BaFin President Felix Hufeld welcomed the ruling on the lawfulness of the banking union: "I am delighted with the decision of the Federal Constitutional Court. It affirms the prudential and resolution aspects of the banking union from a constitutional viewpoint, but at the same time recognises the primary powers of the national competent authorities," he stated.

On 30 July, the Federal Constitutional Court ruled to reject the constitutional complaints against the legal bases of the European Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM). However, it added the caveat that the SRM and SSM regulations and the German SSM Authorising Act (SSM-VO-Gesetz) had to be interpreted strictly.

In their remarks, the German judges emphasised that the SSM Regulation does not fully confer on the European Central Bank (ECB) banking supervision in the euro area. They pointed out that the ECB only performs certain tasks that relate to all credit institutions in the euro area. Those aside, they noted, it generally only supervises significant institutions (SIs).

It remains to be seen how the European Court of Justice (ECJ) will react to the German ruling in its future case law, in particular following the ECJ’s ruling of 8 May 2019 (case C-450/17 P). Here, the ECJ upheld the interpretation of the General Court (EGC) that the ECB had exclusive competence for prudential supervision of all significant institutions. It held that exclusive competence is conferred on the ECB for the tasks listed in Article 4(1) of the SSM Regulation, the decentralised performance of which by the national authorities is permitted under the SSM and under the control of the ECB. In the ECJ case, the key issue related to the particular circumstances under which a bank that is large in terms of its key figures can exceptionally be classified as less significant in order to remain under national supervision.

Primary tasks of national regulators

The German judges avoided clashing with their EU counterparts by regarding their general statements on the allocation of responsibilities within the SSM as irrelevant to the ruling.

However, the Federal Constitutional Court now expressly holds that the national competent authorities exercise their powers on the basis of their primary competences, which does not require prior authorisation by the ECB.

The German judges argue that the national competent authorities are responsible for less significant institutions and are active in all "areas of banking supervision that are not subject to the SSM Regulation". Hufeld had already made it clear during an oral hearing before the Federal Constitutional Court in November 2018 that even in the case of significant institutions subject to direct supervision, the national authorities remain responsible for certain aspects of supervision such as anti-money laundering and clearing and prospectus obligations. BaFin is also responsible for supervising significant institutions if the legal basis is purely national, such as authorisations to conduct Pfandbrief business and the Bausparkassen business that have no basis in EU law.

The SSM, i.e. the cooperation between the ECB and national authorities such as BaFin, operates independently. Nevertheless, the Federal Constitutional Court believes that as a whole the SSM is democratically legitimated in organisation and staff matters as well as in factual and substantive terms.

Role of the SRB and BaFin in the SRM

The Federal Constitutional Court also believes that the Single Resolution Mechanism (SRM) can continue in its present form. Its members include national resolution authorities such as BaFin, and the Single Resolution Board (SRB), which manages the Single Resolution Fund (SRF). The fund supports the SRM and currently amounts to EUR 33 billion. The SRB comprises a Chair (Dr Elke König), four other full-time members and one representative from each of the member states. BaFin is represented by Dr Thorsten Pötzsch, Chief Executive Director of BaFin’s Resolution Sector.

In its ruling, the Federal Constitutional Court stated that it was permissible to establish the SRB on the basis of the SRM Resolution and to confer its current competencies, provided the boundaries of these tasks and powers are strictly observed.

In accordance with the SRM Regulation, the SRB and BaFin carry out their tasks independently. The Federal Constitutional Court also considers this legally valid: "The procedure to appoint the members of the Board, which is independent when carrying out its tasks, the accountability obligations and the fact that it is subject to extensive administrative and judicial scrutiny ensure sufficient democratic control." To the extent that the SRM Regulation also declares the national resolution authorities to be independent, this is compensated by transparency requirements, reporting and accountability obligations vis-à-vis the national parliaments and judicial review.

In addition, the bank levy does not impact the German parliament's overall budgetary responsibility. The Federal Constitutional Court also noted that the bank levy was not based on the SRM Regulation, but rather the German Restructuring Fund Act (Restrukturierungsfondsgesetz). The revenue raised is transferred to the SRF based on an intergovernmental agreement.