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Part I General, 5 Corporate Law Versus Financial Regulatory Rules: The Impact on Managing Directors and Shareholders of Banks

Kitty Lieverse, Claartje Bulten

From: Governance of Financial Institutions

Edited By: Danny Busch, Guido Ferrarini, Gerard van Solinge

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Bank supervision — Investment business

(p. 91) Corporate Law Versus Financial Regulatory Rules

The Impact on Managing Directors and Shareholders of Banks

I.  Introduction

5.01  This chapter discusses the impact of financial regulatory rules on the corporate governance of banks1 established in Europe. Company law will be considered as (p. 92) it exists in the various Member States, with a specific focus on the Netherlands, Germany, and the United Kingdom (English law). In Europe, banks may take a variety of legal forms, for example cooperatives and private or public limited liability companies.2 The analysis in this chapter is limited to banks that operate as public limited liability companies.3 The shares in the capital of the bank (or its holding company) may or may not be listed on a stock exchange. For listed banks, not only company law such as the UK Companies Act 2006, the Dutch Civil Code (Book 2 on Legal Entities), or the German Stock Corporation Act (Aktiengesetz or AktG) are of relevance. Typically a corporate governance code will apply. The three mentioned jurisdictions all have such a code. The codes are specifically written for listed companies, but mostly contain rules on corporate governance that may be considered ‘universal’ in a jurisdiction. A company must comply with the provisions of a code or must explain why it deviates from a given principle or practice.4 There is only limited European harmonization on the various national systems of company law regarding matters of corporate governance.5

5.02  Where in this chapter reference is made to financial regulatory rules this refers, broadly speaking, to the rules that regulate the financial markets and the financial market participants. This chapter will only look at the financial regulatory rules for the banking sector of European descent.6 For banks in particular, this means that the focus of the chapter will be on the national implementation of CRD IV7 as well (p. 93) as the CRR8 including the delegated regulations thereto and the related guidelines and opinions of the European Banking Authority (EBA). In addition, the Single Supervisory Mechanism (SSM)9 system will be considered. The ‘Single Rulebook’ will be used to refer to this set of European banking regulation. This chapter will not focus on the rules for bank recovery and resolution,10 which in fact provide for a very distinctive and far-reaching impact on the corporate governance of a bank.11

5.03  This chapter proceeds on the basis of the description of ‘corporate governance’ deducted from the G-20/Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance:12 ‘Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides for a structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.’ For this analysis, the impact of financial regulatory rules on the board of directors and the shareholders of a bank are looked at. On this basis, two broad elements of corporate governance concerning banks are discussed: the impact of financial regulatory rules on (i) company law systems that may either be shareholder-driven or stakeholder-driven, and (ii) the duties and responsibilities of a bank’s managing directors. In this context, the relationship between banks and their shareholders and the management of the banks, and the position of other stakeholders are focused on. If and how, on the basis of company law, this relationship is impacted by the financial regulatory system will be considered.

5.04  The basic assumption here is that, clearly, banks are not ordinary companies. In view of their activities, they also have to deal, through financial supervision, with extensive regulation of public interests. This impacts both the structure of banks and the manner in which they operate. A further dimension is added because of the European origin of the financial regulatory rules for the banking sector, as referred (p. 94) to above, and because (within the SSM) the ECB acts as a single supervisor.13 The impact of financial regulatory rules, including intervention by the supervisor, on the corporate governance of banks might potentially provide for European harmonization of national company law based on the public interests that are being pursued for this sector.14

II.  Taking Stock: The Potential Tension between Corporate Law and Financial Regulatory Rules

A.  Introduction

5.05  The starting point of the Single Rule Book is that national company law is respected. Recitals 55 and 56 of CRD IV acknowledge that different corporate governance structures are used across the Member States. Recital 55 states that the definitions used in CRD IV are in fact intended to embrace all existing structures, without advocating any structure in particular (i.e. a one-tier board versus a two-tier board). From this Recital it can be deduced that the purpose of the CRD IV definitions is to state a particular outcome in respect of corporate governance, rather than to prescribe a certain allocation of competences that would be determined by national company law. This (effectively) neutral position of the Single Rulebook vis-à-vis the system of national company law is confirmed by Article 3(1)(7) of CRD IV, which gives the following definition of ‘management body’: it ‘means an institution’s body or bodies, which are appointed in accordance with national law, which are empowered to set the institution’s strategy, objectives and overall direction, and which oversee and monitor management decision-making, and include the persons who effectively direct the business of the institution’. This substance-based description includes both the executive and supervisory function, which may be included in a single board or may be incorporated in a two-tier system, where the supervisory function is performed by a separate supervisory board and the executive function is performed by a separate management board which is responsible and accountable for the day-to-day management of the bank.15 This ‘substance over form’ approach indicates that, on the one hand, the Single Rulebook is flexible in that it facilitates different systems of national company laws, while on the other hand the national (p. 95) company law systems also have to be flexible, in order to ensure that the result prescribed by the Single Rulebook is achieved.

B.  Types of tension

5.06  The tension resulting from the simultaneous applicability of company law and financial regulatory rules may take several forms. The first, although not necessarily creating ‘tension’, is that financial regulatory rules may provide for additional regulation on top of company law. As a result, a bank not only has to comply with company law, but also with the rules on corporate governance arising from the financial regulatory rules. The second is that provisions of financial regulatory rules on corporate governance may set aside certain company law rules that deviate from the financial regulatory rules. The distinction between the first and second type of tension is not always very strict and depends on variations in national company law systems. For example, if the number of board positions a director may hold is not restricted under national company law, the Single Rulebook may provide additional rules on this subject. If national company law rules differ from the rules in the Single Rulebook in this regard, this constitutes a deviation. For instance, the Single Rulebook provides in respect of significant banks, that in order to ensure that members of the management board may devote sufficient time to their position,16 they may not hold more than one of the following combinations of directorships at the same time: (i) one executive directorship and two non-executive directorships; or (ii) four non-executive directorships.17 As mentioned earlier, national company law systems may or may not contain rules on combining functions, and/or may stipulate different rules on this subject. The third type of tension distinguished here relates to the application by the supervisor (the ECB and/or the national competent authorities) of certain financial regulatory rules which leads to interference with company laws.

