If interpreted strictly, the framework for the European Banking Union does not exceed the competences of the European Union

Press Release No. 52/2019 of 30 July 2019

Judgment of 30 July 2019
2 BvR 1685/14, 2 BvR 2631/14

The European Union did not exceed the competences conferred on it by the Treaties when adopting the legislative framework regarding the European Banking Union, including the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) if this framework is interpreted strictly. Neither the SSM Regulation nor the SRM Regulation encroach on the constitutional identity of the Basic Law. This is what the Second Senate of the Federal Constitutional Court has decided in its judgment pronounced today. The Court has held that the SSM Regulation does not manifestly exceed the authorisation under Art. 127(6) of the Treaty on the Functioning of the European Union (TFEU), given that it does not fully confer on the European Central Bank (ECB) the supervision of all credit institutions in the euro area. The establishment of and competences assigned to the Single Resolution Board (SRB) by the SRM Regulation raise concerns with regard to the principle of conferral, but they do not amount to a manifest exceeding of competences if the Board acts strictly within the limits of the tasks and powers assigned to it. Where the establishment of independent agencies is limited to exceptional circumstances, it does not encroach on the constitutional identity of the Basic Law. However, the diminished level of democratic legitimation that results from the independence of supervisory and resolution authorities at the European Union and national level is not permissible without limits and requires justification. In the domain of banking supervision and resolution, this diminished level of legitimation is acceptable in the end because it is compensated by specific safeguards allowing for democratic accountability. Consequently, the Federal Government and the German Bundestag did not participate in the adoption or implementation of secondary law that exceeds the limits of the European integration agenda (Integrationsprogramm); therefore, there is no violation of the complainants’ “right to democracy” under Art. 38(1) first sentence of the Basic Law (Grundgesetz – GG).

Facts of the case:

“European Banking Union” is the term used for the transfer of national competences to European institutions and the creation of uniform rules for financial market supervision and the resolution of credit institutions. Its core elements are the Single Supervisory Mechanism, which confers on the European Central Bank supervisory powers regarding “systemically important banks” in the Member States of the euro area, and the Single Resolution Mechanism, which establishes the Board and the Single Resolution Fund (the Fund) for the resolution of insolvent big banks. The Fund is still being set up.

The constitutional complaints are, in essence, directed against the two underlying regulations (SSM Regulation, SRM Regulation) and the federal authorising act (SSM Authorising Act).

Key considerations of the Senate:

1. Based on the Senate’s interpretation, the adoption of the SSM Regulation does not exceed the competences conferred on the European Union by the Treaties in a sufficiently qualified manner. The SSM Regulation does not confer full banking supervision on the ECB.

a) Therefore, the transfer of supervisory powers to the ECB does not manifestly exceed the competences conferred by Art. 127(6) TFEU. According to this provision, specific tasks relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings may be conferred on the ECB.

aa) The SSM Regulation provides for a division of banking supervision between the ECB and national authorities. Essentially, national authorities retain their competences; only specific supervisory powers which are crucial to ensure a coherent and effective implementation of the European Union’s policy in this domain are conferred on the ECB. To this end, certain tasks are conferred on the ECB that it must perform for all credit institutions in the euro area. In principle, the ECB is competent only for supervising significant credit institutions, while the national supervisory authorities generally remain competent for supervising less significant credit institutions in accordance with the regulations, guidelines and general instructions adopted by the ECB. In areas of banking supervision that are not subject to the SSM Regulation, national supervisory authorities retain their competences.

bb) The national supervisory authorities exercise their powers on the basis of their primary competences, not on the basis of powers conferred by the ECB. Such a re-delegation of powers by the ECB would entail that all supervisory tasks had fully been conferred on the ECB, which is specifically not what Art. 127(6) TFEU allows and what the SSM Regulation provides. A full conferral of all tasks would exceed the limits of the European integration agenda in an evident and structurally significant manner and would deprive Member States of a central part of their economic governance. Such an interpretation of the SSM Regulation is neither compatible with the wording of Art. 127(6) TFEU nor tenable in light of a systematic analysis.

