreed work plan.100 In an early assessment of the SRB’s operation (2017), the European Court of Auditors 23 criticized the lack of clarity in the cooperation between the SRB and the NRAs. 101 In particular, it pointed out that the operational distribution of work between the SRB and the NRAs within the IRT framework was unclear.102 It also noted that, in terms of human resources, the SRB could only express its views on the minimum number of staff required for an IRT and the level of the NRA contribution, but did not have control over the composition, seniority, expertise, or performance evaluation of the staff assigned by NRAs to work in the IRTs.103 Finally, it considered the then prevailing level of staffing insufficient for the work assigned to the IRTs.104 To a certain extent, the shortcomings identified by the European Court of Auditors reflected the SRM’s growing pains, and have been alleviated by the subsequent specification of the IRTs’ operating models and steps in the SRB’s manuals. However, the integration of the administrative capacities and human resources at the two levels is likely to remain less than seamless, due to the unavoidable organizational discontinuities.
II. Information gathering and transmission The exchange of information is an essential pillar (and frequently, the sole object) of 24 any relation of cooperation between public authorities, whether at the national level or internationally. It is thus only natural that the close cooperation between the SRB and the NRAs is premised on their mutual obligation to exchange in an accurate manner and without delay all information necessary for the performance of their respective tasks.105 This obligation must be performed in a manner consistent with the duty of both sides to respect the principle of professional secrecy and maintain the confidentiality of the information thus shared, in accordance with the applicable provisions of the European resolution framework.106 The SRMR provides numerous grounds for the exchange of information between 25 the SRB and the NRAs.107 Beyond a general duty of all authorities implicated in the resolution process to provide each other with all information necessary for the performance of their respective tasks,108 issue-specific provisions require: the transmission by NRAs to the SRB of all information necessary for the drawing up and implementation of resolution plans109; the collection and transmission by NRAs of information on individual institutions’ MREL110; the submission by NRAs of extensive information on their exRecital (13) and Art. 26(5) sent. 1 COFRA. European Court of Auditors, Special Report No 23 (2017), paras. 120–129 and 154. 102 European Court of Auditors, Special Report No 23 (2017), paras. 122–123 and 154. 103 European Court of Auditors, Special Report No 23 (2017), paras. 123 and 154. 104 European Court of Auditors, Special Report No 23 (2017), paras. 124–125 and 154. 105 Recital (9) COFRA. Cf Art. 21 SSM‑FR. 106 Arts. 88–91 SRMR; Art. 84 BRRD; and Recital (10) COFRA. 107 Art. 8(4) SRMR (transmission by NRAs of all information necessary for the drawing up and implementation of resolution plan); Art. 12(2) SRMR (collection and transmission by NRAs of information on the MREL); Art. 28(1) SRMR (submission by NRAs of information relating to the execution of the SRB’s resolution schemes); Art. 30(2) sent. 2 SRMR (general duty of all authorities involved in the resolution process to provide each other with all information necessary for the performance of their respective tasks); and Art. 34(3) and (6) SRMR (transmission by the SRB and the NRAs, respectively, of information received in pursuance of a request for information). 108 Art. 30(2) sent. 2 SRMR. 109 Art. 8(4) SRMR. 110 Art. 12(2) SRMR. 100
101
Christos Hadjiemmanuil
907
Art. 31 SRMR
Cooperation within the SRM
ecution of the SRB’s resolution schemes111; and the transmission by the SRB or the NRAs, as the case may be, of information received from institutions in pursuance of a request for information addressed to them.112 Art. 31(1) SRMR complements these provisions by identifying a further category of information that NRAs must share with the SRB, namely, information concerning the NRAs’ performance of resolution tasks in relation to LSIs under their direct responsibility.113 This is necessary to enable the SRB to exercise its oversight function, a matter discussed below. 26 While the legislative text tends to refer to the exchange of information collected independently by each party, in reality the operation of the SRM relies largely on mutual assistance and/or the joint SRB-NRA gathering and analysis of information. The collection by the SRB of information from entities and groups subject to the resolution regime (that is, both significant institutions and LSIs),114 their employees, and any third parties to which they have outsourced functions or activities, is governed by the SRMR’s chapter on “investigatory powers”.115 Its provisions vest on the SRB powers: to request information from these persons, either through the NRAs or directly after informing the NRAs, and either ad hoc or on a continuous basis116; to conduct investigations, either through the NRAs or directly after informing the NRAs117; and to conduct on-site inspections at the business premises of the aforementioned persons, either independently or, where appropriate, in cooperation with the NRAs.118 27 In practice, the SRM’s operational arrangements with regard to requests for information go further than the legislative text by requiring, not merely the exchange of information gathered independently by the SRB or the NRAs, but its joint gathering through the IRTs. COFRA’s 2018 revision makes abundantly clear that the IRTs shall act as the single point of contact for requests of information from the entities or groups for which they are responsible.119 While the original text assigned to the NRAs and, in particular, to the NRA-appointed sub-coordinators of IRTs the frontline responsibility for requesting information from the relevant entities and persons,120 it is now stipulated that the concrete modalities for relevant contacts must be decided by the IRT’s SRB-appointed coordinator in cooperation with the sub-coordinator(s)121 and that the contacts must be conducted in full transparency to all IRT members.122 In addition to ad hoc requests, the collection of information on a regular basis is pursued through a harmonized system for the reporting by institutions of very detailed liability data, using standardized templates.123 Relevant reports are submitted to the NRAs, which then transmit them to the SRB.124
Art. 28(1) SRMR. Art. 34(3), (6) SRMR. 113 Art. 31(1) SRMR. 114 Art. 34(1) SRMR, with reference to Art. 2 SRMR. 115 Recitals (93)–(94) and Arts. 34–37 SRMR. See → Arts. 34–37. 116 Art. 34 SRMR. 117 Art. 35 SRMR; and Art. 40 COFRA. 118 Art. 36 SRMR; and Art. 41 COFRA. The power to conduct on-site inspections has never been used during the SRM’s early years; however, the SRB plans to gradually develop and implement the process between 2021 and 2023, starting with pilot visits by certain ITSs within 2021; SRB, ‘SRB Multi-Annual Programme 2021–2023; Work Programme 2021’ (2020), at pp. 21–22, 43. 119 Art. 39 COFRA, as replaced by SRB/PS/2018/15. 120 Original version of COFRA, SRB/PS/2016/07, Art. 39. 121 Art. 39(2) COFRA. 122 Art. 39(3) COFRA. 123 SRB, ‘Guidance on the 2021 Liability Data Report’ (version 1.01, 2 October 2020). 124 SRB, ‘Guidance on the 2021 Liability Data Report’ (version 1.01, 2 October 2020), at p. 5. 111
112
908
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
Art. 31(1) SRMR links the SRB’s investigatory powers to the requirement of close co- 28 operation between the SRB and the NRAs. Specifically, it notes that the SRB may exercise “at any time” these powers “in order to ensure effective and consistent application of this Article”.125 The formulation is odd, because the relevant provisions leave no doubt that the investigatory powers can anyhow be exercised at any time, if this appears appropriate. Even worse, the linkage of the investigatory powers to the purposes of Art. 31 SRMR, which is concerned with the internal administrative cooperation between the resolution authorities, is infelicitous, because the collection of information must be exclusively aimed at, and be proportional to, the performance of resolution tasks in relation to the institutions concerned. Nonetheless, the provision is probably meant to underline the close involvement of the NRAs in the relevant information-gathering activities.126
III. NRA involvement in formal SRB procedures In the context of the SRB’s formal decision-making, cooperation takes the form of 29 prior consultation of the relevant NRAs.127 This applies to decisions concerning the SRB’s replacement of the NRAs in the direct exercise of resolution powers in relation to LSIs,128 the drawing up of resolution plans,129 the application of simplified obligations or the waiver of the obligation to draft resolution plans,130 the recognition and enforcement of third-country resolution proceedings,131 the deferral of institutions’ payment of extraordinary ex-post contributions to the SRF,132 and any other decisions of the SRB’s executive session as to which the consultation is considered necessary, either on the SRB’s own initiative or upon request from the relevant NRA.133 Such consultation must be conducted at a sufficiently early stage of the relevant procedure to enable the SRB to take into actual consideration the views expressed by the NRAs,134 and the NRAs must be given sufficient time to respond.135 If in its final decision it does not follow the views expressed by the NRAs, the SRB is obliged to explain any deviations. 136 Evidently, in addition to such consultation, the NRAs may attempt to influence the fi- 30 nal decision through the participation of their representatives in the SRB’s extended executive session, which the SRMR entrusts with decision-making on individual cases.137 Art. 31(1)(2)(b) SRMR. The local NRA is obliged to provide assistance to the SRB in relation to the conduct of investigations or on-site inspections by exercising its powers under national law as necessary to overcome phenomena of obstruction; the NRA may assist the SRB by facilitating access to relevant business premises, sealing premises or books and records, and so on, or, if it lacks such powers, by seeking the assistance of the appropriate national authorities; Arts. 35(2)(2) and 36(5) SRMR. In the case of on-site inspections, the local NRA is further obliged to actively assist the SRB by supporting its inspection team with its own staff and other accompanying persons; Art. 36(4) SRMR. Significantly, participating in on-site inspections in this manner constitutes not only an obligation, but also a right of the NRA; Art. 36(4) sent. 3 SRMR. 127 Art. 9(1) COFRA. 128 Art. 9(1)(a) COFRA, in conjunction with Art. 7(4)(b) SRMR. 129 Art. 9(1)(b) COFRA, in conjunction with Art. 8(2) SRMR and Art. 28 COFRA. 130 Art. 9(1)(c) COFRA, in conjunction with Art. 11(1) SRMR and Art. 29 COFRA. 131 Art. 9(1)(e) COFRA, in conjunction with Art. 33(2) SRMR. 132 Art. 9(1)(f) COFRA, in conjunction with Art. 71(2) SRMR. 133 Art. 9(1)(g) COFRA. 134 Art. 9(1) sent. 1 COFRA. 135 Art. 9(3)(1) sent. 1 COFRA. 136 Art. 9(2) sent. 2 COFRA. 137 Art. 54(1)–(2) SRMR. Exceptionally, the adoption of resolution schemes involving substantial financial support from the SRF may be decided by the plenary session; Art. 50(1)(c) SRMR. 125
126
Christos Hadjiemmanuil
909
Art. 31 SRMR
Cooperation within the SRM
The NRA representatives from the country/ies where the credit institution or group concerned is established, participate in this formation alongside the SRB’s chair and four full-time members.138 Nonetheless, it may be difficult for the NRA representatives to exert substantial influence at so late a stage – especially if one takes into account the peculiar decisional rules, according to which, whenever unanimous agreement cannot be reached, the NRA representatives are excluded from the voting process and the final decision is taken by a simple majority of the five European officials alone.139 31 A different dynamic may pertain, however, in the many instances when the NRAs are not merely consulted prior to the adoption of a decision, but are given actual responsibility for its drafting. Thus, in the context of resolution planning and the assessment of resolvability, the SRB may delegate to the institution’s home NRA the task of drafting the resolution plan.140 In this scenario, the SRB may further request the NRA to draft the decision on the determination of the institution’s MREL.141 Moreover, the NRAs have a right of initiative with regard to the application of simplified obligations or waiver of the obligation to draft a resolution plan in relation to particular institutions, which they can exercise by submitting a reasoned proposal to this effect, supported by appropriate documentation142; and if their proposal is heeded, they are subsequently entitled to initiate the procedure for the withdrawal of the relevant SRB decision. 143 Similarly, the NRAs are entitled to propose the modification of the MREL of the resolution entities of GSIIs and other large banking groups.144 32 Turning to crisis management, during the early intervention phase, as the SRB refines its strategy with regard to the distressed institution, it may ask the home-country NRA to draft a preliminary resolution scheme.145 This may give the NRA the opportunity to influence in advance the shape of the eventual resolution action. Moreover, the views of the NRA representatives are likely to carry increased weight in the actual resolution phase, due to the very pressing timeframes and conditions and the fluid nature of the relevant interactions. It should be noted, however, that a description of the resolution process by reference to the formal decision-making steps envisaged in the legislative texts may not fully capture the more intertwined nature of SRB-NRA relations within the relevant IRT, where most of the preparatory work, including the assessment of compliance with the statutory conditions for resolution,146 may actually take place, with the active assistance of relevant SRB units and departments (such as the Resolution Planning and Decision Units and the Legal and Financial Stability Departments and, if necessary, the SRF team). 147 At the same time, the NRA will be focused on preparing the measures of national law implementing the envisaged resolution action.148
Art. 53 SRMR. Art. 55 SRMR. 140 Art. 8(2) sent. 2 SRMR; and Art. 28(1) COFRA. 141 Art. 30(1)(b) COFRA. 142 Art. 11(2) SRMR; and Art. 29(2) COFRA. 143 Art. 11(9) SRMR; and Art. 29(3) COFRA. 144 Art. 12c(4) sent. 1 SRMR. 145 Art. 13(2)(3) SRMR; and Art. 31(2) COFRA. 146 Art. 32 BRRD; and Art. 18(1), (4)–(5) SRMR. 147 SRB, ‘SRB Multi-Annual Planning and Work Programme 2018’ (2017), at p. 30. 148 SRB, ‘SRB Multi-Annual Planning and Work Programme 2018’ (2017), at p. 30. 138
139
910
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
IV. Execution of resolution schemes In the course of the execution of the resolution scheme by the relevant NRAs, 33 cooperation takes the special form of the monitoring by the SRB of the actions taken by the NRAs at the national level and the concomitant duty of the NRAs to submit to the SRB all information necessary for this purpose.149 The SRB may further steer the process by addressing instructions to the NRAs,150 which the latter are under a duty to implement151; and in the event that an NRA fails to comply with the resolution scheme or the instructions, the SRB can exercise reserve powers of intervention in the form of direct issuance of orders to the institution concerned.152 These issues are discussed elsewhere in this volume.153
V. SRB’s oversight of NRA resolution planning and decisions concerning LSIs Concerning the NRAs’ direct responsibility for their domestic LSIs,154 it must 34 be observed that its exercise is tightly constrained by three interrelated factors, based on which the SRB is able to dictate to NRAs the applicable resolution standards, practices, and procedures, thus reducing greatly their room for autonomous decisionmaking: – the power to issue guidelines and general instructions, which the SRB can employ in order to streamline the NRAs’ treatment of LSIs across the BU 155; – the SRB’s continuous oversight of NRAs’ performance of their direct responsibility; and – the reserve power of the SRB under Art. 7(4) SRMR to step in and exercise itself the resolution tasks, if it considers that this is necessary in order to ensure the consistent application of high-resolution standards.156 Art. 31(1) SRMR provides the legal ground for the first and second of these factors. 35 Having already discussed the former in a wider context above,157 we may presently focus on the latter. The SRB’s oversight function has two legs: on the one hand, the SRB’s monitoring the NRAs’ performance of their tasks; and on the other hand, its proactive involvement in their decision-making processes. To ensure full and effective monitoring, the SRB is empowered to request NRAs to 36 submit relevant information on a regular or ad hoc basis.158 The scope and timing of the required reporting depends on the nature, size, and financial situation of the LSIs concerned and on the importance of the measures or actions taken in its regard. 159 This implies that the SRB’s oversight should become more intense as an LSI approaches the point of failure.
Art. 28(1) SRMR. Art. 28(2) SRMR. 151 Art. 29(1) SRMR; and Arts. 10–11 COFRA. 152 Art. 29(2)–(4) SRMR. See → Art. 29 paras. 34–39. 153 See → Arts. 28 and 29. 154 Art. 7(3) SRMR; and Art. 32 COFRA. 155 Art. 31(1) SRMR. 156 Art. 7(4)(b) SRMR. 157 See supra, → paras. 15–18. 158 Art. 31(1)(2)(c) SRMR; and Art. 35 sent. 1 COFRA. 159 Art. 35 sent. 2 COFRA. 149
150
Christos Hadjiemmanuil
911
Art. 31 SRMR
Cooperation within the SRM
At the same time, the text establishes a system of prior notice and consultation, which enables the SRB to intervene ex ante in the NRAs’ administrative procedures, without, however, fully eliminating their decisional autonomy. Thus, before reaching final decisions on individual cases, NRAs are required to submit to the SRB draft decisions, which the SRB must assess from the viewpoint of their compliance with the SRMR and its own general instructions.160 The responsibility for such assessments belongs to the SRB’s extended executive session,161 which must observe always the principles of consistency and proportionality.162 This system of prior assessment applies to NRA decisions involving the adoption of resolution plans, the assessment of resolvability, the application of simplified obligations, the determination of MREL, the application of measures of early intervention, the placement of an entity under resolution or the assessment that the conditions for resolution are not met, the adoption of the resolution scheme, and the write-down or conversion of capital instruments, the application of resolution tools, and the exercise of resolution powers, if these were not already foreseen in the resolution scheme.163 Specifically with reference to the SRB’s assessment of draft resolution plans, Art. 31(1) SRMR enables the SRB to request the NRAs concerned to submit all pertinent information that they can obtain by exercising the powers envisaged in the relevant provisions of the BRRD. 164 The SRB must complete its assessment of draft decisions within 20 working days from their notification, except for decisions adopting resolution plans with a resolution scenario165 (as distinct from those envisaging the liquidation of the LSI concerned) or applying simplified obligations, for which the period for assessment is prolonged to 40 working days.166 In situations of urgency, the period for the assessment of a draft decision placing a failing LSI under resolution or in liquidation can be curtailed as appropriate by the relevant NRA in agreement with the SRB. 167 38 Where the SRB’s assessment of a draft decision leads to the conclusion that this is not compliant with the SRMR or the SRB’s general instructions, the SRB may issue a warning to the relevant NRA.168 If its warning goes unheeded, the SRB may then decide, after consulting the NRA, to activate its reserve power of intervention under Art. 7(4) SRMR in relation to the LSI concerned,169 thus bringing into play the third factor mentioned above. This, however, has not been attempted as yet (September 2021). 39 From a practical perspective, the SRB’s ability to effectively perform its oversight function is constrained by the very large number of the LSIs concerned, which, despite 37
Art. 31(1)(2)(d) SRMR. Art. 53(3) SRMR. 162 Art. 34(5) COFRA. 163 Art. 7(3)(1) SRMR; and Arts. 33 and 34(1) COFRA. 164 Art. 31(1)(3) SRMR, with reference to Arts. 11 and 13(1) BRRD. The provision is framed in terms almost identical to Art. 8(4) SRMR, concerning the submission by NRAs of all information necessary for enabling the SRB to draw up resolution plans for entities and groups under its own direct responsibility. 165 A miniscule proportion (between 2.5 % and 4 %) of resolution plans for LSIs envisage resolution as the preferred course of action; SRB, ‘Annual Report 2017’ (2018), at p. 15; SRB, ‘Annual Report 2018’ (2019), at p. 15; SRB, ‘Annual Report 2019’ (2020), at p. 16; and SRB, ‘Annual Report 2020’ (2021), at p. 18. 166 Art. 34(2) COFRA. 167 Art. 34(3) COFRA. 168 Art. 7(4)(a) SRMR. The SRB’s public information is silent on the actual use of this power. The only information in this regard can be found in the annual report for 2017, where one reads that the notification by NRAs of 2047 draft measures led to only 19 decisions of the extended executive session, in eight of which the SRB “expressed views in accordance with Article 31(1)(d) SRMR”; SRB, ‘Annual Report 2017’ (2018), at p. 15. It is not clear, whether these views indicated that the draft decisions failed to comply with the SRMR or with the SRB’s general instructions, thus amounting to warnings, in the sense of Art. 7(4)(a) SRMR. See also Art. 7(2) sent. 2 COFRA. 169 Art. 7(4)(b) SRMR. 160
161
912
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
considerable attrition over the years, continues to run above 2200.170 Moreover, within the SRB’s administration, the oversight function is not supported by a dedicated department or unit.171 Nonetheless, following an initial period of neglect, which can be attributed to the SRB’s more pressing priorities relating to its internal operational development and the need to produce resolution plans for the significant institutions under its direct responsibility,172 the oversight function has gradually gained in importance. It is operationalized on the basis of a detailed internal procedure173; and an LSI Early Warning System, based on NRA-generated information on entities facing signs of financial distress, enables the SRB to closely monitor the situation and prepare for the prior assessment of eventual crisis measures.174
VI. Cooperation in relation to the SRF The close cooperation between the SRB and the NRAs also extends to the opera- 40 tionalization of the SRF.175 In this area, two issues stand out: the levying of ex-ante and ex-post contributions from institutions; and the investment decisions of the SRB in relation to the sums thus collected, which are targeted to reach at least 1 % of the total covered deposits of all credit institutions authorized in the Banking Union by 2023.176 The interface for administrative cooperation between the NRAs and the SRB is a dedicated committee, the Fund Committee, which, depending on the issue, meets in two compositions, the contributions composition and the investment composition.177 Under the applicable legislation, the NRAs perform a number of functions in the 41 levying of contributions: they are the primary point of contact for the collection of data used for the calculation of contributions178; they cooperate closely with the SRB for the assessment of each institution’s contributions179; they receive in writing the SRB’s decisions on the matter, and translate them into national administrative decisions
170 SRB figures based on notifications from the NRAs show a steady decline in the total number of LSIs in the BU, from approximately 3200 in 2016 to 2821 in 2017, 2301 in 2018, 2260 in 2019, and 2220 in 2020; SRB, ‘Annual Report 2016’ (2017), at p. 27; ‘Annual Report 2017’ (2018), at p. 15; ‘Annual Report 2018’ (2019), at p. 15; ‘Annual Report 2019’ (2020), at p. 16; and ‘Annual Report 2020’ (2021), at p. 18, respectively. Around 60 % of these LSIs are German, and another 20 % Austrian, with other countries, with the exception of Italy, counting LSIs in single or double digits; SRB, ‘Work Programme 2020’ (2019), at p. 16 (Table 2). 171 SRB, ‘Annual Report 2020’ (2021), at p. 64 (Annex I: ‘Organisational chart’). 172 See European Court of Auditors, Special Report No 23 (2017), paras. 120–129 and 154. 173 SRB, ‘Annual Report 2016’ (2017), at p. 27. 174 SRB, ‘SRB Multi-Annual Programme 2021–2023; Work Programme 2021’ (2020), at pp. 22–23, 45; and SRB, ‘Annual Report 2020’ (2021), at p. 20. See further SRB, ‘Annual Report 2019’ (2020), at p. 17, noting that, in this area, the SRB also cooperates with the competent services of the ECB. 175 Arts. 67–71 SRMR; and Intergovernmental Agreement of 21 May 2014 on the transfer and mutualisation of contributions to the Single Resolution Fund (IGA). 176 SRB, ‘SRB Multi-Annual Programme 2021–2023; Work Programme 2021’ (2020), at pp. 11, 30, 49. 177 SRB, ‘SRB Multi-Annual Planning and Work Programme 2018’ (2017), at p. 34. 178 Art. 14 Commission Delegated Regulation (EU) 2015/63 of 21 October 2014 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to ex ante contributions to resolution financing arrangements, OJ 2015 L 11/44, as amended by Commission Delegated Regulation (EU) 2016/1434; and Art. 42(2) COFRA. 179 Art. 70(2)(1) SRMR; Art. 4 Council Implementing Regulation (EU) 2015/81; and Art. 42(3) COFRA.
Christos Hadjiemmanuil
913
Art. 31 SRMR
Cooperation within the SRM
addressed to the institutions owing to the contributions180; and they are responsible for raising the contributions and transferring them to the SRF.181 42 With regard to investment decisions, the formal decision-making power lies with the SRB’s plenary session.182 The plenary session is also responsible for decisions on the actual use of the SRF, if this exceeds the threshold of €5 billion for capital support or €10 billion for liquidity support for a single resolution action or for all resolution actions in the last 12-month period183; and in the same context, it decides on the necessity of levying extraordinary ex-post contributions, requesting loans from the national financing arrangements of Member States outside the BU, or accessing alternative means of financing.184 As a result, all NRAs are represented and have a vote on the final SRB decisions on the investments and any large-scale use of the SRF. To ensure the effectiveness of the NRAs’ involvement, the SRB’s restricted executive session is required to inform in advance their representatives of all decisions having a strategic impact on the functioning of the SRF or affecting in a significant way the calculation of contributions or the implementation of the investment policy.185
VII. Policy development 43
Over and above the day-to-day work and decisions concerning particular entities and groups, the SRB is involved in a continuous effort to build up the resolution framework by developing, in cooperation with the NRAs, a comprehensive set of internal SRM policies and standards for the various areas and tasks of the resolution process. The COFRA refers in this connection to the development of “uniform practices, standards and frameworks” as a means of ensuring the “consistent implementation and smooth functioning” of the SRM.186 At the same time, it notes that the SRM’s high resolution standards “should be in line with good practices as may be further elaborated in [l]egal instruments of the SRB and guidelines and recommendations of the [EBA]”.187 This brings into the picture the EBA’s function as Union-wide regulator for the purposes of the pan-European Single Rulebook for credit institutions, and the BRRD in particular. While the SRB’s policy-making contributes to a structured and consistent approach to its individual decision-making, it also entails the assumption by the SRB of a quasi-regulatory role in the resolution field, as to which the SRMR does not contain a clear mandate. In contrast, it includes several references to the binding regulatory and implementing technical standards, the guidelines, and the recommendations developed 180 Art. 5 Council Implementing Regulation (EU) 2015/81 of 19 December 2014 specifying uniform conditions of application of Regulation (EU) No 806/2014 of the European Parliament and of the Council with regard to ex ante contributions to the Single Resolution Fund, OJ 2015 L 15/1; Art. 13(1) Commission Delegated Regulation (EU) 2015/63; and Art. 42(4)–(5) COFRA. Even though the SRB decisions are addressed to the NRAs, they are unquestionably of direct and individual concern to the institutions owing the contributions, which have, accordingly, locus standi to challenge them before the General Court; Case C-414/18, Iccrea Banca SpA Istituto Centrale del Credito Cooperativo v Banca d’Italia, ECLI:EU:C: 2019:1036, paras. 65–69. See also Case T-411/17, Landesbank Baden-Württemberg v SRB, ECLI:EU:T: 2020:435, paras. 28–29, 88, and 91; and C‑663/17 P, C‑665/17 P and C‑669/17 P, ECB and Others v Trasta Komercbanka and Others, EU:C:2019:923, paras. 103–104. 181 Art. 67(4) SRMR; and Art. 42(1) COFRA. 182 Art. 50(1)(f) SRMR. 183 Art. 50(1)(c)–(d) SRMR. 184 Art. 50(1)(e) SRMR, with reference to Arts. 71–74 SRMR. 185 Art. 42(7) COFRA. 186 Recital (6) COFRA. 187 Recital (7) COFRA.
914
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
by the EBA under specific mandates in the BRRD.188 On the other hand, the development of consistent internal practices (a process necessary for the coherence of any organization’s actions) constitutes a primary objective of the SRM,189 whose pursuit through the issuance of legal instruments (namely, guidelines and general instructions) is envisaged by the SRMR, albeit in rather fuzzy terms.190 As it happens, the lack of a clearly delineated policy-making mandate reduces the certainty and transparency of the resolution regime and creates the risk that, despite the legislative intentions, 191 the policies and standards of the SRB may overlap, and potential clash, with the EBA’s outputs on the same issues. The SRB develops the internal policies of the SRM in cooperation with NRAs. The 44 involvement of the latter is pursued within the framework of the SRB committees and working groups and the discussions at the plenary level.192 In particular, the so-called Resolution Committee (CoRes) serves as the main forum for the NRAs’ contribution to the elaboration of horizontal policies193 (even though the SRB’s services probably play the leading role194). In contrast to the approval of the SRB’s annual work programme, the annual activity report, and the SRB-NRA cooperation framework,195 however, the final endorsement of internal SRM policies does not figure within the tasks of the plenary session. This responsibility falls to the restricted executive session as a decision to implement the SRMR.196 The SRM’s policy work is organized in two broad streams, resolution planning and 45 crisis management (or resolution action). 197 Concerning the latter, the crisis governance handbook198 describes the exact steps and procedures for the preparation and actual adoption of decisions on resolution schemes, including, in particular, the interactions between the SRB and the relevant directorates-general of the Commission (DG FISMA and DG COMP). A first draft was produced as early as December 2015 under the responsibility of the SRB’s Crisis Management Committee. Upon the dissolution of that committee in September 2016, the Resolution Committee took over this policy area too.199 To increase preparedness and test the practicability of the envisaged procedures, the completion of the handbook was followed by dry-run exercises (that is, simulations of the reaction to a hypothetical bank failure), initially involving solely high-level participants from the SRB, the ECB, and the Commission, but later on expanded to encompass the NRAs.200 Since 2019, a dedicated team201 within the SRB is tasked with Recitals (18) sent. 3 and (35) sent. 4 and Art. 5(2)(2) sent. 1 SRMR. Recitals (2)–(4) and (9) sent. 1 SRMR. 190 Art. 31(1)(2)(a) SRMR. See supra, → paras. 15–18. 191 Recitals (24) sent. 7 and (35) sent. 2–3 SRMR. 192 SRB, ‘Work Programme 2020’ (2019), at p. 18. 193 SRB, ‘Annual Report 2016’ (2017), at p. 27; and SRB, ‘SRB Multi-Annual Programme 2021–2023; Work Programme 2021’ (2020), at pp. 23, 45. 194 Within the SRB, a unit responsible for “Resolution Policy, Processes and Methodology” operates within the Directorship of Resolution Policy and Cooperation; SRB, ‘Annual Report 2020’ (2021), at p. 64 (Annex I: ‘Organisational chart’). 195 Art. 50(1)(a), (g), and (q) SRMR, respectively. 196 Art. 54(1)(b) SRMR. 197 SRB, ‘Working Priorities 2015’ (2015), at p. 5. 198 This description is used in recent SRB documents; SRB, ‘Work Programme 2019’ (2018), at p. 19; SRB, ‘Work Programme 2020’ (2019), at pp. 7, 20; and SRB, ‘Annual Report 2020’ (2021), at p. 80. Originally, the handbook was referred to as ‘the Crisis Management Manual/Handbook’; SRB, ‘Annual Report 2015’ (2016), at pp. 10, 18–19; and SRB, ‘Annual Report 2016’ (2017), at p. 19. 199 SRB, ‘Work Programme 2017’ (2016), at p. 15. 200 SRB, ‘Work Programme 2017’ (2016), at p. 16. 201 The Resolution Tactical Team, established in April 1919; SRB, ‘Annual Report 2019’ (2020), pp. 32–33. 188
189
Christos Hadjiemmanuil
915
Art. 31 SRMR
Cooperation within the SRM
the handbook’s further update, the training of SRB staff, and the performance of dry runs, in cooperation with other SRB teams, NRAs, and external parties.202 Always in relation to crisis management, the cooperation between the SRB and the NRAs further entails the provision of assistance by the SRB to the NRAs with regard to the preparation of national handbooks on the operationalization of resolution tools and the execution of resolution decisions under each NRA’s national law.203 46 In connection to resolution planning, partial policies and standards are developed over time for the various sub-areas, which are then incorporated into a comprehensive resolution planning manual. This serves to standardize the IRTs’ working practices and approach to their planning and execution tasks.204 Following the completion of the resolution planning manual’s originally envisaged modules, since 2019 the SRB’s policy work is focused on filling perceived gaps, refining, and updating the framework. 47 In principle, the SRΜ’s policy documents are internal operating documents not intended for publication. Accordingly, the full manuals are not accessible to the public.205 Even so, the SRB has selected to publish on its website policies, expectations from credit institutions, and operational guidance on a variety of issues. This practice is followed with increasing frequency. By mid-2021, the policy documents published in this manner covered the following sub-areas of resolution planning: MREL,206 critical functions,207 expectations for Brexit,208 the public interest assessment,209 expectations for banks,210 operational continuity in resolution,211 FMI contingency plans,212 bail-in implementation,213 prior permissions for the reduction of eligible liabilities,214 expectations for banks engaging in mergers and acquisitions (M&As),215 the operationalisation of bail-in in respect of international bearer debt securities issued by and safekept in the international central securities depositories (ICSDs),216 liquidity and funding in
SRB, ‘Work Programme 2020’ (2019), at p. 7. SRB, ‘Work Programme 2020’ (2019), at pp. 7, 21. By 2021, all national handbooks were in place, although their updating and expansion was envisaged, e.g., with regard to the operationalization of resolution tools; SRB, ‘SRB Multi-Annual Programme 2021–2023; Work Programme 2021’ (2020), at pp. 10, 28, 48; and SRB, ‘SRB Annual Report 2020’ (2021), at p. 79. 204 SRB, ‘Work Programme 2020’ (2019), at p. 17. 205 By way of information to the public, the SRB has issued a booklet detailing its approach to resolution planning; SRB, ‘The Single Resolution Mechanism: Introduction to Resolution Planning’ (2016). 206 A series of policies on the matter have been published with almost annual frequency, starting with SRB, ‘MREL: Approach Taken in 2016 and Next Steps’ (2017). See now SRB, ‘Minimum Requirement for Own Funds and Eligible Liabilities (MREL): SRB Policy under the Banking Package’ (2021). 207 SRB, ‘Critical Functions: SRB Approach in 2017 and Next Steps’ (n.d. [2017]). 208 SRB, ‘Single Resolution Board Expectations to Ensure Resolvability of Banks in the Context of Brexit: SRB Position Paper’ (2018). See also SRB, ‘Communication on SRB Approach to Eligibility of UK Law Instruments Without Bail-In Clauses After Brexit’ (2021). 209 SRB, ‘Public Interest Assessment: SRB Approach’ (n.d. [2019]); and SRB, ‘Addendum to the Public Interest Assessment: SRB Approach’ (2021). 210 SRB, ‘Expectations for Banks’ (2020). 211 SRB, ‘Operational Guidance on Operational Continuity in Resolution’ (2020). 212 SRB, ‘Operational Guidance for FMI Contingency Plans’ (2020). 213 SRB, ‘Operational Guidance on Bail-in Playbooks’ (2020), accompanied by SRB, ‘SRB Bail-In Data: Instructions’ (2020). 214 SRB, ‘Communication on SRB Permission Regime on Reduction of Eligible Liabilities’ (2020); and SRB, ‘SRB Communication on Application of RTS Provisions on Prior Permission for Reducing Eligible Liabilities Instruments as of 1 January 2022’ (n.d. [2021]). 215 SRB, ‘Single Resolution Board Expectations for Ensuring the Resolvability of Banks Engaging in Mergers, Acquisitions and Other Corporate Transactions’ (2020). 216 SRB, ‘Reflecting Bail-In in the Books of the International Central Securities Depositories (ICSDs): Description of processes and communication templates’ (2021). 202
203
916
Christos Hadjiemmanuil
Art. 31 SRMR
Cooperation within the SRM
resolution,217 and notifications of impracticability to include bail-in recognition clauses in contracts.218 The (partial) publication of SRM policies is sometimes justified by the SRB as a way 48 to increase transparency and reach a broader audience.219 In reality, however, it serves a more immediate purpose, namely, to provide guidance to institutions subject to the resolution regime on the SRB’s expectations relating to their resolvability. The most conspicuous example of this approach is “Expectations for Banks”, SRB’s first-ever document to go through a public consultation process.220 This policy document identifies numerous “principles” (or parameters) of resolvability and the actions which the SRB expects banks to take in order to achieve resolvability by 31 December 2023 at the latest. The document will henceforth be used by the SRB as a reference point for the drafting of individualized annual priority letters addressed to each institution.221 Preceded by a document of narrower scope but similar nature, concerning expectations regarding resolvability in the context of Brexit, and followed in quick succession by three sets of “operational guidance” also addressed to banks, the “Expectations for Banks” paper marked a turn from policies as internal documents to policies as externally orientated instruments of quasi-regulatory nature. A paper setting out methodological expectations for valuations of institutions under resolution for the use of potential valuers222 falls within the same category. The assumption by the SRB of a quasi-regulatory role raises a number of issues, including that of the bindingness of its policies. Despite the inclusion in each document of a boilerplate disclaimer to the effect that “it is not intended to create any legally binding effect” and “it may not be relied upon for any legal purposes”,223 the policies under discussion have all the hallmarks of instruments of soft law.224 As such, the SRB’s statements of its intended approach in published policies can generate legitimate expectations; and they oblige the SRB not to depart from the stated approach without good reason, thus operating as a self-limitation of its discretion.
VIII. Staff The close cooperation is finally reflected in their staff arrangements. The SRMR 49 includes special provisions on the exchange and secondment of staff from the NRAs to the SRB.225 Moreover, the SRB organizes training programmes and activities for the development of staff expertise, to which NRA staff are invited to participate and contribute.226
SRB, ‘Liquidity and Funding in Resolution: Operational Guidance for 2021’ (n.d. [2021]). SRB, ‘Notification of Impracticability to Include Bail-In Recognition Clauses in Contracts: SRB Approach and Expectations’ (2021). 219 SRB, ‘Work Programme 2019’ (2018), at p. 16; and SRB, ‘Work Programme 2020’ (2019), at pp. 17– 18. 220 SRB, ‘Expectations for Banks 2019’, open from consultation from 23 October to 4 December 2019. The final version was published on 1 April 2020; SRB, ‘Expectations for Banks’ (2020). 221 SRB, ‘Expectations for Banks’ (2020), at p. 8. 222 SRB, ‘Framework for Valuation’ (2019). 223 The ‘Framework for Valuation’ contains, instead, a statement to the effect that it ‘does not restrict the independence of the valuer and the exercise of professional judgement in the course of the valuation performed in a specific resolution case’; SRB, ‘Framework for Valuation’ (2019), at p. 5. 224 In accordance with the long line of decisions commencing with Case 22-70, Commission v Council (ERTA), 1971 ECR 263, ECLI:EU:C:1971:32. 225 Art. 83(1)–(2) SRMR. 226 SRB, ‘Annual Report 2017’ (2018), at p. 24. 217 218
Christos Hadjiemmanuil
917
Art. 32 SRMR
Consultation of, and cooperation with, non-participating Member States
F. Disapplication of BRRD rules on cross-border banking groups and resolution colleges The BRRD contains a series of rules on resolution planning for cross-border banking groups227 and the cooperation between the resolution authorities of the countries hosting such groups within the structure of specially constituted resolution colleges.228 The specificities of the SRM, however, render these provisions unsuitable for intraSRM cooperation. For groups operating exclusively within the BU, the exercise of resolution tasks is centralized in the hands of the SRB, whose direct responsibility includes both significant and other cross-border groups.229 With regard to such groups, the close cooperation between the SRB and the NRAs provides a functional equivalent to cooperation within resolution colleges – and in terms of coherence and effectiveness, a superior alternative. In view of these considerations, Art. 31(2) SRMR excludes relations between the NRAs participating in the SRM from the scope of applicability of the relevant provisions of the BRRD.230 51 The exclusion is limited to relations of a purely intra-SRM nature. Accordingly, it leaves unaffected the operation of the rules in relation to cross-border banking groups comprising subsidiaries both within and outside the BU. For such groups, it will still be necessary to establish resolution colleges or, in the case of groups with third-country parent undertakings and subsidiaries in different Member States, European resolution colleges. The mode of operation of these colleges, including the exchange of information and cooperation between participating resolution authorities, continues to be governed by the BRRD. The two-tiered structure of the SRM, however, raises the problem of the BU’s representation in resolution colleges and the collaboration between the SRB and the NRAs therein. The issue is addressed in Art. 32 SRMR and in related provisions of the COFRA.231 For present purposes, it suffices to note that, where both the SRB and the NRAs are represented in resolution colleges, European resolution colleges, and other groups or colleges, COFRA’s general principles require them to cooperate closely and exchange information in a timely manner in the run-up to meetings.232 The evident expectation is that the BU representatives will present a common front (even though this is not stated expressly, but merely implied by way of a reference to the need to ensure the “effective and consistent” functioning of the SRM233). 50
Art. 32 SRMR Consultation of, and cooperation with, non-participating Member States and third countries 1. Where a group includes entities established in participating Member States as well as in non-participating Member States or third countries, without prejudice to any approval by the Council or the Commission required under this Regulation, the Board shall represent the national resolution authorities of the participating Mem227 Arts. 13(4)–(10) BRRD (on resolution planning for cross-border banking groups) and Art. 45h BRRD (on the procedure for determining their MREL). 228 Arts. 88–89 BRRD. 229 Art. 7(2) SRMR. 230 Art. 31(2) sent. 1–2 SRMR. 231 Recital (9) and Art. 32 SRMR; and Arts. 36a–36b and 37–38 COFRA. See Psaroudakis, comment on Art. 32 SRMR. 232 Art. 3(4) COFRA. 233 Art. 3(4) COFRA.
918
Georgios Psaroudakis
Consultation of, and cooperation with, non-participating Member States
Art. 32 SRMR
ber States for the purposes of consultation and cooperation with non-participating Member States or third countries in accordance with Articles 7, 8, 12 to 12k, 13, 16, 18, 55, and 88 to 92 of Directive 2014/59/EU. Where a group includes entities established in participating Member States and subsidiaries established, or significant branches located, in non-participating Member States, the Board shall communicate any plans, decisions or measures referred to in Articles 8, 10, 11, 12 and 13 relevant to the group to the competent authorities and/or the resolution authorities of the non-participating Member State, as appropriate. 2. The Board, the ECB and the resolution authorities and competent authorities of the non-participating Member States shall conclude memoranda of understanding describing in general terms how they will cooperate with one another in the performance of their tasks under Directive 2014/59/EU. Without prejudice to the first subparagraph, the Board shall conclude a memorandum of understanding with the resolution authority of each non-participating Member State that is home to at least one global systemically important institution, identified as such pursuant to Article 131 of Directive 2013/36/EU. 3. Each memorandum shall be reviewed on a regular basis and shall be published subject to the requirements of professional secrecy. 4. The Board shall conclude, on behalf of the national resolution authorities of participating Member States, non-binding cooperation arrangements in line with the EBA framework cooperation arrangements referred to in Article 97(2) of Directive 2014/59/EU. The Board shall notify EBA of any such cooperation arrangement. Bibliography Christos V. Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal aspects of the second main pillar of the (European) Banking Union (5th edn, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=%202668653; Matthias Haentjens, ‘Title V and VI. Cross-Border Group Resolution and Third Countries’, in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2016), 285; Ilya Kokorin, ‘Co-ordination in Bank Resolution and the Issue of Conflicts of Interest’, (2020) 35 JIBLR 107; Michael Anderson Schillig, ‘Global solutions’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Cross-Border Bank Resolution (Elgar, Cheltenham-Northampton 2019), 2.
Art. 32 SRMR goes beyond the two articles directly preceding it, in that it does not 1 refer to the cooperation within the SRM, but rather to consultation of and cooperation with the non-participating Member States and third countries.1 According to Art. 32(1) SRMR the Board “represents” the NRAs in the context of such cooperation. Recital (91) to the Regulation explains that this is the result, in the present context, of the broader replacement of NRAs by the Board in resolution decision-making.2 As part of this, communications of plans and decisions are made by the Board to competent and resolution authorities of non-participating Member States, as provided in Art. 32(1)(2) SRMR, and also vice versa for the same reason. Moreover, aspects of this competence of the Board is that it assumes, as regards group entities established in participating Member States, the function that would otherwise be performed by NRAs in the decision-making process (towards a joint decision of the authorities involved and, in case of failure, in the form of 1 This is an instance of the “weak global governance” in these matters: see Schillig, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at p. 13. 2 On this connection between the general competence of the Board and its competence in cross-border matters see Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal aspects of the second main pillar of the (European) Banking Union (5th edn, 2019), , at p. 87.
Georgios Psaroudakis
919
Art. 32 SRMR
2
3
4
5
Consultation of, and cooperation with, non-participating Member States
individual decisions of the authorities involved) for group resolution plans; similarly, that the Board participates at the assessment of resolvability for groups and the decisionmaking at the group level on addressing or removing impediments to resolvability; and that it participates at group resolution colleges, which may, if needed, make decisions on group resolution schemes. Depending on the position within the group of the group entity established in a participating Member State, the Board may perform the function of the group-level resolution authority or of the resolution authority for another member of the college. This competence of the Board should be read together with Art. 7(2)(b) SRMR. In particular, the division of tasks within the SRM, on the basis of which NRAs retain important tasks (catalogued in Art. 7(3) SRMR) with regard to less significant entities and groups, does not apply to cross-border groups. The Board is responsible for drawing up resolution plans and adopting resolution decisions for cross-border groups irrespective of any further assessment of their significance. Thus, the fact that it is the Board, rather than NRAs, that always assumes cooperation with the non-participating Member States only mirrors the Board’s comprehensive competence in the area of cross-border groups, which is of interest here. Art. 32(2) SRMR provides, in its two subparagraphs, for two kinds of MoUs. First, the MoUs of Art. 32(2)(1) SRMR, a possible content of which is mentioned in Recital (38) to the Regulation: Among other things regarding the application of resolution law by resolution and competent authorities, they clarify consultation on Board decisions that have an effect on subsidiaries or branches in the non-participating Member States (and vice versa, one would presumably add, on decisions of the non-participating State’s resolution authority that have an effect on subsidiaries or branches in the euro area). Second, the MoUs of Art. 32(2)(2) SRMR, with the resolution authority of each non-participating Member States home to at least one G-SII. These are individual MoUs with each resolution authority, relating to the G-SII or G-SIIs under its competence. The MoUs mentioned in Art. 32(2)SRMR have not been made yet. The broader MoU between the SRB and the ECB in respect of cooperation and information exchange, made on 22 December 2015 and revised on 30 May 2018,3 does provide, in para. 11 thereof, for close cooperation with regard to the non-participating Member States, but this is a very general statement of principle between these two authorities, while no MoUs with authorities of such non-participating Member States have been made. Notably, since the departure of the United Kingdom from the EU, there are no non-participating Member States home to G-SIIs, with the resolution authorities of which the Board would need to make MoUs under Art. 32(2) SRMR. Art. 32(4) SRMR provides for cooperation arrangements that the Board may make, in lieu of NRAs, with third-country resolution authorities;4 the Board exercises a function that has originally been introduced in Art. 97(4) BRRD. The Board has signed seven cooperation arrangements of the kind, in particular with the resolution authorities of Canada, USA, Brazil, Serbia, Mexico, Albania and Japan.5 As stipulated in paragraph 4, these are non-binding instruments, which refer to the exchange and confidentiality of
3 SRB, Memorandum of Understanding between the Single Resolution Board and the European Central Bank in respect of cooperation and information exchange, available at . 4 See also Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2016), at p. 298, para. 8.21. 5 The list and the texts of the arrangements can be found at .
920
Georgios Psaroudakis
Recognition and enforcement of third-country resolution proceedings
Art. 33 SRMR
information, the facilitation of mutual understanding on resolution planning, etc.6 They also set some broad principles on the resolution of cross-border entities by referring in particular to the coordinating role of home country authorities and the will to accommodate to the extent feasible the respective resolution objectives of the two sides. Lastly, this provision does not affect Art. 97(4)(2) BRRD, according to which Member States themselves (or their competent authority) may conclude agreements with third countries.
Art. 33 SRMR Recognition and enforcement of third-country resolution proceedings 1. This Article shall apply in respect of third-country resolution proceedings unless and until an international agreement as referred to in Article 93(1) of Directive 2014/59/EU enters into force with the relevant third country. It shall also apply following the entry into force of an international agreement as referred to in Article 93(1) of that Directive with the relevant third country to the extent that recognition and enforcement of third-country resolution proceedings is not governed by that agreement. 2. The Board shall assess and issue a recommendation addressed to the national resolution authorities on the recognition and enforcement of resolution proceedings conducted by third-country resolution authorities in relation to a third-country institution or a third-country parent undertaking that has: (a) one or more Union subsidiaries established in one or more participating Member States; or (b) assets, rights or liabilities located in one or more participating Member States or governed by the law of participating Member States. The Board shall conduct its assessment, after consulting the national resolution authorities and, where a European resolution college is established pursuant to Article 89 of Directive 2014/59/EU, with the resolution authorities of non-participating Member States. The assessment shall give due consideration to the interests of each individual participating Member State where a third-country institution or parent undertaking operates, and in particular to the potential impact of the recognition and enforcement of the third-country resolution proceedings on the other parts of the group and the financial stability in those Member States. 3. The Board shall recommend to refuse the recognition or enforcement of the resolution proceedings referred to in paragraph 1, if it considers that: (a) the third-country resolution proceedings would have an adverse effect on financial stability in a participating Member State; (b) creditors, including in particular depositors located or payable in a participating Member State, would not receive the same treatment as third-country creditors and depositors with similar legal rights under the third-country home resolution proceedings;
6 See also Kokorin, ‘Co-ordination in Bank Resolution and the Issue of Conflicts of Interest’, (2020) 35 JIBLR 107, at p. 110.
Georgios Psaroudakis
921
Art. 33 SRMR
Recognition and enforcement of third-country resolution proceedings
(c) recognition or enforcement of the third-country resolution proceedings would have material fiscal implications for the participating Member State; or (d) the effects of such recognition or enforcement would be contrary to the national law of the participating Member State. 4. National resolution authorities shall implement the recommendation of the Board and ask for the recognition or enforcement of the resolution proceedings in their respective territories, or shall explain in a reasoned statement to the Board why they cannot implement the recommendation of the Board. 5. When exercising resolution powers in relation to third-country entities, national resolution authorities shall, where relevant, exercise the powers conferred on them on the basis of the provisions referred to in Article 94(4) of Directive 2014/59/EU. Bibliography Jens-Hinrich Binder, ‘Cross-border coordination of bank resolution in the EU: All problems resolved?’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Cross-Border Bank Resolution (Elgar, Cheltenham-Northampton 2019), 30; FSB, ‘Principles for Cross-border Effectiveness of Resolution Actions’ (November 2015); Christos Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal aspects of the second main pillar of the (European) Banking Union (5th edn, 2019), ; Matthias Haentjens, ‘Title V and VI. Cross-Border Group Resolution and Third Countries’, in: Gabriel Moss, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2016), 285; Matthias Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107; Michael Anderson Schillig, ‘Global solutions’, in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Cross-Border Bank Resolution (Elgar, Cheltenham-Northampton 2019), 2; Pierre-Hugues Verdier, ‘Transnational Regulatory Networks and their Limits’, The Yale Journalof International Law34 (2009), 113; Bob Wessels, ‘International insolvency law and EU bank resolution rules’, in Matthias Haentjens and Bob Wessels (eds), Research Handbook on Cross-Border Bank Resolution (Elgar, Cheltenham-Northampton 2019), 132.
A. Allocation of competence for recognition and enforcement 1
The present article deals with recognition and enforcement of third-country resolution proceedings that may affect the participating Member States because, as explained in Art. 33(2) SRMR, the institution or parent undertaking under third-country resolution has one or more subsidiaries in participating Member States, or it has assets or liabilities located in such Member States or governed by their laws. A similar connection with a non-participating Member State alone is dealt with by its national resolution authority. In particular, given the lack of harmonization with third countries, the fundamental problem here is, succinctly put, the tension between the public interest at the basis of the third-country resolution proceedings and, on the other side, the private interests in assets, rights and liabilities connected with participating Member States as well as their own public interest, in particular in financial stability. Beyond the very complexity inherent in resolution and the general difficulty in having such proceedings interfere with assets and liabilities under different applicable laws, issues that potentially arise may also involve more direct clashes of interest between home and host country: Ringfencing of assets and creditor discrimination on the basis of their connection with one or the other country come to mind.1 1 See Binder, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at pp. 37-38; Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at p. 113; Schillig, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at p. 6. On the need for equitable treatment of creditors and the avoidance of discrimination (or, indeed, the perception of discrimination) see also FSB, Principles for Cross-border Effectiveness of Resolution Actions (2015), at p. 13.
922
Georgios Psaroudakis
Recognition and enforcement of third-country resolution proceedings
Art. 33 SRMR
The present article sets rules of both procedure, relating in particular to the allocation of competence between the Board and NRAs of participating Member States, and substance, introducing criteria to be used in order to determine whether foreign proceedings shall be granted recognition or enforcement or not. It generally corresponds to Arts. 94-95 BRRD. The present article is announced to be of subsidiary application, in the sense that international agreements made by the EU with a third country under Art. 93(1) BRRD take precedence, to the extent that they regulate these issues, and this article applies only insofar as this is not the case. Interestingly, Art. 93(1-2) BRRD itself does not refer explicitly to mutual recognition and enforcement as the subject-matter of these agreements with third countries, but rather mainly to information sharing; however, its “inter alia” (Art. 33(1) SRMR)2 / “in particular” (Art. 33(2) SRMR) wording allows recognition and enforcement to be regulated in such agreements. Then, it is the present provision (along with Art. 94(1) BRRD which corresponds to it) that highlights recognition and enforcement as issues that can be regulated in these agreements, since it makes its own rules on recognition and enforcement subject to these matters not being governed by such agreement.3 It is submitted though that this article retains significance even if such agreement is made on recognition and enforcement. To the extent that such agreement does not introduce fully automatic recognition and enforcement, but rather, as is more likely, either recognition and enforcement criteria or at least a rule in favour of recognition but with some escape clause, the question still arises on competence, on the EU side, to make an assessment on these criteria or potentially apply the escape clause. The competence structure of the present article, to be examined in more detail immediately below, would then come into play. The Board would make a recommendation to NRAs; the very existence of a binding international agreement would tend to be a basis to overcome potential obstacles in national law to the implementation of this recommendation. The division of competence under the present article with regard to the decision whether to recognize and enforce third country proceedings is somewhat complex. On the one hand, it is reasonable to favour consistency on the part of (at least participating) Member States; such consistency vis-à-vis third country proceedings is also part of the level playing field that this Regulation seeks to establish. As explained in Recital (92) to the Regulation, this is a matter of a “coherent approach vis-à-vis third countries”. On the other hand, if no international agreement has been made with the third country, the criteria for recognition and enforcement are not harmonized, but rather left to national law. The result is the said division, in which the Board issues a recommendation and NRAs “comply or explain” or, in the words of Art. 33(4) SRMR, “implement or explain”. In this context, there are two manners, in which the NRA influences the decision on recognition or enforcement. Ex ante, the Board consults the NRA for an informed recommendation to be issued. This consultation seems to have two aspects: The NRA has an opportunity to explain in advance difficulties in national law, so that they are taken into account by the Board under Art. 33(3)(d) SRMR. But the consultation also goes beyond this, as the NRA may also express its view on the application of the other criteria to be found in Art. 33(3) SRMR: financial stability, equal treatment, fiscal implication. Ex post, and perhaps even more significantly, the NRA is not bound by the recommendation, in the sense explained below. 2 On which see Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at p. 126. 3 See also Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at pp. 126-127.
Georgios Psaroudakis
923
2
3
4
5
Art. 33 SRMR
Recognition and enforcement of third-country resolution proceedings
In particular, the Board does not have authority to impose on NRAs (let alone on other national authorities, on which see below) to follow its recommendation, neither is it empowered by the present article to declare that the NRA’s explanation for not being able to implement the recommendation is not valid. But still the NRA has the burden of argumentation if it deviates from the recommendation, as evidenced in its obligation to provide a written statement to the Board to this effect. The material counterpart to this procedural obligation is a presumption in favour of implementing the recommendation of the Board, unless there is a compelling reason in national law not to do so. In other words, ambiguities in the interpretation of national law should, if possible, be dealt with in the manner that facilitates compliance with the recommendation. 7 A related issue to keep in mind is that the NRA is not very likely to be in a position to implement the Board’s recommendation by itself. Depending on national law as well, it is very probable that national courts or other administrative authorities have to be involved in the recognition and enforcement of third country proceedings.4 This is why Art. 33(4) SRMR provides that the NRA shall “ask for” recognition or enforcement. Even if the NRA itself holds that it would be possible in national law to comply with the recommendation of the Board, it may be that a different national authority does not recognize or enforce the third-country proceedings. This too would then be a “reason” for the statement of the NRA to the Board explaining non-implementation, since the present article does not provide the Board or the NRA with the power to override this other national authority. 8 Moreover, it is possible that there are more than one (participating and/or non-participating) Member States involved, due to Union subsidiaries or significant branches of the third-country entity. In such cases, a European resolution college as per Art. 89 BRRD must have been established. Then, the Board’s consultation involves the NRAs and/or the resolution authorities of the non-participating Member States involved, as explained in Art. 33(2)(2) SRMR. But beyond this consultation with authorities of the nonparticipating Member States, which serves some degree of coordination and thus extends the idea of Art. 89 BRRD to the area of recognition and enforcement, the rest of the process concentrates on participating, rather than non-participating, Member States. The Board’s recommendation is addressed to the NRAs (i.e., those of participating Member States), and the criteria applied to reach it refer to the effects of recognition and enforcement on participating Member States. This is only reasonable, given that, notwithstanding any agreements as per Art. 93(1) BRRD in this case too, non-participating Member States retain authority to deal with third-country resolution proceedings without being affected by processes in the SRM. 9 Lastly, Art. 33(5) SRMR corresponds to Art. 94(4) BRRD and makes clear that the potential exercise of resolution powers on third-country entities (also given that that “Member States retain the right to act in relation to branches of institutions having their head office in third countries”, according to Recital (102) to the BRRD) still falls under national competence. While the Board assumes a function in issuing recommendations, as explained here, as to the recognition and enforcement of third-country proceedings, exercising resolution powers on third-country entities is a matter for the NRAs only. 6
4 See also Binder, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at p. 40; Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at p. 138.
924
Georgios Psaroudakis
Recognition and enforcement of third-country resolution proceedings
Art. 33 SRMR
B. The material criteria for recognition and enforcement Before looking at the individual criteria that the Board looks at in connection with 10 recognition and enforcement, it is noteworthy that the formulation of Art. 33(3) SRMR is negative: It explains when the Board recommends to refuse recognition or enforcement. Therefore, there is a presumption in favour of recognition and enforcement of third-country proceedings, unless these criteria suggest otherwise. For example, it is not necessary to show that third-country resolution proceedings benefit financial stability in a participating Member State, in order to recognize and enforce them; it must rather be shown, if the case may be, that they would have an adverse effect on financial stability in a participating Member State for them not to be recognized. On the other hand, the presumption is, of course, rebuttable, and indeed quite weak, for two reasons. First, given the alternative rather cumulative formulation in Art. 33(3) SRMR (“or”), it is adequate that one of the criteria examined provides a reason against recommending recognition and enforcement.5 Second, recognition or enforcement may be denied on the basis not just of “legal” reasons, such as unequal treatment, but also of assessments on financial stability and fiscal effects. In other words, the Board is called to perform a public interest analysis, which is really a reflection of the broader connection between resolution and public interest.6 This presumption, and the weakness thereof, are consistent with broader features of 11 the relevant law. The idea that the home country is competent to apply reorganization (including resolution) measures informs Directive 2001/24/EC (the Winding-up Directive),7 as amended to extend to resolution. Indeed, it goes back to the universality of insolvency proceedings taking place at the State of the debtor’s centre of main interest (though such universality is not without controversies or qualifications) as per Art. 7 of Regulation (EU) 2015/8488, and even as per the UNCITRAL Model Law on Cross-Border Insolvency, in particular Arts. 17 and 20 thereof – notwithstanding differences in various aspects of these regimes and though bank resolution involves public interest in a more direct manner than insolvency.9 Therefore, it is reasonable that resolution proceedings initiated in the third home country tend to be recognized and enforced. But it is also reasonable that the policy for mutual recognition is weaker if there is no 12 harmonization of material law, which also means that no common basis for balancing the interests involved has been developed; in a similar vein, comity in international law is clearly weaker than cooperation in good faith within the Union. Thus, recognition in case of third-country proceedings is not automatic procedurally (except in the unlikely case that there is an agreement with the third country to such effect), just like it is not automatic under Art. 11 of the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments either; moreover, recognition might fail to be
5 Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): Legal aspects of the second main pillar of the (European) Banking Union (5th ed., 2019), , at p. 89. 6 On which cf. Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at pp. 112-113. 7 On the “strong universalist approach” of this Directive see Schillig, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at p. 5 n. 22 and see also Binder, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at p. 42. 8 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings, OJ L 141, 5.6.2015, p. 19. 9 See, in the context of an analysis on cross-border issues, Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at p. 119.
Georgios Psaroudakis
925
Art. 33 SRMR
13
14
15
16
Recognition and enforcement of third-country resolution proceedings
granted on the basis of a public interest and legal assessment.10 Overall, the weak presumption is consistent with the broader idea that, in this transnational regulatory context, each side may want to retain some flexibility in the rules it applies, as the effects of a more rigid rule could be hard to predict.11 The flipside of this remark is that EU resolution law, which does not commit to recognizing third country proceedings, is also uncertain that third countries will recognize its own resolution measures; this is why it requires (in particular in Art. 55 BRRD) institutions to include contractual terms on the recognition of its measures. This is purported to allow this issue to be dealt with at the less controversial level of the lex causae in such contracts (in particular debt instruments) between institutions and third parties. Turning now to the four individual criteria examined by the Board, one might structure them in two groups, as already implied: The first and third criteria point at a public interest assessment, while the second and fourth criteria involve a rather legal assessment. The assessment of potential adverse effects on financial stability in a participating Member State is broadly reminiscent of the public interest test that the resolution authority has to perform before applying resolution actions. The difference is, of course, that here it is the recognition and enforcement of existing third-country proceedings, which are typically directed at public interest in the third country, that is at issue. This is why it is not a positive effect on financial stability in a participating Member State that is required, but merely the lack of a negative effect thereon. Material fiscal implications for a participating Member State are also meant to be avoided. They would tend to be indirect rather than direct, given that it is impossible to imagine an involuntary contribution of the Member State’s budget to the financing of third-country proceedings. Here the Board, which has no competence of its own on fiscal matters, would be well-advised to consult, before issuing its recommendation, with the Ministry of Finance of the participating Member State (presumably through its NRA). A further reason to refuse recognition or enforcement is discrimination against domestic depositors or creditors in a participating Member State, subjected to worse treatment than their counterparts in the third country. This is significant as a means of protection against one-sided resolution schemes on the part of the home country authority. Notably, this should not be understood as a general assessment of the third country’s resolution scheme by the Board. That the treatment of creditors overall might have been better in an alternative scheme, is not material, and it would not be for the Board to examine whether an alternative scheme would be preferable in case of a bank which is completely outside its competence; it is this unequal treatment that is targeted. Lastly, the Board takes into account incompatibilities with the national law of a participating Member State, e.g. that a particular third-country resolution action affects rights in rem in a manner that is not admissible under such national law. This is a way to coordinate the actions of the Board and the NRA and to avoid an unnecessary recommendation of the Board, which the NRA would be unable to follow. As the recommendation is not binding on the NRA (or, better said, on the NRA and other national authorities that are called to recognize and enforce the foreign proceedings), it is possible that the NRA does not ultimately accept the Board’s conclusion that effects of recogni10 It has been noted that the potential grounds for refusal of recognition are quite broad: Haentjens, in: Moss, Wessels and Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, 2016), at p. 299, para. 8.24; Wessels, in: Haentjens and Wessels (eds), Research Handbook on Cross-Border Bank Resolution (2019), at p. 150. 11 Cf. Verdier, ‘Transnational Regulatory Networks and their Limits’, The Yale Journal of International Law 34 (2009), 113, at p. 125.
