11 October 2023

SUERF: The European Commission’s crisis management and deposit insurance (CMDI) proposal increases system-wide liquidity risk and makes mor

We agree with Lind and Berg (2023; SUERF Policy Note No. 306), who see no need to stray from the original ideas behind the BRRD, and disagree with Restoy (2023), who supports the European Commission’s proposal in his SUERF Policy Note No. 318.

In this policy note, we argue that the European Commission’s crisis management and deposit insurance (CMDI) proposal is a costly policy error. One of the main reasons for the reform is that in some EU Member States existing resolution regimes have not been applied to address failing banks, and authorities have shied away from their application as they feared high political costs. We partly agree with this diagnosis of the Commission but argue that the reform proposal addresses the symptoms rather than the root causes of the failed framework. First, the proposed general depositor preference shifts the costs of bank failures from large uncovered depositors to deposit guarantee schemes (DGS) and – via the pass-through of the associated bank contributions – largely to covered depositors by ranking all deposits pari passu. Second, this shift of costs constitutes a subsidy and makes large, uncovered short-term deposits more attractive. Their mispricing increases moral hazard and system-wide liquidity risk and contradicts key objectives of the capital markets union project. Third, the proposal makes more banks systemic in gone concern, which increases costs for banks and supervisors. Finally, we conclude by making a strong case for improving the current regime in a less intrusive and complex manner. ...

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