Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.3.1.1:4.3.1.1 The primary law sources

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.3.1.1

4.3.1.1 The primary law sources

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The legal basis for the SRMR and the BRRD is Article 114 TFEU. In accordance with Article 114 TFEU, the European Parliament and the Council may, acting in accordance with the ordinary legislative procedure and after consulting the Economic and Social Committee, adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.1 With regard to the scope of Article 114 TFEU, the ECJ has recalled that a legislative act adopted on that legal basis must, first, comprise measures for the approximation of the provisions laid down by law, regulation or administrative action in the Member States and, second, have as its object the establishment and functioning of the internal market.2 While a mere finding of disparities between national rules is not sufficient to justify having recourse to Article 114 TFEU, it is otherwise where there are differences between the laws, regulations or administrative provisions of the Member States which are such as to obstruct the fundamental freedoms and thus have a direct effect on the functioning of the internal market. As discussed in section 4.2.2, this was considered to be the case as a result of the development of the national resolution regimes.

Tuominen takes a critical stance towards the use of Article 114 TFEU as the basis for the European Banking Union, which includes the resolution framework, taking into account that the European Banking Union stands at the crossroads between the Economic Monetary Union (EMU)3 and the internal market, containing the four fundamental elements of free movement. The European Banking Union can be critized for mixing the internal market and economy policy objectives, which makes reliance on Article 114 TFEU insecure.4

In addition, an intergovernmental agreement was entered into by the participating Member States of the SSM on transferring the funds raised at national level towards the SRF as well as on a progressive merger of the different funds raised at national level to be allocated to national compartments of the SRF (the SRF Agreement). The obligation to transfer the contributions raised at national level towards the SRF does not derive from EU law. This had therefore to be established by the SRF Agreement.5 The SRF supports the SRM.6 It is only available to support the resolution of banks and banking groups in scope of the SRM.

The home state principle

Since the legal basis of the SRMR and the BRRD is formed by Article 114 TFEU, the ‘home state principle’ should be mentioned, being the underlying principle of the internal market for financial services. In the absence of harmonization measures, each Member State is considered competent to conceive rules that are valid in its own territory. However, the TFEU provisions on the free movement of goods, services, persons and capital prohibit all national measures that might render less attractive or hinder free movement. These provisions therefore require Member States to take into account regulations and measures which have already been fulfilled in the state of origin (the home state). This is also referred to as the home state principle.7

The home state principle applies in relation to the Reorganisation and Winding up Directive and CRD IV/CRR.

The Reorganisation and Winding up Directive provides that the administrative or judicial authorities of the home Member State which are responsible for winding up shall alone be empowered to decide on the opening of winding up proceedings concerning a bank, including branches established in other Member States. This decision has to be recognised within the territory of all other Member States and is effective there when the decision is effective in the Member State in which the proceedings are opened.8 The home state principle also applies in relation to reorganization measures, including the application of resolution tools and the exercise of resolution powers provided for in the BRRD.9

The application of the home state principle in relation to CRD IV/CRR entails that the Member State licensing a bank is also responsible for supervising its activities throughout the EU. The home state principle forms the basis of the single license and the European passport that were introduced with the adoption of the First Banking Directive10 in 1977 and the Second Banking Directive11 in 1989, respectively.12 On the basis of the European passport, banks established in Member States may offer services, either through the cross-border provision of services or through the establishment of branches, in any other Member State without seeking authorisation from the host Member State.13

The home state principle also applies in relation to the BRRD, as a result of which the BRRD’s tools and procedures are applied in a decentralized manner, with individual Member States retaining responsibility for the resolution of their domestic banks.14 The BRRD ensures that all assets and liabilities of a bank regardless of the country in which they are situated, are dealt with in a single process in the home Member State and that creditors in the host Member States are treated in the same way as creditors in the home Member State.15

Although the BRRD is based on the home state principle, the development of the SSM and the SRM led to the introduction of a centralized supervisory and resolution power in the form of the ECB and the SRB, respectively, for significant banks and (certain) banking groups within the Eurozone.16 Although the ECB and SRB seem to consider themselves as absorbing the roles of the home and host state supervisor and replacing the resolution authorities, respectively,17 it is the author’s view that the centralization of power at the level of the ECB and the SRB in the Eurozone is incompatible with the home state principle. One could even say that the concept of home state and host state are actually no longer relevant within the SSM (and therefore SRM). The only fact of relevancy is whether the bank is established within a participating Member State of the SSM or not. It is no longer relevant which participating Member State that is.18

In the author’s view, abandoning the home state principle within the SSM and SRM does not impair and can even contribute to the internal market for financial services. A few observations should however be made. First, it should be recognised that there may be a certain tension, if the home state principle still applies to other parts of the internal market. One could for example think of the winding up of banks through normal insolvency proceedings or the public funding of failing banks.

In respect of the latter, it is stated that during the GFC most Member States applied a ‘home taxpayer principle’; that is, the money had to come from the taxpayer of the country where the (cross-border) bank had its headquarter, e.g. Belgium for KBC, the Netherlands for ING, the UK for Barclays. Exceptions have been Fortis, where Belgium, Luxembourg and the Netherlands have contributed, Kaupthing Bank Luxembourg, where Belgium and Luxembourg have contributed, and Dexia, where Belgium, France and Luxembourg have contributed. In the BRRD it was acknowledged that effective resolution regimes in all Member States are necessary to ensure that banks cannot be restricted in the exercise of the internal market rights of establishment by the financial capacity of their home Member State to manage their failure.19 Within the SRM, the SRF was created, which has to become a mutual fund accessible for all banks within the Eurozone. Leaving the whole tab to national taxpayers, while introducing centralized supervision in the Eurozone, was politically impossible.20 That is why the SRF will have to provide for centralized funding. At the time of writing this dissertation, the SRF however still lacks a common backstop.21

Secondly, the centralization of power only takes place within the SSM and SRM. There may therefore be tension between Member States that participate in the SSM and SRM (currently, the Eurozone Member States) and non-participating Member States.22

It can be read in the SRMR that the establishment of the SRM only within the Eurozone is not considered to impair the internal market, since the SRM is open to all Member States.23 In addition, it is noted in literature that Member States that participate in the SRM have to participate in all elements of the European Banking Union. Cherry-picking is not allowed.24 The question is, however, whether this is also conceived in such a way by others, such as the non-participating Member States.25 The UK may be an example of such a Member State that reconsidered its position against the background of the further development of the economic and monetary union – inter alia, through the SRM26 – in the Eurozone and the impact thereof on non-Eurozone Member States.27 Unfortunately, this resulted in the Brexit.

Thirdly, the home state principle is not completely replaced within the SRM and SSM. The home state principle still applies in relation to the exercise of powers by the national competent authorities and resolution authorities to banks and banking groups in scope of the SSM and SRM.28 This makes that there is a certain complexity of the resolution process, that may not necessarily contribute to the efficiency thereof.

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