Brussels, 26 October 2018 Centre for Housing Law, Rights and Policy

1. The ECB and its role on mortgage lenders in the Eurozone: NPLs and human rights. Integrating the Charter into the prudential supervision of mortgage lenders Brussels, 26 October 2018 Centre for Housing Law, Rights and Policy Prof. Marco Lamandini – Prof. David Ramos Muñoz University of Bologna – ESFS Board of Appeal and SRB Appeal Panel – Vice-Chair Academic Board EBI University Carlos III of Madrid and University of Bologna – EBI Academic Board member

2. Do fundamental rights texts apply to EU or national authorities when they exercise their functions within the SSM ?   Addressing first the question in relation with the EU Charter, Article 51 states that: The provisions of this Charter are addressed to the institutions, bodies, offices and agencies of the Union with due regard for the principle of subsidiarity and to the Member States only when they are implementing Union law. Thus, the answer seems quite clear with regard to the ECB, which is an EU institution. But are NCA to be considered part of an institution of the Union when they are legislatively allocated under Article 6(4) of the SSM Regulation some responsibilities in the performance of some (but not all) micro-prudential tasks under Article 4(1) on less significant banks? A FIRST PREMISE : a) FFRR, EU institutions implementing Union law and the SSM

3. b) FFRR, ECHR and its current scope for EU institutions and SSM • Addressing the ECHR application, the situation is still a fluid. The ECHR is not formally part of EU law, though specific references are made in article 52(3) of the EU Charter, and article 6(2) and (3) TEU. A draft accession treaty was negotiated in 2013, but, then, the CJEU held, in 2014, that such treaty (and parts of the ECHR) was incompatible with EU law, mainly because the new powers of the ECtHR would impinge upon the powers of the CJEU. • Therefore, up to this point the ECHR does not apply, nor can the ECtHR decide, on actions by EU institutions (including the ECB). The CJEU however takes into account of the ECHR case law when interpreting the Charter. • Moreover, the ECHR applies to actions by Member States, and, in the past, the ECtHR has held that its jurisdiction to decide on a violation of Convention rights cannot be excluded solely because a State was, simply, giving effect to EU law. In Bosphorus Airways v Ireland the ECtHR for the first time examined the merits of a case where domestic authorities were implementing EU law without exercising discretion. It established that the system of protection of fundamental rights within the EU created a presumption of Convention compliance for acts by a State that gave effect to EU measures and that the presumption had not been rebutted. This is the current context. However, it is a context in flux.

4. c) FFRR and Member States cooperation beyond the EU Treaties • An interesting situation could arise if the SSM mechanism happens to operate under the aegis of the European Stability Mechanism. • In Pringle the CJEU held that the Charter was considered inapplicable when Member States take collaborative action outside the EU legal order. • The question could arise if, say, a specific supervisory action is initiated as part of the package of measures indicated by the ESM. In that case, the Charter would be applicable to the ECB actions. There would also be a strong argument to apply the Charter if, in executing the Memorandum of Understanding, the NCA concerned makes use of the collaborative structures envisaged in the SSM and SRM. However, this is a bit of uncharted territory.

5. c) FFRR and housing rights • Article 34.3. Charter states that the Union recognises and respects the right to social and housing assistance in order to combat social exclusion and poverty and so as to ensure a decent existence for all those who lack sufficient resources, in accordance with the rules laid down by Community law and national laws and practice. • This rights was discussed by CJEU Grand Chamber in its judgment 24 April 2012, in case C-571/10, Kamberaj • The idea that housing rights should be taken seriously was recently confirmed also in the US by the 9th Cir. Court of Appeal in Martin v. Boise, 9 April 2018, case 15-35845

6. A SECOND PREMISE:WHAT IS AN NPL? A preliminary clarification: What is a NPL? Non-Performing Loan (NPL) or the broader concept of Non-Performing Exposure (NPE) are subject to Article 178 of Parliament and Council Regulation 575/2013/EU, on the definition of “default”, and International Accounting Standard 39 (IAS 39) on the definition of “impaired” as well as the different guidelines and standards issued in this regard.

