Joined Cases T‑150/18 and T‑345/18

BNP Paribas

v

European Central Bank

 Judgment of the General Court (Second Chamber, Extended Composition), 9 September 2020

(Economic and monetary policy – Prudential supervision of credit institutions – Contribution to the deposit guarantee scheme or the Single Resolution Fund through irrevocable payment commitments – Tasks conferred on the ECB – The ECB’s specific supervisory powers – Article 4(1)(f) and Article 16(1)(c) and (2)(d) of Regulation (EU) No 1024/2013 – Measure imposing the deduction of the cumulative amount of outstanding irrevocable payment commitments from Common Equity Tier 1 capital – No individual examination)

1.      Economic and monetary policy – Economic policy – Supervision of the EU financial sector – Single supervisory mechanism – Prudential supervision of groups of credit institutions on a consolidated basis – Capital requirements – Scope of the control and evaluation carried out by the European Central Bank

(Council Regulation No 1024/2013, Arts 4(1)(f) and 16(1)(c) and (2)(d))

(see paragraphs 55-60)

2.      Economic and monetary policy – Economic policy – Supervision of the EU financial sector – Single supervisory mechanism – Prudential supervision of groups of credit institutions on a consolidated basis – Capital requirements – Scope of the control and evaluation carried out by the European Central Bank – Obligation to carry out an individual supervisory review

(Council Regulation No 1024/2013, Arts 4(1)(f) and 16(1)(c) and (2)(d))

(see paragraphs 61, 75-82)

3.      Economic and monetary policy – Economic policy – Supervision of the EU financial sector – Single supervisory mechanism – Prudential supervision of groups of credit institutions on a consolidated basis – Capital requirements – Scope of the control and evaluation carried out by the European Central Bank – Funds that may be the subject of a measure requiring the implementation of a specific policy or treatment – Concept – Irrevocable payment commitments (IPC) – Included

(Council Regulation No 1024/2013, Arts 4(1)(f) and 16(1)(c) and (2)(d))

(see paragraphs 69, 70)

Résumé

The applicant, BNP Paribas, is a credit institution which is classified as ‘significant’ and, accordingly, is subject to the direct prudential supervision of the European Central Bank (ECB). In connection with the financing of the Single Resolution Fund, the applicant opted for a contribution by means of irrevocable payment commitments (‘IPC’). (1) In carrying out its task of prudential supervision, on 19 December 2017 the ECB adopted a decision (2) requiring the applicant to deduct from its Common Equity Tier 1 (CET 1) capital (3) the cumulative amounts of its IPCs (‘the contested measure’).

The ECB based that decision on the finding that the applicant treated its IPCs as off-balance-sheet items, causing a risk of the over-valuation of its CET 1 capital. The IPCs were not recorded on the applicant’s balance sheet and, since the guarantee attached to them was unavailable until they had been paid into the Single Resolution Fund, they could not be used to cover potential losses connected with the applicant’s business. The ECB took the view that that situation did not give an accurate view of the applicant’s financial soundness since there was a difference between the amount of CET 1 capital declared by the applicant and the actual amount of the losses it was able to bear.

Following an action brought by the applicant before the ECB’s Administrative Board of Review, the ECB replaced its decision of 19 December 2017 with a decision of 26 April 2018, (4) in which the section relating to IPCs remained unchanged. That decision was replaced on 1 March 2019 by a decision of 14 February 2019, (5) which imposed on the applicant a measure identical to the contested measure. The applicant has brought before the General Court two actions for the partial annulment of the ECB’s decisions which imposed that measure on it.

In its judgment of 9 September 2020, sitting in extended composition and after joining the two actions (T‑150/18 and T‑345/18), the General Court partially annulled the decisions of the ECB on the grounds that it had not carried out an individual supervisory review of the applicant’s risk profile before imposing the contested measure on it.

First, the General Court found that the decisions adopted by the ECB did not lack a legal basis since the ECB had intervened within the framework of its powers of supervisory review and evaluation which authorise it to require institutions to apply a specific provisioning policy or treatment of assets in terms of own funds requirements. (6)

Secondly, after having found that the sums put up as collateral for the payment of IPCs (7) were inextricably linked to the IPCs themselves, the General Court rejected the applicant’s argument that those IPCs could not be the subject of a prudential supervisory measure imposing a specific treatment of assets in terms of own-funds requirements on account of their treatment as off-balance-sheet items. The General Court held that, although the contested measure did not relate directly to IPCs but to the sums put up as collateral for their payment, the fact that they were inextricably linked made it possible to extend that measure to IPCs.

However, the use of such a measure required the ECB to carry out an individual examination of the applicant’s risk profile and, in particular, the arrangements, strategies and mechanisms implemented to address the risk resulting from the treatment of IPCs for accounting purposes. In that regard, the General Court found first of all that the ECB established the level of the applicant’s exposure to the risk arising from having subscribed to IPCs. Nevertheless, the General Court considered that the reasoning adopted by the ECB, in accordance with which the treatment of IPCs for accounting purposes as off-balance-sheet items, was, in itself, problematic since it implied by definition an over-valuation of CET 1 capital and formed part of findings of a general nature which may apply to any credit institution which opts for a similar treatment of IPCs. Therefore, the General Court found that the contested decisions did not refer to any individual examination by the ECB aimed at verifying whether the applicant had implemented arrangements, strategies or mechanisms with the aim of addressing the prudential risks associated with the treatment of IPCs as off-balance-sheet items.

Moreover, holding that the contested measure had been adopted within the framework of the Supervisory Review and Evaluation Process (SREP), the General Court concluded that situation did not necessarily mean that an individual examination which takes into account the applicant’s specific circumstances had been carried out. Furthermore, the General Court considered that, although the impact assessment carried out prior to the adoption of the contested decisions may be useful for the purposes of assessing the proportionality of the contested measure, it pursues a different logic and objective from those of an individual examination and cannot be equated with such an examination.

Consequently, the General Court concluded that, in the absence of an examination going beyond the mere finding of the potential risk caused by the IPCs treated as off-balance-sheet items and an examination of the applicant’s specific situation, in particular its risk profile and level of liquidity, and as no account was taken of possible factors to mitigate the potential risk, the ECB infringed its obligation to carry out the individual supervisory review of the applicant. (8)

1      The contributions which credit institutions are required to pay to the Single Resolution Fund may be paid by an immediate payment or an IPC. Under Article 70(3) of Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ 2014 L 225, p. 1), credit institutions must commit to pay the amount of the contribution to the Single Resolution Fund at the resolution authority’s first request.

2      ECB Decision No ECB/SSM/2017-R0MUWSFPU8MPRO8K5P83/248 of 19 December 2017.

3      Those funds are intended to ensure continuity of the business of a credit institution and to prevent situations of insolvency.

4      ECB Decision No ECB-SSM-2018-FRBNP-17 of 26 April 2018.

5      ECB Decision No ECB-SSM-2019-FRBNP-12 of 14 February 2019.

6      Pursuant to Article 16(1)(c) and (2)(d) of Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ 2013 L 287, p. 63).

7      Those sums take the form of a cash deposit of an amount equivalent to that of the IPCs, at the free disposal of the resolution authorities.

8      As provided for in Articles 4(1)(f) and 16(1)(c) and (2)(d) of Regulation No 1024/2013.