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Emilija Berzanskaite
Emilija Berzanskaite
11th October 2021
Banking & Finance Human Rights

Op-Ed: “Bank of Slovenia’s Bail-in Powers Come Under Constitutional Scrutiny by the Strasbourg Court” by Kern Alexander

The judgment of the European Court of Human Rights (the ‘Court’) in Pintar and Others v. Slovenia provides an important statement on the procedural safeguards for the protection of property rights for shareholders and bondholders of banks that are forced into resolution.

The case concerned extraordinary measures taken by the Bank of Slovenia in 2013-14 against several major Slovenian banks, resulting in the cancellation or bailing-in of the applicant shareholders and bondholders of the banks. The Court made two important holdings: 1) that the value of shares and bonds in a failing bank that had lost most of their value could still constitute ‘possessions’ under Article 1 of Protocol No. 1 of the ECHR based on the proprietary nature of the applicants’ claim and the principle of legitimate expectations; and 2) that the relevant Slovenian legislation governing how shareholders and bondholders bring claims for unlawful takings of property and/or compensation failed to provide an adequate legal protection for the applicants to contest the lawfulness of the alleged breach of the right to property under Article 1 of Protocol No. 1.

The Court’s decision has significant implications, particularly for EU member states, concerning the issue of procedural guarantees for shareholder and bondholders subject to bail-in under bank resolution law.

Under EU bank resolution law, bail-in provisions are designed to restore the balance sheet solvency of a struggling bank during periods of market distress by recapitalising it with the value of shareholder equity and the capital of subordinated bonds and hybrid financial instruments. The overall intent of bail-in is to mitigate the moral hazard problem of so-called too-big-to fail financial institutions and the unfairness of having taxpayers subsidize excessive private sector bank risk-taking. Nevertheless, the misapplication of the bail-in provisions and their misuse as resolution tools – such as imposing losses on certain groups of shareholders and bondholders, but not others – without providing any concrete guidance in advance as to how losses would be allocated and on what basis they would be imposed, including the extent of the losses, and failing to provide clear procedural safeguards for investors to contest the decision of resolution authorities to impose bail-in on bank shareholders and bondholders, can potentially create moral hazard in the financial system on the part of investors, which may be as likely to cause or exacerbate financial problems, as to solve them.

The Court’s opinion in the Pintar case clearly emphasises the importance of domestic law providing procedural guarantees that allow shareholders and bondholders of banks and other financial institutions subject to resolution powers to understand the basis upon which resolution decisions are made and to have clarity in how they can challenge the decisions of resolutions authorities to impose bail-in on their property (ownership and creditor) rights in financial institutions. In Pintar, the Slovenian banking industry had suffered substantial losses because of the Eurozone banking and sovereign debt crisis of 2012-13. The Slovenian government provided financial assistance to bailout many Slovenian banks and smaller institutions to prevent their collapse, but as a condition of the bailout funding was required to comply with EU state aid rules. The European Commission issued a Communication in 2013 stating that the Slovenian government could temporarily provide financial assistance to the Slovenian banks, but only on the condition that the Bank of Slovenia (the central bank) together with the European Central Bank and independent auditors conduct an Asset Quality Review (AQR) and stress test of the Slovenian banks to determine which banks were insolvent and whose shareholders and bondholders would be required to recapitalise their respective institutions. The Bank of Slovenia issued a decision to implement the Commission Communication in December 2013 stating that the AQR and stress test would be conducted during 2014 by the Bank of Slovenia, the ECB and the auditors, and the results published in December 2014. The announcement of the results triggered a number of actions by the Bank of Slovenia including putting a number of institutions that did not pass the AQR and stress test into resolution and issuing legal directives to recapitalise the institutions with the capital of shareholders, subordinated bondholders and hybrid instrument holders.

