The case law on the EU’s banking union is expanding rapidly. But like in any other nascent area of law, there are unsettled issues. Liability for the resolution of banks is one of them.
On 1 June 2022, the General Court delivered its much-awaited judgments in the first five of many cases on the resolution of Banco Popular Español in 2017. That resolution was the first and until recently only resolution carried out by the Single Resolution Board [SRB]. Several other Italian, Latvian, Luxembourgish, and Croatian banks that became insolvent in the period 2017-2019 were wound up under national liquidation procedures.
Resolution is the process by which an insolvent but systemically significant bank – i.e., a bank that is important in the banking system – is cleansed of its bad loans so that its essential functions can continue operating. Under the Single Resolution Mechanism (‘SRM’), resolution, as opposed to liquidation, is preferred only when it is in the public interest. Indeed, given the interconnectedness of the banking system in the Eurozone, allowing a systemic bank to collapse would undermine the Eurozone’s financial stability.
A bank becomes insolvent when its liabilities exceed its assets. The assets of a bank are mostly in the form of loans it makes to businesses and households. When borrowers default the assets of the lending bank decrease in value, and it has to absorb the resulting losses. The first in line to absorb losses are the shareholders. Therefore, resolution – i.e., the process of getting rid of non-performing loans – necessarily results in losses for shareholders.
The applicants in the five cases before the General Court contested the resolution decision of the SRB and/or its endorsement by the Commission. Ultimately their objective was to obtain compensation for the money they lost.
Compensation is often pursued but not yet achieved
Since the outbreak of the financial crisis in September 2008, no investor has succeeded in receiving compensation for damage caused by a decision of an EU institution. Neither holders of bank shares, nor holders of sovereign bonds have managed to persuade EU courts that EU institutions were liable for the damage they suffered.
The case law on damage claims has dealt with three issues: whether the damage is the natural consequence of the risk borne by investors, whether EU institutions are liable, and whether the right to property  can be overridden by other public policy objectives.
With regard to whether investors may demand compensation for damage, the case law is rather harsh. Investors bear the risk and the consequences it entails. This risk implies that the entire amount that is invested in shares or bonds may be lost. Moreover, investors in the EU can no longer expect that a bank will be bailed-out with public money because state aid is in principle prohibited by Article 107(1) TFEU., 
With respect to whether EU institutions are liable, claimants must prove that the provisions of Article 340 (2) TFEU are applicable. They must show that the institution concerned has acted illegally, that they have suffered damage and that there is a causal link between the actions of the institution and the damage. Normally, the second condition is easy to prove. Claimants have also managed to persuade EU courts that Article 340 covers all institutions, agencies, and entities of the EU, not only the seven bodies which are listed as institutions in Article 13 TEU. However, so far no one has been able to demonstrate that any EU institution has acted illegally or beyond its mandate. No one has successfully argued that statements by EU institutions before the contested decisions created “legitimate expectations”. To entertain legitimate expectations, one needs to receive unequivocal and unconditional assurances from an EU institution. Perhaps, even more importantly, no one has proven the existence of a direct link between a decision of an EU institution and the actual terms of the restructuring of a bank or sovereign bond. This is because there is always an intermediary national authority (i.e., the National Resolution Authority or ‘NRA’). EU decisions express the general objectives to be achieved, while national authorities implement them. Even in the case of decisions of the SRB, which are very detailed and define the resolution tools, national authorities still retain a certain degree of discretion in their implementation. It is always national authorities that so far have been found to bear potential liability.
More importantly, for liability to arise the damage suffered must be the result of state intervention. It is for this reason that no investor has so far proven that resolution was more damaging than the alternative option of liquidation without state intervention, given that in both cases the losses of the failing bank have to be absorbed fully by shareholders and unsecured bondholders. Hence, they have not been able to claim that they would have been better off without resolution. It is worth noting that at least one investor argued, rather ingeniously, that the losses she suffered could have been smaller not in comparison to liquidation but instead compared to an alternative resolution arrangement. She claimed that her losses would have been smaller, had Banco Popular Español – the bank in question – been sold without converting her bonds into ordinary shares at a lower value. The Court of Justice rejected that claim on the grounds that the price at which the bank was sold depended on whether all losses were absorbed first by shareholders and bondholders.
