On 18 April 2023, the European Commission (Commission) published its crisis management and deposit insurance (CMDI) legislative package. The legislative package contains amending proposals to the EU regime for the recovery and resolution of credit institutions. The legislative package consists of the following legislative proposals:

• Proposal for a Directive amending the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).
• Proposal for a Regulation amending the Single Resolution Mechanism (SRM) Regulation ((EU) 806/2014).
• Proposal for a Directive amending the Deposit Guarantee Schemes Directive (2014/49/EU) (DGSD).

The BRRD established a framework for the recovery and resolution of EU credit institutions and systemically important investment firms following the 2007 – 2008 global financial crisis. The framework requires credit institutions and systematically important investment firms to develop recovery plans and plan ahead in the event of a resolution. In addition, the BRRD framework provides powers to (national) resolution authorities to resolve firms that are failing or likely to fail (FOLF).

The SRM Regulation established the Single Resolution Mechanism, which applies to all credit institutions established in EU Member States participating in the Banking Union (all Eurozone countries and Bulgaria). It contains a framework for the resolution of Banking Union credit institutions that corresponds to the framework set out in the BRRD, but with the Single Resolution Board (SRB) taking on many of the functions assigned to national resolution authorities by the BRRD. The SRM Regulation also established the Single Resolution Fund (SRF).

The main aim of the proposed amendments is to address a number of deficiencies that have been identified following a review of the framework and to improve the effectiveness of the resolution and deposit protection regimes for EU banks.

Among other things, the Commission proposes the following amendments to the current regime:

Early intervention measures

The Commission proposes to amend the conditions for applying early intervention measures, including the removal of management and the appointment of temporary managers, to remove ambiguity. The proposals, among other things, would amend Articles 27(1), 28 and 29(1) BRRD to provide that early intervention measures may be used when the conditions for supervisory measures under the Capital Requirements Directive IV (2013/36/EU) (CRD IV) or the Investment Firms Directive ((EU) 2019/2034) have been met, but those measures have not been taken by the institution or are deemed insufficient to address the identified issues. The Commission also proposes a number of amendments to the BRRD that would facilitate cooperation between competent and resolution authorities.

Public interest assessment

The proposal includes provisions that would expand the scope of resolution by reviewing the public interest assessment. In the event a credit institution is considered FOLF and there is a public interest in resolving it, the resolution authorities will intervene by using the tools provided by the BRRD if there is no private solution available. The public interest exists, when the actions taken by the resolution authority would achieve one or more of the objectives of the framework, for example protecting financial stability, critical functions of the credit institution, and the need to limit the use of extraordinary public financial support. In the proposal, the Commission amends the definition of “critical functions” to ensure that it refers to the impact of the disruption on the real economy and financial stability at a regional level. The objective to limit the use of extraordinary public support is amended to include a specific reference to support provided by the budget of a Member State, to indicate that funding provided by the industry-funded safety nets should be considered preferable to funding supported by taxpayers’ money. The objective related to depositor protection is amended to clarify that resolution should aim at protecting depositors, while minimising losses for deposit guarantee schemes (DGS), meaning that resolution should be preferred if insolvency would be most costly for the DGS.

Conditions for providing extraordinary public financial support

The Commission considers it is necessary to provide for strict conditions on when public funds in the form of extraordinary public financial support can be provided and what form it can take, as it does not want to use public funds to support institutions that are not financially viable. To ensure that the existing rules under the BRRD suffice, the Commission proposes an amendment stating that public financial support outside of resolution should be limited to:

• Cases of precautionary recapitalisation;
• Preventive measures of DGS aimed at preserving the financial soundness and long-term viability of credit institutions;
• Measures taken by DGS to preserve the access of depositors; and
• Other forms of support granted in the context of winding up proceedings.