5.07  Some examples of tension between financial regulatory rules and/or the application by the supervisor on the one hand, and company law rules on the other are provided in the following section. This does not represent an exhaustive inventory of rules on corporate governance of banks. Rather, the examples given serve as illustration for the impact financial regulatory rules have on the corporate structure and operations of the bank, including the management board, and on the relationship with their shareholders.18

(p. 96) C.  The different nature of company law and financial regulatory rules

5.08  One of the causes of the tension between company law rules and financial regulatory rules could be their nature. Traditionally, company law has a facilitating nature. It is said to be a law in favour of trade. Too many detailed provisions would only raise barriers. Company law is therefore not based on a comprehensive set of rules. It is not uncommon for a company law system to provide a basic set of rules. Deviating from it (e.g. in the articles of association) is often allowed. In this way, a company can make its own choices in respect of the corporate governance system that best suits the business of that company.19

5.09  The financial regulatory rules are of a different kind. The regulatory framework is extensive and often provides detailed rules. Although proportionality20 allows for some flexibility and avoids a strict ‘one size fits all’ approach, there is nevertheless typically only limited room to waive certain rules, or to deviate from them.

5.10  The guiding principle for regulating the banking sector is to maintain the confidence of the public (i.e. the deposit holders) in their bank and the banking sector as a whole. Against this background, financial regulatory rules are mandatory, with limited or no room to deviate. So, where company law essentially leaves room for tailor-made companies, financial regulatory rules generally require banks to adopt the uniform result that follows from application of these rules.

III.  Impact on the Board

A.  Variety in board models; appointment of board members

5.11  Historically, the Dutch board model is a two-tier model. The operational management and strategy are part of the tasks of the management board. The supervisory board is a separate body. The tasks of the supervisory board consist of supervising and advising the management board.21 These two boards are separate: one cannot be simultaneously a member of the management board and a member of the supervisory board. In 2013, the one-tier model with executive and non-executive directors was implemented in the Dutch Civil Code. A non-executive director in a one-tier system has at least the same supervisory task as a member of the supervisory board in a two-tier system.22

(p. 97) 5.12  In Germany the two-tier system is mandatory for large companies. If a German company prefers a one-tier board, it often chooses the structure of a SE (Societas Europeae), with a seat based in Germany.

5.13  In the United Kingdom a single-tier board model is assumed by the legislation. This type of board model, however, is not mandatory. The legislation is silent on this subject.23 In addition, the UK Corporate Governance Code provides for a one-tier board, although the code does not explicitly require this kind of board structure either.24 In practice, UK companies (including banks) typically opt for one-tier boards.

5.14  As mentioned in 5.05, the Single Rulebook does not prescribe either a one-tier or a two-tier board model. Regardless of the board model as prescribed or allowed under national company law, however, the functions and requirements stipulated in the Single Rulebook in respect of the board must be complied with.

B.  Appointing directors

5.15  National company law provides rules for the appointment of managing (executive) directors and supervisory (non-executive) directors of a bank. In the absence of other arrangements in the articles of association, the authority to appoint an individual as a managing or supervisory director of a bank is typically vested in the general meeting of shareholders. In that situation, the general meeting determines who controls the bank in terms of day-to-day policy making and who supervises the management as a supervisory (non-executive) director. Exceptions apply, however.

5.16  The management board of a German bank is for example appointed by the supervisory board.25 The supervisory board in turn consists of members who are appointed by the general meeting of shareholders or by the employees. This system of co-determination leads to the representation of two groups of stakeholders—shareholders and employees—in one body. It is remarked that this mandatory employee representation leads to a stakeholder-oriented composition of the boards in Germany; see 5.51.26

(p. 98) 5.17  Dutch company law also recognizes a special role for the employees. Large Dutch companies are subject to labour co-determination rules. These rules prescribe that members of the supervisory board are appointed by the general meeting of shareholders, on the nomination and proposal of the supervisory board, whereby the supervisory board nominates and selects one-third of the supervisory directors on the recommendation of the works council.27

5.18  For completeness’ sake: the United Kingdom has no requirements for employee representation at board level.

5.19  At the same time, however, the Single Rulebook contains certain rules that in fact limit the appointment rights. The first of these is Article 13(1) of CRD IV, which prescribes that a bank must have at least two persons who effectively direct the business.28 The Single Rulebook also anticipates that the bank has arranged for a supervisory function.29 In respect of the individuals that may be appointed to perform these functions, the Single Rulebook provides that they must meet the requirements of Article 91 of CRD IV. This entails as a general rule30 that all members of the management board must be of sufficiently good repute and possess sufficient knowledge, skills, and experience to perform their duties. Furthermore, the overall composition of the management body must reflect an adequately broad range of experiences. The national implementation of this part of the Single Rulebook may differ as to whether individuals are tested by the supervisor on this requirement before they are being appointed (ex-ante) or afterwards (ex-post).31 Regardless of this difference in application, the fit and proper requirements included in the Single Rulebook have to be complied with in the context of the appointments of members of the management body. The required stamp of approval of the supervisor must be taken into account. This includes that the national company law rules on appointment of directors of a bank can only be exercised with due consideration of the Single Rulebook provisions, that prevail in this regard.32

C.  Composition of the boards: diversity criteria

5.20  National company law may or may not impose certain diversity criteria in respect of the composition of boards.

(p. 99) 5.21  Dutch company law contains a provision on gender diversity for both the management and the supervisory board.33 Diversity is seen as a balanced division of the seats between women (at least 30 per cent) and men (at least 30 per cent). If a company does not meet these target figures, the reasons must be explained in its annual report.34 No sanction is imposed on the company in case of non-compliance. In the Netherlands, the debate on including mandatory gender diversity quota in legislation is pending.

5.22  In Germany, the system of co-determination described in 5.16 has resulted in a situation whereby there are slightly more women on the boards than the European average. A special act requires that the number of female employee representatives on the board must be proportional to the number of female employees in the company as a whole.35 Furthermore, the German Corporate Governance Code implies a (non-binding) duty on the supervisory board to respect diversity when appointing members to the management board. In particular, it must aim for an appropriate participation of women. Another special provision applies to management levels below the board, to the effect that the management board must set targets to increase the share of women in the two management levels below the management board. The consequences of non-compliance with these rules on gender diversity are comparable to those under Dutch company law: there are no formal sanctions.