926
Georgios Psaroudakis
Art. 34 SRMR
Requests for information
tion are compatible with national law. In any case, there must be a specific basis for such incompatibility. In other words, the present article is based on the assumption that recognition and enforcement of third-country proceedings are possible in principle, and indeed that such proceedings are (weakly) presumed to be able to be recognized and enforced. Thus, a (theoretical) national rule of the host Member State to the effect that no third-country resolution proceedings are recognized, or e.g. that they are only recognized if they contribute positively to financial stability in the said host country (rather than that they do not harm financial stability there, as the first criterion in Art. 33(3) SRMR is formulated), would be incompatible with the logic and the effet utile of the present article, and thus invalid. Put differently, while the present article does not introduce uniform rules on the recognition and enforcement of third-country proceedings, it does rest on an assumption of their basic ability to be recognized and enforced, and at least this assumption should be taken to be binding. It is noteworthy that reciprocity on the part of the third country, in which the pro- 17 ceedings to be recognized or enforced originate, is not required by Art. 33(3) SRMR, neither indeed is it mentioned among the criteria used. This is consistent with the FSB recommendation that recognition of third-country resolution proceedings should in principle not be contingent on reciprocity.12 In any case, it is reasonable to suggest that the Board and the participating Member States may expect that this rather accommodating stance should be met with a similar one by third countries, when it comes to resolution proceedings decided by the Board or an NRA.13
Art. 34 SRMR Requests for information 1. For the purpose of performing its tasks under this Regulation, the Board may, through the national resolution authorities or directly, after informing them, making full use of all of the information available to the ECB or to the national competent authorities, require the following legal or natural persons to provide all of the information necessary to perform the tasks conferred on it by this Regulation: (a) entities referred to in Article 2; (b) employees of the entities referred to in Article 2; (c) third parties to whom the entities referred to in Article 2 have outsources functions and activities. 2. The entities and persons referred to in paragraph 1 shall supply the information requested pursuant to that paragraph. The requirements of professional secrecy shall not exempt those entities and persons from the duty to supply that information. The supply of the information requested shall not be deemed to infringe the requirements of professional secrecy. 3. Where the Board obtains information directly from those entities and persons, it shall make that information available to the national resolution authorities concerned. 4. The Board shall be able to obtain, including on a continuous basis, any information necessary for the exercise of its functions under this Regulation, in particular
FSB, Principles for Cross-border Effectiveness of Resolution Actions (2015), at p. 12. Cf. in a related context Lehmann, ‘Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders’, ICLQ 66 (2017), 107, at p. 127. 12
13
Klaus Lackhoff and Mikulas Prokop
927
Art. 34 SRMR
Requests for information
on capital, liquidity, assets and liabilities concerning any institution subject to its resolution powers. 5. The Board, the ECB, the national competent authorities and the national resolution authorities may draw up memoranda of understanding with a procedure concerning the exchange of information. The exchange of information between the Board, the ECB, the national competent authorities and the national resolution authorities shall not be deemed to infringe the requirements of professional secrecy. 6. National competent authorities, the ECB where relevant, and national resolution authorities shall cooperate with the Board in order to verify whether some or all of the information requested is already available. Where such information is available, national competent authorities, the ECB where relevant, or national resolution authorities shall provide that information to the Board. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Scope of information request powers of the SRB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Material scope – what can be requested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Personal scope – who can be requested to provide information . . . . . . . . . . . . . . III. Professional secrecy – no limitation to the obligation to provide information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 4 9 18
C. Exercise of the power to request information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
A. Function and background of the provision In order to carry out its tasks, the SRB needs access to all information that is relevant for carrying out its tasks in respect of entities subject to the SRMR. Chapter 5 of the SRMR provides to this end investigatory powers to the SRB. The investigatory powers include (i) the power to require certain persons to provide information (Art. 34 SRMR), (ii) the power to conduct all necessary investigations of certain persons (Art. 35 SRMR), and (iii) the power to carry out on-site inspections (Arts. 36 and 37 SRMR). These powers are vested in the SRB for the exclusive purpose of carrying out its tasks under SRMR. In general, the investigatory powers of the SRB concretely reflect the BRRD requirement that “resolution authorities and competent authorities shall have all information-gathering and investigatory powers that are necessary for the exercise of their respective functions.”1 2 The investigatory powers under the SRMR closely mirror the investigatory powers that the ECB has under Arts. 10-13 SSMR. Therefore, if the provisions under the SRMR are substantively the same as in the SSMR, a reference will be made to the relevant paragraphs discussing the provision in the SSMR. 3 In general, the SRB may exercise the investigatory powers for the purposes of performing the tasks conferred on the SRB by the SRMR. In particular, the division of tasks between the SRB and national resolution authorities within the SRM under Art. 7 SRMR is indicative as to in which situations and for which entities the SRB may use the investigatory powers. Conversely, the national resolution authorities maintain the investigatory powers, in accordance with national law implementing Art. 110(3) of Directive 2014/59/EU2 in order to fulfil their tasks under Directive 2014/59/EU and SRMR. 1
Art. 110(3) of Directive 2014/59/EU. Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.6.2014, at p. 190. 1 2
928
Klaus Lackhoff and Mikulas Prokop
Art. 34 SRMR
Requests for information
B. Scope of information request powers of the SRB I. Material scope – what can be requested Art. 34(1) SRMR provides that the SRB is entitled to obtain and make full use of all information available to the ECB or to the national competent authorities and may, directly or through the national resolution authorities, require the legal and natural persons specified in Art. 34(1) SRMR3 (“information providers”) to provide all the information necessary to perform its tasks under the SRMR. Art. 34(4) SRMR further provides in a non-exhaustive manner for concrete examples of the material scope of the information to be provided. This includes information on capital, liquidity, assets and liabilities concerning any institution subject to the resolution powers of the SRB. In requesting information, the SRB is bound by the principle of proportionality. This principle is also embedded in Art. 34(1) SRMR. The SRB must, in a first step, make full use of information already available at the ECB or the national competent authorities. It follows that the SRB may only, in a second step, request information from information providers if this information cannot be gathered from the ECB or the national competent authorities. Consequently, it may be expected that the information exchange with the supervisory authorities is the primary source of information of the SRB. In order to facilitate the full use by the SRB of the information already available at the ECB and the national competent authorities, Art. 34(6) SRMR requires that the national competent authorities, the ECB and national resolution authorities cooperate with the SRB in order to verify whether some or all of the information requested by the SRB is available. Where such information is available, the ECB, national competent authorities and national resolution authorities are required to provide such information to the SRB. In this respect, the SRB, the ECB, the national competent authorities and the national resolution authorities may draw up memoranda of understanding with a procedure concerning the exchange of information.4 The exchange of information between the SRB, the ECB, the national competent authorities and national resolution authorities shall not be deemed to infringe the requirements of professional secrecy (Art. 34(5) SRMR). From a substantive perspective it is noted that one of the early intervention measures available to the competent supervisory authorities under Art. 27(1)(h) of Directive 2014/59/EU is to “acquire, including through on-site inspections and provide to the resolution authority, all the information necessary in order to update the resolution plan and prepare for the possible resolution of the institution and for valuation of the assets and liabilities of the institution in accordance with Article 36 [of Directive 2014/59/EU]5”. This early intervention power may facilitate a smoother preparation of the resolution by creating the possibility that the competent authorities collect the information necessary for the SRB and national resolution authorities to carry out their tasks. When Art. 34(1) SRMR requires making the full use of the information available at the ECB this organically follows the provisions of Directive 2014/59/EU. Finally, a question may arise whether “information available to the ECB or the national competent authorities” implies the necessity of the ECB and the national competent See infra, → paras. 9–17. In line with this approach, the ECB has established early on a Memorandum of Understanding with the SRB, see . 5 Art. 36 of Directive 2014/59/EU on valuation for the purposes of resolution is mirrored by Art. 20 SRMR. 3
4
Klaus Lackhoff and Mikulas Prokop
929
4
5
6
7
8
Art. 34 SRMR
Requests for information
authorities to compile or derive new information from the information already available and already collected. In this regard, the term “making a full use of information” available should be read in a general light of proportionality: before requesting information from the information providers6, the information already available to the competent and resolution authorities should be used to the extent reasonably and timely possible without compromising the effet utile of the provision. The bottom line is that the SRB should have all and timely information to perform its tasks under the SRMR and the process in obtaining such information should follow this objective.
II. Personal scope – who can be requested to provide information Art. 34(1) SRMR provides for a conclusive list of information providers. This list includes (i) credit institutions established in the participating Member State (see infra, → paras. 10 and11), (ii) parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR (see infra, → paras. 12–14), (iii) investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR (see infra, → paras. 13 and 14), (iv) employees of entities mentioned under (i) to (iii) (see infra, → para. 15), and (v) third parties to whom the entities mentioned under (i) to (iii) have outsourced their functions, no matter where such persons or third parties are established (see infra, → paras. 16 and 17). 10 The SRB may request information from credit institutions established in participating Member States (Art. 34(1)(a) SRMR in combination with Art. 2(a) SRMR). The provision does not differentiate whether the credit institutions are directly supervised by the ECB or not. Hence the SRB may request information from all credit institutions regardless of whether these are significant or less significant credit institutions, provided that the requested information is necessary for the purposes of performing the SRB’s tasks. 11 The division of tasks between the SRB and national resolution authorities within the SRM under Art. 7 SRMR is indicative that most of the information requests shall be directed to significant credit institutions and cross-border groups (consisting of less significant institutions). This being said, Art. 7 SRMR makes the SRB also responsible for the effective and consistent functioning of the SRM as well as for a resolution which requires use of the single resolution fund and resolutions in participating Member States which opted for the SRB being the responsible resolution authority also for less significant credit institutions. In these examples, the SRB shall have the power to request information also from less significant credit institutions. The SRB may request information from credit institutions on both individual and consolidated levels.7 12 The SRB may request information from parent undertakings, including financial holding companies and mixed financial holding companies, established in a participating Member State, where they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) SSMR (Art. 34(1)(a) SRMR in combination with Art. 2(b) SRMR). This power is in particular important in case the SRB takes a resolu9
6 7
930
Which is envisaged as an early intervention measure, Art. 27(1)(h) BRRD. This is also aligned with the powers of the ECB. See also supra, → SSMR Art. 10 para. 24.
Klaus Lackhoff and Mikulas Prokop
Art. 34 SRMR
Requests for information
tion action in respect of financial institutions and their parent undertakings in accordance with Arts. 16 and 18 SRMR. Similarly, the SRB may request information from investment firms and financial institutions established in a participating Member State, where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Art. 4(1)(g) SSMR (Art. 34(1)(a) SRMR in combination with Art. 2(c) SRMR). Again, this power is necessary for effective group resolution and hence the scope follows the entities included in the scope of prudential consolidation pursuant to Art. 18(1) CRR.8 The reference of Art. 2(b) and (c) SRMR to “consolidated supervision carried out by the ECB in accordance with Article 4(1)(g) SSMR” could be read as limiting Art. 34(1)(a) SRMR to the power of the SRB to request information only from significant groups. However, in light of the General Court’s judgment of Landeskreditbank Baden-Württemberg9, reference to Art. 4(1)(g) SSMR could, within the scope of the tasks assigned to the SRB, be read differently as including all consolidated supervision carried out in the participating Member States and hence would cover both significant and less significant banking groups. Under 34(1)(b) SRMR, the SRB may request information from employees of all the entities included under Art. 2 SRMR (see supra, → paras. 10–14). This provision is narrower than for example Art. 10(1)(e) SSMR in its broad reading,10 but the term “employees” should be read also to include members of the management, which might not have an employment contract stricto sensu. Under Art. 34(1)(c) SRMR, the SRB may request information from third persons to whom any of the entities included under Art. 2 SRMR (see supra, → paras. 10–14) has outsourced functions and activities. Such third persons could be both natural and legal persons. The functions and activities referred to in Art. 34(1)(c) SRMR should be interpreted as including all (or part of the) functions and activities of the entities which may be subject to the resolution action which is relevant for the tasks of the SRB. It would not matter whether such functions and activities are outsourced directly or indirectly (i.e. by a first outsourcing provider) to the relevant party. It should be noted that Art. 34(1)(c) SRMR is not limited by the location of the outsourcing provider, which may also be located outside the EU. In this respect, the SRMR claims extraterritorial effects. On the discussion of extraterritorial effects, see supra, → SSMR Art. 10 paras. 20 et seq.
13
14
15
16
17
III. Professional secrecy – no limitation to the obligation to provide information Art. 34(2) SSMR expressly stipulates that professional secrecy provisions do not ex- 18 empt information providers from the duty to supply such information and supplying such information shall not be deemed to be in breach of professional secrecy. For the
8 However, a possible gap between the prudential consolidation and the scope of information providers under the SRMR may arise in case of the cross-border groups as, unlike Art. 18(2) CRR, Art. 34(1)(a) SRMR in combination with Art. 2 SRMR does not include in the list of information providers ancillary services undertakings, however, it may be possible to receive the necessary information from the parent undertaking if available. 9 See Case T-122/15, Landeskreditbank Baden-Württemberg – Förderbank v ECB, ECLI:EU:T:2017:337, in particular paras. 20–24 and 54. 10 See supra, → SSMR Art. 10 para. 27 et seq.
Klaus Lackhoff and Mikulas Prokop
931
Art. 35 SRMR
General investigations
discussion on professional secrecy obligations see supra, → SSMR Art. 10 paras. 31 et seq.
C. Exercise of the power to request information The SRB may request information from the information providers through the national resolution authority or directly, after informing the national resolution authorities.11 Unlike for general investigations under Art. 35 SRMR and on-site inspections under Art. 36 SRMR, the SRMR does not expressly require that the SRB adopts a decision to request information under Art. 34 SRMR. In this regard, it should be noted that the SRB information request would be ultimately enforceable vis-à-vis the information provider if the SRB adopts a decision. 12 Also, one could argue that information providers which are requested to provide information would only be able to avail themselves of the exemption from the professional secrecy (Art. 34(2) SRMR) when they are requested to provide information by an SRB decision. For a more detailed discussion on this topic, see supra, → SSMR Art. 10 para. 35. 20 The SRB Decision establishing the framework of the practical arrangement for the cooperation within the SRM between the SRB and national resolution authorities13 (“SRB Framework Decision”) establishes in its Art. 39 the manner of obtaining information from entities and groups under the direct SRB responsibility. In particular, it specifies that the national resolution authorities are, in particular during resolution planning, in charge of requests for information from entities and groups located within their Member States, including employees and outsourcing providers of such entities. National competent authorities are obliged to immediately submit any information received in such a way to the SRB. This process, however, does not prevent the SRB to obtain information directly, for example in cases of urgency or in cases where information is not provided by national resolution authorities in a timely manner. If the SRB obtains information directly, the SRB Framework Decision stipulates that the SRB is to submit information to the relevant national resolution authority. 19
Art. 35 SRMR General investigations 1. For the purpose of performing its tasks under this Regulation, and subject to any other conditions laid down in relevant Union law, the Board may, through the national resolution authorities or directly, after informing them, conduct all necessary investigations of any legal or natural person referred to in Article 34(1) established or located in a participating Member State. To that end, the Board may: (a) require the submission of documents; (b) examine the books and records of any legal or natural person referred to in Article 34(1) and take copies or extracts from such books and records; 11 The SRB must also make full use of all the information available to the ECB or to the national competent authority before making such request. See supra, → paras. 5–8. 12 For the applicable decision making procedure see infra, → Art. 35 para. 3. 13 28.6.2016 (SRB/PS/2016/07) and Decision of the Single Resolution Board of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15).
932
Klaus Lackhoff and Mikulas Prokop
Art. 35 SRMR
General investigations
(c) obtain written or oral explanations from any legal or natural person referred to in Article 34(1) or their representatives or staff; (d) interview any other natural or legal person who consents to be interviewed for the purpose of collecting information relating to the subject matter of an investigation. 2. The natural or legal persons referred to in Article 34(1) shall be subject to investigations launched on the basis of a decision of the Board. Where a person obstructs the conduct of the investigation, the national resolution authorities of the participating Member State where the relevant premises are located shall afford, in accordance with national law, the necessary assistance including facilitating the access by the Board to the business premises of the natural or legal persons referred to in Article 34(1), so that those rights can be exercised. A. Personal scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Material scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Exercise of the general investigation powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
A. Personal scope Art. 35 SRMR empowers the SRB to conduct “all necessary investigations of any person 1 referred to in Art. 34(1) established or located in a participating Member State”. Hence, its personal scope prima facie follows the personal scope of Art. 34 SRMR. However, by the addition of “established or located in a participating Member State” this personal scope appears to be limited only to persons established or located in a participating Member State.1 This would be relevant in respect of outsourcing providers (Art. 34(1)(c) SRMR), i.e. a general investigation would not be available towards an outsourcing provider not established or located in a participating Member State while a request for information would be possible. The reason for such a differentiation of the personal scope is not clear and appears inconsistent with Art. 34(2)SRMR which refers to the “persons referred to in Art. 34(1)” without adding “established or located in a participating Member State”.2
B. Material scope Art. 35(1) SRMR provides a list of general investigation powers which consists of 2 (i) the power to require the submission of documents, (ii) the power to examine books and records, (iii) the power to obtain written or oral explanations, and (iv) the power to interview any other person who consents to be interviewed. This list of general investigation powers is identical to the list of the ECB’s general investigation powers under Art. 11 SSMR. For a more detailed elaboration please see Art. 11 SSMR paragraphs 7-16 mutatis mutandis.
1 This understanding is also confirmed in Art. 40(1) SRB Framework Decision, 28.6.2016 (SRB/PS/ 2016/07) and Decision of the Single Resolution Board of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15). 2 See also the discussion supra, → SSMR Art. 11 paras. 3 and 4 which would apply mutatis mutandis also on this case.
Klaus Lackhoff and Mikulas Prokop
933
Art. 35 SRMR
General investigations
C. Exercise of the general investigation powers 3
4
5
6
7
8
The SRB may exercise its general investigation powers through (i) the national resolution authority or (ii) directly after informing national resolution authorities. In both cases of indirect and direct exercise of general investigation powers, Art. 35(2) SRMR expressly requires that the SRB adopts a decision to launch investigations in order to conduct investigations at any legal or natural person listed in Art. 34(1) SSMR. The SRB decision launching general investigations is to be adopted by the executive session of the SRB in accordance with Arts. 53-55 SRMR.3 If the SRB exercises its general investigation powers indirectly through national resolution authorities, it is pursuant to Art. 29 SRMR for the national resolution authorities to ensure that the applicable safeguards under Directive 2014/59/EU 4 are complied with and those general investigations are conducted in accordance with the conditions laid down in national law. It should be noted that Recital 88 of Directive 2014/59/EU reminds that in accordance with Art. 47 CFREU the parties concerned have a right to due process and to an effective remedy against the measures affecting them and that, therefore, the decisions taken by the resolution authorities should be subject to a right of appeal. It is however not fully clear whether the decisions of the national resolution authorities implementing general investigation decisions required by the SRB would at all times be necessarily subject to the right to be heard; the SRB Regulation does not include a provision providing for or requiring a hearing.5 Unlike for fines and periodic penalty payments6, the SRMR does also not provide for any specific due process requirements such as the right to be heard for an SRB decision to launch a general investigation decision which is implemented by the SRB directly.7 Where the SRB intends to conduct the investigation directly, the relevant national resolution authority must be informed as soon as possible and in any event at least one week before the start of the investigation.8 The SRB has to inform the relevant national resolution authorities of the outcome.9 Even when the SRB conducts the investigation directly, it may at any time ask the relevant national resolution authority for the necessary assistance.10 In addition, pursuant to the second subparagraph of Art. 35(2) SRMR, when a person obstructs the conduct of the investigation, the national resolution authority of the participating Member State where the relevant premises are located must afford, in compliance with national law, the necessary assistance. This assistance would, in case of on-site inspection, mean facilitating the access by the SRB to the business premises of the natural and legal persons subject to on-site inspection. Whenever the SRB conducts the investigation through national resolution authorities, the SRB’s decision requesting the NRA to conduct an investigation must duly speci3 As Art. 35 SRMR is not listed among the topics vested to be decided by the plenary session of the SRB (Art. 50 SRMR) or the Chair of the SRB (Art. 56 SRMR). 4 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.6.2014, at p. 190. 5 See also supra, → SSMR Art. 10 para. 36. 6 Art. 40 SRMR. 7 See supra, → SSMR Art. 10 para. 36 and for the parallel situation in the SSMR Lackhoff, The Single Supervisory Mechanism (2017), para. 763. 8 Art. 40(2) SRB Framework Decision (see fn. 1). 9 Art. 40(4) SRB Framework Decision, (see fn. 1). 10 Art. 40(3) SRB Framework Decision, (see fn. 1).
934
Klaus Lackhoff and Mikulas Prokop
Art. 36 SRMR
On-site inspections
fy the purpose of the investigations and the activity required.11 The national resolution authorities are then required to carry out the investigation and to keep the SRB duly informed about the progress of the investigation and to inform the SRB of the outcome of the investigation as soon as possible, accompanied by all the relevant documents.12 The decision of the SRB to launch an investigation or requiring a national resolution 9 authority to carry out an investigation can be contested in court (Art. 263 TFEU) and as in the latter case the national resolution authority is bound to carry out the general investigation the credit institution should (also) contest this decision if it intends to contest the investigation. The professional secrecy provisions do not exempt the entities subject to general in- 10 vestigations from an obligation to provide any information, documents, access to books and records or other data to the SRB or national resolution authorities. Supplying such information to the SRB or national resolution authorities should not be deemed to be in breach of professional secrecy. The provisions of Art. 34(2) SRMR apply mutatis mutandis to general investigations (Art. 35 SRMR). This follows from the fact that Art. 35 SRMR complements Arts. 34 and 36 SRMR by providing specific powers by which the SRB may obtain information about supervised entities in both on-site and off-site investigations and, therefore, should have the same relationship vis-à-vis the professional secrecy rules. Furthermore, such interpretation is also necessary to ensure the effectiveness of general investigation powers; otherwise, the entities subject to general investigations could easily obstruct general investigations.
Art. 36 SRMR On-site inspections 1. For the purpose of performing its tasks under this Regulation, and subject to other conditions laid down in relevant Union law, the Board may, in accordance with Article 37 and subject to prior notification to the national resolution authorities and the relevant national competent authorities concerned, and, where appropriate, in cooperation with them, conduct all necessary on-site inspections at the business premises of the natural or legal persons referred to in Article 34(1). Where the proper conduct and efficiency of the inspection so require, the Board may carry out the on-site inspection without prior announcement to those legal persons. 2. The officials of and other persons authorised by the Board to conduct an on-site inspection may enter any business premises and land of the legal persons subject to an investigation decision adopted by the Board pursuant to Article 35(2) and shall have all of the powers referred to in Article 35(1). 3. The legal persons referred to in Article 34(1) shall be subject to on-site inspections on the basis of a decision of the Board. 4. Officials of, and other accompanying persons authorised or appointed by, the national resolution authorities of the Member States where the inspection is to be conducted shall, under the supervision and coordination of the Board, actively assist the officials of, and other persons authorised by, the Board. To that end, they shall enjoy the powers referred to in paragraph 2. Officials of, and other accompanying persons authorised or appointed by, the national resolution authorities of the participating Member States concerned shall also have the right to participate in the on-site inspections. 11 12
Art. 40(4) SRB Framework Decision, (see fn. 1). Art. 40(4) SRB Framework Decision, (see fn. 1).
Klaus Lackhoff and Mikulas Prokop
935
Arts. 36, 37 SRMR
On-site inspections/Authorisation by a judicial authority
5. Where the officials of and other accompanying persons authorised or appointed by the Board find that a person opposes an inspection ordered pursuant to paragraph 1, the national resolution authorities of the participating Member States concerned shall afford them the necessary assistance in accordance with national law. To the extent necessary for the inspection, that assistance shall include the sealing of any business premises and books or records. Where that power is not available to the national resolution authorities concerned, it shall exercise its powers to request the necessary assistance of other national authorities.
Art. 37 SRMR Authorisation by a judicial authority 1. If an on-site inspection provided for in Article 36(1) and (2) or the assistance provided for in Article 36(5) requires authorisation by a judicial authority in accordance with national rules, such authorisation shall be applied for. 2. Where authorisation as referred to in paragraph 1 of this Article is applied for, the national judicial authority shall control that the decision of the Board is authentic and that the coercive measures envisaged are neither arbitrary nor excessive, taking into account the subject matter of the inspection. In its control of the proportionality of the coercive measures, the national judicial authority may ask the Board for detailed explanations, in particular relating to the grounds the Board has for suspecting that an infringement of the decisions referred to in Article 29 has taken place, the seriousness of the suspected infringement and the nature of the involvement of the person subject to the coercive measures. However, the national judicial authority shall not review the necessity for the inspection or demand to be provided with the information on the Board's file. The lawfulness of the Board's decision shall be subject to review only by the Court of Justice. A. Scope of an on-site inspection powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Personal scope of an on-site inspection – who can be subject to an on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Territorial scope of an on-site inspection – where can the SRB conduct an on-site inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Substantive scope of on-site inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 5 6
B. Conduct of on-site inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
C. Authorisation by a judicial authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
A. Scope of an on-site inspection powers I. Personal scope of an on-site inspection – who can be subject to an on-site inspection 1
Art. 36 SRMR empowers the SRM to conduct “all necessary on-site inspections at the business premises of natural and legal persons referred to in Article 34(1).” Hence, the personal scope of the power to carry out on-site inspections follows the personal scope of the power to request information under Art. 34(1) SRMR.1 1
936
See infra, → Art. 34 paras. 9-17.
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 36, 37 SRMR
Unlike the ECB under the SSMR, it appears that the SRB may conduct on-site inspec- 2 tions not only at the premises of legal persons but also of certain natural persons as the personal scope of Art. 34 SRMR extends also to certain natural persons. That being said, this wider personal scope of SRB’s on-site inspection under Art. 36(1) SRMR is not reflected in Art. 36(2) SRMR which empowers “the officials of and other persons authorised by the SRB to conduct an on-site inspection [to] enter any business premises of the legal persons [emphasis added] subject to an investigation decision adopted by the Board pursuant to Article 35(2) [SRMR]”. It is argued here that the authorisation of officials and other persons authorised by the SRB should be read in line with Art. 36(1) SRMR and allow entering business premises also of natural persons,2 if within the scope of SRMR. On-site inspections may be conducted at different levels of consolidation, depend- 3 ing on the goals of the on-site inspection. An inspection can be done at a group level in which the scope of an on-site inspection would include the parent entity as well as some or all of the subsidiaries in the group, or it can be conducted at an individual level, in which the on-site inspection investigates one particular member of a group (be it the parent or subsidiary entity). In general, if an on-site inspection is taking place at a group level, the formal communication takes place with the parent entity of that group. For inspections specifically conducted on an individual basis, formal communication would normally take place with the management of that subsidiary. Art. 36 SRMR thus empowers the SRB to conduct an on-site inspection in (i) credit 4 institutions established in participating EU Member States; (ii) their parent undertakings where they are subject to consolidated supervision carried by the ECB; as well as (iii) investment firms and financial institutions where they are covered by the consolidated supervision of the parent undertaking carried out by the ECB. The SRB may also subject third parties to whom these entities have outsourced their functions and activities to an on-site inspection.
II. Territorial scope of an on-site inspection – where can the SRB conduct an on-site inspection By referring to Art. 34 SRMR which refers to Art. 2 SRMR, the SRMR empowers the 5 SRB to conduct an on-site inspection only if (i) credit institutions; (ii) their parent undertakings; as well as (iii) the investment firms and the financial institutions which are covered by the consolidated supervision of the parent undertaking carried out by the ECB are established in participating EU Member States. The SRB may also subject third parties to whom these entities have outsourced their functions and activities, even if such outsourcing providers are located in the non-participating EU Member States or in third countries.
III. Substantive scope of on-site inspections As explained by Recital 93 of the SRMR, the general purpose of the on-site inspec- 6 tion powers of the SRB is twofold. This power shall enable the SRB (i) to ensure that decisions under the SRMR are taken on the basis of fully accurate information and (ii) to monitor implementation by national authorities effectively. Therefore, the SRB may initiate an on-site inspection in pursuing one of these two objectives. It follows that the SRB may conduct on-site inspections on any issue which follows from the tasks of 2
On other hand, it is argued that private premises of natural persons may not be entered.
Klaus Lackhoff and Mikulas Prokop
937
Arts. 36, 37 SRMR
On-site inspections/Authorisation by a judicial authority
the SRB under the SRMR, having in mind the general purpose of ensuring that any resolution or pre-resolution actions are taken based on the full information and that the decisions of SRB are properly implemented.
B. Conduct of on-site inspections Pursuant to Art. 36(3) SRMR, on-site inspections are conducted on the basis of an SRB decision. Unlike, Art. 143 of the SSM‑FR, Art. 41 of the Decision of the Single Resolution Board of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15) (hereafter referred to as SRB Framework Decision)3 does not specify the minimum requirements for such decision. Nevertheless, an SRB decision to launch an on-site inspection should contain at least the subject matter, the purpose of the on-site inspection and the investigatory powers to be utilised.4 The SRB decision launching an on-site inspection is to be adopted by the executive session of the SRB in accordance with Arts. 53-55 SRMR. 5 8 Unlike for fines and periodic penalty payments,6 the SRMR does not provide for any specific due process requirements such as the right to be heard for an the SRB decision to launch an on-site inspection.7 No prior hearing period is required anyhow where this is necessary for the proper conduct and efficiency of the on-site inspection and hence no prior announcement of an on-site inspection is to be made pursuant to the last sentence of Art. 36(1) SRMR. 9 If an investigated person is located in a participating Member State, the officials of and other persons authorised by the SRB shall have according to Art. 36(2) SRMR all the powers stipulated in Art. 35(1) SRMR I.e. the officials of and other persons authorised by the SRB may exercise on-site any of the investigatory powers included in Art 35 SRMR. 10 Following the SRB decision to conduct an on-site inspection, pursuant to Art. 36(3) SRMR, the SRB is in charge of the establishment and composition of an on-site inspection team with the possible involvement of staff members of and other persons authorised or appointed by NRAs in accordance with Art. 36 of the SRMR (Art. 41(2) SRB Framework Decision8). The SRB may designate the head of the on-site inspection team from among SRB and NRAs staff members (Art. 41(3) SRB Framework Decision). Those carrying out the on-site inspection must follow the instructions of the head of the onsite inspection team as regards their tasks in the on-site inspection (Art. 41(6) SRB 7
3 https://www.srb.europa.eu/en/system/files?file=media/document/decision_of_the_srb_on_cofra.pdf; for a brief overview on the procedural law to be applied by the SRB see Lackhoff, ‘Procedural law requirements for conducting administrative procedures by the ECB and the SRB’, in: Zilioli and Wojcik, Judicial review in the European Banking Union, paras. 10.12 et seq. 4 This content is likely needed to enable possible review by national judicial authorities. See infra, → paras. 15 et seq. 5 As Art. 36 SRMR is not listed among the topics vested to be decided by the plenary session of the SRB (Art. 50 SRMR) or the Chair of the SRB (Art. 56 SRMR). 6 Art. 40 SRMR. 7 See also supra, → SSMR Art. 10 para. 36 and for the parallel situation in the SSMR Lackhoff, The Single Supervisory Mechanism (2017), para. 763. See also supra, → SSMR Art. 10 paras. 4 and 36, → SSMR Art. 11 para. 18 and → SSMR Arts. 11 and 12 para 15. 8 Decision of the Single Resolution Board of 17 December 2018 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and National Resolution Authorities (SRB/PS/2018/15), https://www.srb.europa.eu/en/ system/files?file=media/document/decision_of_the_srb_on_cofra.pdf, referred to as SRB Framework Decision.
938
Klaus Lackhoff and Mikulas Prokop
On-site inspections/Authorisation by a judicial authority
Arts. 36, 37 SRMR
Framework Decision).9 If applicable, the members of the internal resolution team (IRT) concerned may assist in the on-site inspection (last sent. of Art. 41(2) SRB Framework Decision). Pursuant to Art. 41(4) SRB Framework Decision, the SRB and NRAs are to consult with each other and agree on the use of NRA resources with regard to the on-site inspection teams. Art. 36(4) sentence 1 SRMR envisages that under the coordination of the SRB, the officials of and other accompanying persons authorised or appointed by the NRA of the participating Member State concerned actively assist the officials of, and other accompanying persons authorised by the SRB to carry out the on-site inspection and shall have to this end the investigatory powers of Art 36(2), 35 SRMR, Art. 36(4) sentence 2 SRMR. Finally, without prejudice to the composition of the on-site inspection team, Art. 36(4) sentence 3 SRMR gives a right to the officials of and other accompanying persons authorised or appointed by the NRA of the participating Member State concerned to participate in the on-site inspection. The functional role (as observer, as person actively assisting or as member of the inspection team) is not determined, but as sentence 1 and 2 cover active assistance and differentiate that from being part of the inspection team only the role as observer can be meant. As a final step in the initiation of an on-site inspection, the SRB must notify the legal person subject to an on-site inspection (see first sent. of Art. 41(5) SRB Framework Decision). There is, unlike in Art. 145 SSM‑FR, no explicit requirement as to how many days before the start of an on-site inspection such notification is to be made and the necessity to identify the members of the on-site inspection team.10 However, the notification of the relevant national resolution authority and the relevant national competent authority concerned (including the ECB) shall be made at least one week before notifying the legal person that is subject to such on-site inspection of the on-site inspection (Art. 36(1) SRMR, Art. 45(5) SRB Framework Decision). Pursuant to Art. 36(1) sentence 2 SRMR and Art. 41(5) sentence 2 SRB Framework Decision, the notification of the legal person subject to an on-site inspection is not necessary if the proper conduct and efficiency of the inspection so require. This would be the case, in particular, where there is a risk that the legal entity subject to inspection would manipulate data, systems or people in order to hamper the on-site inspection. Even in such a case, the SRB needs to notify the NRA and the NCA as soon as possible before the start of such an on-site inspection. Where the officials of and other accompanying persons authorised or appointed by the SRB find that the inspected legal person opposes an inspection, the NRAs of the participating Member State concerned are required under Art. 36(5) SRMR to afford them the necessary assistance in accordance with national law. To the extent necessary for the inspection, this assistance shall include the sealing of any business premises and books or records. Where that power is not available to the NRA concerned, it shall use its powers to request the necessary assistance of other national authorities. Other national authorities are required to provide assistance in line with the national law. The on-site inspection team has a right to enter premises and use all the investigatory powers under Art. 35(1) SRMR. Hence, it may require submission of necessary documents, examine books and records, obtain written or oral explanation and interview also any person other than those listed in Art. 34(1) SRMR. Inherent to an on-site inspection However, without prejudice to their tasks and duties within their respective NRA. Compare with Art. 145 SSM‑FR – see Arts. 12 and 13 SSMR para. 19. On other hand, Art. 41(5) of the SRB Framework Decision requires that the SRB notifies the NRA and the NCA where the on-site inspection is to be conducted as well as the ECB one week before notification of the legal person. 9
10
Klaus Lackhoff and Mikulas Prokop
939
11
12
13
14
Arts. 36, 37 SRMR
On-site inspections/Authorisation by a judicial authority
is further the right to search for documents falling within the scope of the on-site inspection. The use of these powers should be proportionate to the subject matter and goals of the on-site inspection. 15 The professional secrecy provisions do not exempt the entities subject to an on-site inspection from an obligation to provide access to premises, information, documents, access to books and records or other data to the on-site inspection team. Supplying such information to the on-site inspection team should not be deemed to be in breach of professional secrecy. The provisions of Art. 34(2) SRMR applies mutatis mutandis to all information received in the course of an on-site inspection – this is based on the fact that Art. 36 SRMR complements Arts. 34 and 35 SRMR by allowing the SRB to obtain information and verify information about credit institutions in on-site investigations and therefore should have the same relationship vis-à-vis the professional secrecy rules. Furthermore, such interpretation is also necessary to ensure the effectiveness of on-site inspection powers; otherwise the entities subject to on-site inspections could easily obstruct on-site inspections.
C. Authorisation by a judicial authority The conduct of on-site inspections, if not sufficiently justified, would interfere with the protection of (also) business premises against arbitrary or disproportionate intervention by public authorities in the sphere of the private activities of any person, whether natural or legal.11 As stated by the CJEU in the context of EU competition law in the Hoechst case, “in all the legal systems of the Member States, any intervention by the public authorities in the sphere of private activities of any person, whether natural or legal, must have a legal basis and be justified on the grounds laid down by law, and, consequently, those systems provide, albeit in different forms, protection against arbitrary or disproportionate intervention. The need for such protection must be recognized as a general principle of Community law”.12 Therefore, carrying out an on-site inspection requires an SRB supervisory decision to justify this interference. 17 In addition, Art. 37 SRMR clarifies that the SRB must apply for a judicial authorisation if such authorisation for (i) an on-site inspection or (ii) the assistance provided by the national resolution authority is envisaged in national law (Art. 37(1) in connection with Art. 36(1) and (2) or (5) SRMR). 18 However, if the SRB applies for such an authorisation envisaged by national legislation, the scope of the control by the national judicial authorities is limited by Art. 37(2) sentence 3 SRMR. They may (only) review whether the SRB decision initiating an onsite inspection is authentic and that coercive measures envisaged by the SRB in the onsite investigation are proportionate, i.e. neither arbitrary nor excessive having regard to the subject matter of the inspection. In particular, Art. 37(2) sentence 2 SRMR specifies further the nature of control of the proportionality of the coercive measures - the national judicial authority may ask the SRB for detailed explanations, in particular relating to the grounds the SRB has for suspecting that an infringement of the SRB decisions (Art. 29 SRMR) has taken place and the seriousness of the suspected infringement and the nature of the involvement of the person subject to the coercive measures. 19 This definition of the scope of national judicial review is the same as under the SSMR and similar to the scope provided in the context of EU competition law as specified in 16
11 12
940
See Case C-94/00, Roquette Frères, ECLI:EU:C:2002:603, paras. 27 et seq. Joined Cases 46/87 and 227/88, Hoechst v Commission, ECLI:EU:C:1989:337, para. 19.
Klaus Lackhoff and Mikulas Prokop
Art. 38 SRMR
Fines
Art. 20(8) of Council Regulation (EC) No 1/200313 which in turn follows the terms of the ECJ competition law judgment in the case Roquette Freres.14 It can however questioned whether (and to what extent) the principles developed for the national judicial review of investigations by the Commission in its capacity as a competition authority, may be so easily applied to the on-site investigations by the SRB as a resolution authority. In particular, as noted in Recital 93 of the SRB Regulation, in the context of resolution, on-site inspections should be available for the SRB to ensure that decisions are taken on the basis of fully accurate information and to monitor implementation by national authorities effectively. Hence, the on-site inspection may not necessarily be driven by the purpose to check whether an infringement exists, but also possibly by other drivers, such as the need to have reliable data for resolution. For this reason, the “seriousness of the suspected infringement” of the relevant Union 20 law as a test for proportionality under Art. 37(2) sentence 2 SRMR of on-site inspections should be read widely and include the possible necessity of investigations in order to enable the Board to adopt resolution measures and to ensure resolution objectives. Finally, the national judicial authority may not examine the lawfulness of the SRB’s 21 decision initiating the on-site inspection or any other SRB decisions following up on the on-site inspection. Such examination is pursuant to Art. 37(2) SRMR in the exclusive competence of the CJEU.
Art. 38 SRMR Fines 1. Where the Board finds that an entity referred to in Article 2 has intentionally or negligently committed one of the infringements listed in paragraph 2, the Board shall take a decision imposing a fine in accordance with paragraph 3. An infringement by such an entity shall be considered to have been committed intentionally if there are objective factors which demonstrate that the entity or its management body or senior management acted deliberately to commit the infringement. 2. The fines shall be imposed on entities referred to in Article 2 for the following infringements: (a) where they do not supply the information requested in accordance with Article 34; (b) where they do not submit to a general investigation in accordance with Article 35 or an on-site inspection in accordance with Article 36; (c) where they do not comply with a decision addressed to them by the Board pursuant to Article 29. 3. The basic amount of the fines referred to in paragraph 1 of this Article shall be a percentage of the total annual net turnover including the gross income consisting of interest receivable and similar income, income from shares and other variable or fixed-yield securities, and commissions or fees receivable in accordance with Article 316 of Regulation (EU) No 575/2013 of the undertaking in the preceding business year, or, in the Member States whose currency is not the euro, the corresponding
13 Regulation (EC) No 1/2003 of the Council of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, OJ L 1, 4.1.2003, pp. 1–25. 14 Case C-94/00, Roquette Frères, ECLI:EU:C:2002:603.
Chryssa Papathanassiou
941
Art. 38 SRMR
Fines
value in the national currency on 19 August 2014, and included within the following limits: (a) for the infringements referred to in paragraph 2(a) and (b), the basic amount shall amount to at least 0,05 % and shall not exceed 0,15 %; (b) for the infringements referred to in paragraph 2(c), the basic amount shall amount to at least 0,25 % and shall not exceed 0,5 %. In order to decide whether the basic amount of the fines should be set at the lower, the middle or the higher end of the limits referred to in the first subparagraph, the Board shall take into account the annual turnover in the preceding business year of the entity concerned. The basic amount shall be at the lower end of the limit for entities whose annual turnover is below EUR 1 000 000 000, the middle of the limit for the entities whose annual turnover is between EUR 1 000 000 000 and 5 000 000 000 and the higher end of the limit for the entities whose annual turnover is higher than EUR 5 000 000 000. 4. The basic amounts referred to in paragraph 3 shall be adjusted, if necessary, by taking into account the aggravating or mitigating factors referred to in paragraphs 5 and 6, in accordance with the relevant coefficients referred to in paragraph 9. The relevant mitigating coefficient shall be applied one by one to the basic amount. If more than one mitigating coefficient is applicable, the difference between the basic amount and the amount resulting from the application of each individual mitigating coefficient shall be subtracted from the basic amount. The relevant aggravating coefficient shall be applied one by one to the basic amount. If more than one aggravating coefficient is applicable, the difference between the basic amount and the amount resulting from the application of each individual aggravating coefficient shall be added to the basic amount. 5. The following aggravating factors shall apply in respect of the fines referred to in paragraph 1: (a) (b) (c) (d)
the infringement has been committed intentionally; the infringement has been committed repeatedly; the infringement has been committed over a period exceeding three months; the infringement has revealed systemic weaknesses in the organisation of the entity, in particular in its procedures, management systems or internal controls; (e) no remedial action has been taken since the infringement was identified; (f) the entity's senior management has not cooperated with the Board in carrying out its investigations. 6. The following mitigating factors shall apply in respect of the fines referred to in paragraph 1: (a) the infringement has been committed over a period of less than 10 working days; (b) the entity's senior management can demonstrate that they have taken all measures necessary to prevent the infringement; (c) the entity has brought quickly, effectively and completely the infringement to the Board's attention; (d) the entity has voluntarily taken measures to ensure that a similar infringement cannot be committed in the future. 7. Notwithstanding paragraphs 2 to 6, the fines applied shall not exceed 1 % of the annual turnover of the entity referred to in paragraph 1 concerned in the preceding business year. 942
Chryssa Papathanassiou
Art. 38 SRMR
Fines
By way of derogation from the first subparagraph, where the entity has directly or indirectly benefited financially from that infringement and where profits gained or losses avoided because of the infringement can be determined, the fine shall be at least equal to that financial benefit. Where an act or omission of an entity referred to in paragraph 1 constitutes more than one infringement listed in paragraph 2, only the higher fine calculated in accordance with this Article and relating to one of those infringements shall apply. 8. In the cases not covered by paragraph 2, the Board may recommend to national resolution authorities to take action in order to ensure that appropriate penalties are imposed in accordance with Articles 110 to 114 of Directive 2014/59/EU and with any relevant national legislation. 9. The Board shall apply the following adjustment coefficients linked to aggravating factors when calculating the fines: (a) if the infringement has been committed repeatedly, for every time it has been repeated, an additional coefficient of 1,1 shall apply; (b) if the infringement has been committed over a period exceeding three months, a coefficient of 1,5 shall apply; (c) if the infringement has revealed systemic weaknesses in the organisation of the entity, in particular in its procedures, management systems or internal controls, a coefficient of 2,2 shall apply; (d) if the infringement has been committed intentionally, a coefficient of 2 shall apply; (e) if no remedial action has been taken since the infringement was identified, a coefficient of 1,7 shall apply; (f) if the entity's senior management has not cooperated with the Board in carrying out its investigations, a coefficient of 1,5 shall apply. The Board shall apply the following adjustment coefficients linked to mitigating factors when calculating the fines: (a) if the infringement has been committed over a period of less than 10 working days, a coefficient of 0,9 shall apply; (b) if the entity's senior management can demonstrate that they have taken all measures necessary to prevent the infringement, a coefficient of 0,7 shall apply; (c) if the entity has brought quickly, effectively and completely the infringement to the Board's attention, a coefficient of 0,4 shall apply; (d) if the entity has voluntarily taken measures to ensure that a similar infringement cannot be committed in the future, a coefficient of 0,6 shall apply. Bibliography Leo Flynn, ‘The judicial review of fines and penalty payments set by the SRB’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 429; Marco Lamandini, David Ramos Munoz, ‘Administrative pre-litigation review mechanism in the SRM: The SRM Appeal Panel’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 44; Silvia Allegrezza and Ioannis Rodopoulos, ‘Enforcing Prudential Banking Regulations in the Eurozone: A Reading from the Viewpoint of Criminal Law’ in: Katalin Ligeti and Vanessa Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (Hart Publishing, Oxford 2017), 233.
Chryssa Papathanassiou
943
Art. 38 SRMR
Fines
A. Direct sanctioning powers of the SRB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. How to infer the degree of intent in legal persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. How to calculate the fines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The three levels of fines: low, medium and higher end . . . . . . . . . . . . . . . . . . . . 2. Aggravating and mitigating factors with the respective coefficients . . . . . .
1 3 4 5 6
B. Indirect sanctions imposed by national resolution or competent authorities at the SRB’s recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
A. Direct sanctioning powers of the SRB The direct sanctioning powers of the Single Resolution Board (SRB) are quite similar with those of the ECB banking supervision.1 The SRB is empowered to impose sanctions for the breaches enumerated in Arts. 38(2) and 39(1) SRMR. The direct sanctioning powers of the SRB fall under the category of administrative penalties and periodic fines. The SRB imposes sanctions to entities which intentionally or negligently do not supply the information requested under Art. 34 SRMR, do not submit to a general investigation under Art. 35 or on-site inspection under Art. 36 SRMR or do not comply with a decision of the SRB under Art. 29 SRMR. Imposing administrative sanctions under Arts. 38 and 39 SRMR requires a decision of the SRB. 2 There are important differences between the SSM and the SRMR concerning the calculation of fines and the maximum and minimum limits of the fines. The SRMR provides very specific guidance to the SRB how to set the level of fines, how to apply aggravating or mitigating factors, and how to enforce these decisions. The case law analysed above under Art. 18 SSMR concerning an independent investigation unit (infra, part C, section I) applies also in the case of sanctions imposed by the SRB. Finally, the SRB is an agency under Art. 42(1) SRMR, while the ECB is a Union institution under Art. 13(1) TFEU, but this difference while important for other areas has no bearing on the SRB’s sanctioning powers. In this regard, the SRMR provides concrete criteria and maximum daily penalties than the SSMR. 1
I. How to infer the degree of intent in legal persons 3
As the level of intent is wilful or negligent misconduct, the SRMR provides specific guidance how this intent can be inferred to regarding legal persons: the intent can be inferred from objective factors that demonstrate that the entity, management body or senior management acted knowingly with the purpose of committing the infringement.
II. How to calculate the fines 4
The level of fines is calculated on the basis of the annual turnover of the entity for the preceding business year. The maximum level of fines varies according to the type of the breach: for not supplying information, not submitting to an investigation or to an on-site
1 Leo Flynn, ‘The judicial review of fines and penalty payments set by the SRB’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), at p. 431; Marco Lamandini, David Ramos Munoz, Administrative pre-litigation review mechanism in the SRM: The SRM Appeal Panel’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 49; Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 255.
944
Chryssa Papathanassiou
Art. 38 SRMR
Fines
inspection between 0.05–0.15 %, for not complying with an SRB decision between 0.25– 0.5 % of the annual turnover.
1. The three levels of fines: low, medium and higher end Fines are divided into three ranges, low, medium and high, and the range of the fine 5 to be imposed on an entity depends on the entity’s annual turnover of the preceding year under Art. 38(3) SRMR. The SRMR provides guidance how high the SRB should decide upon the limits: for entities below 1 billion at the lower end of the limits, for entities between 1 and 5 billion EUR to the middle; and for entities above 5 billion EUR to the higher end of fines. By contrast to the ECB, the level of fines that the SRB can impose is lower than that the maximum level that the ECB can impose, which is explained by the questionable benefit of imposing sanctions to an entity that is subject to resolution.2
2. Aggravating and mitigating factors with the respective coefficients Other factors may also play a role: aggravating or mitigating factors are foreseen in 6 Art. 38(5) SRMR. For each of the aggravating or mitigating factors, the coefficient foreseen in Art. 38(9) SRMR applies, which contributes to a higher or lower fine. If more aggravating or mitigating factors apply and thus more coefficients, Art. 38(4) SRMR explains how the aggravating or mitigating coefficients applying for each factor will be added or subtracted respectively from the basic amount. In case of multiple infringements, only the higher fine is imposed. Following the application of the coefficients, the fines cannot exceed 1 % of the annual turnover of the preceding year. However, the fine can be higher and at least equal to the profit gained or losses avoided if an entity has benefited directly or indirectly from the infringement and the financial profit or losses avoided from the breach can be determined. (Art. 38(7) SRMR).
B. Indirect sanctions imposed by national resolution or competent authorities at the SRB’s recommendation Indirect sanctions are foreseen in Art. 38(8) SRMR. For breaches that are not includ- 7 ed in the exclusive enumeration list of Art. 38(2) SRMR, the SRB may recommend to national resolution authorities to take action in order to impose penalties in line with Arts. 110 to 114 BRRD and the national legal provisions transposing the above referenced BRRD provisos.3 Art. 110(1) BRRD foresees that the administrative penalties are without prejudice to criminal sanctions, meaning that in practice a cumulation of administrative and criminal sanctions is possible. The considerations underpinning the principle of ne bis in idem as stated above in Art. 18 SSMR (supra, part C, section IV) are also valid in the context of the SRMR. Depending on the nature of the infringement, national resolution or competent supervisory authorities may impose the administrative sanctions enumerated in Art. 111 BRRD. 2 Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 256. 3 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council, OJ L 173, 12.6.2014, at p. 190.
Chryssa Papathanassiou
945
Art. 39 SRMR
Periodic penalty payments
Art. 111 BRRD foresees the breaches for which the Member States should introduce administrative penalties as well as the types of administrative penalties: public statement indicating the breach and the wrong doer, order to cease and desist, temporary ban on members of the management body or senior management or other natural person to exercise its functions and fines up to 10 % of the annual turnover of a legal entity for the preceding year and up to 5 million EUR for a natural person or the disgorgement up to double the benefit gained if such a benefit can be determined. 9 Art. 112 BRRD foresees the publication of the fines but also deviation from the publication in case the publication is disproportionate. Art. 113 BRRD foresees that the national authorities inform the EBA of all breaches and that the EBA keeps a central database. Finally, Art. 114 BRRD provides a list of the factors that national authorities should take into account when determining the administrative penalties among which feature the gravity, the financial strength of the entity, the level of cooperation and systemic consequences of the infringement, not of the fine. 8
Art. 39 SRMR Periodic penalty payments 1. The Board shall, by a decision, impose a periodic penalty payment in respect of an entity referred to in Article 2 in order to compel: (a) that entity to comply with a decision adopted under Article 34; (b) a person referred to in Article 34(1) to supply complete information which has been required by a decision pursuant to that Article; (c) a person referred to in Article 35(1) to submit to an investigation and, in particular, to produce complete records, data, procedures or any other material required and to complete and correct other information provided in an investigation launched by a decision taken pursuant to that Article; (d) a person referred to in Article 36(1) to submit to an on-site inspection ordered by a decision taken pursuant to that Article. 2. A periodic penalty payment shall be effective and proportionate. A periodic penalty payment shall be imposed on a daily basis until the entity referred to in Article 2 or person concerned complies with the relevant decisions referred to in points (a) to (d) of paragraph 1 of this Article. 3. Notwithstanding paragraph 2, the amount of a periodic penalty payment shall be 0,1 % of the average daily turnover in the preceding business year. A periodic penalty payment shall be calculated from the date stipulated in the decision imposing the periodic penalty payment. 4. A periodic penalty payment may be imposed for a period of no more than six months following the notification of the Board's decision. Bibliography Leo Flynn, ‘The judicial review of fines and penalty payments set by the SRB’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 429; Marco Lamandini, David Ramos Munoz, ‘Administrative pre-litigation review mechanism in the SRM: The SRM Appeal Panel’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 44; Silvia Allegrezza and Ioannis Rodopoulos, ‘Enforcing Prudential Banking Regulations in the Eurozone: A Reading from the Viewpoint of Criminal Law’ in: Katalin Ligeti and Vanessa Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (Hart Publishing, Oxford 2017), 233.
946
Chryssa Papathanassiou
Hearing of the persons subject to the proceedings
Art. 40 SRMR
The SRB may impose periodic penalty payments to require an entity to comply with 1 its decision under Art. 34 SRMR or to submit itself to the investigation or on-site inspection or to supply information under Art. 34 SRMR. The periodic penalty payment is imposed by a decision of the SRB, on a daily basis until the entity complies (Art. 39(2) SRMR) and is fixed at 0.1% of the average daily turnover of the preceding year under Art. 34(3) SRMR and is calculated from the date fixed in the decision imposing this sanction. Since the daily amount is fixed in secondary Union law, the principle that it should be effective and dissuasive in Art. 39(2) SRMR has to guide the SRB’s judgement whether to impose the fine or not.1 Periodic penalty payments are imposed for up to six months from the notification of the SRB’s decision (Art. 39(4) SRMR).
Art. 40 SRMR Hearing of the persons subject to the proceedings 1. Before taking any decision imposing a fine and/or periodic penalty payment under Article 38 or 39, the Board shall give the natural or legal persons subject to the proceedings the opportunity to be heard on its findings. The Board shall base its decisions only on findings on which the natural or legal persons subject to the proceedings have had the opportunity to comment. 2. The rights of defence of the natural or legal persons subject to the proceedings shall be fully complied with during the proceedings. They shall be entitled to have access to the Board's file, subject to the legitimate interest of other persons in the protection of their business secrets. The right of access to the file shall not extend to confidential information or internal preparatory documents of the Board. Bibliography Koen Lenaerts, ‘Some Thoughts on Evidence and Procedure in European Community Competition Law’, Fordham International Law Journal Vol. 30, Issue 5 (2006), 1463; Judith Resnik, ‘Procedure as Contract’, Notre Dame Law Review 80 (2005), 593.
The SRB must hear the party subject to the proceedings leading to a sanctioning deci- 1 sion under Art. 38 or Art. 39 SRMR (Art. 39(1) SRMR) and can only base its decision on findings on which the party had the opportunity to comment. The parties against which a decision imposing sanctions will be taken have the rights of defence, also known as due process1 requirements, which are reflected in Art. 6 ECHR and in Art. 41 CFREU. The most important rights 2 of the addressee of a sanction decision are: the motivation of
1 Leo Flynn, ‘The judicial review of fines and penalty payments set by the SRB’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 431; Marco Lamandini, David Ramos Munoz, ‘Administrative pre-litigation review mechanism in the SRM: The SRM Appeal Panel’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 46; Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 246. 1 Lenaerts, Fordham International Law Journal (2006) at p. 1474; To compare with the US, see Judith Resnik, Notre Dame Law Review 80 (2005), 593, at p. 605 – Congress started in 1922 enacting statutory requirements for due process, which were heralded as one of the ‘major turning points of English and American legal history’ in the 1960s; Goldberg v. Kelly 397 U.S. 254 (1970). 2 The existing case law affirmed that the fundamental rights guaranteed in the legal order of the European Union are applicable in all situations governed by Union law, Case C-617/10, Åklagaren v Hans Åkerberg Fransson, EU:C:2013:105, para 20; Case C-216/13, Siragusa, EU:C:2014:126; Case C-411/10, N.S. and others, EU:C:2011:865; C-258/14, Florescu and Others, EU:C:2017:448; C-371/13, Schuster &Co Ecologic, EU:C:2013:748.
Chryssa Papathanassiou
947
Art. 41 SRMR
Disclosure, nature, enforcement and allocations of fines
the decision3, which allows for judicial scrutiny, the right to be heard4, so that the SRB has complete information about the case, and access to file5 subject to the legitimate interests or others in the protection of their business secrets. An party’s right to access the file of the decision addressed to it does not extend to confidential documents or preparatory documents of the SRB.
Art. 41 SRMR Disclosure, nature, enforcement and allocations of fines and periodic penalty payments 1. The Board shall publish the decisions imposing penalties referred to in Article 38(1) and Article 39(1), unless such disclosure could endanger the resolution of the entity concerned. The publication shall be on an anonymous basis, in any of the following circumstances: (a) where the information published contains personal data and following an obligatory prior assessment, such publication of personal data is found to be disproportionate; (b) where publication would jeopardise the stability of financial markets or an ongoing criminal investigation; (c) where publication would cause, insofar as it can be determined, disproportionate damage to the natural or legal persons involved. Alternatively, in such cases, the publication of the data in question may be postponed for a reasonable period if it is foreseeable that the reasons for anonymous publication will cease to exist within that period. The Board shall inform EBA of all fines and periodic penalty payments imposed by it under Articles 38 and 39 and shall provide information on the appeal status and outcome thereof. 2. Fines and periodic penalty payments imposed pursuant to Articles 38 and 39 shall be of an administrative nature. 3. Fines and periodic penalty payments imposed pursuant to Articles 38 and 39 shall be enforceable. Enforcement shall be governed by the applicable procedural rules in force in the participating Member State in the territory of which it is carried out. The order for its enforcement shall be appended to the decision without any other formality than verification of the authenticity of the decision by the authority which the government of each participating Member State shall designate for that purpose and which it shall make known to the Board and to the Court of Justice.
3 Case T-365/16, Portigon AG v SRB, ECLI:EU:T:2019:824, paras. 161-162; Case T-2/19, Algebris (UK) Ltd and Anchorage Capital Group LLC v SRB, ECLI:EU:T:2019:741, para. 64; Case T-557/17, Liaño Reig v SRB, ECLI:EU:T:2019:771, para. 55. 4 Case C‑32/95 P, Commission v Lisrestal and Others, ECR I‑5373, para. 21. 5 It is settled case law that observance of the rights of defence in all proceedings in which sanctions may be imposed is a fundamental principle of Union law which must be respected in all circumstances, even if the proceedings in question are administrative ones, see Lenaerts, Fordham International Law Journal (2006) at p. 1475; Case T-7/89, SA Hercules Chems. NV v Commission, [1991] E.C.R. 11-1711, para. 54; Engel and others v The Netherlands App No 5100/71 (1976) ECHR 3; A. Menarini Diagnostics S.r.l. v Italy – 43509/08 (2011) ECHR.
948
Chryssa Papathanassiou
Disclosure, nature, enforcement and allocations of fines
Art. 41 SRMR
When those formalities have been completed on application by the party concerned, the latter may proceed to enforcement in accordance with the national law, by bringing the matter directly before the competent body. Enforcement may be suspended only by a decision of the Court of Justice. However, the courts of the participating Member State concerned shall have jurisdiction over complaints that enforcement is being carried out in an irregular manner. 4. The amounts of the fines and periodic penalty payments shall be allocated to the Fund. Bibliography Leo Flynn, ‘The judicial review of fines and penalty payments set by the SRB’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 429; Marco Lamandini, David Ramos Munoz, ‘Administrative pre-litigation review mechanism in the SRM: The SRM Appeal Panel’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), 44; Silvia Allegrezza and Ioannis Rodopoulos, ‘Enforcing Prudential Banking Regulations in the Eurozone: A Reading from the Viewpoint of Criminal Law’ in: Katalin Ligeti and Vanessa Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (Hart Publishing, Oxford 2017), 233. A. Publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Administrative and judicial review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
A. Publication The SRB is required to publish its decisions imposing administrative penalties or pe- 1 riodic penalty payments unless such publication jeopardizes the resolution. This criterion is different from the ECB’s sanctioning regime as laid down in Art. 132 SSMFR. Publication can occur anonymously if a full publication of the sanctioning decisions is disproportionate or endangers financial stability. Publication can be postponed for a reasonable period if the above conditions for anonymous publication are expected to cease (Art. 41(1) SRMR). The length of a reasonable period will be determined ad hoc based on the specificities of each case. The SRB provides information to the EBA on the sanctions and if there are any appeals. The SRMR does not foresee that the EBA has to publish such information. The information will be in principle published by the SRB, unless an exception for anonymous or deferred publication applies.
B. Enforcement All decisions adopted by the SRB imposing fines and periodic penalty payments are 2 of administrative nature and enforceable in line with Art. 41(3) SRMR. Such decisions are enforced by following the national procedural rules in each Member State of the euro area. The government of each Member State designates an authority which verifies the authenticity of the decision and appends the order for its enforcement. The CJEU is competent to suspend this enforceability but the national courts are competent for complaints of irregularity. This is an unusual procedure of enforcement with mixed characteristics of national and Union court jurisdiction. The amounts of the fines are allocated to the Single Resolution Fund and thus benefit future resolutions.
Chryssa Papathanassiou
949
Art. 42 SRMR
Legal status
C. Administrative and judicial review 3
All decisions adopted by the SRB can be subject to appeal before the Appeal Panel under Art. 85(1) SRMR. The appeal has no suspensory effect but the Appeal Panel may suspend the execution of a sanction. According to the case law of the CJEU, suspension occurs only if there is a risk of irreparable damage. Pecuniary penalties cannot be considered irreparable damage because if a fine is illegal it can be repaid back to the entity. 1 The CJEU is competent for the judicial review of all SRB decisions in line with Art. 263 TFEU. The addressee or any person whose legal rights are adversely affected can challenge the SRB decision. The legality check of the CJEU extends to the existence of a legal basis, of competence, the violation of due process requirements and manifest error or misuse of power.2
Art. 42 SRMR Legal status 1. The Board is hereby established. The Board shall be a Union agency with a specific structure corresponding to its tasks. It shall have legal personality. 2. In each Member State, the Board shall enjoy the most extensive legal capacity accorded to legal persons under national law. It may, in particular, acquire or dispose of movable and immovable property and be a party to legal proceedings. 3. The Board shall be represented by its Chair. Bibliography Merijn Chamon, EU Agencies (Oxford University Press, Oxford 2016); Eduardo Chiti, ‘An important part of the EU’s institutional machinery: features, problems and perspectives of European Agencies’, CMLR (2009) 46, 1395; Michelle Everson, Cosimo Monda and Ellen Vos (eds), European Agencies in between Institutions and Member States (Wolters Kluwer, Alphen aan den Rijn 2014); Katja Michel, Institutionelles Gleichgewicht und EU-Agenturen (Duncker & Humblot, Berlin 2015); Andreas Orator, Möglichkeiten und Grenzen der Einrichtung von Unionsagenturen (Mohr Siebeck, Tübingen 2017); Matthias Ruffert, Law of Administrative Organization of the EU (Edward Elgar, Cheltenham 2021); Nicolas Gregor Schutzerschitz, ‘EU Agencies as Subjects of International Law’, IOLR 1 (2004), 163; Nicolas Sölter, Rechtsgrundlagen europäischer Agenturen im Verhältnis vertikaler Gewaltenteilung (Duncker & Humblot, Berlin 2017); Kirsten Weißgärber, Die Legitimation unabhängiger europäische und nationaler Agenturen (Nomos, Baden-Baden 2016).
