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European Union: Court Dismisses German Bank’s Challenge Against “Significant Entity” Classification

(June 22, 2017) In a decision issued on May 16, 2017, the General Court of the European Union confirmed the decision of the European Central Bank (ECB) to classify the German State bank Landeskreditbank Baden-Württemberg – Förderbank as a “significant entity.” The bank is therefore subject to direct supervision by the ECB rather than supervision by the German national authorities under the ECB’s control.  The Court held that there were no “particular circumstances” that justified allowing the bank to come under direct prudential supervision by the German authorities despite its status as a “significant entity.”  (Judgment of the General Court (Fourth Chamber) (May 16, 2017), Case T‑122/15, INFO CURIA.) The General Court is one of the two components of the Court of Justice of the EU, the other component being the Court of Justice. It rules on actions for annulment and deals primarily with competition law, state aid, trade, agriculture, and trademarks. (Court of Justice of the European Union (CJEU), EUROPA (last updated June 20, 2017).)

The suit marks the first time that a bank has challenged its classification as “significant” since the task of direct supervision was conferred upon the ECB in 2014. The ECB derives this function from its role in the system of banking supervision in the EU, called the “Single Supervisory Mechanism” (SSM).  The SSM is made up of the ECB and the national supervisory authorities of the participating EU countries.  (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 (SSM Regulation), 2013 O.J. (L 287) 63, art. 6 ¶ 1.)

The Court stated that as the total value of the bank’s assets exceeded €30 billion (about US$33.4 billion), it is to be classified as “significant” in accordance with the criteria set out in the SSM Regulation. (Case T‑122/15,¶ 76, supra; SSM Regulation, art. 6 ¶ 4.) The Court dismissed as irrelevant the bank’s argument that direct supervision by the ECB was “inappropriate” because the bank allegedly had a low risk profile and prudential supervision could therefore be sufficiently achieved by the national authorities. (Case T‑122/15, ¶¶ 87-89.)

The Court further stated that under the SSM Regulation and the SSM Framework Regulation, a classification as “significant” is only inappropriate if there are “specific factual circumstances” that make direct supervision by the national authorities “better able to attain the objectives and safeguard the principles of the relevant rules including, in particular, the need to ensure the consistent application of high supervisory standards.” (Id. ¶ 80; 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 Framework Regulation) (ECB/2014/17), 2014 O.J. (L 141) 1, art. 70, EUR-LEX.) In this case, the Court held, the bank had not demonstrated that supervision by the German authorities would be better able to attain the objective of consistent application of high prudential supervisory standards, only that it would be “sufficient.” (Case T‑122/15, ¶ 88.)

Background on Banking Supervision in the European Union

The ECB is generally responsible for the effective and consistent functioning of the SSM. (SSM Regulation, art. 6 ¶ 1.) Since November 4, 2014, the ECB directly supervises the “significant” credit institutions, financial holding companies, or mixed financial holding companies of the EU countries that participate in the SSM. What constitutes a “significant bank” is determined by the ECB according to the criteria set out in article 6, paragraph 4, of the SSM Regulation, among them size (total value of assets), economic importance for the EU or any participating Member State, cross-border activities, and whether or not the bank has requested or received direct public financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF). (Id. art. 6 ¶ 4.)

The ESM is a permanent stability mechanism that was set up in 2012 by the euro-area Member States according to article 136, paragraph 3 of the Treaty on the Functioning of the European Union to safeguard the stability of the euro-area as a whole. The purpose of the ESM is to mobilize funding and provide financial assistance to an ESM member that is experiencing, or is threatened by, severe financing problems, as was the case with Greece. The EFSF was the predecessor of the ESM and was set up as a temporary crisis resolution mechanism in May 2010. (Consolidated Version of the Treaty on the Functioning of the European Union, 2012 O.J. (C 326) 47, EUR-LEX; Jenny Gesley, FALQ: The Greek Debt Crisis – Part I, IN CUSTODIA LEGIS (July 16, 2015); Jenny Gesley, FALQ: The Greek Debt Crisis – Part II, IN CUSTODIA LEGIS (July 17, 2015).)