Radboud University: Banking system reforms lead to new uncertainty

The 2008 financial crisis prompted reforms in the supervision and regulation of the European banking system, with the aim of preventing a new crisis. These reforms led to a greater intertwining of national and European rules and supervision. But ambiguity about where banks can challenge the rules and supervision could lead to new problems and risks. This is the conclusion of research conducted by Mirik van Rijn, who will receive his PhD from Radboud University on 25 February.

In Europe, the financial crisis led to measures such as the establishment of the European banking union. The rules for banks in the EU Member States were aligned more closely, and supervision was entrusted to the European Central Bank. This was done with the intention of reducing large differences between countries, which had caused instability in the sector in the past. However, this new system also has shortcomings, Van Rijn points out.

Soft law
Since the formation of the European banking union, work has been done to create the Single Rulebook, a set of rules that applies to all banks in the European Union. Van Rijn: “Generally formulated standards are given concrete form in extremely detailed guidelines that are not formally binding. We call this ‘soft law’: it’s not a formal legal obligation, but in practice, such guidelines are observed and considered binding. But because they are not formally binding, they cannot be directly brought before a European court.”

Legal protection
Banks that want to test these regulations also run into other ambiguities related to legal protection, Van Rijn notes. “The European Central Bank is responsible for supervision and therefore decides whether a bank complies with the regulations. But the preparatory work for those decisions is done at the national level by the national supervisors. This makes it unclear to banks to which court they can turn if they disagree with a decision: should they challenge the final decision before the Union courts or the underlying draft decision before a national court? If an appeal is brought against a decision, it is unclear whether the court will also include the preparatory work in its assessment.”

“The high degree of overlap between European and national supervision does not entirely fit into the current system of European judicial protection. That system is calibrated on the principle that supervision takes place either at the national level or at the European level, but not the mishmash that is currently used. As a result, it is unclear to the bank which rules are being applied and where it can turn to challenge the decision. That undermines the legitimacy of the new supervisory system and thus the functioning of that system, so we need to think about solutions now.”

For instance, Van Rijn proposes that the European courts make it easier for (legal) persons, such as banks, to challenge the legality of the banking rulebook, including formally non-binding acts. In addition, the interconnectedness of supervision should be reflected in the system of judicial protection. This can be achieved by strengthening the opportunities for collaboration between the European national courts.

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