The European Court of Justice [official website] on Tuesday found [decision text] that a European Commission [official website] rule generally requiring a so-called “bail-in” for banks receiving state aid is consistent with EU law. The Commission’s Banking Communication [text, PDF], issued in July 2013, provides that shareholders and subordinated creditors must share the burden of a struggling bank’s financial shortfall prior to any state aid being authorized. In the context of a challenge to Slovenia’s response to capital shortfalls at five of the country’s banks in 2013, the ECJ found that the Commission can require that losses be absorbed by holders of equity as a precondition to public money being made available to shore up a bank’s finances. The court also noted that the Banking Communication contains safeguards that empower the Commission to suspend the requirement in the exercise its “broad discretion” when considering a particular Member State’s proposed action. Although the decision was prompted by Slovenia’s state aid to banks, the ruling is seen to have implications for the banking crisis [Vox report] in Italy, where the common practice of individuals holding junior debt in banks has made the bail-in [Economist backgrounder] provisions potentially troublesome.

This is the latest development in the ongoing issue of financial stability in the EU. In June, Germany’s Federal Constitution Court ruled [JURIST report] that an unlimited bond-buying program created by the European Central Bank [official website] complies with German law. In January 2015 EU Advocate General Cruz Villalon gave legal support [JURIST report] to the ECB program as an attempt to remedy the financial crisis in the Eurozone. In September 2014 the EU parliament approved [JURIST report] a new bank supervisory mechanism. Last November the ECJ ruled [JURIST report] that the Eurozone’s permanent bailout fund, the European Stability Mechanism, is in line with European law. The ruling came following several member states’ own courts finding the ESM constitutional under their own laws, including Estonia and Germany [JURIST reports]. That June the European Commission [official website] announced [JURIST report] a proposal that would address the problems of bailing out large banks with public funds during financial crises in the future.