1 Leo Flynn, ‘The judicial review of fines and penalty payments set by the SRB’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), at p. 433; Marco Lamandini, David Ramos Munoz, ‘Administrative pre-litigation review mechanism in the SRM: The SRM Appeal Panel’ in: Chiara Zilioli, Karl-Philipp Wojcik (eds), Judicial Review in the European Banking Union (Edward Elgar, 2021), at p. 49; Order of the Vice-President of the Court C-551/12 P(R), Électricité de France SA (EDF) v. Commission, ECLI:EU:C:2013:157, para. 41: “Whilst, in the present case, the application for interim measures does not formally seek suspension of the operation of a measure, the interim measures sought resemble such a suspension since the appellant seeks to obtain an additional period of more than two years in order to choose between the two options laid down in the commitments given by it with regard to the Nest-Energie project. Thus, such interim measures can be adopted only if the Commission’s refusal to grant the extension sought by the appellant is considered to be the decisive cause of the alleged serious and irreparable harm.”; Order of the President of the Court in Cases C-51/90 and C-59/90, Comos‑Tank and Others v Commission, ECLI:EU:C:1990:228, para. 24; Order of the President of the Court of First Instance in Case T-201/04, Microsoft v Commission, ECLI:EU:T:2007:289. 2 Allegrezza and Rodopoulos, in: Ligeti and Franssen (eds), Challenges in the Field of Economic and Financial Crime in Europe and the US (2017), at p. 246.
950
Christoph Ohler
Art. 42 SRMR
Legal status
A. Legal nature of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Status of agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Meroni jurisprudence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Specific structure of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 5 7
B. Legal personality of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
C. Representation of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
A. Legal nature of the Board I. Status of agencies The Board that is established under Art. 42(1) SRMR is an agency of the EU. Agencies are bodies created by secondary law and, accordingly, do not constitute institutions in the meaning of Art. 13 TEU. Their existence is acknowledged in various provisions of the Treaties that refer to “bodies, offices, agencies”.1 Under Art. 114 TFEU, which is also the legal basis of the SRMR, an agency may be established when the legislature deems it necessary for contributing to the implementation of a process of harmonisation.2 In the political terminology of the EU the Board is a decentralised agency,3 which has its seat in one of the Member States (cf. Art. 48 SRMR: Brussels). In contrast to the so-called executive agencies which are set up for a definite period only, it is a permanent body. A commonly recognised definition of what constitutes an “agency” has not been developed so far in EU law. In practice, they are specialised public authorities of the Union whose purpose is to oversee sectoral policy areas and implement specific provisions of secondary law. Their tasks may include coordinating with or supporting national authorities, preparing decisions of the European Commission and, depending on the relevant provisions of secondary law, adopting legally binding measures addressed to third parties. This applies also to the Board even if it does not have the power to address decisions directly to credit institutions and other entities to which the SRMR applies. As it is the case with many other agencies, the performance of the Board’s tasks requires the deployment of specific technical and professional expertise.4 It must also ensure that the resolution regime of the SRMR is implemented in a systematic, uniform and effective way in the participating Member States.5 Underlying is the concept that the uniform application of the substantive provisions will be enhanced as their implementation is entrusted primarily to a central authority such as the Board. In many cases, however, the Board will tackle complex socio-economic problems, the solution of which requires the full involvement of the Commission and the Council and of national resolution authorities.6
Cf. e.g. Arts. 15(1), 16(2), 123(1), 228(1) and 263(1) TFEU. Case C-217/04, United Kingdom v Parliament and Council, ECLI:EU:C:2006:279, para. 44; Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, para. 104. 3 Cf. Report from the Commission, Progress report on the implementation of the Common Approach on EU decentralized agencies, COM(2015) 179 final, at p. 3. 4 For this argument see Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, para. 82. 5 Cf. Recital 11 SRMR. 6 Cf. Art. 1(2) SRMR. 1
2
Christoph Ohler
951
1
2
3
4
Art. 42 SRMR
Legal status
II. Meroni jurisprudence The executive tasks to be conferred to an agency are moreover to be defined on the basis of the Meroni case law of the CJEU, reflecting the constitutional principle of institutional balance. According to this jurisprudence, the institutions of the EU may not confer upon the authority receiving the delegation powers different from those which the delegating authority itself received under the Treaty.7 In addition, the CJEU distinguishes between two fundamentally different forms of delegation. Insofar, only clearly defined executive powers the exercise of which can be subject to strict judicial review may be delegated by the institutions. In contrast thereto, a delegation that involves a discretionary power, implying a wide margin of discretion which may make possible the execution of actual economic policy, would not be legal.8 In a judgement of 2014 referring to powers delegated to ESMA, the CJEU stated that those criteria apply also when the EU legislator defines the tasks of an agency that has been established by secondary law.9 6 This means for the Board that its tasks and powers are conclusively defined by the SRMR. With respect to the requirements of the Meroni jurisprudence, the legislature restricted the Board’s autonomy to act so that its power to adopt resolution schemes is subject to endorsement by the Commission and the Council in each individual case. 10 5
III. Specific structure of the Board 7
The “specific structure corresponding to its tasks” to which Art. 42(1) SRMR refers is provided for by Arts. 43 to 56 SRMR.
B. Legal personality of the Board A further characteristic of the Board, which it shares also with other agencies, is that it has a legal personality, Art. 42(1) SRMR, and is, accordingly, a subject of law with the entitlement to act in its own name and enter into rights and obligations with other persons. The legal personality conferred on the Board strengthens also its independence that is enshrined in Art. 47 SRMR.11 9 One point of reference of the capacity to act is the domestic legal order of the Member States as can be seen from Art. 42(2) SRMR. It may, in particular, acquire or dispose of movable and immovable property and be a party to legal proceedings. This status applies in all Member States, not only in the participating Member States in the meaning of Art. 4(1) SRMR. 10 In addition, the wording of Art. 42(1) SRMR permits an interpretation according to which the legal personality of the Board refers also to the international legal order and insofar to third countries.12 With a view to the similar provision of Art. 47 TEU, this legal personality is distinct from that of the European Union. Under international law, 8
Case C-9/56, Meroni v ECSC High Authority, ECLI:EU:C:1958:7, at pp. 133, 150. Ibid, at p. 152. 9 Case C-270/12, United Kingdom v Parliament and Council, ECLI:EU:C:2014:18, para. 43. 10 Cf. Art. 18 SRMR. 11 In this respect see Case C-11/00, Commission v ECB, ECLI:EU:C:2003:395, para. 132; Andreas Orator, Möglichkeiten und Grenzen der Einrichtung von Unionsagenturen (2017), at p. 44. 12 Cf. Andreas Orator, Möglichkeiten und Grenzen der Einrichtung von Unionsagenturen (2017), at pp. 44 et seq. 7
8
952
Christoph Ohler
Art. 43 SRMR
Composition
however, EU secondary law would not be binding on other States and international organisations, so that the exact legal status of the Board will depend on its recognition by these subjects of international law. This recognition may become effective in the domestic legal order of a third State or on the international level. The international legal personality forms the basis for the Board performing its tasks 11 to consult and cooperate with third countries in accordance with Art. 32 SRMR and the respective provisions of the BRRD. Due to this specific mandate, however, the Board’s international legal personality is of partial nature only, in contrast to the comprehensive one that sovereign states have under public international law. In addition, the Board may conclude a headquarters agreement governed by public international law with Belgium, its host state according to Art. 48 SRMR.
C. Representation of the Board Pursuant to Art. 42(3) SRMR the Board is represented by its Chair (Art. 56 SRMR). 12 This power refers to all legal relationships with all other parties, regardless of the applicable law. Also in all court proceedings involving the Board, it is represented by the Chair. In his absence or reasonable impediment, the Vice-Chair will carry out the functions of the Chair.13 Within certain limits, the Chair may delegate its powers to staff members of the Board. The CJEU held in the Tralli judgment that a delegating authority must take an express decision transferring decision-making powers and that the delegation can relate only to clearly defined executive powers.14
Art. 43 SRMR Composition 1. The Board shall be composed of: (a) the Chair appointed in accordance with Article 56; (b) four further full-time members appointed in accordance with Article 56; (c) a member appointed by each participating Member State, representing their national resolution authorities. 2. Each member, including the Chair, shall have one vote. 3. The Commission and the ECB shall each designate a representative entitled to participate in the meetings of executive sessions and plenary sessions as a permanent observer. The representatives of the Commission and the ECB shall be entitled to participate in the debates and shall have access to all documents. 4. In the event of more than one national resolution authority in a participating Member State, a second representative shall be allowed to participate as observer without voting rights.
13 14
Art. 56(3) SRMR. Case C-301/02 P, Tralli v ECB, ECLI:EU:C:2005:91, para. 43.
Christoph Ohler
953
Art. 43 SRMR
Composition
5. The Board's administrative and management structure shall comprise: (a) a plenary session of the Board, which shall perform the tasks referred to in Article 50; (b) an executive session of the Board, which shall perform the tasks referred to in Article 54; (c) a Chair, which shall perform the tasks referred to in Article 56; (d) a Secretariat, which shall provide the necessary administrative and technical support on the performing of all the tasks assigned to the Board.
A. Composition Art. 43 SRMR defines the composition of the Board. Its members include the Chair, four further full-time members appointed in accordance with Art. 56 SRMR, and a member appointed by each participating Member State, representing their national resolution authorities. In addition, a Vice-Chair who supports the Chair is attached to the Board as a non-voting member, unless it carries out the functions of the Chair in one of the cases defined by Art. 56(3) SRMR. 2 This (rather slim) structure – with members instead of a variety of bodies – departs from the model of all other agencies of the Union in order to ensure a swift and effective decision-making process of the Board.1 However, its composition also ensures that due account is taken of all relevant interests at stake in resolution procedures. Mainly for this purpose, the national resolution authorities of all participating Member States are represented in the Board. 3 In contrast to the Chair, the Vice-Chair and the four further full-time members, the SRMR does not define the requirements as concerns the professional qualification of the national members and leaves it to the Member State to decide whom they designate as representatives of their national resolution authorities. They may also withdraw and replace them at any time. 4 The Commission and the ECB shall each designate a representative entitled to participate in the meetings of executive sessions and plenary sessions as a permanent observer. These persons do not have a voting right but may participate in the debates and must have access to all documents available to the Board.2 When a participating Member State has more than one national resolution authority, it may designate a second representative who is allowed to participate as an observer without voting rights.3 In addition, the Board may invite representatives of other institutions, including EBA and ESM, as observers to its meetings.4 1
B. Administrative and Management Structure 5
The Board is convened by the Chair in different compositions, depending on whether a plenary session (Arts. 49 to 51 SRMR), an executive session (Art. 53(1) SRMR) or an extended executive session (Art. 53(2) SRMR) takes place. In any of these formations, each member of the Board, including the Chair, has one vote.5 Cf. Recital 31 SRMR. Art. 43(3) SRMR. 3 Art. 43(4) SRMR. 4 Recital 35 and Art. 51(3) SRMR. 5 Art. 43(2) SRMR. 1
2
954
Christoph Ohler
Art. 45 SRMR
Accountability
The Secretariat, as mentioned by Art. 43(5)(d) SRMR, provides the necessary admin- 6 istrative and technical support on the performing of all the tasks assigned to the Board.
Art. 44 SRMR Compliance with Union law The Board shall act in compliance with Union law, in particular with the Council and the Commission decisions pursuant to this Regulation. Bibliography Stefanie Schmahl, ‘Rechtsstaatlichkeit’ in: Reiner Schulze, Manfred Zuleeg and, Stefan Kadelbach (eds), Europarecht (3rd edn, Nomos, Baden-Baden 2015), 284.
Art. 44 SRMR reiterates a constitutional principle of EU law that the executive branch 1 of the Union, to whom the Board belongs,1 is bound by all Union law, including primary and secondary law.2 The Union is based on the rule of law3 so that all acts of the Board, regardless of their content or the person to whom they are addressed, must comply with Union law. This obligation is also reflected in Arts. 263 and 267 TFEU permitting the CJEU to review the compatibility of acts of the Union’s institutions, bodies, offices and agencies with secondary law, the Treaties, general principles of law and fundamental rights. Also Art. 51(1) of the EU Charter of Fundamental Rights confirms the obligation of the institutions, bodies, offices and agencies “to respect the rights, observe the principles and promote the application thereof in accordance with their respective powers and respecting the limits of the powers of the Union as conferred on it in the Treaties.”
Art. 45 SRMR Accountability 1. The Board shall be accountable to the European Parliament, the Council and the Commission for the implementation of this Regulation, in accordance with paragraphs 2 to 8. 2. The Board shall submit an annual report to the European Parliament, the national parliaments of participating Member States in accordance with Article 46, the Council, the Commission and the European Court of Auditors on the performance of the tasks conferred on it by this Regulation. Subject to the requirements of professional secrecy, that report shall be published on the Board's website. 3. The Chair shall present that report in public to the European Parliament, and to the Council. 4. At the request of the European Parliament, the Chair shall participate in a hearing by the competent committee of the European Parliament on the performance of the resolution asks by the Board. A hearing shall take place at least annually. 5. The Chair may be heard by the Council, at the Council's request, on the performance of the resolution tasks by the Board.
1 2
seq.
Cf. Art. 42(3) et seq. SRMR See e.g. Schmahl, in: Schulze, Zuleeg and Kadelbach (eds), Europarecht (3rd edn, 2015), § 6 paras. 36 et
3 Cf. Case C-402/05 P, Kadi, ECLI:EU:C:2008:461, para. 281; Case C-362/14, Schrems, ECLI:EU:C: 2015:650, para. 60.
Fabian Amtenbrink
955
Art. 45 SRMR
Accountability
6. The Board shall reply orally or in writing to questions addressed to it by the European Parliament or by the Council, in accordance with its own procedures and in any event within five weeks of receipt of a question. 7. Upon request, the Chair shall hold confidential oral discussions behind closed doors with the Chair and Vice-Chairs of the competent committee of the European Parliament where such discussions are required for the exercise of the European Parliament's powers under the TFEU. An agreement shall be concluded between the European Parliament and the Board on the detailed modalities of organising such discussions, with a view to ensuring full confidentiality in accordance with the requirements of professional secrecy imposed on the Board by this Regulation and when the Board is acting as a national resolution authority under the relevant Union law. 8. During any investigations by the European Parliament, the Board shall cooperate with the European Parliament, subject to the TFEU and regulations referred to in Article 226 thereof. Within six months of the appointment of the Chair, the Board and the European Parliament shall conclude appropriate arrangements on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the Board by this Regulation. Subject to the power of the European Parliament pursuant to Article 226 TFEU, those arrangements shall cover, inter alia, access to information, including rules on the handling and protection of classified or otherwise confidential information, cooperation in hearings, as referred to in Article 45(4) of this Regulation, confidential oral discussions, reports, responding to questions, investigations and information on the selection procedure of the Chair, the Vice-Chair, and the four members referred to in Article 43(1)(b) of this Regulation. Bibliography Fabian Amtenbrink and Rosa Maria Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies – A Theoretical Framework’ in: Richard V. De Mulder (ed), Mitigating Risk in the Context of Safety and Security. How Relevant is a Rational Approach? (Rotterdam: Erasmus School of Law & Research School for Safety and Security (OMV) 2008), 115; Phoebus Athanassiou, ‘Financial Sector Supervisor’s Accountability. A European Perspective’, ECB Legal Working Paper Series No. 12 (August 2011); Iris H.-Y. Chiu, ‘Power and Accountability in the EU Financial Regulatory Architecture: Examining Inter-Agency Relations, Agency Independence and Accountability’, in: Mads Andenas and Gudula Deipenbrock (eds), Regulating and Supervising European Financial Markets (Springer, 2016), 67; Roberto Cisotta, ‘The Quest for Financial Stability and Democracy in the Banking Union: Promoting Institutional Transformation and Regulatory Evolution Through Unconventional Means’, in: Luigi Daniele, Pierluigi Simone and Roberto Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer, 2017), 283; Deirdre Curtin, “Accountable Independence” of the European Central Bank: Seeing the Logics of Transparency’, ELJ 23 (2017), 28; Diane Fromage and Renato Ibrido, ‘The “Banking Dialogue” as a model to improve parliamentary involvement in the Monetary Dialogue?’, Journal of European Integration 40 (2018), 295; Christos V. Gortsos, ‘Banking Resolution’, in: Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1145; Marco Lamandini and David Ramos Muñoz, ‘Banking Union’s Accountability System in Practice. A Health Check-Up to Europe’s Financial Heart’, (28 September 2020). Available at SSRN: https://ssrn.com/abstract=3701117 or http://dx.doi.org/10.2139/ssrn.3701117; Menelaos Markakis, Accountability in the Economic and Monetary Union (Oxford University Press, Oxford 2020); Michael Shackleton, ‘The European Parliament’s New Committees of Inquiry: Tiger or Paper Tiger?’, Journal of Common Market Studies (1998), 115; René Smits, ‘SSM and the SRB accountability at European level: room for improvements?’, Study requested by the ECON Committee of the European Parliament, PE 645.726 – April 2020, available at https://www.e uroparl.europa.eu/RegData/etudes/STUD/2020/645726/IPOL_STU(2020)645726_EN.pdf; René Smits, ‘SSM and the SRB accountability at European level: room for improvements?’, Study requested by the ECON Committee of the European Parliament, PE 645.726 – April 2020, available at https://www.europ arl.europa.eu/RegData/etudes/STUD/2020/645726/IPOL_STU(2020)645726_EN.pdf; Jonathan Zeitlin and Filipe Brito Bastos, ‘SSM and the SRB accountability at European level: room for improvements?’ In-Depth Analysis Requested by the ECON Committee, European Parliament, PE 645.747 – May 2020.
956
Fabian Amtenbrink
Art. 45 SRMR
Accountability
A. Origin and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Detailed explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Accountability of the Single Resolution Board for the implementation of the SRM Regulation (Art. 45(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Annual report (Art. 45(2)-(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Appearances before the European Parliament (Art. 45(4) SRMR) . . . . . . . . . . . IV. Appearance before the Council (Art. 45(5) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Questions by the European Parliament and the Council (Art. 45(6) SRMR) VI. Confidential oral discussions with the European Parliament (Art. 45(7) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Cooperation with European Parliament investigations (Art. 45(8) SRMR) . .
5 5 8 13 17 20 23 27
A. Origin and development The inclusion of the accountability arrangements in Council Regulation (EU) No 1 806/2014 (the SRMR)1 is closely linked to the institutional arrangements concerning the independence of the Single Resolution Board (SRB) as a Union agency in conducting SRM-related tasks, provided for in Art. 47 SRMR.2 As has been observed in the context of the equivalent provision in the SSMR,3 the need for legal arrangements derives from the function of accountability as a counter-balancing force to agency independence, but in the case of the SRB mainly also derives from the potentially large implications of exercise of the powers vested in the SRB, even if the SRMR foresees in major roles for the European Commission and the Council in the resolution procedure.4 What is more, similar to what has been observed for the ECB in the context of the SSM, accountability may also support agency independence, credibility, and performance.5 Given that Art. 114 TFEU serves as the legal basis for the SRMR, the ordinary legis- 2 lative procedure applied, putting the European Parliament on an equal footing with the Council in the legislative procedure.6 It is thus hardly surprising that the European Parliament has taken an active stand in the drafting of the SRMR, as can be seen from a study of the European Parliaments ECON Committee report on the European Commission proposal.7 Main areas related to accountability in which the European Parliament pushed for amendments concerned the specification of the frequency of its exchanges with the Chair of the SRB, transparency requirements, and the contents of the arrangements between the SRB and the European Parliament foreseen in what was then Art. 41(8) of the proposal (now Art. 45(8) SRMR), including namely the appointment procedure for the Chair and Vice-Chair of the SRB and the confidential requirements, which has resulted in the Agreement between the European Parliament and the Single Resolution Board on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the Single Resolution Board within the framework of the Single Resolution Mechanism (Interinstitutional Agreement).8
OJ L 225, 30.7.2014, p. 1 (as amended). On the status of the SRB as a Union agency see Art. 42(1) SRMR. 3 See Art. 19(1) SSMR. 4 See section 4.1.6. of the explanatory memorandum to the European Commission proposal for the SRM Regulation (COM/2013/0520 final). Generally with regard to accountability see supra, → SSMR Art. 20, with further references to relevant literature. 5 See Art. 19(1) SSMR. 6 Arts. 114(1), 289, and 294 TFEU. 7 A7-0478/2013. 8 OJ L 339, 24.12.2015, p. 58. 1 2
Fabian Amtenbrink
957
Art. 45 SRMR
Accountability
Similar to what can be observed for the SSMR, while participation in the SRM - for the time being - does not include all Member States, the accountability arrangements included in the SRMR are addressed to the European Parliament as a Union institution and as such are not in any way limited to MEPs from the Member States participating in the SSM. Such a limitation to euro area MEPs would be problematic against the background of Art. 14(2) TEU, according to which MEP’s are representatives of the Union’s citizens, rather than of their own national electorates.9 4 Next to Art. 45 SRMR and the Interinstitutional Agreement, also the memorandum of Understanding between the SRB and the Commission (SRB-Commission MoU), as well as the memorandum of Understanding between the SRB and the ECB (SRB-ECB MoU) have to be considered.10 3
B. Detailed explanations I. Accountability of the Single Resolution Board for the implementation of the SRM Regulation (Art. 45(1) SRMR) The first paragraph of Art. 45 SRMR states in very general terms that the Board of the SRM must be accountable to the European Parliament, to the Council, as well as to the European Commission for the implementation of the SRMR in accordance with the rest of this provision. 6 Albeit somewhat indirectly, the Interinstitutional Agreement offers an explanation for the need for accountability arrangement stating that “the conferral of resolution tasks implies a significant responsibility for the Board to contribute to financial stability in the Union, using its resolution powers in the most effective and proportionate way”, and pointing out that such powers should be “balanced by appropriate accountability requirements”.11 In this regard Art. 45 SRMR provides a necessary counterbalance to Art. 47 SRMR that provides the SRB, but also the national competent authorities, with a considerable degree of independence in performing the tasks conferred on them by the SRMR. It is implicitly stated in the Preamble to the SRMR that the accountability arrangements vis-à-vis the (European) Parliament and the Council provide the necessary democratic legitimacy, as a reference is made to these two bodies as being “democratically legitimized institutions representing the citizens of the Union and the Member States”, whereby the qualitative difference between the European Parliament and the Council being respectively directly and indirectly democratically legitimized Union institutions, is not considered.12 7 Similar to what can be observed for Art. 20 SSMR, no legal definition of the notion of accountability is provided for in the first paragraph or any other parts of Art. 45 SRMR for that matter. Moreover, neither Art. 3 SRMR on “Definitions” nor the preamble to the Regulation offer any details in this regard. Art. 45(8) SRMR refers to “democratic ac5
See also supra, → SSMR Art. 20. Memorandum of Understanding between the Single Resolution Board and the Commission in respect of certain elements of cooperation and information exchange pursuant to the Single Resolution Mechanism Regulation; Memorandum of Understanding between the Single Resolution Board and the Europeean Central Bank in respect of cooperation and information exchange. Both documents available at available at . 11 OJ L 339, 24.12.2015, p. 58. See section C and D. 12 OJ L 339, 24.12.2015, p. 58, section D. 9
10
958
Fabian Amtenbrink
Art. 45 SRMR
Accountability
countability and oversight”, whereby a definition of the latter concept is also absent. In the context of the accountability arrangements provided for in the SRMR it cannot be seen how these two notions are used systematically to describe different concepts or procedures. For this reason, hereafter the commentary on Article 45 SRMR focuses on the notion of accountability.
II. Annual report (Art. 45(2)-(3) SRMR) Art. 45(2) SRMR introduces an obligation on parts of the SRB to draw up an annual 8 report on the performance of the tasks conferred on it pursuant to the SRMR and to submit this report to the European Parliament, the national parliaments of the Member States participating in the SRM, the Council, the European Commission, as well as the Court of Auditors. The SRB itself considers the annual report as “the main document of accountability towards the public and the European Parliament.”13 As the accountability arrangements for the SSM and the SRM, both forming part of the European Banking Union, are often compared, a difference can be observed regarding the addresses of the annual report that can be explained with the different legal position of the ECB and the SRB and the tasks they have been assigned in their respective legal bases. A first notable difference is the fact that the national parliaments of the Member States participating in the SRM are put on an equal footing with the three Union institutions mentioned in Art. 45(2) SRMR, i.e. the European Parliament, the Council, the Commission and the Court of Auditors. This underlines the characteristics of the SRM in which “a centralised power of resolution is established and entrusted to the Single Resolution Board established in accordance with this Regulation (‘the Board’) and to the national resolution authorities.”14 It moreover also reflects the fact that the SRB has one appointed representative of the national resolution authorities for each each participating Member State.15 A second difference is the inclusion of the European Commission in the list of bodies that the SRB has to address the annual report to. From Art. 56(2)(g) SRMR it becomes clear that the annual report must include a sec- 9 tion on the resolution activities of the Board, as well as on financial and administrative matters.16 Further details of what the annual report should cover can be found in section I.1. of the Interinstitutional Agreement, according to which not only the execution of the tasks conferred on the SRB need to be included, but inter alia also the sharing of tasks with the national resolution authorities, the cooperation with other national or Union relevant authorities, as well as with any public financial assistance facility including the European Financial Stability Facility and the European Stability Mechanism, the amounts of administrative contributions by the legal entities covered by the SRMR to the administrative expenditures of the SRB, and the implementation of the budget for resolution tasks. A draft version of the report has to be made available to the European Parliament on 10 a confidential basis seven working days in advance of the public hearing in one of the 24 official languages of the EU, and that the annual report must be published on the website of the SRB.17 The Chair of the SRB is obliged to present the annual report to the Euro13 Speech by Elke König at the ECON Committee Hearing, European Parliament, 11 July 2018. Available at . See also Article 46(1) SRMR. 14 Preamble No. 11 of the SRMR. 15 See further Art. 43(1) SRMR. 16 See further Art. 56(2) SRMR. 17 Art. 45(2) SRMR. Available at . This publication is subject to the requirements of professional secrecy.
Fabian Amtenbrink
959
Art. 45 SRMR
Accountability
pean Parliament and to the Council. In the case of the European Parliament this has to take place in a public hearing.18 In practice, the Chair of the SRB presents the annual report in the ECON Committee of the European Parliament. Interestingly, despite being explicitly mentioned as one of the recipients of the annual report in Art. 45(2) SRMR, the national parliaments of the participating Member States have not been included here.19 11 The listing in this provision of the Court of Auditors emphasises its more significant role, as compared to the SSM,20 in the accountability regime of the SRM.21 This inter alia also becomes clear from Art. 92 SRMR with regard to the review by the Court of Auditors of the annual accounts and the drafting of a special report for each 12-month period, examining whether sufficient regard was had to economy, efficiency and effectiveness with which the Fund has been used, in particular the need to minimise the use of the Fund, and whether the assessment of Fund aid was efficient and rigorous.22 More generally, the inclusion of the Court of Auditors can be explained with reference to Art. 287(1) TFEU, according to which it examines the accounts of all revenue and expenditure of all bodies, offices or agencies set up by the Union. 12 Next to the annual report, according to the Section I.4. of the Interinstitutional Agreement on “Access to information” the SRB must provide the ECON Committee “executive or plenary session of the Board, including an annotated list of decisions, enabling an understanding of the discussions.” The Interinstitutional Agreement furthermore specifies the conditions and substance of the ex-post disclosure of non-confidential information inter alia relating to a resolved entity.
III. Appearances before the European Parliament (Art. 45(4) SRMR) 13
Similar to what has been observed for the SSM (Arts. 20(5), 45(4) SRMR introduces an obligation on parts of the Chair of the SRB, to take part in hearings upon request of the European Parliament which can cover “all aspects of the activity and functioning of the SRM covered by the SRMR”.23 Internally the European Parliament’s ECON Committee is charged with this task. Pursuant to Art. 45(4) SRMR such hearings must take place at least once a year, but section I.2. of the Interinstitutional Agreement specifies that “ordinary public hearings” take place biannually, and must include a discussion on the contributions, alternative funding means, access to financial facilities, investment strategy, as well as the use of the Fund.24 Next to these regular public hearings, the Interinstitutional Agreement also foresees in ad hoc exchanges of views and special confidential meetings. The latter can take place on request by the Chair of the ECON Committee, in written and giving reasons, when considered necessary for the exercise of the European Art. 45(3) SRMR and Section I.1. Interinstitutional Agreement. Further on the rights of national parliaments see Art. 47 SRMR. 20 With regard to the limited role of the Court of Auditors in the context of the SSM see supra, → SSMR Art. 20. 21 On the role of the Court of Auditors in the SRM see already Cisotta, in: Daniele, Simone, Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer, 2017), 283, at p. 291. 22 For more details see infra, → Art. 92. 23 Section I.2. para. 9 Interinstitutional Agreement. For a state of play for the 8 th and 9th parliamentary term see respectively and . 24 Section I.2. para. 1 Interinstitutional Agreement. 18
19
960
Fabian Amtenbrink
Art. 45 SRMR
Accountability
Parliament’s powers Union law, whereby no minutes or other recordings are made of such meetings and no press statements are issued.25 In the period June 2015 to December 2021 an average of three public hearings where undertaken, which included ad hoc exchanges of views and the presentation of the annual reports.26 By mutual agreement of the Chairs of the SRB and of the European Parliament’s 14 ECON Committee, the Vice-Chair of the SRB, the four full-time members of the SRB, as well as senior members of the SRB staff, namely its General Counsel, Heads of Units or their Deputies, can be invited to participate not only in the ordinary public hearings, but also in any ad hoc exchanges of views and the special confidential meetings. Similar to what can be observed for the supervisory dialogue in the context of the 15 SSM,27 the exchanges of the ECON Committee with the ECB’s Supervisory Board are prepared by the Banking Union Working Group of the European Parliament’s ECON Committee, which defines its task with “monitoring the implementation” of the SRMR, 28 as well as by the Economic Governance Support Unit. The latter provides a briefing paper for each regular hearing and ad hoc exchange, and coordinates the analyses and reports by external experts that are commissioned for exchanges.29 Transcripts of the meetings are available on the European Parliament website30 and a very general account is also provided in the SRB’s Annual Report. In the context of the appointment procedures for the Chair, Vice-Chair and the 16 additional full-time members of the SRB, the Interinstitutional Agreement foresees in a right for the European Parliament’s ECON Committee to conduct public hearings of the candidates that have been submitted to it by the European Commission and which require the approval of the European Parliament before they can be effectively appointed by means of an implementing decision by the Council.31
IV. Appearance before the Council (Art. 45(5) SRMR) Pursuant to Art. 45(5) SRMR the Council of the European Union can ask the Chair of 17 the Single Resolution Mechanism for an exchange on the performance of the resolution tasks by the SRB. Different to the SSM, a Memorandum of Understanding governing the relationship between the SRB and the Council is absent.32 Interestingly, this provision does not correspond with the matching provision in the 18 SSMR,33 which refers to the Eurogroup. Still, in practice these exchanges are are organized by the Eurogroup rather than the Economic and Financial Affairs Council. An explanation for the involvement of the Eurogroup rather than the Council as a whole can be that regarding the scope of application of the SRM, Art. 4(1) SRMR refers to Art. 2 SSMR and thus to the euro area Member States, as well as those countries with which 25 Section I.2. paras. 2 and 4 et seq. Interinstitutional Agreement. With regard to confidential meetings see hereafter the commentary on Art. 45(7) SRMR. 26 See references to the state of play for the 8 th and 9th parliamentary term in fn 24 above. 27 See Art. 21(5) SSMR. 28 As stated in a document on the composition of the Banking Union Working Group by the ECON Committee. Available at . 29 The publicly available documents can be found on the webpage of the European Parliament’s ECON Committee. 30 Available at . 31 Section II.3. Interinstitutional Agreement. See further Art. 56(5) SRMR. 32 For the SSM, see supra, → Art. 20. 33 See Art. 21(4) SSMR.
Fabian Amtenbrink
961
Art. 45 SRMR
Accountability
close cooperation agreements are in place. Still, it is questionable whether Art. 45(5) SRMR provides a legal basis to exclude the government representatives of the Member States outside the SSM and SRM from the hearing of the Chair of the SRB. The reference in Art. 45(5) SRMR to the Council may be explained with the principle role of the Council in the appointment of the Chair and Vice-Chair of the SRB,34 as well as more generally with the fact that the SRB executive powers are delegated by the Council (Art. 291 TFEU).35 This calls for an “effective control”36 on the SRB by the Council (next to the European Commission), which first and foremost comes in the shape of the exante review namely of the assessment by the SRB of the existence of a public interest in a given resolution decision.37 In this context, the establishment of a forum allowing for a review of the performance of the resolution tasks of the SRB by the Council as part of the accountability framework established by the SRMR can be understood as an ex-post control instrument for the Council concerning the tasks delegated to the SRB. Finally, the reference to the Council, thus not excluding non-participating Member States, can also be considered appropriate against the background of the impact of the resolution activities of the SRB for the internal market as a whole, which also derives from the choice of Art. 114 TFEU as the legal basis for the SRMR. 19 The exchanges of the Eurogroup with the SRB Chair are regularly combined with the exchanges with the Chair of the ECB’s Supervisory Board.38
V. Questions by the European Parliament and the Council (Art. 45(6) SRMR) According to Art. 45(6) SRMR the European Parliament and the Council have a right to submit questions to the SRB, which the latter has to reply to orally or in writing in accordance with its own procedures, but in any event within five weeks of receipt of the question.39 21 Section I.3. of the Interinstitutional Agreement provides details on the execution of this obligation, determining first of all that written questions must be forwarded to the Chair of the SRB via the Chair of the European Parliament’s ECON Committee and, moreover, that all written questions are also answered in writing. Finally, it is determined that both the SRB and the European Parliament must dedicate a specific section of their respective websites to the publication of such questions and replies. 22 In practice, the responses to written questions by MEPs are published on the website of the SRB under the somewhat nondescript header “European Co-operation”.40 As to the internal rules of procedure of the European Parliament, the same rules apply for questions concerning the SRM and the SSM.41 20
34 For more details see Art. 56(6) SRMR. On appointment and removal see also Lamandini and David Ramos Muñoz (2020), at pp. 9-11; Zeitling and Brito Bastos, (2020), at pp. 23-24. 35 On the scope of the delegation of executive powers by the EU legislator of the European Commission see case C-270/12, United Kingdom v European Parliament and Council, ECLI:EU:C:2014:18, namely paras. 78-79. 36 See preamble No. 24 SRMR. 37 Both the European Commission and the Council have a right of objection pursuant to Art. 18(7) SRMR. For more details see Art. 18(7) SRMR. 38 See e.g. video conference of the Eurogroup of 11 June 2020. Available at 39 As to the internal rules applicable at the European Parliament see Art. 20(5) SSMR (supra, → SSMR Art. 20). 40 Available at . 41 See in this regard Art. 20(6) SSMR.
962
Fabian Amtenbrink
Art. 45 SRMR
Accountability
VI. Confidential oral discussions with the European Parliament (Art. 45(7) SRMR) Similar to what can be observed for the accountability framework provided for in the SSMR,42 Art. 45(7) SRMR allows for confidential oral discussions between the Chair of the Single Supervisory Board and the Chair and Vice-Chair of the ECON Committee, constituting the “competent committee of the European Parliament”, “behind closed doors” concerning its supervisory tasks. The Chair of the ECON Committee can request confidential oral discussions with the Chair and Vice-Chair of the Supervisory Board “where such discussions are required for the exercise of the European Parliament’s powers under the TFEU”. These discussions must then be conducted in a way so as to ensure “full confidentiality obligations imposed on the ECB as a competent authority under relevant Union law”.43 Art. 45(7) SRMR foresees that the details concerning confidential discussions are provided for in an agreement between the Single Resolution Board and the European Parliament. Correspondingly, section I.2. of the Interinstitutional Agreement determines that such a request must be made in writing, providing reasons, and thereafter be held on a mutually agreed date. The Interinstitutional Agreement stresses that the primary Union law principle of openness of Union institutions bodies, offices and agencies also applies to the SRB, whereby “The discussion in special confidential meetings shall comply with that principle, including by providing an explanation around the relevant circumstances.”44 Confidential meetings may be attended by two members of the SRB's staff and of the European Parliament’s Secretariat. Moreover, subject to a mutual agreement, representatives of the European Commission who have been involved in a given resolution decision to be discussed in a special confidential meeting can be allowed access to the confidential meeting.45 Upon a reasoned request by the Chair of the ECON Committee or of the Supervisory Board, and by mutual agreement of both parties, the confidential meetings may also be attended by ECB representatives in the Supervisory Board or senior members of the supervisory staff (Director Generals or their Deputies). 46 Moreover, upon a reasoned request by the Chair of the SRB or the Chair of the European Parliament’s ECON Committee, and with mutual agreement, the Board Vice-Chair and the four full-time Board Members or senior members of the Board's staff, such as the General Counsel, Heads of Units or their Deputies, can be invited to participate in confidential meetings.47 All participants in the special confidential meetings are subject to confidentiality requirements equivalent to those applying to the members of the SRB and its staff. In this context, it is hardly surprising that the Interinstitutional Agreement also rules out minutes or other recordings of these meetings, as well as the issuing of press statements and the like.48
See in this regard Art. 20(8) SSMR. Art. 45(7) SRMR. 44 Section I.2., para. 3 Interinstitutional Agreement. 45 Section I.2., para. 7 Interinstitutional Agreement. 46 Interinstitutional Agreement, section 2, second and third indent. According to section 2, tenth indent, the Chairs may also be accompanied by two members of respectively ECB staff and of the European Parliament’s Secretariat. 47 Section I.2., para. 8 Interinstitutional Agreement. 48 Section I.2., para. 7 Interinstitutional Agreement. 42 43
Fabian Amtenbrink
963
23
24
25
26
Art. 45 SRMR
Accountability
VII. Cooperation with European Parliament investigations (Art. 45(8) SRMR) Similar to what can be observed for the accountability framework of the SSM,49 Art. 45(8) SRMR introduces an obligation of sincere cooperation of the SRB with European Parliament investigations, whereby the “practical modalities” are to be determined in “appropriate arrangements” between the SRB and the European Parliament, covering “the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the (Single Resolution) Board” by the SRMR.50 The provision lists in a non-exhaustive manner “access to information, including rules on the handling and protection of classified or otherwise confidential information, cooperation in hearings (…), confidential oral discussions, reports, responding to questions, investigations and information on the selection procedure of the Chair, the Vice-Chair, and the four members referred to in Art. 43(1)(b) of this Regulation.’51 28 Corresponding with the Interinstitutional Agreement between the European Parliament and the ECB in the context of the SSM, section III of the Agreement between the European Parliament and the SRB explicitly refers to the former’s right to set up a Committee of Inquiry as foreseen in Art. 226 TFEU and further specified in Decision 95/167/ EC,52 and introduces an obligation for the SRB to assist such a parliamentary committee “in carrying out its tasks in accordance with the principle of sincere cooperation”. The same applies to any other investigation by the European Parliament, whereby the abovementioned confidentially arrangements provided for in section I.2. of the Interinstitutional Agreement apply. 29 To be sure, similar to what can be observed for Art. 20(9) SSMR, the obligation to cooperate with such investigations in principle already derives from Art. 226 TFEU in conjunction with Decision 95/167/EC. Art. 226(1) TFEU provides the European Parliament with the right to set up a temporary Committee of Inquiry for the purpose of investigating “alleged contraventions or maladministration in the implementation of Union law, except where the alleged facts are being examined before a court and while the case is still subject to legal proceedings.”53 Decision 95/167/EC further details the exercise of this right by the European Parliament by specifying that such a temporary committee can be set up in case of alleged contraventions or maladministration “which would appear to be the act of an institution or a body of the European Communities [now Union], of a public administrative body of a Member State or of persons empowered by Community law [now Union law] to implement that law.”54 What derives from this is that the SRB as a Union agency, can in principle be the subjected to an investigation, unless the alleged facts are examined in ongoing court proceedings. Art. 3 of Decision 95/167/EC specifies the conditions under which Union institutions or bodies can be invited to appear before a Committee of Inquiry and the exceptional grounds of secrecy or public or national security considerations on which such a request may be refused, as well as the grounds on which a request for documents “necessary” for the performance of the inquiry may be refused by the Union institution or body in question. Moreover, 27
See in this regard Art. 20(9) SSMR. Brackets added. 51 Brackets added. 52 Decision 95/167/EC on the detailed provisions governing the exercise of the European Parliament's right of inquiry, OJ L 113, 19.05.1995, p. 1. 53 For a critical review of the European Parliament’s Committee of Inquiry see Shackleton, Journal of Common Market Studies (1998), 115, with further references. 54 Ibid, Art. 2(1). Brackets added. 49 50
964
Fabian Amtenbrink
Art. 46 SRMR
National parliaments
section III of the Interinstitutional Agreement lays down confidentiality requirements that apply in this context.
Art. 46 SRMR National parliaments 1. Due to the specific tasks that are conferred on the Board by this Regulation, national parliaments of the participating Member States, by means of their own procedures, may request the Board to reply and the Board is obliged to reply in writing to any observations or questions submitted by them to the Board in respect of the functions of the Board under this Regulation. 2. When submitting the report provided for in Article 45(2), the Board shall simultaneously submit that report directly to the national parliaments of the participating Member States. National parliaments may address to the Board their reasoned observations on that report. The Board shall reply orally or in writing to any observations or questions addressed to it by the national parliaments of the participating Member States, in accordance with its own procedures. 3. The national parliament of a participating Member State may invite the Chair to participate in an exchange of views in relation to the resolution of entities referred to in Article 2 in that Member State together with a representative of the national resolution authority. The Chair is obliged to follow such invitation. 4. This Regulation shall be without prejudice to the accountability of national resolution authorities to national parliaments in accordance with national law for the performance of tasks not conferred on the Board, the Council or the Commission by this Regulation and for the performance of activities carried out by them in accordance with Article 7(3). Bibliography Diane Fromage and Renato Ibrido, ‘The “Banking Dialogue” as a model to improve parliamentary involvement in the Monetary Dialogue?’, Journal of European Integration 40 (2018), 295; Christos V. Gortos, ‘Banking Resolution’, in: Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1145; Marco Lamandini and David Ramos Muñoz, ‘Banking Union’s Accountability System in Practice. A Health Check-Up to Europe’s Financial Heart’ (28 September 2020). Available at SSRN: https://ssrn.com/abstract=3701117 or http://dx.do i.org/10.2139/ssrn.3701117; Menelaos Markakis, Accountability in the Economic and Monetary Union (Oxford University Press, Oxford 2020); René Smits, ‘SSM and the SRB accountability at European level: room for improvements?’, Study requested by the ECON Committee of the European Parliament, PE 645.726 – April 2020, available at https://www.europarl.europa.eu/RegData/etudes/STUD/2020/645726/I P O L _ S T U(2020)645726_EN.pdf; Tobias Tröger and Alexander Friedrich, ‘§ 18 Einheitliche Abwicklungsmechanismus (Single Resolution Mechanism, SRM)’, in: Ulrich Hufeld and Christoph Ohler (ed), Europäisches Wirtschafts- and Währungsrecht (Nomos, Baden-Baden 2022), 847; Jonathan Zeitlin and Filipe Brito Bastos, ‘SSM and the SRB accountability at European level: room for improvements?’ InDepth Analysis Requested by the ECON Committee, European Parliament, PE 645.747 – May 2020. A. Origin and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Detailed explanation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Reporting to and questions by national parliaments (Art. 46(1)-(2) SRMR) II. Appearances before national parliaments (Art. 46(3) SRMR) . . . . . . . . . . . . . . . . III. Accountability arrangements pursuant to national law (Art. 46(4) SRMR) . .
4 4 7 12
Fabian Amtenbrink
965
Art. 46 SRMR
National parliaments
A. Origin and development Similar to what can be observed for the SSM,1 the need for the inclusion of national parliaments of the Member States participating in the SRM into the accountability framework derives from the organisational structure of the SRM and namely the role that national resolution authorities in the context of the SRM. In the preamble to Council Regulation (EU) No 806/2014 (SRMR)2 the role in the accountability framework for national parliaments, and namely possibility for an exchange of views with the Chair of the SRB is explained with “the potential impact that resolution actions may have on public finances, institutions, their customers and employees, and the markets in the participating Member States.”3 Finally, the involvement of national parliaments can be explained by the fact that the SRB may perform tasks and exercises powers, which, pursuant to Council Directive 2014/59/EU are to be performed or exercised by the national resolution authority.4 2 Different from what can be observed for the drafting of the SSMR, the initial European Commission proposal did provide for a separate provision on the role of national parliaments in the accountability framework, which to a large extent resembles today’s Art. 46 SRMR. One specific area in which the European Parliament has pushed for amendments has been the inclusion in this provision of an obligation on parts of the SRB to also submit its annual report to the national parliaments of the Member States participating in the SRM, which currently can be found in Arts. 45(2) and 46(2) SRMR. 3 It should be noted that the Agreement between the European Parliament and the SRB on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the Single Resolution Board within the framework of the Single Resolution Mechanism (Interinstitutional Agreement) solely cover the arrangements between the European Parliament and the SRB and as such neither concerns the arrangements on the accountability of the SRB vis-à-vis other Union institutions, namely the Council and the European Commission, nor deal with the accountability of national competent authorities acting in the SRM vis-à-vis national parliaments.5 A similar agreement does not exist between the national parliaments and the SRB. 1
B. Detailed explanation I. Reporting to and questions by national parliaments (Art. 46(1)-(2) SRMR) 4
Art. 46(1) SRMR introduces an obligation on parts of the SRB to reply in writing to any observations or questions submitted by the national parliaments to the SRB in respect of its functions under the SRMR and in that regard is almost identical to Art. 21(1) SSMR.6 This right is limited to national parliaments of those Member States that participate in the SRM. See in this regard supra, → SSMR Art. 20. OJ L 225, 30.7.2014, p. 1 (as amended). 3 Preamble No. 34 SRMR. 4 Art. 5 SRMR (see supra, → Art. 5). For details on the distribution of tasks within the Single Resolution Mechanism see e.g. Tröger and Friedrich (2022), at pp. 874 et seq. 5 See Preamble P and Q Interinstitutional Agreement. 6 See Art. 21(1) SSMR (supra, → SSMR Art. 21). 1
2
966
Fabian Amtenbrink
Art. 46 SRMR
National parliaments
From Art. 46(2) SRMR it becomes clear that this also includes observations and ques- 5 tions based on the annual report, which the SRB – as becomes already clear from Art. 45(2) SRMR - does not only have to submit to the European Parliament, the Council, the European Commission and the Court of Auditors, but also to the national parliaments of the Member States participating in the SRM. From the reference to “the functions of the Board under this Regulation” it can be concluded that such observations or questions must be directly related to the powers assigned to the SRB by the SRMR. As to the procedure for the submission of questions, Art. 46(1) SRMR refers to the (applicable) national procedures. In contrast to Art. 21(2) SSMR, which only refers in a rather noncommittal way to a “request” for a reply by the ECB that national parliaments can make, Art. 46(1) SRMR includes an explicit obligation on parts of the SRB to reply in writing or, in the case of observations or questions on the annual report, also orally. In practice, the responses to written questions by national parliamentarians are 6 published on the website of the SRB under the rather nondescript header “European Co-operation”.7 Overall the number and geographic spread of questions by national parliamentarians has been rather limited. Questions submitted to the SRB concerned both the activities of the SRB in a broader sense, e.g. on the number of resolution plans that have been drawn up by the SRB,8 and concrete cases, e.g. concerning the dealing with the Banca Popular Español.9
II. Appearances before national parliaments (Art. 46(3) SRMR) Similar to what can be observed for the Chair of the Supervisory Board of the SSM in 7 Art. 21(3) SSMR, the Chair of the SRB is obliged to follow an invitation by a national parliament of a SRM Member State to participate in an exchange of views “in relation to the resolution of entities” in that Member State that falls within the scope of the SRMR. Next to the SRB Chair also a representative of the competent national resolution authority must be invited.10 As is the case for the exchange with national parliaments in the context of the SSM, 8 and different to the European Parliament’s ECON committee, which can hold a hearing on any aspect relating to the performance of the resolution tasks by the SRB, according to the wording Art. 46(3) SRMR exchanges with national parliaments are limited to aspects of the resolution of entities established in that particular Member State, thus at least theoretically excluding more general issues linked to the performance of the SRB of its supervisory tasks. Whether national parliamentarians in practice are actually discouraged from addressing such broader questions to the Chair is doubtful. This is even more so the case since Art. 46(1) SRMR provides national parliamentarians with a procedure to request the Chair to reply to any questions in respect of the functions of the SRB under the SRMR. While Art. 46(3) SRMR remains silent on this point, it has to be assumed that the ap- 9 plicable procedure for the inviting of the SRB Chair is subject to national law, but that the term “national parliament” is referred to as a generic concept, and as such in the context bicameral parliamentary systems has to be interpreted to refer to each chamber Available at . See SRB letter of 8 May 2018 (SRB/CM/ARES(2018)2668080), available at . 9 See SRB letter of 25 July 2017 (SRB/EK/u2(2017)0725, available at . 10 Art. 46(3) SRMR itself does not introduce an obligation also on parts of the representative to appear. 7
8
Fabian Amtenbrink
967
Art. 47 SRMR
Independence
individually,11 whereby the allocation of this task within parliament (the competent committee) and the applicable (decision-making) procedures are equally determined by national (constitutional) law. 10 As to the participation of a representative of the national resolution authority in such exchanges it should be noted that the purpose of Art. 46(3) SRMR cannot be viewed as the primary legal basis for their accountability vis-à-vis national parliaments, as becomes also clear from the wording of Art. 46(4) SRMR. 11 Finally, neither Art. 46(3) SRMR nor any other part of this provision provides for a full accountability mechanism, namely also providing for concrete sanctioning instruments at the disposal of the national parliaments as the parties at the helm of the accountability mechanism.
III. Accountability arrangements pursuant to national law (Art. 46(4) SRMR) From Art. 46(4) SRMR it becomes clear that neither Article 46 nor any other provision of the SRMR conclusively regulates the accountability arrangements applicable to national resolution authorities of the Member states participating in the SRM. This does not only apply to those tasks performed by these authorities outside the SRM framework, but also for those activities that they perform pursuant to Art. 7(3) SRMR with regard to the less significant entities and groups. In these instances, the applicable accountability arrangements are provided for by the applicable national legal framework. 13 While the accountability arrangements may thus differ across the jurisdictions of the Member States participating in the SRM, in evaluating such arrangements, and particular any sanction mechanisms, Art. 47(1) SRMR have to be taken into consideration according to which the national resolution authorities acting within the SRM must act independently and in the general interest when performing tasks conferred on them by the SRMR. 12
Art. 47 SRMR Independence 1. When performing the tasks conferred on them by this Regulation, the Board and the national resolution authorities shall act independently and in the general interest. 2. The Chair, the Vice-Chair and the members referred to in Article 43(1)(b) shall perform their tasks in conformity with the decisions of the Board, the Council and the Commission. They shall act independently and objectively in the interest of the Union as a whole and shall neither seek nor take instructions from the Union's institutions or bodies, from any government of a Member State or from any other public or private body. In the deliberations and decision-making processes within the Board, they shall express their own views and vote independently. 3. Neither the Member States, the Union's institutions or bodies, nor any other public or private body shall seek to influence the Chair, the Vice-Chair or the members of the Board. 11 In this context a parallel can be drawn to Art. 6 of the Protocol (No. 2) on the application of the principles of subsidiarity and proportionality, attached to the TEU and TFEU.
968
Fabian Amtenbrink
Art. 47 SRMR
Independence
4. In accordance with the Staff Regulations of Officials as laid down by Council Regulation (EEC, Euratom, ECSC) No 259/68 (19) (the ‘Staff Regulations’) referred to in Article 87(6) of this Regulation, the Chair, the Vice-Chair and the members referred to in Article 43(1)(b) of this Regulation shall, after leaving service, continue to be bound by the duty to behave with integrity and discretion as regards the acceptance of certain appointments or benefits. Bibliography Fabian Amtenbrink and Rosa Maria Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies – A Theoretical Framework’ in: Richard V. De Mulder (ed), Mitigating Risk in the Context of Safety and Security. How Relevant is a Rational Approach? (Rotterdam: Erasmus School of Law & Research School for Safety and Security (OMV) 2008), 115; Basel Committee on Banking Supervision, Core Principles for effective Banking Supervision’ (Basel, September 1997); Merijn Chamon, ‘The empowerment of agencies under the Meroni doctrine and article 114 TFEU: comment on United Kingdom v Parliament and council (short-selling) and the proposed single resolution mechanism’, ELR (2014), 380; Christos V. Gortos, ‘Banking Resolution’, in: Fabian Amtenbrink and Christoph Herrmann, EU Law of Economic & Monetary Union (Oxford University Press, Oxford 2020), 1145; Marco Lamandini and David Ramos Muñoz, ‘Banking Union’s Accountability System in Practice. A Health Check-Up to Europe’s Financial Heart’ (28 September 2020), available at ; Rosa Maria Lastra, Central Banking and Banking Regulation (London School of Economics, 1996); Marc Quintyn, Silvia Ramirez, Michael W. Taylor, ‘The Fear of Freedom: Politicians and the Independence and Accountability of financial Sector Supervisors’, IMF Working Paper WP/07/25; Miroslava Scholten and Marloes van Rijsbergen, ‘The ESMA-Short Selling Case. Erecting a New Delegation Doctrine in the EU upon the Meroni-Romano Remnants’, Legal Issues of European Integration 41 (2014), 389; Jonathan Zeitlin and Filipe Brito Bastos, ‘SSM and the SRB accountability at European level: room for improvements?’ In-Depth Analysis Requested by the ECON Committee, European Parliament, PE 645.747 – May 2020. A. Origin and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Detailed description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Independence of the Single Resolution Board and of the national resolution authorities (Art. 47(1)-(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Duties of the Chair, Vice-Chair and the full-time members of the Single Resolution Board upon leaving the service (Art. 47(4) SRMR) . . . . . . . . . . . . . . .
4 4 13
A. Origin and development Other than stating that “each individual component of the Single Resolution Mecha- 1 nism will be independent in the performance of its tasks”, the explanatory memorandum of the European Commission proposal for Council Regulation (EU) No 806/2014 (SRMR)1 does not provide any explanation for the necessity to bestow the Single Resolution Board with the level of independence currently foreseen in Art. 47 SRMR. 2 Similar to what has been observed with regard to the independence of the Supervisory Board in the SSM, these arrangements have to be placed in the broader context of the discourse on functional decentralization and independent agencies.3 While the Basel Committee on Banking Supervision’s 1997 Core Principles for Effective Banking Supervision are geared towards banking supervision agencies, considering the significant consequences for financial systems and the economy of a Member State more broadly, but also possible OJ L 225, 30.7.2014, p. 1 (as amended). Proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council (COM/2013/0520 final), section 4.1.6. 3 See Art. 19 SSMR (supra, → SSMR Art. 19). 1 2
Fabian Amtenbrink
969
Art. 47 SRMR
Independence
political fallouts, of the resolution of significant credit institutions established in that Member State, including the consequences of a potential bail-in, the need for the competent (supranational) resolution body to be able to pursue its responsibilities and objectives “free from political pressure”4 arguably equally applies to resolution authorities. The approach to the institutional setup was also welcomed by the ECB, which in its opinion on the European Commission proposal for the SRMR stressed that “A strong and independent single resolution authority (SRA) should be at the centre of the SRM”, referring to the need for such an authority to have “broad and independent powers to prepare resolution plans and resolution schemes and request their implementation.” 5 2 While the provision on independence included in the original European Commission proposal (then Art. 43 SRMR) consisted of only two paragraphs, basically resembling 47(1) and – in parts – (2) SRMR, the final provision spells out the independence arrangements in more detail, thereby not only recognizing the prominent role of the Chair and Vice-Chair of the SRB, but also the legal nature of the SRB as an Union agency.6 Moreover, a specific provision addressing potential conflicts arising from subsequent employments has been included. 3 In studying Art. 47 SRMR, also the Agreement between the European Parliament and the Single Resolution Board on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the Single Resolution Board within the framework of the Single Resolution Mechanism (Interinstitutional Agreement), the Code of Conduct of the Single Resolution Board (Code of Conduct), which applies to the members of the Plenary Session and Executive Session in the performance of their duties as Members of the Single Resolution Board, as well as the SRB Ethics and Compliance Framework have to be considered.7
B. Detailed description I. Independence of the Single Resolution Board and of the national resolution authorities (Art. 47(1)-(3) SRMR) 4
According to Art. 47(1) SRMR, both the Single Resolution Board and the national resolution authorities of the Member States participating in the SRM must act independently and in the general interest in performing the tasks that the SRMR confers on them.
4 As formulated in the Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision Basel, September 1997, section II.4. 5 Footnotes excluded. See ECB, Opinion of the ECB on a proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council (CON/2013/76), OJ C 109A ,11.4.2014, p. 2 para. 12. 6 See further Art. 42(1) SRMR. 7 Agreement between the European Parliament and the Single Resolution Board on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the Single Resolution Board within the framework of the Single Resolution Mechanism, OJ L 339, 24.12.2015, p. 58; Code of Conduct of the Single Resolution Board, decision of the SRM of 24 June 2020 (SRB/PS/2020/16); Decision of the Single resolution Board of 27 October 2020 establishing the SRB Ethics and Compliance Framework, and repealing and replacing Decision (SRB/PS/2015/12) (SRB/CH/2020/17).
970
Fabian Amtenbrink
Art. 47 SRMR
Independence
Similar to what can be observed for the Single Supervisory Board in the context of the SSM, a legal definition of independence is missing in the SRMR.8 In its Preamble the Regulation refers in general terms to “operational independence” of the SRB,9 whereas elsewhere in the Preamble reference is made to “full autonomy and independence”. 10 Generally speaking, as becomes also clear from the statement in Art. 47(2) SRMR that the Chair and Vice-Chair must “perform their tasks in conformity with the decisions of the Board, the Council and the Commission”, the SRB enjoys a relative independence that cannot be compared to that namely of the ECB.11The SRB does not enjoy institutional independence in the sense that it stands independent from other decisionmaking bodies foreseen in the SRM (internal aspect) or more generally vis-à-vis other EU institutions (external aspect). This becomes inter alia clear from Art 5(2) SRMR, according to which the SRB (next to the Council and the Commission) is subject to binding regulatory and implementing technical standards developed by the European Banking Authority (EBA) and adopted by the Commission in accordance with Articles 10 to 15 of Regulation (EU) No 1093/2010 and to any guidelines and recommendations issued by EBA under Article 16 of that Regulation. The SRB must make every effort to comply with any guidelines and recommendations of EBA which relate to tasks of a kind to be performed by those bodies. Moreover, while the SRB is independent in deciding on the adoption of the resolution scheme, it only enters into force, if it is not objected against by the Council or the European Commission.12 This relative independence derives from the legal nature of the SRB. In establishing the latter as an EU agency the European legislator is bound by the principles of the delegation of powers to (independent) bodies established by the jurisprudence of the Court of Justice of the European Union, in particular regarding the need for a Union legal basis and continuous control by the delegating body, as well as regarding the possibility to transfer discretionary powers.13 The Chair, Vice-Chair, as well as the additional four full-time members of the SRB must act in conformity not only with the decisions of the SRB itself, but also those by the Council and the European Commission. Within those confinements they are supposed to act independently and objectively in the interest of the Union as a whole and in doing so must neither seek nor take instructions from EU institutions or bodies, from any government of a Member State or from any other public or private body.14 They are also prohibited from holding office at the national, EU or international level.15 Furthermore, strengthening the personal independence of SRB members is Art. 47(2) SRMR, according to which in the deliberations and decision-making processes within the SRB, they are not confined to expressing the views of any EU institution or any other public or private body for that matter, as they are expected to express their own views and vote independently. This provision is particularly important from the point of view of the independence of the SRB, as the Art. 43(3) SRBR foresees in the participation of a On the notion of independence see Art. 19 SSMR (supra, → SSMR Art. 19). Preamble No. 26 SRMR. 10 Preamble No. 97 SRMR. 11 On the different types of independence see supra, → SSMR Art. 19. 12 Art. 18 SRMR. 13 Case 5-56, Meroni v High Authority, ECR 1958, 133; Case 98/80, Romano, ECLI:EU:C:1981:104; Case C-270/12, United Kingdom v European Parliament and Council, ECLI:EU:C:2014:18. See e.g. Chamon, ELR (2014), 380; Scholten and van Rijsbergen, Legal Issues of European Integration 41 (2014), 389; Lamandini and Ramos Muñoz, at p. 6, refer to the SRB as am EU agency “with a status shrouded in uncertainty”. 14 With regard to the reference to ‘Union interest’ see Art. 19(1)-(2) SSMR (supra, → SSMR Art. 19). 15 Art. 56(5) SRMR. 8
9
Fabian Amtenbrink
971
5
6
7
8
Art. 47 SRMR
9
10
11
12
Independence
representative not only of the ECB, but also of the European Commission in the meetings of the executive sessions and plenary sessions of the SRB as permanent observers with a right to participate in the debates.16 Art. 4 of the Code of Conduct restates the obligations provided for in Art. 47(1)-(3) SRMR and ads to this that the SRB members must carry out their tasks “free from any interference, in particular from industry interference that would affect their personal independence”, and moreover, prohibits professional activities outside the SRM “that could hinder their independence or present them with the possibility of using privileged information”.17 Matching the obligation on parts of the permanent members of the SRB, Art. 47(3) SRMR prohibits the EU institutions or bodies and the Member States, as well as any other public or private body from seeking to influence the Chair, the Vice-Chair or the other SRB members. Next to the SRMR, the Code of Conduct holds specific rules geared towards securing the independence of the SRB, including inter alia on private financial transactions (Art. 5), declaration of interests, such as their previous occupational activities, private activities, official mandates and financial interests (Art. 6), conflicts of interest (Art. 9), as well as cooling-off periods (Art. 8). Further details can be found in the SRB Ethics and Compliance Framework and namely the SRB Code of Ethics. Concerning the appointment and dismissal of the Chair, Vice-Chair and the other full-time members of the SRB, reference can be made here to Art. 56 SRBR, according to which the Council implementing decision on appointments is based on a European Commission proposal that requires the approval of the European Parliament.18 According to the Interinstitutional Agreement, the ECON Committee may consult the SRB concerning the shortlisted candidates and may moreover hold public hearings for each proposed candidate. More importantly in the context of the personal independence of the SRB members, pursuant to Art. 56 SRMR, the full-time members of the SRB can only be removed from office when found guilty of serious misconduct. This then requires an implementing decision from the Council that is based on a proposal from the European Commission, which has been approved by the European Parliament.19 The initiative for such a removal from office lies with the European Parliament and the Council. 20 Overall, similar to what can be observed for the Supervisory Board in the context of the SSM, the dismissal rules ensure that the full-time members of the SRB are shielded from unwarranted dismissal based for example on political considerations.21 With regard to the financial independence of the SRB, reference can be made to Art. 58 SRMR, according to which the SRB has an autonomous budget that is not part of the Union budget, whereby administrative expenditures are financed by annual contributions from the banking sector.22 The SRMR itself does not as such determine in any detail the institutional arrangements at the national level relating to the national resolution authorities and namely their relationship with other national institutions, bodies, offices and agencies beyond what has been observed above. What becomes clear from Art. 47 SRMR however is that See further Art. 42 SRMR. Art. 4(4)-(5) Code of Conduct. 18 For details see infra, → Art. 56. See also Interinstitutional Agreement, section II.4. For a brief account from practice see Lamandini and Ramos Muñoz (2020), at pp. 10-11. 19 See also section II.5. Interinstitutional Agreement, which does not however add anything substantially. 20 Ibid. 21 For details see supra, → SSMR Art. 19) 22 For details see Art. 58 SRMR. See also Gortsos (2020), at pp. 1166-1167. 16
17
972
Fabian Amtenbrink
Art. 48 SRMR
Seat
any national law provisions that seriously impair an autonomous functioning of the national resolution authority within the SRM, must be viewed as problematic.
