Independence and supervisory discretion – a transatlantic perspective

Keynote speech by Pedro Machado, Member of the Supervisory Board of the ECB, at the 2025 Harvard Law School/PIFS Europe – US Symposium

Madrid, 4 June 2025

Distinguished members of the 2025 Harvard Law School/PIFS Europe – US Symposium,

It is both a pleasure and an honour to address you today at this distinguished forum.

I would like to start by paying tribute to Harvard Law School, the non-financial sponsor of this event, which is one of the most prestigious and influential law schools in the world, for its significant contributions to legal scholarship through its pioneering case method of teaching, rigorous academic environment and a prolific faculty producing cutting-edge research in virtually every field of law. Its scholarly journals, including the Harvard Law Review, have shaped legal thinking in the United States and internationally. Harvard’s extensive library, research centres and vibrant intellectual community continue to serve as a hub for innovative legal thought.

This symposium fosters vital dialogue between the EU and US legal systems, so this is the perfect setting for me to offer a transatlantic view on independence and supervisory discretion.

The political choice underpinning the supervision pillar of the banking union was to grant an independent institution – the ECB – powers and responsibilities to supervise European banks.^[1] The transfer of these powers and responsibilities from national to EU level was tied to the independent exercise of supervisory powers.^[2]

The German Federal Constitutional Court (BVfG), in its judgment on the banking union in the context of the German constitutional review^[3], examined the tensions that the ECB’s independence raises in relation to democratic legitimacy enshrined in the German Constitution, in particular as its supervisory tasks come on top of its monetary policy mandate^[4]. In the view of the BVfG, this tension is “compensated by specific safeguards that serve to ensure democratic accountability” in relation to the supervisory tasks and powers entrusted to the ECB. These safeguards in the SSM Regulation notably include strict judicial review of the ECB’s actions in that domain and specific national parliamentary oversight rights, coupled with the ECB being accountable to the EU institutions that have transferred tasks and powers to it, “in order to enable those institutions to evaluate such transfers, to rescind them where necessary, or to limit or withdraw the ECB’s independence”^[5].

So accountability by means of democratic oversight and scrutiny paired with judicial review constitutes the backbone of the ECB’s independent exercise of supervisory powers. As a result, the ECB has broad discretion when performing its supervisory tasks, as also pointed out by the BVfG in a crucial passage of its judgment.^[6] On this basis, it is argued that supervisory discretion is an essential tenet of the exercise of powers by the ECB in its supervisory role.

Administrative discretion has been the subject of much research in Europe for decades now. The work of European administrative law scholars has had significant influence on the extent of administrative discretion in EU law, even though the EU’s institutional setup does not always allow for a strict reproduction of national legal concepts and presents particular challenges when it comes to the administrative discretion of EU agencies in view of the Meroni doctrine on the delegation of powers.

When it comes to the ECB, the SSM Regulation empowers it to exercise discretion in pursuit of its supervisory tasks and responsibilities. And rightly so – supervision is not a purely mechanical activity or the strict implementation of legal norms and rules. Rather, it relies on specific technical expertise, which entails exercising judgement backed by thorough fact-finding and based on forecasts and complex assessments. Effective and efficient supervision therefore requires a margin of technical discretion.

It is argued that this margin of technical discretion needs to be respected unless the ECB commits a manifest assessment error or exercises this discretion in an unlawful manner – notably, if the ECB exceeds the remit of the competences entrusted to it or does not observe essential procedural guarantees. These guarantees include the ECB’s obligation to carefully and impartially examine all the relevant elements of the situation in question and to provide an adequate statement of the reasons for its decisions.

A manifest error of assessment should, in turn, be seen from the perspective of the judicial standard of review. As proposed by Advocate General Emiliou in his Opinion in the Livret A case^[7], “the concept of ‘standard of review’ refers, generally, to the intensity of review that courts may exercise when reviewing the lawfulness of the challenged acts. Approached from another angle, the standard of review corresponds to the degree of deference accorded by courts to the bodies which adopted the challenged acts. Obviously, the higher the intensity of review, the lower the degree of deference accorded to the body in question and vice versa”.

The EU judicial standard of review, reflected in settled case law, revolves around deference towards technical discretion subject to certain limits. This means that EU courts do not perform a de novo assessment of the subject matter brought before them. Instead, they establish whether the evidence relied on is factually accurate, reliable and consistent, whether that evidence contains all the relevant information which must be taken into account in order to assess a complex situation, and whether it is capable of substantiating the conclusions drawn from it. They perform a “review of legality” of the challenged acts against the relevant procedures and substantive rules. The EU judges refrain from setting out what would have been, in their view, the best course of action for the institution concerned considering the specificities of the case at hand. This is also the standard followed by the Court in reviewing ECB acts adopted in the exercise of supervisory discretion. As expressly asserted in the judgment delivered in the very same case, “in so far as the ECB has a broad discretion (…), the judicial review which the Courts of the European Union must carry out of the merits of the grounds of a decision such as the decision at issue must not lead them to substitute their own assessment for that of the ECB, but seeks to ascertain that that decision is not based on materially incorrect facts and that it is not vitiated by a manifest error of assessment or misuse of powers.”^[8]

It is thus not sufficient, in order to establish a manifest error of assessment, for the judges merely to take a different opinion to that of the institution responsible for the action under review. This is precisely because technical discretion entails choices which are permitted by law, notably when EU institutions are given discretion when applying the open-textured legal concepts in individual cases enabling, for instance, prospective analyses which necessarily rest on value judgements or empirical assessments.

