The Palgrave Handbook of European Banking Union Law

The global financial crisis of 2007–2009 has prompted a radical re-evaluation of the structures and functions of banking regulation. This contribution discusses the appropriate locus and boundaries of such regulation focusing on the balance between the national, the regional/European and the international dimension (multilevel governance) as well as the respective role of soft and hard law in making the financial system sounder. There is no single solution to the problem of reconciling the global good of financial stability with the structure of financial regulation. What may be appropriate—or even necessary—in the European Union (EU) or Eurozone may not be so globally given the continuing existence of sovereign states with political responsibility to national electorates and different degrees of openness to global financial markets.

The (European) Banking Union (BU) has been in place since November 2014, even though its form is not yet complete. The legal acts adopted on its basis and those constituting the single rulebook underlying its three main pillars are concurrently the key sources of European Union (EU) banking law. Nevertheless, mainly due to the pivotal role of the European Central Bank (ECB) as a monetary and banking supervisory authority, the question arises whether these legal acts also constitute EU monetary law. This study, structured in six sections, seeks to substantiate that, even though the BU is considered to be a condition for the deepening of the Economic and Monetary Union (EMU), its legal sources are fully embedded into EU banking law, but not in EU monetary law.

This chapter engages with two interrelated questions: First, what is the function of the European Union (EU) institutions within the European Banking Union (EBU)’s normative and institutional framework? Second, what impact does the EBU have on the EU’s institutions? It analyses the balance of power horizontally (amongst EU bodies) and vertically (between Union and national actors) within the supervisory and resolution pillars. It argues that the EBU’s design results overall in the fragmentation of executive power. Moreover, whilst the EBU’s new institutional equilibrium is shaped primarily by the Union legislator, the emerging jurisprudence of Union courts plays its own distinct role in influencing the allocation of powers, which often works in favour of the European Central Bank (ECB). The debate on the appropriate kind and degree of accountability of the ECB in its supervisory capacity requires careful consideration of the scope and efficiency of all available administrative, political and judicial accountability mechanisms.

This chapter will discuss the principle of proportionality in the Single Rule Book and the pros and cons of diverging regulatory and supervisory rules for different types of institutions. It will do so in light of the current capital requirements by analysing the provisions of the CRR and the CRDIV, as well as relevant Level 2 and 3 acts developed by the European Banking Authority (EBA). It will present and criticise the current plethora of rules and their complexity, which weighs heavily on small and medium-sized institutions. Against this background, the chapter will explore possibilities for a more differentiated approach to regulation and supervision of firms, such as a small banking box or a two-tier banking law.

The chapter deals with the administrative and judicial remedies set up by the Regulation (EU) no. 1024/2013 of 15 October 2013 which conferred supervisory powers on the European Central Bank (ECB).

The Regulation provides natural and legal persons with the possibility to request a review of the decisions taken by the ECB under the powers conferred on it. The Regulation establishes an Administrative Board of Review to carry out the review pertaining the procedural and substantive conformity with the Regulation of the decisions of the ECB. The chapter analyzes the features of the new remedy comparing it with similar remedies against the decisions of the European Banking Authority and of the Single Resolution Board. The chapter examines the procedural and operating rules of the Administrative Board of Review contained in the Decision of the ECB of 14 April 2014.

European integration has been strongly influenced by the case law of the European Union (EU) Court of Justice, not by chance considered the “Master of Community Law”. New fields of EU law, such as banking union law, are confirming the role of European judges as the architects of Union law. Despite the number of regulations provided for the banking union, unparalleled in any other area of the law, the jurisprudence of the European Court of Justice (ECJ) and of the General Court has resulted decisive for grounding the new European Banking Union (EBU) and giving it internal coherency and consistency within the institutional EU system. The economic relevance of the EBU litigation indicates that European judges will maintain a crucial role in the future as well for guaranteeing both the general interests of the Union and the rights of the interested parties.

This chapter looks at the future of the Banking Union. It focuses on two factors for its sustainability over time. First, the extent to which the Banking Union can rely on the existing risk-sharing mechanisms at the European level to address financial instability and systemic shocks. Second, the extent to which the Banking Union will be considered to have democratic legitimacy. These two factors are intertwined. As the Banking Union leads to much deeper integration than ever before, there will be distributive implications in periods of both financial stability and instability. The future of the Banking Union will depend on the extent to which it will be resilient at all times, not only with risk-sharing, but also with a democratic system that ensures that its distributive effects are perceived as legitimate.

The allocation of tasks and powers within the Single Supervisory Mechanism (SSM) is not always crystal clear and may lead to an increase in the Supervisory Board’s workload. Burdening the latter with an increasing amount of trivial supervisory decisions runs the risk of hampering the smooth functioning of the SSM. The delegation of minor supervisory decisions to the European Central Bank (ECB)’s heads of units is likely to marginalize the role of the Supervisory Board. An alternative solution may be found either (1) in a system of two distinct delegations by the Supervisory Board and the Governing Council of the powers they respectively enjoy under the SSM Regulation or (2) in the National Competent Authorities’ responsibility to assist the ECB in the performance of its supervisory tasks.

