Insights Blog

The European Commission’s long-signposted proposal to update the existing bank CMDI (crisis management and deposit insurance) framework was announced last week.

It consists of proposals to amend the Bank Recovery and Resolution Directive, amend the Single Resolution Mechanism Regulation and amend the Deposit Guarantee Schemes (DGS) Directive.

An overarching aim of the proposal is depositor protection.  The Commission wants to better protect depositors by prioritising the transfer of their funds to a ‘healthy’ bank should their account bank fail.

Under the proposal, banks’ capital buffers will remain their first line of defence, followed by ‘industry-funded safety nets’ i.e. DGS and resolution funds.  To access safety nets such as resolution funds, the 8% minimum bail in will remain.  However, banks with high deposit volumes may (subject to strict conditions) be able to access DGS funds as a bridge to meet the 8% level to insulate depositors from losses.  All usage of DGS funds in a bank resolution will be subject to a harmonised ‘least cost test’ – this is designed to ensure that any use of these funds cannot exceed the hypothetical cost of reimbursing covered depositors in a liquidation of the bank.

The tiers of depositor protection would, under the Commission’s proposal, be removed and protection would be harmonised.  While the €100,000 per-depositor-per-institution coverage would remain in place, the Commission wants to extend protection to public entities (such as hospitals and schools) and to client money deposited in certain types of client funds (e.g. by investment companies, payment institutions, and e-money firms).  Temporary high (> €100,000) balances on bank accounts would also be protected where linked to ‘specific life events’ such as property sales, inheritances and insurance) and a pan-European harmonised information sheet for depositor protection would be introduced.

The Commission’s proposal would not impose ex ante thresholds for determining whether banks should be subject to resolution, but the Commission emphasised that many failing small and medium-sized banks have been supported by taxpayers’ money rather than by DGS and resolution funds, and the Commission is keen to change that approach. Ultimately, resolution authorities will continue to be the ones who determine, on a case-by-case basis, whether a bank should be resolved or wound-up (based on a ‘public interest assessment’ that looks at both options, and which option would better achieve financial stability, and depositor and taxpayer protection).  There is no proposal to change the existing division of responsibilities as between the Single Resolution Board and national resolution authorities.

The Commission’s proposal will now be considered by the EU Council and the European Parliament, and may be subject to change as it moves through that process.