Financial Regulatory Observer - September 2017: ECB holds sway in new banking order

by White & Case LLP
Contact

White & Case LLP

A German lender tried and failed to remove itself from the clutches of ECB supervision – what does this mean for the wider banking sector?

€30 billion

Banks with more than €30 billion in assets fall under ECB Supervision

In May 2017 a small German state-owned bank lost its fight to escape the clutches of ECB supervision in the first judgement handed down by European General Court relating to Single Supervisory Mechanism (SSM).

When it was introduced in November 2014, the SSM created an institutionalized process of supervising credit institutions and became one of three pillars of European Banking Union along with the Single Resolution Mechanism (SRM) and the European Deposit Guarantee Scheme (DGS). The SSM also established the European Central Bank (ECB) as the lead supervisory body for Eurozone banks holding more than €30 billion in assets. Landeskreditbank Baden- Württemberg, which has assets of €70 billion, argued that it should be regulated instead by its national competent authority (NCA)—in this case German watchdog Bafin and the Bundesbank– rather than the ECB on the grounds that its debt is guaranteed by the state of Baden- Württemberg, and as such it posed no systemic threat. L-Bank preferred to be supervised by its national regulator because of the lower cost of compliance.

The General Court rejected the L-Banks’s claim in every aspect. It stated that an exemption from the ECB’s supervision can only be made upon proof that the NCAs’ supervision is better able to attain the supervisory objectives. Hence, L-Bank`s plea that the German NCAs’ supervision was sufficient to attain these objectives couldn’t justify its claim. In short, the judge ruled that the ECB has free reign when it comes to which banks it wants to supervise and delegates to NCAs at its own discretion.

SSM created an institutionalized process of supervising credit institutions

FRO: Henning, some observers have been disappointed by the L-Bank judgment, criticizing its "pro-centralization stance" and the fact that it does not address "the substantive questions at hand." Is this convincing?

Henning Berger (HB): In my view, these observers don’t take into account the circumstances of the case. The L-Bank judgment dealt with a rather narrow legal question and seems to have been led more out of principle than to clarify many of the open questions regarding the SSM. One of these questions concerns the competent courts when the ECB and the NCAs act "in concert". Regarding the latter, there are currently a number of pending cases before the General Court concerning the European Banking Levy, which may give a better understanding of the court’s review of administrative decisions in the European Banking Union.

FRO: So is there anything we can infer from the L-Bank judgment?

HB: The court has confirmed that there is no easy escape from the supervision of the ECB: The ECB has a margin of discretion concerning the question of whether an exemption from its supervision should be made due to its inappropriateness. Hence, the judgment confirms what was to be expected: Significant credit institutions will remain under the direct supervision of the ECB and cannot expect to be easily released into the supervision of the NCAs.

FRO: Taking into account the leading position of the ECB in the SSM, what is the remaining role of the NCAs? And how can an institution determine the competent authority?

HB: In general, supervision is now under the umbrella of the ECB, but the NCAs still play an important role in the process. Both act in close cooperation. Firstly, in order to determine the competent authority, we must differentiate between CRR-credit institutions categorized as significant and those that are not. The supervision of significant institutions is carried out directly by the ECB, whereas the supervision of non-significant institutions lies in the hands of the NCAs.

Regardless of the size and significance of an institution, the ECB has some exclusive competences, such as the granting or withdrawal of banking authorizations. But this exclusive competence does not mean that NCAs are excluded from the decision. For example, in case of the authorization of an institution, requests must be addressed to the acting NCAs. The NCAs review the criteria and prepare reasoned proposals for the ECB, which then reviews and adopts where appropriate. In a nutshell, the SSM is a complex and interwoven system of shared and sole competencies. The ECB and NCAs are acting in close cooperation, but in most cases the ECB has the last word.

SSM is a complex and interwoven system of shared and sole competencies

FRO: In case a decision is made by the ECB but prepared by the NCA, for example the withdrawal of an authorization, related what are the legal steps an institution can undertake to defend itself?

HB: All ECB decisions can be reviewed on an administrative level and an institution can seek judicial protection irrespectively. The competent court depends on the measure in dispute. National administrative courts have exclusive jurisdiction in matters of legal protection against measures taken by a national authority. The actions of a Union authority can only be reviewed by the Court of Justice of the European Union (ECJ).

As some decisions by the SSM are composed of actions by both the NCAs and the ECB, it may be necessary to take legal action before national courts and the ECJ in parallel. In cases where the allocation of a measure is not clear, it may be necessary to seek legal protection before both courts simply as a precaution. The pending cases concerning the European Banking Levy demonstrate how difficult it is even for the authorities themselves to determine who is responsible for a certain measure.

FRO: The NCAs and ECB apply both European Law, for example the SSM Regulation, and national law. Doesn’t this lead to uncertainties when there are different rules?

HB: There can be uncertainties, but that’s not always the case. Basically, the new European norms apply in addition to the existing national supervisory law, such as the French code monétaire et financier or the German KWG. Together, they establish the supervisory requirements that an institution has to fulfill. Conflicts can result from the fact that these requirements are applied by both the ECB and the NCAs, and the authorities may deviate in their practices. In this regard, a revolutionary feature of the SSM is that the ECB must apply national law based on European law. As the applicable national laws may differ, the ECB will strive to harmonize its practice as far as possible.

FRO: Are there examples of this practice?

HB: Of course. For example, in the ECB’s application of the fit-and-proper-rule, the compulsory assessment procedure concerning the appointment of new management does not apply across the entire EU. However, the ECB has developed a formal procedure that it applies to the appointment process within all member states. Consequently, in member states that don’t prescribe the formal approval of members of the management body, the ECB has factually introduced such a procedure of approval. This has a significant impact, as fit-and-proper proceedings are of great practical relevance to the institutions.

FRO: All in all, what are the main challenges banks have to face under the SSM?

HB: As the practice of the SSM and the courts develops over time, a clearer allocation of procedural acts and competencies will emerge, making it no longer necessary to seek legal parallel protection. The same is true for other legal uncertainties as the standards of fit and proper the ECB can apply.

Besides that, language barriers between the ECB on the one hand and NCAs and banks on the other hand can be challenging. Even though institutions can choose the language they use for their communication with the ECB, the latter usually aims at establishing English as the language of communication. The communication between the ECB and NCAs has been agreed to be in English. Still, the internal working language in most NCAs and banks is not English. This does not only entail a substantial translation workload, but also a lack of transparency and comprehensibility, especially when an institution cannot easily clarify and defend its practice to the ECB. At first sight, this may seem surprising, but in practice it can be quite an issue.

Meanwhile differing legal cultures among the member states can lead to a diverging understanding of the applicable supervisory criteria and the extent of judicial review of decisions. Although joint supervisory teams (JSTs) have been created to discuss these differences, the ECB’s practical approach can differ from that of the NCAs. As a result, banks may expect a different interpretation of the prudential regulations based on national practice than the ECB will take. All in all, the SSM is a perfect example of the special challenges and difficulties of European cooperation and integration in general. Overcoming these is an ongoing process.

Click here to download a PDF of this chapter.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© White & Case LLP | Attorney Advertising

Written by:

White & Case LLP
Contact
more
less

White & Case LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.