A central bank of a euro area country can be held liable for compensating holders of financial instruments that it has itself removed as part of a bank resolution process, the Court of Justice of the European Union ruled on Tuesday 13 September (Case C-45/21).
Banka Slovenije is of the opinion that the Slovenian ZPSVIKOB legislation, which specifies the rules for providing legal protection to former holders of financial securities removed by the central bank in the resolution of an insolvent banking group, is incompatible with EU law (Article 123 TFEU and Article 21 of the Protocol on the ESCB and the ECB).
According to the Court, when a Member State chooses its central bank as the competent authority for the supervision and reorganisation of credit institutions, the central bank performs this function on its own responsibility and assumes the inherent risks. It is for the Member State to define the conditions under which such liability may be incurred, which must remain compatible with the prohibition on monetary financing laid down in Article 123 TFEU.
A central bank may therefore be liable for damages suffered by former holders of financial securities that it has removed in the context of a bank resolution. However, the European Court considers that to deduct from the central bank’s reserves, as required by Slovenian law, an amount which may affect its ability to conduct monetary policy, combined with an inability to restore its reserves autonomously, is liable to place the central bank in a situation of dependence on the public authorities of a Member State and is therefore contrary to EU law.
See the Court’s judgment: https://aeur.eu/f/31z (Original version in French by Mathieu Bion)