26 January 2021

European Commission: Targeted consultation on the review of the crisis management and deposit insurance framework

Background of this targeted consultation

In response to the global financial crisis, the EU took decisive action to create a safer financial sector for the EU single market. These initiatives triggered comprehensive changes to European financial legislation and to the financial supervisory architecture. The single rulebook for all financial actors in the EU was enhanced, comprising stronger prudential requirements for banks, improved protection for depositors and rules to manage failing banks. Moreover, the first two pillars of the banking union – the single supervisory mechanism (SSM) as well as the single resolution mechanism (SRM) – were created. The third pillar of the banking union, a common deposit insurance, is still missing. The discussions of the co-legislators on the Commission’s proposal to establish a European deposit insurance scheme (EDIS), adopted on 24 November 2015, are still pending.

In this context, the EU bank crisis management and deposit insurance framework lays out the rules for handling bank failures while protecting depositors. It consists of three EU legislative texts acting together with relevant national legislation: the Bank Recovery and Resolution Directive (BRRD – Directive 2014/59/EU), the Single Resolution Mechanism Regulation (SRMR – Regulation (EU) 806/2014), and the Deposit Guarantee Schemes Directive, DGSD – Directive 2014/49/EU)1. For the purpose of this consultation, reference will be made also to insolvency proceedings applicable under national laws.2 For clarity, the consultation only concerns insolvency proceedings applying to banks. Other insolvency proceedings, notably those applying to other types of companies, are not the subject of this consultation.

Experience with the application of the current crisis management and deposit insurance framework3 until now seems to indicate that adjustments may be warranted. In particular:

 One of the cornerstones of the current framework is the objective of shielding public money from the effects of bank failures. Nevertheless, this has only been partially achieved. This has to do with the fact that the current framework creates incentives for national authorities to deal with failing or likely to fail (FOLF) banks through solutions that do not necessarily ensure an optimal outcome in terms of consistency and minimisation in the use of public funds. These incentives are partly generated by the misalignment between the conditions for accessing the resolution fund and certain (less stringent) conditions for accessing other forms of financial support under existing EU State aid rules, as well as the availability of tools in certain national insolvency proceedings (NIP), which are in practice similar to those available in resolution. Moreover, a reported difficulty for some small and medium-sized banks to issue certain financial instruments, that are relevant for the purpose of meeting their minimum requirement for ownfunds and eligible liabilities (MREL), may contribute to this misalignment of incentives.

 The procedures available in insolvency also differ widely across Member States, ranging from pure judicial procedures to administrative ones, which may entail tools and powers akin to those provided in BRRD/SRMR. These differences become relevant when solutions to manage failing banks are sought in insolvency, as they cannot ensure an overall consistent approach across Member States.

 The predictability of the current framework is impacted by various elements, such as divergence in the application of the Public Interest Assessment (PIA)4 by the Single Resolution Board (SRB) compared to National Resolution Authorities (NRA) outside the banking union. In addition, the existing differences among national insolvency frameworks (which have a bearing on the outcome of the PIA) and the fact that some of these national insolvency procedures are similar to those available in resolution, as well as the differences in the hierarchy of liabilities in insolvency across Member States, complicate the handling of banking crises in a cross-border context.

 Additional complexity comes from the fact that similar sources of funding may qualify as State aid or not and that this depends on the circumstances of the case. As a result, it may not be straightforward to predict ex ante if certain financial support is going to trigger a FOLF determination or not.

 The rules and decision-making processes for supervision and resolution, as well as the funding from the resolution fund, have been centralised in the banking union for a number of years, while deposit guarantee schemes are still national and depositors enjoy different levels and types of guarantees depending on their location. Similarly, differences in the functioning of national deposit guarantee schemes (DGSs) and their ability to handle adverse situations, as well as some practical difficulties (e.g., when a bank transfers its activities to another Member State and/or changes the affiliation to a DGS) are observed.

 Discrepancies in depositor protection across Member States in terms of scope of protection, such as specific categories of depositors,5 and payout processes result in inconsistencies in access to financial safety nets for EU depositors.6

The possible revision of the resolution framework as well as a possible further harmonisation of insolvency law are also foreseen in the respective review clauses of the three legislative texts.7 By reviewing the framework, the Commission aims to increase its efficiency, proportionality and overall coherence to manage bank crises in the EU, aswell as to enhance the level of depositor protection, including through the creation of a common depositor protection mechanism in the banking union. Crisis management and deposit insurance, including a common funding scheme for the banking union, are strongly interlinked and inter-dependent, and present the potential for synergies if developed jointly. Additionally, in the context of the crisis management and deposit insurance framework review, the State aid framework for banks will also be reviewed with a view to ensuring consistency between the two frameworks, adequate burden-sharing of shareholders and creditors to protect taxpayers and preservation of financial stability.

Full consultation

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