Banking Union
date: 31/05/2023
On 18 April, the European Commission put forward a proposal to review the bank recovery and resolution directive, the deposit guarantee schemes directive and the single resolution mechanism regulation. The review – a long-standing project that was initiated a few years ago – is an opportunity to take stock of the experience gained over the last few years and address any identified shortcomings.
Significant progress achieved
Since the financial crisis and the sovereign debt crisis in Europe, the EU has built a unified bank resolution and deposit guarantee framework to preserve financial stability, depositor confidence and prevent the use of public funds to rescue banks in difficulty (bail-in instead of bail-out).
Significant progress has been achieved over the last few years. Resolution plans have been prepared to determine the most effective strategies to implement in case of a bank failure. Banks have made an effort to improve their resolvability, including through the build-up of resolution buffers to prepare for a potential bail-in. And deposit guarantee schemes and resolution funds have been set up and financed by the industry. However, the European resolution framework has scarcely been applied, especially in the Banking Union.
The implementation of resolution strategies presented challenges for smaller and medium-sized banks, which are financed mainly with own funds and deposits from their customers. Consequently, their balance sheet structure does not always ensure that the minimum bail-in condition of 8 % of total liabilities necessary to access resolution funds can be met without bailing-in depositors. Resolution authorities have been reluctant to impose losses on depositors, given the risks of contagion, loss of confidence and financial instability. As a result, using resolution funds to facilitate the implementation of the planned resolution strategy became more challenging. This may have prompted the search for alternative national measures, outside of the harmonised resolution framework, subject to less stringent conditions and in most cases backed by recourse to public money.
Improving the crisis management framework
The reform aims to make greater use of the harmonised resolution framework when it better preserves financial stability, protects depositors, and minimizes the use of public funds. The public interest assessment, defining whether a bank should be resolved or placed in liquidation, is clarified to underline the fact that resolution is not and has never been ‘only for the few’. Experience has shown that the high degree of discretion enjoyed by resolution authorities increased the risks of divergence and an unlevel playing field in the management of bank failures.
The proposals also address the issue of resolution financing, to make sure that private funding – from the banks’ internal loss-absorbing capacity (shareholders and creditors), deposit guarantee schemes and resolution funds – is available to help carry out the resolution strategies. The reform is intended to facilitate the intervention of deposit guarantee schemes in resolution when authorities conclude that imposing losses on depositors would threaten financial stability. This mechanism, subject to safeguards and facilitated through targeted changes to the hierarchy of claims, will better shield depositors and taxpayers by ensuring that costs are borne by industry-funded safety nets.
The reform also recognises the merit of other crisis tools outside resolution, such as preventive measures or alternative measures from deposit guarantee schemes, which are useful to address bank crises and should remain part of the toolbox.
Enhancing depositor protection
The reform will also improve the protection of depositors throughout the EU. The level of coverage of EUR 100 000 per depositor and bank will remain for all EU eligible depositors, but the standards of depositor protection across the EU will be harmonized to ensure consistent protection of EU citizens’ money. The new framework extends depositor protection to public entities such as hospitals, schools or municipalities. It also includes measures to harmonise the protection of temporary high balances on bank accounts in excess of EUR 100 000, linked to specific life events (such as inheritance or insurance indemnities).
CMDI and the Banking Union agenda
The reform of the crisis management and deposit protection framework is an important step that will contribute to the Banking Union project. It offers the opportunity to build a coherent resolution mechanism, thereby reassuring European citizens that their financial system is robust and can withstand possible future crises. Finally, the reform will pave the way for resuming policy discussions on the other parts of the Banking Union, starting with a European deposit insurance scheme and the integration of the banking market in Europe.