Banking Law and Institutional Legitimacy in Spain

1. Introduction

Institutional legitimacy in Spanish banking law concerns the legal authority, accountability, independence, transparency and procedural fairness of the institutions that regulate, supervise and resolve banks.

A banking regulator possesses substantial public powers. It may inspect banks, demand information, impose additional capital requirements, restrict activities, impose sanctions, intervene in governance and, under the resolution framework, participate in measures capable of affecting shareholders and creditors.

The important legal question is therefore not simply whether regulators have sufficient power. It is also:

Why is the exercise of that power legally legitimate?

In Spain, institutional legitimacy is principally supported by:

statutory authorization;

clearly allocated institutional competences;

regulatory independence;

accountability;

transparency;

procedural safeguards;

proportionality;

judicial review;

cooperation between Spanish and EU authorities; and

protection of fundamental rights.

Spain's banking supervisory system must also be understood as part of the European Banking Union. Consequently, legitimacy no longer depends exclusively on Spanish institutions. The Banco de España, European Central Bank, FROB, Single Resolution Board, Spanish courts and EU courts can all have roles within the system.

2. Legal Foundation

One of the principal Spanish statutes is Law 10/2014 of 26 June on the regulation, supervision and solvency of credit institutions.

The legislation designates the Banco de España as an important supervisory authority and gives it powers necessary to supervise compliance with banking regulation. Articles 50–55 cover supervisory functions, compliance mechanisms, risk supervision, corporate governance, supervisory guidance and supervisory programmes.

Law 10/2014 also expressly recognizes that Spanish banking supervision operates within the European institutional framework, particularly the Single Supervisory Mechanism and the prudential responsibilities assigned to the European Central Bank.

Institutional legitimacy therefore begins with the principle of legality: a banking authority must exercise powers conferred on it by law rather than simply acting because it considers intervention economically desirable.

3. Banco de España and Institutional Legitimacy

The Banco de España is central to Spanish banking supervision.

Article 50 of Law 10/2014 identifies it as the authority responsible for supervision of relevant credit institutions for purposes of ensuring compliance with banking regulation and discipline.

Its supervisory responsibilities include examination of:

regulatory compliance systems;

risks affecting banks;

capital and liquidity;

governance arrangements;

remuneration policies;

internal controls;

financial reporting; and

other prudential matters.

For example, Article 52 requires supervision of risks to which institutions are or may become exposed, while Article 53 addresses governance and remuneration arrangements.

The legitimacy of these functions depends on their exercise within the limits established by legislation.

4. Institutional Independence

A credible banking supervisor must have sufficient independence from the institutions it supervises.

If banks could control supervisory decisions, regulation would lose credibility. Similar concerns arise where short-term political considerations improperly determine technical prudential decisions.

Institutional independence therefore serves several purposes:

reducing regulatory capture;

promoting consistent enforcement;

allowing technically difficult decisions;

protecting long-term financial stability; and

increasing confidence in supervision.

However, independence does not mean absence of accountability.

A legitimate independent regulator remains subject to:

legislation;

institutional mandates;

procedural rules;

transparency obligations;

judicial review; and

other accountability mechanisms.

The key concept is therefore:

independence + accountability, rather than independence without control.

5. Accountability

Banking authorities exercise significant public power and must be capable of explaining and defending their actions.

Accountability can operate at several levels.

Legal accountability

Regulators must act within powers granted by law.

Judicial accountability

Affected persons can challenge reviewable regulatory decisions before competent courts.

Institutional accountability

Different national and European authorities operate within legally defined mandates.

Administrative accountability

Authorities must comply with applicable procedural requirements.

Public accountability

Publication of legislation, regulatory standards, supervisory information and institutional reports helps outsiders understand the framework within which decisions are made.

These mechanisms prevent independence from becoming arbitrary regulatory discretion.

6. The Single Supervisory Mechanism

Spain participates in the Single Supervisory Mechanism (SSM).

This fundamentally changes the institutional structure of banking supervision.

The European Central Bank possesses important prudential supervisory responsibilities under EU law, particularly regarding significant credit institutions. National competent authorities, including the Banco de España, continue to perform important functions within the integrated system.

Law 10/2014 expressly recognizes that Banco de España's supervisory responsibilities operate in cooperation with and without prejudice to powers directly assigned to the ECB.

Institutional legitimacy in Spain must therefore be examined at two interconnected levels:

Spanish legitimacy + European Union legitimacy.

