EU court’s judgment sheds new light on how the ECB should apply national administrative measures

Background of the case

In 2016, BAWAG acquired a securitised EUR 1.4 billion portfolio of French real estate loans. The transaction involved a transfer of the portfolio to a fund whose shares BAWAG subsequently acquired. Due to data protection concerns, BAWAG only received the details of the underlying borrowers in encrypted form. This led the ECB to conclude that BAWAG was not entitled to apply a "look-through" approach and its exposure to the fund thus violated the 25% limit on large exposures. Based on a provision of the Austrian Banking Act, the ECB levied absorption interest of over EUR 19 million. 

Key arguments for BAWAG’s legal challenge 

BAWAG challenged the ECB decision relying on two key arguments that were discussed in detail by the General Court:

1. Lack of competence: The ECB lacked competence to levy the absorption interest as it was based on a provision of national law that does not delegate such power to the ECB. At most, the ECB could require the Austrian national competent authority (FMA) to apply the measure.
2. Breach of the proportionality principle: The bank also argued that the ECB's decision failed to respect the EU general principle of proportionality. BAWAG maintained that its inability to fully identify the borrowers was due to a legitimate effort to minimise the processing of personal data, a factor the ECB did not adequately consider.

The first legal issue: the ECB’s competence to apply national law 

The General Court has consistently interpreted the powers conferred on the ECB under the Single Supervisory Mechanism (SSM) Regulation rather broadly.

The crux of the issue was whether the ECB could enforce a measure that, while stemming from the Capital Requirements Directive IV (CRD IV), was not explicitly mentioned therein. The Court held that the term "under Union law" encompasses all powers where they result from an obligation or power to legislate under a directive's legal framework (as opposed to a mere recognition of Member States' power to set stricter rules). In the case of CRD IV the Court found that the power to impose absorption interest as an administrative measure. 

The second legal issue: the interpretation of national law

The issue revolved around the interpretation of national law by EU institutions.

The ECB had taken the view that under Austrian law, absorption interest was to be levied automatically if the large exposure limit was exceeded and in taking that view had relied on the interpretation of the provision by Austrian courts.

In previous case law (Caisse régionale T-133/16), the General Court had in essence held that in applying national law transposing a directive, the ECB was entitled to follow the interpretation given to it by national courts and the Court would not engage in a review the substance of such an interpretation.

The General Court, however nuanced its stance in the present decision. It held that the interpretation of national law as interpreted by national courts would only be shielded from review insofar as that interpretation ensured the compatibility of national law with EU law.

Based on the principle of primacy of EU law, the General Court would interpret national law provisions so far as possible in light of the directive it seeks to transpose. Thus, where national courts' interpretation is in conflict with EU law, the General Court may give a deviating interpretation to the provision.

In the present case, the General Court found the Austrian courts' interpretation that levying absorption interest was a non-discretionary measure to be in contravention of the requirement under CRD IV that national competent authorities have a margin of discretion when applying administrative measures.

The outcome of BAWAG’s challenge

The General Court concluded that the ECB made an error of law by treating the absorption interest measure as non-discretionary and not considering its proportionality. By not recognising it had a margin of discretion, the ECB failed to consider relevant circumstances and based its decision on a legally flawed premise, leading to the annulment of the ECB's decision. 

Key takeaways from the judgment 

There are two key takeaways from the decision:

• The General Court continues to interpret the ECB’s powers under the SSM Regulation broadly. Those powers include applying national law measures that are not explicitly provided for in CRDIV whose list of measure is non-exhaustive. 
• The ECB's reliance on the interpretation of national law given by national courts is more open to challenge than previously may have been thought. The ECB is still obliged to interpret national law in light of EU law, which will generally require proportionality in applying administrative measures. 

Further Reading

Read the parallel judgment in Sber v ECB (Case T-99/22) with similar facts here.