Depositor preference

Article 108 BRRD lays down a three-tier depositor preference in the hierarchy of claims, providing that covered depositor and DGS claims should have super-preference in the creditor ranking in national insolvency laws relative to non-covered preferred deposits (deposits that exceed the coverage level of EUR 100,000). The Commission proposes an amendment to provide more clarity for non-covered non-preferred deposits, such as corporate non-SME deposits exceeding the coverage level of EUR 100,000. It introduces a general depositor preference with a single-tiered ranking by extending the legal preference relative to ordinary unsecured claims to extend all deposits. As a result, all deposits, including eligible deposits of large corporates and excluded deposits, will rank above ordinary unsecured claims. In addition, the relative ranking between the different categories of deposits would be replaced by a single-tier depositor preference, where the super-preference of the DGS/covered deposits is removed, and where all deposits rank pari passu and above ordinary unsecured claims.

Amendments related to the minimum requirement for own funds and eligible liabilities (MREL)

Resolution authorities define the preferred and variant resolution strategies and prepare the application of the relevant tools to ensure their effective execution as part of resolution planning. In general, bail-in is the preferred resolution tool for large and complex institutions, which implies the write-down and conversion of own funds and eligible liabilities to absorb losses and recapitalise the bank emerging from resolution. Under the current framework, the level of the MREL requirement should reflect the preferred resolution strategy. The existing provision focuses on MREL calibration for bail-in strategies (requirement for loss absorption and recapitalisation amount, with detailed rules on how each should be adjusted, and on subordination requirements mostly geared towards ensuring compliance with the 8% total liabilities and own funds requirement). Yet, the current BRRD does not regulate in detail MREL calibration for transfer strategies. The Commission therefore proposes a number of amendments aimed at providing a clearer legal basis for distinguishing MREL calibration for transfer strategies from that used for bail-in. A new Article 45ca would be added which sets out the principles to be considered when calibrating MREL for transfer strategies.

To address an existing gap in legal clarity of the current framework with respect to the power of the resolution authorities to prohibit certain distributions in case of failure of an entity to meet the combined buffer requirement in addition to its MREL, and in particular where the entity is not subject to the combined buffer requirement (under Article 104a of CRD IV) on the same basis as its MREL, Article 16a BRRD is amended to clarify that the power to prohibit certain distributions should be applied on the basis of the estimation of the combined buffer requirement resulting from a to-be-adopted delegated act that specifies the methodology to be used by resolution authorities to estimate the combined buffer requirement in such circumstances. The Commission introduces the mandate for the European Banking Authority to draft this methodology in the review proposal as well.

Use of DGS in resolution

In general, the BRRD framework provides that funding in resolution should first be provided by the bank’s internal resources, to be complemented by the resolution financing arrangements (only after 8% of the bank’s capital and liabilities are used) and the DGS, in lieu of covered depositors up to the amount of losses that they would have suffered. The Commission has found that smaller institutions find it difficult to meet these requirements. To ensure a higher degree of proportionality of the resolution framework and enhance the application of transfer tools in resolution for smaller or medium-sized banks that will access the market, the Commission proposes to amend Article 109 BRRD to clarify the use of DGS in resolution. Among other things, Article 109 provides that the DGS can be used to support transfer transactions that include covered deposits, and, under certain conditions, eligible deposits beyond the coverage level and deposits excluded from the DGS guarantee. The DGS contribution should cover part of or the entire difference between the value of the deposits transferred to a buyer or to a bridge institution and the value of the transferred assets. If a contribution is required by the buyer as part of the transaction to ensure its capital neutrality and preserve compliance with the buyer’s capital requirements, the DGS is also allowed to contribute. The contribution of the DGS in resolution remains subject to certain limits to avoid depletion and ensure that the DGS has sufficient resources to maintain its functions.

Amendments to the SRMR

The amendments to the SRMR largely mirror those proposed for the BRRD, reflecting the close interaction between the two legislative acts (explained above). The amendments are aimed at addressing a broad number of issues identified in the CMDI review. In addition, the SRMR review proposal includes amendments to the governance framework and allocation of responsibilities of the SRB, the ranking of claims under the SRF, and the exchange of information between competent and resolution authorities.

Next steps

The CMDI legislative package has been submitted to the European Parliament and the Council for consideration. It is expected that the European Parliament and the Council will need at least one year before they can reach a common position on the Commission’s proposals. The legislative process may be delayed significantly as a result of the European Parliament elections, which will take place in May 2024.