In the end, national authorities can also escape liability because the right to property is not absolute. It can be overridden by public policy objectives such as financial stability or maintaining the integrity of the banking system. These policy objectives also override the right to be heard (see Jane Reichel’s blog in this series) because the resolution has to be effected quickly to prevent financial contagion. So, investors can lose their money without having any prior saying in it. Moreover, in the case of failing banks, it is the bank board that eventually decides to wind up the bank. So, any compensation claims have to be made against the board or management for mismanagement or fraud. We then enter into criminal law with much higher standards of proof.
Given this overwhelming predisposition in the case law in favour of public authorities, it was not surprising that on 1 June 2022 the General Court rejected the appeals in all five cases.
Who is liable?
One may or may not sympathise with the plight of the applicants. They invested and lost their money. Perhaps that should be the end of it. However, for the EU the real issue is that in the system it has established for banks, liability has become pretty elusive.
To appreciate the consequences of the elusiveness of liability, it is, first, necessary to understand the objectives of the banking union. This is summarised neatly in the five judgments of 1 June 2022. The financial crisis exposed the regulatory fragmentation of the banking sector in the EU: the rules in the various Member States varied, the same rules were interpreted differently and enforced unevenly, while the causes of instability arising outside the jurisdiction of each national authority were ignored. Not only did this fragmentation lead to different treatment of banks across the Member States, but it also precipitated cross-border financial instability. Therefore, the establishment of the single supervisory mechanism [SSM] aimed to ensure that the rules were implemented in “a coherent and effective manner”, that they “applied in the same manner to credit institutions in all Member States” and that “those credit institutions are subject to supervision of the highest quality, unfettered by other, non-prudential considerations”, “with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system”. Similarly, the aim of the single resolution mechanism [SRM] was “to establish uniform rules and a uniform procedure for the resolution” of banks.
While the SSM is embedded in the European Central Bank [ECB] which is an independent institution, the SRB is an EU agency and as such its actions have to comply with the CJEU’s “Meroni doctrine” (see blog piece by M Chamon in this series discussing this aspect). As explained by the General Court, where the SRB exercises discretion, its decisions have to be endorsed by the Commission to avoid “transfer of responsibility”. “Thus, as regards the resolution procedure, Article 18(7) of the SRM Regulation provides that the Commission must either endorse the resolution scheme or object to its discretionary aspects and that a resolution scheme may enter into force only if the Council or the Commission has not raised any objections within 24 hours of its submission by the SRB.”
In the specific case of Banco Popular Español, the ECB concluded on 6 June 2017 that it was “failing or likely to fail”. On 7 June 2017, the SRB adopted Decision SRB/EES/2017/08 to resolve Banco Popular based on the SRM. That decision was addressed to FROB, the Spanish resolution authority. Accordingly, Banco Popular was to be sold to Banco Santander for EUR 1 and shareholders were bailed in up to 100% of the value of their shares. On the same day, the resolution scheme was submitted to the Commission for endorsement. Within a little more than an hour, the Commission adopted Decision 2017/1246 endorsing the SRB’s resolution scheme.
Although the applicants, Algebris & Anchorage Capital Group, raised several pleas, for our purposes the relevant pleas are the first and second: that the Commission failed to assess the resolution scheme before endorsing it and that it breached the obligation to state reasons by simply agreeing with the scheme. The General Court rejected the first plea on the grounds that the Commission did participate in the various meetings of SRB leading up to resolution and was kept informed by the SRB. So, it was in a position to assess it. The General Court also rejected the second plea because the Commission decision did refer to the reasons cited by the SRB. It would have to explain its views only if it would object to the scheme.
The valuation and assessment of the prospects of a bank are complex tasks. There is an element of inherent and unavoidable subjectivity in such tasks. Where EU institutions exercise their discretion in assessing complex technical and economic issues, EU courts have limited themselves to determining the existence of “manifest error” and compliance with procedural rules. In this context, the General Court held that in order to prove that the SRB committed a manifest error, its conclusions had to be “implausible”.
