Case T‑768/16

BNP Paribas

v

European Central Bank

(Economic and monetary policy — Prudential supervision of credit institutions — Article 4(1)(d) and (3) of Regulation (EU) No 1024/2013 — Calculation of the leverage ratio — ECB’s refusal to authorise the applicant to exclude exposures meeting certain conditions from the calculation of the leverage ratio — Article 429(14) of Regulation (EU) No 575/2013 — ECB’s discretion — Errors of law — Manifest errors of assessment)

Summary — Judgment of the General Court (Second Chamber, Extended Composition), 13 July 2018

Economic and monetary policy — Economic policy — Supervision of the EU financial sector — Prudential requirements applicable to credit institutions and investment firms — Liquidity requirements — Leverage ratio — Calculation — Possibility of excluding certain exposures to public sector entities — European Central Bank decision refusing to grant the derogation — Refusal based on the risk posed by the period for the adjustment of the credit institution’s positions with those of a public financial institution — Failure to examine the characteristics of regulated savings — Not permissible

Economic and monetary policy — Economic policy — Supervision of the EU financial sector — Prudential requirements applicable to credit institutions and investment firms — Liquidity requirements — Leverage ratio — Calculation — Possibility of excluding certain exposures to public sector entities — European Central Bank decision refusing to grant the derogation — Refusal based on considerations inherent to the exposures concerned by the derogation and the payment default situation of the State concerned without examining the likelihood of the risk — Not permissible

See the text of the decision. (see para. 19)

In so far as the European Central Bank has a discretion and, consequently, a wide power of assessment in choosing to grant or not to grant the benefit of Article 429(14) of Regulation No 575/201 on prudential requirements for credit institutions and investment firms, as amended by Regulation 2015/62, the judicial review which the Court must carry out of the merits of the grounds of the contested decision must not lead it to substitute its own assessment for that of the ECB, but focuses on whether the contested decision is based on materially incorrect facts, or is vitiated by an error of law, manifest error of assessment or misuse of powers. (see para. 30)

Although the European Central Bank is free within the framework of the exercise of the discretion recognised to it under Article 429(14) of Regulation No 575/2013 on prudential requirements for credit institutions and investment firms, as amended by Regulation 2015/62, to grant or not to grant the derogation envisaged in that provision, the exercise of that freedom must not disregard the objectives pursued by that derogation and must not deprive it of its practical effect. It necessarily follows that the ECB cannot rely on grounds that would make the possibility offered by Article 429(14) of Regulation No 575/2013 virtually inapplicable in practice, without depriving that provision of practical effect and disregarding the objectives that led to its introduction. Accordingly, the European Central Bank cannot exclude a credit institution’s exposures to a public financial institution from the benefit of Article 429(14) of Regulation No 575/2013 on the basis of considerations which are inherent in the exposures concerned by that provision. That is the case of the consideration based on the fact that that credit institution’s exposures to the financial institution appear on the assets side of its balance sheet. In so far as the exposures in respect of which Article 429(14) of Regulation No 575/2013 envisages the possibility that they will not be taken into account in the calculation of the leverage ratio of a credit institution must by their nature appear on the assets side of that institution’s balance sheet, the consideration based on the fact that the exposures to a public financial institution shown on the assets side of the applicant’s balance sheet cannot validly justify the refusal to grant the requested derogation. The same applies, and for similar reasons, to the consideration based on the fact that those exposures constitute a proportion of the sums deposited with the applicant as regulated savings, which remain on the liabilities side of its balance sheet. Likewise, since Article 429(14) of Regulation No 575/2013 concerns only exposures to public service entities having a State guarantee, a refusal given on the theoretical ground that a State may be in a payment default situation, without consideration of the likelihood of such a possibility in the case of the State concerned, would amount to rendering the possibility envisaged by that provision virtually inapplicable in practice. Nor, consequently, in so far as the ECB does not examine the likelihood of a payment default, can the reference in the decision to refuse to grant the benefit of Article 429(14) of Regulation No 575/2013 to the volume of a credit institution’s exposures to a financial institution justify in itself those exposures being taken into account in the calculation of the leverage ratio. That volume might be relevant only if, as a result of a payment default by the State concerned, that credit institution could not obtain from that financial institution the sums transferred as regulated savings and would have to have recourse to forced sales of assets. (see paras 39, 52-54, 56, 57, 61, 63)

By the derogation provided in Article 429(14) of Regulation No 575/2013 on prudential requirements for credit institutions and investment firms, as amended by Regulation 2015/62, the Commission, with the prior authorisation of the legislature, envisaged the possibility that a credit institution’s exposures to public-sector entities which, because of a State guarantee, present the same low risk level as exposures to that State and which do not correspond to an investment choice by the credit institution — in that the credit institution is under an obligation to transfer the sums concerned — are not relevant for the calculation of the leverage ratio and may therefore be excluded. Accordingly, the only exposures affected by Article 429(14) of Regulation No 575/2013 are those which, in application of the standard approach to the calculation of minimum own funds requirements, would be assigned a risk weight of 0%. Consequently, the implementation of Article 429(14) of that regulation entails the reconciliation of two objectives: first, compliance with the logic of the leverage ratio, which requires that the calculation of that ratio include the overall exposure measure of a credit institution, without weighting by reference to the risk, and, second, consideration of the objective of the Commission, authorised in advance by the legislature, that, if necessary, certain exposures with a particularly low risk profile which are not the result of an investment choice made by the credit institutions are not relevant for the calculation of the leverage ratio and may therefore be excluded. In that regard, it should be observed that the recognition in favour of the competent authorities of a discretion when they implement Article 429(14) of Regulation No 575/2013 allows them to decide between those two objectives in the light of the particular characteristics of each individual case. (see paras 48-51)

It follows from the definition of excessive leverage set out in Article 4(1)(94) of Regulation No 575/2013 on prudential requirements for credit institutions and investment firms, as amended by Regulation 2015/62, that the risks envisaged in respect of excessive leverage materialise in a situation of insufficient liquidity. It is in order to obtain liquidity that a credit institution may find it necessary to take unintended measures to its business plan, including distressed selling of assets having the consequences explained in that provision, as stated in recital 90 of Regulation No 575/2013. Since the negative consequences of excessive leverage are revealed in the case of insufficient liquidity, the fact that the period for the adjustment of the credit institution’s positions with those of a public financial institution is concerned with liquidity does not deprive that period of relevance to the assessment of the risk associated with its leverage ratio. However, that adjustment period is not at the origin of a liquidity risk for the purposes of the assessment of the liquidity coverage requirements set out in Article 412 of Regulation No 575/2013 and in Regulation 2015/61 supplementing Regulation No 575/2013 with regard to liquidity coverage requirement for credit institutions. The grant of the benefit of Article 26 of Regulation 2015/61 — which allows the competent authorities and thus the ECB to offset interdependent outflows and inflows if, owing to the existence of a guarantee by the central government of a Member State and the short duration of the period between the outflows and inflows, it considers that the period does not give rise to a liquidity risk — by the European Central Bank to inflows and outflows linked with exposures to a financial institution is tantamount to recognition by the ECB that the period that may separate those inflows and outflows does not give rise to a liquidity risk. (see paras 70-73, 76, 77)