The European Central Bank – judicial review of monetary policy and banking supervision

The financial crisis has had broad political
and economic effects across the European Union. It has had legal effects too – leading
to the European Central Bank (ECB) not only developing controversial new means
of intervention in monetary policy,
but also being granted new powers of banking
and (with the ‘Troika’ of the Commission and the IMF)
becoming involved in austerity policies
in the Member States that needed financial assistance. 

The two blog posts below discuss recent developments
in the case law on review of the monetary policy (Weiss: blog post by
Annelieke Mooij) and banking supervision powers (La Banque Postale: blog post by Carlos Bosque and Alejandro Pizarroso) of the ECB. As for judicial review of austerity policy, the EU General
Court recently followed up the CJEU ruling in Ledra Advertising (discussed here)
with its judgments in Bourdovali
and Chrysostomides.
While the recent judgments reaffirmed the
limited judicial review of ECB measures on monetary and austerity policy, they
suggest a contrary willingness to demand stricter judicial scrutiny of banking
supervision. Whether this becomes a more general trend remains to be seen.
Judicial review of the ECB’s monetary and economic
policy powers: the latest chapter
, PhD student in EU law, Dublin City University
In June the last
bail-out agreement was struck with Greece signalling
the end (at least for now) of the Greek financial crisis
. The
Asset Purchasing Programme
of the European Central Bank (ECB), also known
as Quantitative Easing, has ended in December 2019. And the most recent case in
the important euro-crisis case-law, the
Weiss case
, has been decided in
December. This is not to say that the discussion surrounding the economic and
monetary union is finalized, nor that no financial crisis will ever rise again.
It is therefore important to reflect on the past crisis and prepare for the
During the
euro-crisis several topics were an important point of discussion, but none was
as prevalent as the question into the powers of the ECB. More precisely to what
extend may monetary policy impact economic policy?  The Treaty
on the Functioning of the European Union
(TFEU) clearly splits economic and
monetary policy. Whereby economic policy is left for the Member States to
conduct and monetary policy is within the competence of the ECB. The
euro-crisis, however, has shown that these two policies are not so easy to
separate. Leading to separate cases where the Court had to decide upon the
lawfulness of the OMT
(Gauweiler, discussed here)
and Public
Asset Purchasing Programme
With the crisis and the Decision of the Court behind us, it is time to add-up
the scores and answer the question to what extent may the ECB enter the field
of economic policy and what instruments has it gained?
In order to
assess the impact of the crisis it is first necessary to make a brief overview
of the state of the art before the crisis. The monetary goal of the ECB in the
TFEU was described as price stability which is by the ECB defined as inflation close
to but under 2%
. In addition the ECB may support, without undermining
monetary policy, general economic policy.
The instruments
available to the Bank are listed in the Protocol of the
, Article 18.1 defines two clear instruments. The first is the purchase
and sale of marketable instruments, the second is to conduct credit operations.
According to the Article 123 TFEU the ECB is prohibited from directly financing
Member States and according to Article 125 TFEU the ECB may not bail-out Member
States. Pre-crisis these formed the most important contours of ECB’s powers
with regard to monetary policy. Then came the euro-crisis.
The euro-crisis
case law exists of three major cases Pringle,
and Weiss. The Pringle case did not involve the ECB but concerned the ESM
programme, in the form of a treaty between Eurozone Member States to assist those
among them which were having economic difficulties. It is nevertheless an
important case as the Court accepted that there can be overlap between economic
and monetary policies. This approach abandons the strict separation that flows
forth from the Treaties. From the perspective of the ECB this is not very
unexpected as the ECB is allowed to conduct monetary policy and support
economic policy. The problem however is the definition of “support”. The word
support entails that it may not determine
economic policy, but the line between the two seems vague.
In the Gauweiler decision the Court stated that
in order to determine whether a measure is of monetary or economic policy the
objectives and instruments have to be assessed. The OMT programme under
discussion in the Gauweiler case had
as objective to restore the monetary transmission channels and the singleness
of monetary policy (paras. 46-49). This included counteraction against the
speculation of a break-up of the Eurozone. Adding the objective of keeping the
euro together may not have fallen within a strict adherence to the law. It is
however not strange that the ECB
chose to save the euro
. The Eurozone falling apart may have led to further
implications for the price stability goal.