Proving implausibility is rather improbable. Not only is the threshold of proof for appeals against an SRB decision very high, but it is also near impossible to demonstrate that the Commission rigorously tested the reasoning process of the SRB and verified that the conclusions of the decision flowed from its premises.
Furthermore, the liability of the SRB is, in principle, circumscribed by the extent of any discretion that remains with national authorities. This means that, given that the General Court ruled on 1 June 2022 that the SRB decision on Banco Popular was addressed to FROB, claimants will also have to disentangle the issues ultimately decided by national authorities from those that are dictated by the SRB.
Therefore, we now have a system that is supposed to apply common rules and enforce them uniformly across the Eurozone, but it is not clear who is liable. There are still no satisfactory answers to the following two fundamental questions on the institutional balance of the banking union:
First, for the endorsement by the Commission of the discretionary aspects of the SRB’s resolution decisions, should the Commission carry out an independent assessment to confirm the validity of the SRB conclusions or is it sufficient that it confirms their plausibility? Should the Commission apply only the standard of EU courts and check for manifest error or does the CJEU’s Meroni doctrine require a stricter or more detailed standard to prevent “transfer of responsibility”?
Secondly, if the rules of the banking union are to be applied in the same manner and uniformly across the Eurozone, what is the extent of the discretion of national authorities and is any discretion they may have sufficient to make them liable for resolution schemes they implement on instructions by the SRB?
Posted by Phedon Nicolaides (Professor at the University of Maastricht and the University of Nicosia). The author is grateful to the editors for comments and suggestions on an earlier version.
 See the judgments in C‑526/14, Kotnik and Others, EU:C:2016:570; C-8/15 P, Ledra Advertising and Others v Commission and ECB, EU:C:2016:701.
 In addition, a primary objective of the banking union is to sever the link between banks and sovereigns. The bailing-in of shareholders and creditors [also known as “burden sharing”] ensures that any state aid that may be authorised is proportional and balances the interests of taxpayers.
 See C-370/89, SGEEM and Etroy v EIB, EU:C:1992:482, paragraphs 13-16; and C-597/18 P, Chrysostomides and Others v Council and Others, EU:C:2020:1028, paragraph 80.
 Also, resolution must respect the principle that no creditor becomes worse off than under liquidation. See the judgments in T-680/13, Chrysostomides and Others v Council and Others, EU:T:2018:486; C-8/15 P, Ledra Advertising and Others v Commission and ECB, EU:C:2016:701; C-597/18 P, Chrysostomides and Others v Council and Others, EU:C:2020:1028.
 See the judgment in case C-947/19 P, Carmen Liano Reig v SRB, EU:C:2021:172, paragraphs 73-76.
 For a fuller analysis, please see the companion article by Sabrina Praduroux, Taking Financial Risks Out of Property Rights Protection under Article 17 of the EU Charter of Fundamental Rights.
 See the judgments in C-551/19 P, ABLV Bank v ECB, EU:C:2021:369; C‑501/18, Balgarska Narodna Banka, EU:C:2021:249.
 See, for example, the judgment in case T‑570/17, Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, EU:T:2022:314, paragraphs 2-8.
 R. Smits, Ten Legal Gaps Regulators Must Close, Central Banking, 2010, vol. 20(4), pp. 35-44.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraph 2.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraph 8.
 See, case 9/56, Meroni v High Authority, EU:C:1958:7.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraphs 112-117.
See also C-270/12, UK v Parliament and Council, EU:C:2014:18, paragraph 42.
 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 L 225, 30.07.2014, p. 1-90 (‘SRM Regulation’).
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraph 120.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraphs 131-144.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraphs 148-154.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraphs 105-108.
 Algebris (UK) Ltd & Anchorage Capital Group LLC v European Commission, paragraph 108.
 See case T‑510/17, Antonio Del Valle Ruíz v European Commission, EU:T:2022:312, paragraph 416.
Suggested citation: Phedon Nicolaides, “Liability for the Resolution of Banks”, REALaw.blog, available at https://wp.me/pcQ0x2-rW.