II. Duties of the Chair, Vice-Chair and the full-time members of the Single Resolution Board upon leaving the service (Art. 47(4) SRMR) Art. 47(4) SRMR states that the full-time members of the SRB continue to be bound 13 by the duty to behave with integrity and discretion as regards the acceptance of certain appointments or benefits “after leaving service”. The expression “leaving service” must be understood as a reference to the end of the term of office which in principle is a nonrenewable 5 years.23 Reference is made in this provision to Council Regulation 259/68 laying down the Staff Regulations of Officials and the Conditions of Employment of Other Servants of the European Communities and instituting special measures temporarily applicable to officials of the Commission.24 Moreover, Art. 8(1) of the Code of Conduct state that members of the SRB must in- 14 form the SRB Chair of their intention to engage in any occupational activity relating to entities that fall under the SRB's responsibilities, regardless of whether the services in question are performed against remuneration. This rule applies for a period of two years from the date of their ceasing to hold office. Apart from other activities in the national authority, the Code of Conduct explicitly lists types of occupational activities that can be engaged with after already one year. The cooling-off periods for alternates of the members of the SRB are somewhat shorter (one year and six months respectively. 25
Art. 48 SRMR Seat The Board shall have its seat in Brussels, Belgium. Bibliography Paul Craig, EU Administrative Law (2nd edn, Oxford University Press, Oxford 2012); Christos V. Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF) – A Comprehensive Review of the second main pillar of the European Banking Union (ECEFIL, Athens 2015); Markus Henze, Einheitliche Abwicklung für Europas Banken – Die zentrale Bankenabwicklung in der Eurozone auf dem Prüfstand (Springer Fachmedien, Wiesbaden 2016); Paul Weismann, European Agencies and Risk Governance in EU Financial Market Law (Routledge, New York 2016). A. Determination of the seat as part of the establishment of the Board . . . . . . . . .
1
B. Brussels as the institutional seat of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Headquarter Agreement (Art. 97 SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
A. Determination of the seat as part of the establishment of the Board Art. 48 SRMR on the seat of the Board forms part of the provisions on the institu- 1 tional framework of the SRM and, more specifically, on the institutional arrangements of the Board to which the centralised power of resolution in the Union is entrusted. Considering the legal status of the Board as a Union agency with legal personality, the See Art. 56(5) SRMR. OJ L 56, 4.3.1968, p. 1 (as amended). 25 Art. 8(2) Code of Conduct. 23
24
Janina Heinz
973
Art. 48 SRMR
Seat
determination of its seat is integral part of the creation of the Board by the Union legislator through the SRMR.
B. Brussels as the institutional seat of the Board 2
3
4
5
6
Art. 48 SRMR determines that the institutional seat of the Board is Brussels, Belgium. Neither the Recitals nor the Explanatory Memorandum1 to the SRMR explicitly provide for a rationale for locating the seat in Brussels. Ultimately, the decision on an agency’s seat is a political decision. However, both general principles applying to Union agencies as well as the Common Approach on EU decentralised agencies, which is set out in a legally non-binding Joint Statement issued by the Parliament, the Council and the Commission,2 provide for some general guidance when deciding about the seat of new agencies. In general, agencies are characterised as institutionally decentralised bodies. This characterisation primarily refers to the organisational separation of an agency from other administrative institutions and the institutional core of administration.3 Closely linked to the organisational separation, the characterisation also applies to the tasks of an agency which do not remain with the centralised responsibility of the core administration, i.e. the Commission in case of Union agencies.4 This decentralisation is considered a prerequisite for the independence of agencies. At the same time, the institutional decentralisation of agencies is often also associated with the geographical location of them as evidenced by the fact that the Union agencies are spread across the Union territory.5 Additionally, the spread of agencies beyond Brussels and Luxembourg is viewed by the Parliament, the Council and the Commission to add to the visibility of the Union in the different Member States.6 Apart from the principles of decentralisation and geographical distribution, the Common Approach on EU decentralised agencies sets out several objective criteria which may be considered when choosing an agency’s seat, including: (i) the assurance that the agency can be set up on site upon the entry into force of its founding act, (ii) the accessibility of the location, (iii) the existence of adequate education facilities for the children of staff members, and (iv) appropriate access to the labour market, social security and medical care for both children and spouses. While those objective criteria are certainly met in the case of Brussels, the decision on the location of the seat of the Board does, on the other hand, not follow the rationale of the (geographical) decentralisation and the desirability of geographical distribution7 considering that the seat of both the Council and the Commission is located in Brussels. 1 COM(2013) 520 final, 2013/0253 (COD), Proposal for a Regulation of the European Parliament and of the Council 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 of the European Parliament and of the Council, 10 July 2013. 2 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012. 3 Weismann, European Agencies and Risk Governance in EU Financial Market Law (2016), at p. 6. 4 Weismann, European Agencies and Risk Governance in EU Financial Market Law (2016), at p. 8. 5 Weismann, European Agencies and Risk Governance in EU Financial Market Law (2016), at p. 54. 6 Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012. 7 See Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012.
974
Janina Heinz
Art. 49 SRMR
Participation in plenary sessions
In this context, it is worth noting that Recital 31 on the role of the Board as “a specific 7 Union agency with a specific structure, corresponding to its specific tasks” recognises that the Board “departs from the model of all other agencies of the Union”. This may be viewed as a reference to the fact that the Board does not exercise the centralised power of resolution in full autonomy, because of the necessary involvement of the Commission and, possibly, also the Council in the adoption of each specific resolution scheme.8 As stated in Recital 120, “(t)he SRM brings together the Board, the Council, the Commission and the resolution authorities of the participating Member States”. Against this background, it is reasonable to conclude that the decision to locate the Board in Brussels especially takes account of the involvement of the Council and the Commission in the exercise of the centralised power of resolution.
C. Headquarter Agreement (Art. 97 SRMR) As a result of locating the seat of the Board in Brussels, the Kingdom of Belgium be- 8 ing the Member State where the seat is located should have concluded a Headquarters Agreement with the Board by 20 August 2016 in accordance with Art. 97 SRMR. This Agreement is apparently not publicly available.9 In general, the Joint Statement on EU decentralised agencies issued by the Parliament, 9 the Council and the Commission10 invites the Member State to create the conditions for a decentralised agency to operate as efficiently as possible by taking into account the elements of the Common Approach11 that relate to them.
Art. 49 SRMR Participation in plenary sessions All members of the Board referred to in Article 43(1) shall participate in its plenary sessions. Bibliography Giuseppe Boccuzzi, The European Banking Union – Supervision and Resolution (Palgrave Macmillan UK, London 2016); Paul Weismann, European Agencies and Risk Governance in EU Financial Market Law (Routledge, New York 2016). A. Overview and background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Participation in plenary sessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. All members of the Board as listed in Art. 43(1) SRMR . . . . . . . . . . . . . . . . . . . . . . II. Vice-Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 6 10
8 As regards the involvement of the Council and the Commission, see Art. 18(7) SRMR. With a view to respecting the principle of delegation of powers to agencies as interpreted by the Court of Justice of the European Union (Meroni doctrine), the involvement of the Council and the Commission takes account of the fact that a margin of discretion remains in the adoption of each specific resolution scheme while only institutions of the Union may establish the (resolution) policy of the Union, i.e. exercise discretion to form the policy of the Union. For details see Henze, Einheitliche Abwicklung für Europas Banken – Die zentrale Bankenabwicklung in der Eurozone auf dem Prüfstand (2016), at pp. 24 et seq. On the Meroni doctrine: Craig, EU Administrative Law (2nd edn, 2012), at pp. 153 et seq. 9 Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF) – A Comprehensive Review of the second main pillar of the European Banking Union (2015), fn 180. 10 Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012. 11 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012.
Janina Heinz
975
Art. 49 SRMR
Participation in plenary sessions
III. Permanent and ad hoc observers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 18
C. Plenary session substructures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
D. Good governance requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
A. Overview and background Art. 49 SRMR on the participation in the plenary sessions of the Board forms part of the provisions on the institutional arrangements of the Board. The provision is to be read in close connection with Art. 43 SRMR which sets out the general composition of the Board and the Board’s administrative and management structure. 2 As regards the structure of the Board, it follows from Art. 43(5) SRMR that the Board has a two-level governance structure. It meets and operates in two sessions, namely, the plenary and an executive session. The two sessions of the Board differ in terms of their composition, tasks and decision-making. While the plenary session is competent to take all decisions of general nature including budgetary matters and certain decisions relating to the use of the Fund, the Board takes decisions in respect of individual entities or groups in its executive session.1 This also means that the Board exercises both administrative and management functions in its plenary sessions. 3 The terminology of the SRMR referring to the two sessions of the Board may not be entirely clear. In accordance with the definition in Recital 11 SRMR, the term Board means Single Resolution Board, i.e. it refers to the agency as a whole and not only the management and/or decision-making body of the agency. By the reference to the plenary and an executive session of the Board, the SRMR does not provide for a clear term for the management and decision-making body or bodies of the agency. Art. 49 SRMR sets out the composition of the Board in its plenary session. It is supplemented by Rules of Procedure of the Board in its plenary session2 (Rules of Procedure PS). 1
B. Participation in plenary sessions The decision-making structures within the SRM are intended to ensure European decisions, but involving Member States, in order to recognise the significance of bank resolution for national economies.3 The structure of the Board including the specific structures of the two sessions reflects this objective and provides for an involvement of Member States where relevant. The representation of Member States in the governing body is a common feature of Union agencies.4 5 Art. 49 SRMR specifies which persons participate in plenary sessions of the Board as voting members. In addition, Art. 3(3) through (5) of the Rules of Procedure PS sets out which further persons may attend the plenary sessions as either members, Vice-Chair, 4
Boccuzzi, The European Banking Union – Supervision and Resolution (2016), at p. 121. Decision of the Single Resolution Board of 24 June 2020 adopting the Rules of Procedure of the Board in its Plenary Session (SRB/PS/2020/15). 3 COM(2013) 520 final, 2013/0253 (COD), Proposal for a Regulation of the European Parliament and of the Council 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 of the European Parliament and of the Council, 10 July 2013, 8. 4 Weismann, European Agencies and Risk Governance in EU Financial Market Law (2016), at p. 54. 1
2
976
Janina Heinz
Art. 49 SRMR
Participation in plenary sessions
SRB Secretariat staff, SRB General Counsel, observers, accompanying persons or experts.
I. All members of the Board as listed in Art. 43(1) SRMR As stipulated in Art. 43(1) SRMR, the Board is composed of the Chair and four further full-time members appointed in accordance with Art. 56 SRMR and a member appointed by each participating Member State, representing their national resolution authorities. Art. 49 SRMR refers to Art. 43(1) SRMR and stipulates that all of the members of the Board as listed in Art. 43(1) SRMR shall participate in the plenary sessions. Those members are referred to as voting members;5 in accordance with Art. 43(2) SRMR, each of them shall have one vote. Details concerning the composition of the plenary session are set out in Art. 1 of the Rules of Procedure PS. Para 2 explicitly lists (a) the Chair of the Board, (b) the four further full-time members of the Board, and (c) the appointed representative of each of the national resolution authorities in participating Member States as the persons of which the plenary session is composed and refers to them as “members”. As concerns the representatives of the national resolution authorities, the SRMR does not make further specifications with regard to the process and criteria that are to be applied by the national resolution authorities when appointing a representative. This means that it is principally left to the discretion of the national resolution authorities and the respective Member State to decide upon the appointment of a representative, including the details of appointment such as its duration. Most commonly, it will be the head of the respective national resolution authority. The Common Approach on EU decentralised agencies6, however, requests the Member States to make efforts to limit turnover of their representatives in the interest of ensuring continuity of the agency’s board work. In addition, Art. 1(6) of the Rules of Procedure PS stipulates that, where more than one national resolution authority is established in a participating Member State, only the representative of one authority may participate in the plenary session as a member, while the representative of the other authority shall be allowed to participate in meetings as observer without exercising any voting rights.
6
7
8
9
II. Vice-Chair Art. 49 SRMR only specifies the voting members of the plenary session. Art. 1(5) in 10 conjunction with Art. 3(3) of the Rules of Procedure PS, on the other hand, stipulate that, as a general rule, also the Vice-Chair may participate in all meetings of the plenary session in order to assist the Chair. In this regard, Art. 1(5) in conjunction with Art. 3(3) of the Rules of Procedure PS may be viewed as a specification of Art. 56(3) SRMR according to which the Chair shall be assisted by a Vice-Chair. An exception to this rule applies where the Chair is absent or unable to attend. In 11 accordance with Art. 14(5) of the Rules of Procedure PS, the Vice-Chair shall exercise the voting rights of the Chair in his or her absence. This means that the Vice-Chair might exceptionally act as a voting member on behalf of the Chair. This is in line with 5 Despite not being explicitly defined in the SRMR, the term “voting member” is used in Arts. 52(1), (2) and (3) SRMR. 6 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012.
Janina Heinz
977
Art. 49 SRMR
Participation in plenary sessions
Art. 56(3)(2) SRMR requiring the Vice-Chair to carry out the functions of the Chair in his or her absence.
III. Permanent and ad hoc observers 12 13
14
15
16
17
In addition to voting and non-voting members, several observers may participate in plenary sessions of the Board. The observers do not have voting rights. First, a representative of each the Commission and the ECB is entitled to participate in the meetings and debates of plenary sessions as permanent observer. This is laid down in Art. 43(3) and Art. 1(4) of the Rules of Procedure PS. For this purpose, the Commission and the ECB shall each designate a representative. The representative shall have access to all documents (cf. Art. 7(1) of the Rules of Procedure PS). The participation of a representative of the Commission is a standard characteristic of the governance structure of Union agencies.7 The involvement of an ECB representative, on the other hand, is to be attributed to the fact that the on-going task of the dayto-day supervision of the most significant credit institutions in participating Member States is entrusted to the ECB. Given that supervision and resolution are complementary and interdependent tasks, the participation of an ECB representative in the Board’s plenary sessions may facilitate the close cooperation and exchange of information that is necessary between the ECB and the Board. This arrangement is not fully mirrored by the SSMR and ancillary rules on the governance of the ECB Supervisory Board which do not provide for a permanent participation of an SRB representative in the meetings of the Supervisory Board. According to para 5.1 of the Memorandum of Understanding between the SRB and the ECB in respect of cooperation and information exchange, the Chair of the SRB shall participate in meetings of the ECB Supervisory Board only for items relating to the tasks and responsibilities of the SRB. This asymmetry, i.e. the limited involvement of the SRB as opposed to the full involvement of the ECB, appears to reflect the different scope of the comprehensive task of the ECB, on the one hand, and the more limited scope of the SRB’s task, on the other hand. The representative of the Commission is provided with a particular tool of political dimension that further shapes his/her role. According to the Common Approach on EU decentralised agencies8 and as specified in the progress report on its implementation9, an alert/warning system shall enable the representative to formally oppose a decision of the agency’s board with a view to ensuring coherence with EU policies and compatibility of the agency’s activities with its mandate and relevant EU legislation. While the representative has no legal possibility to suspend a decision, the tool allows him/her to formally request the board to refrain from adopting the relevant decision. Second, in accordance with Art. 43(4) SRMR and Art. 1(6) of the Rules of Procedure PS, in the event of more than one national resolution authority in a participating Member State, a second representative shall be allowed to participate as observer in plenary sessions. Third, the Board may invite additional observers to participate in the meetings of its plenary session on an ad hoc basis pursuant to Art. 51(3) SRMR. This provision is fur7 See the Common Approach on EU decentralised agencies set out in the Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012. 8 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012. 9 COM(2015) 179 final, Report from the Commission, Progress report on the implementation of the Common Approach on EU decentralised agencies, 24 April 2015, at p. 7.
978
Janina Heinz
Art. 49 SRMR
Participation in plenary sessions
ther specified in Art. 1(7) and (8) of the Rules of Procedure. Ad hoc observers may be invited to meetings of the plenary session where their participation is relevant for the execution of the plenary session’s task. Representatives of the EBA and of a national resolution authority of a non-participating Member State are listed as examples for possible ad hoc observers.
IV. Experts Art. 3(5) of the Rules of Procedure PS also provides for the option to invite experts to 18 participate in meetings of the plenary session as technical experts. Those experts shall not be present, however, at the time of voting. Moreover, a simple majority of the voting members of the plenary session may oppose the participation of an expert at the meeting. The Chair shall invite experts upon his/her own initiative or upon request of any 19 of the other members, the Vice-Chair or observers of the plenary session, whenever appropriate.
C. Plenary session substructures As regards the organisational arrangements and internal structures of the Board including its plenary session, Art. 13 of the Rules of Procedure PS provides for the option of the plenary session to establish substructures. This option reflects the independence of the Board which allows it to organise its own affairs. Pursuant to Art. 50(1)(p) SRMR, the corresponding task to take decisions relating to the establishment of the Board’s internal structures lies with the plenary session. Substructures established by the plenary session shall, as a rule, be composed of one representative appointed by each of the (voting) members of the plenary session and participation to the committees shall be determined individually by each member. In view of this standard composition of a substructure representing the individual members of the plenary session, the substructures may be viewed as an extension of the plenary session. Their task is to advise and provide guidance in the work of the plenary session and its members in accordance with their mandate. They shall be chaired, as a rule, by the Vice-Chair, one of the full-time Board members or a senior staff member of the Board. Similar to the organisational arrangements applying to the participation in the plenary session, a representative of each of the permanent observers to the plenary session, i.e. the participating observers of the Commission and the ECB, may be invited to a substructure as observer in accordance with Art. 13(3) of the Rules of Procedure PS. In the second half of 2016, an SRB committee structure was introduced with the aim to enhance the functioning of the SRM, including the following three committees: (i) the Resolution Committee, (ii) the Fund Committee, and (iii) the Administrative and Budget Committee. 10 In relation to the Fund Committee, Art. 14(5) of the Commission Delegated Regulation (EU) 2016/45111 on the investment strategy and rules for the administration of the Fund explicitly provides for the option that the Board establishes a comSingle Resolution Board, Work Programme 2017, at p. 10. Commission Delegated Regulation (EU) 2016/451 of 16 December 2015 laying down general principles and criteria for the investment strategy and rules for the administration of the Single Resolution Fund. 10
11
Janina Heinz
979
20
21
22
23
Art. 50 SRMR
Tasks
mittee of the plenary session with the mandate to assist the Board in the application of the Delegated Regulation. 24 In the most recent Multi-Annual Programme 2021-2023,12 the Board outlined the following horizontal and support-functions as part of its organisation which are to contribute to effective operations of the Board and the achievement of the priorities for the Multi-Annual Programme: the SRB Secretariat, the Resolution Planning Office (RPO), Information and communication technology, SRB Legal Service, Compliance, Communications, Internal audit, Internal control, Appeal Panel Secretariat, Data Protection Office and Administrative tasks (Human Resources, Finance & Procurement). 25 According to the SRB’s Work Programme 2017, the work of the Board was also going to be supported by two networks of senior experts, one in legal matters and one in information and communication technology (ICT).13
D. Good governance requirements As a result of the participation in the plenary session, the members, observers and experts as well as the participants of the substructures established by the plenary session are required to comply with rules on good governance. 27 In particular, in accordance with Art. 50(1)(j) SRMR, the plenary session has adopted rules for the prevention and management of conflicts of interest. The members of the plenary session, permanent observers and alternates have to comply with the rules on conflicts of interest set out in Art. 9 of the Code of Conduct14. The Chair, the Vice Chair and the other four full-time members of the Board are additionally bound by the rules on conflicts of interest set out in Section 3 of the SRB Code of Ethics as appended to the SRB Ethics and Compliance Framework15. 28 In accordance with Art. 14 of the Code of Conduct, the members of the plenary session, the permanent observers and other participants are bound by professional secrecy requirements pursuant to which they are prohibited in particular from disclosing confidential information. While accompanying persons and technical experts who are not regular participants, attending less than twice a year to the Board sessions, are not subject to the application of the Code of Conduct, those participants have to sign a declaration of ethical conduct prior to their first participation in any of the Board sessions (cf. Art. 1(3) of the Code of Conduct). 26
Art. 50 SRMR Tasks 1. In its plenary session, the Board shall: (a) adopt, by 30 November each year, the Board’s annual work programme for the following year, based on a draft put forward by the Chair and shall transmit it 12 Single Resolution Board, Multi-Annual Programme 2021-2023 - Work Programme 2021, published 25 June 2021. 13 Single Resolution Board, Work Programme 2017, at p. 10. 14 Decision of the Single Resolution Board of 24 June 2020 adopting the Code of Conduct of the Single Resolution Board (SRB/PS/2020/16). 15 Decision of the Single Resolution Board of 27 October 2020 establishing the SRB Ethics and Compliance Framework, and repealing and replacing Decision (SRB/PS/2015/12) (SRB/CH/2020/17).
980
Janina Heinz
Art. 50 SRMR
Tasks
for information to the European Parliament, the Council, the Commission, and the ECB; (b) adopt and monitor the annual budget of the Board in accordance with Article 61(2), and approve the Board’s final accounts and give discharge to the Chair in accordance with Article 63(4) and (8); (c) subject to the procedure referred to in paragraph 2, decide on the use of the Fund, if the support of the Fund in that specific resolution action is required above the threshold of EUR 5 000 000 000 for which the weighting of liquidity support is 0,5; (d) once the net accumulated use of the Fund in the last consecutive 12 months reaches the threshold of EUR 5 000 000 000, evaluate the application of the resolution tools, in particular the use of the Fund, and provide guidance which the executive session shall follow in subsequent resolution decisions, in particular, if appropriate, differentiating between liquidity and other forms of support; (e) decide on the necessity to raise extraordinary ex-post contributions in accordance with Article 71, on the voluntary borrowing between financing arrangements in accordance with Article 72, on alternative financing means in accordance with Articles 73 and 74, and on the mutualisation of national financing arrangements in accordance with Article 78, involving support of the Fund above the threshold referred to in point (c) of this paragraph; (f) decide on the investments in accordance with Article 75; (g) adopt the annual activity report on the Board’s activities referred to in Article 45, which shall present detailed explanations on the implementation of the budget; (h) adopt the financial rules applicable to the Board in accordance with Article 64; (i) adopt an anti-fraud strategy, proportionate to fraud risks taking into account the costs and benefits of the measures to be implemented; (j) adopt rules for the prevention and management of conflicts of interest in respect of its members; (k) adopt its rules of procedure and those of the Board in its executive session; (l) in accordance with paragraph 3 of this Article, exercise, with respect to the staff of the Board, the powers conferred by the Staff Regulations on the Appointing Authority and by the Conditions of Employment of Other Servants of the European Union as laid down by Council Regulation (EEC, Euratom, ECSC) No 259/68 (‘Conditions of Employment’) on the Authority Empowered to Conclude a Contract of Employment (‘the appointing authority powers’); (m) adopt appropriate implementing rules for giving effect to the Staff Regulations and the Conditions of Employment in accordance with Article 110 of the Staff Regulations; (n) appoint an Accounting Officer, subject to the Staff Regulations and the Conditions of Employment, who shall be functionally independent in the performance of his or her duties; (o) ensure adequate follow-up to findings and recommendations stemming from the internal or external audit reports and evaluations, as well as from investigations of the European Anti-Fraud Office (OLAF); (p) take all decisions on the establishment of the Board’s internal structures and, where necessary, their modification; (q) approve the framework referred to in Article 31(1) to organise the practical arrangements for the cooperation with the national resolution authorities.
Janina Heinz
981
Art. 50 SRMR
Tasks
2. When taking decisions, the plenary session of the Board shall act in accordance with the objectives as specified in Articles 6 and 14. For the purposes of point (c) of paragraph 1, the resolution scheme prepared by the executive session is deemed to be adopted unless, within three hours from the submission of the draft by the executive session to the plenary session, at least one member of the plenary session has called a meeting of the plenary session. In the latter case, a decision on the resolution scheme shall be taken by the plenary session. 3. In its plenary session, the Board shall adopt, in accordance with Article 110 of the Staff Regulations, a decision based on Article 2(1) of the Staff Regulations and on Article 6 of the Conditions of Employment, delegating relevant appointing authority powers to the Chair and establishing the conditions under which the delegation of powers can be suspended. The Chair shall be authorised to sub-delegate those powers. In exceptional circumstances, the Board in its plenary session may by way of a decision temporarily suspend the delegation of the appointing authority powers to the Chair and any sub-delegation by the latter and exercise them itself or delegate them to one of its members or to a staff member other than the Chair. Bibliography Paul Craig, EU Administrative Law (2nd edn, Oxford University Press, Oxford 2012); Christos V. Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF) – A Comprehensive Review of the second main pillar of the European Banking Union (ECEFIL, Athens 2015). A. Overview and background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Tasks of the plenary session (Art. 50(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Planning and monitoring of the Board’s activities, including budgetary matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Annual work programme and annual activity report (Arts. 50(1)(a), (g) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Budgetary matters (Arts. 50(1)(b), (h) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Tasks in relation to the Single Resolution Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Decisions in relation to the use and management of the Fund (Arts. 50(1)(c)-(e) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Decisions in relation to the administration of the Fund (Art. 50(1)(f) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Internal governance of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Good governance (Arts. 50(1)(i), (j), and (o) SRMR) . . . . . . . . . . . . . . . . . . . . . 2. Internal structures (Arts. 50(1)(k), (p) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Staff matters (Arts. 50(1)(l)-(n) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Cooperation within the SRM (Art. 50(1)(q) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . .
5
19 23 24 25 26 29
C. Relevant considerations for decision-taking (Art. 50(2)(1) SRMR) . . . . . . . . . .
30
6 6 11 14 14
D. Legal fiction of adoption (Art. 50(2)(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
E. Delegation of appointing authority powers (Art. 50(3) SRMR) . . . . . . . . . . . . . .
32
A. Overview and background 1
Art. 50 SRMR sets out the tasks of the Board in its plenary session. The provision is to be viewed against the background of the two-level governance structure of the Board. The provision serves the purpose to delineate the tasks of the Board in the plenary session, on the one hand, and the tasks of the Board in the executive session (Art. 54 SRMR) and of the Chair (Art. 56(2) SRMR), on the other hand. This means that Art. 50 SRMR is primarily relevant for the internal arrangements of the Board and, more specifically, the internal division of tasks. Accordingly, the provision forms part of the rules
982
Janina Heinz
Art. 50 SRMR
Tasks
on the institutional framework (Part III of the SRMR). The competences and responsibilities of the Board as an agency vis-à-vis the public and other external bodies, on the other hand, are predominantly set out in Part II of the SRMR. In line with the Common Approach on EU decentralised agencies1, according to 2 which a non-executive session gives general orientation for an agency’s activities, the plenary session of the Board is tasked to take all decisions of general nature including budgetary matters and certain decisions relating to the use of the Fund, whereas the executive session takes decisions in respect of individual entities or groups. While Art. 50 (1)(a) through (q) SRMR individually lists the tasks of the plenary session, the executive session is more broadly mandated to take all of the remaining decisions to implement the SRMR (Art. 54(1)(b) SRMR). In addition to listing the tasks of the plenary session, Art. 50 SRMR determines the 3 considerations that are relevant in the decision-making process when executing those tasks. Pursuant to Art. 50(2)(1) SRMR, the Board shall act in accordance with the general principles specified in Art. 6 SRMR and the resolution objectives laid down in Art. 14 SRMR when taking decisions. Finally, Art. 50(3) SRMR comprises rules on the delegation of the appointing authori- 4 ty powers to the Chair of the Board. The issue of delegation of tasks from the plenary session of the Board is addressed more broadly in Art. 5 of the Rules of Procedure PS.
B. Tasks of the plenary session (Art. 50(1) SRMR) Art. 50(1) SRMR lists the tasks of the plenary session of the Board. Those tasks can 5 be grouped into the following five categories: (i) tasks related to the planning and review of the activities of the Board, including budgetary matters, (ii) decisions relating to the Fund, (iii) responsibilities in relation to the internal governance of the Board, (iv) staff matters, and (v) cooperation within the SRM.
I. Planning and monitoring of the Board’s activities, including budgetary matters 1. Annual work programme and annual activity report (Arts. 50(1)(a), (g) SRMR) Art. 50(1)(a) SRMR lays down one of the core tasks of the plenary session reflecting 6 the role of this forum which is to guide the general direction of the work of the Board. The provision requires the plenary session to adopt, by 30 November each year, the Board’s annual work programme for the following year. While the plenary session is responsible for the adoption of the annual work programme, the draft is prepared by the Chair. The annual work programme provides the framework for the activities to be carried 7 out by the Board within the coming year. It defines the objectives and priorities of the Board and describes the key activities planned to achieve the set targets. The SRMR does not specify the required content of the work programme. Given its nature as a strategy paper for the operation of the Board, it should be comprehensive and address both the planning of the external activities related to the competences conferred on the Board, in particular, resolution planning as well as the planning of Board’s internal measures, 1 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012.
Janina Heinz
983
Art. 50 SRMR
Tasks
including, for example, HR, IT and other administrative matters. Moreover, the annual work programmes should be understood as successive planning papers, for example, by identifying new and recurring objectives. 8 Art. 50(1)(a) SRMR further requires that the work programme is transmitted for information to the European Parliament, the Council, the Commission, and the ECB. The fact that there is no provision in the SRMR for any consultative or similar role of those institutions as regards the annual work programme should allow the Board to define the focus of its operations and, thereby, the Board's strategic orientation without significant external influence. This level of independence is not a given as some other agencies are required to reconsider their programme where the Commission disagrees with the initial proposal.2 Having said that, the limited input from external institutions is appropriate in light of the expert role of the Board and its mandate to apply and implement the Union resolution framework. Apart from the information requirement vis-à-vis specific Union institutions, the Board publishes the work programme on its website. 9 The implementation of the annual work programme, on the other hand, is assigned to the Chair, Art. 56(2)(f) SRMR, reflecting the fact that the role of the plenary session is to set clear guidelines for the activities of the Board, but not to engage in the day-to-day work. 10 While the adoption of the annual work programme is a forward-looking exercise, the plenary session is also tasked, pursuant to Art. 50(1)(g) SRMR, to adopt the annual activity report on the performance of the tasks conferred on the Board by the SRMR. This annual report serves to ensure that the European Parliament, the Council and the Commission, to which the Board is accountable for the implementation of the SRMR (cf. Art. 45(1) SRMR), are sufficiently informed about the activities carried out by the Board, including detailed explanations on the implementation of the budget. Pursuant to Art. 56(2)(g) SRMR, the Chair is responsible to prepare a draft of the report with a section on the resolution activities of the Board and a section on financial and administrative matters. Further details as regards the submission and presentation of the annual report are set out in Art. 45 SRMR.
2. Budgetary matters (Arts. 50(1)(b), (h) SRMR) Closely linked to the adoption of the annual work programme and the annual activity report is the adoption and monitoring of the annual budget of the Board, as the budget sets out the allocation of the Board’s financial resources to its activities. Pursuant to Art. 50(1)(b) SRMR, the plenary session is tasked to adopt and monitor the annual budget, approve the final accounts of the Board and give discharge to the Chair in respect of the implementation of the budget. Details as regards the approval of the final accounts and giving discharge to the Chair are laid down in Arts. 63(4) and (8) SRMR, respectively. 12 In accordance with Art. 61 SRMR, the draft budget is drawn up and subsequently submitted by the Chair to the Board for adoption by 15 February each year. By 31 March each year, the Board in its plenary session shall adopt the final budget together with the establishment plan. 13 The additional task of the plenary session to adopt financial rules is closely connected to the preparation of the budget. Pursuant to Art. 50(1)(h) SRMR in connection with Art. 64 SRMR, the plenary session shall adopt internal financial rules specifying the detailed procedure for establishing and implementing the budget of the Board. This means that the responsibility of the Chair to establish the draft budget is guided by the Board’s 11
2
984
See Craig, EU Administrative Law (2nd edn, 2012), at pp. 164 et seq.
Janina Heinz
Art. 50 SRMR
Tasks
financial rules as adopted by its plenary session. Through this mechanism, the provisions of the SRMR strike a balance between the management responsibilities of the Chair, on the one hand, and the role of the plenary session to give general orientation for the operations of the Board, on the other hand.
II. Tasks in relation to the Single Resolution Fund 1. Decisions in relation to the use and management of the Fund (Arts. 50(1)(c)-(e) SRMR) As a general rule, decisions in respect of individual entities or groups, including on the use of the Fund for financing a resolution process in connection with the adoption of a resolution scheme, are taken by the executive session of the Board. Art. 50(1)(c) SRMR provides an exception to this rule and requires a decision of the plenary session on the use of the Fund under certain circumstances. Such decision of the plenary session is necessary where the required support of the Fund in a specific resolution action exceeds the threshold of five billion Euros for which the weighting of liquidity support is 0.5. In this context, Art. 50(2)(2) SRMR provides, however, that the resolution scheme prepared by the executive session is deemed to be adopted unless, within three hours from the submission of the draft to the plenary session, at least one member of the plenary session has called a meeting of the session. In that case, a decision on the resolution scheme shall be taken by the plenary session. The rationale for this provision is set out in Recital 33 SRMR according to which, regarding the use of the Fund, it is important that there is no first-mover advantage and that the outflows of the Fund are monitored. Accordingly, any member of the plenary session of the Board should be able, within a strict deadline, to request that the plenary session decide on the use of the Fund above the threshold of five billion Euros. Similar considerations apply once the net accumulated use of the Fund in the last consecutive twelve months reaches the threshold of five billion Euros. In this case, Art. 50(1)(d) SRMR requires the plenary session to evaluate the application of the resolution tools, in particular the use of the Fund, and to provide guidance which the executive session shall follow in subsequent resolution decisions. In accordance with Recital 33 SRMR, the guidance to the executive session should, in particular, focus on ensuring the non-discriminatory application of resolution tools, on avoiding a depletion of the Fund and differentiating appropriately between no-risk or low-risk liquidity and other forms of support. The assignment of the tasks set out in Arts. 50(1)(c) and (d) SRMR to the plenary session ensures that a high level of scrutiny applies and that all participating Member States are adequately involved in cases of a substantial use of the Fund, which consists of contributions stemming from entities situated in all participating Member States. If support of the Fund above the threshold set out in Art. 50(1)(c) SRMR is required, the plenary session is, pursuant to Art. 50(1)(e) SRMR, also responsible to decide on: – the necessity to raise extraordinary ex-post contributions in accordance with Art. 70 SRMR; – voluntary borrowing between financing arrangements in accordance with Art. 72 SRMR; – alternative financing means in accordance with Arts. 73 and 74 SRMR; and
Janina Heinz
985
14
15
16
17
18
Art. 50 SRMR –
Tasks
the mutualisation of national financing arrangements in accordance with Art. 78 SRMR.3
2. Decisions in relation to the administration of the Fund (Art. 50(1)(f) SRMR) The plenary session is further responsible to perform certain tasks concerning the administration of the Fund. In contrast to decisions on the use of the Fund, the administration of the Fund is not linked to decisions in respect of individual entities or groups. Accordingly, Art. 50(1)(f) SRMR requires the plenary session to take decisions on the investments of the amounts held in the Fund in accordance with Art. 75 SRMR. 20 Art. 75(3) SRMR requires the Board to have a prudent and safe investment strategy. In addition to those general considerations, the Commission Delegated Regulation (EU) 2016/4514 provides for detailed rules which the Board has to take into account when adopting and implementing the investment strategy. Pursuant to Art. 13 of the Delegated Regulation, the Board shall review the investment strategy every year. 21 In addition, the Delegated Regulation specifies the division of tasks between the plenary session and the executive session in respect of the implementation of the investment strategy. While Art. 14(1) of the Delegated Regulation requires the Board to adopt a governance framework, including an allocation of tasks and necessary delegations, to ensure an efficient implementation of the investment strategy, Art. 14(3) stipulates that the executive session of the Board shall keep the plenary session informed of the results of the implementation of the investment strategy. This suggests that the executive session is responsible for the implementation of the investment strategy. Moreover, Arts. 16(1) and (3) of the Delegated Regulation enable the executive session to decide on the outsourcing of specific activities conferred upon the Board by Art. 75(3) SRMR, while keeping the plenary session informed of any such upcoming decisions. 22 In light of the fact that Art. 50(1)(f) SRMR explicitly tasks the plenary session to decide on investments in accordance with Art. 75 SRMR, the scope of the competences conferred on the executive session by Arts. 14 and 16 of the Delegated Regulation must be interpreted in a narrow manner. In particular, it must be ensured that any outsourcing decision taken by the executive session does not undermine the competence of the plenary session to guide the Board in the performance of its tasks and to set the investment strategy. 19
III. Internal governance of the Board 23
The plenary session is tasked to adopt certain decisions and rules relating to the internal governance of the Board. Those tasks concern issues of good governance as well as the shaping of the internal structures of the Board.
3 See Gortsos, The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF) – A Comprehensive Review of the second main pillar of the European Banking Union (2015), at p. 32. 4 Commission Delegated Regulation (EU) 2016/451 of 16 December 2015 laying down general principles and criteria for the investment strategy and rules for the administration of the Single Resolution Fund.
986
Janina Heinz
Art. 50 SRMR
Tasks
1. Good governance (Arts. 50(1)(i), (j), and (o) SRMR) In respect of good governance requirements, the plenary session is responsible to 24 adopt: – an anti-fraud strategy, proportionate to fraud risks taking into account the costs and benefits of the measures (Art. 50(1)(i) SRMR); and – rules for the prevention and management of conflicts of interest in respect of the members of the Board (Art. 50(1)(j) SRMR). Moreover, Art. 50(1)(o) SRMR requires the plenary session to ensure adequate follow-up to findings and recommendations stemming from the internal or external audit reports and evaluations, as well as from investigations of the European Anti-Fraud Office.
2. Internal structures (Arts. 50(1)(k), (p) SRMR) The SRMR does not specify the details as to how the Board operates. Against this 25 background, it is necessary to establish rules creating standardised and efficient processes that serve the implementation of the SRMR. Accordingly, the plenary session is responsible to: – adopt its rules of procedure and those of the Board in its executive session (Art. 50(1)(k) SRMR); and – take all decisions on the establishment of the Board’s internal structures and, where necessary, their modification (Art. 50(1)(p) SRMR). In accordance with Art. 52(4) SRMR, the rules of procedure shall establish more detailed voting arrangements.
IV. Staff matters (Arts. 50(1)(l)-(n) SRMR) Pursuant to Art. 50(1)(m) SRMR, the plenary session is responsible for the adoption 26 of appropriate implementing rules for giving effect to the Staff Regulations 5 and the Conditions of Employment in accordance with Art. 110 of the Staff Regulations. This provision requires agencies to consult the relevant Staff Committee and seek agreement with the Commission before adopting the implementing rules. Moreover, Art. 50(1)(l) SRMR tasks, in principle, the plenary session to exercise the 27 appointing authority powers, i.e. the powers conferred by the Staff Regulations on the Appointing Authority and by the Conditions of Employment on the Authority Empowered to Conclude a Contract of Employment. Pursuant to Art. 2(1) of the Staff Regulations, the agency shall determine who within it shall exercise the powers conferred by the Staff Regulations on the appointing authority. Accordingly, Art. 50(3) SRMR stipulates that the plenary session shall adopt a decision delegating relevant appointing authorities to the Chair. Finally, the plenary session is required to appoint an Accounting Officer who shall be 28 functionally independent in the performance of his or her duties (Art. 50(1)(n) SRMR).
5 Regulation (EEC, Euratom, ECSC) No. 259/68 of the Council of 29 February 1968 laying down the Staff Regulations of Officials and the Conditions of Employment of Other Servants of the European Communities and instituting special measures temporarily applicable to officials of the Commission.
Janina Heinz
987
Art. 51 SRMR
Meeting of the plenary session of the Board
V. Cooperation within the SRM (Art. 50(1)(q) SRMR) 29
In order to be able to perform its tasks in close cooperation with national resolution authorities, the Board shall approve a framework to organise the practical arrangements for the cooperation in accordance with Art. 31 SRMR. This task lies with the plenary session pursuant to Art. 50(1)(q) SRMR.
C. Relevant considerations for decision-taking (Art. 50(2)(1) SRMR) 30
Art. 50(2)(1) SRMR clarifies that, when taking decisions, the plenary session shall act in accordance with the general principles laid down in Art. 6 SRMR and the resolution objectives set out in Art. 14 SRMR.
D. Legal fiction of adoption (Art. 50(2)(2) SRMR) 31
Art. 50(2)(2) SRMR provides for a legal fiction. In cases where the adoption of a resolution scheme exceptionally requires a decision by the plenary session because it provides for a use of the Fund above the threshold set out in Art. 50(1)(c) SRMR, the resolution scheme prepared by the executive session is deemed to be adopted unless, within three hours from the submission of the draft to the plenary session, at least one member of the plenary session has called a meeting. This provision serves to ensure a timely adoption of a resolution scheme for a failing or likely to fail entity.
E. Delegation of appointing authority powers (Art. 50(3) SRMR) 32
Art. 50(3) SRMR lays down the framework in which the plenary session of the Board shall delegate relevant appointing authority powers (see para. 1 lit. (l)) to the Chair. This is in line with the Common Approach on EU decentralised agencies6 according to which the agency’s board should be given the powers of the Appointing Authority, not only for the Director but, in general, also for the rest of the staff. However, except for the appointment of the Director, these competences should be delegated to the Director and the Board should only become involved in exceptional circumstances.
Art. 51 SRMR Meeting of the plenary session of the Board 1. The Chair shall convene and chair meetings of the plenary session of the Board in accordance with Article 56(2)(a). 2. The Board in its plenary session shall hold at least two ordinary meetings per year. In addition, it shall meet on the initiative of the Chair, or at the request of at least one-third of its members. The representative of the Commission may request the Chair to convene a meeting of the Board in its plenary session. The Chair shall provide reasons in writing if he or she does not convene a meeting in due time.
6 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012.
988
Janina Heinz
Meeting of the plenary session of the Board
Art. 51 SRMR
3. Where relevant, the Board may invite observers in addition to those referred in Article 43(3) to participate in the meetings of its plenary session on an ad hoc basis, including a representative of EBA. 4. The Board shall provide for the secretariat of the plenary session of the Board. A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Convening and chairing of meetings (Art. 51(1) SRMR) . . . . . . . . . . . . . . . . . . . . . I. Competence to convene and chair the meetings of the plenary session . . . . . . II. Form and process of convening a meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Chairmanship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 2 3 7
C. Organisation of meetings (Art. 51(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Ordinary and ad hoc meetings; urgent procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Ordinary meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Ad hoc meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Urgent procedures in situations of emergency . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Preparation and documentation of meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Access to information (Art. 7 Rules of Procedure PS) . . . . . . . . . . . . . . . . . . . . . . . .
9 10 11 12 14 15 20
D. Attendance at the meetings (Art. 51(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
E. Secretariat (Art. 51(4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
A. Overview Art. 51 SRMR establishes the framework as to how the plenary session of the Board 1 operates. The provision sets out some basic principles that apply to the meetings of the plenary session (paras. 1 through 3) and stipulates that the plenary session is to be supported by a secretariat (para. 4). Art. 51 SRMR is supplemented by some more detailed, albeit rather technical rules laid down in the Rules of Procedure PS.
B. Convening and chairing of meetings (Art. 51(1) SRMR) I. Competence to convene and chair the meetings of the plenary session Art. 51(1) SRMR in connection with Art. 56(2)(a) SRMR stipulates that meetings of 2 the plenary session are to be convened and chaired by the Chair of the Board. In case the Chair is absent or unable to attend the meeting, Art. 3(1) of the Rules of Procedure PS requires the Vice-Chair to chair the meeting in accordance with Art. 56(3)(2) SRMR. Where both Chair and Vice-Chair are absent, the most senior of the four full-time members of the Board1 shall chair the meeting of the plenary session, Art. 3(2) of the Rules of Procedure PS.
II. Form and process of convening a meeting The SRMR does not prescribe a specific form and process for convening a meeting of 3 the plenary session. Some general rules applicable to form and process can, however, be derived from the Rules of Procedure PS. 1 The seniority primarily refers to the length of membership, and, in the event of two or more members having the same length of membership, to the age of the member.
Janina Heinz
989
Art. 51 SRMR
Meeting of the plenary session of the Board
As regards the form for convening a meeting, it can be derived from Art. 10(1) in conjunction with Art. 5(2) of the Rules of Procedure PS that the Rules of Procedure PS expect a meeting of the plenary session to be convened by way of circulating a provisional agenda and related documentation through the Chair. 5 As regards the process of convening a meeting, in particular the notification period, Arts. 2 and 5 Rules of Procedure PS provide certain guidance. Pursuant to Art. 2(2) Rules of Procedure PS, the plenary session should decide on the dates of the plenary session, which holds at least two ordinary meetings per year, in good time before the start of each calendar year on the basis of a proposal from the Chair. In addition, Art. 5(2) Rules of Procedure PS stipulates that the Chair shall prepare a draft agenda for each meeting and the SRB Secretariat shall send it to the members, the Vice-Chair and observers of the plenary session at least five working days before the relevant meeting, except in cases of urgency. This means that a meeting of the plenary session should be convened no later than at least five working days before the meeting. The date of an ordinary meeting will, however, be known to the participants further in advance due to the scheduling procedure. 6 In light of the fact that neither the SRMR nor the Rules of Procedure PS prescribe a more stringent process and notification period for the convening of a meeting of the plenary session, it can be concluded that the Chair is provided some discretion when executing this responsibility. With regard to the notification period, in particular, the Chair will need to take into account the reasonable expectations of the members of the plenary session when exercising his/her discretion also considering that not all participants of the plenary session are full-time members of the Board and, thus, might be subject to time constraints. Accordingly, Art. 5(2) requires the Chair to endeavour to circulate related documentation earlier before the minimum five working days ahead of a meeting. The plenary session is free to amend the Rules of Procedure PS to specify the process and notification period for convening a meeting, if this becomes necessary in practice. 4
III. Chairmanship The SRMR, in particular Art. 51(1) SRMR does not explicitly spell-out as to what the tasks of chairing the meetings of the plenary session entails. In accordance with general principles, the Chair should preside over the meetings and conduct them in an orderly fashion. In connection with the quorum of the plenary session, Art. 8(1) of the Rules of Procedure PS assigns the competence to the Chair to postpone deliberations to another meeting, if the relevant quorum is not met. 8 Some specifications of the responsibilities that are related to the chairing of the meetings of the plenary session, in particular their organisation, are set out in Art. 51(2) SRMR and the Rules of Procedure PS. Those specifications will be covered in the subsequent section. 7
C. Organisation of meetings (Art. 51(2) SRMR) 9
Art. 51(2) SRMR addresses the number of ordinary meetings of the plenary session and the competence to initiate additional, i.e. ad hoc (extraordinary) and, as the case may be, urgent procedures in situations of emergency. Further rules relating to the organisation of meetings of the plenary session are included in the Rules of Procedure PS.
990
Janina Heinz
Meeting of the plenary session of the Board
Art. 51 SRMR
I. Ordinary and ad hoc meetings; urgent procedures Art. 51(2) SRMR provides for rules on the minimum number of ordinary meetings of 10 the plenary session per year and on the competence to initiate extraordinary meetings. The provision is supplemented by Arts. 2 and 10 of the Rules of Procedure PS which also include rules on urgent procedures.
1. Ordinary meetings Pursuant to Art. 51(2) sent. 1 SRMR, the plenary session shall hold at least two ordi- 11 nary meetings per year. According to Art. 2(1) of the Rules of Procedure PS, meetings should be regular and the dates for those meetings should be set out in a yearly schedule determined by the plenary session on the basis of a proposal by the Chair. Consequently, it lies within the discretion of the plenary session to hold ordinary meetings more frequently than twice a year.
2. Ad hoc meetings In addition to the pre-scheduled ordinary meetings, ad hoc meetings of the plenary 12 session are to be convened upon the initiative of the Chair, or upon request of at least one-third of the members of the plenary session, Art. 51(2) sent. 2 SRMR, Art. 2(2) and (3) of the Rules of Procedure PS. Moreover, the representative of the Commission may request the Chair to convene a 13 meeting. The Chair is required to provide reasons in writing if such meeting is not convened in due time, Art. 51(2) sent. 3 and 4 SRMR, Art. 2(3) of the Rules of Procedure PS. This reflects the role of the Commission representative who is tasked to ensure coherence of the Board’s activities with EU policies and compatibility with the Board’s mandate and relevant EU legislation.
3. Urgent procedures in situations of emergency In accordance with Art. 10 of the Rules of Procedure PS, the Chair may also convene 14 a meeting of the plenary session in situations of emergency, in case the Chair deems it urgency. The Chair is responsible to decide in light of the specific circumstances which notification period is adeqaute and whether deliberations by written procedures are appropriate.
II. Preparation and documentation of meetings The preparation and documentation of the meetings of the plenary session are 15 covered in Arts. 5 through 7 of the Rules of Procedure PS. While the Chair is responsible to carry out all preparatory work related to the preparation and documentation of the meeting, the other members of the plenary session and also the observers are provided with several tools that allow them to exert certain influence in particular on setting the agenda. As regards the preparation of the meetings, Art. 5(2) of the Rules of Procedure PS re- 16 quires the Chair to draft an agenda and to provide it, together with the related documents, to the members, the Vice-Chair and the observers of the plenary sessions via the SRB Secretariat. The Chair as well as any other member of the Board may propose to remove or to add items to the still provisional agenda. In this case, the Rules of Procedure stipulate that the members may decide to remove or to add those items. On this Janina Heinz
991
Art. 51 SRMR
Meeting of the plenary session of the Board
basis, it is necessary that at least a simple majority of the Board’s members vote in favour in order to remove or to add the item to the provisional agenda (cf. Art. 5(3) of the Rules of Procedure PS). This allows for an efficient operation of the plenary session by requiring that the proposal of individual members to amend the agenda is sufficiently supported by other members. Thus, an individual member of the Board cannot drive the agenda of the plenary session. 17 The (provisional) agenda is to be adopted by the plenary session (cf. Art. 5(1) of the Rules of Procedure PS). This ensures that all members of the Board are adequately involved in determining the issues on which the plenary session deliberates. 18 As regards the documentation of the meetings of the plenary session, the Chair is responsible to ensure that a record of proceedings of each meeting is prepared, Art. 6(1) of the Rules of Procedure PS. Members of the plenary session, the Vice-Chair and observers, who attended the meeting, may send written comments to amend the draft record of proceedings within a deadline set by the Head of the SRB Secretariat. The record of proceedings shall be adopted by a simple majority of members attending the relevant meeting of the plenary session. Pursuant to Art. 6(4) of the Rules of Procedure PS, each member, the Vice-Chair and observers of the plenary session have the right to ask for their position to be recorded in the record of proceedings. 19 The relevant language for all documents and general communication of the plenary session is English, Art. 8(4) of the Rules of Procedure PS. The communication and documents relevant for the plenary session shall in principle be effected electronically, Art. 8(5) of the Rules of Procedure PS.
III. Access to information (Art. 7 Rules of Procedure PS) Art. 7 of the Rules of Procedure PS provides for rules on the access to information. Pursuant to para 1, members of the plenary session, the Vice-Chair and observers shall have equal access to complete updated information as submitted to and deliberated on at meetings and may request further relevant information within the scope of their respective tasks. The reference to the respective tasks means that the scope of the right to access information may vary depending on the role of the person who is requesting such further information. 21 The rules on the access to information set out in Art. 7(1) of the Rules of Procedure PS are not exclusively relevant for meetings of the plenary session. They are linked to the (continuous) performance of the tasks of the plenary session. Thus, access to information should not only be provided in preparation of meetings, but whenever necessary in light of the plenary session’s tasks. Para 3, however, specifically relates to the meetings of the plenary session and requires that the documents and information made available to the members, the Vice-Chair and observers include key items of information that enable a meaningful understanding of the issues being deliberated. 20
D. Attendance at the meetings (Art. 51(3) SRMR) 22
As a general rule, attendance at the meetings of the plenary session is restricted to its members, the Vice-Chair and the representative from each the Commission and the ECB as permanent observers as well as the SRB Secretariat staff and the SRB General Counsel.2 Art. 51(3) SRMR, however, widens the scope of participants stipulating that 2
992
Art. 1(2) through (4) in conjunction with Art. 3(2) of the Rules of Procedure PS.
Janina Heinz
Meeting of the plenary session of the Board
Art. 51 SRMR
the Board may invite further (ad hoc) observers, including a representative of the EBA, where necessary. In addition, Arts. 3 and 4 of the Rules of Procedure PS provide for certain specifica- 23 tions as regards the attendance at meetings which facilitate to conduct the meetings in an efficient and expedient manner. In particular, Art. 3(4) of the Rules of Procedure PS principally allows the members as well as observers to be accompanied by one person. Moreover, Art. 4(2) through (4) of the Rules of Procedure PS provide for the option to appoint an alternate or, in case a member, who is an appointed representative or alternate of a national resolution authority, or an observer is unable to attend the meeting, that he/she appoints an ad hoc representative. Regarding the administration of the attendance at the meetings of the plenary ses- 24 sion, the contact details of the representatives of the national resolution authorities participating in the plenary sessions, of alternates, ad hoc representatives, observers, and accompanying persons shall be notified to the SRB Secretariat.3 The SRB Secretariat is required to maintain an updated list of the members, observers and of alternates and ad hoc representatives and is to be informed in due time of any change to that list.4
E. Secretariat (Art. 51(4) SRMR) Art. 51(4) SRMR stipulates that “(t)he Board shall provide for the secretariat of the plenary session of the Board”. The wording of this provision is not entirely clear. On the one hand, it could be interpreted as requiring the plenary session to self-administrate its affairs. On the other hand, it could also be interpreted as requiring the Board to assign administrative tasks concerning the plenary session to the Board’s Secretariat which, pursuant to Art. 43(5)(d) SRMR, shall provide the necessary administrative and technical support on the performing of all the tasks assigned to the Board. In practice, both aspects are reflected in the organisation and operation of the plenary session. On the one hand, the plenary session provides in its Rules of Procedure for rules which ensure that the affairs of the plenary sessions and its proceedings are adequately administrated. For example, the Rules of Procedure lay down requirements for the preparation and documentation of the meetings of the plenary session.5 In this regard, the plenary session assumes its responsibility to manage its own affairs. On the other hand, the Board assigned certain supporting tasks to the SRB Secretariat. For example, the Secretariat is required to maintain an updated list of the attendants of the meetings of the plenary session.6 In addition, the revised Rules of Procedure PS provide in Art. 11 for a specific provision on the SRB Secretariat which outlines its task and certain formalities concerning the execution of its tasks such as the use of electronic means. In conclusion, Art. 51(4) SRMR should be interpreted as assigning the responsibility to properly administrate the plenary session’s affairs and proceedings to the Board in its plenary session. However, the Secretariat is tasked to perform specific administrative tasks which result from the Board’s responsibility.
Art. 4(5) and (6) of the Rules of Procedure PS. Art. 4(3) through (5) of the Rules of Procedure PS. 5 See Arts. 5 and 6 of the Rules of Procedure PS. 6 See Art. 4(5) of the Rules of Procedure PS. 3
4
Janina Heinz
993
25
26
27
28
Art. 52 SRMR
General provisions on the decision-making process
Art. 52 SRMR General provisions on the decision-making process 1. The Board, in its plenary session, shall take its decisions by a simple majority of its members, unless otherwise provided for in this Regulation. Each voting member shall have one vote. In the event of a tie, the Chair shall have a casting vote. 2. By way of derogation from paragraph 1, decisions referred to in Article 50(1)(c) and (d) as well as on the mutualisation of national financing arrangements in accordance with Article 78, limited to the use of the financial means available in the Fund, shall be taken by a simple majority of the Board members, representing at least 30 % of contributions. Each voting member shall have one vote. In the event of a tie, the Chair shall have a casting vote. 3. By way of derogation from paragraph 1 of this Article, decisions referred to in Article 50(1), which involve the raising of ex-post contributions in accordance with Article 71, on voluntary borrowing between financing arrangements in accordance with Article 72, on alternative financing means in accordance with Article 73 and Article 74, as well as on the mutualisation of national financing arrangements in accordance with Article 78, exceeding the use of the financial means available in the Fund, shall be taken by a majority of two thirds of the Board members, representing at least 50 % of contributions during the eight-year transitional period until the Fund is fully mutualised and by a majority of two thirds of the Board members, representing at least 30 % of contributions from then on. Each voting member shall have one vote. In the event of a tie, the Chair shall have a casting vote. 4. The Board shall adopt and make public its rules of procedure. The rules of procedure shall establish more detailed voting arrangements, in particular the circumstances in which a member may act on behalf of another member and including, where appropriate, the rules governing quorums. A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Principles of the decision-making process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Voting in meetings; written procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Simple majority of voting members (Art. 52(1) SRMR) . . . . . . . . . . . . . . . . . . . . . .
2 2 10
C. Qualified majorities (Arts. 52(2), (3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
D. Rules of Procedure (Art. 52(4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
A. Overview 1
Art. 52 SRMR forms part of Part III (Institutional framework), Title II (Plenary session of the Board) of the SRMR and is titled “General provisions on the decision-making process”. Accordingly, the general provisions set out in Art. 52 SRMR apply to the voting of the plenary session. Those general provisions primarily lay down rules on the votes required to adopt a decision, i.e. the required majorities (paras. 1–3). In accordance with para 4, more detailed voting arrangements are adopted in the Rules of Procedure PS.
994
Janina Heinz
General provisions on the decision-making process
Art. 52 SRMR
B. Principles of the decision-making process I. Voting in meetings; written procedure The rules set out in the SRMR only provide a framework for the decision-making process of the plenary session of the Board. From the systematic relation between Art. 51 SRMR on the meetings of the plenary session, on the one hand, and Art. 52 SRMR on the decision-making process, on the other hand, it can be derived that decisions of the plenary session are principally taken in meetings. However, Art. 9 of the Rules of Procedures PS clarifies that decisions may also be taken by written procedure. As regards the voting in meetings, Art. 8(1) of the Rules of Procedure PS requires a quorum of two-thirds of the voting members of the plenary session to be present at the meeting (either in person or by means of teleconference) in order to be competent to adopt a decision. In case the quorum is not met, the Chair may postpone the decision to another meeting, or, in case of emergency, close the meeting and immediately convene an extraordinary meeting. Art. 9 of the Rules of Procedure PS lays down detailed rules on the adoption of decisions of the plenary session by written procedure. Still, the rules do not explicitly specify the items that may be made subject to a decision by written procedure nor the person(s) competent to initiate a written procedure. In light of the fact that, pursuant to Art. 56(2) (a) SRMR, the Chair is tasked to prepare the work of the Board, it is to be concluded that it is also the responsibility of the Chair to launch a written procedure. The potentially conflicting interests of the other members of the plenary session are sufficiently safeguarded by Art. 9(1) of the Rules of Procedures PS according to which a decision may not be taken by written procedure if at least three members object within 48 hours of the launch of the written procedure or, if shorter, within the deadline of the written procedure. In such case, the item is to be put on the agenda of the next meeting of the plenary session or a meeting shall be convened by the Chair to that effect. As regards the items that may be made subject to a decision by written procedure, there is no apparent restriction. However, in exercising his/her discretion when preparing a decision of the plenary session, the Chair will need to determine in the individual case as to whether it is adequate to make a specific item subject to a decision by written procedure. Paras. 2, 4 and 5 of Art. 10 of the Rules of Procedures PS set out certain procedural requirements applicable to every written procedure. According to those provisions, a written procedure shall allow at least five working days for consideration by the plenary session, unless there is a case of emergency. Where the Chair establishes a shorter period for voting, he/she will need to give the reasons for the shortening of the period (cf. Art. 10(3), (4) of the Rules of Procedure PS). As a general rule, the absence of an explicit vote in a written procedure is deemed as an approval of the decision by the relevant voting member of the plenary session (cf. Art. 9(6) of the Rules of Procedure PS). Votes are required to be in written form. However, the Rules of Procedure PS do not specify as to what this requirement exactly entails, in particular whether an electronically submitted vote is sufficient, or whether a vote is to be submitted in hard copy (e.g. by letter). In consideration of the overall context of the Rules of Procedure PS, an electronically submitted vote should be sufficient to satisfy the written form requirement. In order to make efficient use of the full period for consideration, which might be as short as five working days or even several hours in cases of emergency, every voting
Janina Heinz
995
2
3
4
5
6
7
8
Art. 52 SRMR
General provisions on the decision-making process
member should be given the opportunity to submit his/her vote electronically without the need to allow time for the mail delivery of the vote. This aspect is particularly relevant when considering the geographical distribution of the members of the plenary session. However, in the interest of legal certainty, the Rules of Procedure PS should address the issue as to what the written form requirement entails more specifically. 9 In view of administrative matters, once the result of a written procedure is determined, Art. 9(5) of the Rules of Procedure PS requires that the outcome is notified to the members of the plenary session, the Vice-Chair and the observers in a timely manner.
II. Simple majority of voting members (Art. 52(1) SRMR) 10
Art. 52(1) SRMR sets out the general rule that decisions of the plenary session are adopted by a simple majority of its members, unless otherwise provided for in the SRMR. This general rule corresponds to the Common Approach on EU decentralised agencies1 stipulating absolute majority voting as the default rule. Further, para. 1 clarifies that each voting member of the plenary session has one vote. More importantly, however, it provides that, in the event of a tie, the Chair has a casting vote.
C. Qualified majorities (Arts. 52(2), (3) SRMR) Both para. 2 and para 3 of Art. 52 SRMR require a qualified majority for decisions of the plenary session concerning the use and management of the Fund. Para. 2 more specifically applies to the following decisions: – on the use of the Fund, if the support in that specific resolution action is required above the threshold of five billion Euros (Art. 50(1)(c) SRMR); – on the guidance which the executive session shall follow in subsequent resolution decisions, once the net accumulated use of the Fund in the last twelve months reached the threshold of five billion Euros (Art. 50(1)(d) SRMR); and – on the mutualisation of national financing arrangements (Art. 50(1)(f) SRMR in connection with Art. 78 SRMR), limited to the use of the financial means available in the Fund. 12 Those decisions are to be taken by a simple majority of the Board members, representing at least 30 % of contributions to the Fund. In the event of a tie, the Chair has a casting vote. 13 Para. 3 more specifically applies to the following decisions pursuant to Art. 50(1)(e) SRMR where support of the Fund is required above the threshold of five billion Euros: – on the necessity to raise extraordinary ex-post contributions in accordance with Art. 70 SRMR; – on voluntary borrowing between financing arrangements in accordance with Art. 72 SRMR; – on alternative financing means in accordance with Arts. 73 and 74 SRMR; and – on the mutualisation of national financing arrangements in accordance with Art. 78 SRMR, exceeding the financial means available in the Fund. Those decisions are to be taken by a majority of two thirds of the Board members, representing at least 11
1 Annex to the Joint Statement of the European Parliament, the Council of the EU and the European Commission on decentralised agencies as of July 2012.
996
Janina Heinz
Art. 53 SRMR
Participation in the executive sessions
–
50 % of contributions to the Fund during the eight-year transitional period until the Fund is fully mutualised; – 30 % of the contributions to the Fund from then on. In the event of a tie, the Chair has a casting vote. The qualified majorities required pursuant to paras. 2 and 3 of Art. 52 SRMR are to 14 be viewed against the background that the Fund is financed by credit institutions’ contributions raised at national level. They are pooled at Union level on the basis of an intergovernmental agreement on the transfer and progressive mutualisation of those contributions executed by the participating Member States. The rules on the qualified majorities ensure a certain elevated representation of the national level at which the contributions are raised. This means in turn that a lower relevance is, in particular, attributed to the voting of the full-time Board members who do not represent the national level.
