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12th February 2020
Banking & Finance Internal Market

Analysis: “AG Opinion on Italian rules regulating cooperative banks” by Laura Wissink

Yesterday, AG Hogan delivered an Opinion in  Adusbef and Others (C-686/16) on the compatibility of Italian legislation for cooperative banks with the requirements of EU prudential rules, the internal market, state aid rules, and the Charter of Fundamental Rights.

He concluded that, if the Court considers the questions referred to be admissible, none of these EU rules preclude the Italian legislation at hand.

The Italian Council of State (Consiglio di Stato) requested the Court of Justice to examine whether the aforementioned EU rules preclude Italian legislation, which sets an EUR 8 billion asset threshold for cooperative banks above which the bank must (i) reduce its assets below that threshold, (ii) convert the bank into a company limited by shares or (iii) liquidate the bank. Furthermore, the legislation grants a cooperative bank converted into a company limited by shares the right to redeem shares held by a withdrawing shareholder for an unlimited period and to limit the associated amount, either in part or in full.

Before examining the compatibility of these rules with EU law, the AG noted that the referring court had not fully met the requirements regarding the content of a preliminary ruling (Article 94 of the Rules of Procedures of the Court). In his view, this results in the inadmissibility of the first question, part of the second question, and the fifth question, which unfortunately deprives the Court of Justice of the ability to provide the necessary clarification for the interpretation of EU law. Given the apparently limited information provided by the referring court, which for instance lacks at times an explanation about the relationship between the relevant EU and national law, it does not seem inconceivable that the Court of Justice will follow the AG’s Opinion in this respect.

The AG examined whether the prudential rules laid down in Article 29 of Regulation No 575/2013, Article 10 of Delegated Regulation No 241/2014, and Article 6(4) of Regulation No 1024/2013 preclude national provisions imposing the EUR 8 billion asset threshold. He concludes that the Court of Justice has no jurisdiction to provide the requested interpretation of Articles 16 and 17 of the Charter of Fundamental Rights in this respect. The referring court does not explain how the provision imposing the threshold would be considered to be an implementation of EU law, which is necessary for the Charter to be applicable.

In his view, the aforementioned prudential rules neither require nor preclude a national asset threshold as the one at issue. The rules concern the qualification of capital instruments and parameters for determining whether the European Central Bank will directly supervise a credit institution. However, they have no connection to the asset threshold at hand.

The AG proceeded to answer if and to what extent an institution may defer for an unlimited period of time the redemption of capital, and to what extent it may limit the amount to be redeemed in light of the aforementioned prudential rules. He concluded that it is permitted under these laws, albeit not unconditionally. The relevant rules on own funds illustrate the importance of the public interest in ensuring the appropriate prudential safeguards, which prevails over the private interests of shareholders seeking to redeem their shares. However, once the prudential requirements of Article 10(3) of Delegated Regulation No 241/2014 are met, redemption may occur.

To avoid repetition, he discusses the possibility of restricting freedom of establishment (Article 49 TFEU), free movement of capital (Article 63 TFEU), freedom to conduct a business (Article 16 Charter) and the right to property (Article 17(1) of the Charter) together.

In his opinion, restrictions resulting from the imposed asset threshold could be permitted if the aim is to ensure the good governance and the stability of the banking sector, and particularly the cooperative banking sector in Italy. The legislator may determine that the cooperative banking model poses a prudential risk to the Italian banking system, which requires these banks to accept a low capital base. Furthermore, it is evidently in the public’s interest that a bank’s capital not be abruptly withdrawn as it may expose the bank, and the wider Italian banking sector, to prudential instability, justifying restrictions due to the deference and limitation of the redemption of shares.

These restrictions must, however, be necessary to achieve the aforementioned objectives and be proportionate in nature. This point is to be assessed by the national court.

Lastly, he concluded that the state aid rules (Article 107 et seq. TFEU) do not preclude the Italian legislation at issue. For a measure to be classified as ‘State aid’, there must be an intervention by the State or through State resources. In this case, he found that this condition is not fulfilled. The resources originate from the shareholders of the banks in question, and are thus private rather than public in nature.

The AG’s conclusion seems a rather straightforward and a correct analysis of the relevant prudential EU rules, which could have, without doubt, been studied more in-depth if the referring court had provided more information about the content and context of the questions referred. Also, as the financial crisis has shown us, the AG’s justifications of the restrictions resulting from the Italian legislators seems appropriate given the enormous impact a failing bank, or banks, can have on financial stability.

It is, nonetheless, interesting to note that the AG does not consider the legislation regarding the asset threshold to be an implementation of EU law, nor in any other way connected to EU law. It can be read more broadly as an effort to manage the prudential risks to the Italian banking system posed by the cooperative banking model, which could provide a sufficient connection to the EU banking rules. The aim of the latter is, after all (inter alia), to ensure the stability of the financial system within the EU and each Member State.

Should the Court follow such a strict interpretation, this may affect other legal discussions such as the one about national powers in which the ECB takes a rather broad interpretation of situations when a supervisory power is considered to be power under relevant EU law (see page 2 of the ECB letter to banks). It remains to be seen if this question will be answered, however, as it is not unlikely that the Court will declare the question as a whole inadmissible.

 

Laura Wissink is an external PhD candidate of Utrecht University, with a background in banking supervision. Her PhD concerns effective judicial protection in cases of composite procedures in the Single Supervisory Mechanism. She recently published a paper, written together with Enrico Gagliardi, about effective judicial protection in the case of ECB decisions based on national law (REALaw, 2020, issue 1, forthcoming) (already available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3522363).

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