7. Allocation of Competence

Clearly defining which institution can take which decision is fundamental.

Possible institutions include:

Banco de España;

European Central Bank;

FROB;

Single Resolution Board;

Ministry or governmental authorities where legally relevant;

CNMV in securities matters;

Spanish administrative courts;

Spanish Constitutional Court;

General Court of the European Union; and

Court of Justice of the European Union.

If authority is unclear, regulated institutions may not know which body is responsible.

Clear allocation of competence therefore promotes:

legal certainty;

accountability;

effective judicial review;

avoidance of duplicated regulation; and

institutional legitimacy.

8. Supervisory Planning

Institutional legitimacy also benefits from systematic rather than arbitrary supervision.

Article 55 of Law 10/2014 requires the Banco de España to establish at least annually a supervisory programme for credit institutions subject to its supervision.

The programme can identify institutions requiring enhanced supervision and may involve measures such as:

more frequent on-site inspections;

continuous supervisory presence;

additional reporting;

more frequent examination of business plans; and

thematic examinations of specific risks.

This illustrates an important legitimacy principle: supervisory intensity should respond to identifiable prudential considerations rather than arbitrary preference.

9. Proportionality

Proportionality is fundamental to legitimate financial regulation.

A supervisory authority may possess broad powers, but the existence of power does not mean that the most intrusive measure should always be selected.

A proportionality assessment generally asks:

Is the measure pursuing a legitimate objective?

Is it capable of achieving that objective?

Is intervention necessary?

Is the burden imposed excessive in relation to the objective?

For example, a minor reporting deficiency should not automatically justify treatment equivalent to that appropriate for a severe solvency crisis.

Proportionality therefore connects regulatory effectiveness with protection against excessive intervention.

10. Transparency

Transparency contributes to legitimacy because regulated institutions should understand the legal standards applied to them.

Law 10/2014 permits the Banco de España to prepare supervisory guidance and to adopt, develop or adapt guidance issued by international banking supervisory bodies.

Published rules and guidance can:

explain regulatory expectations;

reduce uncertainty;

improve compliance;

promote consistency;

constrain arbitrary decision-making; and

enable public scrutiny.

Complete transparency is nevertheless impossible in banking supervision.

Authorities frequently possess confidential information concerning liquidity, customer information, business strategies and emerging financial problems.

Institutional legitimacy therefore requires an appropriate balance between transparency and supervisory confidentiality.

11. Due Process

A bank affected by a regulatory decision should ordinarily receive the procedural protections applicable under Spanish and EU law.

Depending on the type of proceeding, these may concern:

notice;

access to relevant material;

opportunity to make representations;

statement of reasons;

impartial decision-making;

rights of defence; and

judicial review.

The precise procedural safeguards vary according to the legal measure.

For example, an ordinary administrative sanction differs significantly from an emergency bank-resolution measure where authorities may have only hours to act.

Legitimacy therefore does not necessarily require identical procedures in every situation. It requires procedures appropriate to the nature and urgency of the governmental power being exercised.

12. Judicial Review

Judicial review is one of the strongest mechanisms supporting institutional legitimacy.

Banking regulators possess technical expertise, but technical expertise does not place them outside the law.

Courts can examine issues such as:

jurisdiction;

competence;

interpretation of legislation;

procedural fairness;

proportionality;

reasoning;

fundamental rights; and

compliance with EU law.

Judicial review therefore performs two functions.

First, it protects affected parties.

Second, it reinforces the legitimacy of regulatory institutions by ensuring that supervisory discretion remains legally bounded.

13. Legitimacy in Bank Resolution

Institutional legitimacy becomes particularly important during bank resolution.

Resolution authorities can potentially:

write down capital instruments;

affect shareholders;

affect certain creditors;

transfer a business;

establish a bridge institution;

separate assets; and

restructure a failing institution.

Such measures can interfere substantially with private economic interests.

The Spanish framework therefore operates within a specialized national and European resolution architecture involving FROB and, where applicable, the Single Resolution Board.

The Banco Popular resolution litigation provides one of the clearest practical demonstrations of how questions of competence, valuation, proportionality, procedural protection and judicial review interact with institutional legitimacy.

14. Financial Stability and Legitimacy

Financial stability itself contributes to the justification for specialized banking institutions.

Banks perform functions extending beyond ordinary commercial activity:

accepting deposits;

providing credit;

processing payments;

financing businesses;

supporting households; and

connecting financial markets.