D. Rules of Procedure (Art. 52(4) SRMR) Art. 52(4) SRMR requires the Board to adopt its rules of procedure which shall estab- 15 lish more detailed voting arrangements, in particular the circumstances in which a member may act on behalf of another member and, including, where appropriate the rules governing quorums. In accordance with this requirement, the plenary session adopted the Rules of Procedure PS2. Those rules include provisions that stipulate the circumstances in which (i) the Vice- 16 Chair shall carry out the functions of the Chair including the exercising of the Chair’s voting rights (Art. 3(1) of the Rules of Procedure PS), and (ii) an alternate of a representative of a national resolution authority or an ad hoc representative may attend a meeting of the plenary sessions and exercise his/her voting rights (Art. 4(2), (3) of the Rules of Procedure PS).
Art. 53 SRMR Participation in the executive sessions 1. The Board in its executive session is composed of the Chair and the four members referred to in Article 43(1)(b). The Board, in its executive session, shall meet as often as necessary. Meetings of the Board in its executive session shall be convened by the Chair on his or her own initiative or at the request of any of the members, and shall be chaired by the Chair. Where relevant, the Board in its executive session may invite observers in addition to those referred to in Article 43(3), including a representative of EBA, and shall invite national resolution authorities of non-participating Member States, when deliberating on a group that has subsidiaries or significant branches in those nonparticipating Member States, to participate at its meetings. The participation shall be on an ad hoc basis. 2. In accordance with paragraphs 3 and 4, the members of the Board referred to in Article 43(1)(c) shall participate in the executive sessions of the Board. 3. When deliberating on an entity referred to in Article 2 or a group of entities established only in one participating Member State, the member appointed by that 2 Decision of the Single Resolution Board of 24 June 2020 adopting the Rules of Procedure of the Board in its Plenary Session (SRB/PS/2020/15).
Janina Heinz
997
Art. 53 SRMR
Participation in the executive sessions
Member State shall also participate in the deliberations and in the decision-making process, and the rules laid down in Article 55(1) shall apply. 4. When deliberating on a cross-border group, the member appointed by the Member State in which the group-level resolution authority is situated, as well as the members appointed by the Member States in which a subsidiary or entity covered by consolidated supervision is established, shall also participate in the decision-making process, and the rules laid down in Article 55(2) shall apply. 5. The members of the Board referred to in Article 43(1)(a) and (b) shall ensure that the resolution decisions and actions, in particular with regard to the use of the Fund, across the different formations of the executive sessions of the Board are coherent, appropriate and proportionate. A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The core composition of the executive session; meetings of the executive session (Art. 53(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The core composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Requirements set by the SRMR; Rules of Procedure ES . . . . . . . . . . . . . . . . . . . 2. Competence to initiate a meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Observers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 3 7 7 11 14
C. The extended composition of the executive session (Arts. 53(2), (3) and (4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Single entity or domestic group (Art. 53(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . II. Cross-border group (Art. 53(4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 17 19
D. Consistent implementation of the SRMR (Art. 53(5) SRMR) . . . . . . . . . . . . . . . .
20
A. Overview In accordance with the heading of Art. 53 SRMR, the provision primarily sets out the persons that participate in the executive sessions of the Board and in what capacity they participate. In particular in comparison to the parallel provision in Art. 49 SRMR concerning the participation in the plenary session, Art. 53 SRMR is quite elaborate. This is because participation in the executive session changes depending on the subject of deliberations. When deliberating on an individual entity or group within the remit of the SRMR and subject to the responsibility of the Board, the executive session should involve national representatives of the participating Member State(s) concerned. 2 In addition, Art. 53 SRMR contains some rudimentary provisions on the meetings of the executive session. Unlike Title II (Arts. 49 to 52 SRMR) on the plenary session of the Board, Title III (Arts. 53 to 55 SRMR) on the executive session does not include a separate article on the meetings of this session in parallel to Art. 51 SRMR on the meetings of the plenary session. Art. 53 SRMR is supplemented by the Rules of Procedure of the Board in its executive session1 (Rules of Procedure ES). 1
1 Decision of the Single Resolution Board of 24 June 2020 adopting the Rules of Procedure of the Board in its Executive Session (SRB/PS/2020/14).
998
Janina Heinz
Art. 53 SRMR
Participation in the executive sessions
B. The core composition of the executive session; meetings of the executive session (Art. 53(1) SRMR) I. The core composition The first sentence of Art. 53(1) SRMR stipulates that the Board in its executive session is composed of the Chair and the four members referred to in Art. 43(1)(b) SRMR, i.e. the full-time Board members. The wording of this provision differs from both the heading of Art. 53 SRMR and the wording of the parallel provision on the plenary session in Art. 49 SRMR as well as of paras. 2 to 4 on the national representatives each referring to the participation in the relevant session as opposed to the composition of the session. However, the divergence in terminology does not seem to imply any difference in substance.2 The Chair and the four full-time Board members form the core of the executive session of the Board participating in all the sessions. They also form the standard composition of the executive session as other Board members, i.e. national representatives (Art. 43(1)(c) SRMR), only participate in the executive session when the conditions set out in para. 3 or para. 4 are met. Art. 1(7) of the Rules of Procedure ES supplements the provision by stipulating that the Vice-Chair shall also participate in all meetings of the executive session to assist the Chair. Art. 1(3) of the Rules of Procedure ES refers, inter alia, to the Chair and the four full-time Board members as members of the executive session. The Vice-Chair, on the other hand, is not a member with the exception that he/she shall exercise the voting rights of the Chair in his/her absence (Art. 1(7) of the Rules of Procedure ES). In its decision on the framework for the cooperation within the SRM,3 the plenary session defines the Board composed of the Chair, the Vice-Chair and the four full-time members as the SRB in its Restricted Executive Session referring to Art. 53(1) SRMR and Art. 56(3) SRMR (Art. 2(m) of SRB/PS/2016/07). From a systematic point of view, the definition is not fully in line with the SRMR given that the Vice-Chair is not listed as a member of the Board (cf. Art. 43(1) SRMR), but his/her role is to assist the Chair and to carry out the function of the Chair in his/her absence (cf. Art. 56(3) SRMR). Accordingly, Art. 1(4) of the Rules of Procedure ES (correctly) defines the Restricted Executive Session as the convening of the executive session in the composition of the Chair and the four further full-time members of the Board.
3
4
5
6
II. Meetings 1. Requirements set by the SRMR; Rules of Procedure ES The SRMR only provides for a basic framework for the meetings of the executive 7 session. In this regard, the second sentence of Art. 53(1) SRMR spells out the almost self-evident requirement that the Board, in its executive session, shall meet as often as necessary. Relating thereto, subpara. 2 regulates upon whose initiative a meeting shall be convened. 2 This conclusion is supported by the German language version of the SRMR where there is no divergence in terminology (Teilnahme; teilnehmen). 3 Decision of the plenary session of the Board of 28 June 2016 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and national resolution authorities (SRB/PS/2016/07).
Janina Heinz
999
Art. 53 SRMR
Participation in the executive sessions
The fact that the SRMR only provides for such basic framework does not fully reflect the relevance of some of the tasks and decisions entrusted to the executive session, in particular the responsibility to assess whether the conditions for resolution are met in relation to a specific entity or group (cf. Art. 18(1) SRMR). The Rules of Procedure ES provide for more detailed rules on the meetings of the executive session, including rules on urgent procedures in situations of emergencies. 9 As regards situations of emergency, Art. 9(2) of the Rules of Procedure ES specifies that when convening an emergency meeting, “the Chair may specify that (…) the quorum of three [out of five] permanent members will not apply”. 10 To provide for explicit rules governing quorums is generally in the interest of legal clarity. However, the legal basis for establishing such rules relevant for the decision-making process of the executive session outside the legislative framework in rules of procedure is not entirely clear. Art. 52(4) SRMR provides that the Board shall adopt its rules of procedure which shall establish, where appropriate, the rules governing quorums. While the wording of this provision covers rules governing quorums for the decision-making process of the executive session, the systematic context of Art. 52 SRMR in Title II of the SRMR on the plenary session of the Board suggests that it only applies in relation to the decision-making process of the plenary session. The issue of quorums in the decisionmaking process of the executive session would thus benefit from a legislative clarification. 8
2. Competence to initiate a meeting Pursuant to Art. 53(1)(2) SRMR, meetings are convened by the Chair primarily at his/her own initiative. However, meetings shall also be convened at the request of any of the members. Members of the Board are the four full-time members and the members appointed by each participating Member State (cf. Arts. 43(1)(b) and (c) SRMR). This means that while the executive session of the Board in its standard composition only comprises the Chair and the four full-time Board members, also the other Board members, i.e. the national representatives, have the right to request a meeting of the executive session. On the basis of a systematic and teleological interpretation, the right of the other members to request a meeting should, however, be restricted to those deliberations of the executive session that include the requesting member, i.e. deliberations on a specific entity or group within the remit of the SRMR. 12 In addition, Art. 2(1) of the Rules of Procedure ES provides that the executive session shall meet regularly following a schedule predetermined on yearly basis. Accordingly, meetings of the executive session occur both on a regular and an ad hoc basis.4 For example, in particular the receipt of a communication from the European Central Bank that it has declared an entity failing or likely to fail, should cause the Chair to convene an ad hoc meeting of the executive session (cf. Art. 18(1) SRMR). 13 The legislator did not follow the recommendation of the European Central Bank to grant it a special right to initiate meeting of the executive session in view of the fact that the supervisor may see a clear need for such meeting, notably following its assessment that an institution is failing or likely to fail, and should be able to at least 11
4 Single Resolution Board, Annual Report 2016, at p. 55: Executive sessions are held about once a month. .
1000
Janina Heinz
Art. 53 SRMR
Participation in the executive sessions
begin a discussion regarding such a case.5 Instead, the Memorandum of Understanding between the Board and the European Central Bank now provides for comprehensive arrangements on cooperation and exchange of information.6
III. Observers In accordance with Art. 43(3) SRMR stipulating that a representative of both the 14 Commission and the European Central Bank is entitled to participate in the meetings of the executive session, Art. 1(6) of the Rules of Procedure ES designates those representatives as permanent observers that are entitled to participate to all the meetings of the executive session. Art. 53(1)(3) SRMR stipulates that the Board in its executive session may invite ad- 15 ditional observers, including a representative of the European Banking Authority, and, shall invite national resolution authorities of non-participating Member States, when deliberating on a group that has subsidiaries or significant branches in those non-participating Member States.
C. The extended composition of the executive session (Arts. 53(2), (3) and (4) SRMR) Art. 53(2) SRMR provides for the general rule that members of the Board referred to 16 in Art. 43(1)(c) SRMR, i.e. national representatives of the participating Member States, shall participate in the executive sessions of the Board where the conditions set out in paras. 3 and 4 are met. Para. 3 applies where a single entity or domestic group is subject of the deliberations of the executive session, whereas para. 4 applies when a cross-border group is concerned. The Board refers to executive sessions that also involve national representatives as the SRB in its Extended Executive Session (cf. Art. 2(n) of SRB/PS/ 2016/07).
I. Single entity or domestic group (Art. 53(3) SRMR) Art. 53(3) SRMR stipulates that when deliberating on an entity or a group of entities 17 within the remit of the SRMR established only in one participating Member State, the member appointed by that Member State shall also participate in the deliberations and in the decision-making process. Group is defined as a parent undertaking and its subsidiaries (cf. Art. 3(1) no. 23 SRMR). This means that where the parent undertaking and all its subsidiaries within the remit of the SRMR are established in the same participating Member State, para. 3 applies irrespective of whether branches are located in other participating Member States. The SRMR does not specify any details as to what is regarded a deliberation on an 18 entity or a group of entities. Recital 32 SRMR states that “(w)hen deliberating on the reso5 Opinion of the European Central Bank of 6 November 2013 on a proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No. 1093/2010 of the European Parliament and of the Council (CON/2013/76), Annex, Amendment 17. 6 Memorandum of Understanding between the Single Resolution Board and the European Central Bank in respect of Cooperation and Information Exchange.
Janina Heinz
1001
Art. 54 SRMR
Tasks
lution of an institution or group (…), the executive session shall convene and involve in the decision-making process the member by the Member State concerned”. This may suggest that an involvement of a national representative is limited to those situations where the executive session is concerned with a resolution. However, this does not appear to be in line with the wording of Art. 53(3) SRMR which does not provide for a similar limitation of its scope of application. Accordingly, it is more convincing to apply para. 3 with regard to all deliberations and decisions in respect of an individual entity or group, including, for example, decisions relating to the resolution planning as set out in Part II, Title I, Chapter 1 of the SRMR. This conclusion is supported by the fact that Art. 23(3) SRMR requires the Board to take into account and to follow the resolution plan, when adopting a resolution scheme. It would be inconsistent to only involve national representatives at the later stage of adopting the resolution scheme considering that the relevant basis for such scheme are the conclusions derived in the resolution planning phase.
II. Cross-border group (Art. 53(4) SRMR) 19
In parallel to para. 3, Art. 53(4) SRMR stipulates that when deliberating on a crossborder group, the member appointed by the Member State in which the group-level resolution authority is situated, and the members appointed by the Member States in which a subsidiary or entity covered by consolidated supervision shall also participate in the decision-making process. A cross-border group is defined as a group that has entities within the remit of the SRMR established in more than one participating Member State (cf. Art. 3(1)(24) SRMR).
D. Consistent implementation of the SRMR (Art. 53(5) SRMR) 20
Art. 53(5) SRMR requires the Chair (cf. Art. 43(1)(a) SRMR) and the four full-time Board members (cf. Art. 43(1)(b)) to ensure that the resolution decisions and actions, in particular with regard to the use of the Fund, across the different formations of the executive sessions of the Board are coherent, appropriate and proportionate. In accordance with Recital 34 SRMR, this provision takes account of the fact that the participants in the decision-making process of the executive session change and, thus, gives the permanent participants the responsibility to make sure that the decisions and actions of the Board are consistent.
Art. 54 SRMR Tasks 1. The Board, in its executive session, shall: (a) prepare all of the decisions to be adopted by the Board in its plenary session; (b) take all of the decisions to implement this Regulation, unless this Regulation provides otherwise. 2. In exercising its duties pursuant to paragraph 1 of this Article, the Board shall: (a) prepare, assess and approve resolution plans for entities and groups referred to in Article 7(2), and for the entities and groups referred to in Article 7(4)(b) and (5), where the conditions for the application of those paragraphs are met, in accordance with Articles 8, 10 and 11; 1002
Janina Heinz
Art. 54 SRMR
Tasks
(b) apply simplified obligations to certain entities and groups referred to in Article 7(2), and entities and groups referred to in Article 7(4)(b) and (5), where the conditions for the application of those paragraphs are met, in accordance with Article 11; (c) determine the minimum requirement for own funds and eligible liabilities that entities and groups referred to in Article 7(2), and entities and groups referred to in Article 7(4)(b) and (5), where the conditions for the application of those paragraphs are met, need to meet at all times in accordance with Article 12; (d) provide the Commission, as early as possible, with a resolution scheme in accordance with Article 18 accompanied by all relevant information allowing in due time the Commission to assess and decide or, where appropriate, propose a decision to the Council, pursuant to Article 18(7); (e) decide upon the Board’s part II of the budget on the Fund, in accordance with Article 60. 3. Where necessary because of urgency, the Board in its executive session may take certain provisional decisions on behalf of the Board in its plenary session, in particular on administrative management matters, including budgetary matters. 4. The Board in its executive session shall keep the Board in its plenary session informed of the decisions it takes on resolution. Bibliography Danny Busch, ‘Governance of the Single Resolution Mechanism’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 281; Albert de Gregorio Merino, ‘Institutional Report’, in: Bándi Gyula et al. (eds), European Banking Union – FIDE, XXVII. Congress 2016 (Wolters Kluwer, Budapest 2016), 157. A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Duties and competences of the executive session (Art. 54(1) SRMR) . . . . . . . . I. Preparation of all decisions of the plenary session (Art. 54(1)(a) SRMR) . . . . II. Responsibility to implement the SRMR (Art. 54(1)(b) SRMR) . . . . . . . . . . . . . . .
3 4 7
C. Specification of the tasks of the executive session (Art. 54(2) SRMR) . . . . . . . . I. Resolution planning (Arts. 54(2)(a) and (b) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . II. Minimum requirement for own funds and eligible liabilities (MREL) (Art. 54(2)(c) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Resolution scheme (Art. 54(2)(d) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Decision on part II of the budget on the Fund (Art. 54(2)(e) SRMR) . . . . . . . .
12 13
D. Competence in cases of urgency (Art. 54(3) SRMR); delegation . . . . . . . . . . . . .
18
E. Reporting to the plenary session (Art. 54(4) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . .
20
15 16 17
A. Overview Art. 54 SRMR primarily specifies the responsibilities and competences of the execu- 1 tive session of the Board and thereby provides for a delineation of the tasks of the executive session, on the one hand, and of the plenary session of the Board (cf. Art. 50 SRMR), on the other hand. In addition, the provision also addresses certain aspects of the interaction and relation between those two sessions of the Board. As regards the relation between the two sessions, Art. 54 SRMR supports the conclu- 2 sion that the executive session assumes the role of a management function within the Board and comprises the persons who are effectively directing the activities of the Board. The plenary session, on the other hand, has a supervisory function that includes the monitoring of the activities and decision-making of the executive session, albeit the
Janina Heinz
1003
Art. 54 SRMR
Tasks
plenary session is not restricted to this role as evidenced by the list of its tasks set out in Art. 50(1) SRMR. Nonetheless, in particular the fact that para. 4 of Art. 54 SRMR requires the executive session to keep the plenary session informed of its decisions on resolution demonstrates that the plenary session is expected to follow and review the activities of the executive session.
B. Duties and competences of the executive session (Art. 54(1) SRMR) 3
Art. 54(1) SRMR defines the responsibilities of the executive session. Those responsibilities are broadly divided into two categories. On the one hand, the executive session has a preparatory role being required to prepare all of the decisions to be adopted by the plenary session (lit. (a)), which are mostly of a general nature.1 On the other hand, the executive session is also an executing body tasked to implement the SRMR (lit. (b)), for example, by taking concrete resolution decisions and actions in relation to individual entities or groups within the remit of the SRM.
I. Preparation of all decisions of the plenary session (Art. 54(1)(a) SRMR) The executive session of the Board is tasked to prepare all of the decisions to be adopted by the Board in its plenary session. This task underlines the management function of the executive session which comprises the Chair and the other four full-time Board members who carry out the activities of the Board on a day-to-day basis. 5 The preparatory task of the executive session is to be viewed in connection with Art. 56(2)(a) SRMR according to which the Chair is responsible for preparing the work of the Board, in the plenary and executive sessions, and convening and chairing its meetings. The responsibility of the Chair implies that he/she has to take the appropriate organisational measures in order to ensure that all tasks of the Board are discharged properly. At the same time, the interrelation between Art. 56(2)(a) SRMR and Art. 54(1)(a) SRMR means that the substantive work required to adequately prepare the decisions of the plenary sessions is to be carried out by all members of the executive session under the direction of the Chair. 6 The scope and content of the preparatory task of the executive session is to a considerable extent determined by the list of tasks of the plenary session set out in Art. 50(1) SRMR, the meeting schedule of the plenary session to be adopted in accordance with Art. 2(1) of the Rules of Procedure PS and, as the case may be, by the annual work programme of the Board which may provide for additional items requiring the attention of the plenary session. Nonetheless, the preparatory task of the executive session also implies that its members are in a position to steer and shape the deliberations and decisions of the plenary session of the Board, too, which further strengthens the role of the executive session and its members within the Board. 4
1 De Gregorio Merino, in: Bándi et al. (eds), European Banking Union – FIDE, XXVII Congress 2016 (2016), 157, at p. 200.
1004
Janina Heinz
Art. 54 SRMR
Tasks
II. Responsibility to implement the SRMR (Art. 54(1)(b) SRMR) Art. 54(1)(b) SRMR stipulates that the Board, in its executive session, shall take all of the decisions to implement the SRMR, unless the SRMR provides otherwise. Accordingly, the provision in para. 1 lit. (b) establishes a general rule as regards the delineation between the tasks and competences of executive session, on the one hand, and the plenary session of the Board, on the other hand. On the basis of this general rule, the executive session of the Board is principally competent to implement the SRMR, whereas the plenary session is only competent to take decisions on the implementation of the SRMR where this is explicitly provided for.2 The most relevant exception to the general rule as set out in para. 1 lit. (b) is the list of tasks of the plenary session of the Board pursuant to Art. 50(1) SRMR. In practice, this means that the plenary session adopts decisions which are mostly of a general nature, whilst the executive session first and foremost takes decisions in relation to individual entities and groups within the remit of the SRMR (cf. para. 2).3 However, in some cases, the delineation of the competences of the two sessions may not be clear cut. This is the case, for instance, where decisions concern the governance of the Board. For example, Art. 83(3) SRMR provides that the Board may establish internal resolution teams composed of its own staff and staff of the national resolution authorities. Taking into consideration that Art. 50(1)(p) SRMR stipulates that the plenary session of the Board shall take all decisions on the establishment of the internal structures of the Board, there are good reasons to argue on the basis of teleological considerations that the plenary session is also competent to decide on the establishment of internal resolution teams as part of its competence to determine the internal structures of the Board. On the other hand, Art. 83(2) SRMR on rules on the exchange and secondment of staff explicitly provides that those rules are to be adopted by the Board in its plenary session. Accordingly, on the basis of a systematic interpretation, it could also be argued that the executive session is responsible to establish internal resolution teams, because Art. 83(3) SRMR in contrast to para. 2 does not explicitly provide for a competence of the plenary session. Such interpretation would mean to regard Art. 83(3) SRMR as the more specific provision (lex specialis) in relation to the general rule on the internal structures of the Board set out in Art. 50(1)(p) SRMR. In practice, Art. 24(2) of the framework for the cooperation within the SRM 4 adopted by the plenary session of the Board provides that the executive session shall be in charge of the establishment of internal resolution teams, ensuring their efficient functioning.
7
8
9
10
11
C. Specification of the tasks of the executive session (Art. 54(2) SRMR) Art. 54(2) SRMR specifies certain of the key duties of the executive session of the 12 Board. The provision does not, on the other hand, enumerate the tasks of the executive
Busch, in: Busch and Ferrarini (eds), European Banking Union (2015), 281, at pp. 291–292, para. 9.27. De Gregorio Merino, in: Bándi et al. (eds), European Banking Union – FIDE, XXVII Congress 2016 (2016), 157, at p. 200. 4 Decision of the plenary session of the Board of 28 June 2016 establishing the framework for the practical arrangements for the cooperation within the Single Resolution Mechanism between the Single Resolution Board and national resolution authorities (SRB/PS/2016/07). 2
3
Janina Heinz
1005
Art. 54 SRMR
Tasks
session in an exhaustive manner. If this was the case, the general competence of the executive session as provided for in para. 1 lit. (b) would be reversed.
I. Resolution planning (Arts. 54(2)(a) and (b) SRMR) Arts. 54(2)(a) and (b) SRMR refer to the responsibility of the executive session to adopt resolution plans for entities and groups within the remit of the SRM, including the conduct of a resolvability assessment (cf. Art. 10 SRMR), and, as the case may be, the application of simplified obligations in relation to the drafting of resolution plans (cf. Art. 11 SRMR). In this regard, para. 2 lit. (a) clarifies that the tasks of the executive session are comprehensive and comprise the preparation, the assessment and the approval of the resolution plans. The details concerning the content of resolution plans and the procedure to be observed for the preparation and adoption of resolution plans, including the consultation of competent supervisory authorities, are set out in Art. 8 SRMR and, as regards the application of simplified obligations, in Art. 11 SRMR. In connection with the adoption of a resolution plan, the Board is further required to conduct an assessment of the extent to which institutions and groups are resolvable in accordance with Art. 10 SRMR. In practice, the Board implemented a structure that assigns the responsibility for the resolution planning in relation to the entities and groups within the remit of the SRM to individual members of the executive session (mainly grouped by country).5 14 The provisions make reference to Arts. 7(2), (4)(b) and (5) SRMR and thereby clarify the scope of entities and groups which are subject to the resolution planning by the Board as opposed of being subject to the resolution planning of the relevant national resolution authority (cf. Art. 9 SRMR). Accordingly, the Board is responsible for the resolution planning in relation to: – entities and groups subject to the prudential supervision of the European Central Bank (Art. 7(2)(a) SRMR); – other cross-border groups (Art. 7(2)(b) SRMR); – entities and groups in respect of which the Board has decided to exercise directly all of the powers under the SRMR in order to ensure the consistent application of high resolution standards (Art. 7(4)(b) SRMR); and – entities and groups established in the territory of a participating Member State which has decided that the Board shall exercise all relevant powers and responsibilities under the SRMR in relation to those entities and groups (Art. 7(5) SRMR). 13
II. Minimum requirement for own funds and eligible liabilities (MREL) (Art. 54(2)(c) SRMR) 15
In accordance with Art. 12(2) SRMR Art. 54(2)(c) SRMR clarifies that the executive session of the Board is tasked to determine the minimum requirement for own funds and eligible liabilities (MREL), which are subject to the write-down and conversion powers under the SRMR, in relation to the entities and groups within the remit of the SRMR. In parallel to lit. (a) and (b), the reference to Arts. 7(2), (4)(b) and (5) SRMR serves to clarify the scope of entities and groups which are subject to the MREL determination by the Board.
5
Single Resolution Board, Organisation Chart as of 1 April 2017.
1006
Janina Heinz
Art. 54 SRMR
Tasks
III. Resolution scheme (Art. 54(2)(d) SRMR) The executive session of the Board is also tasked with the adoption of a resolution 16 scheme in relation to an entity or group in respect of which the conditions for resolution are met (cf. Art. 18(1) SRMR) and to submit the resolution scheme to the Commission for the decision on the endorsement of the scheme (cf. Art. 18(7) SRMR). This also implies that the executive session is responsible to assess as to whether the conditions for resolution are met in respect of an entity or group within the remit of the SRM. In this context, Art. 54(2)(d) SRMR clarifies that the submission of a resolution scheme to the Commission also requires the executive session to prepare all relevant information allowing in due time the Commission to assess and decide on the endorsement of the resolution scheme.
IV. Decision on part II of the budget on the Fund (Art. 54(2)(e) SRMR) Art. 54(2)(e) SRMR stipulates that the executive session of the Board shall decide up- 17 on Part II of the budget of the Board on the Fund, in accordance with Art. 60 SRMR. The autonomous budget of the Board comprises two parts, one for the administration of the Board (Part I), and one for the Fund (Part II) (cf. Art. 58 SRMR). The revenues of Part II consist, in particular, of the contributions paid by the institutions established in the participating Member States (cf. Art. 60(1)(a) SRMR), while the expenditures of Part II consist, in particular, of the expenses resulting from the use of the Fund to ensure the effective application of resolution tools (cf. Art. 60(2)(a) SRMR, Art. 76 SRMR).
D. Competence in cases of urgency (Art. 54(3) SRMR); delegation Art. 54(3) SRMR provides for a competence of the executive session of the Board in 18 cases of urgency. More specifically, the executive session may take certain provisional decisions on behalf of the plenary session of the Board, in particular on administrative management matters, including budgetary matters, where necessary because of urgency. Taking into consideration that most of the tasks assigned to the plenary session do not concern the day-to-day management of the Board, but are rather of an overarching and general nature such as, for example, the adoption of the annual work programme and budget, the actual scope of application of this provision seems limited. To be distinguished from the provisional decision-making in cases of urgency is the 19 full delegation of tasks from the plenary session to the executive session of the Board. The SRMR does not provide for such delegation.
E. Reporting to the plenary session (Art. 54(4) SRMR) Art. 54(4) SRMR requires the executive session to keep the Board in its plenary ses- 20 sion informed of the decisions it takes on resolution. The provision demonstrates that the plenary session is expected to follow and review the resolution activities of the executive session. Considering that the composition of the executive session varies depending on the entity or group subject to resolution activities (cf. Art. 53(2) SRMR), the reporting to the plenary sessions allows to monitor the uniform application of the resolution tools and to ensure the non-discriminatory exercise of the resolution powers. Janina Heinz
1007
Art. 55 SRMR
Decision-making
Art. 55 SRMR Decision-making 1. When deliberating on an individual entity or a group established only in one participating Member State, if all members referred to in Article 53(1) and (3) are not able to reach a joint agreement by consensus within a deadline set by the Chair, the Chair and the members referred to in Article 43(1)(b) shall take a decision by a simple majority. 2. When deliberating on a cross-border group, if all members referred to in Article 53(1) and (4) are not able to reach a joint agreement by consensus within a deadline set by the Chair, the Chair and the members referred to in Article 43(1)(b) shall take a decision by a simple majority. 3. In the event of a tie, the Chair shall have a casting vote. Bibliography Danny Busch, ‘Governance of the Single Resolution Mechanism’, in: Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford University Press, Oxford 2015), 281; Albert de Gregorio Merino, ‘Institutional Report’ in: Bándi Gyula et al. (eds), European Banking Union – FIDE, XXVII. Congress 2016 (Wolters Kluwer, Budapest 2016), 157. A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Decision-making process in the extended executive session . . . . . . . . . . . . . . . . .
2
C. Decision-making process in the core executive session . . . . . . . . . . . . . . . . . . . . . . .
5
A. Overview 1
Art. 55 SRMR forms part of Part III (Institutional framework), Title III (Executive Session of the Board) of the SRMR and is titled “Decision-making”. While the title suggests that Art. 55 governs the decision-making process in the executive session, paras 1 and 2 only provide for rules in respect of the decision-making process in the extended executive session, i.e. cases where the Board is deliberating on an individual entity or a (crossborder) group (cf. Arts. 53(3) and (4) SRMR). Art. 55 SRMR does not explicitly address the decision-making process in the core or standard composition of the executive session (cf. Art. 53(1) SRMR). The Rules of Procedure ES, in particular Art. 7 of the Rules of Procedure ES, supplement Art. 55 SRMR.
B. Decision-making process in the extended executive session Arts. 55(1) and (2) SRMR are parallel provisions. While para 1 governs the decisionmaking process relating to deliberations on an individual entity or a domestic group that involves the participation of a Board member appointed by one participating Member State (cf. Arts. 53(2) and (3) SRMR, Art. 43(1) (c) SRMR), para 2 governs the decisionmaking process relating to deliberations on a cross-border group that involves the participation of Board members appointed by two or more participating Member States (cf. Arts. 53(2) and (4) SRMR, Art. 43(1)(c) SRMR). On substance, paras 1 and 2 provide for identical rules. 3 As a general rule, paras 1 and 2 require the Chair and the other participating Board members to reach a joint agreement by consensus within a deadline set by the Chair. In case the Chair and the other participating Board members fail to reach such joint agreement, the Chair and the Board members referred to in Art. 43(1)(b) SRMR, i.e. the full2
1008
Janina Heinz
Art. 55 SRMR
Decision-making
time Board members, shall take a decision by a simple majority.1 Each member, including the Chair, shall have one vote (cf. Art. 43(2) SRMR). In the event of a tie, the Chair shall have a casting vote pursuant to para 3. Considering that the Chair and the other four full-time Board members are five voting members in the executive sessions, the event of a tie will only occur where a voting member is not present or abstains from voting.2 Accordingly, in the absence of consensus, the Board member(s) appointed by the par- 4 ticipating Member State(s) concerned, i.e. the national representative(s), is/are not entitled to take part in the voting.3 The provision goes beyond the initial considerations in the legislative procedure. In its proposal, the Commission highlighted that none of the participants in the deliberation should have a veto.4 Similarly, the European Central Bank welcomed in view of the proposed governance framework the fact that no party, specifically national resolution authorities, would have a power of veto in the decisionmaking of the Board.5 The fact that the representatives of the national resolution authorities do not have a voting right in the event that a joint agreement by consensus cannot be reached is ultimately a political decision. Possibly, it strengthens the independence of Board, in particular from participating Member States. This provision in paras 1 and 2 is an exception to the general rule set out in Art. 43(2) SRMR according to which each member of the Board shall have one vote. Art. 7(4) of the Rules of Procedure ES mainly repeats the rules set out in Arts. 55 SRMR.
C. Decision-making process in the core executive session Art. 55 SRMR does not explicitly address the decision-making process in the core or 5 standard composition of the executive session, i.e. the composition of the executive session competent in respect of all deliberations of the executive sessions except for deliberations on an individual entity or group within the remit of the SRMR (cf. Art. 53(1) SRMR). Only para 3 of Art. 55 SRMR, stipulating that the Chair shall have a casting vote in the event of a tie, is worded openly to include all decision-making processes of the executive session. However, the general principles embedded in Art. 55 SRMR, in particular, the provi- 6 sion that the members of the executive session should aim for consensus and, otherwise, take decisions by simple majority, can be applied to the decision-making process in the core executive decision, too. Accordingly, Art. 7(2) of the Rules of Procedure ES requires generally, i.e. for all decisions to be taken by the executive session, that the executive session shall strive for consensus. The Chair shall initiate a voting procedure if consensus is 1 De Gregorio Merino, in: Bándi et al. (eds), European Banking Union – FIDE, XXVII Congress 2016 (2016), 157, at p. 200. 2 Busch, in: Busch and Ferrarini (eds), European Banking Union (2015), 281, at p. 295, para. 9.34. 3 Busch, in: Busch and Ferrarini (eds), European Banking Union (2015), 281, at pp. 294–295, para. 9.31. 4 COM(2013) 520 final, 2013/0253 (COD), Proposal for a Regulation of the European Parliament and of the Council 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 of the European Parliament and of the Council, 10 July 2013, 12. 5 Opinion of the European Central Bank of 6 November 2013 on a proposal for a Regulation of the European Parliament and of the Council 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 Bank Resolution Fund and amending Regulation (EU) No. 1093/2010 of the European Parliament and of the Council (CON/2013/76), 4.
Janina Heinz
1009
Art. 56 SRMR
Appointment and tasks
not reachable or upon request from two of the permanent (i.e. voting) members in respect of a version of the draft proposal two permanent members jointly request to take a vote on (cf. Art. 7(3) of the Rules of Procedure ES). Pursuant to Art. 7(4) of the Rules of Procedure ES, the executive session shall take its decisions by a simple majority of its (voting, i.e. permanent) members. 7 Moreover, as regards quorums of the executive session, Art. 7(1) of the Rules of Procedures ES requires that “at least three [out of five] of its permanent members [attend] the meeting, either in person or by means of teleconference”. The permanent members are the Chair and the four full-time Board members (cf. Art. 1(5) of the Rules of Procedure ES). This raises the question as to whether the presence of two full-time Board members and the Vice-Chair is also sufficient to have a quorum. Considering that the Vice-Chair fully exercises the role of the Chair in his/her absence (cf. Art. 56(3)(2) SRMR; Art. 4(2) of the Rules of Procedure ES), it is legally consistent that the Vice-Chair together with two full-time Board members also constitute a quorum for the decisionmaking in the executive session. On the other hand, the Chair, the Vice-Chair and one full-time Board member do not constitute a quorum in the absence of a rule allowing for the Vice-Chair to act in the capacity of a full-time Board member in the meaning of Art. 43(1)(b) SRMR.
Art. 56 SRMR Appointment and tasks 1. The Board shall be chaired by a full-time Chair. 2. The Chair shall be responsible for: (a) preparing the work of the Board, in its plenary and executive sessions, and convening and chairing its meetings; (b) all staff matters; (c) matters of day-to-day administration; (d) the establishment of a draft budget of the Board in accordance with Article 61(1) and the implementation of the budget of the Board, in accordance with Article 63; (e) the management of the Board; (f) the implementation of the annual work programme of the Board; (g) the preparation, each year, of a draft of the annual report referred to in Article 45 with a section on the resolution activities of the Board and a section on financial and administrative matters. In the performance of the tasks referred to in this Article, the Chair shall be assisted by a dedicated staff. 3. The Chair shall be assisted by a Vice-Chair. The Vice-Chair shall carry out the functions of the Chair in his or her absence or reasonable impediment, in accordance with this Regulation. 4. The Chair, the Vice-Chair and the members referred to in Article 43(1)(b) shall be appointed on the basis of merit, skills, knowledge of banking and financial matters, and of experience relevant to financial supervision, regulation as well as bank resolution. The Chair, the Vice-Chair and the members referred to in Article 43(1)(b) shall be chosen on the basis of an open selection procedure, which shall respect the principles of gender balance, experience and qualification. The European Parliament and the Council shall be kept duly informed at every stage of that procedure in a timely manner.
1010
Janina Heinz
Art. 56 SRMR
Appointment and tasks
5. The term of office of the Chair, of the Vice-Chair and of the members referred to in Article 43(1)(b) shall be five years. Subject to paragraph 7 of this Article, that term shall not be renewable. The Chair, the Vice-Chair and the members referred to in Article 43(1)(b) shall not hold office at national, Union, or international level. 6. After hearing the Board, in its plenary session, the Commission shall provide to the European Parliament a shortlist of candidates for the positions of Chair, Vice-Chair and members referred to in Article 43(1)(b) and inform the Council of the shortlist. By way of derogation from the first subparagraph, for the appointment of the first members of the Board following the entry into force of this Regulation, the Commission shall provide the shortlist of candidates without hearing the Board. The Commission shall submit a proposal for the appointment of the Chair, the Vice-Chair and the members referred to in Article 43(1)(b) to the European Parliament for approval. Following the approval of that proposal, the Council shall adopt an implementing decision to appoint the Chair, the Vice-Chair and the members referred to in Article 43(1)(b). The Council shall act by qualified majority. 7. By way of derogation from paragraph 5, the term of office of the first Chair appointed after the entry into force of this Regulation shall be three years. That term shall be renewable once for a period of five years. The Chair, the Vice-Chair, and the members referred to in Article 43(1)(b) shall remain in office until their successors are appointed. 8. A Chair whose term of office has been extended shall not participate in another selection procedure for the same post at the end of the overall period. 9. If the Chair or the Vice-Chair or a member referred to in Article 43(1)(b) no longer fulfil the conditions required for the performance of his or her duties or has been guilty of serious misconduct, the Council may, on a proposal from the Commission which has been approved by the European Parliament, adopt an implementing decision to remove him or her from office. The Council shall act by qualified majority. For those purposes, the European Parliament or the Council may inform the Commission that it considers the conditions for the removal of the Chair, the Vice-Chair or the members referred to in Article 43(1)(b) from office to be fulfilled, to which the Commission shall respond. Bibliography Paul Craig, EU Administrative Law (2nd edn, Oxford University Press, Oxford 2012). A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. The Chair of the Board (Art. 56(1) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Tasks of the Chair (Art. 56(2) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
D. The Vice-Chair of the Board (Art. 56(3) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
E. Appointment to the Board (Arts. 56(4) and (6) SRMR) . . . . . . . . . . . . . . . . . . . . . . I. Relevant qualifications and experiences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Selection procedure and appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 18 19
F. Term of office (Arts. 56(5), (7) and (8) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General provisions (Arts. 56(5) and (7) sent. 3 SRMR) . . . . . . . . . . . . . . . . . . . . . . . II. Special provisions in relation to the first Chair (Arts. 56(7) sent. 1 and 2, (8) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21 21
G. Removal from office (Art. 56(9) SRMR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Janina Heinz
23
1011
Art. 56 SRMR
Appointment and tasks
A. Overview 1
Art. 56 SRMR forms part of Part III (Institutional framework), Title IV (Chair) of the SRMR and is titled “Appointment and tasks”. The content of this provision goes, however, beyond those headings and does not only address the appointment and the tasks of the Chair of the Board (paras. 1, 2, 4, and 6). In addition, Art. 56 SRMR also sets out the appointment and the function of the Vice-Chair of the Board (paras. 3, 4, and 6) and also covers the appointment of the four full-time Board members as referred to in Art. 43(1)(b) SRMR (paras. 4 and 6). Moreover, Art. 56 SRMR lays down the rules on the term of office (paras. 5, 7, and 8) and the removal from office (para. 9) of the Chair, the Vice-Chair and the four full-time Board members.
B. The Chair of the Board (Art. 56(1) SRMR) Art. 56(1) SRMR closely relates to the composition and structure of the Board as set out in Art. 43 SRMR by stipulating that the Board shall be chaired by a full-time Chair. In this regard, Art. 43(1)(a) SRMR already establishes that the composition of the Board includes a Chair. The role of the Chair is subsequently specified in Art. 43(5)(c) SRMR according to which the Chair forms an integral part of the Board’s administrative and management structure. Art. 56(1) SRMR adds to that by clarifying that acting as the Chair of the Board is a full-time responsibility. 3 This prominent position of the Chair of the Board is reflected in his/her responsibilities as set out in Art. 56(2) SRMR and his/her competences. In particular, the Chair assumes the role as legal representative of the Board in line with Art. 42(3) SRMR according to which the Board shall be represented by its Chair. In line with the common features of Union agencies, the Chair as opposed to a collective body1 is given a central role in running the affairs of the Board.2 2
C. Tasks of the Chair (Art. 56(2) SRMR) Art. 56(2) SRMR lists the responsibilities of the Chair. In line with his/her full-time role (Art. 56(1) SRMR), the set of tasks of the Chair is broad and comprehensive. In particular, it includes matters of day-to-day administration (lit. (c)), i.e. the oversight of the day-to-day work of the agency, and the executive management of it (lit. (e)), as well as the implementation of the agency's annual work programme (lit. (f)) and the drafting of its annual report (lit. (g)) reflecting on the activities of the Board over the past year, including a separate section on its resolution activities. 5 Closely related to that, the Chair is tasked with the preparation and running of the plenary and executive sessions of the Board (lit. (a)), i.e. the two decision-making forums of the members of the Board. In addition, the Chair is responsible for all staff matters (lit. (b)) and the establishment of a draft budget as well as the implementation of the adopted budget of the Board (lit. (d)). 4
1 In this context, it is worth noting that the group formed by the full-time Board members is not recognised as a functional body by the SRMR. In this regard, it is misleading that the website of the Board lists under the heading “The Board” the Chair, the Vice-Chair and the other four full-time members, while the SRMR refers to the Single Resolution Board as “Board”, see definition in Recital 11. Still, the executive session of the Board is composed of the Chair and the four full-time Board members, Art. 53(1) SRMR. 2 See, for example, Craig, EU Administrative Law (2nd edn, 2012), at p. 163.
1012
Janina Heinz
Art. 56 SRMR
Appointment and tasks
Art. 56(2) SRMR seems to concentrate all tasks and responsibilities in relation to the proper administration and operation of the Board at the level of the Chair. In practice, however, there is a more sophisticated and nuanced division of tasks between the fulltime members of the Board, including the Chair and the Vice-Chair. According to the Board's Organisation Chart as of 28 June 2021, the responsibilities are distributed as follows amongst the full-time Board members:3 The Chair is responsible for the following organisational units: – SRB Secretariat – Internal Control Office; – Strategy, International Relations and Communications; – Internal Audit; – Accounting; and – Appeal Panel, Data Protection and Compliance Team. The Vice-Chair is responsible for matters relating to the Single Resolution Fund and Legal & Corporate Services comprising the following organisational units: – Single Resolution Fund Investments; – Resources, including HR and Finance and Procurement; – Corporate Services and Information and Communication Technology (ICT), including ICT and Facilities; – Contributions and Financing; and – Legal Services. The fact that the Vice-Chair is responsible, in particular, for Resources appears at odds with lit. (b) and (d) of para. 2 according to which staff matters and the implementation of the budget explicitly fall within the tasks of the Chair. On the other hand, the Vice-Chair's role comprises the assistance of the Chair so that the allocation of these organisational units under the responsibility of the Vice-Chair may be viewed as an expression of this role. One of the other full-time Board members is responsible for Resolution Policy and Cooperation comprising the organisational units Resolution Policy, Processes and Methodology; Cooperation with Stakeholders; Financial Stability and Economic Analysis; and Resolution Tactical Team. The other three full-time Board members are all responsible for Resolution Planning and Decisions in relation to the individual entities and groups subject to the SRM. This area is sub-divided into organisational units covering specific countries and, in some instances, specific banking groups. The organisational structure set out above providing for the distribution of responsibilities between the Chair, the Vice-Chair and the other full-time Board members is not expressly envisaged in the SRMR. It is also not entirely clear on what basis exactly this structure has been implemented. On the one hand, it may be viewed as part of the plenary session's competence to take all decisions on the establishment of the Board's internal structure pursuant to Art. 50(1)(p) SRMR to specify the organisational structure. In the absence of any such decision of the plenary session, the Chair should be competent to decide on the organisational structure in the exercise of his/her responsibility for the management of the Board in accordance with lit. (e) of para. 2.
6
7
8
9
10
11
D. The Vice-Chair of the Board (Art. 56(3) SRMR) Pursuant to Art. 56(3) SRMR, the Board also has a Vice-Chair. In accordance with 12 this provision, his/her function is two-fold. First, the Vice-Chair shall assist the Chair 3
.
Janina Heinz
1013
Art. 56 SRMR
Appointment and tasks
in the performance of his/her role (subpara. 1). Second, where the Chair is absent, the Vice-Chair shall carry out the functions of the Chair (subpara. 2). 13 Those functions are not further specified by the SRMR. Moreover, the Vice-Chair is not mentioned in Art. 43 SRMR on the composition of the Board alongside the Chair and the other four full-time Board members. Accordingly, the Vice-Chair also does not have a voting right in the sessions of the Board (Art. 43(2) SRMR). 14 Still, the Rules of Procedure PS/ES stipulate that the Vice-Chair shall participate in all meetings of the plenary/executive session.4 This may be viewed as part of his/her function to assist the Chair. In practice, this function is further shaped by the responsibilities assigned to the Vice-Chair in the context of the organisational distribution of tasks between the Chair, the Vice-Chair and the other full-time Board members (see above). 15 As regards the function to assume the responsibilities of the Chair in his/her absence, the Rules of Procedures PS/ES clarify that the Vice-Chair shall exercise all powers of the Chair in his/her absence;5 this includes, in particular, the voting right.
E. Appointment to the Board (Arts. 56(4) and (6) SRMR) As regards the appointment to the Board, the SRMR does not differentiate between the Chair, the Vice-Chair and the other four full-time members, but provides for rules applicable to all full-time Board members. Para. 4 of Art. 56 SRMR sets out the relevant qualifications and experiences for candidates to be appointed to the Board and stipulates that the candidates shall be chosen on the basis of an open selection procedure, whereas para. 6 provides for the details of the selection procedure and the appointment. 17 The SRMR does, on the other hand, not explicitly address the role and functions of the other four full-time Board members apart from the fact that all of them form part of the composition of the Board (Art. 43(1)(b) SRMR) and, thus, have a voting right in the plenary and executive sessions (Art. 43(2) SRMR). As set out above, in practice, a division of tasks between the full-time Board members, including the Chair and the ViceChair, is established that assigns particular responsibilities to each of the members. 16
I. Relevant qualifications and experiences 18
Art. 56(4) SRMR stipulates that candidates shall be appointed on the basis of merit, skills, knowledge of banking and financial matters, and of experience relevant to financial supervision, regulation as well as bank resolution. Accordingly, the emphasis is appropriately placed on the skills relevant to the Board's mandate.6
4 Art. 1(5) of the Rules of Procedure of the SRB in its Plenary Session and Art. 1(7) of the Rules of Procedure of the SRB in its Executive Session, respectively. 5 Art. 1(5) of the Rules of Procedure of the SRB in its Plenary Session and Art. 1(7) of the Rules of Procedure of the SRB in its Executive Session, respectively. 6 This would be in line with the observation in legal commentary according to which there has been an increase in the importance on the need for an agency director to be independent and to possess the skills relevant to the agency's area, Craig, EU Administrative Law (2nd edn, 2012), at p. 164.
1014
Janina Heinz
Art. 56 SRMR
Appointment and tasks
II. Selection procedure and appointment Pursuant to Art. 56(4) SRMR, candidates shall be chosen on the basis of an open se- 19 lection procedure. The European Parliament and the Council shall be kept duly informed at every stage of that procedure in a timely manner. While the selection procedure is mainly run by the Commission, the appointment of the selected candidates must be approved by the European Parliament and is subject to an implementing decision of the Council. The details of that procedure are set out in Art. 56(6) SRMR requiring the Commis- 20 sion to provide to the European Parliament a shortlist of candidates and to inform the Council of the shortlist (subpara. 1). With the exception of the procedure for the appointment of the first members of the Board (subpara. 2), the Commission shall hear the Board in its plenary session before providing the shortlist to the European Parliament. Subsequently, the Commission shall submit a proposal for the appointment to the European Parliament for approval. Subject to the approval of the proposal, the Council shall adopt, by qualified majority, an implementing decision to appoint the Chair, the ViceChair and the other full-time members (subpara. 3).
F. Term of office (Arts. 56(5), (7) and (8) SRMR) I. General provisions (Arts. 56(5) and (7) sent. 3 SRMR) Art. 56(5)(1) SRMR stipulates that the term of office of the Chair, the Vice-Chair and 21 the other full-time members of the Board is five years and that, in principle, the term shall not be renewable. Following the expiry of their term, the Chair, the Vice-Chair and the other members shall remain in office until their successors are appointed (para. 7 sent. 3). During their term in office, the Chair, the Vice-Chair and the other members are 22 required to refrain from holding an office at national, Union, or international level (para. 5 subpara. 2).
II. Special provisions in relation to the first Chair (Arts. 56(7) sent. 1 and 2, (8) SRMR) The first Chair who has been appointed after the entry into force of the SRMR is 23 subject to special provisions derogating from the general rules set out above. First, the term of office is only three years. However, it may be renewed once for a period of five years. In case the term of office has been extended to an overall period of eight years, the Chair shall not participate in another selection procedure for the same post at the end of this period. The effect of those provisions is that the term of office of the Chair, on the one hand, 24 and the term of office of the Vice-Chair and the other members, on the other hand, is not aligned. This may well be in the interest of the continuity of the work when a new member takes office. Those provisions also raise a couple of issues. First, the SRMR does not specify the 25 procedure for renewing the term of office of the new Chair. Considering that both the appointment of the Chair as well as the early removal from office (Art. 56(9) SRMR) require a decision of the Council based on a proposal from the Commission which, in Janina Heinz
1015
Art. 57 SRMR
Resources
turn, is subject to the approval by the European Parliament, the same procedure should apply to the renewal. There are no objective grounds to treat this personnel decision any differently. 26 Second, the fact that Art. 56(8) SRMR clarifies that a Chair whose term of office has been extended shall not participate in another selection procedure for the same post, suggests that the Vice-Chair and the other members are eligible to participate in another open selection procedure for the position of Chair, Vice-Chair or full-time members of the Board.
G. Removal from office (Art. 56(9) SRMR) Art. 56(9) SRMR sets out the reasons and the procedure to remove the Chair, the Vice-Chair or one of the other full-time members of the Board from office. A removal from office may be based on the fact that the person either no longer fulfils the conditions required for the performances of his/her duties or has been guilty of serious misconduct. 28 The decision to remove a person from office must be adopted by the Council, acting by qualified majority and upon the proposal from the Commission which, in turn, is subject to the approval by the European Parliament. The proposal from the Commission may be triggered, however, as a result of an information by the Council or the European Parliament. In this regard, the Commission is required to respond to the information that the Council or the European Parliament considers the conditions for the removal from office to be fulfilled. 27
Art. 57 SRMR Resources 1. The Board shall be responsible for devoting the necessary financial and human resources to the performance of the tasks conferred on it by this Regulation. 2. The funding of the Board's budget or its resolution activities under this Regulation may under no circumstances engage the budgetary liability of the Member States. Bibliography Jean-Victor Louis, ‘Guest Editorial: The no-bailout clause and rescue packages’ CMLR 47 (2010), 971; Henry G. Schermers and Niels M. Blokker, International Institutional Law (6 th edn, Martinus Nijhoff, Leiden, Boston 2018); Rudolf Streinz (ed), EUV/AEUV (3rd edn, C.H. Beck, Munich 2018).
1016
A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Responsibility of the Board to devote the necessary resources (Art. 57(1)) . . I. Tasks for which resources must be devoted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Concept of financial and human resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Consequences of failure to devote the necessary resources . . . . . . . . . . . . . . . . . . .
4 4 7 10
C. Exclusion of the budgetary liability of the Member States (Art. 57(2)) . . . . . . . I. Political and legal rationale for the exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legal content of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Budgetary liability of the Union? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 12 13 17
Andreas Witte
Art. 57 SRMR
Resources
A. Function and background of the provision Art. 57 SRMR commences the financial provisions of the SRMR and formulates two 1 fundamental principles underlying the SRB’s fiscal regime: The responsibility of the Board to devote the necessary financial and human resources to the performance of its tasks (Art. 57(1) SRMR), and the exclusion of a budgetary liability of the Member States (Art. 57(2) SRMR). It paves the way for the more detailed budgetary provisions which follow in the subsequent articles. The direct substantive content of Art. 57 SRMR is limited in the sense that it is difficult to envisage cases where “hard” legal consequences follow from it which would be different otherwise; nonetheless, the article should not be relegated to the status of mere rhetoric since its content can inform or restrict the interpretation and application of other provisions of law. Most importantly, Art. 57 SRMR can be seen as a corollary to Art. 42 SRMR, according to which the SRB is to have its own legal personality and extensive legal capacity, and Art. 47 SRMR, according to which the SRB is to act independently. It must therefore have its own resources funded by itself from its own sources of income, enabling it to discharge its duties autonomously without depending financially on other institutions. Compared with the SSMR (where the corresponding budgetary provisions can be 2 found in Arts. 28–30 SSMR), the regime of budgetary provisions in the SRMR is much more extensive and elaborate. This is because the SSMR allocated supervisory competences to the ECB as an already existing Union institution whose budgetary regime was already established; the sedes materiæ in primary law for the ECB’s budget law is Chapter VI of the ESCB Statute. The SSMR could therefore limit itself to some modifications, such as the stipulation that the supervisory budget had to be separately identifiable within the overall ECB budget (Art. 29(1) SSMR) but otherwise let the ECB’s existing budget rules operate also on supervision. The SRB, on the other hand, is a newly created Union agency and thus had to be equipped by its founding Regulation with its own budgetary regime. This regime was not amended by the “banking package” amendments to the SRMR in 2019. Art. 57 SRMR does not allow for its interpretation as a legal basis for powers of the 3 Board vis-à-vis other person, be them national resolution authorities, entities within the meaning of Art. 2 SRMR, or others. It might appear tempting at first glance to rely on an “implied powers”-based line of argument1 that an obligation of the Board to devote financial resources (as well as human resources, which, in turn, require financial resources) implies a power of the Board to raise the resources necessary to comply with this obligation (impossibilium nulla obligatio est). Such a reasoning would, however, be unsustainable. It would be at odds with the principle of conferral (Art. 5(2) TEU) which informs the interpretation of all of Union law and binds the Union as well as its institutions and the agencies which the Union creates. What is more, it would make obsolete the nuanced and differentiated provisions of the SRMR as to the raising of the monies necessary for resolution purposes as well as the running of the Board itself. In the light of this explicit funding regime for the SRB as a lex specialis, recourse to a general principle of implied powers is excluded. The Board thus has only those fundraising powers explicitly attributed to it by the Regulation (which are extensive). This situation is analogous to that of the Union budget, where Art. 311(1) TFEU (“The Union shall provide 1 The doctrine of implied powers as such is acknowledged in the case law of the Court of Justice. It was used, prominently, in Case 20/70, Commission v Council (“AETR”), ECLI:EU:C:1970:84 to establish legal bases for external action of the Community derived from internal legal bases to adopt harmonisation measures. It is also an accepted doctrine in general public international law (see e.g. Schermers and Blokker, International Institutional Law (6th edn, 2018), paras. 232–233A).
Andreas Witte
1017
Art. 57 SRMR
Resources
itself with the means necessary to attain its objectives and carry through its policies”) is generally read as not providing for a general fundraising (e.g. taxing) power of the Union beyond the legal bases explicitly provided for elsewhere in Union law.2
B. Responsibility of the Board to devote the necessary resources (Art. 57(1)) I. Tasks for which resources must be devoted The tasks for which the necessary financial and human resources must be devoted are, as the wording of Art. 57(1) SRMR makes clear, those of the Board. This reflects the set-up of the SRM as a mechanism rather than a monolithic entity. The SRM consists of the SRB, the Council, the Commission and the national resolution authorities (Art. 1(2) SRMR); the SRM as a whole, however, does not have a legal personality in itself, and Art. 42 SRMR bestows it only on the Board (i.e., the SRB), not the SRM. The national resolution authorities, in particular, retain the legal capacities and personalities which they possess under their respective national laws. This means that Art. 57(1) SRMR does not stipulate a responsibility of the Board to ensure that financial or human resources are devoted to the performance of the tasks conferred on the Council, the Commission, or the national resolution authorities; this is within the respective responsibilities of those authorities and institutions. Likewise, to the extent the SRMR addresses the ECB, it remains the ECB’s own responsibility to devote the necessary resources to the performance of its tasks. Nonetheless, the duty to cooperate in good faith3 would be breached if the Council, the Commission or a Member State were to grossly underfund or understaff their organisational units or authorities tasked with resolution tasks in a manner jeopardising the orderly functioning of the SRM. It is, however, the SRB’s own responsibility to ensure that it devotes the necessary financial and human resources for its own interaction with other institutions and bodies with which it is mandated to cooperate; as a consequence, an increasing level of workload requiring added financial and human resources of the SRB can also result e.g. from increasing resolution action at the national level, for instance by a national resolution authority under Art. 7(3) SRMR. Even though such action remains within the competence of the national resolution authority, it creates a need for the SRB to coordinate closely with the national authority (Art. 7(3)(4) SRMR). 5 Thus, the SRB may devote financial and human resources only to the performance of its own tasks. It may not dedicate resources to the performance of tasks of other institutions or bodies, either of a Union or a national (or international) nature. This may seem like a truism at first, but it does have a substantive legal content in the sense that it excludes any possibility for using the SRB to “outsource” functions of other bodies (which might be attractive to policy-makers since it could be used to hide the associated costs from other budgets). Likewise, the tasks of the Board for which resources may be devoted must be those conferred on it by “this [i.e., the SRM] Regulation” (emphasis added). This severely limits the possibility of imposing additional new tasks on the Board by 4
Niedobitek, in: Streinz (ed), EUV/AEUV (3rd edn, 2018), Art. 311 TEU para. 3. This can be anchored, specifically for the SRM, in Arts. 30 and 31 SRMR. With the rank of primary law it is stipulated in Art. 4(3) TEU (for the relationship between the Union and the Member States) and Art. 13(2) TEU (among the institutions and, by extension, also the agencies of the Union). Case law has aligned these two Treaty provisions in their scope and meaning even before what is now Art. 13 TEU acquired its present wording (Case 204/86 Hellenic Republic v Council, ECLI:EU:C:1988:450, para. 16). 2
3
1018
Andreas Witte
Art. 57 SRMR
Resources
means of other legal acts which could in the future potentially be adopted. Even though such an imposition of additional tasks is, in principle, possible,4 the SRB would be precluded from dedicating resources to the performance of these tasks since they are not conferred “by this Regulation” within the meaning of para. 1 of Art. 57 SRMR. In essence, at least with regard to the tasks for which resources may be dedicated, the SRMR is thus a self-contained regime, and the funding and staffing of additional SRB tasks would require an explicit amendment to that Regulation. The most important sources of tasks for which resources must be attributed are the 6 provisions of the SRMR which concern the delineation of tasks in resolution matters between the Board and other bodies; these can be found, most significantly, in Arts. 7 and 18 SRMR. They are not limited to these articles, however. Tasks stipulated in other parts of the Regulation, too, can create workload which requires financial and human resources that must be devoted under Art. 57(1) SRMR; this applies also to “back office” functions necessary to manage the SRB’s own affairs and support the “front office” (i.e. those units dealing with actual resolution tasks), e.g. the SRB’s HR, administrative, and audit functions. The lists of tasks in Arts. 50, 54, and 56 SRMR are, on the other hand, not of relevance for the application of Art. 57(1) SRMR. These lists concern only the horizontal allocation of competences to different organs within the SRB (Board in the plenary session, Board in the executive session, Chair), all of which are tasks of the SRB as an agency.
II. Concept of financial and human resources Financial resources means, of course, money. Even though Art. 57 SRMR does not 7 create a power of the SRB to raise money (see supra, → para. 3; this power stems from other provisions), it does mandate the Board to use these powers to the extent (and only to that extent; for that see Art. 58(2) SRMR) necessary to raise the monies that it needs to fund the performance of its tasks. These monies may be spent in a wide variety of ways, as long as these ways can be shown to be necessary for the performance of the SRB’s tasks; Art. 59(2) SRMR provides a non-exhaustive list of conceivable expenditures. Human resources means, of course, primarily staff. The explicit mentioning of hu- 8 man resources in Art. 57(1) SRMR appears superfluous, since the dedication of human resources could be subsumed as part of the dedication of financial resources necessary to hire staff, but it does provide an added emphasis on the knowledge-driven nature of the SRB’s tasks. For the legal regime applicable to the Board’s employment relations, see Art. 82 SRMR. This does not mean, however, that the only way for the Board to devote the necessary human resources to the performance of its tasks is by hiring its own personnel; it may also make use of seconded national experts or other staff not employed by it (Art. 83(1) SRMR). This opens the possibility of relying, inter alia, also on temporary 4 The situation in this regard is clearer for the SRB than for the ECB: The supervisory tasks of the ECB are, as far as their primary law basis is concerned, rooted in Art. 127(6) TFEU, which requires a special legislative procedure. In the light of the case law of the Court of Justice – the leading case on this is Case C-300/89, Commission v Council (“titanium dioxide”), ECLI:EU:C:1991:244 –, this might put limits on the possibility of creating additional supervisory tasks for the ECB in legal acts adopted in a different legal procedure since otherwise the procedural rights of the institutions safeguarded by that procedure would be encroached upon. The SRM Regulation, on the other hand, was adopted on the basis of the general harmonisation power of Art. 114 TFEU, which uses the ordinary legislative procedure. One would thus assume that other acts also adopted in the ordinary legislative procedure could add tasks for the SRB without infringing this doctrine. The wording of Art. 57 SRMR excludes the use of SRB resources for such non-SRMR tasks.
Andreas Witte
1019
Art. 57 SRMR
Resources
agents or external consultants. This is not novel; a number of Union institutions and agencies have experience with making use of such staff, and the approaches followed at the European level, e.g. the “blend” of permanent, fixed-term, temporary and external staff, vary widely. As a consequence, the Board will have considerable discretion and leeway in determining its own HR strategy. 9 The obligation to devote the necessary human resources is not merely a question of quantity but also of quality. The Board has to ensure that its staff possess the required skills and qualifications to perform their duties. As a corollary, it has considerable discretion and leeway in setting its own recruitment procedures (e.g. eligibility and selection criteria) and ongoing training programmes.