5.23  In the United Kingdom the matter of diversity is addressed in the UK Corporate Governance Code. According to the Preface of the code, diversity is broader than gender-diversity: ‘This includes, but is not limited to, gender and race.’ A separate section in the annual report should describe the work of the nomination committee, including a description of the board’s policy on diversity.36 Just as in the Netherlands and Germany, no sanctions are imposed in the United Kingdom in case of non-compliance with the principles and best practices in respect of diversity. Under the UK Corporate Governance Code, the rule of ‘comply or explain’ applies.

5.24  The Single Rulebook37 provides that Member States or competent authorities must require institutions and their respective nomination committees to put in place a policy promoting diversity on the management body.38 This explicitly includes gender diversity.39 In addition, banks must provide at least annual updates (p. 100) in respect of their policy on diversity with regard to the selection of members of the management body, its objectives, and any relevant targets set out in that policy, and the extent to which these objectives and targets have been achieved.40 Significant banks41 are additionally required to set up a nomination committee that sets a target for the representation of the underrepresented gender in the management body and that prepares a policy to increase the number of the underrepresented gender in the management body in order to meet that target. The target, policy, and its implementation must be made public.42 According to the EBA/European Securities and Markets Authorities (ESMA) ‘Guidelines on the assessment of suitability’, if any of the diversity objectives or targets are not met, significant banks must document the reasons why, the measures to be taken, and the timeframe for taking these measures, to ensure that the diversity objectives and targets will be met as yet.43 Against this background, and as part of the fit and proper testing of individuals and the related considerations of a sufficiently diverse composition of the management body as a whole, the provisions of the Single Rulebook should incentivize diversity within the management boards of banks.

5.25  On the topic of diversity within the board of a bank, it is concluded here that both the company law rules and the Single Rulebook focus on setting targets and transparency, rather than on setting strict goals through prescribed quota.

D.  Tasks and duties of directors

5.26  Company law typically does not include detailed provisions prescribing how directors should perform their tasks. The principal guiding principle for managing and supervisory directors is to act in the best interest of the company. Secondly, it is commonly accepted that a director has a commitment of loyalty towards the company. Apart from these general principles, company law does not give further details on how directors should perform their tasks and duties. This matter is typically addressed further within the legal framework of questions on liability of directors. The rules on directors’ liability are principle-based and provide for open norms and standards, which must be detailed depending on the specific circumstances of the case. For example, UK company law reflects that the directors’ duties include a duty of care.44 The Dutch Supreme Court has ruled that under Dutch company law, a director has to be competent and must fulfil his task diligently.45 Germany (p. 101) company law does not impose standards for how a director should perform its task and duties.46 The standard expressed in the literature is that managing and supervisory directors should have adequate skills and experience.47

5.27  Focusing on the role and responsibilities of the management board, Article 88(1) of CRD IV states that Member States must ensure that the management body defines, oversees, and is accountable for the implementation of the governance arrangements that ensure effective and prudent management of an institution, including the segregation of duties in the organization and the prevention of conflicts of interest.

5.28  The instruction to the management body that the bank’s governance arrangements must ensure (inter alia) an effective and prudent management of the bank, is further specified by providing five principles that must be met through these governance arrangements. These principles include that the management body must have the overall responsibility for the institution and approve and oversee the implementation of the bank’s strategic objectives, risk strategy, and internal governance.48 The EBA Guidelines49 further specify that the responsibilities and duties should be documented in writing and approved by the management body and must include (inter alia) the implementation of the bank’s business strategy within the applicable legal and regulatory framework, taking into account the bank’s long-term financial interests and solvency. Other elements to be included are fostering: (i) a risk culture which addresses the bank’s risk-awareness and risk-taking behaviour;50 and (ii) a corporate culture and values which encourages responsible and ethical behaviour.51 In addition to these principles regarding the duties and responsibilities of the management body as a whole, there are guidelines for the performance of the management and supervisory functions.52 In respect of the management function, the Guidelines specify that the managing directors (inter alia) ‘should constructively challenge and critically review propositions’, and must inform the management body in its supervisory function on the risks and developments affecting the bank, for example ‘material decisions on business activities and risks taken, the evaluation of the institution’s economic and business environment, liquidity and sound capital base, and assessment of its material risk exposures’.

(p. 102) 5.29  On this topic, it is concluded here that financial regulatory rules provide detailed rules for the manner in which directors should perform their tasks and function and the guiding principles that should be applied. In contrast to this, company law addresses the performance by a director of his task and duties in retrospect, by stating standards for breach of such duties and tasks on the basis of questions on liability.

E.  Arrangements on remuneration

5.30  Although national company law systems and/or provisions of corporate governance codes may differ somewhat in this regard, one would expect the general meeting to be involved in determining the remuneration policy for the management board, and the remuneration committee (if any) to be leading as regards the individual packages for remuneration.

5.31  Apart from the extensive provisions in the Dutch corporate governance code on remuneration, the comments made in the previous paragraph are indeed valid for Dutch company law.53 Whereas the remuneration policy for managing directors is determined by the general meeting, the remuneration of individual directors is effectively set by the supervisory board. A comparable system applies under German company law, where the general meeting of shareholders passes a resolution approving the remuneration scheme. This is comparable to the Dutch remuneration policy. The resolution passed by the general meeting is however merely a guidance and does not create any rights or obligations in respect of the remuneration of individual directors. The aggregate remuneration of any member of the management board is determined by the supervisory board. These obligations of the supervisory board must remain unaffected.54 There is a difference between the Dutch and the German remuneration rules as regards the level at which the rules are enacted. Under Dutch company law, the basic rules of the Dutch Civil Code are followed by extensive rules in the Dutch Corporate Governance Code. Under German company laws, the German Stock Corporation Act contains detailed clauses in respect of remuneration, while the regulation on remuneration in the German Corporate Governance Code is limited to a few remarks. In the United Kingdom, both the Companies Act 2006 and the UK Corporate Governance Code contain rules on remuneration. The Code focuses on the structure of remuneration packages and the tasks and duties of the remuneration committee. The provisions in the Companies Act are various in nature but all give some sort of approval rights to the general meeting of shareholders, for example a vote on a Directors Remuneration Report of a listed company.