Failure of a large bank can therefore affect people who have no contractual relationship with the failing institution.

This creates a legitimate public interest in prudential regulation.

However, invoking "financial stability" cannot by itself justify unlimited governmental power.

The intervention must still have:

legal authority + legitimate objective + appropriate procedure + proportionality + accountability.

15. Institutional Expertise

Technical expertise is another important element.

Bank supervision requires understanding of:

capital ratios;

liquidity;

credit risk;

market risk;

operational risk;

governance;

stress testing;

financial accounting;

cybersecurity; and

complex financial instruments.

Specialized institutions can therefore make decisions that ordinary administrative bodies may not be technically equipped to make.

Expertise strengthens institutional credibility, but expertise alone does not establish legal legitimacy.

A technically correct decision can still be unlawful if made by the wrong authority or through an unlawful procedure.

16. Cooperation Between Authorities

Law 10/2014 recognizes extensive cooperation between Banco de España and other supervisory authorities.

Spanish banks can operate internationally, while foreign institutions can operate in Spain. Banking groups may additionally contain securities firms, insurance companies and other financial businesses.

Consequently, institutional legitimacy increasingly depends on effective cooperation rather than isolated national decision-making.

Article 56, for example, defines important aspects of Banco de España's supervisory scope, while subsequent provisions address consolidated groups and cross-border supervisory situations.

Cooperation reduces the danger that financial institutions exploit jurisdictional gaps between different regulators.

17. Institutional Legitimacy and Regulatory Capture

Regulatory capture occurs when a regulator becomes excessively influenced by the industry it is supposed to regulate.

Banking creates a particular risk because:

financial institutions possess substantial technical expertise;

regulation is extremely complex;

regulators frequently communicate with industry participants;

supervisors may depend upon information supplied by banks; and

regulated entities can possess substantial economic influence.

Mechanisms capable of reducing capture include:

institutional independence;

conflict-of-interest rules;

transparent standards;

professional supervisory staff;

judicial review;

multiple accountability mechanisms; and

clear statutory mandates.

Institutional legitimacy therefore depends not merely on formal legal authority but also on confidence that authority is being exercised for statutory regulatory purposes.

18. Sanctions and Legitimacy

Law 10/2014 also contains a detailed sanctions framework.

The availability of sanctions is essential because supervision without enforcement could become ineffective.

However, sanctions also represent coercive governmental power.

Legitimate enforcement therefore requires:

a legal basis for the offence;

competent authority;

proper procedure;

evidence;

rights of defence;

proportionality; and

availability of legal challenge.

The legislation combines supervisory powers with a formal enforcement framework rather than leaving punishment to unrestricted administrative discretion.

IMPORTANT CASE LAWS

The following cases illustrate institutional legitimacy through questions involving authority, accountability, judicial review, resolution powers and protection of affected parties.

1. Banco Santander SA v J.A.C. and M.C.P.R., Case C-410/20

This Court of Justice case arose from the resolution of Banco Popular Español.

Banco Popular had undergone resolution in 2017. Its shares and certain capital instruments were written down, and the institution was transferred to Banco Santander.

The dispute concerned the relationship between investor remedies and the legal consequences of the resolution.

The Court of Justice delivered its judgment on 5 May 2022.

Importance for institutional legitimacy

The case demonstrates that resolution authorities possess exceptional statutory powers, but the legal consequences of those powers remain subject to interpretation and review by independent courts.

Institutional legitimacy therefore depends upon both:

effective administrative authority and effective judicial supervision.

2. Aeris Invest Sàrl v Single Resolution Board, Case T-628/17

Aeris Invest, a former Banco Popular shareholder, challenged the decisions associated with the bank's resolution.

The case required judicial consideration of important aspects of the European resolution framework.

Importance

The litigation illustrates the principle that even emergency financial-stability decisions can be subjected to judicial scrutiny.

Resolution authorities need sufficient discretion to respond rapidly to a failing bank, but their decisions remain legally reviewable.

This creates an institutional balance between:

expertise + speed + discretion + legality.

3. Algebris (UK) Ltd and Anchorage Capital Group LLC v European Commission, Joined Cases T-570/17 and T-575/17

These proceedings also arose from Banco Popular's resolution.

Investors challenged decisions connected with the European resolution process.

Importance

The case demonstrates the complexity of institutional legitimacy within the Banking Union.

A Spanish bank may be supervised and resolved through a framework involving both national and EU institutions.

