Ahead of the Ecofin Council on 21 June, the Belgian Presidency of the Council of the European Union is working hard to reach a political agreement in principle on the CMDI legislative package aimed at strengthening the European framework for banking crisis management (see EUROPE 13400/1).
It has circulated compromise proposals, of which Agence Europe has received a copy, notably on the way in which national bank deposit guarantee schemes (DGS) could intervene to help finance the resolution of a medium-sized bank. Such a contribution would enable a failing bank to reach the legal threshold requiring it to mobilise at least 8% of its total liabilities including own funds (‘MREL’ assets) for its bail-in before being able to call on the ‘Single Resolution Fund’ (SRF), the financial arm of the ‘resolution’ strand within the banking union, over a three-year period.
On this point, the Belgian Presidency suggests that any recourse to a DGS system to finance a banking resolution should be regulated.
This option, to be activated only in exceptional cases to preserve financial stability, would be limited to financial institutions managing assets of up to €30 billion.
Larger banks could also benefit, provided that their business model consists ‘mainly’ of managing bank deposits, and that this intervention is approved by five of the six board members of the Resolution Board (SRB), the European authority responsible for resolving large banks within the banking union. However, large groups with a balance sheet in excess of €80 billion or any institution that cannot demonstrate that it complied with the obligation to hold 8% of ‘MREL’ assets at least 12 months before its failure would be excluded.
In order to ensure that the losses and/or costs of a recapitalisation resulting from a failure are first absorbed by the shareholders and creditors of the bank concerned, the Belgian Presidency proposes that the contribution of the DGS scheme should not exceed 2.5% of ‘MREL’ assets for banking institutions managing less than €30 billion in assets, or 1.25% of ‘MREL’ assets for those managing between €30 and €80 billion in assets.
The compromise text adds that the shareholders and creditors of a bank managing less than €30 billion in assets will have to contribute amounts of at least 6.5% of ‘MREL’ assets, or up to 8% of these assets for other eligible financial institutions. These two additional thresholds, the text specifies, take into account the contribution of shareholders and creditors to the absorption of losses and the recapitalisation of the institution over the 12 months prior to when the institution declares that it is failing, up to a maximum of 1% of ‘MREL’ assets for banks managing less than €30 billion in assets and 1.25% for other banking groups.
Once these requirements have been met, the SRF could be used to complete the financing of a bank resolution.
“Given the considerable impact of the resolution decisions on the financial stability of Member States and on the Union as a whole, as well as on the fiscal sovereignty of Member States, it is important that the implementing power to take certain decisions relating to resolution be conferred on the Council”, argues the Belgian Presidency. It therefore proposes that any mobilisation of the ‘Single Resolution Fund’ for a bank managing more than €30 billion should be approved by the EU Council on a proposal from the European Commission.
Creditor hierarchy. In its initial proposal, the Commission suggests facilitating the financing of a banking resolution via DGS schemes by creating a single category of protected depositors (individuals, SMEs, large companies, public authorities) up to €100,000 (see EUROPE 13164/7).
The Belgian Presidency initially envisaged a three-tier system as opposed to the two provided for in the ‘BRRD’ directive governing bank resolution (see EUROPE 13400/1). This time, however it is putting forward the following system with four tiers of decreasing protection for protected depositors and creditors: - eligible deposits of up to €100,000 would be the most protected; - the part of the eligible deposits belonging to individuals and SMEs exceeding the threshold of €100,000 as well as the deposits for SMEs that would be eligible if they had not been made in branches located outside the EU of banks established in the EU; - ineligible deposits with a maturity of less than one year, the portion of other eligible deposits exceeding the threshold of €100,000 and with a maturity of less than one year; - the same deposits as the previous category, but with a maturity of more than one year.
Links to the Belgian Presidency’s compromise proposals revising:
- the ‘SRMR’ regulation (806/2014): https://aeur.eu/f/cmg
- the ‘BRRD’ Directive (2014/59): https://aeur.eu/f/cmh
- the ‘DGS’ directive (2014/49): https://aeur.eu/f/cmi (Original version in French by Mathieu Bion)