On 21 March 2024, the European Parliament issued a press release stating that the Economic and Monetary Affairs Committee (ECON) had voted on the Crisis Management Deposit Insurance Review and adopted new rules concerning orderly market exit for banks of all sizes, in order to minimise the economic burden on society. The new rules thus constitute a toolset against bank failures and align with ECON’s broader objectives of ensuring better safeguarding of taxpayer’s money, bringing more banks into scope, empowering authorities to effectively handle a potential failure and harmonising depositor protection.

The new rules make changes to:

  • The Bank Recovery and Resolution Directive (BRRD)
  • The Single Resolution Mechanism (SRM)
  • The Deposit Guarantee Scheme Directive (DGSD)

The package affects three primary areas; bank resolution in the public interest, the depositor hierarchy and deposits protection.

Bank resolution in public interest

MEPs agreed that the resolution framework should be applied to any bank, where it is assessed that there is public interest to do so, irrespective of its size. As a bank can play a critical function at a regional level, it was also clarified that a resolution action should be treated in the public interest where winding up of the institution under normal insolvency proceedings would not meet those resolution objectives more effectively. Outside resolution, it was agreed that tax-payer funded extraordinary financial support could be granted only to remedy a serious disturbance in the economy of a Member State of an exceptional or systemic nature and to preserve financial stability. This aims to protect public finances, as well as the level playing field within the internal market.

Depositor hierarchy

MEPs also introduced a modification in the ranking of creditors, which should make the deposit guarantee schemes (DGS) and the single resolution fund more accessible in the funding of resolution. This in turn should limit the use of public support and pave the way for more effective solutions in the case of a bank resolution. A two-tiered approach was also proposed, where the deposits of retail clients, as well as micro, small and medium sized enterprises, benefit from a higher priority ranking over eligible deposits of large enterprises and central and regional governments. This tiered approach is designed to provide enhanced protection for a wide range of depositors and reflect unique characteristics.

Protecting deposits

The package also aims to ensure a smooth transition to the completion of the banking union through harmonising the DGSD’s functions. As such, the number of discretions under national law should be limited and all DGSs should be able to finance resolution measures, preventative measures and other alternative measures for the pay out of depositors. All involvement of the DGSs must be cost-effective and transparent.

In addition to the coverage of 100 000 EUR per depositor and bank, MEPS want deposits resulting from certain events such as a real estate transaction to be protected in the EU. Moreover, Member States should ensure a direct repayment of covered deposits by DGSs to clients. For example, where a DGS is not able to make a repayable amount available within seven working days, depositors should have access to an appropriate amount to cover the cost of living within five working days of making the request. To mitigate moral hazard, where banks receive support from DGSs (in the form of preventative measures), shareholders, creditors or business groups to which banks belong should contribute to the restructuring from their own resources and provide an adequate remuneration for the preventative measure granted by the DGS.

Ludek Niedermayer, responsible for BRRD, said that the package “will make sure the failings of the banks and the costs associated with it are not borne by the taxpayers but by the industry itself. The rules will also protect depositors better, by introducing new rules on the pay out in case of bank failure. The reports have also made sure that smaller banks are not included in the scope”.

Next steps

Plenary is expected to vote on the texts during the second plenary session in April, to close the first reading without agreement with the Council of the EU. The file will be followed up by the new European Parliament after the 6-9 June 2024 European elections.