On Tuesday 16 May, EU Finance Ministers held an initial discussion on the ‘CMDI’ legislative package aimed at strengthening the European bank crisis management framework. Discussions at technical level will start in the EU Council next week.
Building on a Eurogroup statement from June 2022 (see EUROPE 12974/10), the European Commission’s legislative proposal suggests extending the scope of resolution to failing medium-sized banks, provided in particular that an affected bank permanently exits the market (see EUROPE 13164/7, 13163/2).
In the past, we have seen that “medium-sized banks have been restructured outside the EU regulatory framework and often using taxpayers’ money”, noted European Commission Executive Vice-President Valdis Dombrovskis.
To finance this extension of the scope of resolution, it would be possible to call on national bank deposit guarantee schemes (DGS) to enable a failing bank to meet the obligation to first call on its shareholders and creditors (‘bail-in’ principle) for up to 8% of its liabilities, and then possibly call on the ‘Single Resolution Fund’ (SRF), the financial arm of the ‘resolution’ component of the banking union in the euro area.
Several Member States expressed reluctance or even opposition to the extension of the scope of resolution to medium-sized banks and to the possibility of bridge financing by national DGSs. They stressed the importance of keeping the ‘bail-in’ principle intact.
“We see no need to expend the resolution regime to smaller banks”, said German Minister Christian Lindner, for whom the German system of intra-group insurance (‘institutional protection schemes’ or IPS) should not be weakened by EU law. “And we need to preserve the responsibility of shareholders and creditors” vis-à-vis the market with the principle of internal bail-in, he added. According to him, the Commission’s proposal suggests “a different approach”.
Finland is on the same wavelength. “Using DGS schemes to top up the financing of a bank resolution goes against the ‘bail-in’ principle,” said Annika Saarikko, for whom this was the last Ecofin Council meeting. The same applies to Slovakia, Romania and Bulgaria. For these countries, DGS schemes should be used primarily, if not exclusively, to cover losses incurred in the event of a bank’s liquidation. Slovenia also does not want to resort to national DGSs until the European Deposit Insurance Scheme (EDIS), the third and final part of the banking union, has been set up. Croatia, Malta and Slovakia described the use of national DGSs to finance a bank resolution as a “sensitive” issue.
While not prima facie opposed to the extension of the scope of resolution, Belgium nevertheless insisted that a bank’s ‘MREL’ assets, mobilised in the first place to finance a resolution, must remain “the first line of defence”. Austria and the Netherlands also supported this position.
Denmark even came out in favour of applying the ‘BRRD’ directive, which governs a bank resolution in the EU, to all European banks.
Reacting to the reluctance of some countries regarding the use of DGS schemes, EU Financial Services Commissioner Mairead McGuinness reiterated that this provision would remain “exceptional” and would not change the ‘bail-in’ requirement of 8% of a bank’s liabilities.
Among the Member States strongly supporting the legislative proposal and in particular the extension of the scope of bank resolution, Spain considered that the SRF should intervene “automatically”, as soon as the minimum ‘bail-in’ requirement has been met. According to its minister, Nadia Calviño, the ECB could intervene to provide liquidity before and after a bank resolution. Portugal called for “more ambition” in the use of funds provided by industry to finance a bank resolution.
Hierarchy of creditors. The ‘CMDI’ legislative package also proposes to change the hierarchy of creditors who would be affected in the event of a bank resolution. This would create a single category of depositors including individuals, SMEs, large companies and public authorities and entities, whereas at present, individual savings benefit from ‘super-protection’ up to €100 000.
These new provisions were supported by Greece. Lithuania and Poland welcomed the fact that the deposits of public institutions would be better protected. However, other countries - such as the Czech Republic, Croatia and Estonia - urged caution in changing the hierarchy.
But the creation of a single category of protected savers is not to the liking of all Member States. “Which creditor should we protect?” asked the French representative, for whom the deposits of large companies should not be protected in the same way as those of individuals and SMEs.
The Netherlands also warned that a reform would “significantly” increase the costs for DGS schemes, which are funded by the banks themselves.
EDIS. During the public debate, ten Member States - Cyprus, Italy, Greece, Croatia, Spain, Malta, Ireland, Estonia, Lithuania and Slovenia - reiterated the importance of completing the banking union by setting up EDIS. Some hoped that the ‘CMDI’ proposal would be a first step in this direction.
On behalf of the ECB, Luis de Guindos largely supported the Commission's proposals. He called for a review of the prudential framework to take account of the circumstances that led to the recent Californian bank failures, which were exacerbated by massive and immediate liquidity withdrawals facilitated by new technologies.
Finally, Ms McGuinness also highlighted that the Commission is currently reassessing its State aid guidelines for the banking sector, which should be finalised in the first quarter of 2024. (Original version in French by Mathieu Bion)