1. Legal Aspects of Finance
Slide Set 13a
Credit Loss Liabilities in Banking:
General Framework of Contractual Damages
Regulation of Customer Relations of Credit Institutions
Liability of Bank Directors Provisions
Special Features of Credit Loss Liability
Matti Rudanko

2. Legal Basis
Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC
Solvency regulation of credit institutions and investment firms
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012
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3. Links to Legislation, European
Directive text: Regulation text:
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4. Finnish Regulation
Savings Bank Act (SBA; Säästöpankkilaki) 2001 / 1502:
in Finnish:
Ch 9: Liability for Damages: references to the Act on Credit Institutions
Act on Credit Institutions (CrIA; Laki luottolaitostoiminnasta) 2014 / 610:
in Finnish:
Ch 21 Section 1: Liability for Damages
Employment Contracts Act (Ch. 12:Damages):
Tort Liability Act:
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5. Damages liability, CrIA Ch. 21, sect. 1
The founder of a credit institution, a member of its Board of Governors or Board of Directors and its managing director shall be liable to compensate any damage or loss he has caused to the credit institution in his duties either intentionally or negligently.
The liability covers also damage or loss he has caused in his duties to a shareholder, member - - or other person intentionally or negligently through a violation of
the Capital Requirements Regulation, Regulations or decisions of the Commission laid down by virtue of Capital Requirements Regulation or the Credit Institution Directive, this Act or a Decree issued by virtue thereof, or a regulation of the Financial Supervisory Authority, the Savings Bank Act, or the by-laws of the bank.
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6. Damages liability, cont.
If the damage or loss has been caused by violating the provisions above, the damage or loss shall be deemed to have been caused by negligence unless the person responsible for the action proves that he has acted with care.
The trustee of a savings bank shall be liable to compensate any damage or loss that he has caused to the credit institution or other person either intentionally or negligently by contributing to a violation of the above provisions.
Provisions on the adjustment of the liability for damages and the distribution of liability between two or more parties liable for damages are laid down in Chapters 2 and 6 of the Tort Liability Act.
The institution of an action for damages on behalf of a savings bank shall be governed by the Savings Bank Act.
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7. Discharge from liability (SBA sect. 123)
The bringing of an action for damages on behalf of a savings bank shall be decided by the Meeting of the Trustees. In addition, the Board of Directors shall have the right to decide to bring an action for damages based on a punishable act.
A decision of the Meeting of the Trustees to grant discharge from liability or not to bring an action shall not prevent the savings bank from bringing an action if
the information submitted to the Meeting of the Trustees in the annual accounts or the audit report or otherwise has not been essentially correct and complete concerning the decision or measure on which the action is based.
If the Meeting of the Trustees has granted discharge from liability or otherwise decided not to bring an action for damages but at least one-tenth of the Trustees have voted against the decision, an action may be brought by at least three trustees who have voted against the decision or by holders of basic fund shares with at least one-tenth of all the basic fund shares.
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8. Liability of an employee (towards the employer)
Employment Contracts Act Ch. 12 s. 1, Tort Liability Act Ch. 4 s. 1:
An employee shall be liable in damages for injury or damage caused by him/her through an error or omission at work (the same rules apply to economic losses)
to an amount deemed reasonable in view of the extent of the injury or damage, the nature of the act, the status of the person causing the injury or damage, the needs of the person suffering the same, and other circumstances.
If the negligence of the employee has been merely slight, he/she shall not be rendered liable in damages.
If the injury or damage has been caused deliberately, full damages shall be awarded unless it is deemed that there are special reasons for reducing the damages.
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9. Legal provisions in force (then)
According to the Act on the Business of Deposit Banks (1990; S. 33,1) (a) a bank should not take so large risks as to substantially jeopardize the solvency of the bank. (b) The bank should have risk control systems adequate in relation to its business.
(c) Giving credit to the same person or the same cluster of clients may not exceed an upper limit of 10 per cent of the bank's own capital, imposed by the supervising authority to the bank. (d) Giving credit to the same cluster of clients may not amount to a volume that would endanger the solvency of the bank.
The Act on Savings Banks 1990: No express rule on sufficient security – Cf. CrIA 2014 Ch. 15 Sect. 11: The residential mortgage loan amount can be at maximum 90 per cent of the current value of the collateral securities at the time of granting of the loan.
Any credit given to a client by a savings bank should as a rule be accompanied by a sufficient security.
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10. Negligence and business judgment rule
Business judgment rule: allowed risk taking not negligent
Credit business is part of banks’ core business, and it involves credit risks
Considering further credit granting to overindebted customers:
Credit marketing expansion in late 80’s
close the credit faucet, let the firm go into bankruptcy and accept the realization of credit risks, or
continue credit giving and accept the risk of increased credit losses with a (slight) hope of the recovery of the firm in the future.
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