Questions therefore arise concerning:

which institution possesses authority;

whether legal conditions for intervention were satisfied;

how investors' rights are protected;

whether procedural requirements were observed; and

which courts can review institutional decisions.

The case shows why clearly defined institutional competences are essential.

4. Fundación Tatiana Pérez de Guzmán el Bueno and SFL v Single Resolution Board, Case T-481/17

This case was another challenge to measures arising from the Banco Popular resolution.

Former investors challenged the legality of aspects of the resolution process.

Importance

The case illustrates that institutional legitimacy does not require courts to substitute themselves for specialist regulators.

Rather, courts determine whether specialist institutions exercised their powers within the applicable legal framework.

This maintains a distinction between:

regulatory expertise and judicial legality review.

Both contribute to institutional legitimacy.

5. Del Valle Ruíz and Others v European Commission and Single Resolution Board, Joined Cases T-510/17, T-511/17 and T-512/17

These cases similarly arose from the Banco Popular resolution.

Former shareholders challenged European measures affecting their investments.

Importance

The litigation addressed issues connected with:

property interests;

proportionality;

institutional authority;

procedural protections;

valuation; and

judicial review.

It demonstrates that financial stability may justify substantial intervention, but the affected measures still exist within a legal framework that allows their validity to be examined by courts.

6. Landeskreditbank Baden-Württemberg v European Central Bank, Case C-450/17 P

Although this case concerned a German institution rather than a Spanish bank, it is highly relevant to Spain because Spain participates in the same Single Supervisory Mechanism.

The dispute concerned the allocation and exercise of supervisory authority within the SSM framework.

Importance for Spain

The case helps explain the institutional architecture within which Spanish banking supervision operates.

EU banking supervision is not simply cooperation between completely separate national regulators. The SSM establishes an integrated supervisory system in which the ECB possesses responsibilities derived directly from EU law.

The case is therefore important for understanding:

ECB authority;

national supervisory responsibilities;

institutional competence;

judicial review; and

legitimacy of centralized European banking supervision.

7. Berlusconi and Fininvest, Case C-219/17

This case concerned a composite administrative procedure involving national authorities and the European Central Bank relating to qualifying holdings in a credit institution.

The Court of Justice examined which court had jurisdiction to review acts forming part of a procedure culminating in an ECB decision.

Importance

This judgment is particularly important for institutional legitimacy because Banking Union decisions may involve both national and EU institutions.

It demonstrates that institutional arrangements must preserve effective judicial protection even where decision-making is divided across different administrative levels.

For Spain, the same principle matters whenever Banco de España participates in a procedure that ultimately results in an ECB decision.

8. Crédit Agricole SA and Others v European Central Bank

Litigation involving Crédit Agricole and the ECB has also contributed to judicial consideration of ECB supervisory powers and governance requirements.

Importance

These cases illustrate that supervisory requirements imposed by the ECB are not immune from judicial scrutiny merely because they involve highly technical banking matters.

The courts can examine:

interpretation of banking legislation;

scope of supervisory authority;

reasoning;

proportionality; and

legal limits on administrative discretion.

This strengthens the institutional legitimacy of European supervision applicable to Spain.

19. The Banco Popular Example

Banco Popular provides an especially useful case study.

The institutional chain broadly involved:

Banco Popular → ECB supervisory assessment → Single Resolution Board resolution process → Spanish implementation/FROB involvement → acquisition by Banco Santander → extensive litigation before EU and national courts.

The example demonstrates both the strengths and difficulties of institutional legitimacy in Banking Union.

Strengths

Different institutions possess specialized responsibilities.

Supervisors assess prudential viability.

Resolution authorities deal with failing institutions.

Courts review legality.

Difficulties

Decision-making can become institutionally complex.

Affected persons may need to determine:

which authority actually made the relevant decision;

which document produced legal effects;

which court has jurisdiction;

what information can be disclosed; and

which procedural safeguards apply.

Institutional legitimacy therefore requires not merely numerous checks and balances but also clarity about how those mechanisms interact.

20. Democratic Legitimacy

Central banks and banking supervisors are deliberately insulated from ordinary political pressures to some extent.

This creates an important question:

How can an independent institution exercising major public powers possess democratic legitimacy?

The answer lies primarily in institutional design.

The legislature establishes the authority's powers through law.

The regulator operates within that mandate.

Administrative and judicial procedures constrain the exercise of those powers.