The second
criterion in determining whether a measure is of monetary or economic policy is
that of the instruments used. In the Gauweiler
case it became clear that these operations may have economic effects (para.
52).  They may however not be violating
either directly or in spirit the no-bail out clause and the prohibition upon
direct lending. The Court determined the main criterion to evaluate this was by
asking the question whether the impetus to keep a sound budgetary policy is
The Weiss case added that these so called
“indirect effects” do not have to be unforeseen and can be knowingly accepted
(para. 62). The Court furthermore states that in order to reach inflationary
goals the ECB’s policy will impact interest rates and the real economy –
thereby accepting that monetary policy, in order to be effective, will often impact
economic policy (para. 63). This conclusion is neither unexpected, nor unwanted
per se as the Treaty clearly provides the ECB the power to support economic
policy. Yet in the Gauweiler case the
Court also accepted the role of the ECB within the so-called Troika.
The Troika
consists of the Commission, ECB and the IMF and has been given shape in the ESM
. This Treaty provides the Commission, IMF and the ECB, when a Member
applies for support, with the task to negotiate and monitor the Memorandum of
Understanding (MoU) with the Member in need of assistance. This MoU contains many
aspects arguably economic in nature. The negotiation and monitoring is considered
by the Advocate
as one of economic policy. The Court does not go into this matter
in its judgement. By not going into the role of the ECB within the Troika the
Court arguably accepts – or at least allows this function. It therefore seems
that during the crisis the ECB has gained the power to negotiate and implement
certain economic goals. These
instruments are difficult to view as monetary policy instruments
. The
remaining option is to classify them as in support of general economic policy.
Weiss – the last chapter?
Arguably the
last chapter, at least for now, in crisis case law is that of the Weiss case. In the Weiss case the programme under discussion was that of the Public
Sector Purchasing Programme (PSPP). Unlike the OMT programme the PSPP has
actually been implemented. Legally, however, this makes little difference as
the OMT programme was adjudicated as if it would be implemented. This programme
is technically one of four programmes conducted under the Asset
Purchasing Programmes
. The word technically is used in this context because
the PSPP purchases far outweigh the other programmes. In the last month of the
programme the PSPP volume was a rough 81% of the total purchases.
This is
interesting to note as one of the criticisms after the Gauweiler case was that the arguments of the ECB were taken at face
value. This seems the case for the argument given by the Advocate
(para. 150.) that PSPP is “just one of the four-programmes”. Part
of this might be because the Court only assesses whether the ECB has made a
“manifest error of assessment” (para. 91). In the same paragraph the Court
however also states that monetary policy decisions are usually controversial
and “nothing more can be required of the ESCB apart from that it use its
economic expertise and the necessary technical means at its disposal to carry
out that analysis with all care and accuracy”. This almost creates a situation
whereby technical assessment of the ESCB’s judgement is impossible, as it is
difficult to find a body appropriate to “second-guess” the ECB’s decision-making.

Another main
difference between the two programmes was that the OMT programme was only to be
applied to countries that fulfilled certain conditionality requirements.  The PSPP on the other hand was a general
programme, which is arguably closer to the ECB’s monetary goals. The Court
considers that a general programme can still breach the monetary assistance
prohibition of article 123 TFEU if the ESCB creates a de facto certainty of
purchase for the primary actors (para. 110). 

Interestingly it also considers
that due to the division key the more debt a Member State accumulates, the
lower the proportion the national bank buys (para. 140). Therefore despite the
general application of the programme the ESCB is still able to uphold the
incentives for individual Member States to keep a sound budgetary policy.
Unlike the referring court the ECJ does not go into the numeral specifics of
the volume of purchases. Thereby indirectly confirming the budgetary
independence the ESCB enjoys. This, however, also indicates there are few or no
organs within the EU to check the details of ESCB decisions.