This provides us grounds for comparison with the US judicial standard of review, which leans towards administrative discretion exercised by independent agencies. In the aftermath of the significant expansion of federal administrative agencies during the New Deal, Congress passed the Administrative Procedure Act (APA) in 1946 to establish procedures for agency rulemaking and adjudication. Under the APA, courts were required to defer to agencies unless agencies’ actions were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law”.^[9] Further, in evaluating agency adjudications, courts were required to accept agency factual findings unless they were “unsupported by substantial evidence”.^[10]

Two years before the enactment of the APA, in Skidmore^[11], the US Supreme Court established the deference standard affirming that judicial deference to an agency’s conclusion was not automatic, requiring courts to consider “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade”.^[12] Chevron changed the deference doctrine in 1984^[13], requiring courts to defer to an administrative agency’s interpretation of an ambiguous statute that it administers, provided the agency’s interpretation is reasonable. The two-step framework consisted of assessing, as a first step, whether Congress had spoken directly to the precise question at hand – if so, courts and agencies would be required to follow Congress’s intent; and in a second step, if the statute is silent or ambiguous, assessing whether the agency’s interpretation is reasonable – if so, courts should defer to the agency’s view.

While in the EU the interpretation of law remains squarely within the scope of full review by the EU courts, here we can see some similarities between judicial deference on both sides of the Atlantic: while deference is granted by the EU courts in the face of technical discretion, in particular when EU institutions are given discretion on how to apply certain open-textured legal concepts or undetermined legal concepts in individual cases, the US Supreme Court considered that statutory ambiguity offered grounds for agency discretion to which the US courts should award deference. As in Europe, the Supreme Court in the United States had the opportunity to counterbalance the idea of automatic deference posed by the Chevron standard in some subsequent rulings^[14], hence leaving the less deferential treatment laid down in Skidmore intact in certain instances.

Last year, however, the Supreme Court made a significant shift by overruling Chevron in Loper Bright.^[15] The Court held that the APA requires courts to exercise their independent judgment in interpreting statutes and that courts may not defer to an agency’s interpretation simply because a statute is ambiguous. Chevron was held inconsistent with the APA’s requirement that courts, not agencies, decide questions of law applicable to agency action, hence ambiguity was quashed as a source of judicial deference towards the agency’s discretion in statutory interpretation.^[16]

Considering the judicial deference standards in the United States and the EU in view of Loper Bright, the question is whether divergent paths seem to be emerging in the sense that US courts will be more prone to significantly curtail independent agencies’ discretion when called to review their actions. It might, however, be premature to consider that Loper Bright heralds the end of judicial deference towards agencies’ discretion, as more traditional deference principles seem to have been left intact, notably in the cases of discretionary determinations made when Congress has conferred upon the agency the power to make that determination, or allegedly in the case of agency fact-finding. Leaning on Professor Thomas Merrill’s carefully reasoned comment on the ruling, as published last year in the Harvard Law Review, it is possible that Loper Bright could ultimately prove to be “a new framework accommodating significant acceptance of agency interpretations” rather than a “power grab” – at least in the hands of judges with the right “attitude”.^[17]

Let me finish our brief tour across the Atlantic by offering some candid views on the institutional rationale for supervisory discretion and on the need to preserve a judicial standard of review of appropriate deference in accordance with certain safeguards.

As I said at the very beginning, broad discretion in the exercise of supervisory powers should be seen as a fundamental pillar of independence which is counterbalanced by accountability and judicial review. The latter, however, should follow a deference standard when it comes to the exercise of supervisory discretion. This is because the rationale underpinning the judicial deference review standard, when it comes to decisions involving technical or expert discretion, does not lie solely in the ill-suited nature of judicial proceedings for any form of ex novo review, but, more importantly, as Advocate General Emiliou emphatically put in his Opinion in the Livret A case^[18] mentioned earlier, “there is a constitutional reason militating against full judicial review of discretional choices made by the administration. In those cases, the power to make those choices has been expressly entrusted to an institution other than the Court of Justice of the European Union (…). A too intrusive form of judicial review would encroach upon the margin of discretion given to the institutions in order to exercise their powers effectively, thus conflicting with the principle of conferral of powers to the institutions, and upsetting the principle of institutional balance”.

While the US Supreme Court tends to assess the exercise of discretion granted to agencies from the perspective of the constitutional separation of powers between the executive and the judicial branches, supervisory discretion granted to the ECB should be seen in the light of the more fundamental construct of institutional balance at EU level so as to ensure that supervision is carried out efficiently and effectively. Drawing on the recommendations of the expert group entrusted with an external assessment of the Supervisory Review and Evaluation Process^[19], empowering supervisory judgement is key for the ECB to become more risk-based in its supervisory approach. Supervisory judgement is particularly important in an environment of rapidly evolving risks, where past trends may not allow for sufficiently forward-looking risk assessments.^[20] In this regard, qualitative measures are a key tool available to supervisors to address gaps – notably in banks’ internal controls, internal governance and risk culture. As qualitative measures aim to address risks that cannot easily be measured numerically, they necessarily require a high degree of supervisory judgement. The effectiveness of qualitative measures relies on timely remediation by supervised entities. When remediation of identified weaknesses is insufficient, supervisors should expeditiously increase the severity of supervisory tools and swiftly move up the escalation ladder. Escalation and enforcement therefore help ensure that supervisory discretion is effectively exercised.

I would like to finish this transatlantic journey with a passage from the correspondence between Simone de Beauvoir and Jean-Paul Sartre, written when the former was in the United States while the latter remained in France^[21]:

“The distance is not merely geographical; it is a distance of experience, of seeing the world in such different terms. But I believe this very dissonance is what enriches our understanding.”