The decision of the Court of Justice of the European Union (CJEU) of 8 May 2019 (C-450/17 P Landeskreditbank Baden-Württemberg v European Central Bank) does not merit a different conclusion. In this decision, the CJEU confirms the view taken by the General Court of the European Union (GCEU) that, with regard to the tasks laid down in Art. 4(1) SSM Regulation, an exclusive competence was conferred on the ECB, the decentralised implementation of which by the national authorities is enabled by Art. 6 of the Regulation, under the SSM and under the control of the ECB, in relation to less significant credit institutions within the meaning of Art. 6(4) subsection 1 SSM Regulation, and in respect of some of the tasks. The CJEU has held that in addition, exclusive competence is conferred on the ECB for determining the content of the definition of “particular circumstances” within the meaning of Article 6(4) subsection 2 SSM Regulation, granting the ECB exclusive supervisory powers in relation to all institutions that are generally considered significant according to the criteria laid down in Art. 6(4) subsection 2 SSM Regulation. This, however, does not amount to a conferral of comprehensive supervisory powers on the ECB also for the far larger number of less significant credit institutions, the ECB’s right to act on its own initiative pursuant to Art. 6(5) SSM Regulation notwithstanding. Current practice regarding banking supervision confirms the interpretation by the Senate.

A manifest violation of the principle of subsidiarity cannot be found, given that the SSM Regulation only conferred tasks and powers on the ECB which are indispensable for effective supervision, and that national authorities still retain extensive powers.

b) The establishment of the Supervisory Board by Art. 26(1) SSM Regulation does not amount to a manifest violation of Art. 129(1) TFEU and Art. 141(1) TFEU in conjunction with Art. 44 ESCB Statute, either.

c) Based on the interpretation adopted by the Senate, the SSM Regulation also does not encroach on the constitutional identity protected by Art. 23(1) third sentence in conjunction with Art. 79(3) GG. The constitutional identity must be taken into account as a standard in ultra vires review, to the extent that the “right to democracy” enshrined in Art. 38(1) in conjunction with Art. 20(1) and (2) in conjunction with Art. 79(3) GG is concerned. 

aa) Ultra vires review and identity review are distinct instruments of review that are independent of one another. Although both instruments can be traced back to Art. 79(3) GG, the respective standard of review differs. Therefore, a constitutional complaint is only admissible in this regard if it contains a sufficiently substantiated submission as to the requirements for either an ultra vires review or an identity review. The Federal Constitutional Court is bound by such an – admissible – submission.

However, to the extent that the complainants assert a violation of the “right to democracy” with their constitutional complaint, a single standard of review is applicable. In this instance, ultra vires review and identity review not only have the same basis in constitutional law, they are also congruent in terms of the asserted rights violation and the aim pursued by the constitutional complaint. A European Union measure that encroaches on the “right to democracy” cannot be based on an authorisation under primary law, given that the legislature deciding on European integration matters, even if it commands the majority required by Art. 23(1) third sentence in conjunction with Art. 79(2) GG, cannot confer sovereign powers on the European Union whose exercise would encroach on the constitutional identity protected by Art. 79(3) GG.

If an asserted ultra vires act or a violation of the constitutional identity is challenged on the basis of an admissible assertion of a violation of the “right to democracy”, the European Union measure in question must thus be extensively reviewed (indirectly) as to its compatibility with Art. 38(1) first sentence in conjunction with Art. 20(1) and (2) in conjunction with Art. 79(3) GG.

bb) The diminished level of democratic legitimation in the domain of banking supervision that results from the independence of the ECB and the national supervisory authorities does not call into question parliamentary responsibility for the measures at issue here in a manner that would affect Art. 20(2) first sentence in conjunction with Art. 79(3) GG.

This diminished level of legitimation is indeed a cause for concern because it is additional to the monetary policy mandate of the ECB, which in itself is far-reaching and difficult to contain. Ultimately, however, it is still acceptable because it is compensated by specific safeguards serving democratic accountability. The decisions implementing the SSM Regulation meet the requirements for democratic accountability due to the way in which the ECB’s decision-making bodies are appointed, and given that the ECB is bound by relevant primary law – namely, the principles of conferral, of proportionality and the Charter of Fundamental Rights – and by the requirements laid down in the SSM Regulation. In addition, the ECB also applies law adopted by the national parliaments to the extent that it transposes directives or makes use of their right to choose from different options provided for in regulations. To the extent that such law entrusts it with discretion, the ECB does have a wide margin; this is ultimately still acceptable because the resulting drops in influence (Einflussknicke) are compensated by specific safeguards such as possibilities of legal protection, accountability and reporting obligations of the ECB vis-à-vis the European Union organs and the national parliaments.

