European Commission to strengthen regulatory framework for bank crisis management

The European Commission published on 18 April 2023 a new legislative package aiming to adapt and strengthen the framework for crisis management and deposit insurance (CMDI), with an acute focus on small and medium-sized banks.

This proposal, which follows the announcement of the Eurogroup finance ministers inviting the Commission and the European co-legislators to review the CMDI framework by early 2024 at the latest, has the following objectives:

1. Safeguard financial stability and taxpayers’ money by facilitating the use of deposit guarantee funds in the event of a crisis;
2. Protect the real economy from bank failure by expanding the situations where resolution can be implemented instead of liquidation;
3. Strengthen deposit protection by increasing the scope of depositors covered.

The CMDI framework consists of several texts that have been developed over the years:

• Directive 2014/59 on Bank Recovery and Resolution (BRRD) which established a legal framework for the resolution of troubled banks to protect taxpayers and minimise market disruption (revised by Directive 2019/879 and Regulation 2022/2036);
• The revised Deposit Guarantee Schemes Directive (DGSD) 2014/49, which provided for common standards for national deposit guarantee schemes in the EU, with a view to enhancing depositor confidence in banks and affecting small depositors;
• Regulation 2014/806 on the Single Resolution Mechanism (SRMR) which established a framework for the financing of bank resolution in the banking union, providing for the creation of a Single Resolution Fund (SRF) financed by bank contributions (revised by Regulation 2019/877).

It should be noted that the creation of a European Deposit Insurance Scheme (EDIS), initially proposed in 2015, has not been relaunched during this new banking package, and could be reconsidered in the light of the revision of the CMDI framework.

Thus, all these legislative texts are subject to proposed amendments, which will soon be discussed in the Council and the Parliament (a first exchange of view at ECOFIN has already occurred, which highlighted very different views on the legislative proposal).

BRRD / SRMR

The proposed amendments to the BRRD are also reflected in the SRMR. They primarily aim at clarifying a resolution framework for small and medium-sized banks where the asset/liability transfer tool would be used.

• Harmonisation of the conditions of the Public Interest Assessment (PIA), comparing resolution to insolvency, with the aim of widening the perspective of recourse to the resolution regime, particularly for small and medium sized banks, and thus reducing the likelihood of impacting depositors or even resorting to public money;
• Facilitate the intervention of deposit guarantee schemes (DGS) in the event of resolution of small and medium-sized banks, using transfer tools that avoid impacting depositors, while respecting the proportionality principle;
• Aligning the level of protection of other/uncovered deposits and eligible retail/SME deposits with that of deposits covered by a DGS, thereby removing the current “super-preference” for the latter;
• Clarification that failing or likely to fail is a sufficient condition for the implementation within a reasonable timeframe of a national winding-up procedure of a bank whose resolution is not deemed to be in the public interest, as well as the role of the Single Resolution Board (SRB) in deciding on resolution measures;
• Finally, with a view to eliminating overlap between supervision and early intervention measures, clarification of the conditions for the latter.

Regarding the capital requirement and eligible liabilities, the text reinforces the principle that MREL should be the “first and main line of defence for all banks“. Some amendments relate to the Daisy chain act or Regulation 2022/20236:

• Introduction of principles for the calibration of MREL for medium and small banks subject to a transfer strategy.
• Adaptation of the MREL framework for entities in liquidation
  • Except in exceptional cases, the MREL will only correspond to the amount needed to absorb losses (i.e., prudential capital);Permission of the prior permission regime for eligible liabilities;No deduction of MREL holdings issued by entities in liquidation;Not subject to MREL reporting and disclosure requirements;
  • For resolution entities and intermediate entities that are part of the same resolution group and established in the same Member State, the resolution authority may decide to apply the internal MREL on a consolidated basis.

DGSD

Most of the amendments aim to better protect depositors by strengthening the role of DGSs in the context of a banking crisis to maintain depositor confidence and financial stability:

• Preventive intervention to support a bank in difficulty (in capital or liquidity, or via guarantees) or in the event of alternative insolvency measures (in the context of transfer strategies);
• Harmonisation of the “least-cost” test, which makes it possible to determine the least costly intervention (calculation methodology to be clarified via an RTS of the EBA);
• Extension of the coverage to deposits above EUR 100K on a temporary basis (e.g. real estate transactions, inheritances, etc.) to all EU countries as well as to deposits of public entities (e.g. hospitals, schools, etc.), but exclusion of deposits related to the financing of terrorism.

Links to the Commission’s proposals and impact assessment:

Banking Union: Commission proposes reform of bank crisis management and deposit insurance framework

Proposed amendments to the Bank Recovery and Resolution Directive

Proposed amendments to the Single Resolution Mechanism Regulation

Proposed amendments to the Deposit Guarantee Schemes Directive

Proposed amendments to the Daisy Chain ActImpact assessment accompanying the proposal