Press release - The Court of Justice of the EU - Bank of Slovenia positions confirmed
In today’s judgment with regard to the interpretation of EU law in connection with the questions of the Constitutional Court of the Republic of Slovenia, the Court of Justice of the European Union supports the positions taken by the Bank of Slovenia in the proceedings to date, before national courts and the Court of Justice alike. In today’s judgment the Court of Justice inter alia confirmed the validity of the so-called Banking Communication, in which the European Commission set out general conditions for the approval of state aid to banks in difficulty. In the judgment the Court of Justice confirmed that via communications the Commission may set out general conditions for the approval of state aid to banks that include the prior write-off of equity and subordinated instruments in the amount necessary for coverage of banks’ determined losses. The Communication is not a binding regulation that would impose autonomous obligations on all Member States, although in the event of an individual Member State failing to meet the aforementioned conditions with regard to state aid measures (with regard to a prior contribution to loss coverage by shareholders and creditors), the Commission would be entitled to refuse the measures in question.
In today’s decision the Court of Justice has followed the opinion of Advocate General Wahl that was issued in February 2016 (Press release 18.2.2016, Press release 19.2.2016) and provided guidance to the Constitutional Court in subsequent proceedings with regard to the interpretation of EU law. The Court of Justice thus confirmed that in procedures for the preliminary approval of state aid the Treaty on the Functioning of the European Union (TFEU) assigns the Commission broad powers to assess the compliance of such aid with rules of competition, and in the exercise of these powers allows the Commission to issue general rules (requirements), such as those set out in the Communication. This also allows the Commission to issue communications setting out its general rules (requirements) with regard to the exercise of its powers in individual cases.
The Court of Justice also confirmed that it is in compliance with EU law if in exercising its powers in the area of state aid the Commission ordinarily requires burden-sharing measures as a prerequisite for the approval of state aid (and they are set out in the Communication). In individual cases of deciding on the admissibility of state aid the Commission must apply the requirements that it set out in previously issued communications. At the same time the Court of Justice warns that in an individual case the Commission may or should derogate from the requirements thus set out in exceptional circumstances only, i.e. if adhering to the requirements would endanger financial stability or would have disproportionate effects.
Here it should be emphasised that in the proceedings before the Court of Justice the Bank of Slovenia presented its findings with regard to the state of the banking system in December 2013, which demanded quick, decisive action by all the competent authorities: first, the government, which negotiated with the Commission on the conditions for state aid and provided for the recapitalisation of the banks under the aforementioned conditions, and also the Bank of Slovenia. All the measures taken contributed to the stabilisation of Slovenia’s banking and financial systems. The Bank of Slovenia did not identify exceptional circumstances of any kind that might justify a derogation from the Commission’s requirements (e.g. instability of the financial system as a result of the fulfilment of the requirement, disproportionality of the requirement).
The Court of Justice did not find any of the alleged infringements of fundamental rights (breach of legitimate expectations, infringement of property rights) in connection with the requirements set out in the Communication with regard to prior burden-sharing via a contribution by equity and subordinated instruments, and concluded that the Commission may require measures of burden-sharing via a contribution by equity and subordinated instruments as a prerequisite for the approval of state aid.
The Court of Justice further clarified that when adopting the Communication the Commission did not infringe on investors’ legitimate expectations, as the Commission never gave assurances of any kind that the requirements with regard to state aid would not be modified in the period after the issue of the instruments in question. Shareholders and subordinated creditors may also make no reference to the principle of the protection of legitimate expectations to oppose the implementation of measures that the Commission did not otherwise require in advance as a prerequisite for the approval of state aid. The Commission’s requirements with regard to the write-off of banks’ equity and subordinated instruments that were issued before the Communication therefore do not constitute an inadmissible infringement of investors’ legitimate expectations.
In its decision the Court of Justice confirmed that the Commission’s requirement that on the basis of a loss having been determined the bank’s instruments of equity and subordinated capital be written off does not constitute an infringement of the property rights of the holders of these instruments, if it is determined in the procedure that the effects on the holders would also occur in the event of the bank’s bankruptcy.
In today’s decision the Court of Justice also confirmed that the application of a bail-in instrument that on the basis of a loss having been determined causes the extinction of the bank’s contractual obligations to its creditors, were the public interest to be endangered in the event of bankruptcy, is in compliance with EU law. The Court of Justice thereby indirectly confirmed the compliance of the Directive of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (the BRRD), which was transposed into Slovenian law in June 2016 by the Resolution and Compulsory Dissolution of Credit Institutions Act. This law replaced the arrangements of the ZBan-1L that had been subject to challenge. The directive and the law stipulate that in the event of the resolution of a bank, in addition to shareholders and holders of subordinated instruments (as set out by the ZBan-1L), ordinary creditors and depositors also contribute to the resolution of the bank via a write-off measure, in the amount of the bank’s determined loss, up to the amount of the deposit not covered by guarantee.
Here the Bank of Slovenia reiterates that all procedures within the framework of the bank recovery of 2013 and 2014 were carried out in accordance with law and with the highest possible measure of diligence, including with regard to the use of taxpayers’ money, and solely with the objective of stabilising the acute situation of that time. Through the extraordinary measures that were allowed at that time by the ZBan-1L (extinction of the bank’s qualified liabilities from equity and subordinated liabilities, and bank recapitalisation through state aid to cover residual loss and to ensure capital adequacy), the Slovenian government prevented bank bankruptcies (including the three largest banks), and ensured the stabilisation of the financial system in Slovenia.
Public Relations Department
Bank of Slovenia