- The cost of bank failures should primarily be borne by shareholders, creditors and industry-funded safety nets
- More banks will fall under resolution measures, and industry-funded deposit guarantee funds can be used in the resolution of a failing bank
- Retail customers and micro-, small-, and medium-sized enterprises will be better protected from incurring losses
On Thursday, MEPs adopted new rules to expand the coverage of EU rules on the orderly resolution of failed banks to minimise economic disruption and protect depositors.
The new rules broaden the scope of banks covered by the EU’s legislation on bank failure, better protecting taxpayer money. They also empower authorities to manage potential bank failures more effectively and harmonise depositor protection across the EU.
Stronger protection for depositors and better access to resolution funding
In insolvency or resolution proceedings, the deposit guarantee scheme (DGS) — the industry-funded system that protects deposits under its scope up to €100,000 and then recovers those funds as a privileged creditor — is given the highest priority in the repayment hierarchy. Retail depositors and micro-, small- and medium-sized enterprises form the second tier, followed by small public authorities such as municipalities and regional governments in the third tier, provided none of these are professional investors.
Beyond the standard EU guarantee of €100,000 per depositor per bank, certain deposits linked to real estate transactions will also be protected, ranging from €500,000 up to €2,500,000 depending on the circumstances.
Resolution of smaller banks
The resolution framework — used by governments and regulators to restructure or wind up failing banks safely while protecting depositors and financial stability — will also cover small and medium-sized banks, where this is deemed to be in the public interest.
To access external funds, a failing bank’s own investors and creditors must first absorb losses equivalent to at least 8% of the bank’s total liabilities and own funds (TLOF). The so-called “bridge the gap” mechanism allows DGS funds to help meet this 8% minimum loss-sharing requirement when a deposit-funded bank does not have sufficient loss-absorbing capacity. This facilitates a smoother transfer of the bank’s business and ensures an orderly market exit.
MEPs insisted that the conditions for using this mechanism be simplified, to keep it as a viable option for smaller banks. Member states may also allow DGS funds to be used for preventive or alternative measures — either to prevent a bank from failing or to ensure depositors can access their funds in the event of insolvency.
Quotes
Luděk Niedermayer (EPP, CZ), responsible for the BRRD said: This was a very complex file, both economically and politically. However, it makes the EU crisis management framework stronger and more coherent. It broadens the resolution system, in particular for small and medium-sized banks, improves predictability, and harmonises the use of tools across the Union. It improves safeguards for citizens, SMEs, and municipalities by clarifying how their funds will be treated in the event of a bank failure.
One of the key objectives was to reduce reliance on taxpayers’ money by promoting market-based solutions and private funding mechanisms. This was a hard-won compromise, after long and difficult negotiations. More importantly, this file will enable more agile progress towards the completion of the banking union, which is a very important part of the EU’s key agenda to improve the functioning of the single market.
Irene Tinagli (S&D, IT), responsible for the SRMR, said: The reform of bank crisis management and deposit insurance framework marks a decisive improvement, making resolution more credible and accessible for small and medium-sized banks, while preserving a prudent framework with loss-absorbing capacity as the first line of defence. At the same time, the agreement strengthens the effective use of industry-funded instruments within a clear and robust framework. It also safeguards the integrity and independence of European governance, ensuring consistency, legal certainty, and greater harmonisation across the banking union. This represents a clear step forward in reinforcing financial stability and integration, while underlining the need for further progress towards a fully-fledged European deposit insurance scheme (EDIS) to complete the banking union.
Kira Marie Peter-Hansen (Greens/EFA, DK) responsible for the DGSD, said: In today’s volatile geopolitical and economic environment, it is more important than ever to have a robust and resilient regulatory framework that enables banks to continue to finance the real economy throughout the economic cycle. The adoption of the crisis management and deposit insurance (CMDI) review, and in particular of the Deposit Guarantee Scheme Directive, is an important first step in that direction and towards the completion of banking union. The main objectives of this review have been achieved. The scope of the resolution has been expanded, while still providing sufficient safeguards to ensure that deposit guarantee schemes remain sufficiently funded. At the same time, we have harmonised the deposit guarantee scheme toolbox, moving towards a more integrated European banking sector. Nonetheless, these are targeted reforms. More ambitious action will be needed to finally complete the banking union, including a fully-fledged European deposit insurance scheme.
Background
The package comprises three legislative files: the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR), and the Deposit Guarantee Schemes Directive (DGSD).
Next steps
The new rules enter into force on the twentieth day following the publication in the Official Journal of the European Union and will apply (with some exceptions) from 24 months from entry into force.
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