Their goal is to minimize the impact of bankruptcies on the economy and protect depositors. The new rules widen the range of banks covered by EU insolvency law, better protecting taxpayers’ money. They also empower authorities to manage potential bank failures more effectively and harmonize depositor protection across the EU.
Stronger depositor protection and better access to resolution funding
In insolvency or resolution proceedings, the highest priority in the repayment hierarchy is given to the Deposit Guarantee Scheme (DGS), an industry-funded scheme that protects deposits up to €100,000 and then recovers these funds as a preferred creditor. Private depositors and micro, small and medium-sized enterprises form the second tier, followed by small public authorities such as municipalities and regional authorities, unless they are professional investors.
In addition to the standard EU guarantee of €100,000 per depositor in each bank, certain deposits related to real estate transactions will also be protected. Depending on the circumstances, they will range from 500,000 to 2,500,000 euros.
Resolution of smaller banks
The resolution framework, which governments and regulators use to safely restructure or liquidate troubled banks while protecting depositors and financial stability, will also extend to small and medium-sized banks if deemed to be in the public interest.
In order to access external funds, investors and creditors of a failing bank must first absorb losses of at least 8% of the bank’s total liabilities and equity (TLOF). The so-called ‘bridging’ mechanism allows NGS funds to help meet this 8% minimum loss-sharing requirement if a deposit-backed bank does not have sufficient loss-absorbing capacity.
MEPs insisted that the terms of use of the facility needed to be simplified to keep it a viable option for smaller banks. Member States may also allow NGS funds to be used for preventive or alternative measures – either to prevent bank insolvency or to ensure that depositors can access their funds in the event of insolvency.
Quotes
The rapporteur for the Banking Recovery and Resolution Directive, LuĽeks Niedermayer (EPP, Czech Republic), said: “This directive is very complex, both economically and politically. However, it will make the EU’s crisis management system stronger and more coherent. The new rules expand the resolution system, especially for small and medium-sized banks, improve predictability and harmonize the use of instruments across the Union. It improves protection measures for citizens, SMEs and municipalities by specifying how to deal with their funds will be held in case of bank failure.
One of the main objectives was to reduce reliance on taxpayers’ money by promoting market-based solutions and private financing mechanisms. This compromise was reached after long and difficult negotiations.
Irene Tinalji (S&D, Italy), rapporteur for the SRM, said: “The reform of the banking crisis management and deposit insurance system marks a decisive improvement, making resolution more reliable and accessible to small and medium-sized banks, while maintaining a system with loss-absorbing capacity as the first line of defense.
At the same time, the agreement strengthens the effective use of industry-funded instruments in a clear and stable system. It also protects the integrity and independence of governance at European level, ensuring consistency, legal certainty and greater coherence across the Banking Union. This is a clear step forward in strengthening financial stability and integration, while underlining the need to continue moving towards a fully-fledged European Deposit Insurance Scheme (EDIS) to complete the Banking Union.”
Kira Marie Peter-Hansen (Greens/EFA, Denmark), rapporteur for the NGSD, said: “In today’s volatile geopolitical and economic environment, it is more important than ever to ensure a stable and resilient legal framework that allows banks to continue to finance the real economy. The adoption of the Crisis Management and Deposit Insurance (CMDI) review and in particular the Deposit Guarantee Schemes Directive is an important first step in this direction and towards the completion of the banking union. The main objectives of this review have been achieved. The scope of regulation has been broadened while still providing sufficient safeguards to ensure that deposit guarantee schemes remain adequately funded. At the same time, we have harmonized the deposit guarantee scheme instruments, moving towards a more integrated European banking sector.”
General information
The package includes three pieces of legislation: the Bank Recovery and Resolution Directive (BAND), the Single Resolution Mechanism Regulation (SRM) and the Deposit Guarantee Schemes Directive (DGSD).
Further measures
The new rules will enter into force on the twentieth day after their publication in the Official Journal of the EU and will (with some exceptions) start to apply 24 months after their entry into force.