The European Commission unveiled on Tuesday 18 April its ‘CMDI’ legislative package aimed at facilitating the resolution in the European Union of medium-sized banks in the event of failure, whereas experience has shown that in the event of failure, these banks were restructured outside the European rules governing bank resolution and with the mobilisation of public money (see EUROPE 13163/2).
The legislative package aims to broaden the tools available to the competent authorities to manage a banking crisis while ensuring the lowest cost to taxpayers. In particular, the ‘public interest assessment’ that a resolution authority carries out to decide whether a failing bank should be subject to resolution or bankruptcy may take into account the regional impact of a banking crisis in order to facilitate the use of a resolution process.
DGS. Fuelled by industry, national bank deposit guarantee schemes (DGS) could be used to enable a failing medium-sized bank to reach the minimum level of internal bail-in required by EU law, before it can access the Single Resolution Fund (SRF), the financial arm of the resolution component of the euro area banking union, which has never been used.
This solution should prove less costly than dismantling the bank, which would require intervention by the DGS regimes to cover deposits up to €100,000 per person.
“We would let a resolution authority use deposit guarantee scheme bridge financing, including access to the Single Resolution Fund, when they think allocating losses to deposits would risk a bank run”, said European Commissioner for Financial Services Mairead McGuinness, insisting that this is “banks’ money, not depositors’ money”.
She listed “the very strict conditions” that make this new scheme possible: - the need to safeguard financial stability; - finance only the exit of the failing bank from the market; - ensure that the banks concerned have adequate internal loss-absorption capacity in place (issuance of MRELs).
Hierarchy of creditors. The Commission also proposes to rationalise the hierarchy of creditors affected in the event of a banking crisis by creating a single category of depositors including individuals, SMEs, large companies and public authorities and entities.
According to Executive Vice-President Valdis Dombrovskis, this development will help mobilise the DGS schemes for a banking resolution.
Within the hierarchy of creditors established by the BRRD, this single class of depositors would be better placed than ordinary unsecured claims in the event of repayment due to bank failure.
Recalling that this legislative package responds to the request of the Eurogroup of June 2022 (see EUROPE 12974/10), its President, Paschal Donohoe, considered that these proposals constitute “an important step” towards the completion of the banking union. Euro area Finance Ministers will reopen the banking union dossier on Friday 28 April in Stockholm. Mr Donohoe stressed the importance of finalising the CMDI package before the end of the current legislature in early 2024.
‘Daisy chain’. On Tuesday, the Commission also presented a legislative proposal revising the BRRD and the Regulation establishing the Single Resolution Mechanism (SRM). This specific initiative follows a clause in the ‘Daisy chain’ Regulation (2022/2036), which allowed for a targeted revision of the banking resolution framework (see EUROPE 12941/25) to come into force in January 2024.
SSM. The Commission also presented a report which concludes that the Single Supervisory Mechanism (SSM), the first part of the banking union through which the ECB directly supervises the large systemic banks in the euro area, is functioning well.
Thanks to this mechanism, banks are well prepared and capitalised to deal with potential financial crises, the Commission believes. The institution said the system had demonstrated its ability to respond “swiftly and agilely” to the challenges arising from the Covid-19 pandemic and Russian military aggression in Ukraine. However, there is still room for improvement in the supervision of highly specialised areas such as internal banking models and technology risks.
See all the legislative texts and communications making up the CMDI package: https://aeur.eu/f/6d6 (Original version in French by Mathieu Bion)