Brussels, 20 March 2024
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Costs of banks failures should be borne in the first instance by shareholders and creditors, and if further resources are needed, by industry-funded safety nets not taxpayers
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Medium-sized banks in scope of resolution if deemed critical to financial stability in a regional market
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Retail customers as well as micro, small and medium-sized enterprises protected from bearing losses
Economic and monetary affairs MEPs adopted new rules concerning orderly market exit for banks of all sizes to minimise the economic burden on society and moral hazard.
On Wednesday evening, the Economic and Monetary Affairs committee voted on Crisis Management Deposit Insurance Review (CMDI). Changes to the directive (BRRD) were adopted with 28 votes to 22 and 3 abstentions and to the regulation (SRMR) with 30 votes to 14 and 9 abstentions. Changes to the directive on deposit protection (DGSD) were adopted with 37 votes to 13 and 3 abstentions. MEPs want to better safeguard taxpayers’ money, bring more banks into scope, empower authorities to handle effectively a potential failure and harmonise depositor protection.
Bank resolution in public interest
MEPs agreed that resolution framework should be applied to any bank, where it is assessed that there is public interest to do so, irrespective of its size. They also clarified, that a bank can play a critical function at a regional level. A resolution action should be treated as in the public interest where winding up of the institution under normal insolvency proceedings would not meet those resolution objectives (such as ensuring continuity of critical functions, avoiding a significant adverse effect on the financial system, protecting public funds and protecting depositors) more effectively.
Outside resolution, in order to protect public finances as well as the level playing field in the internal market, tax-payer funded extraordinary financial support could be granted only to remedy a serious disturbance in the economy of a Member State of an exceptional or systemic nature and to preserve financial stability.
Depositor hierarchy
MEPs also introduced a modification in the ranking of creditors, which should make the deposit guarantee schemes (DGS) funded by banks to compensate depositors as well as the single resolution fund (SRF) more accessible for the funding of resolution.
That in turn should limit use of public support and pave the way to more effective solutions in case of a bank resolution. They proposed a two-tiered approach where deposits of retail clients as well as micro, small and medium-sized enterprises benefit from a higher priority ranking over eligible deposits of large enterprises and central and regional governments. That tiered approach is designed to provide enhanced protection for a wide range of depositors, reflecting their unique characteristics.
Protecting deposits
Finally, MEPs want to ensure a smooth transition to the completion of the banking union. In order to do so, they voted for harmonisation of the DGS’ functions. The number of discretions under national law should be limited and all DGSs should be able to finance resolution measures, preventive measures and other alternative measures to the payout of depositors.
MEPs stressed that any involvement of the DGSs must be cost-effective and transparent
On top of the coverage of 100 000 Euros per depositor and bank, MEPs want deposits resulting from certain events such as a real estate transaction to be protected in the EU (as a minimum to an amount of EUR 500 000 and as a maximum to an amount of EUR 2 500 000 for a harmonised duration of 6 months). Moreover, member states should ensure a direct repayment of covered deposits by DGSs to clients. In case a DGS is not able to make the repayable amount available within seven working days, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of making a request for that amount.
To mitigate moral hazard, banks receiving support from DGSs in the form of preventive measures, their shareholders, creditors or a business groups to which they belong should contribute to the restructuring from their own resources and provide an adequate remuneration for the preventive measure granted by the DGS.
Quotes
Luděk NIEDERMAYER (EPP, CZ), responsible for BRRD said:
“The package voted in today is bringing the Banking Union a step closer. It will make sure the failings of the banks and the costs associated with it are not borne by the taxpayers but by the industry itself. The rules will also protect the depositors better, by introducing new rules on the pay out in case of bank failure. The reports voted in today have also made sure that smaller banks are not included in the scope, if it is not necessary.
Negotiations of compromises were surprisingly difficult, and I am proud that we were able to bridge our differences. This result will be good for protection of banks clients, stability of financial sector and the economy, while making the state interventions much less likely. I hope we will also reach the support of the majority in the Plenary”.
Pedro MARQUES (S&D, PT), responsible for SRMR, said:
“The CMDI package delivers on three key fronts: it increases financial stability, ensures better depositor protection, and brings us closer to the Banking Union we want and need.
The package expands the EU-level resolution toolbox to small- and medium-sized banks, in case whose failure could lead to spillover effects and a larger disruption of services and stability. It establishes greater harmonisation regarding the use of industry-funded safety nets, consequently improving the level playing field; finally, the rules make public interventions less likely, and effectively only a last resort, thus better protecting taxpayers.
We managed to reach a balanced compromise with other groups, and we are confident that this result also merits support from the EP plenary.
Kira Marie PETER-HANSEN (Greens/EFA, DK) responsible for the DGSD, said:
“The Parliament has just approved an ambitious revision of the Deposit Guarantee Scheme Directive (DGSD). By further harmonising the use of DGS funds, we pave the way towards the creation of an European Deposit Insurance Scheme (EDIS), the still missing piece of the Banking Union. Our report also ensures a level playing field, while enhancing the protection of depositors.”
Next steps
Plenary is expected to vote on the texts during the second plenary session in April, to close the first reading without agreement with Council. The file will be followed up by the new Parliament after the 6-9 June European elections.