III. Consequences of failure to devote the necessary resources The phrasing of Art. 57(1) SRMR as a responsibility begs the question of the consequences if this responsibility is not fulfilled, i.e., if the Board fails to fund and staff its activities appropriately. One would assume that these consequences would remain mostly at the political level. The members of the Board would be seen as discharging the office entrusted to them in an unsatisfactory way, but a removal from office under Art. 56(9) SRMR would be available only in severe cases of gross inadequacies. 11 A question of potentially greater practical relevance is whether the Board can be held liable for damages arising from insufficient resources on the basis of non-contractual liability. In case of e.g. a bank resolution action, creditors who suffer losses could claim that the situation could have been prevented or mitigated if the SRB had acted earlier, which did not happen owing to insufficient resources dedicated in the SRB to the monitoring of this bank. In principle, the rules on non-contractual liability of the Union, as developed and elaborated upon in the case law of the Court of Justice, do apply to the SRB (Art. 87(3) SRMR, which was modelled after Art. 340(2) TFEU and Art. 41(3) CFR). It is, however, difficult to imagine cases in which the requirements of such a liability would be met. It is questionable whether the purpose of Art. 57(1) SRMR is to protect third parties with a financial stake in a bank, which would be a requirement for noncontractual liability on the basis of a breach of that provision.5 Furthermore, one will have to accord a leeway of discretion to the Board in determining which financial and human resources are necessary to the performance of its tasks. This means that only in “sufficiently flagrant”6 cases would a non-contractual liability be incurred. Lastly, it would be difficult to demonstrate a causal link between the underfunding or understaffing as the causal factor and the damages as the consequence of the SRB’s alleged failure to devote the necessary resources. 10
See e.g. Case C-152/88, Sofrimport SARL v Commission, ECLI:EU:C:1990:259, para. 26. This is the famous formulation of Case 5/71, Aktien-Zuckerfabrik Schöppenstedt v Council, ECLI:EU: C:1971:116, para. 11. The “sufficiently flagrant (or: serious)” threshold, which requires a manifest and grave disregard for the limits to the defendant institution’s (or agency’s) discretion, was initially developed for liability arising from legislative action; but it has meanwhile been clarified that it applies also to administrative action in individual cases: Case C-312/00 P Commission v Camar Srl and Tico Srl, ECLI: EU:C:2002:736, paras. 54-55. 5
6
1020
Andreas Witte
Art. 57 SRMR
Resources
C. Exclusion of the budgetary liability of the Member States (Art. 57(2)) I. Political and legal rationale for the exclusion Art. 57(2) SRMR is, in part, a response to political debates surrounding the adoption 12 first of the BRRD and then of the SRMR. When the resolution regime was developed, some observers in the political debate were concerned that it would fail at bringing an end to taxpayer-funded bail-outs of banks. When the SRM was established, a cross-border component was added to this debate, with some observers fearing that taxpayers in some Member States could be held liable for losses occurred in private banks in other Member States. Art. 57(2) SRMR is part of a system of safeguards assuaging such concerns.
II. Legal content of the provision The formulation of Art. 57(2) SRMR mirrors the “no bail-out” clause in Art. 125 13 TFEU, which stipulates a similar exclusion of liability of the Union for Member State liabilities, or of the Member States for liabilities of each other. Art. 125 TFEU was one of the provisions at the heart of the (legal) debate surrounding the compatibility of the range of measures taken in the wake of the sovereign debt crisis.7 Meanwhile, the Court of Justice has ruled in Pringle that Art. 125 TFEU did not exclude the granting of financial assistance by the Member States to each other provided that such assistance is indispensable for the safeguarding of the financial stability of the euro area as a whole and subject to strict conditions aiming to ensure the implementation of a sound budgetary policy.8 The ruling should not be transposed and applied to the SRM without careful reflection, owing to the considerable differences between a private sector-funded resolution regime which resolves banks without resort to taxpayer money on the one hand and fiscal support between public budgets of sovereign Member States on the other hand. Nonetheless, conclusions for the interpretation of Art. 57(2) SRMR can and should be informed by the logic of Pringle. One would conclude that financial assistance by Member States to the Board, or the Fund owned by it (Art. 67(3) SRMR) and used by the Board for the discharge of its resolution functions, is not ruled out as a matter of principle; such assistance could conceivably take, for instance, the form of loans granted by Member States or Member State-controlled private sector entities within the meaning of Arts. 60(1)(c) and 73 SRMR. It would, however, have to occur under restrictions similar to those which characterised the ESM and which led the CJEU to conclude in Pringle that the ESM was compatible with the “no bail-out clause”. Applying the rationale of that ruling mutatis mutandis, one would assume that such financial assistance must not undermine the fundamental principle of the SRMR that the costs of resolution are to be contained within the private sector and that any public funds provided to the Board must be recovered without altering the liabilities of those liable to pay contributions to the Fund. Some of these restrictions are included explicitly in the wording of the SRMR, e.g. in Art. 73 SRMR, but the logic of Pringle would imply that they also follow from Art. 57(2) SRMR. 7 As an example of this debate, and the doubts which were raised as to the compatibility of these measures with the “no bail-out” clause, see Louis, CMLR 47(2010), 971. 8 Case C-370/12, Thomas Pringle v Government of Ireland, ECLI:EU:C:2012:756, paras 136–137.
Andreas Witte
1021
Art. 57 SRMR
Resources
What Art. 57(2) SRMR certainly excludes is a direct liability of the Member States for the financial obligations of the Fund or the Board. Creditors of the Board, or of banks being resolved by the Board (or a national resolution authority, for that matter) cannot demand payment directly from the Member States, either collectively or from one or more Member States individually. 15 The provision is largely, though not exclusively, declaratory in nature. One would assume that anybody who claims a liability of the Member States for SRB obligations would have to demonstrate the existence of a legal basis for such liability, not the Member States a legal provision excluding or denying it. Even though the question has never been strictly subjected to a litmus test (as no Union agency has ever become unable to pay its financial obligations, leading to creditors attempting to obtain payment from the Member States), there appears to be no legal basis for such a liability. Certainly no legal basis exists in positive law, and deriving it from general principles of law would appear tenuous.9 Nonetheless, the inclusion of the provision in the SRMR is not superfluous. First, it assuaged political opposition which would otherwise have been fiercer (see above); second, it removes any even hypothetically existing doubt by providing the clarification that a financial liability of the Member States exists “under no circumstances”, i.e. not even indirectly (such as via an internal recourse of the SRB or the Union against the Member States after paying third-party creditors, rather than a direct liability of the Member States vis-à-vis the third-party creditors10); thirdly, the fact that Art. 57(2) SRMR was modelled with Art. 125 TFEU in mind allows the Pringle case law to inform its interpretation. This would help spell out the substantive content of such a clause with some more substance (see supra, → para. 13). The point is also reiterated in other parts of the Regulation, e.g. Recital 100 and Art. 6(6) SRMR. 16 Art. 57(2) SRMR applies to the Board’s budget in general, i.e., both parts provided for in Art. 58(3) SRMR. This means that not only the costs of resolution action are excluded from national budgetary liability (even though this was the politically more sensitive part and is particularly emphasised by the added reference to “resolution activities”); also the administrative expenditures of Part I (Art. 59 SRMR) are covered by the exclusion of Art. 57(1) SRMR. 14
III. Budgetary liability of the Union? 17
The wording of Art. 57(2) SRMR “budgetary liability of the Member States” (emphasis added) appears to leave room for an e contrario argument. Since only the Member States are explicitly mentioned as entities whose budgetary liability is excluded, it could be argued that a budgetary liability of other entities, such as the Union itself, exists. Such a reasoning would be misleading. It would run afoul of the principle that the SRB budget is not part of the Union budget (Art. 58(1) SRMR) and of the principle that the SRB is to be exclusively funded from contributions levied from the institutions in the participating Member States (Recital 97 SRMR); it would also undermine the separate legal personali9 General public international law does not include a rule whereby Member States of an organisation are liable for the financial liabilities of the organisation or bodies acting for it: Schermers and Blokker, International Institutional Law (6th edn, 2018), para 1585 (this became of relevance in the infamous saga of the ill-fated International Tin Council). Even within federal systems such as the United States, Switzerland, or Germany, a liability of the various subnational states or cantons for financial obligations of entities established at the federal level is usually negated; this must, then, apply a fortiori to a system such as the European Union, which is not itself a State. 10 Schermers and Blokker, International Institutional Law (6 th edn, 2018), para. 1586 acknowledge such a right of recourse, but for the SRB Art. 57(2) excludes also this indirect liability of the Member States.
1022
Andreas Witte
Art. 58 SRMR
Budget
ty of the SRB as an agency (Art. 42 SRMR) and, ultimately, its independence (Art. 47 SRMR), since it would risk putting the Board at the whim of an outside body which provides its financial foundation.
Art. 58 SRMR Budget 1. The Board shall have an autonomous budget which is not part of the Union budget. Estimates of all of the Board's revenue and expenditure shall be prepared for each financial year, corresponding to the calendar year, and shall be shown in the Board's budget. 2. The Board's budget shall be balanced in terms of revenue and expenditure. 3. The budget shall comprise two parts: Part I for the administration of the Board and Part II for the Fund. Bibliography Christian Calliess and Matthias Ruffert (eds), EUV/AEUV (5th edn, C.H. Beck, Munich 2016); Walter Frenz, Handbuch Europarecht, Vol. 4: Europäische Grundrechte (Springer, Berlin, Heidelberg 2009); Robert Lee et al., Public Budgeting Systems (10th edn, Jones & Bartlett, Burlington 2021); Gerald J. Miller, ‘Nonconventional Budgets: Interpreting Budgets and Budgeting Interpretations’ in: Aman Khan and W. Bartley Hildreth (eds), Budget Theory in the Public Sector (Quorom Books, Westport (Connecticut), London 2002); Rudolf Streinz (ed), EUV/AEUV (3rd edn, C. H. Beck, Munich 2018). A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Role in the system of the SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Basic principles of the SRB budget cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Recourse to other sources of budgetary law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 2 3
B. SRB budget (Art. 58(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Autonomy of the SRB budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Showing estimates of revenue and expenditure in the budget . . . . . . . . . . . . . . . . III. Financial year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 6 8 13
C. Balancing of the budget (Art. 58(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
D. Division of the budget in two parts (Art. 58(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
A. Function and background of the provision I. Role in the system of the SRMR Art. 58 SRMR establishes the duty of the Board to prepare a budget to begin with, 1 and stipulates some fundamental legal requirements relating to this budget. More provisions on the budget are included in the articles which follow. The function of the budget is to discharge the Board’s obligations to devote the necessary financial resources (Art. 57 SRMR); any spending of monies by the SRB is impermissible if no appropriation is provided for it in a duly adopted budget (subject to exceptions to this principle, which will be discussed below).
II. Basic principles of the SRB budget cycle Even though the term is used neither in the SRMR nor the SRB-FR (on the latter 2 see infra, → para. 4), the system of budgetary provisions is clearly undergirded by the
Andreas Witte
1023
Art. 58 SRMR
Budget
traditional four-step budget cycle which can commonly be found in most public sector financial regimes:1 1. Budget preparation – This refers to the formulation of a draft budget on the basis of estimates of upcoming revenue and expenditures. For the SRM, this role is primarily assigned to the Chair by Art. 61(1) SRMR. 2. Budget adoption – This refers to the approval of a budget by the competent decision-makers on the basis of the drafts prepared in the first stage. For the SRM, this role is assigned to the Board in its plenary session (Arts. 61(2) and 50(1)(b) SRMR). 3. Budget implementation – This refers to the execution of the budget, i.e. the actual collecting of the revenues envisaged in it and spending of funds appropriated in it. The central provision for this in the SRMR is Art. 63(1) SRMR. 4. Budget monitoring – This refers to the ongoing evaluation whether the financial activities of the Board are conducted in line with the approved budget. The SRMR assigns competences in this regard to a number of bodies, such as the Board in its plenary session (Art. 50(1)(b) SRMR), the Board’s own Accounting Officer (Art. 63(2)(2) SRMR), the SRB’s internal audit function (Art. 62 SRMR), the European Court of Auditors (Arts. 63(2)(1), 63(4), and 63(5) SRMR), and the European Parliament, the Council, and the Commission (Arts. 63(5) and (9) SRMR). The publication of the final accounts (Art. 63(7) SRMR) adds another element of transparency and public scrutiny of the management of the SRB.
III. Recourse to other sources of budgetary law Owing to the independent status of the SRB, it is subject to its own budgetary law, governed by the SRB Regulation itself as well as tertiary law provisions adopted by the Board on the basis of the SRB Regulation (see infra, → para. 4). Direct recourse to the budgetary law governing the Union budget itself is, in principle, excluded (even though the two regimes are, to a large extent, similar and reflect generally acknowledged “best practices” in public sector finance). To the extent that the SRB’s own regime is subject to lacunae, these gaps may be filled by means of an interpretation informed by the approaches developed for the Union’s budgetary law; where divergent explicit provisions for the SRB exist, however, these take priority. These budgetary rules of the Union from which inspiration may be drawn for the SRB regime are codified primarily in Arts. 310–325 TFEU and in the Union Financial Regulation (Regulation (EU, Euratom) 2018/10462).3 4 Arts. 57–66 SRMR are too concise to provide clarity on all the individual steps of the budget process and ensure legal certainty. To spell out the necessary details, the Board 3
1 See, with a slightly different terminology but identical in substance, Lee et al., Public Budgeting Systems (10th edn, 2021), at pp. 105-118. 2 Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012, OJ L 193, 30.7.2018, at pp. 1–222. 3 Until 2018, a separate Commission Delegated Regulation laying down “Rules of Application” for the Union Financial Regulation existed: Commission Delegated Regulation (EU) No. 1268/2012 on the rules of application of Regulation (EU, Euratom) No. 966/2012 of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union, OJ L 362, 31.12.2012, at pp. 1–111. In 2018, its main provisions were incorporated into the new Union Financial Regulation itself.
1024
Andreas Witte
Art. 58 SRMR
Budget
has adopted tertiary law specifications in the form of the SRB-FR.4 It was adopted by the SRB itself on the basis of the secondary law provision of Art. 64 SRMR (see also the annotations thereto) after consultation of the European Court of Auditors and the Commission, and is binding on the SRB. It is closely modelled on a framework financial Regulation developed by the Commission for use by agencies (Commission Delegated Regulation (EU) 2019/715); for details of the SRB-FR see the annotations to Art. 64 SRMR. The version of the SRB-FR that was adopted in January 2020 is already the third incarnation of this act in only six years of the SRB’s existence. The present commentary will, in its annotations, make reference to the SRB-FR where necessary. Primary law provisions and general principles of law which apply to all of Union 5 law are binding on the Board in its budgetary activities. This means, for instance, that the SRB is required to prepare and implement its own budget in accordance with the principle of good administration,5 which would exclude e.g. arbitrariness in the SRB’s budget preparation or implementation. Likewise, the SRB must be taken to be bound by the principle of sound financial management, which constitutes a general principle of law.6 This principle is also explicitly acknowledged in the SRB-FR7 in addition to its primary law bindingness. On top of this, the SRB-FR spells out a number of additional principles for the budgetary regime of the SRB, many of which can be seen as embodiments of the principles of good administration and sound financial management; for details see the annotations to Art. 64 SRMR.
B. SRB budget (Art. 58(1)) I. Autonomy of the SRB budget The SRB budget is autonomous. This means that it stands in itself and is not part of 6 any other institution’s or body’s budget. The addition that it is not part of the Union budget is thus tautological, but still useful to remove any potentially remaining doubt that the SRB’s budget might be somehow incorporated into that of the Union (which is the situation for EU institutions, with the exception of the ECB: Art. 314(1) TFEU). Consequently, the budgetary processes of the SRB are also independent from those of the Union or other agencies, institutions, or bodies and do not require financial or substantive input from their budgetary processes. The financial autonomy of the SRB is thus very far-reaching and more extensive than that of the EU institutions (with the exception of the ECB) and that of many other EU agencies, including, for instance, the EBA
4 Decision of the Single Resolution Board of 17/01/2020 adopting the Financial Regulation of the Single Resolution Board (SRB/PS/2020/05). A consolidated version can be found on the website of the SRB at . 5 The primary law basis for this principle can be located in Art. 41 CFR. This is a fundamental right, i.e., a subjective right that can be invoked by individuals. That function is not of great relevance in budgetary provisions, where an encroachment upon individual rights is difficult to imagine. It is, however, widely accepted that in addition to their function of protecting subjective rights, fundamental rights also serve the purpose of establishing objective rules and principles which addressees of the rights are bound by in all their activities (see e.g. Frenz, Handbuch Europarecht, Vol. 4 (4th edn, 2009), paras. 347–351. 6 Case T-105/99, CCRE v Commission, ECLI:EU:T:2000:306. 7 See Arts. 5, 26, 28, 34, 37 and 41 SRB-FR.
Andreas Witte
1025
Art. 58 SRMR
Budget
(which receives a subsidy from the Union budget, Art. 62(1)(b) EBAR, 8 and is thus dependent on the Union budgetary process). 7 This financial autonomy correlates with additional obligations of the Board: It has to fund itself using the tools made available to it by secondary legislation, and cannot disclaim political or legal responsibilities in cases of underfunding or misappropriations to other institutions or bodies. For the scope and consequences of these responsibilities, see the annotations to Art. 57(1) SRMR.
II. Showing estimates of revenue and expenditure in the budget Art. 58(1) SRMR requires estimates of all of the Board’s revenue and expenditures to be shown in the budget. The obligation applies to both parts of the budget provided for in Art. 58(3) SRMR. Revenues are those legally permissible under the relevant provisions. This means that for Part I, only the annual contributions levied under Art. 65 SRMR can be booked as estimated revenue (Art. 59(1) SRMR); for Part II, on the other hand, the list of permissible revenues in Art. 60(1) SRMR is not exhaustive (“in particular”), even though it is hard to think of other revenues for Part II not covered by that list. The situation is the reverse for expenditures: Part II of the budget may be used only for the expenditures exhaustively listed in Art. 60(2) SRMR, whereas the list of expenditures in Art. 59(2) SRMR is not exhaustive (“at least”). In any case, expenditures can be booked into the SRB’s budget only if they are necessary for the performance of the tasks conferred on the SRB by the SRMR (→ Art. 57(1) SRMR). 9 Art. 58(1) SRMR speaks of estimates. This is a reflection of the budget cycle, whereby the budget is prepared and adopted in advance and can thus necessarily only provide for estimates for the future. The word “estimates” must not be interpreted as excluding the legal bindingness of the budget. Funds may be spent only if an appropriation for that spending and for that purpose is made in a duly adopted budget, unless an exception is legally provided for.9 Such exceptions include: – The possibility to make commitments or payments up to a certain limit (which is calculated on the basis of the appropriations in the preceding year’s budget) in case the budget is not definitively adopted yet at the beginning of a financial year, i.e., 1 January (Art. 14 SRB-FR). – The possibility to transfer appropriations from one budget title to another under authority of the SRB Chair (Art. 25 SRMR in conjunction with Art. 24SRB Financial Regulation). – The possibility to set up an imprest account, i.e. an account dedicated for the payment of relatively small amounts which will be automatically replenished once a payment out of the account is made (Arts. 50-51 SRB-FR). 10 These provisions are intended to ensure that the Board’s ability to act is not unduly restricted because budgetary reasons make it impossible to bear the necessary expenditures. 11 On the other hand, the appropriation of funds for a particular purpose does not entail a legal obligation to actually spend them in full. Art. 11 SRB-FR deals with the question whether unspent appropriations are to be cancelled or may be carried over to 8
8 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, OJ L 331, 15.12.2010, at pp. 12–47. 9 This is a consequence of the very nature of a budget as embodied in general principles of public sector budgetary law, but is explicitly reiterated in Art. 7 SRB-FR.
1026
Andreas Witte
Art. 58 SRMR
Budget
the next financial year. If they are carried over to the next year, they can only be carried over to the same Part of the budget as in the previous year; otherwise the division of the budget into two mutually exclusive parts (see infra, → para. 19–21) would be undermined. The SRMR does not mandate the currency in which the SRB’s budget be drawn up, 12 but Art. 17 of the SRB-FR does, requiring the drawing-up in euros. Should non-euro area Member States opt for a voluntary participation in the banking union,10 the SRB would, therefore, have to make arrangements for the inclusion of entities which account in another currency. In the light of the urgency typically associated with bank resolution, it would appear unnecessarily restrictive to draw an analogy to Art. 321 TFEU requiring the SRB to notify the Member States of currency transfers or to conduct its financial operations only through financial institutions designated by the Member States.
III. Financial year The financial year is the calendar year, i.e., the period from 1 January until 31 De- 13 cember, including both (principle of annuality, see the heading of Title II Chapter 2 of the SRB-FR, and Art. 8 of that Regulation). This is the period which must be covered by any given annual budget. This is analogous to the budgetary regime of the Union (Art. 313 TFEU). As a further parallel, the Union budget’s multi-annual financial framework (Art. 312 TFEU) is mirrored by the SRB’s multi-annual programming (Art. 30(2) SRB-FR), which aims to facilitate the advance planning of the SRB’s workload and allocation of necessary financial resources with a time horizon longer than one year. The multi-annual planning does not relieve the SRB of the duty to adopt annual budgets and of the principle that each expenditure needs to be appropriated in the budget. Owing to the rule that the budget covers an entire calendar year, the balancing re- 14 quirement under Art. 58(2) SRMR (see infra, → para. 15) extends over the stretch of that year. Expenditures and revenues must, thus, not be balanced against each other on an intra-annual basis. This would not be achievable, since the main sources of revenue – administrative contributions for Part I and the bank levy for Part II – will normally be collected once a year, whereas expenditures can occur at any time during the year.
C. Balancing of the budget (Art. 58(2)) Art. 58(3) SRMR requires the budget to be balanced. This statement is phrased apod- 15 ictically, but it is not evident at first glance which precise legal consequences this has: The wording is evidently modelled after Art. 310(1)(3) TFEU, which imposes a balancing requirement for the Union budget. For this provision, there was a debate about the scope of its content.11 According to one view, the balancing requirement is limited to a purely formalistic rule whereby the budgetary accounting mechanics (e.g. booking new loans which are taken up as revenue) would ensure that each budget is by necessity bal10 The legal basis for this “opt-in” is the conclusion of a close cooperation with the ECB on the basis of Art. 7 SSMR. This would make the Member State concerned a participating Member State in the SSM, and be reflected in the SRM (see Art. 4 SRMR). 11 For summaries of the debate see Niedobitek, in: Streinz (ed), EUV/AEUV (3 rd edn, 2018), Art. 310 TFEU para. 28 and Waldhoff, in: Calliess and Ruffert (eds), EUV/AEUV (5th edn, 2016), Art. 310 TFEU para. 27. See also the parliamentary questions for written answers asked by Jonás Fernández MEP and the answers given by Commission Vice-President Georgieva: Question E-001662/2015 (asked 2 February 2015) and question E-005201/2015 (asked 31 March 2015), both available on .
Andreas Witte
1027
Art. 58 SRMR
Budget
anced, even if it is heavily credit-funded, in much the same way as double-entry bookkeeping will by necessity always lead to a balanced balance sheet. According to another view, the balancing requirement has an actual substantive content putting limits to the extent to which the Union budget may be credit-funded. Case law points to the latter view, postulating a content of the balancing requirement which goes beyond purely formalistic accounting mechanics.12 This implies that at least in the longer run, the Union budget should be funded through “real”, i.e. non-credit, revenue. In the light of the similarities in wording between Art. 310(1)(3) TFEU and Art. 58(2) SRMR, and in the absence of evidence to the contrary, this case law can be transposed to the SRB budget regime – even more so since the formalistic view would make the provision appear superfluous, since the balancing of the budget in the merely formalistic sense would follow automatically from the mathematics of the budget and thus not require an explicit stipulation in the SRMR. This means that the Board is legally required to run sustainably, i.e. in the longer run, neither a profit nor a loss; it is supposed to cover all its expenditures, but only its expenditures, with the sources of revenues made available to it by the SRMR. Nonetheless, this requirement should not without reflection be equated with balanced budget requirements which can sometimes be found in national constitutions for national budgets.13 The balancing requirement has different consequences for the two parts (see below), and to a limited extent the SRMR does allow credit financing for Part II (but not Part I; see also the annotations to Art. 65(2) SRMR). 16 The requirement to balance the budget applies to the budget in its entirety, i.e., both parts referred to in Art. 58(3) SRMR. Owing to the fact that the two parts are mutually exclusive and collectively exhaustive (see below), this means that each part must be balanced within itself; a cross-subsidisation of one part by the other is not permitted. This is also a consequence of the fact that a cross-subsidisation of one part by the other would have to show up as a revenue in the subsidised part and an expenditure in the subsidising part, but Arts. 59 and 60 SRMR, which list the revenues and expenditures of both parts, make no mentioning of such interpart flows of funds. 17 Nonetheless, the requirement to balance the budget in terms of revenue and expenditures has different effects on the two parts. Arts. 60(1)(b) and (c) SRMR allow the SRB to take up loans as revenues for Part II; conversely, returns on the amounts of the Fund previously invested can be budgeted as revenue for Part II under Art. 60(1)(d). This means that the revenue of Part II can be spread intertemporally. A lower amount of revenue from contributions to the Fund, or a higher amount of expenditures for resolution action, can be offset with higher contributions or lower expenditures in an earlier year (through investment revenue) or a later year (through the taking up of loans, to be repaid later). Part I, on the other hand, allows only for Art. 65 SRMR contributions as revenue. To a limited extent, the carry-over of unspent revenues (Art. 11 SRB-FR) allows for an intertemporal spreading also here; but under Art. 15(3) SRB-FR, contributions must be set at a level such as to avoid a significant accumulation of surplus. The SRB can thus not run a persistent surplus in Part I of the budget; in such a case the contributions would have to be adjusted. The Fund for which Part II is established, on the other hand, is precisely intended to accumulate funds persistently, in order to reach the target level stipulated in Art. 69 SRMR. 18 The balancing requirements applies to each part individually and for each part to the entire part as a whole. There is no legal requirement for a correlation between individu12 Case C-392/02, Commission v Denmark, ECLI:EU:C:2005:683, para. 54; Case C-284/90, Council v Parliament, ECLI:EU:C:1992:154, para. 31. 13 See, e.g., Art. 109 of the German Grundgesetz (with differentiated balanced budget requirements for the federal and the State budgets).
1028
Andreas Witte
Art. 58 SRMR
Budget
al revenue items and individual expenditure items, or to use specific revenues only for a specific purpose, beyond the allocation of revenues and expenditures to the two parts (see Art. 58(3) SRMR).
D. Division of the budget in two parts (Art. 58(3)) Art. 58(3) SRMR mandates that the budget of the Board be divided into two parts. 19 The revenues and expenditures which make up the two parts are governed by Art. 59 SRMR (Part I) and Art. 60 SRMR (Part II) respectively. The two parts must be clearly indicated in the budget; for each revenue or expenditure item it must be unambiguous to which part it belongs. The formulation that the budget “shall comprise” two parts means that the two parts exhaustively make up the (entire) SRB budget. The addition of Parts III, IV etcetera, or of budget items not allocated to either part, would be impermissible. 14 The formulation also means that the two parts are mutually exclusive. No item can belong to both parts simultaneously. The division of the two parts is reminiscent of the widespread practice in public sec- 20 tor finance to distinguish an operating budget and a capital budget. In this distinction, which is frequently though not universally used, the operating (or administrative) budget comprises the revenues and expenditures from the day-to-day operations of the budgeting body, whereas the capital budget covers the long-term assets and investments. There is thus a certain parallel between the operating budget in this sense and Part I in the SRB’s budget; likewise, the capital budget can in some sense be likened to the SRB’s Part II. The analogy should, however, not be taken too far; for instance, since Part I includes, among other things, operational expenses (Art. 59(2) SRMR), the purchase of e.g. an office building by the SRB would have to show up in that part. The allocation of revenues and expenditures of the SRB to the two budget parts must thus first and foremost be taken from the SRMR, rather than potentially flawed analogies to general public sector budgeting. The rationale behind the division in two parts is to ensure that all revenues of the 21 Board are used only for the purpose to which the SRMR dedicates them. The bank levy collected under Arts. 70 and 71 SRMR is intended solely for the purpose of carrying out the mission of the Fund (see Art. 76 SRMR), but not for bearing the administrative costs of the Board. Conversely, the administrative contributions levied under Art. 65 SRMR are intended only for the operating expenses of the Board but not resolution financing. This distinction matters since the contributors of the two types of revenues differ. Arts. 70 and 71 SRMR allow for the levying of contributions to the Fund only from institutions (within the meaning of Art. 3(1)(13) SRMR, i.e., credit institutions, and investment firms covered by consolidated supervision), whereas administrative contributions under Art. 65 SRMR are collected from all entities referred to in Art. 2 SRMR, which is a broader universe of contributors. In addition, the algorithm for allocating the total levies to the individual contributors might differ for the two types of contributions. A commingling of the two must therefore be avoided.
14 Miller, ‘Nonconventional Budgets: Interpreting Budgets and Budgeting Interpretations’ in Khan and Hildreth (eds), Budget Theory in the Public Sector (2002) provides, from a public policy perspective, a critical view of the occasional political demands for a proliferation of specialised budgets.
Andreas Witte
1029
Art. 59 SRMR
Part I of the budget on the administration of the Board
Art. 59 SRMR Part I of the budget on the administration of the Board 1. The revenues of Part I of the budget shall consist of the annual contributions necessary to cover the annual estimated administrative expenditure. 2. The expenditure of Part I of the budget shall include at least staff, remuneration, administrative, infrastructure, professional training and operational expenses. 3. This Article is without prejudice to the right of the national resolution authorities to levy fees in accordance with national law, in respect of their administrative expenditures of the types referred to in paragraphs 1 and 2, including expenditures for cooperating with and assisting the Board. Bibliography Lucia Orszaghova and Martina Miskova, ‘Financial Contributions and Bank Fees in the Banking Union’, Biatec 23 (2015), 13; Andreas Witte, ‘The Application of National Banking Supervision Law by the ECB: Three Parallel Modes of Executing EU Law?’, MJ 21 (2014), 89. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Revenues of Part I (Art. 59(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
C. Expenditures of Part I (Art. 59(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
D. Safeguard for national levies (Art. 59(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Purpose and parallel provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Extent of the safeguard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Constraints on national funding schemes for NRAs outside Art. 59(3) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 7 12 15
A. Function and background of the provision 1
The provision combines two related yet distinct subject matters. The first is the scope of revenues and expenditures which make up Part I of the SRB budget (Arts. 59(1) and (2) SRMR). The second is the safeguard for bank levies under national law to defray the administrative costs of the NRAs (Art. 59(3) SRMR). The reason for combining these questions in one provision lies in the fact that the safeguard in Art. 59(3) SRMR is limited to the administrative expenditures of the NRAs; NRAs can thus only collect administrative bank levies for those expenses which, in the SRB’s budgetary regime, would fall under Art. 59 SRMR.
B. Revenues of Part I (Art. 59(1)) 2
Art. 59(1) SRMR stipulates that the revenues of Part I consist of the annual contributions necessary to cover the annual administrative expenditure. Even though Art. 59(1) SRMR does not contain an explicit reference, the identity in wording between Art. 59(1) and Art. 65 SRMR leaves no doubt that the contributions envisaged here are those levied under Art. 65 SRMR; for details of these contributions see the annotations to that provision.
1030
Andreas Witte
Part I of the budget on the administration of the Board
Art. 59 SRMR
Art. 59(1) SRMR is exhaustive; the SRMR does not permit the booking of other rev- 3 enues into Part I.1 The administrative expenditures under Art. 59(2) SRMR may and must be covered entirely by the annual contributions, but not exceed them. This is a consequence of the balancing requirement stipulated in Art. 58(2) SRMR (see annotations thereto). This is compatible with Art. 16 SRB-FR. According to this provision, a budget sur- 4 plus which arises in one year from the budget implementation reports (i.e. the monitoring of the actual budget implementation after the adoption of the budget for that year) shall be entered as revenue for the budget of the following year; conversely, a budget deficit in one year is entered into the next year’s budget as an expenditure appropriation. This treatment does not violate the exhaustive character of Art. 65 SRMR levies for the funding of Part I, provided that the revenue arising from a budget deficit in Part I in one year is also entered as a revenue for Part I of the following year’s budget. That way, it is ensured that the operational costs of the SRB are covered entirely by Art. 65 SRMR levy, as intended.
C. Expenditures of Part I (Art. 59(2)) Art. 59(2) SRMR lists the expenditure items which make up the administrative ex- 5 penditures that constitute Part I of the budget. The list in Art. 59(2) SRMR is not exhaustive, as evidenced by the words “at least”. This does not mean, however, that the scope of expenditures which can be booked in Part I is virtually unlimited. Art. 59(1) SRMR states that the revenues of Part I may be used to cover the annual estimated “administrative expenditure”. The list in Art. 59(2) SRMR must therefore be construed as an elaboration on para. 1, more precisely an elaboration on what constitutes “administrative expenditure” in the sense in which paragraph 1 uses that term. An item may therefore be booked in Part I only if it can, in the application of the usual methods of statutory interpretation, be argued to constitute an “administrative expenditure”. What is more, in line with the ejusdem generis rule of interpretation2 one would assume that other items have to be of a similar nature as that of the items listed in Art. 59(2) SRMR to be eligible as expenditure items for Part I of the budget, i.e., they must relate to the costs for the operational running of the SRB’s work. The individual items listed in Art. 59(2) SRMR are not easily differentiated from 6 each other. For instance, it is difficult to imagine which substance the item “staff ” is supposed to have as distinguished from “remuneration” and “professional training”. Owing to the non-exhaustive and exemplary character of the list, a precise delineation of the items against each other is, however, not required. The main substance of Art. 59(2) SRMR is that Part I of the budget comprises those expenditures which relate to the operational running of the SRB (as opposed to the financing of resolution measures, which falls under Part II; see the comments to Art. 60 SRMR). Since neither the SRMR nor other related financial legislation includes definitions of these words as terms of art, they must be taken as being used in their ordinary meaning in general linguistic usage. 1 One would assume that this means donations and bequests from third parties to the SRB, as envisaged by Art. 21 SRB-FR, would have to be booked in Part II, where the list of permissible revenues in Art. 60(1) SRMR is not exhaustive. The reason for the existence of Art. 21 SRB-FR is that such a provision also exists in the framework financial Regulation of the Commission on which the SRB-FR was based (see annotations to → Art. 64); when this framework was used to draft the SRB-FR, the wording of the provision was not amended to take into account the peculiar separation of the SRB budget in two parts. 2 For the recognition of the rule as part of the interpretative toolbox in European law see Case C-101/01, Bodil Lindqvist, ECLI:EU:C:2003:596, para. 44.
Andreas Witte
1031
Art. 59 SRMR
Part I of the budget on the administration of the Board
Should a precise delineation of these terms ever become necessary, recourse can thus be taken to the definitions of the words in general usage dictionaries.3 In the light of the need to keep the SRB operationally functioning, however, it would appear advisable not to interpret these terms too restrictively.
D. Safeguard for national levies (Art. 59(3)) I. Purpose and parallel provisions The purpose of Art. 59(3) SRMR (mirrored in Recital 98 SRMR) is to safeguard the policy decision of national legislators to finance the administrative expenditures of their national resolution authorities through levies collected from banks. The historical background is rooted in a long-standing practice according to which Union law is usually applied4 by national authorities, owing to the fact that the Union has a very limited administrative apparatus of its own.5 Case law6 has thus traditionally accorded great respect for the freedom of national legislators to design their own national administrative bureaucracies, both institutionally and procedurally. Art. 3 BRRD thus left it to national legislators to designate a national resolution authority and let it apply the BRRD, in the form of its national transposing legislation, within the framework of national administrative law and practices. This autonomy also extended to the funding scheme for the national authorities, e.g. through the general national budget or through fees levied from institutions. 8 The SRMR, which is grafted upon the BRRD and its national transpositions, incorporates this concept and integrates the national resolution authorities (NRAs) into the SRM (Art. 1(2) in conjunction with Art. 3(1)(3) SRMR). They still retain their institutional autonomies, however. The legislator of the SRMR thus intended to safeguard the decision of the national legislator to defray the operational costs of the NRA through contributions levied from institutions. 9 The situation is analogous to that in banking supervision. Art. 4 CRD mandates the Member States to designate competent authorities for banking supervision, and the SSMR integrates these “national competent authorities” (NCAs) into the SSM. The operational expenditures of the ECB’s own supervisory activities within the SSM are funded through supervisory fees levied under Art. 30 SSMR, but Art. 30(5) SSMR safeguards the right of the NCAs to levy national supervisory fees to defray their own expenditures. 10 Art. 59(3) SRMR does not formulate a nexus between the administrative expenditure levies collected by the SRB and the NRAs. In particular, there is no provision linking the introduction (or possible future raises) of the SRB’s levies with a need for con7
3 See Case T-45/06, Reliance Industries Ltd. v Council and Commission, ECLI:EU:T:2008:398, para. 102 for the permissibility to rely on dictionary definitions for the interpretations of legal acts in Union law. 4 The present author intentionally avoids the popular term “implemented” here owing to its ambiguity: “Implementation” of Union law is often used to refer to the adoption of the national legislation transposing a Directive which is required by Art. 288(3) TFEU. This is conceptually a legislative act. In the present context, however, what matters is the execution of Union law, i.e. its practical application to individual cases by administrative authorities. This is conceptually an executive act. It is deplorably common to lump, terminologically, both together under the heading of “implementation”. 5 See Witte, MJ 21 (2014), 89 at p. 90 for the fact that this is in itself remarkable. Many federal systems would set up a federal authority to apply laws adopted at the federal level. 6 E.g. Joined Cases 205–215/82, Deutsche Milchkontor GmbH and others v Federal Republic of Germany, ECLI:EU:C:1983:233.
1032
Andreas Witte
Part I of the budget on the administration of the Board
Art. 59 SRMR
comitant reductions in the NRAs’ levies, or vice versa.7 Complaints from the financial industry about a “dual burden” arising from payment obligations to both SRB and NRAs (the sum of which exceeds their pre-SRM burden under the national resolution schemes) are therefore of a political rather than legal nature and do not legally vitiate the co-existence of both levies. The safeguard is not a legal basis for the collection of levies from institutions. This 11 legal basis has to be provided for in national legislation, in line with the respective national constitutional requirements. The function of Art. 59(3) SRMR is limited to stating that the introduction of such a levy by national legislation is not incompatible with Union law.
II. Extent of the safeguard The safeguard is limited to administrative expenditures. The use of this wording in 12 both Arts. 59(1) and (3) SRMR, as well as the reference in Art. 59(3) SRMR to paras. 1 and 2, means that fees collected under Art. 59(3) SRMR may only be used for purposes which would fall under Part I of the budget in the SRB’s own budgetary regime, and may not exceed these expenditures; in particular, NRAs are prohibited from continuing to operate a separate bank levy analogous to those collected under Arts. 70 and 71 SRMR, feeding into a national resolution fund that exists in parallel to the SRF.8 The safeguard can thus be said to put a Union law constraint on national administrative expenditure levies in the sense that (like the SRB) the NRAs are not allowed to generate profit from their resolution activities. The safeguard is not a grandfathering clause; national legislators are not limited to 13 maintaining levies which existed at the time of entry into force of the SRMR (or their accession to the SRM for Member States joining the banking union at a later stage). They may also introduce new levies for NRAs which previously did not collect any, or amend existing levy schemes, or abolish them. The expenditures covered by the safeguard are those of the NRAs. It is not permissi- 14 ble for a Member State to impute to its NRA expenses which were, in fact, incurred by the SRB, and to incorporate these into the calibration of the national fees. It is, however, permissible to incorporate administrative expenditures incurred by the NRA which became necessary as a result of the NRA’s cooperation with and assistance to the SRB.
III. Constraints on national funding schemes for NRAs outside Art. 59(3) SRMR Art. 59(3) SRMR establishes a safeguard of the right of NRAs to levy such fees in ac- 15 cordance with their national laws; it does not create an obligation to make use of this 7 A statement to that effect was included, for the supervisory fees levied by the ECB and the NCAs within the context of the SSM, by the Commission in its initial proposal for the SSMR: Commission, ‘Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions’ COM (2012) 511 final, Recital 39. The wording did not make it into the SSMR as adopted. For the SRMR no such statement was even included in the initial draft. 8 A – narrow – exception to this concerns entities which are covered by Art. 1(1) BRRD but not Art. 2 SRMR. These entities will continue to be subject to purely national resolution financing arrangements. See the annotations to these provisions.
Andreas Witte
1033
Art. 59 SRMR
Part I of the budget on the administration of the Board
possibility. National legislators are thus free to provide for a different funding mechanism, e.g. in the overall national budget and thus financed through general taxation. It is, however, conceivable that restrictions on the choice of FRA funding schemes available stem from other legal requirements. 16 Of particular relevance, in this regard, is the prohibition of monetary financing under Art. 123 TFEU. It prohibits the national central banks (NCBs) of euro area Member States to abuse their ability to create fiat money by extending credit to public sector entities. The prohibition is traditionally interpreted broadly, in the sense that it also sets limits to the allocation of new tasks or competences by national legislation to the NCB. Since central banks can also cover their own expenses through money creation (allowing them, uniquely, to run persistent losses in theory), giving the central bank a competence which would otherwise be assigned to a separate public authority would be a convenient way for national legislators to eliminate the associated costs from the general budget and have them funded monetarily. Owing to the public sector nature of resolution authorities and competencies (Art. 3(2) BRRD), it is thus questionable whether the allocation of the NRA role to an NCB, funded through that central bank’s budget, is in line with Art. 123 TFEU. 17 On the other hand, Art. 14.4 ESCB Statute does give NCBs the freedom to perform tasks other than those specified in that Statute, provided that the ECB’s Governing Council does not find that this interferes with the objectives and tasks of the ESCB. Specifically for resolution, the position of the ECB is that the allocation of the role of resolution authority to an NCB (as opposed to merely administrative resolution tasks) is not atypical for a central bank and may be allocated to an NCB provided they do not interfere financially and operationally with the performance of the NCB’s ESCB-related tasks (especially monetary policy).9 18 Furthermore, in line with general requirements of Union law, the national levy must be non-discriminatory. It may not impose a higher burden on foreign institutions from EEA countries, e.g. by charging a higher fee from subsidiaries or branches of banks located in other EEA countries.10 Higher burdens on branches of third country banks (cf. Art. 96 BRRD) would, however, appear to be permissible since third-country institutions do not benefit from the non-discrimination provisions accorded by the fundamental freedoms to EEA entities, unless a special agreement with the third country accords non-discriminatory treatment to its entities.
9 Opinion of the European Central Bank of 3 May 2016 on the resolution and winding-up of banks (CON/2016/28), available at , para. 3.2.5.3. 10 The pertinent primary law reference prohibiting such practices is the freedom of establishment (Art. 49 TFEU), which precludes discrimination also in the design of public tax and levy regimes (Case 270/83, Commission v France, ECLI:EU:C:1986:37, paras. 18–19). Since Art. 49 TFEU protects cross-border economic activity within the internal market both through the setting-up of branches and of subsidiaries, it would also be the relevant legal provision prohibiting discrimination of subsidiaries of foreign EEA banks (see, in this respect, Case C-231/05, Oy AA, ECLI:EU:C:2007:439, paras. 23–24). Owing to this applicability of a specific fundamental freedom, recourse to Art. 18(1) TFEU as a lex generalis is not necessary (Case C-222/04, Ministero dell'Economia e delle Finanze v Cassa di Risparmio di Firenze SpA et al., ECLI:EU:C:2006:8, para. 99).
1034
Andreas Witte
Art. 60 SRMR
Part II of the budget on the Fund
Art. 60 SRMR Part II of the budget on the Fund 1. The revenues of Part II of the budget shall consist, in particular, of the following: (a) contributions paid by institutions established in the participating Member States in accordance with Article 67(4) and Articles 69, 70 and 71; (b) loans received from other resolution financing arrangements in non-participating Member States in accordance with Article 72(1); (c) loans received from financial institutions or other third parties in accordance with Articles 73 and 74; (d) returns on the investments of the amounts held in the Fund in accordance with Article 75; (e) any part of the expenses incurred for the purposes indicated in Article 76 which are recovered in the resolution proceedings. 2. The expenditure of Part II of the budget shall consist of the following: (a) expenses for the purposes indicated in Article 76; (b) investments in accordance with Article 75; (c) interest paid on loans received from other resolution financing arrangements in non-participating Member States in accordance with Article 72(1); (d) interest paid on loans received from financial institutions or other third parties in accordance with Articles 73 and 74. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Revenues of Part II (Art. 60(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Bank levies (Art. 60(1)(a)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Loans received from resolution financing arrangements in non-SRM Member States (Art. 60(1)(b)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Loans received from financial institutions or other third parties (Art. 60(1)(c)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Returns on investments (Art. 60(1)(d)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Recovered resolution expenditures (Art. 60(1)(e)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 3
C. Expenditures of Part II (Art. 60(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Expenditures for resolution financing (Art. 60(2)(a)) . . . . . . . . . . . . . . . . . . . . . . . . II. Investments (Art. 60(2)(b)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Interest paid on loans from resolution financing arrangements in non-SRM Member States (Art. 60(2)(c)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Interest paid on loans received from financial institutions or other third parties (Art. 60(2)(d)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 9 12 14 16 16 17 19 22
A. Function and background of the provision Art. 60 SRMR is the functional counterpart to Art. 59 SRMR. The two provisions de- 1 fine the composition of the two parts of the SRB budget provided for in Art. 58(3) SRMR. It is noteworthy that in terms of exhaustiveness, Arts. 59 and 60 SRMR are worded criss-cross in a chiastic pattern: In Art. 59 SRMR, the paragraph on revenues is exhaustive but the paragraph on expenditures is not; in Art. 60 SRMR the situation is reversed. The importance of this arrangement should, however, not be overestimated. The division of the budget in two parts is based on the premise that the operational running of the SRB should be, in budgetary terms, kept separate from resolution financing, and the respective costs should be funded separately. This is to be accomplished by
Andreas Witte
1035
Art. 60 SRMR
Part II of the budget on the Fund
booking the respective expenditures in separate parts of the budget and funding them via two separate levies. The non-exhaustiveness of the lists of Part I expenditures and Part II revenues should thus not be seen as implying that there is free discretion of the Board to determine the budget part in which a particular item is booked. Items – both revenue and expenditure – which relate to the operational running of the SRB have to be booked in Part I, and items – both revenue and expenditure – which relate to the funding of resolution measures have to be booked in Part II. 2 The wording of Art. 60 SRMR is subject to a certain incompleteness which can only be remedied through purposive interpretation. In particular, in several instances it is explicitly provided that financial transactions are booked as revenue or expenditures, but the reversing transaction is not mentioned in the text of the provision. The logic of the SRB budgetary regime, in particular the requirement to balance1 both parts of the budget (Art. 58(2) SRMR) and the principle of universality (according to which all revenues and expenditures must be included in the budget, Art. 58(1) SRMR, as well as Art. 18 SRB-FR), require that where a transaction is booked as revenue, the reversing transaction be booked as expenditure, and vice versa. For a detailed discussion see the annotations infra, → paras. 13, 17, 21 and 22. This does, however, not mean there is complete leeway for the SRB to book any revenues or expenditures it likes under Part II; this part is strictly reserved to the financial management of the Fund for the purposes of resolution financing.
B. Revenues of Part II (Art. 60(1)) I. Bank levies (Art. 60(1)(a)) The bank levy is by far the most important source of revenue for Part II of the budget; it provides the basis for all other sources of revenue: The other items listed in Art. 60(1) SRMR rely on the usage of monies that were already available to the Fund before. In contrast to that, the bank levy is the tool for the SRB to raise new funds from outside necessary for the funding of resolution measures, which constitute the expenditures of Part II. 4 The reference in Art. 60(1)(a) SRMR to Arts. 70 and 71 SRMR makes clear that both the ex-ante contributions (i.e. those that are levied every year irrespective of whether actual resolution action is taken) and ex-post contributions (i.e. those which are levied once resolution action is taken and the financial means available are insufficient) constitute Part II revenues for the SRB. The added reference in Art. 60(1)(a) SRMR also to Arts. 67(4) and 69 SRMR is redundant (but not harmful). Art. 70 SRMR includes stipulations for the calculation of the contributions, and Art. 67(4) SRMR includes references to Arts. 69, 70 and 71 SRMR, but neither of these provisions provides for another kind of revenue in addition to the ex-ante contributions under Art. 70 SRMR and the ex-post contributions under Art. 71 SRMR. 3
1 Of course the two transactions (e.g. disbursement of a loan and repayment of its principal) will usually occur in different years and thus be booked in different annual budgets. But even across different years, the balancing requirement requires reversing transactions to be booked symmetrically: If the SRB takes out a loan and books it as revenue, and years later repays it with funds raised from banking levies, then the repayment must be booked as expenditure; otherwise the budget will show revenues from the banking levy which do not stay within the Fund and are not counterbalanced even though the monies are not available for any of the uses explicitly listed in Art. 60(2) SRMR.
1036
Andreas Witte
Art. 60 SRMR
Part II of the budget on the Fund
Art. 60(1)(a) SRMR is not a legal basis for a payment obligation of institutions. This 5 payment obligation stems from the contribution notices addressed to the institutions by the national resolution authorities (Art. 67(4) SRMR). These notices, in turn, find their legal bases in the national transposing statutes of the BRRD, since the SRMR leaves the collection of the contributions to the NRAs, which then transfer the monies raised to the Fund. The substantive content of the contribution notices, however, is predetermined by the calculations decided upon by the SRB (Art. 70(2) SRMR for the ex-ante contributions, Art. 71(1) SRMR in conjunction with Art. 70(2) SRMR for the ex-post contributions).
II. Loans received from resolution financing arrangements in non-SRM Member States (Art. 60(1)(b)) The BRRD, which is premised on the idea of separate resolution financing arrange- 6 ments for the individual EU Member States, provides for a mechanism of mutual borrowing between national resolution financing arrangements (Art. 106 BRRD). The lending of such funds is voluntary and thus not limited to the financing arrangements of Member States where group entities are located; it operates independently of the mutualisation of group resolution financing under Art. 107 BRRD. The modalities of the loan are agreed between the financing arrangements involved; the BRRD does not include provisions for these terms save for the safeguard that all participating financing arrangements shall, as a matter of principle (even though deviations may be agreed) have the same terms (Art. 106(4) sent. 2 BRRD). Art. 72 SRMR, which refers to Art. 106 BRRD, transposes this mechanism for the SRB and provides that the Board shall take the decision to request borrowing from other resolution financing arrangements (introductory sentence of Art. 72(1) SRMR), or to grant a request from another resolution financing arrangement (Art. 72(3) SRMR). Art. 60(1)(b) SRMR stipulates that loans thus obtained are to be booked as revenue for Part II of the budget. This booking as revenue is of a purely budgetary nature; in economic terms, taking 7 up such a loan does not add value to the SRB since the loan must later be repaid. In finance terms, borrowing from other financing arrangements thus serves to provide liquidity to the Fund (but not solvency). The booking as revenue is, however, necessary to make the funds available to the Board for resolution financing, since the resolution measures which are financed through the loan are booked as expenditures under Art. 60(2) (a) SRMR; the loan itself must therefore be booked as revenue since otherwise Part II of the budget would not be balanced, as required by Art. 58(2) SRMR. Lending between compartments of the Fund under Art. 7 of the Interinstitutional 8 Agreement during the transitional period (“temporary transfer”) does not fall under Art. 60(1)(b) SRMR: Lit. b is concerned only with borrowing/lending transactions between the Fund and external liquidity providers, not for such transactions among different compartments within the Fund.
III. Loans received from financial institutions or other third parties (Art. 60(1)(c)) Art. 60(1)(c) SRMR is analogous to Art. 60(1)(b) SRMR: Whereas lit. b (in conjunc- 9 tion with Art. 72(1) SRMR) allows the Board to request borrowing from other resolution financing arrangements within the meaning of the BRRD and to book such loans received as revenue for Part II, Art. 60(1)(c) SRMR (in conjunction with Arts. 73 and 74 Andreas Witte
1037
Art. 60 SRMR
Part II of the budget on the Fund
SRMR) covers borrowing from financial institutions and other third parties. The SRB is thus given the possibility to contract funding from the financial markets. Since these funds have to be repaid, they can be considered a provision of liquidity. The provision covers both private and public sector counterparties. 10 It is moot to speculate whether the term “financial institution” in this sense is to be read in the narrow sense in which the word is normally used as a term of art in financial legislation, i.e. as comprising primarily financial holding companies and mixed financial holding companies (Art. 4(1)(26) CRR), or whether the word is intended to have a broader meaning covering a wide range of financial market participants.2 The narrow reading would not be meaningful (in spite of the fact that Art. 3(1)(15) SRMR defines financial institutions by reference to the CRR definition) since an entity which conducts financial market transactions such as the lending envisaged in Art. 60(1)(c) SRMR would likely cease to meet this narrow definition of a financial institution. But since Art. 60(1)(c) SRMR puts, for the purposes of these lending arrangements, “other third parties” on the same footing as “financial institutions”, there is no doubt that the SRB can contract borrowing from a wide range of financial market actors, irrespective of whether they are subsumed under the heading of “financial institutions” or that of “other third parties”. 11 This does not mean, however, that there are absolutely no restrictions on the third parties from which the SRB can borrow on behalf of the Fund and Part II of the budget. Most importantly, the prohibition of monetary financing under Art. 123(1) TFEU precludes borrowing from the Eurosystem (ECB or a national central bank), since the SRB is an agency of the Union; thus the extension of central bank credit to it is prohibited by virtue of this primary law provision. The same goes for the national resolution authorities, as they are authorities of the Member States.
IV. Returns on investments (Art. 60(1)(d)) Art. 75 SRMR allows the SRB to invest the monies of the Fund in line with a prudent and safe investment strategy. This is in the interest of the contributory institutions. Instead of having the monies lying around idly while they are not needed for resolution purposes, they should be invested to generate revenue. These proceeds count as revenue of Part II of the budget and complement the Fund; as a consequence, they count towards the target level stipulated under Art. 69 SRMR and lower the overall contribution burden. 13 The term “return on investment” is not to be construed restrictively in the sense in which the word (often shortened to ROI in this usage) is used as a term of art in accounting (net profits divided by invested assets). This follows from two considerations: Firstly, other language versions of the SRMR use wording that is broader than the English version and is not as closely linked to an accounting term of art as the English version appears to be.3 Secondly, ROI as an accounting figure would include only the profit generated from the investment (e.g. interest revenue in case of lending, dividends and share price increases in case of equity investments), not the repayment of the invested 12
2 Certainly in Art. 127(6) TFEU, the term “financial institutions” is used in a wide sense: Firstly, the narrow sense would imply that the secondary law provision of the CRR predetermines authoritatively the meaning of a primary law text, which it cannot; secondly, credit institutions in the CRR sense are themselves not financial institutions in the CRR sense, meaning that the wording “credit institutions and other financial institutions” in Art. 127(6) TFEU cannot be taken to use these terms in their CRR meaning. 3 E.g. French “revenus des investissements”; German “Erträgen aus der Anlage der vom Fonds gehaltenen Beträge”; Spanish “rendimiento de las inversiones”.
1038
Andreas Witte
Art. 60 SRMR
Part II of the budget on the Fund
principal itself. The logic of the SRMR would, however, require the repaid principal to be booked as revenue as well. This principal was booked as an expenditure when the investment was initially made (Art. 60(2)(b) SRMR), so it would be asymmetrical to not also book it as revenue when the invested amount flows back to the investor. Besides, accounting also the repaid principal would keep Part II of the budget balanced (as required by Art. 58(2) SRMR) in cases where investments are liquidated precisely in order to raise the means necessary for resolution action. The term “returns on the investments” in Art. 60(1)(d) SRMR must therefore be taken as including both the proceeds from an investment as well as the recovery of the invested amount itself.
V. Recovered resolution expenditures (Art. 60(1)(e)) Where the SRB uses monies from the Fund to finance resolution action under Art. 76 14 SRMR, the expectation (or at least hope) is that these monies are not lost for good. At least parts of these sums might be recoverable; for instance, a loan made under Art. 76(1)(b) SRMR can be (partially) repaid, assets purchased under Art. 76(1)(c) SRMR might be able to be sold on the market at some non-negative value, or the Board might become shareholder of an asset management vehicle which, in eventual sale or orderly wind-down, might fetch some value (Arts. 76(1)(d) and 26(2) SRMR, in conjunction with Arts. 42(2) and (3) BRRD). Art. 60(1)(e) SRMR prescribes that such recovered amounts must be booked as revenue of Part II. This is in line with the basic idea that for each transaction that is booked as a revenue or expenditure of the SRB, the reversal of that transaction must, reversely and symmetrically, be booked as an expenditure or revenue, respectively, since otherwise the budget could not be balanced. The initial resolution action was booked as expenditure under Art. 60(2)(a) SRMR (even though the years of booking might well differ). Even though the SRMR does not spell it out explicitly, the SRB must be taken to be 15 subject to a fiduciary duty to attempt a recovery of the monies spent on resolution measures to the largest extent possible. This obligation emanates from the principle of economy,4 which is an aspect of the principle of sound financial management and which obliges the Board to make the most efficient use of the monies entrusted to it.
C. Expenditures of Part II (Art. 60(2)) I. Expenditures for resolution financing (Art. 60(2)(a)) Art. 60(2)(a) SRMR is concerned with the primary raison d’être of the Fund and of 16 Part II of the SRB budget, which relates to the Fund. It lies in the financing of resolution measures in accordance with Art. 76 SRMR. Art. 60(2)(a) SRMR is not in itself a provision authorising the use of funds for resolution action; that is provided for in Art. 76 SRMR. But Art. 60(2)(a) SRMR provides that the monies thus used must be booked as expenditures of Part II of the budget. It is noteworthy that the use of monies for this purpose must be provided for in a duly adopted resolution scheme within the meaning of Art. 18 SRMR. On the details of the ways monies can be used for resolution financing, see the annotations to Arts. 76, 24–27 and 20 SRMR. 4 The principle is codified in Art. 26 SRB-FR, but also follows from general principles of law; see the annotations to Art. 58 SRMR.
Andreas Witte
1039
Art. 60 SRMR
Part II of the budget on the Fund
II. Investments (Art. 60(2)(b)) Art. 60(2)(b) SRMR is the mirror image to Art. 60(1)(d) SRMR. The former encompasses the making of an investment of Fund monies in accordance with Art. 75 SRMR; the latter covers the repayment of that investment (including also the principal, see supra, → para. 13). Art. 60(2)(b) SRMR mandates that the making of such an investment is to be booked as an expenditure of Part II; the restrictions on the types of investments that may be made are stipulated in Art. 75 SRMR and the delegated act adopted by the Commission. 18 It may be noted that the SRB may borrow from other resolution financing arrangements. It is also evident from Art. 72(3) SRMR that the SRB, on behalf of the Fund, is entitled to lend to other resolution financing arrangements in accordance with Art. 106 BRRD. Logically such loans granted must be booked as expenditures in Part II of the budget if borrowing is to be booked as revenue (as per Art. 60(1)(b) SRMR), but there is no item in Art. 60(2) SRMR dealing explicitly with this situation. Art. 60(2)(b) SRMR should thus be interpreted as including, in the meaning of the term “investments”, such loans extended to other resolution financing arrangements (which is consistent with the meaning of the word “investment” in general usage and with Art. 106(6) BRRD, according to which outstanding loans constitute assets of the financing arrangement that acted as lender). For the same reason, loans granted to private sector entities outside resolution should be treated and booked as “investments” under Art. 60(2)(b) SRMR, which constitutes the mirror image to the borrowing from such entities, which is booked as revenue under Art. 60(1)(c) SRMR (where the loan to a private sector entity is granted as part of a resolution scheme, its accounting treatment will be covered by Art. 60(2)(a)). 17
III. Interest paid on loans from resolution financing arrangements in non-SRM Member States (Art. 60(2)(c)) The borrowing/lending between resolution financing arrangements under Arts. 72 SRMR and 106 BRRD is subject to terms which are negotiated upon between the arrangements involved (Art. 106(4) BRRD). These terms include the possibility to charge interest. As far as the SRB is concerned, only borrowing from or lending to resolution financing arrangements in EU/EEA Member States not participating in the banking union are available, since the Fund itself constitutes the resolution financing arrangement of the participating Member States (Art. 96 SRMR). Art. 72 SRMR does not cover borrowing from or lending to resolution financing arrangements in third countries outside the EU/EEA, even though such arrangements can potentially fall under the term “other third parties” within the meaning of Art. 73 SRMR. Their budgetary treatment would thus fall under Arts. 60(1)(c) and 60(2)(d) SRMR. 20 There is a certain tension in this lending among resolution financing arrangements within the EU/EEA. On the one hand, this lending constitutes a form of solidarity between the arrangements concerned, which would tend to suggest that only concessionary interest rates or no interest at all should/would be charged (and most likely there would be political pressure on the lending arrangement to grant such concessions). On the other hand, the authorities managing the resolution financing arrangements (including the SRB as owner and manager of the Fund, Art. 67(3) SRMR) are subject to a fiduciary duty in the interest of the institutions contributing to the arrangements that the monies are used and managed prudently. This would require the charging of interest in line with prevalent market conditions; overly concessionary rates would, in effect, con19
1040
Andreas Witte
Establishment and implementation of the budget
Art. 61 SRMR
stitute a cross-subsidisation of contributory institutions subject to one financing arrangement by those subject to another. Union law provides for no legal basis for this. One would therefore have to assume that even though the lending arrangements involved have discretion in negotiating and agreeing upon the terms, including interest rates, of their lending, such considerations put limits to the exercise of this discretion. The wording of Art. 60(2)(c) SRMR speaks only of interest paid on the loans as ex- 21 penditure, not the repayment of the principal itself. However, the disbursement of the initial loan was booked as revenue as per Art. 60(1)(b) SRMR; the principles of universality and of equilibrium could therefore not be met if the repayment of the principal were not also booked as expenditure (supra, → para. 2).
IV. Interest paid on loans received from financial institutions or other third parties (Art. 60(2)(d)) The disbursement of the initial loan was booked as revenue under Art. 60(1)(d) 22 SRMR. For the reasons analogous to those pointed out in → paras. 2, 13, 17 and 21, it would, however, run against the logic of the SRB budgetary regime to not also book the repayment of the principal as an expenditure of Part II.
Art. 61 SRMR Establishment and implementation of the budget 1. By 15 February each year, the Chair shall draw up a draft budget of the Board, including a statement of estimates of the Board's revenue and expenditure for the following year together with the establishment plan and shall submit it to the Board for adoption. 2. By 31 March each year, the Board in its plenary session shall, where necessary, adjust the draft submitted by the Chair and adopt the final budget of the Board together with the establishment plan. Bibliography Nigel Foster, Foster on EU Law (7th edn, Oxford University Press, Oxford 2019); Rudolf Streinz (ed), EUV/AEUV (3rd edn, C.H. Beck, Munich 2018); Dimitrios V. Skiadas, ‘Judicial Review of the Budgetary Authority during the enactment of the European Union’s Budget’ EIoP 4/7 (2000) ; Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’, JFR 1/2 (2015), 226; Andreas Witte, ‘Viel Lärm um nichts? – Wirkung und Normenhierarchie des Völkerrechts im Unionsrecht vor und nach Kadi’, ZÖR (2012), 679. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Role of Art. 61 SRMR in the SRB budgetary regime . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legal nature and challengeability of the budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 2
B. Drawing-up and adoption of the budget (Art. 61(1)) . . . . . . . . . . . . . . . . . . . . . . . . .
7
C. Adjustments and adoption of final budget (Art. 61(2)) . . . . . . . . . . . . . . . . . . . . . . .
11
D. Consequences of non-compliance with Art. 61 SRMR . . . . . . . . . . . . . . . . . . . . . . .
17
E. Possibility to adopt supplementary and amending budgets? . . . . . . . . . . . . . . . . .
21
Andreas Witte
1041
Art. 61 SRMR
Establishment and implementation of the budget
A. Function and background of the provision I. Role of Art. 61 SRMR in the SRB budgetary regime 1
The title of Art. 61 SRMR is slightly confusing when held against the title of Art. 63 SRMR, since both speak of budget “implementation”. In spite of this parallel in wording, the two provisions deal with different subject matters. Art. 61 SRMR concerns the preparation of the draft budget and the submission of the draft for adoption (Art. 61(1) SRMR) as well as the adoption itself (Art. 61(2) SRMR). It thus deals with the processes by which budgetary appropriations can be established. Art. 63 SRMR, on the other hand, deals with putting these appropriations into practice, i.e., by actually spending the monies appropriated, and also with the mechanism for monitoring whether this is done correctly and in line with the budget. The word “implementation” is thus not used in the same meaning in both titles.
