German Judges Reopen Old Wounds Over Scope of ECB Powers

(Bloomberg) --

The European Union’s post-crisis system of banking supervision survived a potentially damaging attack at Germany’s Constitutional Court -- even as judges took a swipe at their EU counterparts over how much power the European Central Bank wields.

The Federal Constitutional Court rejected challenges of the EU’s so-called banking union in a ruling issued Tuesday in Karlsruhe. Critics claimed the new system strips German regulators of key rights while exposing taxpayers to potentially unlimited financial risks. While there are constitutional doubts, they can be solved by employing a restrictive interpretation of the EU rules, the judges said.

The EU measures are valid because they “don’t transfer banking supervision competences completely to the EU level and leave substantial powers with national regulators,” court president Andreas Vosskuhle said when delivering the decision.

As part of the banking union, the EU in 2014 switched regulation of the euro zone’s bigger lenders to the ECB under the Single Supervisory Mechanism, a reaction to the 2008 financial crisis. Another structure -- the Single Resolution Mechanism -- was created to deal with large banks in crisis. Under the system, a separate board would step in with a plan to restructure or close an endangered lender. In some cases, it can use money from a fund established for such situations.

Exceptional Cases

But in their reasoning, the German judges took aim at a ruling of the EU’s Court of Justice. In May, the EU tribunal ruled that banking supervision was completely transferred to the ECB and national regulators can only control smaller lenders to the extent that the euro area’s central bank allows them. The German judges instead argued that supervision principally remains national and the ECB can only step intervene in exceptional cases.

What seems to be an academic dispute is another example of how the German court has tried to draw red lines on how far EU integration can go. Like in all other challenges at the constitutional court so far, the judges formally rejected the case but warned that under the bloc’s treaties -- and democratic principles -- the only powers that principally can be transferred to the EU are ones that members states can’t handle on their own.

174 Pages

While the judges didn’t formally overrule their EU counterparts, the court is trying to make the EU court change course by introducing the arguments in their reasoning. Tuesday’s judgment has 174 pages, long even by German standards.

What happens if the EU court doesn’t accept the German suggestions was under discussion at a hearing later Tuesday. In a separate case over the ECB’s controversial asset-purchase program, dubbed quantitative easing, the EU court rejected a restrictive interpretation by the German judges. They in turn are now discussing whether to finally take the bold move of ruling for the plaintiffs in an EU case -- risking a constitutional crisis in an EU already rocked by Brexit.

In the QE case, Vosskuhle said the court still sympathizes with the plaintiffs’ view that the ECB overstepped its powers. However, there are high hurdles for the German court to intervene, he said. The German constitution only allows an EU top court ruling to be disregarded if it is arbitrary and gravely unreasonable and not just because it seems wrong, he said. The hearing will continue on Wednesday. A ruling in the QE case is expected in a couple of months.

German Sovereignty

Law professor Markus Kerber, a member of a group of eurosceptic plaintiffs who filed the suit against the EU’s banking union, is also among the challengers in the ECB QE case -- one of a series of suits aimed at winning back German sovereignty over economic affairs.

While the bloc’s bank-resolution mechanism also lacks democratic control, there are various other controls, according to the judges. The rules are acceptable as long as they are handled restrictively, the court said. The judges rejected the argument that the resolution mechanism poses unlimited budgetary risks. The fund used to restructure banks is financed by a levy lenders have to pay and not the EU member states.

Of the 118 banks that are now supervised by the ECB, 21 are German, Felix Hufeld, head of German financial regulator Bafin, said at a hearing in the case in November. About 1,400 lenders remain under the exclusive jurisdiction of Bafin. The ECB has about 80% of the total balance sheet assets of the euro zone’s banks under supervision, while in Germany, it’s only 60%. That shows the important role of smaller lenders in Germany, Hufeld said.

The cases are: BVerfG, 2 BvR 1685/14 and 2631/14.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Peter Chapman, Brian Swint

©2019 Bloomberg L.P.