The applicant investors contested the Bank of Slovenia’s bail-in of their ownership interests by filing claims in Slovenian courts based on the Slovenia Banking Act and the Slovenian Constitution. In 2016, the Slovenian Supreme court upheld the investors’ claims on the grounds of procedural irregularities and lack of due process provided by the Bank of Slovenia in imposing bail-in on the investors’ property rights. It should be emphasised that the Slovenia Supreme Court did not invalidate the lawfulness of the bail-in measures per se, but instead ruled that domestic law had not afforded investors with adequate legal protection and procedural safeguards of their property rights in that there was no legal procedure to contest the Bank’s resolution decisions before a court. Further, the Slovenian Court held that the decision to impose bail-in on bank investors based on undisclosed AQR and stress tests was a violation of due process and procedural fairness and was thus unconstitutional.

The Slovenian court ordered that the Bank of Slovenia submit its decision to put the respective institutions into resolution and to impose bail-in to judicial review by a designated court in Maribor that would handle all investor claims against bail-in of their interests. The court also ordered the Slovenian Parliament to pass new legislation creating transparent and fair procedures for investors to contest the Bank of Slovenia’s resolution decisions.

The Slovenian Parliament did not pass the mandated legislation until 2020. In the meantime, the applicant investors’ claims were brought before the European Court of Human Rights on the grounds that the Bank of Slovenia’s actions in imposing bail-in were a violation of their right to peaceful enjoyment of their property under Article 1 of Protocol No. 1 of the ECHR. Further, the investors asserted that Slovenian domestic law failed to provide them with legal protection in that there were inadequate procedural guarantees for them to bring claims against the Bank of Slovenia for its decision to impose bail-in on their property rights, including, among other things, that they did not have access to the data and analytical information that served as a basis for the Bank of Slovenia to put their respective institutions into resolution.

The Court addressed two fundamental issues of ECHR law: 1) whether shares or bonds in a bank taken into resolution meet the definition of ‘possessions’ and merit protection from unlawful interference with the right to property; 2) whether the state’s interference with property rights by imposing bail-in on the bank shareholders and bondholders met certain conditions to be lawful under the ECHR.

As discussed above, the Court held that although the bank shares and bonds had only negligible value in resolution, they were still ‘possessions’ under Article 1 of protocol No. 1 because the shares represented proprietary claims against the bank and that the bonds were ‘possessions’ or property for bondholders based on the principle of legitimate expectations. The Court appeared to side with the Slovenian Supreme Court in recognising the lawfulness of the Bank of Slovenia’s decisions to impose resolution measures that included bail-in of bank investors. But it questioned the legal remedies that were available to investors to challenge the resolution decisions in a court of law and to obtain information and data upon which the bail-in decisions were based. The Court ruled in essence that Slovenia had failed to provide legal procedural safeguards for the investors to contest the resolution decisions in Slovenian courts. These procedural safeguards included investors having a right to obtain the data and other information that was material for the Bank of Slovenia in deciding to impose bail-in.

The Court also questioned the European Union case-law decided by the Court of Justice (EU) that the data and information relied on by the ECB and Eurosystem central banks to make decisions in the exercise of their powers was off limits to claimants in lawsuits on the grounds of ECB independence. The Court held that ECB independence cannot be used as a basis to deny or limit the legal protection of fundamental rights under the Convention. This case should ring alarm bells for the ECB and the Eurosystem that it is now time to become more transparent in its decision-making, particularly when such decisions can result in infringements on fundamental Convention rights. It is also an important case that should attract the attention of the EU’s Single Resolution Board regarding the legal safeguards that are required to be followed to ensure effective protection of legal rights of bank investors during a resolution.


Kern Alexander holds the Professorial Chair in Law and Finance and is Professor of Banking Regulation at the University of Zurich. He is the author of many research articles and books, including most recently Principles of Banking Regulation (Cambridge University Press, 2019), Brexit and Financial Service (co-author, Moloney et al, Bloomsbury, 2018), Global Governance of Financial Systems (co-author, Oxford Univ Press 2006), and Economic Sanctions: Law and Public Policy (Macmillan 2009). 


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