II. Legal nature and challengeability of the budget 2
It is clear that the budget has legal effects, since it constitutes the legal basis for spending which would otherwise be impermissible. In line with well-established case law,1 it is thus in principle susceptible to judicial review.2 There were, in the past, doubts about the reviewability of budgets owing to their political nature and the fact that the Court of Justice should not act as the financial authority,3 but these concerns did not prevent the Court of Justice from admitting litigation against budgets; moreover, these concerns stemmed mostly from the complex institutional interplay between the Council
1 Case 190/84, Parti écologiste “Les Verts” v Parliament, ECLI:EU:C:1988:94. Union law thus deviates markedly from e.g. American constitutional law, according to which there can be acts with binding legal effect which are not susceptible to judicial review (see e.g. Nixon v United States, 506 U.S. 224 (1993)). 2 Case C-284/90, Council v Parliament, ECLI:EU:C:1992:154. The judgment does not make it entirely clear whether the subject matter of an action for annulment aimed at challenging a budget would be the budget itself, or a decision of a Union institution adopting the budget or determining that it has been adopted. In that case, an action for annulment was brought against both the budget and a decision (pursuant to what is now Art. 314(9) TFEU) declaring its adoption (para. 1), but the operative part of the judgment only annulled the latter, without giving a ruling on the application to annul the budget itself. In the reasoning, however, there is a passage stating that the annulment of the decision declaring that the budget has been adopted has the effect of depriving the budget itself of its validity (para. 33). In the light of this, it appears that it would be unnecessarily atomistic to differentiate between actions for annulment against the budget itself on the one hand and actions against a decision adopting the budget or declaring that it has been adopted on the other hand. (This situation differs from the judicial review of international agreements of the Union by the Court of Justice, where the annulment can only affect the decision concluding the agreement on behalf of the Union, not the agreement itself: Witte, ZÖR 2012, 679, at pp. 694–695.) Joined Cases C-181 and C-248/91, Parliament and Council v Commission, ECLI:EU:C:1993:271 is not a precedent against the view that the budget is susceptible to judicial review: The reason why the action against a budget entry was declared inadmissible in that judgment was not the lack of legal effect of the budget; it lay in the fact that the Court of Justice attributed that particular budget entry (a collective effort of the Member States to provide aid to a developing country) to the representatives of the Member States acting collectively as Member States, rather than as organs of the Community. The action in question was thus an action of national governments outside the reach of the Court of Justice’s jurisdiction. 3 These doubts are summarised and related by Skiadas, EIoP 4/7 (2000), citing Case 34/86, Council v Parliament, ECLI:EU:C:1986:221, Opinion of AG Mancini, para. 17.
1042
Andreas Witte
Establishment and implementation of the budget
Art. 61 SRMR
and the Parliament as the institutions jointly responsible for the Union budget,4 and apply therefore to a lesser extent to the SRB, where the power of adopting the budget is clearly assigned (only) to the Board in its plenary session. It is, however, difficult to imagine natural or legal persons having standing (in the 3 restrictive Plaumann interpretation of Art. 263(4) TFEU5) to bring such an action against the SRB budget. Likewise, the semi-privileged applicants of Art. 263(3) TFEU would not be entitled to challenge the legality of the SRB budget since they have no protected prerogatives or procedural rights in the adoption of that budget, owing to the budgetary autonomy of the SRB. A direct action for annulment of the SRB budget would thus appear to be admissible only from the privileged applicants with automatic standing under Art. 263(1) TFEU, who are politically unlikely to bring an application. On the other hand, it is not entirely implausible to assume that the legality of the SRB 4 budget can become an incidental question of relevance in proceedings before national courts. Under the SRM, NRAs are in some cases responsible for implementing the SRB resolution scheme by adopting decisions under national administrative law in the exercise of their powers under the national transpositions of the BRRD.6 Such NRA measures might well be litigated in national courts. Since any use of the Fund for resolution purposes requires an appropriation in the budget of the SRB,7 a litigant might thus attempt to allege procedural or substantive flaws in the adoption of the SRB budget as an argument in the litigation against the resolution measures. The legality of the SRB budget could thus become a question of relevance8 in national legal proceedings which could be submitted to the Court of Justice by means of a reference for preliminary ruling under Art. 267 TFEU.9 The fact that the budget is, in principle, susceptible to judicial review has to be 5 distinguished from the question of the standard of scrutiny applied in this judicial review. Budgetary decisions involve, by necessity, a wide leeway for a political assessment as to how the limited available funds should be spent. This political assessment is attributed, by the SRM Regulation, to the Board in its plenary session and should thus not be substituted by the assessment of the judiciary. One would therefore assume that the judicial review of the SRB budget would focus primarily on compliance with the procedural rules provided for, whereas the review as to the substance of the budget
4 A past Financial Regulation governing the Community budget thus described both Parliament and Council together as the “budgetary authority” for the Community budget: Art. 9(5) of Council Regulation (EC, Euratom) No. 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, OJ L 248, 16.9.2002, at pp. 1–48. The present Union Financial Regulation does not contain this statement, but the complex procedural ping-pong between the two institutions still applies to the adoption of the Union budget (Art. 314 TFEU). 5 Case 25/62, Plaumann v Commission, ECLI:EU:C:1963:17. 6 Art. 7(3)(3) BRRD. 7 Art. 60(2)(a) SRMR. 8 At least, the question of legality of the SRB budget would not be obviously lacking relevance for the national proceedings. In line with case law, this can be sufficient for the admissibility of a reference for preliminary ruling: Case C-210/06, Cartesio, ECLI:EU:C:2008:723, para. 67. See, more generally, Witte, JFR 1/2 (2015), 226, at pp. 255–257 for Art. 267 TFEU as a vehicle for judicial review of acts in the area of financial regulation by parties with difficulties to show standing in the sense of Case 25/62, Plaumann v Commission, ECLI:EU:C:1963:17. 9 Such a reference would not only be admissible but mandatory for courts of last instance (by virtue of Art. 267(3) TFEU), and for courts of lower instance if they consider the budget unlawful (by virtue of the Foto-Frost line of case law (Case 314/85, Foto-Frost v Hauptzollamt Lübeck-Ost, ECLI:EU:C:1987:452). Both potential grounds for a duty to refer are subject to the “acte clair” counter-exemption (see on this Case 283/81, CILFIT v Ministry of Health, ECLI:EU:C:1982:33).
Andreas Witte
1043
Art. 61 SRMR
Establishment and implementation of the budget
is limited to cases where budgetary discretion is exercised in a manifestly wrong or arbitrary manner.10 6 Compared to these questions, it is of little doctrinal or practical relevance to speculate whether the budget constitutes a legal act sui generis, or a decision without addressee within the meaning of Art. 288(4) TFEU, or something else. The comparison to the budget of the Union itself would suggest a sui generis character,11 which is not incompatible with the statement above about susceptibility to judicial review.12
B. Drawing-up and adoption of the budget (Art. 61(1)) Art. 61(1) SRMR regulates two important aspects of the SRB’s budgetary process. First, the competence of the Chair to draw up the draft budget (including a statement of estimates of revenue and expenditures, together with the establishment plan). This competence is also reiterated in Art. 56(2)(d) SRMR. Of course as a matter of practice, the draft is prepared by SRB staff, who are managed on a day-to-day basis by the Chair, but Art. 61(1) SRMR makes it clear that, legally, the draft budget is presented to the SRB by the Chair as his or her product for which he or she takes responsibility. 8 The second key element of the substantive content of Art. 61(1) SRMR is the deadline of 15 February (for the budget of the following year; e.g. the 2022 budget must be drawn up and submitted by 15 February 2021). By this deadline, both the preparation of the draft and its formal submission to the Board must be completed. The submission has to take place in accordance with the procedure in place for meetings of the Board in its plenary session, which is codified in Art. 8 of the relevant Rules of Procedure. 13 All these preparatory steps ahead of the meeting need to be complied with by 15 February in order to “submit” in time, as required by Art. 61(1) SRMR. The meeting itself need not take place within this deadline, since Art. 61(1) SRMR requires only submission by that date, not discussion or adoption. 9 Art. 61(1) SRMR does not require that the “statement of estimates of the Board’s revenue and expenditures” be a separate document; these figures can be incorporated into the budget itself, as demonstrated by the word “including” (as opposed to the establishment plan, which is drawn up and submitted “together with” the budget). In line with the general nature of a budget, one would expect these estimates to be the cornerstone of the budget as a document. 10 The “establishment plan” mentioned in Art. 61(1) SRMR is a table summarising the number of job positions in the various SRB departments and the pay grade to which they have been assigned. This may not be immediately obvious from the word “establishment plan”, but is in line with common usage in EU institutions and agencies and 7
10 That seems to be the standard of review presupposed by Case 204/86, Greece v Council, ECLI:EU:C: 1988:450, para. 22. The judgment as a whole focusses mostly on procedural aspects, but this particular passage can be read in a way that it applies to questions of substantive law (even though the contentious classification of an item as “compulsory expenditure” had procedural consequences). In contrast to the Court of Justice’s traditional leniency in matters of substantive discretion, its case law is typically rather strict on procedural grounds and does not limit the review of the procedure to cases of arbitrary or manifestly wrong violations of procedural rules (as exemplified by Case C-269/90, Technische Universität München v Hauptzollamt München-Mitte, ECLI:EU:C:1991:438). 11 Niedobitek, in: Streinz (ed), EUV/AEUV (3rd edn, 2018), Art. 314 TFEU, para. 41. 12 Cf. Foster, Foster on EU Law (7th edn, 2019), at p. 118, citing Joined Cases 8–11/66, Cimenteries and others v Commission, ECLI:EU:C:1967:7. 13 Decision of the Plenary Session of the Board of 29 April 2015 adopting the Rules of Procedure of the Single Resolution Board in its Plenary Session (SRB/PS/2015/9).
1044
Andreas Witte
Establishment and implementation of the budget
Art. 61 SRMR
confirmed by other language versions of the SRM Regulation.14 The establishment plan is a document separate from the budget, but submitted "together with” it to the Board.
C. Adjustments and adoption of final budget (Art. 61(2)) Art. 61(2) SRMR is structured in a way which parallels the logic of Art. 61(1) SRMR. It, too, regulates two key components of the budgetary process. Firstly, the competence to adopt the budget. This competence lies with the Board in its plenary session, which is reiterated in Art. 50(1)(b) SRMR. The plenary session is the composition of the Board as governed by Arts. 49 and 51 SRMR. Secondly, like Art. 61(1) SRMR, Art. 61(2) SRMR provides for a deadline. The adoption of the budget (together with the establishment plan) must occur by 31 March. Even though the wording of Art. 61(2) SRMR does not explicitly say so, the juxtaposition to Art. 61(1) SRMR leaves no doubt that this applies to the budget and establishment plan for the following year (e.g. the 2022 budget must be adopted by 31 March 2021). The 31 March deadline refers to the adoption of the budget (and, potentially, adjustments to the draft, but these occur by necessity before adoption). That means the decision-making steps of the Board (in its plenary session) must be completed by then. The wording of Art. 61(2) SRMR makes it clear that the plenary session of the Board has the power to adjust the draft. This means the Board is not limited to adopting or rejecting the draft presented to it by the Chair; it can, sua sponte, make amendments to the Chair’s proposal and adopt the budget in this amended form. The words “where necessary” seem to impose a restriction on the Board’s ability to make adjustments. One would, however, have to acknowledge a wide discretion for the Board (being the decision-making body to which the budgetary power is assigned) in determining whether and for which reasons such adjustments are “necessary”. The complex decision-making processes of Art. 18(6) SRMR do not apply to the budget. This means that, in budgetary matters, the SRB is, in fact, master of its domain; it can adopt its own budget and does not need the endorsement of the Commission or the approval of the Council as it does for resolution schemes. This may well create frictions in the institutional balance, since any use of the Fund for resolution purposes needs to be based on appropriations in a budget (Art. 60(2)(a)) SRMR, which might well require an amending budget (see below) if the resolution action in question was not foreseen in the budget of the current year as already adopted. The budgetary control thus gives the SRB a degree of control over resolution action which does not become immediately apparent from Art. 18 SRMR. The SRM Regulation itself does not require publication of the SRB budget (unlike for the final accounts, see Art. 63(7) SRMR). Such a publication is, however, required by Art. 29(3) SRB-FR for a full version of the budget (including establishment plan, any amending budget, and an indication of the number of contract staff and seconded national experts) on the SRB website. In addition, Art. 29(2) SRB-FR requires the publication of a summary of the budget (and any amending budget) in the Official Journal.
11
12
13
14
15
16
D. Consequences of non-compliance with Art. 61 SRMR The SRB has repeatedly failed to adopt a budget in line with the deadlines provided 17 for in Art. 61 SRMR. For instance, the 2016 budget was adopted in September 2015 (and 14
E.g. German “Stellenplan”, Spanish “cuadro de personal”, Dutch “personeelsformatie”.
Andreas Witte
1045
Art. 61 SRMR
Establishment and implementation of the budget
subsequently amended twice); the 2017 budget was adopted in November 2016.15 This begs the question of the legal consequences arising from such breaches. 18 The impact of non-adoption of the budget on the work of the SRB is governed by Art. 14 SRB-FR. This provision was modelled after Art. 315 TFEU, but is more granular because it differentiates between payments and commitments. For each budget chapter, commitments (i.e., the act of entering into legally binding obligations to pay) may be made up to one quarter of the appropriations of the same chapter in the previous budget, plus one twelfth per month that has elapsed (Art. 14(2)(1) SRB-FR). Payments (i.e., the actual flow of money to honour financial commitments), on the other hand, may be made every month up to an amount of one twelfth of the previous year’s budget (Art. 14(2)(3) SRB-FR). Both are capped by reference to figures in the statement of estimates of revenue and expenditure for the current year, and in exceptional cases the Board in its plenary session may, even though it has not yet adopted the budget, authorise higher expenditures under Art 14(4) and (5) SRB-FR.16 19 A different question is whether the failure to comply with Art. 61 SRMR legally vitiates the budget once it is adopted. Traditionally, the jurisprudence of the Court of Justice is quite strict when it comes to legal provisions which allocate procedural roles to various actors interacting in the adoption of an act;17 one would thus assume that a violation of the procedural roles allocated in Art. 61 SRMR (such as the competence of the Chair to submit the draft budget, or the competence of the Board in its plenary session to adjust the draft and adopt [or reject] it) would be a breach of an essential procedural requirement leading to the illegality and nullity of the budget. Such breaches can, however, only be invoked by private parties if the procedural provision which was violated can be seen as creating rights for such parties and contributing to legal certainty for them,18 which would normally be difficult to argue for the provisions of Art. 61 SRMR. If the Court of Justice does find the budget to be unlawful, it can still, in the interest of legal certainty, declare that commitments or payments made before the judgment on the basis of the annulled budget remain valid.19 20 One would have to be less strict about violations of the deadlines provided for in Art. 61 SRMR (e.g. submission of the draft budget to the Board later than 15 February, adoption of the budget by the Board later than 31 March). If one were to take breaches of these deadlines as grounds for the illegality of the budget in all cases, then the expiry of these deadlines would mean that no budget could at all be adopted for the year in question, since any subsequently adopted budget would by necessity be in breach of the deadlines. This result would be absurd; surely it is, in the interest of legitimising the Board’s financial management, preferable to have a duly (albeit late) adopted budget rather than to rely on the stopgap of Art. 14 SRB-FR for the entire year to come. One 15 The 2015 budget was not adopted until March 2015, but since the SRB became fully operational only on 1 January 2015 (Art. 98(1) SRMR), this should not be regarded as a failure to comply with the deadlines of Art. 61 SRMR. 16 Past versions of the SRB-FR defined such competences using the term “management board”, which is terminology alien to the SRM Regulation. The use of this term, which was eliminated in the 2020 recast of the SRB-FR, originated in the Commission’s framework financial Regulation which provided the boilerplate for the SRB-FR (infra, → Art. 64). 17 This strictness is exemplified by Case 138/79, Roquette v Council, ECLI:EU:C:1980:249, and Case 84/82, Germany v Commission, ECLI:EU:C:1984:117; specifically for budget matters, see Case 204/86, Greece v Council, ECLI:EU:C:1988:450. 18 Joined Cases T-79/89 et al., BASF AG and others v Commission, ECLI:EU:T:1992:26, para. 78. 19 Case C-284/90, Council v Parliament, ECLI:EU:C:1992:154, paras 34–37. This can be justified on the basis of Art. 264(2) TFEU, which applies not only to actions for annulment but also to declarations of illegality within the context of a preliminary reference under Art. 267 TFEU (Case C-228/92, Roquette Frères v Hauptzollamt Geldern, ECLI:EU:C:1994:168, para. 19).
1046
Andreas Witte
Art. 62 SRMR
Internal audit and control
would therefore have to limit annulments of the budget for these reasons to cases where it cannot be ruled out that the budget would have been different if the deadlines had been complied with.20
E. Possibility to adopt supplementary and amending budgets? The adjustments of which Art. 61(2) SRMR speaks are adjustments made to the draft 21 budget before adoption, not amendments to an already adopted budget. This situation is analogous to that for the Union budget, where the primary law provisions (Arts. 310 and 313–319 TFEU) do not explicitly provide for amendments to budgets after adoption. Nonetheless, a possibility to make such amendments appears indispensable to remain able to act in case of unforeseen courses of events. Art. 44 of the Union Financial Regulation thus permits the possibility to adopt amending budgets (sometimes called supplementary and amending budgets) for the Union, and the Court of Justice has accepted this practice.21 The same rationale would apply to the budget of the SRB, especially since the use of the Fund for the purpose of resolution action, which cannot be foreseen with certainty ex ante when the annual budget is drawn up, requires budgetary appropriations. One would therefore conclude that the provision of Art. 32 of the SRB-FR, which allows for amending budgets, is not incompatible with the SRM Regulation.22 As a matter of fact, the SRB has already made use of the possibility to adopt amending budgets, by amending twice the budget for the year 2016. As per Art. 32 of the SRB-FR, amending budgets must be adopted by the same proce- 22 dure as the initial (i.e., regular annual) budget of the SRB.23 Of course the dates and deadlines provided for in Art. 61 SRMR cannot be complied with in the case of intraannual amendments, but the procedural steps themselves are the same, and are legally required. The draft amending budget is drawn up by the Chair and submitted to the Board for adoption (Art. 61(1) SRMR). The Board, acting in plenary session (Art. 50(1) (b) SRMR), adopts the amending budget, but can make adjustments to the draft submitted by the Chair (Art. 61(2) SRMR).
Art. 62 SRMR Internal audit and control 1. An internal audit function shall be set up within the Board, to be performed in compliance with the relevant international standards. The internal auditor, appointed by the Board, shall be responsible to it for verifying the proper operation of budget implementation systems and budgetary procedures of the Board. For that standard see e.g. Case C-301/87, France v Commission, ECLI:EU:C:1990:67, para. 31. In Case C-284/90, Council v Parliament, ECLI:EU:C:1992:154, the Court of Justice struck down an amending budget, but not because the possibility to make such amendments was questioned as a matter of principle. In Case 23/86 R, UK v Parliament, ECLI:EU:C:1986:125, the Court of Justice ordered, by way of interim measures, a Community organ to make amendments to an already adopted budget. 22 The word “final” in Art. 61(2) SRMR should best be read in contrast to the draft budget submitted to the Board by the Chair, and not as excluding amending budgets. This is supported by the fact that the Court of Justice (as stated in the text) approves of the possibility to make amendments to the Union budget in spite of the presence of the similarly sounding wording “definitively adopted” in Art. 314(9) TFEU. 23 This would arguably apply even if the SRB-FR did not explicitly say so, since the amendment constitutes an actus contrarius to the initial budget. On the acceptance of that doctrine in Union law see Case T-251/00, Lagardère v Commission, ECLI:EU:T:2002:278, para. 130, and Case C-402/11 P, Jager & Polacek GmbH v OHIM, ECLI:EU:C:2012:649 (Appeal against the General Court, T-488/09). 20
21
Andreas Witte
1047
Art. 62 SRMR
Internal audit and control
2. The internal auditor shall advise the Board on dealing with risks, by issuing independent opinions on the quality of management and control systems and by issuing recommendations for improving the conditions of implementation of operations and promoting sound financial management. 3. The responsibility for putting in place internal control systems and procedures suitable for performing the tasks of the internal auditor shall lie with the Board. Bibliography Richard G. Brody and D. Joran Lowe, ‘The New Role of the Internal Auditor: Implications for Internal Auditor Objectivity’, International Journal of Auditing 4 (2000), 169; Fabrizio Cafaggi, Colin Scott and Linda Senden (eds), The Challenge of Transnational Private Regulation (Wiley-Blackwell, Oxford 2011). A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Set-up of the internal audit function (Art. 62(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Institutional position of the internal audit function . . . . . . . . . . . . . . . . . . . . . . . . . . II. Compliance with international standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Verification role of the internal audit function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 4 12 14
C. Advisory role of the internal audit function (Art. 62(2)) . . . . . . . . . . . . . . . . . . . . .
16
D. Responsibilities of the Board (Art. 62(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
E. External audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
A. Function and background of the provision Art. 62 SRMR provides for the existence of an internal audit function within the Board and establishes some rules concerning its mandate and its organisational position. The provision thus has an internal governance angle, which is why it could systematically also have been placed in the context of the provisions on the SRB’s governance. The placement within the context of the financial provisions is ostensibly a result of the fact that the verification of the budget implementation systems and budgetary procedures is an important part of the internal audit function’s mandate. That mandate does, however, not end there; generally accepted best practices in the financial industry provide for a mandate of internal auditors that goes beyond the mere collection and spending of money and includes the efficiency and soundness of processes in general, which Art. 62 SRMR somewhat cumbersomely describes as “quality of management and control systems” and “improving the conditions of implementation of operations”. 2 The brevity of Art. 62 SRMR means additional rules are necessary to flesh out the position and mandate of the internal audit function in more detail. Such provisions are included in Arts. 74-77 of the SRB-FR. In addition, Art. 74(2) of that Regulation provides for an internal audit charter laying down the mandate of the internal audit function.1 As far as is ascertainable, that charter has, at the time of writing, not yet been adopted and published. 3 The SRB’s internal audit function has no power of audit over the national resolution authorities; these authorities possess their own internal audit departments. This does not prevent the SRB and the NRAs from cooperating in the area of internal audit, e.g. by liaising with respect to their audit plans and conducting coordinated audits across both SRB and NRAs to properly monitor the performance of functions within the SRM. 1
1 The existence of such a charter is also required by relevant international standards; see e.g. para. 1000 (Purpose, Authority, and Responsibility) of the IIA’s International Standards for the Professional Practice of Internal Auditing.
1048
Andreas Witte
Art. 62 SRMR
Internal audit and control
B. Set-up of the internal audit function (Art. 62(1)) I. Institutional position of the internal audit function The internal audit function operates “within the Board”. This does not mean that the audit function has to be exercised in person by people who are members of the Board within the meaning of Art. 43(1) SRMR; it means that the Board as a Union agency (Art. 42(1) SRMR) is obliged to maintain a department dedicated to internal audits. The use of the term “internal auditor” in Arts. 62(1) and (2) SRMR could give rise to misunderstandings; the term normally means anybody whose task it is to conduct internal audits. There are thus many “internal auditors” within a large institution, who collectively make up the internal audit function. The fact that Art. 62 SRMR uses the term in the singular (and also the fact that the “internal auditor” is to be appointed by the Board, which would be cumbersome if it applied to every single employee of the internal audit function) indicates that the “internal auditor” referenced here is the head of the internal audit function (which may be referred to by other terms; the IIA standards, for instance, use “chief audit executive”). This is also the meaning in which the word is used in the SRB-FR. Other staff employed in the internal audit function are not captured by the wording “internal auditor” as used in Art. 62 SRMR, and therefore do not enjoy the same safeguarded institutional position. They can be recruited by management within the internal audit function, rather than being appointed directly by the Board, and take instructions from that management (but not SRB management outside the internal audit function). The internal auditor enjoys independence. This rule is only imperfectly alluded to in the text of Art. 62 SRMR (“independent opinions” in Art. 62(2) SRMR), but it is spelt out in strong terms in Art. 75 SRB-FR, and firmly anchored in generally recognised best practices, as codified in international standards (see below). This means that even though he or she is responsible to the Board, the Board is not entitled to issue instructions to the internal auditor concerning the planning or execution of internal audits and the assessment and evaluation of the facts uncovered in these audits. Even more importantly, the internal audit function also enjoys independence vis-à-vis other functions and departments of the SRB. The internal auditor is appointed by the Board. The SRM Regulation does not explicitly govern his or her dismissal; in particular, it does not provide for a fixed term of office to which he or she is appointed. One would therefore have to assume that the Board is free to dismiss the internal auditor at any time and appoint a successor. This creates a certain tension with the internal auditor’s independence (see above); but even international standards which subscribe to the principle of independence of the internal auditor do typically not require a fixed tenure but rather acknowledge the possibility to dismiss the internal auditor provided that high-level decision-makers decide to do so.2 In the light of the text of the SRM Regulation and the role of the internal audit function as an advisory body to the Board, one would therefore have to acknowledge the power of the Board to dismiss the internal auditor at any time and appoint a successor. For the sake of completeness, it should, however, be added that this possibility relates solely to his or her removal from the specific role of internal auditor; should he or she be a member of staff of the SRB (which will typically be the case), then dismissal from the role of 2 See e.g. para. 1110 (Organizational Independence) of the IIA’s International Standards for the Professional Practice of Internal Auditing, requiring a decision of the board to appoint or dismiss the chief audit executive.
Andreas Witte
1049
4
5
6
7
Art. 62 SRMR
8
9
10
11
Internal audit and control
internal auditor does not automatically terminate his or her employment with the SRB. Such termination can only be effectuated in accordance with the applicable employment law (infra, → Art. 82). Art. 74(2) of the SRB-FR specifies that the role of internal auditor is incompatible with the roles of authorising officer or accounting officer (an office established under Art. 50(1)(n) SRMR) of the SRB or the Commission. This also implies, by necessity, that the Chair, who is ex officio authorising officer by virtue of Art. 63(1) SRMR, cannot be internal auditor, even though this should go without saying. The internal auditor is responsible to the Board. This means, first and foremost, that he or she communicates directly with the Board, rather than indirectly (e.g. solely via the Chair). Since the SRM Regulation regards the plenary and the executive sessions of the Board merely as two different compositions of the same body rather than two distinct bodies, one would assume that the internal auditor is entitled to communicate directly with either session, as he or she deems necessary in the fulfilment of his or her tasks. Typically the communication will, however, be with the plenary session, since the responsibilities of the internal audit function are closely linked to the plenary session’s monitoring tasks under Art. 50(1)(b) SRMR. Under the current organisation of the SRB, the internal audit function reports to the Chair.3 This is in line with international standards, which typically express a preference for reporting of the internal audit department to the chief executive officer (or equivalent) rather than another member of the highest decision-making body of the institution. This concerns, however, only the day-to-day management of the internal audit function and does not eliminate the internal auditor’s right to address the Board directly rather than merely indirectly via the Chair. Art. 74(4) of the SRB-FR stipulates that the internal auditor’s mandate extends to all activities and departments of the SRB, meaning that there are no audit-free areas within the SRB. The same provision stipulates also that the internal auditor enjoys “full and unlimited access to all information required to perform his or her duties”. Since it is within the discretion of the internal auditor to determine which information is necessary to perform the audit duties, this means, in effect, that no confidentiality regimes within the SRB can restrict the audit function’s access to data and information. These powers of the internal auditor extend to the entirety of his or her mandate, i.e. both the verification and the advisory role (see infra, → paras. 14-21).
II. Compliance with international standards 12
Art. 62(1) SRMR requires the internal audit function to perform its role “in compliance with the relevant international standards”. The standards envisaged here are soft law documents which are issued by a number of professional organisations and standard-setting bodies at the international level. In the area of internal audit, important global standard-setters include The Institute of Internal Auditors (IIA), an association of professionals working in internal audit functions which manages and administers, most importantly, the Certified Internal Auditor (CIA) certification which is widely recognised by employers around the world, and the International Auditing and Assurance Standards Board (IAASB) which brings together a large number of standard-set-
3 See the organisation chart .
1050
Andreas Witte
Art. 62 SRMR
Internal audit and control
ting bodies at the national level.4 Both bodies issue their own documents which aim to codify generally accepted best practices for the roles of internal audit functions in institutions and of the individual auditors working there. In addition to these, other bodies exist as well, also at the national level (many of which participate in the work of globallevel organisations such as IAASB); the SRM Regulation does not specify which standards, exactly, are those which the SRB’s internal audit function is expected to comply with. But the various standards do, usually, not contradict but rather complement each other, and constitute embodiments of the same values, principles, and best practices; a precise delineation of the standards which the SRB internal auditors should comply with is therefore usually dispensable. This lack of precise circumscription of the standards referenced in Art. 62(1) SRMR 13 makes it difficult to suppose that the reference is meant to impose the standards as a binding obligation in a legal sense on the SRB. Such a binding effect would also be questionable from the perspective of the institutional autonomy of the SRB, since it would effectively delegate power to private sector bodies, or public/private sector hybrids such as the IIA and the IAASB, to legislate for the SRB. One should therefore read the reference to international standards more as a strong suggestion and expectation that the SRB’s internal audit function operates in accordance with generally recognised international best practices of internal auditors, rather than as a strict legal bindingness of any particular document. Such standards might also serve as interpretative aids in the construction of audit-related provisions of the SRM Regulation or the SRB-FR, where the wording of these provisions is ambiguous.
III. Verification role of the internal audit function Art. 62(1) SRMR assigns to the internal audit function the responsibility (owed to the 14 Board, see above) of verifying the proper operation of budget implementation systems and budgetary procedures of the SRB. This wording makes it clear that the audit function’s mandate does not extend to assessing, in substantive terms, the budgetary appropriations and the purposes for which these appropriations were made; that is a matter for the budgetary discretion of the Board. Instead, the audit function is mandated to monitor whether the safeguards and processes put in place within the SRB ensure that the budget is carried out as adopted by the Board. The word “implementation” here is used in the same meaning as in Art. 63 SRMR, i.e. the actual collection and spending of funds in accordance with the budget, rather than in the title of Art. 61 SRMR, where it refers to the preparation of a draft budget and its adoption. Likewise, the word “budgetary procedures” is meant to refer to the procedures for executing the budget rather than the procedures for adopting it, since otherwise the audit function would be responsible for challenging the validity of the very budget whose execution it is tasked to monitor.5 Art. 74(3)(b) of the SRB-FR, which constitutes an elaboration on Art. 62 SRMR, phrases this as “assessing the efficiency and effectiveness of the internal control and audit systems applicable to each operation for implementation of the Board’s budget”. Only 4 Many standard-setting bodies which issue such soft law documents consist mainly of private sector representatives. The standards can thus be seen as instances of private self-regulation, which is increasingly getting attention also from the academic sphere (see, as an example, the contributions in Cafaggi, Scott and Senden (eds), The Challenge of Transnational Private Regulation (2011)). Some standard-setters include representatives of both the private and the public sector, a phenomenon known as co-regulation. 5 This becomes more apparent in the German version of Art. 62(1) SRMR, which places “Systeme und Verfahren des Ausschusses für die Ausführung des Haushalts” in lieu of “budget implementation systems and budgetary procedures of the Board”.
Andreas Witte
1051
Art. 62 SRMR
Internal audit and control
in very exceptional cases of an evidently illegal budget (e.g. a budget not adopted by the Board in its plenary session) would one have to assume a mandate of the internal audit function to question the properness of the budget itself. 15 The SRMR does not specify the precise way by which the internal auditor exercises this verification mandate. The internal auditor (safeguarded by his or her independence and thus not subject to instructions from anyone, including the Board itself) thus has discretion to decide how to act. The typical way would presumably be the conduction of targeted audits of specific departments of functions within the SRB, resulting in an audit report that is presented to the Chair and the Board in its plenary session under Art. 74(6) of the SRB-FR.6
C. Advisory role of the internal audit function (Art. 62(2)) Art. 62(2) SRMR assigns to the internal audit function an additional mandate. The fact that this is spelt out in another paragraph seems to imply that this mandate is fundamentally different from the verification mandate under Art. 62(1) SRMR; but in substance, the two mandates appear to overlap, in particular since the Art. 62(2) SRMR mandate also extends to recommendations for “improving the conditions of implementations and operations and promoting sound financial management”, which has a close relationship to the “budget implementation systems” referred to in Art. 62(1) SRMR. In addition, the SRB-FR, in Art. 74(3)(b), regards the mandate of “assessing the efficiency and effectiveness of the internal control and audit systems applicable to each operation for implementation of the Board’s budget” as an embodiment of the Art. 62(2) SRMR mandate even though it appears to be more closely related to Art. 62(1) SRMR. One should therefore not overestimate the divide between the mandates under Arts. 62(1) and (2) SRMR. 17 A genuine difference between the two mandates, however, lies in the risk management angle of Art. 62(2) SRMR. Under this part of his or her mandate, the internal auditor is responsible for advising the Board on “dealing with risks”, by issuing opinions “on the quality of management and control systems”. The “risks” envisaged here are those to which the SRB itself is exposed, not the risks to which institutions subject to the SRM are exposed, nor systemic risks. These risks are typically of an operational nature; credit, liquidity, or concentration risks e.g. arising from the Board’s investments made under Art. 75 SRMR are dealt with by a risk management or risk control function which is separate from the internal audit function (even though the mandate of the internal audit function to verify the proper operation of the SRB’s procedures and to issue opinions on the quality of management and control systems extends, of course, also to the work of that risk management function). This mirrors the institutional set-up required of banks. 18 The advisory role of the internal auditor is not limited to explicit requests for advice from the Board. He or she can also give opinions or recommendations sua sponte, without having been asked. This can be derived from an e contrario argument on the basis of Art. 287(4)(2) TFEU (which limits the advisory role of the Court of Auditors towards the other institutions explicitly to questions and requests from these institutions) as well as from Art. 74(5) of the SRB-FR, whereby the internal auditor is responsible for drawing up the annual audit plan and is only obliged to consider, but not strictly bound by, the assessment of risk in the SRB by the Chair. The Chair can thus not prevent audits of 16
6 The fact that the Board in its plenary session and the Chair are the addressees of such audit reports follows from the wording “the management board and the director” in Art. 78(6) of the SRB-FR, in conjunction with the definition of these terms in Art. 2 of that Regulation.
1052
Andreas Witte
Art. 62 SRMR
Internal audit and control
certain departments or functions of the SRB by classifying them as “low risk” from an audit perspective.7 The recommendations and opinions mentioned in Art. 62(2) SRMR are not synony- 19 mous with the meaning with which these words are used in Art. 288 TFEU, where they denote types of legal acts, albeit non-binding ones. This is because the recommendations and opinions issued by the SRB’s internal auditor are purely internal documents within the SRB and thus lack the external effect outside the originating institution or agency that characterises legal acts. The term is thus used in a nontechnical sense in Art. 62 SRMR, meaning that the internal auditor can issue them in any format he or she deems appropriate, also in documents titled differently (e.g. “audit report”). Nonetheless, they can be made publicly accessible in accordance with Art. 74(9) of the SRB-FR. 8 In any case, in line with the ordinary meaning of the words “recommendation” and “opinion” and with the ultimate responsibility of the Board for running its own affairs, the internal auditor’s findings have no binding effect on the Board. The term “management and control systems” has a broad meaning. It refers to all 20 processes and institutional arrangements put in place within the SRB. In particular, it is not limited to management and control systems relating to budgetary matters, in spite of the fact that Art. 62 SRMR is placed within the context of the SRB’s budgetary regime; in line with best practices in the financial industry, the mandate of the internal audit function extends to the functioning of all processes and mechanisms within the SRB (see supra, → para. 1). The mandate of the internal auditor does not extend to the substance of the work 21 conducted by the SRB. For instance, the internal audit function is not supposed to opine on whether a resolution scheme which was adopted by the Board and not objected to by Commission or Council under Art. 18 SRMR constitutes a correct or expedient use of the available resolution tools. This is a matter for the discretion of the competent decision-makers. It is, however, within the mandate of the internal audit function to ascertain whether the SRB has adequate procedural safeguards in place to assess resolution questions appropriately and in a manner that ensures a correct exercise of discretion.
D. Responsibilities of the Board (Art. 62(3)) Art. 62(3) SRMR assigns to the Board the responsibility of putting in place internal 22 control systems and procedures suitable for performing the tasks of the internal auditor. This means, in simpler terms, that the Board has to equip the internal audit function with the processes necessary to fulfil its mandate. It has to put in place processes for the internal audit function to obtain the necessary information from the various departments, to conduct its assessments, and to present its findings. The wording of Art. 62(3) SRMR does not encompass the follow-up to audits, i.e. the 23 taking of remedial action to address shortcomings identified by the internal audit function. In the light of the duty of the Board to properly organise itself, however, one would have to assume a duty to at least give consideration to the findings of the internal audit 7 See Brody and Lowe, International Journal of Auditing 4 (2000), 169 for a case study-based examination of how this shift of the internal audit’s function from monitoring to advice may impact the impartiality of its work. 8 The word “only” in that provision indicates that it constitutes a restriction on access to documents rather than a separate legal basis for it. This means that, in order to obtain access to reports, findings or differently titled documents of the internal audit function, the requirements not only of Art. 74(9) of the SRB-FR but also those of an available legal basis for access to documents (e.g. under Art. 90 SRMR) must be met.
Andreas Witte
1053
Art. 63 SRMR
Implementation of the budget, presentation of accounts and discharge
function, even though these findings are not binding on the Board in a strictly legal sense. This illustrates that the role of internal audit in any institution is ultimately that of advising the top decision-making body in the exercise of its duty to organise itself. For the SRB, the duty to ensure the adequate follow-up to internal audit findings is allocated to the Board in its plenary session (Art. 50(1)(o) SRMR); the tools it can use to effectuate such a follow-up and take remedial action are those given to it in the area of internal organisation, e.g. the adoption of an anti-fraud strategy (Art. 50(1)(i) SRMR) or modifications to the internal structures of the Board (Art. 50(1)(p) SRMR). The word “Board” in the latter sense refers to the SRB as a Union agency, with all its departments, not just to the college of natural persons referred to in Art. 43(1) SRMR.
E. External audit 24
Art. 61 SRMR deals only with the internal audit function and does not mention external audit by commercial audit firms (the role of the Court of Auditors of the Union is provided for in other provisions, namely Arts. 45, 63, 64, 66 and 92 SRMR). An external audit by such firms is, however, hinted at and presupposed by Recital 97 and Art. 50(1) (o) SRMR. It is explicitly required pursuant to Art. 96 SRB-FR; that Regulation also clarifies, in Art. 96(1)(3), that the “external auditor” provided for is distinct from the Court of Auditors as a public sector institution. It must thus be concluded that it is mandatory for the SRB to be audited by an external audit firm in addition to the internal audit function and the Court of Auditors. This triad of three separate layers of audit is not unusual; it can be found also, e.g., in the institutional set-up of the ECB and the national central banks of the Eurosystem.9
Art. 63 SRMR Implementation of the budget, presentation of accounts and discharge 1. The Chair shall act as authorising officer and shall implement the Board's budget. 2. By 1 March of the following financial year, the Board's Accounting Officer shall send the provisional accounts, accompanied by the report on budgetary and financial management during the financial year, to the Court of Auditors for observations. By 31 March of the following financial year, the Board's Accounting Officer shall submit the report on budgetary and financial management to the members of the Board, and to the European Parliament, the Council and the Commission. 3. By 31 March each year, the Chair shall transmit to the European Parliament, the Council and the Commission the Board's provisional accounts for the preceding financial year. 4. On receipt of the Court of Auditors' observations on the Board's provisional accounts, the Chair, acting on his or her own responsibility, shall draw up the Board's final accounts and shall send them to the Board in its plenary session, for approval.
9 See Art. 27 Statute of the European System of Central Banks and of the European Central Bank. A peculiarity here is that, in the interest of the Eurosystem’s independence in monetary policy, the mandate of the Court of Auditors is limited to the operational efficiency of the management of the ECB.
1054
Andreas Witte
Implementation of the budget, presentation of accounts and discharge
Art. 63 SRMR
5. The Chair shall, following the approval by the Board, by 1 July each year, send the final accounts for the preceding financial year to the European Parliament, the Council, the Commission, and the Court of Auditors. 6. Where observations are received from the Court of Auditors, the Chair shall send a reply by 30 September. 7. By 15 November each year, the final accounts for the preceding financial year shall be published in the Official Journal of the European Union. 8. The Board, in its plenary session, shall give discharge to the Chair in respect of the implementation of the budget. 9. The Chair shall submit at the request of either the European Parliament or the Council, any information referred to in the Board's accounts to the requesting Union institution, subject to the requirements of professional secrecy laid down in this Regulation. A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Authorising officer (Art. 63(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
C. Drawing-up, submission and transmission of the provisional accounts (Arts. 63(2) and (3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Overview of documents and deadlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Content of the documents that are to be drawn up under Arts. 63(2) and (3) SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Drawing-up, approval and transmission of the final accounts (Arts. 63(4) to (7)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 7 9 14
E. Discharge (Art. 63(8)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
F. Provision of information to the Parliament and/or the Council (Art. 63 (9))
23
A. Function and background of the provision Art. 63 SRMR combines stipulations governing the last two of the four stages of the 1 SRB budget cycle1 Budget implementation2 in the sense of the actual collection of revenues and spending of expenditures as foreseen in the budget, and budget monitoring, i.e. the ex post verification whether this was done in accordance with the budget. To be precise, Art. 63(1) SRMR is concerned with budget implementation, and Arts. 63(2) to (9) SRMR with monitoring. For both phases, the provisions of the SRM Regulation are complemented by stipulations in the SRB-FR. The Accounting Officer to whom various responsibilities are assigned in Art. 63 2 SRMR is appointed by the Board in its plenary session (Art. 50(1)(n) SRMR, reiterated by Arts. 47 and 48 of the SRB-FR). The references to the Staff Regulations and the Conditions of Employment in these provisions clarify that the Accounting Officer has the status of a staff member of the SRB (and can, consequently, not be one of the Board members mentioned in Art. 43(1) SRMR; for the Chair this is made more explicit by Art. 42 SRB-FR). Under the 2015 version of the SRB-FR, it was permissible for the SRB to share its Accounting Officer with another Union body. This provision was inherited from Art. 50(2) of the framework financial Regulation (Commission Delegated Regulation (EU) 2019/715), but for the peculiar case of the SRB with its pronounced budSee supra, → Art. 58. It has to be reiterated that the term “implementation of the budget” in the present usage differs from that of the title of Art. 61 SRMR, where it refers to the drafting and adoption of the budget. See also the annotations to Art. 61 SRMR. 1 2
Andreas Witte
1055
Art. 63 SRMR
Implementation of the budget, presentation of accounts and discharge
getary autonomy, such a set-up would not be advisable. The 2020 recast of the SRB-FR rightly abolished this option.
B. Authorising officer (Art. 63(1)) The term “authorising officer” is common in EU budgetary regimes and plays a key role also in the Union Financial Regulation. For the SRB, his or her powers and duties are laid out in the SRB-FR – most importantly in its Art. 43; a large number of other provisions of the SRB-FR make reference to the office of authorising officer by establishing details of how he or she is to perform the functions laid down in Art. 43 SRB-FR. 4 Art. 63(1) SRMR stipulates that the function of authorising officer is performed by the Chair. This is reiterated (but at a lower level in terms of hierarchy of norms) by Art. 37(1) in conjunction with Art. 2, fifth indent, of the SRB-FR. 5 Art. 39 SRB-FR provides that the powers of the authorising officer may be delegated and subdelegated to staff of the SRB covered by its Staff Regulations (i.e., not to external staff or agency staff, for instance). This possibility of delegation is not explicitly provided for in the SRM Regulation; nonetheless, case law acknowledges that the need to ensure that decision-making bodies are able to function even under heavy workload constitutes a principle inherent in institutional systems. The possibility to delegate certain powers within an organisation, with the exception of questions of principle, is therefore recognised.3 The possibility to delegate (and, by extension, subdelegate) as provided for in the SRB-FR will thus have to be deemed permissible. Where such a delegation occurs, the provisions of the SRB-FR governing the powers and duties of the Chair as authorising officer apply to the authorising officers by delegation/subdelegation mutatis mutandis (Art. 44 SRB-FR). 6 The main function of the authorising officer is to implement the budget, i.e., to actually carry out the revenues and expenditures provided for in it. Art. 43(3) SRB-FR, supplemented by Arts. 64 to 73 of that Regulation, spells out how expenditures are implemented: by making commitments, validating expenditures, and authorising and conducting the payment. Likewise, Art. 42(4) SRB-FR, supplemented by Arts. 58-73 of that Regulation, spells out how revenues are implemented: by drawing up estimates of amounts receivable, establishing the amounts receivable, issuing recovery orders and conducting the collection of the amounts. 3
3 Case 5/85, Akzo Chemie v Commission, ECLI:EU:C:1986:328, cited approvingly e.g. in Case C-301/02 P, Tralli v ECB, ECLI:EU:C:2005:306, para. 59 and Case T-324/05, Estonia v Commission, ECLI: EU:T:2009:381, para. 68. The statement, reiterated throughout this line of case law, that questions of principle cannot be delegated recalls the Meroni doctrine (Case 9/56, Meroni v High Authority, ECLI:EU: C:1958:7, relied on – but arguably applied in a more liberal manner than the wording of the original Meroni case would insinuate – more recently in Case C-270/12, UK v Parliament and Council, ECLI:EU: C:2014:18). However, that doctrine is not directly applicable in the present context, since it concerns delegation of tasks to new entities established by secondary law rather than delegations to different decision-makers within the same entity.
1056
Andreas Witte
Implementation of the budget, presentation of accounts and discharge
Art. 63 SRMR
C. Drawing-up, submission and transmission of the provisional accounts (Arts. 63(2) and (3)) I. Overview of documents and deadlines Arts. 63(2) and (3) SRMR require the provision of two documents to certain par- 7 ties: the provisional accounts and the report on budgetary and financial management. There is a differentiated set of deadlines governing which party is to receive which document by which deadline. The deadlines and responsibilities are as follows: – Provision of the provisional accounts and the report on budgetary and financial management to the Court of Auditors for observations: 1 March of the year following the one to which the budget relates. Responsibility for this lies with the Accounting Officer. – Provision of the report on budgetary and financial management to the members of the Board, the Parliament, the Council, and the Commission: 31 March of the year following the one to which the budget relates. Responsibility for this lies with the Accounting Officer. – Provision of the provisional accounts to the European Parliament, the Council and the Commission: 31 March of the year following the one to which the budget relates. Note that – unlike the report on budgetary and financial management as per the previous bullet point – the provisional accounts are not also provided to the members of the Board; the reason for this is the fact that the members of the Board will receive the accounts (in their form as final accounts, after receipt of the Court of Auditors’ observations) later on for approval (Art. 63(4) SRMR). Responsibility for the provision of the provisional accounts lies with the Chair, rather than the Accounting Officer, which underlines the greater political significance of the accounts and their communication to outside parties for purposes of accountability.4 It must be noted that only the Court of Auditors receives the documents for the ex- 8 plicit purpose of an opportunity to submit observations; the processing of these observations is dealt with under Art. 63(4) SRMR.
II. Content of the documents that are to be drawn up under Arts. 63(2) and (3) SRMR The provisional accounts constitute, as the name implies, the provisional draft of 9 those accounts which will later be adopted as final accounts under Art. 63(4) SRMR. As a consequence, the provisions governing the content of the final accounts also apply to the content of the provisional accounts. That means the provisional accounts consist of two parts: The financial statements of the SRB and the reports on implementation of the budget of the SRB (Art. 89 SRB-FR). As far as the financial statements are concerned, substantive provisions as to their 10 content are codified in Art. 90 SRB-FR. They comprise a balance sheet, astatement of fi4 In addition, the careful reader will spot a subtle difference in the wording of these provisions. The report on budgetary and financial management is (i) sent to the Court of Auditors but (ii) submitted to the members of the Board, the Parliament, the Council and the Commission, and the provisional accounts are (iii) transmitted. It would be overly pedantic to attach importance in substance to these discrepancies, especially since this is not mirrored in all language versions (e.g. German and French use the same verb in the first and third cases but a different one in the second case; Spanish uses the same verb in the first and second cases but a different one in the third case; Italian uses the same verb in all three cases).
Andreas Witte
1057
Art. 63 SRMR
Implementation of the budget, presentation of accounts and discharge
nancial performance, a cash flow statement, and a statement of changes in net assets, together with supplementary notes; and the latter must be in line with the rules adopted by the Accounting Officer of the Commission based on internationally accepted accounting standards for the public sector (Art. 90(3) in conjunction with Art. 49 SRB-FR). The latter reference is not to be read as a reference to IFRS stricto sensu, even though the philosophy of IFRS is underlying much of the accounting standards of the Commission (and thus, by virtue of the reference in the SRB-FR, also of the SRB). The details of these rules are laid down in the European Union Accounting Rules, which were adopted by the Commission’s Accounting Officer on the basis of an empowerment in Art. 80 of Regulation 2018/1046 (Union Financial Regulation). These accounting rules were, in substance, based on the International Public Sector Accounting Standards (IPSAS), a code of accounting standards developed under the auspices of the International Federation of Accountants.5 11 The “reports on implementation of the budget” of the SRB which are required by Art. 89(b) SRB-FR are identical to the “budgetary implementation reports” whose content is governed by Art. 91 of that Regulation, but distinct from the “report on budgetary and financial management” which will be discussed in the next margin number; the former constitute a part of the provisional accounts, the latter do not, even though they are transmitted together with the provisional accounts. Of particular relevance for the budgetary implementation reports is the provision of Art. 91(2) SRB-FR, according to which the implementation reports mirror the structure of the budget itself. They aggregate the revenues and expenditures for each budget item. 12 The content of the report on budgetary and financial management was, in the 2015 version of the SRB-FR, spread over a number of provisions but has now been consolidated in Art. 95. 13 The report can be seen as providing summary information of how the implementation of the budget, both on the revenue and the expenditure side, has proceeded as compared to the adopted budget. In addition to these requirements from tertiary law, inspiration for the report may be drawn from the established practices in the area of the Union budget, for which Art. 249 of Regulation 2018/1046 (Union Financial Regulation) also requires the production of such a report.
D. Drawing-up, approval and transmission of the final accounts (Arts. 63(4) to (7)) Arts. 63(4) to (7) SRMR prescribe what happens to the provisional accounts after they have been drawn up and provided to the various parties under Arts. 63(2) and (3) SRMR. They deal only with the accounts, consisting of the financial statements and the budgetary implementation reports (Art. 89 SRB-FR); as far as the report on budgetary and financial management (which is not part of the budget) is concerned, their life-cycle ends with the transmission under Art. 63(3) SRMR, and Art. 63 SRMR does not mandate further procedural steps in relation to them after that transmission. 15 Pursuant to Art. 63(4) SRMR (and Art. 63(2)(1) SRMR), the Court of Auditors is entitled to submit observations on the provisional accounts. This procedural step resembles a consultation in the sense that the Court of Auditors is not merely notified; it is invited to actively comment upon the provisional accounts transmitted to it. The text of neither the SRM Regulation nor the SRB-FR explicitly says that the Court of Auditors’ 14
5
For the European Union Accounting Rules, see .
1058
Andreas Witte
Implementation of the budget, presentation of accounts and discharge
Art. 63 SRMR
observations have to be incorporated; one would, however, have to assume, in the light of the purposes of the procedure, a duty of the Chair (who is responsible to draw up the final accounts) to at least consider the observations, even though he or she is empowered to disregard them if he or she has grounds to disagree with them. In any case, there is an obligation under Art. 63(6) SRMR to respond to the observations by 30 September. It is noteworthy that this reply is sent by the Chair rather than the Board, meaning that the Chair does not require the approval of the Board to send the reply (even though he or she is, of course, free to initiate a discussion on a draft reply in the Board nonetheless). The right of the Court of Auditors to make observations is limited to the provision- 16 al accounts. These do not include the report on budgetary and financial management, even though that report accompanies the provisional accounts. It is, admittedly, possible to read the wording of Art. 63(2)(1) SRMR, in the sense that this report is also submitted for observations; the fact that Art. 63(4) SRMR refers only to the accounts and not to the report indicates, however, that observations are not to be made on the report. It is, of course, still possible for the Court of Auditors to comment upon the report as it was transmitted to it and to communicate these comments to the Board, but this would be an informal liaison between the SRB and the Court of Auditors as opposed to the formalised observation procedure governed by Art. 63 SRMR.6 The SRM Regulation does not provide for a deadline for the Court of Auditors’ ob- 17 servations. Art. 94(1) SRB-FR purports to set a deadline of 1 June; but the effectiveness of this stipulation is doubtful, considering that it was adopted by the SRB itself, which (as a Union agency established under secondary law with the power to adopt tertiary law provisions) does not have legislative or regulatory powers over the Court of Auditors (a Union institution established by primary law). The only “hard” deadline set by the SRMR is the 1 July deadline for the submission of the final accounts (following the approval of the Board) under Art. 63(5) SRMR. In the light of the duty of cooperation in good faith, one would, at most, be able to assume an obligation of the Court of Auditors to submit its observations early enough to give the SRB sufficient time to complete the required procedural steps to meet this 1 July deadline. Following this submission and consideration of the Court of Auditors’ observations, 18 the final accounts are drawn up. Responsibility for this is assigned to the Chair (unlike the previous procedural steps, which were within the responsibility of the Accounting Officer; this indicates the rising political significance of the final accounts as the budget cycle approaches its last stages and the Chair has to fulfil his or her responsibility to the
6 In spite of the similarity in wording, there are differences between the “observations” of the Court of Auditors under Art. 63 SRMR and those under Art. 287(4) TFEU. Under the latter provision, the Court of Auditors makes observations in the form of an annual report (Art. 287(4)(1) TFEU) or, e.g. in the form of a special report, at any time on specific questions, which it is entitled to do sua sponte (Art. 287(4)(2) TFEU). In other words, the “observations” of the Court of Auditors come in the form of a document initiated by it. Under Art. 63 SRMR, however, the Court of Auditors provides its “observations” in the form of comments on a document provided to it by the SRB. Nonetheless, one would have to assume that the purpose of the two procedures is the same, namely to contribute to improving the financial management of the Union by providing for reports to be transmitted to its bodies and for the latter to respond to them. This way, guidance is given to the budgetary authority required to discharge the accounts and, more generally, to all public bodies capable of contributing to the filling or correction of any lacunae or dysfunction observed by the Court of Auditors; see Case C-539/09, Commission v Germany ECLI:EU:C:2011:733, para. 62 and Case C-315/99 P, Ismeri Europa v Court of Auditors, ECLI:EU:C:2001:391, para. 27.
Andreas Witte
1059
Art. 63 SRMR
Implementation of the budget, presentation of accounts and discharge
Board for the proper implementation of the budget).7 They are submitted for approval, which is a competence assigned to the Board in its plenary session by Art. 63(4) SRMR (reiterated in Art. 50(1)(b) SRMR). This approval is not automatic; the Board can refuse to approve the final accounts if it deems them erroneous. 19 Once approved, the final accounts are sent to the Parliament, the Council, the Commission and the Court of Auditors. Art. 63(5) SRMR stipulates a deadline of 1 July for this, and Art. 94(4) SRB-FR stipulates additional letters and notes which must accompany the transmission of the final accounts. They must also be published in the Official Journal, the deadline for which is 15 November (Art. 63(7) SRMR).
E. Discharge (Art. 63(8)) Discharge within the meaning of Art. 63(8) SRMR is the expression of an approval by the Board that the financial management of the SRB for the year in question was carried out properly and in accordance with the budget as adopted. The discharge is granted by the body which possesses the authority to adopt the budget and monitor its implementation (which, for the SRB, is the Board in its plenary session) to the body which is responsible for the implementation of the budget, i.e., for carrying out its revenue collection and expenditures as budgeted for (which, for the SRB, is the Chair). 21 The word “shall” in Art. 63(8) SRMR denotes an allocation of competence. It is the Board, in its plenary session, which grants discharge (see also Art. 50(1)(b) SRMR). The word “shall” does, however, not denote an obligation to actually grant discharge. Discharge can be denied. This follows from parallels to the Union’s budgetary regime, which uses a very similar wording that discharge “shall” be given8 but indubitably includes the possibility to deny discharge (which has happened in the past, in one instance leading, famously, to the resignation of the Santer Commission in 1999). It also follows from the function of the discharge as an expression of approval of the financial management of the Board, which necessarily implies that this approval can be withheld if the financial management was not satisfactory. 22 The granting of discharge has no immediate legal effect other than formally putting an end to the budget cycle for the year in question, in the sense that the accounts may now be closed. In some national corporate law systems,9 the discharge of the officers of a corporation by its shareholders can have the effect of waiving potential claims of the corporation for damages or compensation against its officers arising from their conduct in office. In Union law, no provision or case law is ascertainable which would attach such consequences to a discharge. The denial of discharge would, consequently, be an act of more political rather than legal consequences; 10 it would indicate a lack of confidence of the Board in the financial management of its affairs by the Chair, and thus most likely be symptomatic of a severe institutional crisis within the SRB. Even denial of discharge 20
7 Art. 94(2) SRB-FR stipulates that the final accounts are drawn up by the Accounting Officer but sent to the Board in its plenary session by the Chair. The preferable way to resolve this apparent conflict, whilst giving due regard to the hierarchically higher rank of the SRMR, is to assume that as a matter of operational execution of the task the Accounting Officer draws up the final accounts, but under the direction of the Chair, who takes responsibility for them as a work product vis-à-vis the plenary session of the Board. 8 Art. 319(1) TFEU and Art. 260(1) of Regulation 2018/1046 (Union Financial Regulation). 9 E.g. in Germany for the GmbH (see BGHZ 94, 324) – but not for the Aktiengesellschaft (Section 120(2) Aktiengesetz). 10 Even in the German GmbH regime, where discharge has the effect of waiving claims for compensation (see previous footnote), the reverse is not true: Denial of discharge is not thought to be tantamount to actually bringing forward a claim for compensation.
1060
Andreas Witte
Art. 64 SRMR
Financial rules
would, however, not force the Chair to resign; he or she can be removed from office only by means of the procedure of Art. 56(9) SRMR.11
F. Provision of information to the Parliament and/or the Council (Art. 63 (9)) Art. 63(9) SRMR requires the Chair to submit to the Parliament or the Council, up- 23 on request, information referred to in the Board’s accounts. This obligation can be seen as an avenue of accountability of the SRB to the democratically elected representatives of the Union citizens (Parliament) or the Member States (Council). The wording “any information” implies that there is a wide range of discretion for the requesting institution to decide which information to request. This discretion is, however, restricted by the wording that the requested information must be “referred to in the Board’s accounts”; in other words, the duty to provide obligations is limited to additional elaborations and details on information included in the accounts, but information items which are entirely beyond the accounts cannot be requested. The reference in Art. 63(9) SRMR to the requirements of professional secrecy 24 means that the professional secrecy restrictions of the SRM Regulation apply also to provision of information under this paragraph. As far as the Council is concerned, Art. 88(6) SRMR provides for a legal basis for the provision of confidential information by the SRB. The Parliament, however, is not covered by Art. 88(6) SRMR; in such cases, another legal basis for the provision of data would have to be found. Potential options include the provision of data in summary or collective form such that the entities involved cannot be identified, or provision of data with the express and prior consent of the entity concerned (both options are stipulated in the last sentence of Art. 88(1)(1) SRMR).
Art. 64 SRMR Financial rules The Board shall, after consulting the Court of Auditors and the Commission, adopt internal financial provisions specifying, in particular, the detailed procedure for establishing and implementing its budget in accordance with Articles 61 and 63. As far as is compatible with the particular nature of the Board, the financial provisions shall be based on the framework financial Regulation adopted for bodies set up under the TFEU in accordance with Article 208 of Regulation (EU, Euratom) No. 966/2012 of the European Parliament and of the Council. Bibliography Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’, 1/2 JFR (2015), 226.
11 This is mirrored in the mutual relations between Commission and Parliament. Legally, a denial of discharge does not terminate the tenure of the Commission – to effectuate this, the Parliament would have to pursue a motion of censure under Art. 234 TFEU. The Commission may – and in the case of the Santer Commission, did –, however, take the denial of discharge as an occasion to step down, but it is under no obligation to do so.
Andreas Witte
1061
Art. 64 SRMR
Financial rules
A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Adoption of the internal financial provisions (Art. 64(1)) . . . . . . . . . . . . . . . . . . . . I. Procedure for adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legal nature of the internal financial provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 3 6
C. Relationship with the framework financial Regulation (Art. 64(2)) . . . . . . . . . .
9
D. Content of the internal financial provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
A. Function and background of the provision Arts. 57 to 66 SRMR lay the foundation of the SRB’s budgetary regime, but are too concise to govern all intricacies of the process with the level of precision which is desirable from a legal certainty perspective. In order to spell out the necessary details, a specification by supplementary legislation is therefore necessary. For the budget of the Union itself, as well as that of many Union agencies, this specification is ensured by the Union Financial Regulation (Regulation (EU, Euratom) 2018/10461, replacing the former version of that Regulation which is cited in the SRMR text). The SRB is, however, not within the scope of that Regulation as it is not part of the general Union budget (Art. 1 Union Financial Regulation). Nor is it an executive agency within the meaning of Art. 69 Union Financial Regulation, having been set up by a special act of secondary legislation rather than by a tertiary law Decision of the Commission based on Council Regulation (EC) No. 58/2003.2 2 This leaves a lacuna for the specification of the SRB’s budgetary regime beyond the provisions stipulated directly in the SRMR. To fill this lacuna, a specification by means of a tertiary law act made specifically for the SRB is advisable. For this purpose, Art. 64 SRMR provides a legal basis for the adoption of internal financial provisions by the SRB itself. This is in accordance with the general spirit of the SRB Regulation to accord the SRB with a great degree of independence and autonomy, meaning that it is not only entitled to adopt and implement its own budget but also define its own budgetary law, within the limits set by the SRB Regulation. The resulting document is, in its own title, styled the “Financial Regulation of the Single Resolution Board” and is cited in the present commentary as the SRB-FR; it has not been published in the Official Journal, but is available on the website of the SRB.3 As indicated above (supra, → Art. 58 para. 4), the current version of the SRB-FR, adopted in January 2020, is already the third incarnation of this act in only six years of the SRB’s existence. Since the Financial Regulation’s purpose is to serve as a reliable legal basis for an annual budget and a multi-annual work programme (covering a time horizon of three years), one may hope that this most recent version provides stability and consistency for the SRB’s financial regime in the years to come. 1
1 Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012, OJ L 193, 30.7.2018, at pp. 1–222. 2 Regulation (EC) No. 58/2003 of the Council of 19 December 2002 laying down the statute for executive agencies to be entrusted with certain tasks in the management of Community programmes, OJ L 11, 16.1.2003, at pp. 1–8. 3 .
1062
Andreas Witte
Art. 64 SRMR
Financial rules
B. Adoption of the internal financial provisions (Art. 64(1)) I. Procedure for adoption The decision-making body for the adoption of the internal financial provisions is the 3 Board in its plenary session (Art. 50(1)(h) SRMR). For the adoption of the internal financial provisions, the general provisions on the Board’s decision-making process, the most important sedes materiæ for which is Art. 52 SRMR, apply. The voting process in the plenary session is that of simple majority under Art. 52(1) SRMR; no weighting of votes on the basis of contributions occurs, as the matter falls neither under Art. 52(2) nor (3) SRMR. In addition, Art. 64(1) SRMR requires the consultation of the European Court of 4 Auditors and the Commission. This consultation is phrased as mandatory. In the light of the great importance which case law attaches to mandatory consultations and other procedural participation safeguards,4 one would assume that a failure to consult would render the financial provisions illegal. The purpose of the consultation requirement is to give the Court of Auditors and the Commission the opportunity to bring in their specific expertise in matters of sound financial management: The Court of Auditors as the primary guardian of the sound use of public funds by Union institutions and agencies (on this see, in particular, Art. 62 SRMR); and the Commission as the Union institution charged with implementing the Union’s own budget (Art. 317 TFEU), and also as the originator of the framework financial Regulation on which the SRB’s internal financial provisions are to be based (Art. 64(2) SRMR). The Commission thus has decades of experience in applying budgetary law, which can be made fruitful for the establishment of the SRB’s own financial regime by means of the adoption of the internal financial provisions. The plenary session, being the originator of the SRB-FR, has the power to amend 5 it by means of an actus contrarius. The same procedure as for the initial adoption of the SRB-FR applies. In case of such amendments, it is advisable to include transitional provisions in the amending act stipulating how the ongoing budget cycle (e.g. the establishment of the budget for the following year where the budget establishment process has already begun, implementation of the budget for the current year, accounts for the previous year) are affected by the changes. Of course the SRB cannot, by means of an amendment to the SRB-FR, liberate itself from binding requirements which stem from higher-ranking law, such as the SRMR or primary law.