(p. 103) 5.32  The recently amended shareholders directive also addresses the say-on-pay for shareholders.55 First of all, it imposes the duty on Member States to ensure that shareholders have the right to vote on the remuneration policy at the general meeting. Secondly, it introduces the obligation to prepare a remuneration report: Member States must ensure that the company draws up a ‘clear and understandable remuneration report’. The general meeting of shareholders will be given an advisory vote on the remuneration report of the most recent financial year.

5.33  The Single Rulebook contains specific provisions on remuneration for banks.56 The bank’s management body is required, in its supervisory function, to adopt and periodically review the general principles of the remuneration policy.57 Other detailed rules are given in respect of (inter alia) guaranteed variable remuneration (which should be exceptional) and balancing the fixed and variable components of total remuneration. It is prescribed that banks must set an appropriate ratio between the fixed and the variable components, whereby the variable component may not exceed 100 per cent of the fixed component of the total remuneration for each individual.58 National law provisions may however allow shareholders to approve a higher maximum level of the ratio between the fixed and variable components of remuneration, provided the overall level of the variable component does not exceed 200 per cent of the fixed component of the total remuneration for each individual. This means that granting a higher bonus than the 100 per cent cap, up to a 200 per cent threshold, is as a matter of operation of Article 94(1)(g)(ii) of CRD IV allocated to the general meeting. This can be seen as a CRD IV focus on the ‘say on pay’ by the shareholders.

5.34  On balance, the Single Rulebook provisions clearly add considerable detail to the regulation of the remuneration for board members. Regardless of national company law systems that may charge the supervisory directors with determining individual remuneration packages, the Single Rulebook stipulates that only the general meeting may set a bonus at a higher level than 100 per cent of the fixed remuneration. On this central position of the general meeting, the Single Rulebook provisions are in fact in line with the ‘say-on-pay’ provisions in the recently amended shareholders directive.

(p. 104) F.  Zooming in: the prevalence of the financial regulatory rules over company law

5.35  This paragraph discusses a recent judgment of the General Court in respect of the ECB’s refusal to approve the appointment of four candidates as board members at Crédit Agricole, a non-centralized French banking group.59 Crédit Agricole comprises, inter alia, regional agricultural credit union branches. For those regional branches, the positions included the office of chairman of the management body and, at the same time, of executive officer. The ECB ruled that such ‘double’ appointment, as a result of which the same person would simultaneously carry out the non-executive position of chairman and that of an executive director, was prohibited under the Single Rulebook and refused to approve the appointments. According to the ECB, the guiding principle is that the exercise of executive and non-executive functions within the management board must be separated. The bank had appealed the decision of the ECB before the General Court.

5.36  Interestingly, the decision of the General Court provides an interpretation of the basic rule of Article 13(1) of CRD IV, which refers to ‘persons [who] effectively direct the business [of the bank]’ and of Article 88 of CRD IV.60 The General Court concluded that it is apparent from the textual, historical, teleological, and contextual interpretations of Article 13(1) of CRD IV that the concept of ‘persons who effectively direct the business of the bank’ refers to the members of the management body who are part of the senior management of the credit institution. The court referred to the objectives pursued by the EU legislature concerning the governance of credit institutions: ‘That objective is to ensure effective oversight of the senior management by the non-executive members of the management body, necessitating checks and balances within the management body.’61 According to the Court it was clear that the effectiveness of such oversight may be jeopardized if the chairman of the management body is also responsible, in its supervisory function, for the effective direction of the business of the bank. With this ruling, the General Court upheld the application of the ECB of Article 88(1)(e) of CRD IV, which provides that the chairman of the management body, in its supervisory function of a credit institution, may not simultaneously exercise the function of CEO in the same institution (unless justified by the institution and authorized by the competent authorities), and the French law implementation thereof. The ECB’s decision entailed that the combination of the non-executive chairman position with any executive directorship (regardless whether this is a formal position of CEO) is not allowed and this decision was upheld by the General Court.

(p. 105) 5.37  This decision by the General Court quite clearly confirms the importance of the provisions of the Single Rulebook on corporate governance.

IV.  Impact on Shareholders

A.  Conditions for shareholdings in company law

5.38  Company law systems typically do not stipulate pre-approval requirements in respect of shareholders. This may however be different for vitally important companies, that is, companies that are vital to national security or public policy. Under European and international law, countries may subject (foreign) share ownership to specific regulations.62 In some countries (like the Netherlands) a company may adopt requirements for shareholders in its articles of association. In addition, protection may exist against hostile takeovers, based on measures derived from company law.63

B.  Approval of (candidate) shareholders in the banking sector

5.39  The Single Rulebook stipulates extensive control in respect of shareholdings in a bank. As soon as they reach the 10 per cent threshold of a qualifying holding64 shareholders must be approved in advance by the supervisor on their suitability to acquire and retain this holding in the bank.65 The criteria on which a shareholder is tested include:66 (i) the reputation of the proposed acquirer; and (ii) the financial soundness of the new shareholder, in particular in relation to the type of business pursued by the bank. This test includes whether the candidate shareholder, given his financial position and the bank’s plans for the coming years, is able to adequately support the bank as a shareholder. The criteria for testing shareholders set forth in the Single Rulebook are strictly of a prudential nature. On this basis, the supervisor may oppose the proposed acquisition only if there are reasonable grounds for doing so on the basis of specified list of acquisition criteria.67

(p. 106) C.  Further conditions for shareholdings in a bank

5.40  Interestingly, the European Court of Justice (ECJ) has confirmed that the supervisor may impose certain conditions on such proposed shareholding.68 In this case69 the Dutch supervisor, deciding on the proposed acquisition of a qualifying interest in an insurer, had imposed certain conditions on the declaration of no objection concerning (inter alia) the dividend policy and the composition of the supervisory board. The requirement concerning the dividend policy included that no distributions to shareholders could be made if this would lead to a deterioration of a certain solvency ratio that had been adjusted by the supervisor and the company in the run-up to the entry into force of Solvency II, a few years later (at that time). The requirement concerning the supervisory board meant that at least half the members, including the chairman, had to be formally independent of the shareholder. The ECJ ruled that the underlying European directive does not in itself prohibit imposing conditions on a declaration of no objection, provided that the rights under the Directive are not violated, and on the understanding that the conditions may not refer to an element that is not included in the exhaustive list of assessment criteria. Furthermore, the conditions must be suitable and necessary to meet these assessment criteria. In other words, imposing conditions on the shareholder does not conflict with the system of the Directive and the restrictive grounds for refusal provided for therein, if the conditions actually cater for granting the application in accordance with the assessment criteria.

