Yves Mersch: Legal aspects of the European Central Bank’s response to the coronavirus (COVID-19) pandemic – an exclusive but narrow competence Keynote speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the ESCB Legal Conference, Frankfurt am Main, 2 November 2020. * * *  Exploring the legal framework governing the ECB’s actions – scope and general legal principles When exploring the scope of our actions we are cognisant that the ECB has exclusive but narrow competence to define the European Union monetary policy for the purpose of maintaining price stability. Moreover, the European Court of Justice has consistently held that the ECB enjoys broad discretion in defining monetary policy within its mandate to pursue the objective of price stability. Discretion without limits increases the risk of arbitrariness. Therefore the Court has insisted on being able to control this discretion on the basis of the criteria that some refer to as the self-imposed constraints. Furthermore, we are bound to respect certain established legal principles. Our measures must be proportionate to the ECB’s legitimate objectives. They must not undermine the spirit of the “no bailout clause” and must also comply with the prohibition of monetary financing, which is its monetary policy counterpart. Last of all, the principle of an open market economy in which resources are allocated efficiently must also be respected. These are the constitutional red lines for our actions.

The recommendation exceptionally has adopted a “one-size-fits-all” approach owing to the current economic uncertainty banks are experiencing, leaving them quite simply unable to forecast their medium-term capital needs accurately. We will review this recommendation in December, and unless we conclude that the banks’ capital projections remain clouded by exceptionally high uncertainty, we should revert to our usual supervisory practice of assessing the planned distribution of dividends on a bank-by-bank basis, taking into account the safety and resilience of the banking system as well as the preservation of its intermediation function at a time of deteriorating asset quality and increased capital consumption. Another new development concerns the leverage ratio. On the basis of the amendments to the Capital Requirements Regulation, ECB Banking Supervision has allowed significant credit institutions to exclude central bank exposures from the calculation of their leverage ratios until July 2021. ECB Banking Supervision has cooperated with and sought the views of the ECB’s central bank function in order to tailor the scope of this temporary exemption so that it covers only those claims on the central bank that are related to the implementation of monetary policy. The measures in relation to dividends and the leverage ratio, as well as the other measures providing temporary capital, liquidity and operational relief to banks, are exceptional measures which are justified as long as the impact of the COVID-19 crisis continues to be felt. We may also decide to discontinue some of these measures, as we did for some of the operational relief measures in July.