The European Court of Justice (ECJ) ruled on Friday that banks may regard capital held against customer deposits as part of their overall reserves.
Under EU rules, banks must have capital buffers worth at least 3% of their total assets.
Until Friday, French banks were forced to maintain an additional capital buffer for certain savings accounts, deposited with the state-owned Caisse des Dépôts (CDC) fund. Since the financial crisis, these funds were not included in the overall 3% calculation.
French lenders hold €400bn in tax-free savings (Louvet A). 65% of this capital is held with the CDC fund, used to finance projects such as public housing.
This policy was introduced after the financial crisis to ringfence the French financial system. In December 2016, BNP Paribas, Société Générale, Crédit Agricole, Crédit Mutuel, BPCE and La Banque Postale challenged the policy in court.
The ECB argued that these funds should not be taken into account because in the event of a liquidity crisis the state-owned CDC fund may not be able to immediately transfer the capital required to the individual lender.
French banks argued that they should not assume the cost of this risk on behalf of the French state.
The private lenders were vindicated. On Friday, the ECJ ruled that the ECB’s supervisory board, headed by Ms Danièle Nouy, misinterpreted the law.
This is the time the ECB is overruled since 2014 when Frankfurt took over the supervision of all systemic lenders.
It is now unclear whether the ECB will choose to appeal the ruling, which makes clear that the ECB’s reasoning was at fault.
All major French lenders have leverage ratios well above the 3% benchmark, but lenders have argued that the rule lead to an inefficient use of capital. The ruling means that the bottom line of all systemic lenders will look more robust.