5.41  This judgment confirms that the supervisor may impose rules on the shareholder through the system of the declaration of no objection to an acquisition, in addition to regular company law rules. The room for the supervisor is limited, however. The imposed conditions may only serve to ensure that a ground for refusal does not apply. Also, the candidate shareholder will typically have stipulated an unconditional declaration of no objection as a condition precedent for his acquisition. This means that if the conditions imposed by the supervisor would be too burdensome in the candidate shareholder’s view, the acquisition may be aborted and the conditions will never become effective.

D.  Redemption of capital, distributions

5.42  Banks are subject to extensive capital and liquidity requirements, as included in the CRR. These requirements are as such not related to corporate governance (p. 107) requirements. However, the Single Rulebook provides for an impact on ordinary or typical rights of the general meeting in respect of distribution and redemption of capital, in the context of specific capital protection rules. These rules apply in addition to and/or in deviation from the common maintenance of capital and distribution rules. Article 77 of the CRR is considered here. This provision requires that a bank needs the prior permission of the competent authority to do either or both of the following: (i) reduce, redeem, or repurchase Common Equity Tier 1 instruments issued by the institution in a manner that is permitted under applicable national law; (ii) effect the call, redemption, repayment, or repurchase of Additional Tier 1 instruments or Tier 2 instruments as applicable, prior to the date of their contractual maturity. As a result of this provision, the general meeting of a bank may only exercise any national company law authority in respect of redemption of capital, if the supervisor has given prior permission to do so.

5.43  In addition, Article 141 of CRD IV limits the potential for distributions to shareholders in connection with Common Equity Tier 1 capital to an extent that such distribution would decrease the bank’s Common Equity Tier 1 capital to a level where the combined buffer requirement70 is no longer met. Banks are obliged to calculate a Maximum Distributable Amount (MDA) in accordance with the provisions of Article 141(4) of CRD IV and if a bank fails to meet, or exceeds, its combined buffer requirement, it shall be prohibited from distributing more than the MDA.

5.44  Furthermore, the Single Rulebook provides for various means of intervention by the supervisor in respect of the protection of the capital and liquidity position of a bank, if there is a breach of Single Rulebook provisions or if such breach is likely to occur within the following twelve months,71 including inter alia: (i) to require institutions to hold own funds in excess of the requirements set out in CRD IV and in the CRR; (ii) to request the divestment of activities that pose excessive risks to the soundness of an institution; and (iii) to restrict or prohibit distributions by the bank to shareholders.72

5.45  From these provisions it may be inferred that the Single Rulebook focuses strongly on a bank maintaining a strong capital position and that the potential for capital redemption and dividend distribution are restricted to serve this purpose.

(p. 108) V.  Impact of the Single Rulebook on the Interpretation of Corporate Interest

A.  Shareholder-driven v stakeholder-driven

5.46  The question has been raised whether the ‘high and unique leverage’ of banks entails that the shareholder-driven model is not appropriate for banks.73 Should management boards of banks not be required to pay specific attention to the interests of their creditors, and the deposit holders in particular, as a vital group of stakeholders, rather than to their shareholders? Before answering this question, the two models will be described briefly.

5.47  In a shareholder-driven model the interests of the company coincide with the interests of its shareholders. The shareholders are basically seen as ‘owners’ of the company. The company’s main goal, in view of the shareholder focus, will be the maximization of shareholder value.

5.48  It is often said that the English company law system is shareholder-focused. But is it indeed a pure shareholder-driven model? On the one hand it is true that under English company law the board can be easily removed by the general meeting of shareholders, and that the shareholders can instruct the board. In case of a (hostile) takeover, the inability of the board to take action to block the takeover is remarkable. It is also true that one of the general duties of the director is to promote the success of the company. Section 172 of the Companies Act 2006 underlines the importance of the position of the shareholders by stating that this director’s duty is about the success of the company ‘for the benefits of its members’. However, in doing so the directors must pay attention to the interests of the other stakeholders as well, including the company’s employees, its suppliers, customers, and others. In addition, the impact of the company’s operations on the community and the environment must be taken into account. In English legal literature it is said that this set of provisions in fact constitutes an enlightened shareholder value as guiding principle.74 In this regard, however, no balancing act between the interests of the shareholders and that of other stakeholders is required. The shareholders’ interests remain the principal goal of achieving business success.

5.49  By contrast, the stakeholder-driven model is all about balancing various interests. For example, in the Netherlands managing and supervisory directors must (p. 109) let themselves be guided by the interests of the company and its business.75 This ‘corporate interest’ is held to be the result of weighing the interests of all parties involved in the company. These stakeholders include (in particular) the company’s shareholders, its employees, creditors and, to a lesser extent, the public interest. The corporate interest is not fixed. The director has to take all specific circumstances into account. This standard refers to the company’s long-term interest. Short-term gain (i.e. profit distribution to shareholders) does not fit into such long-term focus. This focus on the company’s long-term success applies to all board members, regardless of whether the board members were nominated by employees or by shareholders, or (in some cases) by third parties such as creditors. All board members have to weigh all the interests involved. This Dutch interpretation of corporate interest resembles a stakeholder-driven model.

