Op-Ed: “Of auctoritas and potestas in the Banking Union: The ECB, the SRB, failing credit institutions and judicial review” by Barbora Budinská
On 6 May 2021, the Court of Justice handed down a judgment in joined cases ABLV Bank v ECB and Bernis and Others v ECB (C-551/19 P and C-552/19 P). The Court ruled that assessments made by the European Central Bank (ECB) on whether a credit institution is ‘failing or likely to fail’ are mere preparatory measures in a complex procedure allowing the Single Resolution Board (SRB) to adopt a resolution scheme for the concerned credit institution. As a result, the ‘failing or likely to fail’ assessments cannot be subject to direct judicial review in an action for annulment.
Background to the case
As Advocate General Campos Sánchez-Bordona pointed out, this presented the first opportunity for the Court to rule on the resolution procedure laid down in Regulation No 806/2014 (SRM Regulation). Established in the aftermath of the 2008-2009 financial crisis, this Regulation contains rules for the resolution of banks as an alternative to insolvency proceedings. An entity can be put under resolution if three conditions, laid down in Article 18(1) of the SRM Regulation, are met: (1) the entity is failing or likely to fail (also: ‘FOLTF assessment’); (2) there is no reasonable prospect that alternative measures would prevent its failure within a reasonable timeframe, and (3) the resolution action is necessary in the public interest (Article 18(5) SRM Regulation). If these three conditions are met, the SRB shall adopt a resolution scheme (Article 18(6) SRM Regulation). While the conditions apply cumulatively, it is in principle for the ECB to assess whether an entity is failing or likely to fail. The SRB will then determine if alternative measures may prevent its failure and whether a resolution action is necessary in the public interest.
On 23 February 2018, the ECB found, after consulting the SRB, that the ABLV Bank AS and ABLV Bank Luxembourg were failing or likely to fail. The SRB concurred with the ECB and decided that the resolution action was not necessary in the public interest. The ABLV Bank AS and its shareholders brought actions seeking the annulment of the ECB’s assessment. In 2019, the General Court dismissed both actions (T-281/18 and T-283/18). Last week, the Court confirmed the General Court’s assessment by not allowing a challenge against the ECB assessment.
Acts open to judicial review
The Court first recalls established case law since its ruling in IBM (C-60/81) that only measures having binding legal effects and that are capable of affecting a person’s interests by bringing about a distinct change in that person’s legal position can be subject to judicial review. These are measures that contain the final position of the adopting authority, concluding an administrative procedure. In contrast, intermediate or preparatory measures, the function of which is to contribute to or prepare a final decision, cannot be subject to an action for annulment. Whether a measure constitutes a final or preparatory act is primarily determined based on objective criteria, such as the content of the measure, the context in which it was adopted, and the powers of the adopting authority (see paragraphs 39-41 of the judgment).
Interpretation of Article 18(1) of SRM Regulation
The Court finds that according to Article 18(1) of the SRM Regulation, it is solely for the SRB to adopt a resolution scheme. The ECB indeed has a primary role in carrying out FOLTF assessments, yet its role in the entire resolution procedure is limited to assessing the first of the three conditions necessary for the adoption of a resolution scheme. Moreover, the content of its assessment is not binding on the SRB. The SRB has the exclusive power to ascertain the second and third conditions and make the final decision (not) to adopt a resolution scheme (see paragraphs 62-71 of the judgment). In the Court’s own words: Article 18(1) of the SRM Regulation contains ‘a complex administrative procedure involving a number of authorities, only the outcome of which, resulting from the SRB’s exercise of its power, may be subject to the judicial review’ (see paragraph 66 of the judgment).
A positive FOLTF assessment undeniably has a significant impact on the future of a credit institution. More often than not, it marks the beginning of the end for the institution’s business in its current form. As the Court carefully put it, it is ‘not inconceivable’ that the assessment in the case at hand had an ‘effect on the economic situation’ of the ABLV Bank (see paragraph 77 of the judgment). Therefore, the Court’s refusal to open FOLTF assessments to judicial review might seem surprising at first sight. But it is consistent with its earlier case law on judicial review of supervisory and resolution actions and does not, at least at this moment, create a gap in the system of judicial protection.