II. Legal nature of the internal financial provisions Art. 64 SRMR does not directly specify the legal nature, i.e. the type of legal act, of the 6 internal financial provisions. The stipulation in Art. 64(2) SRMR that the provisions shall, as far as compatible with the SRB’s particular nature, be based on the Commission’s framework financial Regulation strongly suggests, however, a Regulation. This was also the way followed by the SRB. The SRB-FR is thus a Regulation within the meaning
4 As exemplified by Case C-269/90, Technische Universität München v Hauptzollamt München-Mitte, ECLI:EU:C:1991:438, paras. 21–22.
Andreas Witte
1063
Art. 64 SRMR
Financial rules
of Art. 288(2) TFEU.5 It is also a challengeable legal act in the sense of the doctrine that all acts under Union law capable of having legal effects are subject to judicial review, 6 but it is difficult to imagine cases where private natural or legal persons would have the standing required under Art. 263(4) TFEU7 to bring an admissible action for annulment. 7 This legal character is not of purely academic relevance, since the direct effect of Regulations means that third parties might be able to rely on the SRB-FR as against the SRB itself when challenging acts of the SRB that are (allegedly) not compliant with the SRB’s own financial rules. For most provisions of the SRB-FR this is irrelevant since they concern the internal working of the Board, in line with the wording “internal financial provisions”; a potential third-party effect could, however, stem from provisions such as the procurement regime in Arts. 83 and 84 SRB-FR. 8 The internal financial provisions are adopted on the basis of an empowerment in secondary law (the SRMR) and thus hierarchically inferior to the SRMR; hence their status as tertiary law. In cases of conflict between the SRB-FR and the SRMR, the latter prevails. One would assume, however, that the SRB possesses a degree of discretion and leeway to interpret the SRMR and define its content when it designs and adopts its financial provisions. A direct conflict between the two acts which would lead to the invalidation of the SRB-FR (or parts thereof) is thus unlikely. Nonetheless, the need for the SRB-FR to stay compatible with the SRMR places limits on the interpretation of the SRB-FR. Where a provision of the SRB-FR allows for several different interpretations, but some of these would lead to a conflict with the SRMR, then resort will have to be taken to a harmonious interpretation of the SRB-FR which avoids this conflict and gives best effect to the provisions of the SRMR.
C. Relationship with the framework financial Regulation (Art. 64(2)) 9
Art. 70 of the Union Financial Regulation empowers the Commission to adopt a framework financial Regulation for certain bodies set up under the TFEU and the Euratom Treaty; it has made use of this empowerment.8 The wording “adopt”, the character as a Regulation, and the adoption by the Commission by means of a delegated act in accordance with Art. 269 of the Union Financial Regulation imply that for these bodies, the framework financial Regulation is, in fact, a binding legal act and not merely a template for the adoption of a binding legal act. Nonetheless, Art. 70(3) of the Union Financial Regulation gives such bodies the possibility to have financial rules which depart 5 This means that the binding effect of the SRB-FR is stronger than that of, for instance, communications or guidelines which Union bodies publish in order to lay down how they intend to apply discretion bestowed upon them in future cases. Such documents are not legally binding in themselves, even though case law recognises that they lead to a self-commitment and create legitimate expectations which means that the Union body that authored them cannot depart from its own announcements (see, recently, Case C-526/14, Kotnik and Others, ECLI:EU:C:2016:570, para. 40). The SRB-FR is, in fact, a legal act and a Regulation with direct effect and thus binding in itself, not only by virtue of this doctrine of self-commitment. 6 The classic citation for this doctrine is Case 294/83, Parti écologiste “Les Verts” v Parliament, ECLI: EU:C:1986:166. Challengeability in that sense was found by the Court of Justice for a financial Regulation governing the funding of development aid in Case C-316/91, Parliament v Council, ECLI:EU:C:1994:76. 7 As interpreted in the seminal Case 25/62, Plaumann & Co. v Commission, ECLI:EU:C:1963:17. For the place and future of the Plaumann formula in financial regulation see Witte, JFR 1/2 (2015), 226. 8 Commission Delegated Regulation (EU) 2019/715 of 18 December 2018 on the framework financial regulation for the bodies set up under the TFEU and Euratom Treaty and referred to in Article 70 of Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council, OJ L 122, 10.5.2019, at pp. 1–38. It was the adoption of this new framework Regulation (replacing its predecessor, 1271/2013) that necessitated a new SRB-FR in 2020.
1064
Andreas Witte
Art. 64 SRMR
Financial rules
from the framework financial Regulation where this is required by their specific needs and with the prior consent of the Commission. Art. 70 of the Union Financial Regulation and the framework financial Regulation 10 adopted on its basis are not directly applicable to the SRB. This is because the SRB does not receive contributions charged to the Union budget, as required by Art. 70(1) of the Union Financial Regulation. Nonetheless, Art. 64(2) SRMR establishes a very similar effect, namely the obligation of the SRB to base its financial provisions as far as is compatible with its particular nature on the framework financial Regulation. The reference in Art. 64 SRMR to Art. 208 of the old Union Financial Regulation (Regulation (EU, Euratom) No 966/2013) is now to be read as one to Art. 70 of the new Union Financial Regulation (Regulation (EU, Euratom) 2018/1046), as per Art. 281(3) of the latter. The principle stipulated in Art. 64(2) SRMR can be justified on two different ac- 11 counts. Firstly, the SRB should be held accountable for the proper use of the monies entrusted to it (which originate, after all, from compulsory contributions that are levied from market participants), and this accountability requires a budgetary regime in line with generally recognised principles of sound public sector budgeting, as embodied in the framework financial Regulation. Secondly, the development of a fully-fledged budgetary regime in line with requirements stemming from higher-ranking law and the expectations of the public is a demanding task that would require considerable effort. In the light of the SRB’s limited human resources, and in order to avoid delays in making the SRB operational, it appeared more efficient to make use of an existing legal framework. Art. 64(2) SRMR does not make the framework financial Regulation binding upon 12 the SRB but only stipulates that the SRB’s financial provisions be “based” on it. There is, thus, the possibility for the SRB to deviate from the framework financial Regulation when drafting its own financial provisions. However, the wording and purpose of Art. 64(2) SRMR stipulate that adherence to the framework financial Regulation should be the rule for the SRB’s financial provisions, and deviations from that Regulation constitute an exception that can only be justified by good reasons inherent in the particular nature of the SRB. In line with general rules of statutory interpretation in Union law, one would expect that these exceptions would have to be narrowly construed.
D. Content of the internal financial provisions The SRB-FR is structured into eleven “Titles”. Some of these Titles are, in line with 13 the usual taxonomy used in Union law texts, subdivided into “Chapters”. The substance of the Titles is as follows: Title I: General Provisions (Arts. 1 to 4 SRB-FR). This Title provides the subject 14 matter of the SRB-FR and some definitions which apply throughout its text. Title II: Budget and Budgetary Principles (Arts. 5 to 29 SRB-FR). This Title pro- 15 vides elaborations on the budgetary principles enumerated at the outset of the Title in Art. 5 SRB-FR. It is divided into eight Chapters, each devoted to one budgetary principle (or set of budgetary principles dealt with together): – Chapter 1: Principles of Unity and Budget Accuracy (Arts. 6 to 7 SRB-FR). This means, in effect, that the SRB has only one budget (though divided into two parts) covering the entirety of its financial conduct. – Chapter 2: Principle of Annuality (Arts. 8 to 14 SRB-FR). The budget is adopted for one year, but possibilities for carrying over budget items to the next year exist. The Chapter also deals with the procedures to be followed if no budget has been adopted
Andreas Witte
1065
Art. 64 SRMR
Financial rules
in time, i.e. how to maintain the SRB’s ability to act in the absence of a duly adopted budget. – Chapter 3: Principle of Equilibrium (Arts. 15 to 16 SRB-FR). It deals with the requirement to balance the budget. – Chapter 4: Principle of Unit of Account (Art. 17 SRB-FR). The currency which serves as the SRB’s unit of account is, unsurprisingly, the euro. – Chapter 5: Principle of Universality (Arts. 18 to 22 SRB-FR). This principle means that the entirety of the SRB’s revenues covers the entirety of its expenditures, subject to the division of the budget into two parts (see the annotations to Arts. 58 to 60 SRMR) and the limited possibilities for earmarking. It also means that there is no netting of revenue and expenditures before their being entered into the budget. – Chapter 6: Principle of Specification (Arts. 23 to 25 SRB-FR). This Chapter deals with the structuring of the budget into appropriations and the possibility to transfer appropriations. – Chapter 7: Principle of Sound Financial Management and Performance (Arts. 26 to 28 SRB-FR). This principle, which is divided into sub-principles, codifies general principles of law which bind the SRB to a responsible and economic use of the monies entrusted to it. – Chapter 8: Principle of Transparency (Art. 29 SRB-FR). It deals with the accountability of the SRB, in the management of its financial affairs, to the public by means of publication of accounts, budgets and reports. 16 All of these principles should not be read in isolation; they inform the application and interpretation of other provisions of the SRB-FR. 17 Title III: Establishment and Structure of the Budget (Arts. 30 to 36 SRB-FR). This Title is also structured into Chapters: – Chapter 1: Establishment of the Board’s Budget9 (Arts. 30 to 32 SRB-FR). This Chapter deals with the process of drawing up the budget, including its derivation from the multi-annual programming, and the adoption of amending budgets. – Chapter 2: Structure and Presentation of the Board’s Budget (Arts. 33 to 36 SRB-FR). In this Chapter, it becomes particularly deplorable that even after repeated amendments, the SRB-FR (owing to its origins in the framework financial Regulation designed for other Union bodies) still makes only minimal adjustments reflecting the peculiarities of the SRB. One would presume that the separation of the SRB budget into two parts (see the annotations to Arts. 58 to 60 SRMR) is a fundamental feature of the structure of the budget of this particular agency. Yet this Chapter makes no reference to this separation.10 Nonetheless, the two-part structure is, of course, binding upon the SRB in its budgetary proceedings by virtue of the SRMR, which takes hierarchical precedence over the SRB-FR. Chapter 2 does, however, give detailed provisions on how budget items must be spelt out within the budgets which are not incompatible with the two-part structure. 18 Title IV: Implementation of the Board’s Budget (Arts. 37 to 82 SRB-FR). This Title is structured into the following Chapters: – Chapter 1: General Provisions (Arts. 37 to 40 SRB-FR). This Chapter defines the Chair as the authorising officer, subject to possibilities of delegation and subdelega-
9 Previous incarnations of the SRB-FR spoke here, as well as in many other instances, of the “Union body” rather than the “Board”. This was a holdover from the terminology of the framework financial Regulation, which is not specific to the SRB. 10 Only Arts. 6 and 15 SRB-FR contain references to this peculiar structure in a manner that adds value over and above to the SRMR text.
1066
Andreas Witte
Art. 64 SRMR
Financial rules
–
–
–
–
–
tion. It also establishes some principles governing the conduct of the Chair in this role. Chapter 2: Method of Implementation (Art. 41 SRB-FR). This Chapter does not add much substantive content to stipulations already included elsewhere. Its main effect appears to be a reiteration of a matter of course, namely that the SRB may “implement” its own budget (in the sense of collecting and receiving money in accordance with it) either directly through its own departments or via outsourcing, but that it remains in all cases bound by the Commission’s delegated acts adopted under Art. 75(4) (see annotations thereto). Chapter 3: Financial Actors (Arts. 42 to 51 SRB-FR). This Chapter is subdivided into four Sections and provides more details on the obligations of the Chair in his or her function as authorising officer, together with mechanisms for monitoring, as well as on the obligations of the Accounting Officer. It also provides for an imprest administrator managing imprest accounts out of which small sums can be paid. Chapter 4: Liability of Financial Actors (Arts. 52 to 57 SRB-FR). This Chapter is also structured into three Sections that confine themselves to references to the Union Financial Regulation.. It establishes the financial liabilities of the financial actors defined in the previous Chapter. The liability envisaged includes monetary compensation for wrongdoings by the financial actor, disciplinary action in line with the SRB’s employment law, as well as safeguards for criminal liability in accordance with the applicable national criminal law. In essence, the Chapter stipulates that consequences can arise for SRP officials for misappropriation or mismanagement of SRB funds. Chapter 5: Revenue Operations (Arts. 58 to 67 SRB-FR). This Chapter provides for the procedures followed by the SRB in the raising of its revenues, i.e., mostly the collection of dues under Arts. 65, 70 and 71 SRMR. It also includes a substantive provision (of potentially great importance) in Art. 65 SRB-FR, providing for the limitation period of entitlements of the SRB (five years as of the date the entitlement became due).11 Chapter 6: Expenditure Operations (Arts. 68 to 73 SRB-FR). This Chapter describes the procedural steps which the SRB follows when it implements the budget by actually spending monies in line with the budgetary appropriations. These steps comprise commitment, validation, authorisation and the actual payment.
11 There are arguments in favour of a narrow and cautious interpretation of this provision, considering that the SRB-FR was adopted by the SRB itself on the basis of an empowerment to adopt “internal financial provisions”. It is thus not evident that the SRB possesses a competence to legislate limitation provisions with substantive effect for its own third-party debtors, overrding potentially shorter limitation provisions from otherwise applicable national law. On the other hand, some kind of statute of limitations for SRB entitlements is certainly desirable from a policy perspective, and in the absence of a provision to that effect in the SRMR, there is probably no institution or entity better placed to legislate it than the SRB itself. The duration to which it calibrated the limitation period is in line with other instances (see, by comparison, the Union Financial Regulation to which the provision refers, or Art. 46 of the Statute of the Court of Justice). Certainly, however, Art. 66 SRB-FR cannot apply to contractual entitlements of the SRB; the limitation period for such entitlements is governed by the applicable lex contractus. Similarly, where the SRB has a non-contractual entitlement governed by a particular national private law system (for instance, a third party negligently damages property of the SRB), one would assume that this tort law regime (to be determined under the rules of private international law) also governs the limitation of the SRB’s claim. It would thus appear preferable to limit the application of Art. 66 SRB-FR, if at all, to the statutory entitlements of the SRB for payment of contributions under Arts. 65, 70 and 71 SRMR (which are governed by Union, not national, law, thus leaving potential scope for a competence of the SRB to legislate on its limitations).
Andreas Witte
1067
Art. 64 SRMR
Financial rules
–
19
20
21
22
23
24
Chapter 7: Internal Auditor (Arts. 74 to 82 SRB-FR). This Chapter defines the institutional role and function of the internal audit within the SRB. For a more detailed elaboration see the annotations to Art. 62 SRMR in the present commentary. – The 2015 version of the SRB-FR contained, between what are now Chapters 6 and 7 of Title IV, a Chapter titled “IT Systems” with some (largely high-level) principles for the information management in the SRB and a (systematically misplaced) obligation to include an indication of available means of redress in all procedural acts that adversely affect the rights of third parties. That latter provision was not carried over into the 2020 SRB-FR. Title V: Public Procurement and Concessions (Arts. 83 to 84 SRB-FR). This Title establishes the SRB’s own procurement regime. It does so largely by providing for references to the procurement rules enshrined in the Union Financial Regulation. In spite of the brevity of this Title in the SRB-FR, it carries a significant potential for litigation since prospective third-party suppliers can rely on the provisions of a Union body’s procurement regime when challenging contract awards by that body. Title VI: Other Budget Implementation Instruments (Arts. 85 to 88 SRB-FR). This brief Title stipulates a mutatis mutandis application of several provisions in the Union Financial Regulation that declare a range of minor expenditures permissible. The provision with the most pronounced practical importance among these is likely going to be Art. 85, governing the use of external consultants in the evaluation stage of procurement processes. Title VII: Annual Accounts and Other Financial Reporting (Arts. 89 to 95 SRB-FR). This Title comprises two Chapters: – Chapter 1: Annual Accounts (Arts. 89 to 94 SRB-FR). This Chapter, subdivided into two Sections (Arts. 89 to 92, and Arts. 93 to 94) deals with the structure of the accounts of the SRB (consisting of the financial statements and the budget implementation reports) and their procedural progression from provisional to final accounts. It also deals with the report on budgetary and financial management which accompanies the accounts without forming part of them. – Chapter 2: Budgetary and Other Financial Reporting (Art. 95 SRB-FR). This Chapter, which consists of only one Article, deals with the annual report on budgetary and financial management which accompanies the accounts without forming part of them. Title VIII: External Audit, Discharge and Combatting Fraud (Arts. 96 to 100 SRB-FR). This Title provides for a duty of the SRB to have itself audited by an external audit firm in addition to both the internal audit function and the Court of Auditors. It also provides additional elaborations upon the discharge provided for in Art. 63(8) SRMR and the anti-fraud provisions of Art. 66 SRMR. The substance of these provisions will be discussed in more detail in the annotations to these provisions. Title IX: Administrative Appropriations (Arts. 100 SRB-FR). This Title, also consisting of a sole Article, contains special provisions governing administrative appropriations, especially expenditures relating to building projects. The SRB-FR does not define the term “administrative appropriations”, other than requiring in Art. 34 a clear distinction between operating and administrative appropriations on the expenditure side of the budget, and stipulating in Art. 68(1) that they may be implemented without a prior financing decision. Inspiration may, however, be drawn from the Union Financial Regulation, which, in Art. 47(4), gives a classification of administrative appropriations. Administrative appropriations are thus those that relate to the administration of the SRB’s own affairs. They can often not be attributed to a particular activity but are rather of an “overhead” nature, supporting the running of the SRB as a whole rather than relat1068
Andreas Witte
Contributions to the administrative expenditures of the Board
Art. 65 SRMR
ing to a particular course of action. This justifies the principle that administrative appropriations are non-differentiated (Art. 101(1) SRB-FR). One would imagine that, owing to the nature of the two Parts of the SRB budget, administrative appropriations can only be entered into Part I and are not conceivable for the use of the Fund under Part II. Title X: Transitional and Final Provisions (Arts. 102 to 104 SRB-FR). In addition to 25 the usual entry-into-force provisions, this Title also contains a right of other Union institutions to request information from the SRB (Art. 102 SRB-FR). This provision appears to be merely declaratory alongside Art. 63(9) SRMR, but is not, because the scope of Art. 102 SRB-FR is partially narrower and partially wider: It includes also the Commission (whereas Art. 63(9) SRMR is limited to the Council and the Parliament), but it is limited to information within the fields of competence of the requesting institution. It will have been noted by the reader that the present annotations to the SRMR make 26 reference to the provisions of the SRB-FR where appropriate to cast more light on the interpretation and application of the SRMR. More detail on the content of the provisions of the SRB-FR will thus be found in the annotations to the affected provisions of the SRMR.
Art. 65 SRMR Contributions to the administrative expenditures of the Board 1. Entities referred to in Article 2 shall contribute to part I of the budget of the Board in accordance with this Regulation and the delegated acts on contributions adopted pursuant to paragraph 5 of this Article. 2. The amounts of the contributions shall be fixed at such a level as to ensure that the revenue in respect thereof is in principle sufficient for part I of the budget of the Board to be balanced each year. 3. The Board shall determine and raise, in accordance with the delegated acts referred to in paragraph 5 of this Article, the contributions due by each entity referred to in Article 2 in a decision addressed to the entity concerned. The Board shall apply procedural, reporting and other rules ensuring that contributions are paid fully and in a timely manner. 4. The amounts raised in accordance with paragraphs 1, 2, 3 shall be used only for the purposes of this Regulation. 5. The Commission shall be empowered to adopt delegated acts on contributions in accordance with Article 93 in order to: (a) determine the type of contributions and the matters for which contributions are due, the manner in which the amount of the contributions is calculated, and the way in which they are to be paid; (b) specify registration, accounting, reporting and other rules referred to in paragraph 3 necessary to ensure that the contributions are paid fully and in a timely manner; (c) determine the annual contributions necessary to cover the administrative expenditure of the Board before it becomes fully operational. Bibliography Andrew Crockett, ‘Why is financial stability a goal of public policy?’, Economic Review (FRB Kansas City) 82 (1997), 5; Angus Stevenson (ed), Oxford Dictionary of English (3 rd edn, Oxford University Press, Oxford 2010); Andreas Witte, ‘Standing and Judicial Review in the New EU Financial Markets Architecture’, JFR 1/2 (2015), 226.
Andreas Witte
1069
Art. 65 SRMR
Contributions to the administrative expenditures of the Board
A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Contributory institutions and overall level of contributions (Arts. 65 (1)–(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
C. Procedure for raising contributions (Art. 65(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
D. Commitment of the contributions to a specific purpose (Art. 65(4)) . . . . . . . . .
12
E. Commission delegated act (Art. 65(5)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Adoption and legal nature of the delegated act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Content of the delegated act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 13 19
A. Function and background of the provision Art. 65 SRMR provides the primary source of revenue for Part1 I of the budget, covering the SRB’s administrative expenditures. The logic behind Art. 65 SRMR is the very reason for this separation of the budget in two Parts in the first place: The intention is to set aside the bank levy (Arts. 70 and 71 SRMR) for the purposes of resolution financing and not to compromise this principle by using the bank levy for administrative expenses. As a consequence, a second levy dedicated solely for the administrative expenditures of the SRB had to be established. In a recent ruling on a legal challenge concerning the Art. 70 bank levy, the General Court has emphasised the difference between that levy and the contributions to administrative expenditures under Art. 65;2 one will therefore have to be cautious when trying to rely on the (growing) case law around the former to draw conclusions for the latter. 2 The contributions levied by the SRB under Art. 65 SRMR have a functional equivalent in Art. 30 SSMR, governing the supervisory fees levied by the ECB to fund its supervisory activities. Both provisions are an embodiment of the same legislative intention: The costs of regulating the financial sector (via prudential supervision as well as the work of a resolution authority) should be borne by that sector itself, rather than the general taxpayer. This is a policy choice, not an inevitable result; it would be equally sound to argue that the work of supervisory or resolution authorities constitutes an activity performed in the public interest, delivering the public good3 of financial stability, and should therefore be defrayed fiscally. The Union legislators, in enacting the SRMR, have decided against such a system and opted for containing the burden of administrative costs of the SRB within the banking industry. 3 Art. 65 SRMR covers only the administrative expenditures of the SRB; it does not deal with the expenditures incurred by the NRAs. For the latter, see Art. 59(3) SRMR and the annotations thereto. Expenditures of the SRB that arise from its cooperation and liaison with NRAs are subject to Art. 65 SRMR, however. 1
1 Art. 65 SRMR contains a slight spelling inconsistency: Whereas Arts. 58–60 SRMR capitalise the word “Part” when referring to the two Parts of the SRB budget, Art. 65 SRMR uses lowercase “part”. This is a mere editorial glitch without effects on substance; there can be no doubt that the “part I” referred to in Art. 65 SRMR is the same as the “Part I” in Arts. 58(3) and 59 SRMR. 2 Case T-758/18, ABLV Bank AS v SRB, ECLI:EU:T:2021:28, para. 86 (appeal pending as case C-202/21 P). 3 It has become increasingly common in regulatory literature in recent years to refer to financial stability as a public good, up to the point where it has almost become a de rigueur catchphrase. The concept is, however, older than the current financial crisis and can be traced back to at least the Asian, Mexican, and Russian crises of the 1990s (see e.g. Crockett, Economic Review (FRB Kansas City) 82 (1997), 5). It may be added that in political debate, the term “public good” is often misused as a convenient argument to support the socialisation of whatever expense the person making the claim wishes to have socialised; but for financial stability, it is, in fact, arguable that it meets the strict technical definition of a public good in economics (non-excludability and non-rivalry).
1070
Andreas Witte
Contributions to the administrative expenditures of the Board
Art. 65 SRMR
B. Contributory institutions and overall level of contributions (Arts. 65 (1)–(2)) Art. 65(1) SRMR defines which entities are liable to pay contributions to the admin- 4 istrative expenditures of the SRB: All entities referred to in Art. 2 SRMR (see the annotations thereto). The division of competences under Arts. 7(2) and 7(3) SRMR is not reflected in Art. 65 SRMR, meaning that even entities for which resolution plans are drawn up, and decisions taken, by the NRAs rather than the SRB are liable to pay contributions to the SRB budget. This is justifiable, considering that even with respect to such entities the SRB has certain tasks and oversight powers (→ Arts. 7(3)-(5) SRMR); they fall within the scope of the SRM and generate workload for the SRB. This mirrors the situation under the SSM, where less significant institutions are also liable to pay supervisory fees to the ECB. It may well be, however, that the calculation of contributions draws a distinction between different classes of entities (see infra, → para. 20 et seq.). Art. 65(2) SRMR is an embodiment of the principle that the SRB is supposed to cover 5 its expenditures, but only its expenditures, and not to generate a surplus. This also implies consequences, by necessity, for the methodology for calculating the contributions. As a first step, the overall administrative expenditures, i.e. the expenditures of Part I of the budget, are estimated for a given financial year. This is an estimate which is easily available, since Art. 61(1) SRMR requires the production of such an estimate for the drawing-up of the budget for the next financial year. By necessity, this overall administrative expenditure is equal to the overall aggregate amount that must be raised under Art. 65 SRMR, because Art. 65 SRMR contributions are the only source of revenue available under Part I of the budget (Art. 59(1) SRMR). As a second step, this overall aggregate amount (EUR 88.8mn in the financial year 2019) which must be raised from all contributory entities is broken down into the individual contributions which each entity is obliged to pay. Art. 65 SRMR does not predetermine the algorithm for this breakingdown process; it is provided for by the Commission delegated act adopted under Art. 65(5) SRMR (for details see infra, → para. 13 et seq.).
C. Procedure for raising contributions (Art. 65(3)) Art. 65(3) SRMR provides for the procedure of collecting the contributions from the 6 individual contributory institutions. “Procedure” in this context has its usual legal meaning, i.e., that of an administrative procedure between the SRB and the individual; the mathematical algorithm for breaking down the overall total of contributions levied to the individual entities is a matter of substance not governed by Art. 65(3) SRMR. Art. 65(3) SRMR gives the SRB the power to adopt decisions addressed to each con- 7 tributory entity, spelling out (“determine”) the contribution which this entity is obliged to pay for a given financial year. The word “decision” is used in its Art. 288(4) TFEU sense, i.e., that of a legal act binding on its addressee. In other words, the SRB is empowered to impose a binding legal obligation to pay upon contributory entities. This obligation is also enforceable pursuant to Art. 9 of the Delegated Act adopted under Art. 65(5) SRMR (on this Delegated Act see infra, → para. 16), meaning that enforcement action by national enforcement authorities (bailiffs etc.) can be initiated against contribution debtors who fail to make a payment, without the need to obtain a court ruling against such debtors as a basis for enforcement. The enforcement action itself would be governed by national law. The interplay between Union and national law in this field is therefore such that the SRB’s contribution notice constitutes an enforceable order in the
Andreas Witte
1071
Art. 65 SRMR
8
9
10
11
Contributions to the administrative expenditures of the Board
sense of national law provisions requiring such an order as a basis for enforcement, e.g. a Vollstreckungstitel within the sense of the German Code of Civil Procedure (ZPO). The fact that section 794 of the ZPO does not list SRB contribution notices as Vollstreckungstitel does not preclude this, owing to the direct effect and supremacy of the Delegated Act as a Union Regulation (see infra, → para. 17).4 Art. 65 SRMR is silent as to the procedural rights of the contributory entities. Nonetheless, as in all of Union law the usual procedural safeguards stemming from primary law (codified in the Charter of Fundamental Rights of the European Union5 and the general principles of law, as developed and elaborated in the case law of the Court of Justice) apply as a matter of course. This includes, most importantly, the right to be heard, the right of access to file, and the duty to provide reasons in SRB decisions (Art. 41(2) CFREU). Administrative and judicial review is available against the decision of the SRB to raise contributions from a contributory entity. This review takes the form, first, of an appeal to the SRB’s own Appeal Panel (Art. 85(3) SRMR), and, subsequently,6 an action for annulment before the Court of Justice (Art. 86 SRMR and Art. 263 TFEU). An application for such review does, however, not suspend the application of the decision. An entity which challenges the decision imposing contributions on it would, therefore, still be obliged to pay while the procedure is pending, unless it successfully applies for suspensory effect by means of an interim injunction (Art. 85(6) SRMR, Art. 278 TFEU). Art. 65(3) SRMR includes a mandate to the SRB to “apply procedural, reporting and other rules ensuring that contributions are paid fully and in a timely manner”. This wording establishes, first and foremost, a responsibility of the SRB to organise its own internal operations. It must put in place mechanisms within the agency suitable for monitoring whether contributory entities meet their payment obligations, and to take action, within the possibilities legally available, against such entities if these obligations are not met. Art. 65(5)(c) SRMR provides a legal basis for the specification of such rules in a Commission delegated act. For the legal nature and effect of this act and the obligations arising from it on private parties see infra, → para. 13 et seq. The word “raise” in Art. 65(3) SRMR is to be read as “collect”, not as “increase”. 7 Otherwise the SRMR would contain a binding mandate to continuously increase the amount of a bank’s contribution year by year, which would be unjustifiable from a policy perspective and irreconcilable with the principle that the collected contributions are meant to balance the SRB’s actual expenditures, but not exceed them (Art. 65(2) SRMR). This is also supported by a comparison to other language versions of the SRM Regulation, which unambiguously contain a word meaning “collect”.8 4 It may be added that the stipulation in the Delegated Act that provides for the enforceability of contribution notices is not entirely without problems: The SRMR itself, on which the Delegated Act is based and which therefore takes a higher hierarchical rank, provides only for the enforceability of fines and periodic penalty payments (Art. 41(3) SRMR), not of contribution notices. Other higher-ranking enforceability provisions of Union law, such as Arts. 280 and 299 TFEU, do not apply to decisions of Union agencies. It is thus at least questionable whether a tertiary law act such as the Delegated Act can expand the enforceability of SRB decisions beyond what has been provided for in primary and secondary law. 5 The bindingness of the Charter upon the SRB follows from Art. 51(1) CFREU. 6 A prior appeal to the Appeal Panel is a necessary precondition for an action for annulment before the Court of Justice; without such an appeal procedure, the action for annulment would be inadmissible. This follows from the wording of Art. 86(1) SRMR. This constitutes another difference to the regime of supervisory fees in the SSM, where an administrative review of an ECB decision under Art. 24 SSMR is optional. For the reasons for this discrepancy, see Witte, JFR 1/2 (2015), 226, at pp. 246–247). 7 Both are possible meanings of the word “raise”; see the entry of “raise” in the Oxford English Dictionary at www.oed.com. 8 E.g. French “perçoit”, German “erhebt”, Spanish “recaudará”, Italian “raccoglie”, Swedish “samla”.
1072
Andreas Witte
Contributions to the administrative expenditures of the Board
Art. 65 SRMR
D. Commitment of the contributions to a specific purpose (Art. 65(4)) Art. 65(4) SRMR is merely confirmatory. It reiterates something which already fol- 12 lows from a number of other provisions, most importantly Arts. 58(1) and 59(1) SRMR. In fact, Art. 65(4) SRMR is less clear and specific than Art. 59(1) SRMR because the latter provision explicitly confines the use of the Art. 65 SRMR contributions to Part I of the budget.
E. Commission delegated act (Art. 65(5)) I. Adoption and legal nature of the delegated act The rationale behind Art. 65(5) SRMR is the idea that it would go into too much detail for the SRMR – a secondary law act adopted by the Parliament and the Council – to spell out the precise algorithm for breaking down the aggregate contributions to be raised into the specific contributions from each entity. This algorithm is of a more technical nature, properly dealt with in a tertiary law act. Art. 65(5) SRMR provides an empowerment for the adoption of such an act. The permissibility of this delegation under primary law follows from Art. 290 TFEU. This provision is not, in itself, a legal basis for the delegated act; the Commission requires, in addition to Art. 290 TFEU, an empowerment in secondary law providing for the adoption of the tertiary law delegated act. Art. 65(5) SRMR is such an empowerment. The procedure for the adoption of the delegated act is spelt out in Art. 93 SRMR. It may be noted that, legally, a Commission delegated act adopted under Art. 93 SRMR is distinct from a regulatory or implementing technical standard adopted by the Commission under Arts. 10 or 15 EBAR,9 where the drafting process by the EBA and the submission of the draft by the EBA to the Commission is legally required. The Commission is thus free to exercise the empowerment independently from the EBA, even though it is, of course, not legally barred from seeking the EBA’s advice. The Commission has made use of the empowerment by adopting Delegated Regulation 2017/2361.10 This act (which will, in the following annotations, be cited as the “Delegated Act”) replaced a provisional system which had been set up at the beginning of the SRM.11 It has since been amended once, in February 2021. The Delegated Act was adopted by the Commission in the form of a Regulation (which is permitted under Arts. 65(5) SRMR and 93 SRMR and Art. 290 TFEU). Even though the Delegated Act is an act of tertiary law, and thus hierarchically inferior to the SRM Regulation, it is thus still a Regulation within the meaning of Art. 288(2) TFEU and has direct effect in the Member States and supremacy over national law. The Delegated Act has legal effects vis-à-vis third parties and is thus subject to judicial review. Even though the precise question has not yet been adjudicated, there is room to argue that it constitutes a “regulatory act” with facilitated standing requirements 9 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, OJ L 331, 15.12.2010, at pp. 12–47. 10 Commission Delegated Regulation (EU) 2017/2361, OJ L 337, 19.12.2017, at pp. 6–14. 11 Commission Delegated Regulation (EU) No. 1310/2014 of 8 October 2014 on the provisional system of instalments on contributions to cover the administrative expenditures of the Single Resolution Board during the provisional period, OJ L 354, 11.12.2014, at pp. 1–5 (repealed).
Andreas Witte
1073
13
14
15
16
17
18
Art. 65 SRMR
Contributions to the administrative expenditures of the Board
pursuant to Art. 263(4) TFEU.12 The more likely avenue for judicial review of the Delegated Act would, however, go via an action for annulment of an SRB decision under Art. 65(3) SRMR which determines the contribution to be paid. Within this action, the legality of the Delegated Act could be raised as an incidental question (see Art. 277 TFEU).
II. Content of the delegated act Unlike its predecessor (Commission Delegated Regulation (EU) No 1310/2014), the current Delegated Act is not intended as a temporary solution. It purports to establish a “final” scheme for the calculation of administrative contributions to the SRB. This is, of course, without prejudice to the Commission’s power to abrogate or amend it by means of actus contrarius. 20 The Delegated Act is premised upon a distinction between entities under Arts. 7(2) and 7(3) SRMR.13 The former are those entities whose resolution plans and resolution decisions fall within the responsibilities of the SRB, whereas the latter are subject to the responsibilities of the NRAs; for details see the annotations to Art. 7 SRMR. As a consequence, the Art. 7(2) entities cause much heavier workload for the SRB, which motivated the legislators of the SRMR to assign to them 95 % of the total amount to be raised as administrative contributions. 21 The predecessor to the current Delegated Act provided that contributions paid by significant entities under it were not final. It foresaw a re-calculation of contributions according to the final system of administrative contributions once this system would be in place. Differences between the amounts paid under the provisional system and the final system were to be settled in the calculations of the contributions for the following year.14 22 The algorithm used by the Delegated Act to translate the aggregate amount of contributions into the contributions to be paid by each entity is governed by Art. 5(2) of the Delegated Act, which makes a reference to Art. 10 of Regulation (EU) No 1163/201415 by means of which the ECB regulated the supervisory fees payable to it under Art. 30 SSMR (see annotations thereto) for the supervisory work performed by it. That algorithm provides for separate calculations for significant and less significant entities (Arts. 10(1) and 10(2) of Regulation (EU) No 1163/2014) 16, which collectively need to bear 95 % and 5 % of the overall burden. For both categories of entities, the aggregate to be levied from that category is then divided into a minimum contribution component, which amounts to 10 % of the amount which the category needs to raise and which is distributed evenly among all entities within the category (Art. 10(6)(b) of Regulation 19
12 Case C-583/11 P, Inuit Tapiriit Kanatami and Others v Parliament and Council, ECLI:EU:C:2013:625, paras. 51–61. See Witte, JFR 1/2 (2015), 226, at pp. 253–255. A potential problem could arise from the “does not entail implementing measures” clause at the end of Art. 263(4) TFEU; one could argue that the SRB decision under Art. 65(3) SRMR which determines the contribution to be paid constitutes an implementing measure. 13 This distinction is not exactly coterminous with that between significant and less significant entities within the meaning of the SSMR. 14 Art. 6(2) of Commission Delegated Regulation (EU) No 1310/2014 and Art. 10 of the current Delegated Act. 15 Regulation (EU) No 1163/2014 of the European Central Bank of 22 October 2014 on supervisory fees, OJ L 311, 31.10.2014, at pp. 23-31. 16 Subject to the SRM-specific modification that entities for which the SRB is responsible as per Art. 7(2) SRMR, even though they are less significant from the perspective of the SSM, are grouped together with the significant ones: Art. 5(3)(b) and (c) of the Delegated Act.
1074
Andreas Witte
Art. 66 SRMR
Anti-fraud measures
(EU) No 1163/2014). The minimum component is thus indifferent to the size of banks. 17 The remaining 90 % of the aggregate which each category needs to raise are, on the other hand, bank-specific and calculated on the basis of contribution factors 18 which are determined on the basis of two parameters of equal weighting, namely the debtor’s total assets and total risk exposure (which, unlike total assets, is risk-weighted 19), relative to other contribution debtors (Arts. 10(3) and 10(6)(c) of Regulation (EU) No 1163/2014. This algorithm thus constitutes a combination between three competing principles 23 which could serve as the basis for the allocation of contributions to individual banks: (i) To all banks evenly, on the basis of the idea that, no matter how small or low-risk an entity is, it still creates workload for the SRB; (ii) in proportion to a bank’s size (as reflected in its total assets), on the basis of the idea that large banks are more of a concern for resolution authorities than small ones; (iii) on the basis of a bank’s risk profile (as reflected in its total risk exposure amount), on the basis of the idea that riskier banks create more workload for the SRB than less risky ones, and that a calculation on the basis of unweighted size (option (ii)) would set undesirable incentives by penalising low-risk high-volume business relative to high-risk low-volume activities, The algorithm, which is undoubtedly the outcome of a compromise among different national interests which diverged in their preferences among the three principles, fuses all three of them into one fairly complicated by still workable methodology. The Delegated Act also contains some procedural rules. It requires the issuance of 24 contribution notices and their communication to the contributory institutions by the SRB (Art. 8 of the Delegated Act). It is fair to assume that the “contribution notices” referred to in the Delegated Act is identical to the contribution “decision” referred to in Art. 65(3) SRMR. The deadline for payment is 35 calendar days as of the date of notification; after this deadline, penalty interests apply in case of non-payment. The Delegated Act also stipulates enforceability (see supra, → para. 7) and provides that the ECB supplies the necessary data for the calculation of the contributions to the SRB (Art. 6 of the Delegated Act). It is remarkable that the contributions under Art. 65 are collected by the SRB itself, rather than via the national resolution authorities as is the case for the resolution fund contributions (→ Art. 67(4)); this is a result of the fact that the Art. 65 contributions serve to finance the SRB’s own work.
Art. 66 SRMR Anti-fraud measures 1. For the purposes of combating fraud, corruption and any other unlawful activity under Regulation (EU, Euratom) No. 883/2013 of the European Parliament and of the Council, within six months from the day the Board becomes operational, it shall accede to the Interinstitutional Agreement of 25 May 1999 concerning internal investigations by OLAF and shall immediately adopt appropriate provisions applicable to all staff of the Board using the template set out in the Annex to that Interinstitutional Agreement. 17 There is one minor aspect which constitutes an exception to this: The 50 % discount on the minimum component which very small (total assets ≤ EUR 10bn) significant institutions receive (Art. 10(6)(b) of Regulation (EU) No 1163/2014). 18 Art. 10 of Regulation (EU) No 1163/2014 speaks of “fee factors”, but it may be deduced from Art. 5(3) of the Delegated Act that the SRB regime replaces the “fee” terminology of the ECB’s Regulation with a “contribution” terminology. 19 The calculation of the risk exposure amount is governed by Art. 2(13) of Regulation (EU) No 1163/2014, which refers to Art. 92(3) of the CRR.
Andreas Witte
1075
Art. 66 SRMR
Anti-fraud measures
2. The Court of Auditors shall have the power of audit, on the basis of documents and on the spot, over the beneficiaries, contractors and subcontractors who have received funds from the Board. 3. OLAF may carry out investigations, including on-the-spot checks and inspections with a view to establishing whether there has been fraud, corruption or other illegal activity affecting the financial interests of the Union in connection with a contract funded by the Board in accordance with the provisions and procedures laid down in Council Regulation (Euratom, EC) No. 2185/96 and Regulation (EU, Euratom) No. 883/2013. Bibliography Eberhard Grabitz, Meinhard Hilf and Martin Nettesheim (eds) Das Recht der Europäischen Union (65th supplement, C.H. Beck, Munich 2018); Waldemar Hummer, ‘From ‘Interinstitutional Agreements’ to ‘Interinstitutional Agencies/Offices’?’, ELJ 13 (2007), 47; Jorg Monar, ‘Interinstitutional Agreements: The phenomenon and its new dynamics after Maastricht’, CMLR 31 (1994), 693; Sonja Puntscher Riekmann, ‘The Cocoon of Power: Democratic Implications of Interinstitutional Agreements’, ELJ 13 (2007), 4; Constantin Stefanou, Simone White, and Helen Xanthaki, OLAF at the Crossroads (Hart, Oxford, Portland 2011). A. Function and background of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
B. Accession of the SRB to the Interinstitutional Agreement (Art. 66(1)) . . . . . . .
2
C. Power of audit of the Court of Auditors (Art. 66(2)) . . . . . . . . . . . . . . . . . . . . . . . . .
6
D. OLAF investigations (Art. 66(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
A. Function and background of the provision 1
In particular since the scandals that led to the resignation of the Santer Commission in 1999, the Union has been acutely aware of the financial and reputational risks arising from potential fraud and corruption in Union institutions and agencies. Emphasis is now laid on avoiding even the impression of inappropriate or illicit behaviour in relation to the use of public funds. These concerns apply also to the SRB, which has been equipped by the SRMR with the power and possibility to deal with large amounts of money which are levied, on the basis of a legal empowerment, from the banking industry and thus constitute, at the end of the day, public funds entrusted to it by legislation, levied on the basis of compulsory contributions similar to taxes. The rationale of Art. 66 SRMR is thus to integrate the SRB into the system of anti-fraud measures at the Union level.
B. Accession of the SRB to the Interinstitutional Agreement (Art. 66(1)) 2
OLAF is the European Anti-Fraud Office, taking its acronym from the French language version of that term (Office de Lutte Anti-Fraude). It was established1 in 1999 in response to the scandals surrounding the Santer Commission and equipped with investi-
1 Its founding act was Commission Decision 1999/352/EC, ECSC, Euratom of 28 April 1999 establishing the European Anti-fraud Office (OLAF), OJ L 136, 31.5.1999, at pp. 20–22, as amended. It replaced a previous Anti-Fraud Coordination Unit (UCLAF) that had been established within the Commission in 1988.
1076
Andreas Witte
Art. 66 SRMR
Anti-fraud measures
gatory powers2 to combat fraud and corruption, but its establishment built upon earlier predecessors dating back to the 1980s. The sedes materiæ in primary law for the activities of OLAF can now be found in Art. 325 TFEU. The establishment of OLAF by means of acts of legislation was accompanied by an 3 Interinstitutional Agreement concluded between the Parliament, the Council, and the Commission.3 The reason for this lay in the administrative autonomy of the various institutions, bodies, offices and agencies of the Union, which meant that these were, first and foremost, themselves responsible for internal administrative investigations within their own houses.4 An agreement between the three institutions was therefore concluded by means of which the institutions entrusted such investigations to OLAF and entered into a requirement to cooperate with OLAF and supply it with information upon request.5 It has since become common practice to include a provision akin to Art. 66 SRMR in the founding acts of new Union agencies. Accession to the Interinstitutional Agreement is mandatory for the SRB; the SRMR 4 does not leave it the possibility to refuse to accede. Doctrinally, it appears as an oddity to establish the anti-corruption regime of Union agencies by obliging them to accede to an agreement concluded in the past by other actors, as opposed to simply including the substantive provisions directly in their founding legislation. Practically, however, that approach has been found to be workable, relegating these doctrinal issues to merely theoretical relevance. An interesting question is whether there is space for subsequent amendments to the Interinstitutional Agreement, which would then become binding upon the SRB. On the one hand, the text of Art. 66(1) SRMR refers to the Agreement as it was concluded on 25 May 1999, implying that this is a static reference and not subject to subsequent amendments; on the other hand, the contractual nature of that document would imply that it could be amended by the parties to it, and that the reference in Art. 66(1) SRMR would then target the amended version in order to avoid a fragmented anti-corruption regime among the different institutions and agencies of the Union. As a matter of fact, the Interinstitutional Agreement has not been amended since 1999; and even if amendments were made, they would certainly require the unanimous consent of all parties involved, including the Commission, the Parliament, and the Council, who are just as free to amend the SRMR by means of legislation. Art. 66(1) SRMR also mandates the SRB (in a binding manner) to adopt provisions 5 following the template attached to the Interinstitutional Agreement. That template sets out a model decision to be adopted by each institution, body or agency subject to the Interinstitutional Agreement; by virtue of adopting an (internal) decision based on this model decision, the SRB would, in the exercise of its administrative autonomy, oblige its own staff to cooperate with OLAF, supply information to OLAF upon request, and inform managers of evidence which gives rise to a presumption of the existence of misconduct. One would presume that the appropriate legal basis for the SRB to adopt such internal provisions is Art. 82 SRMR. 2 Regulation (EC) No. 1073/1999 of the European Parliament and the Council of 25 May 1999 concerning investigations conducted by the European Anti-Fraud Office (OLAF), OJ L 136, 31.5.1999, at pp. 1–7, as amended. 3 Interinstitutional Agreement of 25 May 1999 between the European Parliament, the Council of the European Union and the Commission of the European Communities concerning internal investigations by the European Anti-fraud Office (OLAF), OJ L 136, 31.5.1999, at pp. 15–19. 4 This rationale becomes particularly apparent in Recital 4 of the Interinstitutional Agreement. 5 Interinstitutional Agreements are common in the institutional system of the Union, but it is not apparent which legal effects (if any) arises from them. For a detailed analysis, see Hummer, ELJ 13 (2007), 47. Monar, CMLRev, 31 (1994), 693 demonstrates that the phenomenon is not novel. For a political theory of these strange animals see Puntscher Riekmann, ELJ 13 (2007), 4.
Andreas Witte
1077
Art. 66 SRMR
Anti-fraud measures
C. Power of audit of the Court of Auditors (Art. 66(2)) Art. 66(2) SRMR establishes a power of audit of the Court of Auditors over the beneficiaries, contractors and subcontractors who have received funds from the SRB. The provision is remarkable in the sense that (untypically for provisions of budgetary law) it is not merely of internal relevance within the SRB but has a clear third-party effect. Any beneficiary, contractor or subcontractor who has received SRB funds can be audited by the Court of Auditors. This applies to public as well as private sector entities. A similar provision exists, with primary law force, for natural or legal persons who have received funds from the Union budget in Art. 287(3) TFEU. 7 The term “power of audit” is not defined in the SRMR, but it includes at least a duty to provide necessary information or to grant access to auditors “on the spot”, i.e., for inspections on the premises of the entities concerned.6 This can be quite intrusive, even though one would assume that, owing to scarce resources, the Court of Auditors will not make use of this possibility to a very large extent vis-à-vis private parties.7 6
D. OLAF investigations (Art. 66(3)) 8
Art. 66(3) SRMR concerns powers of OLAF and thus has a relation to Art. 66(1) SRMR (which makes it, structurally, somewhat of an oddity to place Art. 66(2) SRMR about the Court of Auditors between the two), but covers a different activity of OLAF: investigations, including on-the-spot, outside an EU institution or agency. The scope of the investigation is defined by the relationship with SRB-funded contracts, as mentioned in Art. 66(3) SRMR, but OLAF is not limited to investigations within the SRB. The Reg-
6 See Magiera, in: Grabitz, Hilf and Nettesheim (eds), Das Recht der Europäischen Union (65 th supplement, 2018), Art. 287 TFEU para. 14 for a discussion of the question whether a Council Declaration of 1975 limits the mandate of the Court of Auditors in on-site investigations. Magiera doubts this, arguing on the basis of primary law amendments that have occurred since this Declaration. By the same token, the wording of Art. 66(2) SRMR, which provides for an audit mandate of the Court of Auditors “on the basis of documents and on the spot”, makes it preferable to argue that the limitations discussed by Magiera do not apply to the power of audit of the Court of Auditors over beneficiaries, contractors and subcontractors who have received SRB funds. 7 The SRMR (as well as the corresponding primary law text in Art. 287 TFEU) is silent as to how these powers are to be enforced in case a private party which is subject to an audit on this basis refuses to comply. Inspiration may be drawn from competition law, where Art. 20 of Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Arts. 81 and 82 of the Treaty, OJ L 1, 4.1.2003, at pp. 1–25, provides for more detailed rules on the mechanism for enforcing the inspection powers of the Commission (which also include on-the-spot checks on the premises of private parties, including the notorious “dawn raids”). Member States would thus be obliged to render the necessary assistance to the Court of Auditors, e.g. through their police authorities. The comparison to the situation under competition law would also indicate that the Court of Auditors itself would not require a judicial warrant to enter the premises of an auditee (Case C-583/13, Deutsche Bahn et al. v Commission, ECLI:EU:C:2015:404), but that where national authorities require a warrant before they can render assistance, this requirement would be respected by Union law and an application to that effect shall be applied for (Article 20(7) of Regulation (EC) No. 1/2003). In the absence of explicit stipulations in the SRMR, corresponding duties of Member States can, doctrinally, be derived from Art. 4(3) TEU.
1078
Andreas Witte
Introduction to Arts. 67–74 SRMR ulations cited in Art. 66(3) SRMR8 empower OLAF – subject to procedural safeguards and due process provisions9 – to conduct investigations also against and at the premises of “economic operators”. That term is not defined in positive law, 10 but undoubtedly has a broad meaning, and may even include natural persons.11 In terms of their legal consequences, OLAF reports arising from an investigation 9 are not legally binding per se. It is not uncommon, though, for Union or national institutions to take action vis-à-vis third parties following an OLAF report, exercising an otherwise available power. Case law does not rule out indirect effects of such a report, such as the potential to remove legitimate expectations.12
Introduction to Arts. 67–74 SRMR Bibliography (for the entire Section) John Armour, ‘Making Bank Resolution Credible’ in: Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University Press, Oxford 2015), 453; BVVA, ‘Funding before and in resolution: A proposal for a funding in resolution mechanism’, BBVA Research (May 2018); Thorsten Beck and Luc Leaven, ‘Resolution of failed banks by deposit insurers: Cross-country evidence’, World Bank Policy Research Working Paper No. 3920 (2006); Concetta Brescia Morra, ‘The Third Pillar of the Banking Union and Its Troubled Implementation’ in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, Springer Nature, Cham Switzerland 2019), 393; Matthäus Buder, Max Lienemeyer, Marcel Magnus, Bert Smits and Karl Soukup, ‘The rescue and restructuring of Hypo Real estate’, Competition Policy Newsletter, 3 (2011), 41; Javier Villar Burke, ‘Building a Bank Resolution Fund Over Time: When Should Each Individual Bank Contribute?’, BBVA Research (2015); Olina Capolino, ‘The Single Resolution Mechanism: Authorities and Proceedings’ in: Mario P. Chiti, and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, Springer Nature, Cham Switzerland 2019), 247; Jacopo Carmassi, Sonja Dobkowitz, Johanne Evrard, Laura Parisi, André Silva and Michael Wedow, ‘Completing the Banking Union with a European Deposit Insurance Scheme: who is afraid of cross-subsidisation?’ ECB Occasional Paper Series No 208 (April 2018); Paul Craig and Gráinne de Búrca, EU Law: Texts, Cases, and Materials (6th edn, Oxford University Press, Oxford, New York 2015); Oana M. Croitoru, Marc C. Dobler and Johan Molin, ‘Resolution Funding: Who Pays When Financial Institutions Fail?’, IMF Monetary and Capital Markets Department, Technical Notes and Manuals (2018); Willem Pieter de Groen, ‘Financing bank resolution: An alternative solution for arranging the liquidity required’, Economic Governance Support Unit (2018); Maria Demertzis, Inês Gonçalves Raposo, Pia Hüttl, Guntram Wolff, ‘How to provide liquidity to banks after resolution in Europe’s banking union’, Economic Governance Support Unit (November 2018); ECB, Financial Integration in Europe (April 2014); European Parliament, ‘Banking Union: Towards new arrangements for the provision of liquidity in resolution?’, Briefing (July 2018); Frederico Fabbrini, ‘On Banks, Courts and International Law: The Intergovernmental Agreement on the Single Resolution Fund in Context’, Maastricht Journal of European & International Law 21 (2014), 444; Mario Giovanoli, ‘The International Financial Architecture and its Reform after the Global Crisis’ in: Mario Giovanoli and Diego Devos (eds), International Monetary and Financial Law: The Global Crisis (Oxford University Press, Oxford – New York 2010), 3; Charles Goodhart, ‘Funding 8 The first of these Regulations (Council Regulation (Euratom, EC) No. 2185/96 of 11 November 1996 concerning on-the-spot checks and inspections carried out by the Commission in order to protect the European Communities' financial interests against fraud and other irregularities, OJ L 292, 15.11.1996, at pp. 2–5) granted these investigatory powers to the Commission. Subsequent legislation, including Regulation (EU, Euratom) No. 883/2013 of the European Parliament and of the Council of 11 September 2013 concerning investigations conducted by the European Anti-Fraud Office (OLAF) and repealing Regulation (EC) No. 1073/1999 of the European Parliament and of the Council and Council Regulation (Euratom) No. 1074/1999, OJ L 248, 18.9.2013, at pp. 1–22, transferred this mandate to OLAF, but still retained the wording that the powers OLAF exercises are conferred on the Commission. 9 On these, see Stefanou, White and Xanthaki, OLAF at the Crossroads (2011), at pp. 86–103. 10 Art. 2(6) of Regulation 883/2013 refers to two previous Regulations using that term, but in fact neither of the two contains an explicit definition of the term. The reference in the 2013 Regulation is thus limited to saying that the new Regulation is not intended to apply to a different scope of operators compared to the previous acts. 11 Case T-483/13, Oikonomopoulos v Commission, ECLI:EU:T:2016:421, paras. 144 and 157. 12 E.g. Case C-47/16, Valsts ieņēmumu dienests v "Veloserviss” SIA, ECLI:EU:C:2017:220.
Christos V. Gortsos
1079
Introduction to Arts. 67–74 SRMR arrangements and burden sharing in banking resolution’ in: Thorsten Beck (ed), Banking Union for Europe. Risks and Challenges (CEPR, London 2012), 105; Christos V. Gortsos, European Central Banking Law – The Role of the European Central Bank and National Central Banks under European Law (Palgrave Macmillan, Springer Nature, Cham, Switzerland 2020); id., ‘The EU Framework Governing the Resolution of Credit Institutions’ in: Fabian Amtenbrink and Christoph Hermann (eds), The EU Law of Economic and Monetary Union (Oxford University Press, Oxford 2020), Chapter 38, 1145; id., ‘The Evolution of European (EU) Banking Law under the Influence of (Public) International Banking Law: A Comprehensive Overview (Second fully updated edn)’ (2019), available at: ; id., ‘The European Deposit Insurance Scheme (EDIS)’ in: Federico Fabbrini and Marco Ventoruzzo (eds), Research Handbook on EU Economic Law (Edward Elgar Publishing, Cheltenham, Northampton 2019), 366; id., ‘The proposed legal framework for establishing a European Monetary Fund (EMF): a systematic presentation and a preliminary assessment’ (2017), available at: ; id., The New EU Directive (2014/49/EU) On Deposit Guarantee Schemes: An Element of the European Banking Union (Nomiki Bibliothiki SA, Athens 2014); Seraina Neva Grünewald, The Resolution of Cross-Border Banking Crises in the European Union: A Legal Study from the Perspective of Burden Sharing (Wolters Kluwer Law & Business, Netherlands 2014); Barbara Guastaferro, ‘Loyalty and Constitutional Identity‘ in: Robert Schütze and Takis Tridimas (eds), Oxford Principles European Union Law – Volume 1: The European Union Legal Order (Oxford University Press, Oxford 2018), 350; Christos Hadjiemmanuil, ‘Bank Resolution Financing in the Banking Union’, LSE Law, Society and Economy Working Papers 6 (2015); Matthias Haentjens, ‘Selected Commentary on the Bank Recovery and Resolution Directive’ in: Gabriel Moss QC, Bob Wessels and Matthias Haentjens (eds), EU Banking and Insurance Insolvency (2nd edn, Oxford University Press, Oxford 2017), 177; Dieter Huber, ‘Resolution Financing’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 143; id., ‘Ex-ante Financed Resolution Funds’ in: World Bank Group (ed), Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRRD (World Bank Group, Finance & Markets, Financial Sector Advisory Center (FinSAC) April 2017), 148; IMF, ‘Euro Area Policies: Financial Sector Assessment Program – Technical Note – Bank Resolution and Crisis Management’, IMF Country Report No. 18/232 (2018); Bart Joosen and Matthias Lehmann, ‘Proportionality in the Single Rule Book’ in: Mario P. Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Union Law (Palgrave Macmillan, Cham/Switzerland, USA 2019), 65; Elke König, ‘Speech at the ECON Committee, European Parliament (July 2018)’, available at: ; Rosa María Lastra, International Financial and Monetary Law (2 nd edn, Oxford University Press, Oxford 2015); Carl Otto Lenz and Klaus-Dieter Borchardt (eds), EU-Verträge. Kommentar: EUV/AEUV/GRCh (6th edn, Bundesanzeiger Verlag/Linde Verlag, Cologne/Vienna, 2012); Jean-Victor Louis, ‘La difficile naissance du mécanisme européen de résolution des banques’, Cahiers de droit européen 50 (2014), 7; Yves Mersch, ‘The limits of central bank financing in resolution’, Speech at the IMFS Distinguished Lecture Series Goethe Universität Frankfurt (January 2018), available at: ; Oliver Moullin, Stefano Mazzocchi, Charlie Bannister and Elisa Cencig, ‘Liquidity in Resolution’, Association for Financial Markets in Europe (June 2018); Gillian García and Maria J. Nieto, ‘The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe?’, LSE Financial Markets Group Paper Series, Special Paper 209 (2012); Peter Nobel, Schweizerisches Finanzmarktrecht (4th edn, Stämpfli Verlag AG, Bern 2019); Wolf-Georg Ringe, ‘Bail-In between Liquidity and Solvency’, Oxford Legal Studies Research Paper No 33/2016 (2017); Pierre Schlosser, ‘Still Looking for the Banking Union’s Fiscal Backstop’, in: Franklin Allen et al. (eds), The changing geography of finance and regulation in Europe (European University Institute, Florence 2017), 163; Dirk Schoenmaker, ‘A macro approach to international bank resolution’, Bruegel Policy Contribution Issue no. 20 (2017); id., ‘On the need for a fiscal backstop to the banking system’, Duisenberg School of Finance, DSF Policy Paper, No 44 (July 2014); Jürgen Schwarze, Ulrich Becker, Armin Hatje and Johann Schoo (eds), EU-Kommentar (4th edn, Nomos, Baden-Baden 2019); SRB, ‘Annual Report’ (2018); id., ‘Annual Report’ (2017); id., ‘Annual Report’ (2016); id., ‘Annual Report’ (2015); René Smits, The European Central Bank, Institutional Aspects (Kluwer Law International, The Hague 1997); Alexander Thiele, Finanzaufsicht. Der Staat und die Finanzmärkte (Mohr Siebeck, Tübingen 2014); Rosalind Z. Wiggins, Michael Wedow, Andrew Metrick, ‘European Banking Union B: The Single Resolution Mechanism’, Journal of Financial Crises 1 (2019), 130; Benedikt Wolfers and Thomas Voland, ‘Bankenrestrukturierung und Bankenabwicklung – Die Bankenabgabe im Rahmen des Single Resolution Mechanism’, in: Jens-Hinrich Binder, Alexander Glos and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS-Verlag, Cologne 2018), 947; George S. Zavvos and Stella Kaltsouni, ‘The Single Resolution Mechanism in the European Banking Union: Legal Foundation, Governance Structure and Financing’ in: Matthias Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar Publishing Ltd., Cheltenham 2015), Ch. 7, also available at: https://ssrn.com/abstract=2531907.
1080
Christos V. Gortsos
Introduction to Arts. 67–74 SRMR ................................................................................ A. Introductory remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Briefly on resolution financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The provisions of international financial law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Resolution financing in the EU context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The structure of Section 1 of the SRMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 1 1 3 8 10
B. The SRF Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Legal nature, purpose and scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Consistency and relationship with EU law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Ratification, approval or acceptance – entry into force and accession . . . . . . . . IV. Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Compensation of non-participating Member States . . . . . . . . . . . . . . . . . . . . . .
13 13 16 18 20 22 22 24
A. Introductory remarks I. Briefly on resolution financing 1. General aspects It is common in (almost) all jurisdictions that the funding necessary to effect resolu- 1 tion actions is provided by a resolution fund, which is financed, in principle, by the banking system; privately-funded deposit guarantee schemes (DGSs) may also be used in resolution financing.1 Resolution funds are as critical an element of the resolution framework as is the bail-in resolution tool in terms of protection of public funds.2 however, while the latter is designed to shift the financial burden of bailing out credit institutions that have been assessed as failing or is likely to fail from taxpayers to their shareholders and creditors, the former is designed to shift this financial burden from taxpayers to the banking system as a whole.3 Resolution funding should be clearly distinguished from last resort lending by cen- 2 tral banks. The latter is a tool for the management of banking liquidity crises, while resolution (including its financing) is a tool for the management of banking solvency crises, which may, in certain cases, be caused by liquidity problems, implying that last resort lending may have already been provided. A related, albeit distinct, issue is that relating to the provision of liquidity after the decision has been taken by the resolution authorities to resolve a bank. In relation to this issue, which is an essential part of an effective resolution framework and is usually discussed as “liquidity in resolution” 1 On resolution financing and resolution funds, see Goodhart, in: Beck (ed), Banking Union for Europe. Risks and Challenges (2012), 105; García and Nieto, LSE Financial Markets Group Paper Series, Special Paper 209 (2012); Grünewald, The Resolution of Cross-Border Banking Crises in the European Union: A Legal Study from the Perspective of Burden Sharing (2014); Armour, in: Moloney, Ferran and Payne (eds), The Oxford Handbook of Financial Regulation (2015), 453, at pp. 479-482; Burke, BBVA Research (2015) and Croitoru, Dobler and Molin, IMF Monetary and Capital Markets Departmen