Early in the evening of Wednesday 25 June, representatives of the European Parliament and the Polish Presidency of the Council of the European Union reached a provisional political agreement on the ‘CMDI’ package aimed at improving bank crisis management (see EUROPE 13664/14).
“This reform of the crisis management and deposit insurance (CMDI) framework provides additional protection for taxpayers and citizens from the fallout from failing banks”, Polish Minister for Finance, Andrzej Domański, said in a statement.
In the opinion of one parliamentary expert, the provisional inter-institutional agreement is “fairly balanced” and should constitute “a necessary first step towards the completion of the banking union”, with a view to setting up the European ‘EDIS’ deposit guarantee scheme. The agreement “broadens the scope of the bank resolution framework”, while putting in place “safeguards to ensure that deposit guarantee schemes are adequately funded” and to avoid “moral hazard” by maintaining the obligation for banks to have sufficient internal capacity to absorb losses (‘bail-in-able instruments’), he added.
The main aim of the reform is to increase the number of European banks likely to be subject to a resolution process in the event of failure. However, many small and medium-sized banks, the business model of which is based primarily on deposit management and which have limited access to capital, find it difficult to hold the ‘MREL’ assets that can be mobilised (the legal minimum threshold set at 8% of liabilities) in the event of a resolution, in order to ensure that the bank’s shareholders and creditors remain the first line of defence in a crisis.
Hence the European Commission’s proposal to use national deposit guarantee schemes (DGS), funds financed by the banking sector, to bridge the gap in ‘MREL’ assets and subsequently, if necessary, call on support from the Single Resolution Fund (SRF), the financial arm of the ‘resolution’ strand of the banking union (see EUROPE 13164/7).
In order to decide whether a failing bank should be resolved or wound up, a resolution authority will carry out a ‘public interest assessment (PIA) to determine which procedure will cause the least disruption to the financial system and the least cost to savers, whose savings are protected by DGS schemes up to €100,000 in the event of bank failure. This PIA will now be able to take into account the regional impact of a banking crisis in order to consider the need for resolution.
In line with the Council’s wishes, the default scenario of triggering a resolution, included in the initial proposal, has been dropped. The PIA will take place in two stages: - resolution will only be possible if there is a risk to the bank’s critical functions, financial stability or the protection of depositors in the market concerned; - if this is the case, the benefits of resolution will have to outweigh those of liquidation.
According to an industry source consulted on the eve of the agreement, the solution on the table would result in “a moderate expansion” of the coverage of a resolution, with “the exclusion of three quarters of the less significant financial institutions from the scope”.
Conditions for using the DGS scheme. The intervention of a DGS scheme in a resolution, as a last resort, will have to be validated by the ‘least cost test’ to determine that the cost of resolution will be lower than that of liquidation.
In their negotiating position of June 2024 (see EUROPE 13435/2), the Member States introduced around 20 conditions aimed at strictly controlling the use of DGS schemes to finance a bank resolution.
To be able to enter resolution, a failing bank will have to have a prior resolution plan that will steer it more towards such a procedure (‘earmarking’). It will have to prove that it met its obligations in terms of ‘MREL’ assets over the four years prior to its failure. Mobilisation of a deposit guarantee scheme has been capped at the amount of covered deposits held by the failing bank. This mobilisation will not exceed 62.5% of the DGS scheme’s target level, although the scheme may go beyond this threshold under certain conditions.
It should be noted that different provisions would apply depending on the size of the banks if their balance sheet is less than €30 billion or €80 billion. Agence Europe was unable to confirm that the measure whereby the directors of a bank in the process of resolution will have to retroactively repay bonuses received up to two years before the bank’s failure will be kept.
According to the parliamentary source, the EU Council will no longer have the right of veto to approve a resolution plan for a failing bank, a step that would be difficult to take in a banking crisis where restructuring decisions have to be taken over a weekend. Other conditions establishing a difference in treatment between banks located inside or outside the banking union are also said not to have been retained.
Renationalisation? The Council amended the initial proposal by modifying the decision-making procedure within the Single Resolution Board (SRB), the European authority responsible for the resolution of large banking groups within the banking union. It thus gave greater weight to national authorities meeting within the plenary session of the SRB.
Supported by the Commission, which feared a renationalisation of the bank resolution process, the Parliament did not waver on this issue and achieve a return to the status quo.
Creditor hierarchy. In its initial proposal, the Commission envisaged the creation of a single category of creditors (savers, SMEs, public authorities) benefiting from priority in the repayment of their deposits in the event of bank failure. The Council advocated a four-tier hierarchy, while the European Parliament favoured a two-tier hierarchy.
Ultimately, the hierarchy adopted will comprise three levels of creditors with: - a super-preference for the repayment of DGS schemes and covered deposits; - a preference for eligible but deposits from households and SMEs not covered by a DGS; - other bank deposits.
This solution “brings more protections for citizens, SMEs, and municipalities, by clarifying how their funds are treated in the event of a bank failure”, said Luděk Niedermayer (EPP, Czech), in a press release.
Home/Host. At the last Ecofin Council, a number of Member States (‘host’ countries), which host subsidiaries of banking groups established in other EU countries (‘home’ countries), warned against upsetting the balance in this area through negotiations on the CMDI package.
The Commission’s position, endorsed by the Council, has prevailed over that of the European Parliament. If a subsidiary closes and its activities are repatriated to the head office, the DGS scheme in the ‘host’ country will pay the DGS scheme in the ‘home’ country the contributions paid to it by the subsidiary during the 12 months prior to its closure.
The Parliament argued that after 2024, DGS schemes reached their target level (see EUROPE 13647/18) and bank contributions are therefore no longer required. It recommended a calculation proportional to the risks transferred by the subsidiary to the head office, the formula for which would be developed by the European Banking Authority.
Preventive measures. MEPs are satisfied with the way in which the reform has brought about greater harmonisation in the operation of DGS schemes. This is particularly the case for preventive measures and/or alternatives to bank resolution. Notably, the conditions under which this type of measure may be used have been clarified, in particular the assets/liabilities of a bank in difficulty. There are also provisions to ensure that the same banks are not always affected by preventive measures.
IPS. Germany was particularly interested in how the legislative package would deal with ‘institutional protection schemes’ (IPS), which can intervene preventively when an entity runs into difficulties and can also act as a DGS scheme.
On this point, the Polish Presidency believes that it has listened to German demands for a system that has proved its worth, while clarifying the obligations of IPS according to their function. A recital in the legislative text is said to include the concept of ‘segregation’ of the funds allocated to the DGS and IPS functions. The possibility of providing loans between DGS and IPS funds has been agreed.
Parliament representatives and the Polish Presidency will now continue technical work to translate the provisional political agreement into legal language, with an initial meeting scheduled for this Friday. It will be up to the Danish Presidency, in the second half of 2025, to finalise this work with a view to completing the legislative procedure in the autumn.
Welcoming the provisional political agreement, the President of the Eurogroup, Paschal Donohoe, who is campaigning for re-election, promised in a press release that the finance ministers of the euro area countries would reflect on the next steps needed to strengthen and complete the banking union. (Original version in French by Mathieu Bion)