5.50  Nowak writes that the qualified predominance of the interests of the shareholders is gaining currency.76 He refers to the view that the interests of the shareholders should normally prevail over the interests of other parties involved, unless these interests would be disproportionately harmed. In Dutch literature this position is referred to as ‘enlightened shareholder value’. It could be said that the impact of shareholders’ interests has recently diminished somewhat; that the predominance of the interests of the shareholders is not the prevailing view. Firstly, the case of Cancun is considered.77 Cancun was a joint-venture (a private limited company) with two shareholders; its directors were directly linked to respectively one of the shareholders. The Dutch Supreme Court ruled that the board had its own responsibility to focus on the company’s interests and the business as conducted by the company. This may be seen as the autonomy of the board and opposes the idea that the shareholders, as owners, have a decisive say on every subject. The Dutch Supreme Courts added that even if the shareholders are closely involved, the directors must act with due care in respect of all the relevant parties involved. The Dutch Supreme Court78 explicitly applied the abovementioned Cancun-rule in Fugro v Boskalis (both listed public companies). By applying this rule to listed public companies as well, the Supreme Court underlined the importance of the concept of autonomy of the board and, by extension, the stakeholder-driven model. Secondly, the Dutch Corporate Governance Code 2016 states in Principle 1.1 that the management board must focus on long-term value creation for the company and its business, taking into account the relevant stakeholders’ interests. In the Preamble, the code clarifies that a company constitutes a long-term alliance (p. 110) between various stakeholders. It underlines the concept of weighing the interests of all those involved, ‘as the company seeks to create long-term value’. A focus on the interests of the shareholders is absent.

5.51  With regard to German company law, Roth holds that the assessment that the German company law follows an enlightened shareholder value approach is correct. In his view, directors are primarily bound by the interests of the shareholders, but they may (and should) give attention to the interests of other stakeholders as well. Over the past few years the focus may have shifted somewhat. In 2016, the German Minister of Justice Maas adopted a firm position by stating that the shareholder-value doctrine no longer prevailed.79 The company’s interests are more than just the interests of the shareholders; it should be stakeholder value, he said. Accordingly, the German Corporate Governance Code states that the management board has to take the interests of the shareholders, employees, and other stakeholders into account, with the objective of creating sustainable value. It might be argued that this tends towards a more stakeholder-driven model for German companies.

B.  The application of the rules on corporate interest to banks

5.52  It is difficult to see how a company operating as a bank, in a highly regulated environment, could be successful in the long term without properly considering, first, the literal text but also the prudential spirit of the Single Rulebook. This is confirmed by the text of Article 88(1) of CRD IV and the EBA Guidelines on internal governance. These provide that the management body must define, oversee, and is accountable for the implementation of the governance arrangements to ensure an effective and prudent management80 of an institution, including the segregation of duties in the organization and the prevention of conflicts of interest.

5.53  A Dutch court case in respect of Fortis illustrates this point.81 In this case, which focused on the question whether any mismanagement had occurred, the Enterprise Court (Ondernemingskamer) started from the presumption that the management board of a bank and insurer should, in the performance of its duties, give priority to the interests of Fortis and its business, and the interests of all those involved in its decision making. According to the Enterprise Court, these interests include, in (p. 111) addition to the interests of shareholders, the interests of those who have entrusted their interests to Fortis, such as deposit holders and policyholders. The Enterprise Court continued by observing that entrepreneurship naturally entails risk-taking and that the assessment and weighing of the risks is a task of the management board. However, the discretion that the board has in performing this task is influenced by the nature of the company, namely conducting the banking and insurance business, and the extent to which various stakeholders and—in some cases—society as a whole, have an interest in the results of that policymaking. The conclusion is that in view of the nature of the Fortis’ business, being a bank, the management board has a special duty of care to always carefully and adequately monitor the risks, and to assess their policy considerations, decision making, and actions. The fact that Fortis was a systemic bank added extra weight, according to the Enterprise Court. In cassation, the appeal against these legal grounds of the Enterprise Court was dismissed.82 The Dutch Supreme Court ruled that the Enterprise Court’s conclusion of ‘mismanagement’ had been correct.

5.54  Based on this reasoning, and in view of the inherent risk of a bank run and the vast importance of maintaining the trust of the deposit holders and other financiers in the bank, proper bank management would entail that members of a bank’s management board should be a bit more ‘boring’ in their business decisions than the managing directors of ‘ordinary’ companies.83 Against this background, the conclusion made here is that banks almost by definition adhere to a stakeholder model, rather than a strict shareholder model, even if national company law would entail the latter.

5.55  Concurring with the position adopted by Hopt, it is held here that for banks the scope of corporate governance goes beyond the shareholders (equity governance), and includes deposit holders and other creditors as well.84 The bank’s management must keep the interests of the deposit holders and other financiers of the bank as its focal point. Compliance with the provisions of the Single Rulebook, including the restrictions on dividend distributions and repayment of capital, serves this purpose. Against this background, a (pure) shareholder-driven model cannot be applied to banks.

(p. 112) VI.  Conclusions

5.56  It may be inferred from the examples given above that a bank has a certain national legal form and that the structure and direction of the bank are basically set by the rules of national company law. The financial supervision legislation is increasingly European in origin or is European-based. Based on the examples given above and techniques of impact, this chapter has tried to map out some areas in which the financial supervisory legislation applies, and how, and thus intervenes in regular (civil-law) relationships and processes. Based on this exercise, it is observed that with regard to the extent in which action can be taken and national rules can be set aside, a development has in fact been set in motion towards a European company law statute for banks, whereby national differences in the underlying company law increasingly lose their significance.

5.57  This approach and outcome is in line with European legislation for banks. The (European) legislation for banks entails that a certain prudent system of corporate governance must be provided, on the understanding that a certain freedom and proportionality exists to choose an appropriate structure. There is no direct interpretation in the financial supervision legislation of the company’s interests that may serve the management board of a bank as a guideline. However, the status of a bank is linked to the requirement to comply with the related regulations and to have a corporate governance structure in place that ensures compliance with these rules. These rules ultimately aim at safeguarding the public interest, which is served by a properly functioning banking sector. These (European) rules for banks are neutral and apply irrespective of legal form and nationality. A Dutch bank that is a public limited company is subject to the same rules as an English bank that is a limited company. They must both meet the same rules and objectives. It is therefore probable that there will ultimately be fewer national differences in the interpretation of the company’s interests between these banking companies in different jurisdictions than is the case for ‘ordinary’ companies.