While the Court does not make an explicit reference to it, the Advocate General rightly draws a comparison between the present case and the Court’s judgments in Berlusconi (C-219/17, for a commentary, see here) and Iccrea Banca (C-414/18, for a commentary, see here) (see paragraphs 97-99 of the Opinion). This comparison further clarifies why FOLTF assessments cannot be subject to direct judicial review. Both judgments dealt with decisions adopted in vertical composite procedures within the framework of the Single Supervisory Mechanism (Berlusconi) and the Single Resolution Mechanism (Iccrea Banca). In Berlusconi, the national supervisory authority was responsible for adopting a draft decision on the acquisition of a qualifying holding. In Iccrea Banca, the national resolution authority was responsible for providing operational support and consultation to calculate and later collect from the credit institutions the ex ante contributions to the Single Resolution Fund. However, the ultimate power to adopt the final decisions in those two procedures laid with the ECB and the SRB, respectively. Against the background of determining whether national courts have jurisdiction to review the preparatory measures, the Court ruled in both cases that judicial review can be exercised only in relation to the final decision. The Court must interpret the applicable legal framework to determine which authority carries ‘the exclusive decision-making power’ for the final product of the composite procedure. This does not mean that the involvement of the national authorities is neglectable. Their contribution to the final act is determined and required by law. Still, the measures adopted by the national authorities are not binding. Indeed, the EU legislature placed the final decision-making power with either the ECB or the SRB. Therefore, according to the Court, it is solely the authority holding this power that has to answer for any errors occurring in the procedure.
The resolution procedure in the present case is horizontal, involving only EU authorities. Yet, following its judgments in Berlusconi and Iccrea Banca, the Court applies the same principles of judicial review. The ECB’s part in the resolution procedure is undeniably crucial. It has the primary role, after consulting the SRB, to initiate the procedure by adopting a positive FOLTF assessment. The ECB is also best placed to adopt such an assessment due to its expertise and knowledge as the main supervisory authority. That is why the Court states that ‘the SRB will probably in most cases endorse the ECB’s assessment’ (see paragraph 69 of the judgment). Or in the words of the Advocate General: ‘the ECB’s assessment may carry auctoritas within the classical sense of the term and […] the SRB [can] not refrain from taking it into account or reject its content uncritically’. But that does not mean that the ECB also has potestas, that is: the final decision-making power. The FOLTF assessment is not the final product of the procedure. It is merely the first step in a process that the SRB concludes. The EU legislature unmistakably chose the SRB, not the ECB, as the authority ultimately responsible for answering for any errors in adopting a resolution scheme. This is not only clear from Article 86(2) of the SRM Regulation that mentions only and specifically the SRB as the authority against whose decisions proceedings in accordance with Article 263 TFEU can be instituted, but also from the fact that the SRB assesses whether any alternative measures could prevent the failure and, under certain circumstances, can make the FOLTF assessment itself (Article 18(1) second subparagraph SRM Regulation). The SRB is, therefore, able, at least in principle, to reject or amend an assessment made by the ECB. In conclusion, while the ECB carries auctoritas, the SRB is endowed with potestas, the final decision-making power (not) to adopt a resolution scheme. As a result, an action for annulment can only be brought against the SRB’s decision.
Finally, and with a view to guaranteeing the legality of measures adopted by the ECB and to secure effective legal protection, it is essential to note that while FOLTF assessments are not open to direct judicial review, the Court must be willing to look indirectly into any potential arguments concerning their illegality in the course of an action brought against final SRB decisions. Since an action by the ABLV Bank against the SRB is already pending (T-280/18), we might soon know whether the Court has that willingness.
Barbora Budinská is a PhD candidate at the Europa Institute of Leiden University.