The European Commission will present, on Tuesday 18 April, a legislative package revising the banking crisis management framework - the ‘BRRD’ (2014/59) and ‘DGS’ (2014/49) directives, the ‘SRMR’ regulation (806/2014) - which will aim, among other things, to broaden the scope of bank resolution to include medium-sized banks and to involve national deposit guarantee schemes more closely in the resolution of a failing bank.
It is not a question of completely overhauling the regulatory framework governing a banking crisis that was put in place after the 2008 financial crisis, such as the number of large banks (currently 120 institutions) that fall within the scope of the ‘Single Resolution Board’ (SRB), the European authority responsible for resolving a failing credit institution. The Commission is also not relaunching the establishment of a European Deposit Insurance Scheme (EDIS), the third part of the banking union, due to a lack of political will in the EU Council.
The aim is to implement the specific request of the Eurogroup, which in June 2022 had only managed to agree on the ‘banking crisis management’ part of the work to complete the Banking Union in the euro area (see EUROPE 12974/10). However, reaching a political agreement between the European Parliament and the EU Council on this legislative package before the end of the legislature in spring 2024 will be a real challenge.
“To date, many failing banks of a small or middle size have been dealt with under national regimes often involving the use of taxpayer money (bailouts) instead of the industry-funded safety nets, such as the Single Resolution Fund (SRF) in the Banking Union that so far has been unused in resolution”, the Commission notes in its proposals, a copy of which was made available to EUROPE.
This was notably the case in the restructuring of two Venetian banks in 2017 (see EUROPE 11816/10).
Extension of the scope of bank resolution
Currently, when a major bank fails, the question for national and/or European regulators is whether the bank should be liquidated under national rules, if there is no industry solution, or whether it should be resolved, as this could be less costly in terms of public money and would maintain critical functions such as deposit management or continued lending to the real economy.
To determine such a choice, the competent authorities carry out a public interest assessment (PIA) to determine whether there is a public interest in subjecting a bank to resolution on the basis of systemic criteria (impact on financial stability and critical functions, limitation of recourse to public funding).
In its proposal, the Commission seeks to better control the discretionary power of the competent authorities, which it believes contributes to a “restrictive” application of the public interest assessment. In particular, the possibility is introduced of considering that there is a public interest in initiating a resolution when the impact of its failure is only regional or sub-state, whereas currently only national and European impacts are taken into account.
This provision, which would allow smaller banks to be included in the scope of resolution, is viewed rather negatively by those Member States whose banking sector is concentrated around a few large systemic banks. These countries fear that the resolution of small failing banks will draw on funding mechanisms to which these small institutions did not initially contribute.
Although the assessment of the public interest remains at the discretion of a resolution authority, the Commission clarifies that in the event of a bank failure, national insolvency procedures should only be chosen as the preferred strategy when they are more efficient than resolution. This will require resolution authorities to demonstrate in more detail why a resolution is not in the public interest.
Increased intervention of national deposit guarantee schemes in a resolution
Within the EU, the banking industry feeds national bank deposit guarantee schemes (DGS) which ensure that in all circumstances, the savings of individuals are covered up to €100,000 on the account of a single bank.
While they are usually only called upon in the event of a bank’s liquidation, the Commission proposes to facilitate the use of DGS schemes in a resolution process, in particular to finance the transfer of covered deposits from a failing institution to one or more other banks.
Under EU law, a bank undergoing resolution must first fund the costs of the resolution process by contributing at least 8% of its liabilities before other financial means, such as the SRF, can be mobilised. This is the internal bail-in, as opposed to the bail-out via public funds.
The EU institution innovates by suggesting that the contribution of DGS schemes can be counted as bail-in elements to reach the 8% minimum threshold. In particular, it argues that medium-sized banks are struggling to issue MRELs eligible for the bail-in process and would therefore find it difficult to access the ‘Single Resolution Fund’ when a failure of these institutions would pose a risk to financial stability.
In the context of a resolution process, the ‘BRRD’ directive has since 2016 established a hierarchy whereby shareholders and creditors are the first to be affected in the event of a bank resolution. Savings deposits are guaranteed up to €100,000 in all circumstances, while deposits above this amount can be called upon, as was the case during the restructuring of the Cypriot banking sector.
To facilitate the use of DGS schemes in a resolution process, the Commission suggests streamlining the current hierarchy by creating a single category that includes all depositors (individuals, SMEs and large companies) regardless of the amounts. The super-preferential category of personal savings below €100,000 all depositors in this new single category would be placed on an equal footing in the event of bank failure. And, within the BRRD hierarchy, this single category would be better placed in the event of creditor reimbursement than ordinary unsecured claims.
According to some observers, such a legislative revision contributes to renationalising the banking union by giving more weight to national regimes. Others warn that deposits held by individuals and large companies should be treated equally if losses are ultimately passed on to depositors.
Note that the Commission now includes the protection of local authority deposits in DGS schemes. And all branches belonging to banks established in third countries will be required to join the deposit schemes in the Member States where they operate.
Finally, as requested by Germany, the specificity of institutional protection schemes (IPS) seems to have been taken into account. These schemes, when recognised as DGS schemes, will be exempted from certain requirements relating to depositor refunds and will be given a longer period (six years instead of four) to change their governance, a development necessary for the adoption of certain preventive measures. (Original version in French by Mathieu Bion)