With the
euro-crisis slowly becoming history (at least for now) it is time to assess its
impact. The impact of the euro-crisis upon the European Central Bank has been
serious. Case law has shown that monetary policy and economic policy are not
strictly separated and one may influence the other (Gauweiler). This influence cannot be contrary to monetary policy
but the effects can be foreseen and knowingly accepted (Weiss). Secondly the power of the ECB to support general economic
policy is more clearly defined. This power may include the task to negotiate
and monitor compliance of fiscal reforms. The legality and consequences of the
latter caused debate amongst scholars and could form a cumulative
process that should be carefully watched
.  The Weiss
case did not bring major reforms, nor does it seem out of place. It however
further demonstrated that there are few organs to check the specific arguments
put forward by the ECB. Though the ECB was designed as a highly independent
bank it is difficult to imagine that this level of independence was desired.
Welcome to Hard Look Review, ECB
Carlos Bosque*
and Alejandro Pizarroso**
* Legal Counsel
at the European Investment Fund. Doctoral Candidate at the Universidad Carlos
III de Madrid
** Legal Counsel
at the Bank of Spain. LL.M. Graduate at the Columbia Law School
The views
expressed herein are those of the authors, and not of the European Investment
Fund or the Bank of Spain
Discretion, like
the hole in a doughnut, does not exist except as an area left open by a
surrounding belt of restriction. It is therefore a relative concept. It always
makes sense to ask, “Discretion under which standards?” or “Discretion as to
which authority?”
Richard Dworkin
Some European
cases (and many recent ones, like the decision on the lawfulness of the public
sector asset purchase program, discussed in the post above) seem to immediately
draw the attention they deserve. Others, however, tend to go unnoticed. Among
these, we may find La
Banque Postale
(T-733/16), a General Court case (sided by five
identical rulings concerning other French credit institutions) dealing with the
review of ECB supervisory decisions, which resulted in the annulment, for the
very first time, of one such decision. The case revolved around the degree of
discretion that the ECB should enjoy in its supervisory action. The message
sent by the General Court was, however, quite clear. It effectively welcomed the
ECB to a heightened standard of review —to hard look review.
We will analyse
this question here, but first we turn to the case.
 The facts
are quite simple. In the aftermath of the Financial Crisis, the European Union legislator
introduced a leverage ratio in order to discourage financial institutions from
taking on excessive leverage risk. This ratio assesses the capital of an
institution in relation to its exposures. But it does so independently of the
risks associated to the latter, so as to measure the overall exposure of an
institution. Some exemptions are nevertheless permitted. In 2014, Article
429(14) of Regulation
was passed, creating a derogation for exposures arising from the
deposits that an institution may be forced to transfer to a public sector
entity for the purposes of funding general interest investments. The ECB, says Article
429(14), “may permit” these exposures to be excluded from the calculation of
the leverage ratio of an institution.
Pursuant to this
provision, La Banque Postale requested the ECB to exclude from the calculation
of its leverage ratio the amounts collected through certain regulated savings
accounts that it was legally bound to transfer to a public entity. The ECB,
however, rejected its request. It advanced three reasons for its decision. First,
it argued that the institution remained globally liable for these exposures.
Secondly, it noted that La Banque Postale was obliged to reimburse its
depositors for the amounts transferred to the public entity, independently of
whether the latter returned the funds to the institution, and even in the event
of France’s default. Finally, the ECB contended that the inevitable delay when
retrieving the funds from the public entity could lead to a fire sale in the case
of a bank run. La Banque Postale, whose leverage ratio denominator was to raise
by 50% from such refusal, challenged this decision.
The case
presented two issues: (1) whether the ECB had discretion in the application of
the exemption; and, if so, (2) whether the ECB had exercised its discretion in
a permissible manner.
While the first
issue was relatively easy to decide, given the clear language (“may permit”) of
the provision, the second issue was rather more thorny. Having established that
the ECB enjoys discretion in the application of the exemption provided that the
conditions in Article 429(14) are met, the General Court turned to the second
question. The answer was clear: the ECB did not exercise its discretion in a
permissible manner. To reach this conclusion, the General Court relied on its
traditional standard of review for discretionary decisions. EU courts —it
noted— must not substitute the judgment of administrative bodies; their
assessment is confined to determine whether an administrative decision is based
on materially incorrect facts, or is vitiated by an error of law, manifest
error of appraisal, or misuse of powers. But the application of this standard
was quite interesting.
