First judgments annulling ECB banking supervision decisions

T-733/16 –
T-745/16, T-751/16,
T-757/16, T-758/16 and

PartiesJurisdictionFormationJudge RapporteurAdvocate GeneralSubject-matter
Preliminary rulingLa Banque postale v European Central BankGeneral CourtSecond Chamber
- Extended Composition
M. Prek/Economic and onetary policy
- European Central Bank
KeywordsEconomic and monetary policy - Prudential supervision of credit institutions - Article 4(1)(d) and A(3) of Regulation (EU) No 1024/2013 - Calculation of the leverage ratio - Decisions of the ECB refusing to allow the applicant to exclude exposure which satisfies a number of conditions from the calculation of the leverage ratio - Article 429(14) of Regulation (EU) No 575/2013 - Discretionary power of the ECB - Error of law - Manifest error of assessment.
Significant pointsIn order to bring more clarity in the levels of own funds of the different credit institutions after the 2008 financial crisis, the EU legislator introduced a new instrument into 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 (CRR): the leverage ratio. Its originality lays in the fact that it is not calculated on the basis of the level of investment risk of the credit institutions (exposures) and that it seeks to take into account all their investments in its calculation.

Nonetheless, the competent authorities, including the European Central Bank may authorise credit institutions to exclude exposure which satisfies a number of conditions from the calculation of the leverage ratio, pursuant to a provision introduced by a delegated act of the EU Commission into CRR.

In order to enjoy the exemption, the exposure must: “(a) concern a public sector entity; (b) be dealt with in accordance with the prudential requirements relating to exposure on public sector entities, and (c) be the result of deposits which the institution is legally bound to transfer to the public sector entity referred to in point (a) in order to finance investments in the public interest.”

Six French banks, subject to its direct supervision as significant credit institutions, were not permitted by the ECB to exclude from the calculation of the leverage ratio certain of their exposure connected to savings accounts, such as livret A (savings account A), opened by them and transferred to the Caisse des dépôts et consignations (CDC), a French public investment group.

The ECB considered that although the conditions laid down in the regulation were satisfied, it had the discretionary power to authorise or refuse the exclusion requested. The ECB explained its refusal by the fact that the mechanism for transfer from the CDC is imperfect and raises prudential concerns.

For the first time, the General Court has annulled decisions of the ECB acting as the prudential authority of banks.

The General Court first acknowledged that the ECB did indeed enjoy a discretionary power within the ambit of Article 429(14) of CRR. Provided that three conditions are met, the competent authorities have the possibility of granting a derogation or not.

As a matter of law, a reason for this discretionary power in Article 429(14) is to be able to make choices having regard to the particular features of each case, between both “the objective of following the logic of the leverage ratio which means taking into account the extent of the total exposure of a credit institution, without risk weighting” and “the objective of treating certain exposure with a particularly low risk profile and which does not arise from an investment choice of the credit institution concerned as irrelevant to the calculation of the leverage ratio and able to be excluded from that calculation”.

Next, the General Court ruled that the elements taken into consideration by the ECB were not sufficient to support its conclusions. In this respect, the General Court pointed out that the ECB based its refusal on considerations inherent to the exposure to which the derogation provided for relates, thus depriving that derogation of useful effect. The ECB gave three reasons for its refusal.

First, it considered that the exposure is regarded as an asset in the balance sheet of the institution concerned. For the General Court, the ECB forgot that the exposure related to the derogation is intended by nature to stand as an asset in the balance sheet.

Second, the ECB submitted that those institutions supported the operational risk connected with regulated savings, whereas it is logical that the risk was endured by the credit institution.

Third, the ECB stated that a default of payment by the French State could have as consequence that the sums transferred to the CDC as regulated savings were not returned to the applicants, forcing them in turn to sell their assets urgently. The General Court rejected this argument on the ground that the ECB did not analyze the likelihood of this kind of default of payment.

As a consequence, the General Court considered that the justifications of the ECB were not enough to demonstrate the existence of justified prudential reasons to refuse the exclusion of exposures, and consequently that ECB erred in law in the exercise of its discretionary power.

Finally, the ECB argued that the period of adjustment between the adjustment of the applicant and of the CDC could facilitate the emergence of an excessive leverage and the risk associated which led to an emergency sale of assets. The General Court, however, concluded that, as the ECB did not consider before the period of adjustment as a liquidity risk, and, regarding the lack of detailed analysis of the regulation savings’ characteristics, this argument is manifestly incorrect.
Noteworthy1. In fact, in these cases the Court considered that, even if the ECB has discretionary power, it must justify its decision to grant or not the exemption in light of the peculiarities of the case and that justification must be well-founded.

Therefore, the ECB does not enjoy absolute discretionary power. It has the obligation to properly reason its decision, notably by assessing carefully the circumstances of the case submitted to it (in concreto analysis), in order not to disregard the objectives pursued by a disposition and not to deprive it of its usefulness.

2. These judgments are noteworthy to the extent that for the first time the ECB, acting as the prudential authority of the most important banks within the Eurozone, has had one of its decisions quashed. Up until now, the General Court has shown much deference towards the ECB in this role. This judgment demonstrates that the General Court is prepared to scrutinise ECB decisions more closely.

3. These judgments constitute also a reminder to the ECB that it is not a legislator but a prudential authority which has to apply EU regulations and directives properly. The ECB may not undermine the usefulness of a provision allowing the grant of a derogation, especially when such a provision is recent.

4. These judgments are to be approved, therefore, in respect of those principles. However, it should be added that the very derogation at hand, introduced in the CRR by a delegated act of the EU Commission, raises serious concerns of legality, external and internal.

First, the introduction of this derogation has not been identified at all in the preparatory works leading to the adoption of the delegated act (report of the EBA, draft of delegated act). Nor has this derogation been explained or justified in the preamble of the delegated act, in contrast to the other provisions of the delegated act. Such puzzling silence is problematic, especially since the legal basis for the adoption of the delegated act, Article 456 (1)(j) , CRR expressly requested the statement of failures of the leverage ratio by national supervisory authorities and indirectly by the EBA. Thus, the process having led to the introduction of Article 429(14) into the CRR and the reasoning of such introduction do not comply with EU law requirements.

Second, the derogation goes beyond the powers granted to the EU Commission to adopt delegated acts to the extent that it contradicts the very ratio legis of the setting up of a leverage ratio. As a matter of law, such a derogation is more than an adaptation of the leverage ratio (see paragraph 124 of the preamble of CRR). In addition, the legal basis for the adoption of the delegated acts requires the statement of any shortcomings detected on the basis of reporting by institutions. Is an alleged inappropriateness in the sense of an excessive burden of the leverage ratio a shortcoming?

Thus, in practice, the reluctance of the ECB to apply a provision which is likely illegal was understandable.

5. However, to justify its approach, the ECB should have raised, at least as a subsidiary argument, the illegality of Article 429(14), as it was authorized to do (see Judgment of the Court of justice of the EU of 2003, Commission v ECB, C-11/00). It chose not to do so for reasons which are unknown.

6. Finally, these six judgments shed light on the fact that, even if delegated acts and implementing acts belong both to the so-called category of “level II measures”, because they are adopted by the EU Commission and not by the co-legislators, their legal scope and effects are different. In contrast to implementing acts, delegated acts may complete or even amend level I provisions. Thus, once adopted, they are more comparable in their legal force to level I provisions than to implementing acts.