A legal dispute has arisen over the competence of the European Central Bank (ECB) to take action against bad loans. The ECB’s supervisory arm SSM (Single Supervisory Mechanism) directly supervises the 120 largest institutions in the eurozone. In October, the SSM proposed for the first time quantitative standards for the treatment of new non-performing loans and put them to consultation..According to the draft document, the ECB expects the SSM banks to fully cover any bad loans arising after 1 January 2018 with provisions. The institutes have up to seven years to do this, with exemptions being possible on a case-by-case basis.
The European Parliament’s legal service had already expressed its concerns. Now also the legal service of the European Council has come to the conclusion that the ECB is thereby exceeding its powers. The ECB’s expectations would de facto have a binding effect on all its supervised banks. In contrast, the ECB asserts that it merely formulates its non-binding risk provisioning expectations. This move is in line with its mandate under Article 16 (2)(a) of the SSM Regulation, which allows the ECB to take bank-specific measures.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The legal dispute over ECB’s competence distracts from the urgent need to tackle bad loans in EU banks’ balance sheets. In Europe, there is a consensus that distressed loans in bank balance sheets are slowing down economic recovery. Ten years after the outbreak of the financial crisis, policymakers are still keeping zombie-banks artificially alive. Higher provisions are not only necessary for new bad loans from some banks, but for all non-performing loans from all banks in Europe. Europe must no longer turn a blind eye to the risks posed by bad loans on banks’ balance sheets.
The ECB is taking the right step, because it creates legal certainty. It is better for banks to know in advance what the supervisor expects as risk provisioning than to be surprised by an individual ECB decision later on. The European Commission does the same by explaining its approach of state aid control to companies through guidance. As long as the ECB complies with the necessary transparency and involves European legislators when issuing rules, it may apply to supervised banks any measure ensuring financial stability. If the European Parliament or the Council disagree on the content, they must regulate this within the framework of their legislative competence.”
Legal opinion of the Council:
Legal opinion of the European Parliament:
Public consultation of the ECB on the management of non-performing loans: