Matching or clashing? ‘Landeskreditbank Baden-Württemberg v ECB’ and the decision of the German Bundesverfassungsgericht on the Banking Union

In a recent paper, I discuss tensions that have lately emerged between the Court of Justice of the European Union (‘CJEU’) and the German Federal Constitutional Court (Bundesverfassungsgericht or BVerfG) following the latter’s judgment on the Banking Union (an English summary of the judgment can be found here). For those that have a sense of imminent doom, let me start by saying that the BVerfG rejected the constitutional complaint directed against the Banking Union. However, following this judgment, not all is as it should be in the Banking Union. This is because the CJEU and the BVerfG do not seem to agree on a basic question of competence in the Banking Union, that is, essentially whether national authorities, when carrying out tasks in relation to ‘less significant’ credit institutions under the Single Supervisory Mechanism (‘SSM’) Regulation (Art 4(1), to be precise), continue to do so on the basis of their pre-existing national competence. The SSM is the first pillar of the Banking Union. It focusses mainly on bank prudential supervision. My paper discusses the competence controversy surrounding the SSM by examining the BVerfG’s findings on competence allocation and the contrasting views of the CJEU. These latter views are found in Landeskreditbank Baden-Württemberg v ECB (or L-Bank in short). For the purposes of this blog post, I will only highlight some of the main points and avoid much of the technicalities and detail.

For a start, the dispute that was at the origin of the action before the EU court did not appear especially remarkable. L-Bank wished to be supervised by the German competent authority (Bafin). However L-Bank was, in SSM jargon, deemed a ‘significant’ entity. Significant entities (basically, large banks) are directly supervised by the ECB. Thus, L-Bank asked the ECB to agree to its reclassification as a ‘less significant’ entity based on a particular provision in the SSM Regulation. In accordance with the SSM Regulation, ‘less significant’ entities, which are basically smaller credit institutions, are generally supervised by national authorities. However, the ECB refused to reclassify L-Bank. The latter challenged the ECB’s decision before the EU court. The General Court (or ‘GC’, one of the courts which, together with the Court of Justice (‘CJ’), make up the CJEU) heard the annulment action. The GC dismissed the appeal, but more remarkably, responded to L-Bank’s annulment action with a broad-brush approach on competence allocation in the SSM. In short, the GC found that national authorities, when carrying out their supervisory tasks under the SSM Regulation in relation to ‘less significant’ entities, acted within the scope of a ‘decentralised implementation’ of an ECB exclusive competence. In reaching this conclusion, the GC played down the role of national authorities under the SSM Regulation. It noted for example that direct supervision by national authorities under the SSM had merely been envisaged as a ‘mechanism of assistance to the ECB’. Crucially, it was not the exercise of a national competence. L-Bank appealed to the CJ. The appeal made no difference. The CJ confirmed the GC’s decision.

Clearly, the CJEU rulings appear to have hit a nerve at the national level. In its July judgment on the Banking Union, the BVerfG set out its own contrasting views on competence in the SSM. To be sure, the BVerfG was in agreement with the CJEU on several points. There was no disagreement between courts on the point that the ECB is exclusively competent to supervise significant entities. There was no disagreement on the point that supervisory tasks that are outside the SSM Regulation are within national competence. Finally, there was no disagreement on the point that the ECB is also competent for certain tasks in relation to less significant entities. Under the SSM Regulation, these tasks are few, but they are a matter for the ECB (eg, the authorisation of a credit institution and the withdrawal of this authorisation). However, for the majority of SSM tasks with respect to less significant entities, matters are more complicated given the involvement of national authorities. Recall in this context that according to the CJEU, national authorities carry out their SSM tasks with respect to less significant entities within the scope of a ‘decentralised implementation’ of an ECB exclusive competence and not because of the exercise of a pre-existing national competence. Not so according to the BVerfG’s: national authorities exercise their tasks on the basis of their primary national competence and not on the basis of ECB competences that were delegated back to them. In my paper, I focus on the main points of difference between the underlying reasoning of the EU and German courts. In short, these differences concern Article 127(6) of the Treaty on the Functioning of the European Union (the legal basis on which the SSM Regulation was adopted), the SSM Regulation and, last but not least, the BVerfG’s reading of the L-bank decisions. Regarding the latter, it suffices to note here that the BVerfG was bold. It adopted a narrow reading of the relevance of the L-Bank decision. It deemed the general findings on competence allocation in L-bank to be of limited relevance to the judgment.

My paper concludes by noting that none of the judgments in this judicial saga can escape criticism. Clearly the BVerfG’s ruling on the Banking Union was a very detailed judgment. Whilst the judgment sets out the BVerfG’s red flags clearly, some of the legal gymnastics with respect to the L-bank decisions (or with respect to some of the recitals of the SSM Regulation), are not beyond criticism. The CJEU’s rulings cannot escape criticism either. It is unlikely that the GC’s decision will be remembered as a decision that was well reasoned. The GC was at times sloppy and arguably went beyond what was strictly necessary to decide the case before it. The subsequent appeal made no difference. This is unfortunate since poorly reasoned judgments that overreach unnecessarily undermine trust. And relationships, including relationships between courts, work better with trust.

Dr Pierre Schammo is an Associate Professor (Reader) in Law at Durham Law School.