7. EU NPL ACTION PLAN AND FFRR: AN OPTIMIST’S VIEW An optimistcould conclude that EU authoritieshavedeveloped, this time, a complete strategy to handle the NPLschallenge in Europe, with: • an ECB Guidance • a Council’s Action plan • an NPL Section on the Communication on the completion of the Banking Union by the Commission • a package of measures to addressNPLsrisks, includingproposals for a directive on credit servicers, credit purchasers and the recovery of collateral, an amendment the capital requirementregulation (CRR), and a blueprint on the set-up of asset management companies (AMCs)

8. A DESCRIPTIVE VIEW • ECB Guidance + Addendum: • Full coverage (provisioning) non-secured NPLs in 2 years + collateral for unsecured part in 7 years • Not «binding» but «supervisory expectation» and basis for a «conversation» with bank • Did the ECB overstep its mandate and legislate? • Commission Proposal • CRR reform on NPLs: follows the ECB line  banks dissuaded from keeping NPLs on-balance sheet • Credit servicers: license to operate across the EU • Purchase of NPLs & non-judicial enforcement made easier • Blueprint for national AMCs… and rules targeted at corporate NPLs

9. A CRITICAL VIEW Source: ECB: LSI supervision within the SSM, November 2017 Source: ECB: LSI supervision within the SSM, November 2017 • What? Measures that are positive… but insufficient. • Macro problem, EU dimension… with micro, partial, and national solutions. • Economic-social problem with solely economic measures (Charter principles not integrated). Chinese walls between prudential supervision and FFRR. • Why? • NPLs are complex and «boring». • If they become «interesting» it is because they can be politically toxic • Best left for the States (and preferably the next person) to deal with. • When? We believe that there is a clear need to deal with NPLs at a European/ Eurowide level NOW. • How? • Elsewhere we developed a proposal for a EU-wide NPLs securitization scheme. • Here we focus on social implications that could threaten FFRR, and backfire on banks’ and governments’ credibility unless a balanced recovery strategy is used.

10. IMPLICATIONS • NPLsprudentialstrategy’s success lies in improvements of credit enforcement and the recovery rate Inefficienciesand disparities in enforcementhindersprudentialstrategy (e.g. Italy). • Lookingat a figure (length of judicialproceedings) itis easy to conclude recoverymechanisms or insolvencylawsneed to be “more efficient”… Tackling the fundamentalprinciplesthatmayliebeneatheach «obstacle» is a differentmatter (e.g. Spain)

11. SOCIAL RIGHTS IMPACT IN FINANCE… REALLY? • The right to housing in the EU Charter, European Social Charter, European Pillar of Social Rights, and nationalconstitutions (Spain, Italy, the Netherlands, Portugal, or Sweden) and the International Covenant on Economic, Social and Cultural Rights. • Skeptics of looselyformulatedcommitments to promotedecenthousingshould look at the condemnation by the Committee on Economic, Social and Cultural Rights in M.B.D. v. Spain, for an eviction of a family with youngchildrenwithoutproviding alternative housing (seealsoI.D.G. v. Spain, first-ever case of Optional Protocol of Covenant on Social Rights). • The European Social RightsCommitteerecentlycondemned EU states in FEANTSA v. France, (holding that “the measurescurrently in place to reduce the number of homeless are insufficient, both in quantitative and qualitative terms”) and FEANTSA v. Slovenia. • … And consumer (includingborrowers’) rights are a major part of the laws of all EU countries • The Aziz case, C-415/11 (and itsprogeny) shows thatcourtsneed to examineviolations of consumer law of theirownmotion, evenduringenforcementproceedings. • The GutierrezNaranjo, C-154/15 shows thatloanclausesmay be annulled, evenif the resultingrestitutionseverelyimpacts the financialhealth of the banks. • … Not to mention privacy, family life, etc. • … The CJEU held in C-8/15 Ledra Advertisingthat EU Institutions are subject to the Charter evenwhenperformingtasksoutside the Charter (ESM – MoU).

12. …WHAT WAS THE QUESTION AGAIN? • Whydoes the ECB NPL policy ignoreaspects of consumer law, and fundamentalrights? • Why do the Commissionproposalssidestep consumer and social issues by focusing on corporate NPLs? • Whyis the AMC strategyleft to the MemberStates? • We do nothave a legal (i.e. notpolitical) answer So… • …Can the circle be squared? Can wehave an NPL strategythatis more efficient, yetrobust from a FFRR standpoint?

13. SOME BASIC PREMISES… • A successful NPL strategy needs not only deal efficiently with current NPLs, but also with future NPLs, and improves the quality of credit markets. • This entails rules and principles (Spanish cases on mis-selling and on loan clauses involved a principles-based interpretation)… • … the problem was that the solution came after a massive volume had been marketed… The pendular swing increased uncertainty. • Uncertainty can be limited if regulatory (e.g. prudential) and enforcement and crisis-management rules incorporate all the relevant fundamental principles SINCE THE BEGINNING (i.e. when the rules are formulated), and are coordinated with public measures, e.g. housing

14. …PLUS SOME BOLD COMMON SENSE • An EU-wide NPLsstrategyneeds to cover consumer loans, and mention FFRR. • The presence of FFRRs in the design of an NPLsstrategy can haveimportant interpretative effects • Sometimesallyouneed to do isask… A prudential supervisor mayreachdifferentdecisionsifitneeds to explainwhatis the impact of its NPL policy on housing or consumer rights. • Public bodies (social housing) should be coordinated with courts (enforcementmechanisms)

