THE BOTTOM LINE
- Clarity on the End of the Road: The EU’s Single Resolution Board (SRB) has the confirmed authority to formally decide against placing a failing bank into resolution. This provides a clear, official trigger for the bank to be wound up under national insolvency laws.
- “Public Interest” is the Deciding Factor: A bank can be officially declared “failing or likely to fail,” but if the SRB determines its failure doesn’t pose a systemic threat to financial stability, an EU-level resolution is off the table. This “public interest” test is the critical hurdle.
- High Bar for Legal Challenges: The Court reaffirmed that the SRB’s decisions are based on complex economic assessments. This gives the Board significant discretion, meaning legal challenges will only succeed if a “manifest error” can be proven, an exceptionally difficult standard to meet.
THE DETAILS
The Court of Justice of the European Union (CJEU) has delivered a significant ruling, solidifying the powers of the Single Resolution Board (SRB), the central authority for handling major bank failures in the Banking Union. The case involved ABLV Bank, a Latvian lender that was declared “failing or likely to fail” by the European Central Bank (ECB) in 2018 following a liquidity crisis. This declaration automatically triggered the SRB’s involvement. The core of the dispute was what happened next: the SRB decided that resolving the bank was not in the public interest and issued a formal decision not to adopt a resolution scheme. ABLV argued the SRB had no legal power to make such a negative decision, effectively claiming it could only act to resolve a bank, not formally decline to do so. The CJEU firmly rejected this, establishing that the SRB is empowered to officially close the EU resolution procedure when its conditions are not met.
The judgment clarifies the critical three-step assessment under the Single Resolution Mechanism Regulation. For the SRB to intervene with a resolution plan, it must determine that (1) the bank is failing, (2) there are no viable private-sector solutions, and (3) resolution is necessary in the public interest to protect financial stability. In ABLV’s case, while the first two conditions were met, the SRB concluded the third was not. It reasoned that winding down the bank through normal Latvian and Luxembourg insolvency proceedings would not create significant adverse effects on the wider financial system. The CJEU endorsed this logic, confirming that the SRB’s negative decision acts as the definitive conclusion of the EU-level process, effectively handing the institution’s fate over to the relevant national authorities.
This ruling also has important implications for the balance of power within the EU’s institutional framework. The Court highlighted a key distinction: a decision to adopt a full resolution scheme—which involves choosing tools like bail-ins and potentially using the Single Resolution Fund—is a significant policy choice requiring endorsement from the European Commission and/or Council. However, a decision not to resolve a bank is a more constrained assessment based on objective criteria. As such, it does not require the same level of political sign-off. This ensures the SRB can act swiftly and decisively, bringing certainty to the market while respecting the limits of its delegated powers. For banks, their investors, and legal advisors, the message is clear: the path from “failing” to “resolution” is not automatic, and the SRB holds the ultimate authority to make the final call based on systemic risk.
SOURCE
Source: Court of Justice of the European Union
