Keywords: precautionary principle; EU law; financial law; banking resolution.
In an abstract sense, precaution means acting in the present to avoid harm in the future, particularly when the likelihood of harm is uncertain. One may carry an umbrella in case the weather changes or wear a seatbelt without expecting an accident. Precautionary measures are taken despite their known or unknown side effects—trial vaccinations come to mind.
In law, the precautionary principle is a heavily ideologized concept. At one end of the spectrum, it conveys a heavy-handed interventionism that can cripple the free market,[1] and which is associated with European-style risk management.[2] At the other end, it is an alternative to reductive cost-benefit analysis of human life and the environment.[3] For example, the precautionary principle would allow a ban on pesticides before the health risks become apparent, even at a significant cost to agriculture. This ideological debate has unfolded in environmental and public health law since the 1990s.
What is the link between precaution and banking/financial law?
The idea of a “financial” precautionary principle emerged, as might be expected, following the global financial crisis of 2007-09. Its proponents point to the similarities between natural ecosystems and the financial system.[4] To list a few: both are characterised by radical uncertainty, or ‘unknown unknowns’; both are prone to inaction bias (although this point is sometimes exaggerated); and both can devastate human life in the event of major failure. The growing integration of environmental and financial policies, for instance, through Environmental, Social and Governance (ESG) standards, lends weight to this theory.
A precautionary principle in financial law denotes the ability (or, in ‘strong’ versions, the obligation) to restrict high-risk, speculative behaviour in the market before its consequences become apparent. It is often expressed in terms of burden shifting, i.e., requiring those who market risky products to prove their safety in order to continue trading.[5] More generally, it indicates process: a principled way of managing uncertainty through provisional ex ante intervention and ongoing ex post review.
Financial law is yet to embrace such a concept. Yet many features of precaution in the abstract (or a ‘precautionary approach’) are already embedded in this field. For example, under the Bank Recovery and Resolution Directive (BRRD), precautionary recapitalisation describes a bail-in of shareholders’ and creditors’ funds carried out while a bank is solvent to remedy serious economic disturbances.[6] Moreover, there are calls for a precautionary approach towards climate-related financial risks, an area where the precautionary principle in environmental law could conceivably apply directly (though climate-related financial regulation is limited, e.g., disclosure rules and stress testing).[7]
What are the problems with the precautionary principle?
The polarising ideology of the precautionary principle often distracts from its many practical limitations. Its history in European Union environmental and health law illustrates this point. To quote Advocate General Bobek:
‘Beauty is in the eye of the beholder. That also appears to be the case for the content, scope and potential use of the precautionary principle’.[8]
First, it is a concept developed in large part through litigation, and which displays, starkly, the flaws of an adversarial system.[9] The majority of cases invoke the precautionary principle as a justification for public measures adopted in the absence of robust scientific evidence—where public safety is ‘said to be involved’.[10] Beyond the obvious risk of political opportunism, it is troubling to approach public safety as a contest with losers and winners.
Second, the notion of burden shifting finds little support in the case law, which instead shows an erosion in the standard of proof across the board. Thus, the precautionary principle gives legal backing to a wide range of policy choices, including ones that push the boundaries of an institution’s mandate, as well as the decision not to act. A third but related challenge is that ex post review of precautionary measures must remain scarce. Courts are neither willing nor suitable to assume this responsibility, which is left on the decision-makers themselves.
Is litigation driving a “financial” precautionary principle?
At present, litigation seems unlikely to bring about drastic change. As a general principle of EU law,[11] the precautionary principle has surfaced, very timidly, in banking resolution. In Fundación Tatiana Pérez de Guzmán el Bueno and SFL, concerning the resolution of Banco Popular in Spain, the applicants argued that the Single Resolution Board (SRB) had failed to intervene in a timely manner to save the bank.[12] They alleged a breach of ‘the principle of prudential banking … derive[d] from the precautionary principle applicable in environmental matters’.[13] The General Court gave rather evasive statements on whether the precautionary principle could apply.[14] Ultimately, the claim was dismissed on the basis that the SRB (i.e., crisis management) did not have the competence to act because prudential policy (i.e., crisis prevention) falls under the remit of other authorities.
However, it is worth contemplating if the precautionary principle is functionally present in the case law. In the recent appeal of Corneli, involving Banca Carige in Italy, the Grand Chamber of the Court examined the issue of the European Central Bank (ECB) applying national law in its capacity as competent authority for systemically important banks in the euro area.[15] One of the questions was whether a bank could be placed under temporary administration in cases of ‘significant deterioration’ as per EU legislation, even though national law explicitly required (the higher threshold) that ‘serious financial losses are expected’. By answering in the affirmative, the Court effectively lowers the standard of proof needed to trigger the resolution process under Italian law, which broadly resembles the application of the precautionary principle.[16]
Over the past few years, the CJEU has dealt with a surge in resolution cases, which is gradually declining. Further research is needed to map precautionary thinking in the case law, the degree of convergence with environmental and public health law, as well as the opportunities that financial law may offer to address the limitations of the precautionary principle.
[1] See esp. Cass Sunstein, Laws of Fear: Beyond the Precautionary Principle (CUP, 2009).
[2] Cf. Jonathan B Wiener, ‘Whose Precaution after All? A Comment on the Comparison and Evolution of Risk Regulatory Systems’ (2003) 13(3) Duke J Comp & Int’l L 207.
[3] See, for a critique of CBA, Frank Ackerman and Lisa Heinzerling, ‘Pricing the Priceless: Cost-Benefit Analysis of Environmental Protection’ (2004) 150(5) Penn Law Review 1553; Douglas A Kysar, ‘It Might Have Been: Risk, Precaution and Opportunity Costs (2006) 22 J Land Use & Envtl L 1.
[4] This debate was initially framed in terms of financial stability, although more recently it extends to consumer protection. See e.g. Hillary J Allen, ‘A New Philosophy for Financial Stability Regulation’ (2013) 45(1) Loy U Chi L J 173.
[5] Hillary J Allen, Driverless Finance: Fintech’s Impact on Financial Stability (OUP, 2022), Chapter 6.
[6] Another example is the Precautionary Liquidity Line of the IMF.
[7] Hugues Chenet, Josh Ryan-Collins and Frank van Lerven, ‘Finance, Climate-change and Radical Uncertainty: Towards a Precautionary Approach to Financial Policy (2021) 183 Ecol. Econ. <https://www.sciencedirect.com/science/article/pii/S092180092100015X> accessed 05/12/2025.
[8] Opinion of AG Bobek in Confédération Paysanne (C-528/16, EU:C:2018:20), para. 47.
[9] Elizabeth Fisher, ‘Is the Precautionary Principle Justiciable?’ (2001) 13(3) JEL 315; Ian S Forrester, ‘The Dangers of Too Much Precaution’ in Mark Hoskins and William Robinson (eds.) A True European: Essays for Judge David Edward (Hart Publishing, 2003).
[10] Forrester, page 227.
[11] Judgment of the Court of First Instance of 26 November 2002, Artegodan (T-74/00, EU:T:2002:283), para. 184.
[12] Judgment of the General Court of 1 June 2022, Fundación Tatiana Pérez de Guzmán el Bueno and SFL, (T-481/17, EU:T:2022:311).
[13] Para. 445.
[14] Paras 446-448.
[15] Judgment of the Court of 15 July 2025, Corneli (C-777/22, EU:C:2025:580).
[16] Para. 166.