The European Commission has adopted a proposal to strengthen the current framework for bank crisis management and deposit insurance with a particular focus on small and medium-sized banks, whose crises have been managed with solutions outside the framework of resolution.
Orderly exit
The Brussels proposal revolves around this principle: to allow authorities to organize an orderly exit from the market for a failing bank of any size and business model, with a wide range of tools. In particular, facilitate the use of industry-funded safety nets to protect depositors in banking crises (deposit guarantee schemes and resolution funds) by moving them from a troubled bank to a healthy one. But the use of such safety nets need only be a complement to banks’ internal loss-absorbing capacity, which remains the first line of defence.
The coverage of deposits (today at the level of one hundred thousand euros per depositor and per bank) would be extended to public entities such as hospitals, schools, municipalities, as well as money deposited in certain types of funds (investment companies, payment and electronic money institutions ). The proposal includes additional measures to harmonize the protection of temporary high balances on bank accounts exceeding €100,000 linked to specific life events such as inheritance or insurance payments. There are no thresholds for determining which banks will be subject to resolution under the reform: the resolution authority will decide on a case-by-case basis.
National specifics
The “institutional protection schemes” recognized as deposit guarantee schemes will have longer times to adjust the preventive measures (up to 6 years): a trick to convince Germany to support the proposal. Furthermore, recognition of the “national specificities to ensure proportionate application” of the rules on deposit guarantee schemes is guaranteed, for which institutional protection schemes may have lower targets.
The central part of the reform consists of three legislative proposals amending the directive on bank recovery and resolution (Directive 2014/59/EU), the regulation on the single resolution mechanism (regulation 806/2014) and the directive on deposit guarantee (Directive 2014/49/EU). Separately, the package also includes an unrelated fourth legislative proposal to amend the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation (the ‘daisy chain’ proposal).