15. …IS HOUSING RIGHT JUST AN ILLUSION?ITS ROLE IN POLICY MAKING • Still, in our view, beyond the perspective of legality/liability outlined above, the “micro” dimension could have a second, more pervasive, implication, from the perspective of “legitimacy”, as a result of the dual dimension of property, privacy, and housing as both “rights”, but also of “values” of the legal order. • A declaration that the Union “recognizes and respects” the right to social and housing assistance to “ensure a decent existence”, or a recognition that “Vulnerable people have the right to appropriate assistance and protection against forced eviction” may not seem like easily actionable rights, but should at least be enough to compel an explanation from the authorities running the NPL scheme about what are they doing to minimize the social impact of enforcements and foreclosures and to what extent a homestead exemption from foreclosure must be granted.

16. …IS HOUSING RIGHT JUST AN ILLUSION?AN IMPLIED EU HOMESTEAD EXEMPTION? • The Commissionseemsaware of theseimplicationsbecause, in its legislative proposal on credit servicers and purchasers, and enforcementprocedures, itexcludes from thoseenforcementprocedures the loans with consumers, non-profit companies, or secured by first-residence residentialproperty. • In a similarvein, the AMC Blueprintconsidersthat the assetperimeter of AMCsshould be formed by loanssecured by commercial real estate and other corporate loans, aswellasotherresidualportfolios, with the possibility of consideringexceptions in highlyspecificcontexts. • Suchexceptionscould include residentialreal estate mortgages and SME loans, which are otherwiseconsideredunsuited. Yetitisstill opportune to quote the express language by which the Commissionjustifies the unsuitability of residentialmortgageloans: The work-out of residentialmortgagesthrough an AMC carries high risks of politicalinterference, especially for primaryresidences (owner-occupiedunits). In thesecasesforeclosure by a State-ownedentitylike an AMC might prove difficult. In suchcircumstances, itcannot be excludedthat the AMC would show leniencytowardsdistressedhomeowners to suchextentthatassetrecoveryisimpeded, whichwouldundoany benefits of an AMC. Politicalindependence of the AMC would be a keycriterion for considering the possibleinclusion of residentialmortgages.

17. …BUT HIDING THE PROBLEM DOES NOT HELP IN SOLVING IT! • The problem is not that the Commission says something untrue: high social sensitivity certainly means greater risk of meddling. • The problem is its lack of nuance. • Resistance to NPL workout or enforcement encompasses a broad spectrum of actions that range from the illegal resistance to authority for sheer political gain, which cannot be condoned, to the legitimate use of legal tools to ensure that something as basic as consumer rights or fundamental rights are respected. • And yet, the Commission is ready to paint all this complexity with the broad brush of “political interference” to leave residential mortgage loans out of its strategy (despite their importance). • The Commission seems to presume that a restructuring of corporate NPLs suffices to put the banking sector back on its feet. • The question is what if it does not?

18. MORE POSITIVE ACTION IS NECESSARY… • The Blueprintuses the term “fundamental rights” onlytwice to refer to the rights… of the banks forced to transfer theirNPLs to an AMC. Thus, either the Commissionismyopic to fundamental rights considerations, whichisunlikely, or itwishes to limititsadvice to the easierproblems, i.e. how to set up AMC’s for corporate debt, leaving Member States the thornier issues that make NPLsstrategiesdifficult in the first place. • Yetthiscouldbackfire, due to the risk of serious feedback effects on public confidence on banks, governments and European institutions. In case a restructuring of corporate NPLswereinsufficient, and social problemsemergedas a result of aggressive foreclosure and recovery strategies, the issue wouldmaterialize downstream the NPLs’ disposalprocessbutwould impact the views on the design of the NPL strategy, the choice of the new NPLsowners and the remediesgranted to recovertheircredits. • If a sizeableamount of European citizens weredeprived of theirresidentialhomeswithoutbeinggranted an alternative living solution, the public reaction couldquestion the legitimacy of the overallscheme.

19. AND IT IS ALSO POSSIBLE! • Why not to use (a relatively small) portion of the stock of impaired real estate assets to solve the problem, making a risk an opportunity? The Italian case • An approach that paints all obstacles with the broad brush of “inefficiency” will fail to support a NPLs strategy with the necessary meaning, consistent with the system’s inner values and, as such, will suffer a backlash or become a relic as soon as the crisis passes.

20. Thank you marco.lamandini@unibo.it These are presentation slides only. For a more comprehensive analysis refer to M.Lamandini, D.Ramos Munoz, G. Lusignani, Does Europe have what it takes to finish the Banking Union, Columbia Journal of European Law, (2018) vol. 24, 233, forthcoming.