The SSM Regulation provides that the national supervisory authorities act independently and are not bound by instructions when carrying out the tasks the SSM Regulation assigns to them. This also poses problems with regard to the level of legitimation of the measures enacted by the competent German authorities. Notably, this concerns the supervision of less significant credit institutions as well as measures supporting the ECB. In this respect, ministerial orders and instructions are impermissible. While this clearly creates tensions with the principle of people’s sovereignty, protected by Art. 20(2) first sentence in conjunction with Art. 79(3) GG, it is justified by factual reasons and ultimately does not encroach on the core of the constitutional identity. The independent exercise of tasks serves to enhance the effectiveness of supervision and to protect against undue political influence and corporate interference. This independence does not render parliamentary scrutiny of German supervisory authorities impossible: The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) and the German Bundesbank remain democratically legitimated in organisation and staff matters as well as in factual and substantive terms. This democratic legitimation is ensured by possibilities of legal protection and special rights to receive information at least to such an extent that the German Bundestag remains accountable to citizens regarding the activities of these institutions.

2. The SRM Regulation does not amount to an ultra vires act, either; nor does it result in a violation of the constitutional identity.

a) The establishment of and the competences assigned to the Board do not exceed the competences conferred on the European Union under Art. 114(1) TFEU in a sufficiently qualified manner. Even though the establishment and competences of the Board raise concerns with regard to the principle of conferral, they do satisfy the criteria developed in the CJEU’s case-law. If the conferred tasks and powers are exercised in a strict manner, there is no manifest and structurally significant violation of Art. 114(1) TFEU.

b) Given the existing compensation measures, the independence provided for in the SRM Regulation of both the Board and BaFin when exercising the relevant tasks does not violate Art. 20(1) and (2) in conjunction with Art. 79(3) GG.

aa) In this instance, too, the establishment of independent bodies and other agencies of the European Union creates tensions with the principle of democracy and requires specific justification as well as guarantees that the Member States and bodies of the European Union are capable of ensuring the democratic accountability of their actions and, where necessary, of adjusting, amending or revoking the relevant statutory bases.

The procedure to appoint the members of the Board, which is independent when carrying out its tasks, the accountability obligations and the fact that it is subject to extensive administrative and judicial scrutiny ensure sufficient democratic control.

bb) To the extent that the SRM Regulation also declares the national resolution authorities to be independent when implementing the SRM, the level of democratic legitimation is lowered even further. However, this is compensated to some extent by transparency requirements as well as reporting and accountability obligations vis-à-vis the national parliaments. Judicial review also contributes to the democratic legitimation of measures enacted by BaFin. However, the regime of legal protection must satisfy the requirements of Art. 19(4) GG.

Encroaching on the principle of people’s sovereignty can be avoided if the various safeguards are interpreted and applied in light of the principle of democracy, and if the German Bundestag makes full use of its possibilities of ensuring democratic accountability.

c) As far as the bank levy is concerned, it does not impair the overall budgetary responsibility of the German Bundestag in a constitutionally relevant manner. The requirements laid down in the SRM Regulation do not manifestly exceed the competence under Art. 114(1) TFEU to harmonise the internal market.

aa) The Fund provided for in Art. 67 SRM Regulation is designed to rule out that taxpayers’ money is used for the resolution of financial institutions in future and to establish joint liability of financial institutions in the participating Member States so that funding for resolution is also ensured in cases where recourse to the owners and creditors is not sufficient. It does not establish a liability of the participating Member States. The Fund supports the Single Resolution Mechanism by financing resolution measures in exceptional cases. In particular, it helps to ensure a uniform administrative practice in the financing of resolutions and to avoid distortions of competition in the internal market.

bb) The bank levy is not part of the Own Resources Decision, and might therefore raise concerns with regard to primary law. However, its levying is not based on the SRM Regulation, but – as far as Germany is concerned – on the German Restructuring Fund Act (Restrukturierungsfondsgesetz). Likewise, the revenue raised by the bank levy is not transferred to the Fund based on the SRM Regulation, but based on the Intergovernmental Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund of 21 May 2014. Thus, there are no grounds for finding a violation of the European integration agenda nor for finding an encroachment on the overall budgetary responsibility of the German Bundestag.

3. Based on these considerations, the SSM Authorising Act is not objectionable under constitutional law. In fact, by adopting this Act, the German Bundestag assumed its responsibility with respect to European integration (Integrationsverantwortung).