5.58  This trend is strengthened by a number of developments. First of all, by the SSM and the ECB’s related role as direct supervisor of the European banking sector, where the rules to be applied by the regulator are to a large extent derived from European regulations (in particular of course: the CRR). Other EU law (including national legislation implementing the European directives) will increasingly move towards fewer national options and less discretion. The legislation on recovery and resolution for banks, including the establishment of a European settlement authority, also confirms this trend.

(p. 113) 5.59  This chapter concludes, therefore, that, in particular with regard to European banking legislation, a development has been set in motion towards a European company statute for banks, harmonizing important elements of company law, including corporate governance, even though no formal harmonization of company law has taken place.(p. 114)


1  Reference in this chapter to ‘banks’ is a reference to ‘credit institution’ within the meaning of Article 4(1)(1) of CRR, that is, an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account.

2  Reference is made to the country-by-country overview of the European Banking Federation showing great variety in legal form and size of banks within the European banking sector; Facts and Figures 2017, available at https://www.ebf.eu, accessed 8 October 2018.

3  As listed in Annex I to Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, [2017] OJ L169/46.

4  Under Dutch law, this is arranged through a transparency requirement in respect of the management report, based on Article 2:391(5) of the Dutch Civil Code (DCC).

5  The most extensive (and important) directive is the Codification Directive, see Directive (EU) 2017/1132 of the European Parliament and the Council of 14 June 2017 related to certain aspects of company law, [2017] OJ L169/46. This Directive contains rules on, among other things, (cross-border) mergers, demergers (division), and capital issues, but very few on corporate governance. The Shareholders Directive (Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies ([2017] OJ L184/17), as amended by Directive 2017/828 of the European Parliament and of the Council of 17 May 2017 ([2017] OJ L132/1) is one of the rare examples of European harmonization of a typically corporate governance issue: the encouragement of shareholder engagement.

6  This is in fact not a limitation of this study, as the Single Rulebook that constitutes the focal point of banking supervision is European in origin. Nevertheless, to the extent allowed by the provisions of the Single Rulebook (i.e. to the extent not prohibited by the prescribed level of harmonization), there could be additional national financial regulation for banks, such as the Dutch bonus cap rule of 20 per cent as set out in Article 1:121 of the Dutch Act on financial supervision, (Wet op het financieel toezicht).

7  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, [2013] OJ L176/338.

8  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, [2013] OJ l176/1, [2013] OJ L321/6 (corrigendum).

9  Council Regulation (EU) No 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, [2013] OJ L287/63.

10  Consisting of: (i) Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms and the rules on Deposit Guarantee Schemes as set out in Directive 2009/14/EU amending Directive 94/19/EC on Deposit Guarantee Schemes as regards the coverage level and the pay-out delay, [2014] OJ L173/190 and (ii) Regulation (EU) 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, [2014] OJ L225/1.

11  See Bart Bierens, Chapter 4, this volume, Section VIII.

12  G20/OECD, ‘Principles of Corporate Governance’, 2015, 9.

13  Within the scope set forth in Article 4 of Council Regulation (EU) 1042/2013 and with the prescribed cooperation of national supervisory authorities as set forth in Article 6 thereof.

14  Parts of this study are based on and a further elaboration of a previous study of the impact of financial regulatory laws on Dutch company law by Kitty Lieverse: (i) ‘Doorwerking van het financieel toezicht recht in het vennootschapsrecht’, inaugural lecture of 24 November 2016, Radboud Repository, (http://hdl.handle.net/2066/167585), and (ii) ‘Doorwerking van het financieel toezicht recht in het vennootschapsrecht’, Ondernemingsrecht, 2017/145.

15  As is also set out in Recital 56 of CRD IV.

16  Article 91(2) of CRD IV.

17  Article 91(3) of CRD IV.

18  For comprehensive studies on corporate governance of banks, see Peter O Mülbert, ‘Corporate Governance on Banks’, European Business Organization Law Review (2009), 10, 411–36 and the Basel Committee on Banking Supervision (BCBS), ‘Guidelines Corporate governance principles for banks’, 2015.

19  For the last two decades, an exception has been made in the various corporate governance codes. They often consist of principles, followed by long lists of best practices. Therefore the framework of corporate governance is nowadays rather extensive in comparison with ‘pre-code times’.

20  Reference is, for example, made to the EBA ‘Guidelines on Internal Governance, EBA/GL/2017/11, 21 March 2018, Ch 4, para 17 et seq.

21  Article 2:140 of DCC.

22  Article 2:129a of DCC.

23  P Davies, ‘Corporate Boards in the United Kingdom’, in P Davies et al (eds), Corporate Boards in Law and Practice, Oxford University Press, 2013, 716–17 and 723.

24  The UK Corporate Governance Code mentions ‘the board’, ‘directors’, ‘executive directors’, and ‘non-executive directors’.

25  German Stock Corporation Act (AktG), Paragraph 84.

26  See M Roth, ‘Employee Participation, Corporate Governance and the Firm: A Transatlantic view focused on Occupational Pensions and Co-determination’, European Business Organization Law Review (2010), 11, 51, para 5. To avoid the mandatory employee representation in a supervisory board, a German company can decide to change into a (German) SE. The co-determination within an SE is subject to (compulsory) negotiations between the management and the employees (represented by a special negotiating body).

27  This nomination and proposal is not easy to depart from; see Article 2:158 of DCC. The articles of association may provide alternative provisions, see Article 2:158(12) of DCC.

28  As a condition for the licence, see Article 13(1) of CRD IV.

29  As set out in Recital 55 and Article 3(1)(7) of CRD IV, either as part of the single board, or by means of a separate board of supervisory directors.

30  Article 91(1) of CRD IV, as further detailed in subsections (2)–(10).

31  Reference is made to the ECB ‘Guide to Fit and Proper Assessments’, May 2017 (Updated in May 2018), para 2.2. and also the ESMA/EBA ‘Guidelines on the assessment of suitability’, para 49.

