Regulation of judicial relief for holders of subordinated debt: Bank of Slovenia again warns of disputed provisions before voting

At the Bank of Slovenia we welcome the government’s intention to regulate judicial relief for holders of subordinated debt, but the solution currently proposed does not provide for it. Before the bill for the Act on Judicial Relief Granted to Holders of Qualified Bank Credit is voted on at the National Assembly, we are therefore drawing attention once again to some of its disputed provisions, which breach the fundamental principles of the functioning of central banks. The bill envisages actions for the Bank of Slovenia that would contravene current Slovenian legislation and international law. In our opinion, a law of this type would not provide for judicial relief for former holders of qualified bank credit. These key points were made in today’s public statement by Jurij Žitko, director of the Bank of Slovenia’s Legal Department.

At the Bank of Slovenia we are again emphasising that the National Assembly is now concluding the process of passing a law that both the Bank of Slovenia and, within the framework of the Eurosystem as a whole, the ECB have stated breaches national and international law. The Legislation and Legal Service of the National Assembly has also expressed its concerns several times in its opinion of the bill.

The proposed solutions are disputable primarily on the grounds of the prohibition of monetary financing. It encroaches on a fundamental principle of the functioning of central banks in the euro area: our power to determine the level of money creation, which is an essential principle of our functional independence.

On these grounds, namely monetary financing, the amendment under which the Bank of Slovenia is supposed to pay flat-rate compensation to certain holders of qualified bank credit is also unacceptable.

The bill puts the Bank of Slovenia in a substantially weaker position, which is unprecedented in Slovenia and the EU, as the proposed solutions are unique in terms of public institutions. The bill stipulates that the Bank of Slovenia’s liability is potentially objective, while it is subject to a reversed burden of proof. In terms of the liability of public institutions, such strict liability is exceptional both in Slovenia and in the EU. It should be further emphasised that the Bank of Slovenia was not the only public institution that took decisions in the bank recovery and resolution process in 2013. 

“At the Bank of Slovenia we do not oppose the regulation of judicial relief for holders of subordinated debt, and we understand the purpose of the proposed solution of flat-rate compensation. Other countries have also introduced solutions of this type. Neither do we oppose liability for any damage incurred as a consequence of the Bank of Slovenia’s actions. But it is not possible to impose the burden of paying compensation on the Bank of Slovenia irrespective of its culpability,” added Mr Žitko.

At the Bank of Slovenia we find it unusual that the proposers of the law decided to not consider the solutions that we had discussed with them when the bill was being drafted. They would rectify the aforementioned irregularities, and would bring the law into compliance with the current legal system.

In the event of the adoption of the law in its proposed form, we would be compelled to take all legal means to ensure the legality of our operations. The Bank of Slovenia adds that in the event of the adoption of the law in its proposed form, resolution of the disputes of the former holders of qualified bank credit would perhaps be further delayed, and again calls on the relevant institutions to resolve the disputed issues before the entry into force of the law.

More details of the Bank of Slovenia’s comments can be found in previous observations: Bank of Slovenia’s position on the amendments to the Act on Judicial Relief Granted to Holders of Qualified Bank Credit.

Also available is an expert article that analyses the position of financial buffers at central banks, and finds that the Bank of Slovenia falls in the median of Eurosystem central banks in terms of the ratio of financial buffers to the balance sheet total.