EU iterates reform plan

The European Commission has proposed to strengthen the EU’s bank crisis management and deposit insurance (CMDI) framework for medium-sized and smaller banks. While the EU’s banking sector has a robust crisis management framework, many failing medium-sized and smaller banks have been managed outside the resolution framework, sometimes involving taxpayers’ money. Today’s proposal allows authorities to organize an orderly market exit for a failing bank of any size and business model with a broad range of tools. It also facilitates the use of industry-funded safety nets to shield depositors in banking crises and better protect taxpayers who do not have to step in to preserve financial stability.

The proposal has three objectives. Firstly, it aims to preserve financial stability and protect taxpayers’ money. Deposit guarantee schemes will only be used for this purpose after banks have exhausted their internal loss absorption capacity and for banks that were already earmarked for resolution in the first place. Secondly, the proposed rules will allow authorities to fully exploit the many advantages of resolution as a key component of the crisis management toolbox, which is less disruptive for clients as they keep access to their accounts, and the bank’s critical functions are preserved. Thirdly, the proposal provides better protection for depositors, harmonizing further the standards of depositor protection across the EU and extending depositor protection to public entities, as well as client money deposited in certain types of client funds.

The legislative package will now be discussed by the European Parliament and Council. The Eurogroup noted in June 2022 that the Banking Union remains incomplete and agreed that the work on the Banking Union should focus on strengthening the crisis management and deposit insurance framework. The European Parliament also supported the need for a review of the crisis management and deposit insurance framework to improve its functioning and predictability to manage bank failures. The proposal aims to preserve financial stability, protect taxpayers and depositors, and support the real economy and its competitiveness.

In conclusion, the proposal adopted by the European Commission aims to further strengthen the EU’s existing bank crisis management and deposit insurance framework with a focus on medium-sized and smaller banks. The proposal enables authorities to use a broad range of tools to organize an orderly market exit for a failing bank of any size and business model, with the use of industry-funded safety nets to shield depositors in banking crises. The legislative package will now be discussed by the European Parliament and Council.