32  See extensively on this topic: Iris Palm-Steyerberg and Danny Busch, Chapter 8, this volume.

33  Article 2:166 of DCC.

34  Article 2:391(7) of DCC.

35  One-Third Participation Act, Paragraph 4(4) (DrittelbeteiligingsGesetz, DrittelbG). This is similar in practice for (large) companies who fall under the Co-Determination Act (MitbestG), according to M Roth, ‘Corporate Boards in Germany’, in Davies et al (eds), n 23, 293 (fn 333).

36  See UK Corporate Governance Code Provision B.2.4.

37  In Article 91(10) of CRD IV, as clarified in Recital 60.

38  This topic is also covered by the joint ESMA and EBA ‘Guidelines on the assessment of suitability’; ‘Final report on guidelines on the assessment of the suitability of members of the management body and key function holders’, EBA/GL/2017/12, 26 September 2017.

39  ESMA/EBA, ‘Guidelines on the assessment of suitability’, paras 43, 44, and 115.

40  Article 435(c)(2) of CRR.

41  This refers to banks which are significant in terms of their size, internal organization and the nature, scope, and complexity of their activities, as specified in Article 6 of SSM Regulation.

42  Article 88(2) of CRD IV, in conjunction with Article 435(c)(2) of CRR.

43  ESMA/EBA, ‘Guidelines on the assessment of suitability’, para 108.

44  Section 174(1) of the Companies Act 2006: ‘A director of a company must exercise reasonable care, skill and diligence’.

45  Dutch Supreme Court (HR), 10 January 1997, NJ 1997/360, annotated by Maeijer (Staleman v Van de Ven).

46  German Stock Corporation Act (AktG), Paragraph 100.

47  Hopt/Roth, Grosskommentar Aktiengezetz, Section 100, no 20.

48  Article 88(1)(a) of CRD IV.

49  EBA, ‘Guidelines on internal governance’, EBA/GL/2017/11, 21 March 2018, effective as of 30 June 2018, reference is made to Title II, para 20 et seq.

50  ibid, para 23(j) and Section 9.

51  ibid, para 23(k) and Section 10.

52  ibid, Sections 2 and 3.

53  Article 2:135 of DCC. There is an (extensive) Chapter 3 on remuneration in the Dutch Corporate Governance Code.

54  German Stock Corporation Act (AktG), Paragraphs 87 and 120 (4).

55  Directive (EU) 2017/828 of the European Parliament and the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, [2017] OJ L132/1.

56  Article 94 of CRD IV.

57  Article 92(2)(c) of CRD IV.

58  Subject to the option for Member States to introduce a lower threshold; Article 94(1)(g)(i) and (ii) of CRD IV.

59  Crédit Agricole v ECB ECLI:EU:T:2018:219, 24 April 2018, EU General Court.

60  In France, CRD IV is implemented in the Code monétaire et financier français (French monetary and financial code) (the CMF). The CMF is not considered in this chapter.

61  Crédit Agricole v ECB, n 59, para 77.

62  See extensively, Bulten and De Jong, ‘Vital companies in safe hands’, Series VHI No 142 (2017), Ch 7 (English summary).

63  In Dutch company law there are, for example, protective measures facilitated by the certification of shares via a foundation or the grant by the company of an option to an independent foundation that may call for the issuance of preference shares to enable such foundation to exercise a considerable package of voting rights.

64  For the full definition, reference is made to ‘qualifying holding’ as defined in point (36) of Article 4(1) of CRR.

65  Article 14 et seq of CRD IV.

66  Article 23(1) of CRD IV.

67  Or if the information provided by the proposed acquirer is incomplete, Article 23(2) of CRD IV.

68  C-18/14 CO Sociedad de Gestión y Participación SA v De Nederlandsche Bank NV ECLI:EU:C:2015:419, 25 June 2015, ECJ.

69  Which in fact concerns the insurance industry where a similar pre-approval requirement for shareholders who wish to acquire a qualifying holding applies.

70  Reference is made to the definition in Article 128(6) of CRD IV.

71  Article 102 of CRD IV.

72  Article 104 of CRD IV.

73  See, e.g, P Davies et al, ‘Boards in Law and Practice’, in Davies et al (eds), n 23, 8 with further references.

74  See P Davies, ‘Corporate Boards in the United Kingdom’, in Davies et al (eds), n 23, 753 with further references.

75  See Article 2:129(5) of DCC for management directors, and Article 2:140(2) of DCC for supervisory directors.

76  R Nowak, ‘Corporate Boards in the Netherlands’, in Davies et al (eds), n 23, 435–6.

77  Cancun ECLI:NL:HR:2014:797, NJ 2014/286, 4 April 2014, para 4.3, Dutch Supreme Court (HR).

78  Fugro v Boskalis ECLI:NL:HR:2018:652, JOR 2018/142, 20 April 2018, Dutch Supreme Court (HR).

79  In his own words: ‘Von der Shareholder-value-Doktrine dieser Jahre sind wir heute abgekommen.’ See H Maas, ‘Aufsichtrad und Vorstand—sollten die Rollen neu definieert werden?’, Speech at the 15th Konferenz Deutscher Corporate Governance Kodex, 21 June 2016, available at https://www.bmjv.de/SharedDocs/Reden/DE/2016/06201016_Corporate-Governance_Kodex.html, accessed 8 October 2018.

80  For a discussion on the interpretation of this part of Article 88(1) of CRD IV, see Kleis Broekhuizen, Klantbelang, belangenconflict en zorgplicht, 2016, Ch 6.

81  VEB v Fortis NV ECLI:NL:GHAMS:2012:BW0991, JOR 2013/41, 5 April 2012, Court of Appeals Amsterdam, Enterprise Court (Ondernemingskamer), annotated by Bulten.

82  VEB v Fortis NV ECLI:NL:HR:2013:1586, JOR 2014/65, 6 December 2013, Dutch Supreme Court (HR), annotated by Holtzer.

83  In respect of systemically important banks: Steven L Schwarcz, ‘Too Big to Fool: Moral Hazard, Bailouts, and Corporate Responsibility’, Minnesota Law Review (2017–18) 761–801; Steven L Schwarcz, ‘Misalignment: Corporate Risk-Taking and Public Duty’, Notre Dame Law Review (2016), 1–50.

84  Klaus J Hopt, ‘Better Governance of Financial Institutions’, Law ECGI Law Working Paper No 207/2013, II.2.