According to the
General Court, the first two grounds put forward by the ECB were affected by an
error of law, because the ECB denied the exemption on reasons that were
inherent to the exposures referred to in the provision, thus rendering the
exemption almost inapplicable. The possibility that France may default —the
main basis for its decision, as the ECB admitted during the trial— was
specifically dismissed. Since the derogation in Article 429(14) refers only to
amounts deposited in a public entity, which are thus state backed, the
possibility that the country in question may default cannot be grounds for
denying the exemption.
But the opinion
also found that the third reason advanced by the ECB was vitiated by a manifest
error of appraisal. The General Court noted that, even if the liquidity risk
identified by the supervisor may materialize in some cases, the ECB had
previously admitted that small delays in retrieving the funds from the public
entity were immaterial for the assessment of the institution’s liquidity ratio.
The ECB, in fact, had established such view in a previous decision concerning
the liquidity ratio of La Banque Postale, and its analysis was backed by the
EBA. This incoherence, the court found, runs counter to the principle of sound
administration that applies to all EU institutions. The ECB’s decision denying
the application of the exemption was therefore annulled.
In our view, this
ruling should not go unnoticed. Certainly, it is the first time that a
supervisory decision of the ECB has been annulled since the Single Supervisory
Mechanism became operational in 2014. But how should we read this case? The
little attention that the judgment has drawn appears striking if, as we are
inclined to think, the General Court is sending a clear message to the ECB with
respect to its discretionary powers in the field of banking supervision.
The General
Court, in fact, seems to be welcoming supervisory decisions to hard look
review, a term coined in the United States to refer to the rigorous standard of
judicial review applied to agency’s action since the 1970s (the phrase is
usually associated with the US Supreme Court decision in State
). The General Court recites its usual standard of review for
administrative discretion, but as Professor Craig has taught us, what really
matters is how the test is used, the intensity of review that the court applies
(Paul Craig, EU Administrative Law 445
(3rd ed. 2018)). It is true that the two specific rules that can be extracted
from the case (i.e. discretion cannot be exercised in a way that runs counter
to the objective of the provision being applied or its effet utile, and discretion
does not allow an administrative body to be incoherent in its assessment over a
given subject) appear to be reasonable.
But what matters
is how scrupulous the assessment of the General Court was, as evidenced by the
(at times, excruciating) lengthiness and complexity of the ruling. The court
avoids substituting the ECB’s judgment. However, it carefully weighs each and
every one of its arguments, despite the clear discretion afforded by the
governing rule, and regardless of the issue’s technical nature. The court seems
to be telling the ECB that, unlike monetary policy, where it “must be allowed …
a broad discretion” (Gauweiler,
C-62/14, ¶ 68), banking supervision is an area of the law where stringent
review of discretionary administrative action applies.
The General
Court, though, offers a way out for the ECB —sufficient justification. While
the opinion does not specifically highlight this aspect, it suggests that by
formulating clear reasons for its decision the ECB could have denied the
application of the exemption. By carefully examining the plausibility of
France’s default or the liquidity risk incurred by La Banque Postale for the
transfer of funds to a public entity, the General Court seems to say, the
decision could have been upheld. But it is now clear that, in its supervisory
role, the ECB is but another administrative body of the EU, whose action will
be subject to intense scrutiny on the part of the General Court, and whose
decisions will have to be carefully justified in order to survive this
heightened standard of review.
Whether this
development should be praised (enhanced judicial review?) or not (ossification
of administrative action?) is a matter of opinion. This is an issue where
reasonable minds can reasonably disagree, but its importance justifies giving
it the attention it demands. The conclusions drawn here are tentative, as we
need to see whether subsequent judgments (by the General Court or the Court of
Justice) will conform to this case law. However, La Banque Postale should serve as a warning —welcome to hard look
review, ECB.
Barnard & Peers:
chapter 19

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