This paper examines the meaning of the concept of systemic importance and its role in the European Banking Union’s (EBU) institutional setting. It shows that this concept is treated inconsistently across the EBU pillars. The paper identifies various factors that determine such an inconsistent treatment: first, there is a lack of a common European Union (EU) legal definition of systemic importance applicable to the various pillars of the EBU; secondly, the European Central Bank (ECB), the Single Resolution Board (SRB) and the European Commission (EC) engage in divergent and inconsistent interpretations of the meaning of systemic importance; and, thirdly, in the EBU, systemic importance is given an asymmetrical role in the shaping of Single Supervisory Mechanism (SSM) supervision and Single Resolution Mechanism (SRM) resolution. In order to address these inconsistencies, this paper proposes, on the hand, a greater harmonisation of the concept of systemic importance in EBU law and, on the other hand, a redefinition of the powers of the SRB in bank resolution.

Economic recovery and a more intrusive supervision have contributed to the progress recently made in reducing the NPL (non-performing loan) legacy in the most affected euro area countries. However, ample differences exist in the adjustment path, explained by country-specific factors and fragilities, and by different constraints arising from the new regulatory framework of bank crisis management. Due to the NPL overhang, many European banks are still in vulnerable conditions, although formally compliant with capital requirements. The single supervisory rulebook has remained unfinished lacking a harmonised supervisory treatment of NPLs. The prudential provisioning backstop proposed by the European Commission in the context of its NPL package is therefore a significant regulatory innovation, aimed at defining a consistent relationship between bank capital and loan loss reserves. However, not enough attention has be paid to what really ought to be the main purpose in dealing with the NPL legacy, that is, maximising the number and the amount of problem loans returned to the performing status.

The chapter gives an overview of the Single Resolution Mechanism as a complex and partial response to the problems of banking crises. The allocation of responsibilities and the decision-making process are centred around the Single Resolution Board, which acts under the control of the European Commission and the Council. National Resolution Authorities have extensive powers for the resolution of banks falling within their responsibility, but they have merely an executive function when national ailing banks fall under the competence of the Single Resolution Board. When the public interest required for the adoption of a resolution scheme is not deemed to be present, ordinary national insolvency proceedings apply, which are not harmonised and do not allow the use of the Single Resolution Fund. In this context, the chapter analyses the initial experiences under the new European rules and the interaction with State aid rules.

Prevention is the most important and innovative aspect of the new European framework for regulating banking crises.

This chapter analyses the main substantive and procedural aspects regarding the creation and approval of recovery and resolution plans under the Bank Recovery and Resolution Directive (BRRD). It also aims to highlight the importance of planning as a governance tool. “Recovery plans” can play a key role in improving corporate governance structures and promoting the development of a new risk management culture.

For recovery and resolution plans to be credible, the planned measures must be able to ensure orderly bank resolution and safeguard the stability of the system. A further aim of this chapter will therefore be to understand how these difficulties can be realistically overcome.

This chapter examines the relevance of the resolution tools within the Single Resolution Mechanism (SRM). Specifically, three dimensions will be explored. First, the chapter assesses potential scenarios and preconditions for successful, effective implementation of the new regime. Second, it will examine operational issues pertaining to the implementation of the resolution toolbox as evidenced by recent case law. Third, the chapter will assess the suitability of the new resolution tools for application in extraordinary cases of macro-economic distress, where adverse market conditions and mounting non-performing loans affect large numbers of credit institutions at the same time.

This chapter analyzes the relationship between burden-sharing arrangements and fundamental rights. Particular attention is paid to the question whether the application of a bail-in constitutes a breach of the right to property (see some judgments of the Court of Justice of the European Union).

This contribution also focuses on the disproportionate effects of the regime. The BRRD does not provide for different treatment of eligible liabilities based on the nature of the holder. In many cases, the initial sale of banks’ debt liabilities to retail investors and disclosure practices has not been applied in line with consumer protection requirements, resulting in the emergence of a number of mis-selling cases. This issue has been the object of a statement of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), according to which, the resolution authorities should balance general and private interests.

This chapter analyzes the overall change of paradigm that occurred with the adoption of BRRD and the establishment of the correspondent resolution regimes by European Union (EU) Member States. Accordingly, the Chapter will evidence how national experiences, with the enforcement of resolution regimes largely coincident with EU rules, also provide an important insight on the complex legal issues associated with, on the one hand, the adoption and calibration of resolution measures in crisis situations and, on the other hand, the review or scrutiny of those resolution measures. The most paradigmatic national experiences will be confronted with the first major test in terms of enforcement of Single Resolution Mechanism (SRM), with the Banco Popular resolution case, putting in context the resolution measures adopted and describing the key legal developments in the wake of such resolution measures. Moreover, it will be focused on the recent national cases in which banks fulfilling the failing or likely to fail test were not placed under a European resolution scheme.

In Europe, the regulation on deposit insurance schemes dates back to 1994 (Dir. 94/19/EC). This Directive only required a minimum level of harmonization between domestic deposit guarantee schemes in the European Union (EU). It was amended first in 2009 (Dir. 2009/14/EC). In the statement of the EU Commission in December 2012, a robust deposit insurance system was the third pillar of the Banking Union, but a Pan-EU Deposit Guarantee Scheme was excluded due to difficulties in reaching a political compromise. In 2014, a new Directive (Dir. 2014/49/EU) was approved which ensures a harmonized level of protection for depositors. In 2016, the European Commission (EC) prepared a new proposal to set up a European Deposit Insurance Scheme (EDIS). Many policy-related obstacles make it difficult to approve the proposal. Moreover, we believe that to strengthen the resilience of the euro-area banking sector to financial crises, the European legislature should think about the proper role of the EDIS in the new legal framework for management of banking crises.