ECB wins appeal on leverage ratio decision with CJEU affirming limits on judicial review of discretionary decisions

What happened so far?

The appeal (C?389/21 P) arose as part of a six-year legal battle between the ECB and French banks over the calculation of the leverage ratio.

Crédit Lyonnais, a French bank, wanted to exclude its exposures to the Caisse des Dépôts et Consignations (CDC), a French public entity that manages regulated savings accounts. Crédit Lyonnais argued that these exposures were very low-risk and had special features, such as a safe investment status, a restricted use and a dual guarantee from the French state and the CDC.

The ECB granted permission only for 66 % of exposures based on its assessment of the risk of fire sales of assets.

On Crédit Lyonnais’ challenge, the General Court sided with the bank and annulled the ECB’s decision, finding that the ECB had not sufficiently justified its assessment of the fire sale risk and had ignored relevant factors. We reported on the General Court’s decision in Case T-504/19 here.

The decision on appeal

The ECB appealed to the CJEU in Case C?389/21 P. The CJEU reversed the General Court’s judgment and upheld the ECB’s decision. It held that the General Court had overstepped the limits of its judicial review of the ECB’s complex assessment, which involved a broad discretion for the ECB.

The CJEU stated that the General Court should not have substituted its own assessment for that of the ECB, but should have only verified whether the ECB’s assessment was based on materially incorrect facts or was vitiated by a manifest error of assessment or misuse of powers.

The CJEU confirmed the broad discretion that the ECB generally enjoys in its supervision of banks and also in applying the leverage ratio requirement. At the same time, the judgment clarifies the limited scope of judicial review that the EU courts can exercise over the ECB’s decisions that involve the exercise of such broad discretion.

The ECB’s discretion and judicial deference

In exercising its power under the SSM Regulation the ECB routinely has a broad discretion. This is because it has to make complex assessments that involve technical, economic and financial considerations, as well as policy choices and objectives.

According to settled EU jurisprudence in such circumstances, courts exercise a significant degree of judicial deference. The judicial review of ECB decisions is then limited to determining if the ECB made a “manifest error of assessment”. This generally means that the conclusion of the ECB is implausible or not rationally supported by the underlying facts.

It is insufficient that the court disagrees with the assessment of the ECB. In order to quash the decision it is required that the ECB’s assessment is outside the range of plausible decisions that could have been reached when taking into account all the relevant facts.

What are the implications of the CJEU judgment for banks?

The CJEU judgment to an extent straightens out the SSM jurisprudence on the review of discretionary ECB decisions. The first instance decision had suggested a more robust approach when it comes to reviewing discretionary decisions of the ECB.

With the clarification of the CJEU that the General Court exceeded the limits of judicial review, it can be expected that it will again exercise more restraint in the future. The grounds on which banks can challenge discretionary ECB decisions remain very narrow.

Further Reading

Full judgment of the CJEU (C?389/21 P) is available here.

Read our blog post on the General Court decision here.