Courts interpret and enforce legal boundaries.

Public institutions remain subject to appropriate reporting and accountability mechanisms.

Thus, democratic legitimacy in technical banking regulation is largely indirect and legal-institutional, rather than requiring politicians to make individual supervisory decisions.

21. Legitimacy During Financial Crises

Financial crises create the greatest test.

Authorities may have to act:

rapidly;

using incomplete information;

before markets open;

without ordinary consultation periods; and

with substantial economic consequences.

Too much procedure may prevent effective intervention.

Too little procedure may undermine rights and accountability.

Modern banking law therefore attempts to combine rapid administrative intervention with safeguards including:

statutory thresholds;

valuation requirements;

defined resolution objectives;

creditor safeguards;

judicial review; and

compensation mechanisms where legally required.

Institutional legitimacy in a crisis therefore depends on lawful emergency capacity, not either unlimited emergency power or regulatory paralysis.

22. Practical Institutional Structure

A simplified Spanish framework can be represented as:

Spanish Legislature / EU Legislature

↓ establishes legal authority

ECB + Banco de España

↓ prudential supervision

Banks

↓ financial deterioration

Recovery / Early Intervention

↓ failure becomes unavoidable

SRB + FROB and other competent authorities

↓ resolution where legal conditions are fulfilled

Spanish and EU Courts

↓ judicial control

Accountability and legality

This illustrates that legitimacy is distributed across several institutions rather than concentrated entirely within one regulator.

23. Key Principles of Institutional Legitimacy

A legitimate Spanish banking regulatory system can therefore be understood through ten core principles:

1. Legality

Every significant supervisory power requires an adequate legal basis.

2. Competence

The institution taking the decision must possess authority to do so.

3. Independence

Supervision should be protected from inappropriate political or industry influence.

4. Accountability

Independent authorities must remain answerable within the legal and institutional system.

5. Expertise

Technical decisions should be handled by institutions possessing appropriate knowledge.

6. Transparency

Rules, responsibilities and regulatory expectations should be sufficiently understandable.

7. Proportionality

Intervention should correspond to the seriousness of the regulatory problem.

8. Procedural Fairness

Affected parties should receive applicable procedural protections.

9. Judicial Review

Independent courts must be capable of reviewing the legality of regulatory action.

10. Effective Financial Regulation

Legitimacy also requires institutions to possess sufficient powers to perform the tasks legally entrusted to them.

24. Overall Assessment

Spain's institutional legitimacy framework for banking law is therefore based on a multi-level regulatory structure.

At national level, Law 10/2014 gives Banco de España extensive supervisory responsibilities. It supervises regulatory compliance, risks and corporate governance and maintains supervisory programmes.

At European level, Spain participates in the Single Supervisory Mechanism, meaning ECB powers coexist with functions performed by Banco de España. Law 10/2014 expressly reflects this integrated structure.

For failing institutions, additional resolution bodies such as FROB and the Single Resolution Board become important.

Finally, Spanish and EU courts provide legal oversight.

The system therefore attempts to avoid two opposite problems:

Weak regulators, which cannot protect financial stability;

and

uncontrolled regulators, which possess substantial powers without adequate legal constraints.

Conclusion

Banking Law and Institutional Legitimacy in Spain concerns whether banking institutions exercise public authority through a legally authorized, independent, accountable and reviewable framework.

The legitimacy of Banco de España rests substantially on statutory authority under Law 10/2014, which establishes its supervisory responsibilities over compliance, risks, governance and other prudential matters. Spain's membership of the European Banking Union means that institutional legitimacy must additionally account for the European Central Bank and the Single Supervisory Mechanism.

Bank resolution adds another institutional level involving bodies such as FROB and the Single Resolution Board. The Banco Popular litigation demonstrates that extremely powerful resolution measures remain capable of generating extensive judicial scrutiny.

Cases including Banco Santander (C-410/20), Aeris Invest, Algebris and Anchorage, Fundación Tatiana, Del Valle Ruíz, Landeskreditbank and Berlusconi/Fininvest illustrate different aspects of this institutional structure.

Taken together, the framework shows that institutional legitimacy in Spanish banking law does not arise merely because a regulator possesses technical expertise. It results from the combination of legal authority, clearly allocated competence, independence, expertise, proportionality, procedural protection, accountability and judicial review.

These principles permit banking institutions to exercise strong supervisory powers while ensuring that those powers remain governed by law.